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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER: 0-18108
FINET.COM, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 94-3115180
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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2527 CAMINO RAMON, SAN RAMON, CA 94583
(Address of principal executive offices)
(925) 242 6500
(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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$.01 PAR VALUE COMMON STOCK Nasdaq
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes /X/ No. / /
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The number of shares outstanding of the issuer's common stock, as of
March 15, 2000 was 93,937,495.
At that date, the aggregate market value of voting common stock held by
non-affiliates of the registrant based on the closing price for the common stock
on Nasdaq was approximately $173,201,953.
Documents incorporated by reference: Items 10 (as to directors), 11, 12, and
13 of Part III incorporate by reference information from the registrant's proxy
statement to be filed with the Securities and Exchange Commission in connection
with the solicitation of proxies for the registrant's 2000 annual meeting of
stockholders, which is expected to be held on May 24, 2000.
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TABLE OF CONTENTS
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PART I
Item 1 Description of Business..................................... 3
Item 2 Description of Property..................................... 22
Item 3 Legal Proceedings........................................... 23
Item 4 Submission of Matters to a Vote of Security Holders......... 23
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 24
Item 6 Selected Financial Data..................................... 25
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Item 7A Quantitative and Qualitative Disclosure about Market Risk... 45
Item 8 Financial Statements and Supplementary Data................. 45
Item 9 Changes in or Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 79
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 80
Item 11 Executive Compensation...................................... 80
Item 12 Security Ownership of Certain Beneficial Owners and
Management................................................ 80
Item 13 Certain Relationships and Related Transactions.............. 80
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 81
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
FINET.COM, INC.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Readers are cautioned that actual results could differ
materially from those indicated in such statements as a result of certain
factors, including those set forth under "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Factors That May Affect Future
Results" and elsewhere in, or incorporated by reference into, this report.
CORPORATE HISTORY AND NEW MANAGEMENT
CORPORATE HISTORY
We were incorporated in 1989 to pursue a line of business unrelated to our
current business. We acquired Finet Corporation, a private technology-oriented
mortgage broker and discontinued our unrelated lines of business in 1990. In
December 1996, we acquired Monument Mortgage, a technology-oriented private
mortgage banking company, and since then, have made several additional
acquisitions to expand our technology and broaden our services. In April 1998,
we acquired Coastal Federal Mortgage Company, a sub-prime mortgage banker with
lending offices in New Jersey, Pennsylvania and Florida, and, in May 1998, we
acquired Mical Mortgage, a mortgage banker with offices in San Diego and Las
Vegas that specialized in the origination of FHA and VA loans. As a result of
operational and loan underwriting problems discovered after these acquisitions,
we discontinued our Coastal and Mical business units in April 1999. We may incur
additional losses from the discontinued businesses of Coastal Federal Mortgage
and Mical Mortgage. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Factors That May Affect Future
Performance".
We currently operate our mortgage businesses through our wholly-owned
subsidiary, Monument Mortgage. On August 20, 1999, FiNet acquired certain
operations and assets of Lowestrate.com, Inc. ("Lowestrate"). The assets
included the trademark "Lowestrate.com" and the related website and certain
equipment and software. The acquired assets and operations will be used in our
consumer-direct segment.
NEW MANAGEMENT
Since December 1999, we have significantly reshaped our management team. On
February 1, 2000, we appointed Rick Cossano as our President and Chief Executive
Officer. In addition, other executive and management positions have been
replaced with people experienced in business-to-business mortgage sales and
secondary marketing. Our new management team is focused on improving profits by
significantly growing revenues and streamlining costs. We intend to grow
revenues by expanding our sales force nationwide and by offering products with
higher margins than our current products.
BUSINESS
FINET.COM
FiNet.com is a full service, on-line mortgage banker that offers an
easy-to-use, one-stop mortgage source for consumers and mortgage brokers. We
provide on-line and e-commerce technologies and loan process management tools to
mortgage broker businesses to enable them to compete more effectively with
on-line and other national lenders and to brokers, to help their customers make
better informed borrowing decisions. We also operate one of the first sites on
the Internet that enables the consumer to apply for and receive credit approval
on-line, and to electronically search, analyze and select from a wide variety of
mortgage loan products and rates offered by us and other lenders. We make the
mortgage process easier
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and more understandable, while maintaining quality service by controlling the
consumer's entire mortgage lending experience.
We generate revenues by providing services to two primary customer groups:
mortgage broker businesses and consumers.
We intend to increase our brand awareness with mortgage broker businesses
by:
- building a strong sales force that will market our services by personal
contact and assist mortgage brokers in adopting on-line technologies;
- introducing new Internet-oriented services, and
- employing traditional marketing strategies, including participation in
trade shows and conferences, advertising in industry publications, flyers
and broker loyalty programs.
We offer mortgage broker businesses the opportunity to use the on-line
technology and automated underwriting systems of our full service mortgage
banking operation to expand and improve service to their local customers and
compete with on-line mortgage originators, while maintaining the flexibility to
control their own businesses. As a full service mortgage banker, we fund loans
originated by mortgage brokers, which we then sell to institutional investors in
the secondary mortgage market. We refer to these services to mortgage brokers as
our business-to-business channel.
We provide our customers with a fast and easy to use on-line method to get
their loans approved through our award-winning iQualify technology. Mortgage
brokers and consumers can use our FiNet.com website to search, analyze and
select from a wide variety of mortgage loan products and rates offered by our
Monument Mortgage subsidiary. We allow each consumer to choose between automated
service and personalized assistance at any time in the loan process. Consumers
are assisted by our mortgage professionals throughout the loan application
process. We refer to these services to consumers as our consumer direct channel.
During the eight months ended December 31, 1999, we originated and/or funded
$519.0 million in mortgage loans directly or through our mortgage broker
customers. We primarily earn revenues from the sale of loans and related
servicing rights in the secondary mortgage market and from interest on mortgage
loans held pending sale.
We offer a full range of loan products, including fixed and adjustable rate
first mortgage loans with a variety of maturities, conforming loans (loans that
meet the purchase standards of Fannie Mae or Freddie Mac), jumbo loans (loans
that meet those standards except they exceed the maximum loan amount), home
equity lines of credit, second mortgages and loans to borrowers who do not meet
one or more of the other credit or documentation standards of the
government-sponsored mortgage programs.
THE UNITED STATES MORTGAGE MARKET
The United States residential mortgage market is a substantial and growing
part of the U.S. economy. According to the Mortgage Bankers Association, loan
origination volume in the U.S. reached $1.3 trillion in 1999, slightly down from
$1.5 trillion in 1998. The residential mortgage market is fragmented, with the
largest mortgage lender, Norwest, accounting for only 7.7% of funded loans in
1999.
Consumers generally seek mortgage loans to finance a home purchase or to
refinance existing mortgage debt. In some cases, a borrower may refinance for
more than the existing mortgage amount and use the cash generated for other
purposes. Mortgage loans are originated through two primary lending channels,
frequently referred to as retail and wholesale. These terms correspond to our
consumer-direct and business-to-business channels. Traditional retail
originators generate loans through direct contact with the consumer. Retail
originators work through local branch offices or telemarketing centers.
Wholesale
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originators pay loan origination fees to mortgage brokers or purchase closed
loans from other lenders, who, in either case, work directly with consumers from
local offices.
Typically, the traditional mortgage loan process involves the following
steps:
- meeting with lender or broker to complete the lengthy paper application;
- gathering extensive supporting documentation for the application;
- entering the application information/data into the broker's or lender's
processing system;
- ordering appraisals, title and credit reports and verifying deposit and
other factual matters;
- submitting the paper loan file to an underwriter to determine loan
eligibility;
- receiving conditions to approval of loan by the underwriter;
- collecting additional information and complying with the conditions;
- resubmitting the revised paper file for approval;
- preparing loan documents and closing instructions;
- reviewing and approving the loan for funding; and
- closing of the transaction.
This paper intensive process generally takes at least three weeks to
complete.
CONSUMERS
The traditional mortgage loan application and closing process described
above is complex, time-consuming, paper-intensive and costly. We believe that
this process causes many consumers to feel:
- uncertain that lenders and brokers are providing unbiased advice and
recommending the most suitable mortgage products;
- skeptical that rates initially quoted will ultimately be available;
- intimidated by the number and variety of mortgage products available;
- pressured to commit to a particular mortgage product before they have
researched and compared alternative products to their satisfaction;
- aggravated by the amount and types of loan fees they are required to pay;
and
- frustrated by the substantial time and effort that it takes to complete a
mortgage loan.
MORTGAGE BROKER BUSINESSES
In 1998 approximately 70% of all mortgages in the United States were
originated through mortgage brokers. The mortgage broker industry is highly
fragmented with approximately 36,000 mortgage broker businesses operating in the
United States according to Wholesale Access. Mortgage broker businesses are
typically small, local enterprises that increasingly lack the financial
resources and technological capability to compete with financially stronger and
better-organized mortgage lenders, including on-line mortgage originators. In
particular, they generally lack access to the technology necessary to determine
borrower eligibility quickly and to search and analyze available mortgage
products to find the best match for their customers. Because local practices and
customs in the mortgage industry vary significantly from jurisdiction to
jurisdiction, and many consumers will continue to prefer face-to-face local
contact, we believe that nationwide lenders will not be able to meet the needs
of local mortgage consumers. Mortgage brokers will thus continue to be an
integral and important part of the mortgage lending process for the foreseeable
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future. However, as technological advances make it easier for consumers to deal
directly with lenders, we believe that mortgage brokers will need to find new
ways to compete more effectively for the consumers' business.
ON-LINE MORTGAGE ORIGINATION
With the advent of on-line and e-commerce technologies, loan originations
can be made electronically, resulting in cost and time savings to consumers and
the mortgage brokers who assist those consumers. Although the on-line mortgage
industry is still relatively new, it is expected to grow rapidly. According to
Forrester Research, the market for on-line mortgage originations is expected to
grow from an estimated $18.7 billion in 1999 to over $91.2 billion in 2003,
representing an increase in on-line mortgage originations from 1.5% of the
existing market in 1999 to 9.6% of the projected market in 2003.
THE FINET.COM SOLUTION
We are a pioneer in offering on-line mortgage services to consumers and
mortgage broker businesses. The FiNet.com solution focuses on both consumers and
the mortgage brokers who assist many consumers in the mortgage loan process. We
believe that by using on-line and e-commerce technologies to streamline and
automate the process of making residential mortgage loans, we can help consumers
and mortgage broker businesses save time and money, and improve access to
mortgage credit. We also believe that we can help mortgage brokers expand their
business and withstand the competitive threat posed by on-line lenders.
The FiNet.com solution provides the following key advantages in our
business-to-business channel:
- EMPOWERING BROKERS WITH TECHNOLOGY. We help mortgage brokers reduce the
cost of their mortgage originations by supplying them with on-line and
e-commerce technologies and loan processing management tools. We believe
that on-line and e-commerce technologies can enable traditional mortgage
brokers to compete more effectively in their local markets with new
on-line mortgage originators and large retail loan originators. We enable
our business-to-business channel customers to provide the benefits of
automated, on-line mortgage services to their local customers while
maintaining personal contact with and controlling the customer
relationship.
- OFFERING BROKERS CHOICE AND ASSISTANCE. As a full service mortgage banker,
we provide our business-to-business channel customers the ability to place
a loan with us either electronically or in the traditional paper format.
We believe that our on-line underwriting services provide exceptional
value to our business-to-business channel customers by greatly reducing
the time it takes to determine customer loan eligibility. Our
business-to-business channel customers have access to numerous leading
on-line underwriting software solutions.
The FiNet.com solution provides the following key advantages in our
business-to-consumer channel:
- CONVENIENCE AND SERVICE. We provide our consumers with a fast and
easy-to-use on-line method to get a mortgage loan approved using our
award-winning iQualify technology. By clicking on our FiNet.com website,
consumers can easily and efficiently search, analyze and compare mortgage
products and rates, and make loan decisions based on their personal
financial situation and needs. In addition, our customers are able to
choose either an automated process to complete their mortgage transaction
or, at any point, choose to receive the personalized assistance of a
mortgage professional. We aim to make our fees and costs competitive with
other on-line mortgage originators, who typically charge .625% for
conforming loan products.
- UNBIASED ADVICE WITH NO SALES PRESSURE. Because our mortgage lending
process is automated, the consumer will not feel pressured to commit to
any particular mortgage product. In addition, by having the ability to
search, compare and analyze different mortgage products and rates without
having to consult with a mortgage broker or lender, the consumer will not
be susceptible to
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receiving biased advice from the mortgage broker or lender. We also give
the consumer the ability to lock in an interest rate when the application
is approved, assuring the consumer that the rate initially quoted will be
available at closing.
- WIDE CHOICE OF MORTGAGE LOANS. Through FiNet.com we provide consumers with
a wide choice of mortgage products and rates offered by Monument Mortgage.
We continuously review the mortgage products and rates offered by other
lenders in order to select new mortgage products to provide our on-line
consumers.
PRODUCTS AND SERVICES
We intend to implement our business strategy by offering fully-automated
on-line mortgage services to consumers through FiNet.com and to mortgage broker
businesses through Monument Mortgage. We believe that our on-line mortgage
services offer distinct advantages over the traditional loan process which is
paper intensive, slow and cumbersome.
FINET.COM
Through our FiNet.com website, consumers can fill out an on-line loan
application and request an automated underwriting analysis of their application.
The FiNet.com process requires the borrower to complete an application which
consists of only 32 fields, in contrast to the extensive, multi-page traditional
paper mortgage application. Our iQualify technology electronically obtains a
credit report on the borrower, combines and reformats the credit and application
information and submits the information through Monument Mortgage to an
automated underwriting system for a comprehensive credit analysis. If the system
returns an "approved" status, the consumer can be confident that a lender will
make the consumer a mortgage loan on the terms submitted, subject to
verification of the information provided by the customer. We have utilized
Fannie Mae's Desktop Underwriter system extensively in our mortgage lending
activities.
We have developed interfaces from FiNet.com to other automated underwriting
systems from Freddie Mac (Loan Prospector), GMAC/RFC (AssetWise) and GE Capital
Mortgage (Good Decisions) to increase the number and type of loans processed by
us that receive an automated approval, including jumbo loans which have loan
amounts greater than the $252,700 Fannie Mae/Freddie Mac limit, and so-called
Alternative A mortgage loans and sub-prime loans, which are loans to borrowers
with credit histories unacceptable for one or more reasons to Fannie Mae and
Freddie Mac. We believe that approximately 80% of consumers seeking loans are
eligible to get their applications approved in our fully automated process.
After receiving automated underwriting approval, the consumer will be able
to select from and compare multiple loan options offered by Monument Mortgage.
FiNet.com also offers consumers the option to exit the fully automated
process and continue to complete the loan process with the personal assistance
of our mortgage professionals. In many cases, the mortgage professionals use our
on-line tools to assist those consumers whose applications fall outside the
parameters of the fully-automated process. These consumers include borrowers who
are self-employed or have credit problems, or who are purchasing investment
property. In addition, if the automated underwriting system is unable to approve
an application, the consumer is provided with a detailed and understandable list
of the reasons why the mortgage application was not approved, which is intended
to facilitate re-application.
MONUMENT MORTGAGE
Although a mortgage broker is generally more familiar with the mortgage
lending process, the broker must still contend with many time consuming and
paper intensive tasks involved in the mortgage lending
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process. To assist the mortgage broker, we provide the mortgage broker with
access to our automated, on-line mortgage approval process. A mortgage broker
can access our services either through the submission of traditional paper files
to our loan processors or electronically through automated underwriting
software. In either case, we use our automated technology to process the
mortgage broker's loan application quickly and efficiently. We are developing an
on-line monitoring system that will enable the mortgage broker to monitor in
real time the status of loans submitted to us.
TECHNOLOGY
We are building our technology systems by combining our own proprietary
technologies with the commercially licensed Internet technologies such as:
- GHR Systems' PremierWare software components for pricing, product searches
and analysis;
- Tuttle & Co.'s LockPoint Xtra for interest rate risk management; and
- GMAC/RFC's RFConnects for warehouse line management.
SOFTWARE AND SYSTEMS
Through our proprietary iQualify technology, we are directly linked to the
underwriting systems of the investors who will eventually purchase the closed
loans from us. Therefore, any loan which is approved through iQualify is also
approved by the investor who will ultimately purchase it from us. iQualify also
tracks mortgage rates and e-mails consumers when their target rate has been
reached.
We are configuring our commercially licensed software to:
- search qualifying product information from more than 50 lenders following
approval;
- provide the correct pricing for the combination of mortgage features
selected;
- perform a variety of mortgage-related computations, such as maximum
affordable sale price, minimum required cash, specified cash investment
and specified monthly payment computations;
- complete a "checklist document" based on the requirements of specific
transactions;
- access an independently maintained, comprehensive closing cost database of
fees for all 50 states on a county-by-county basis;
- provide automated tracking status of a loan, or loans in the case of our
mortgage broker business customers, through the lending process; and
- allow a mortgage broker or consumer to directly "lock-in" a rate and
points on loans in process.
SERVER HOSTING AND BACK-UP
Our website's hardware systems are housed at our facilities in San Ramon,
California, where we have redundant power back-up and redundant communications
lines. Our routers are configured for load balancing and fault tolerance. We
have a strict maintenance schedule for our hardware and are not required to take
our website off-line to perform scheduled maintenance.
SECURITY
Through a Linux firewall we are able to maintain the integrity of our system
by blocking unauthorized traffic. The firewall is accessible only via the
console which is housed in a secure cage at our facility. In addition, all
sensitive transmissions between the client and server are encrypted.
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MARKETING
We intend to selectively pursue business partnerships in order to leverage
our current market position, increase our on-line visibility, and accelerate
distribution of our services. We intend to operate primarily in the
business-to-business channel by providing increased services to mortgage broker
businesses. We incurred large general advertising expenditures to promote our
brand name during the eight months ended December 31, 1999. Due to our shift in
focus to the business-to-business channel, we expect to significantly decrease
advertising costs for brand name promotion, which are associated with the
consumer direct channel. However, we may incur additional other costs of
expanding our sales force consistent with supporting a business-to-business
infrastructure.
BUSINESS-TO-BUSINESS CHANNEL
We intend to increase our brand awareness with mortgage broker businesses
by:
- building a strong sales force that will market our services by personal
contact and assist mortgage brokers in adopting on-line technologies;
- introducing new Internet-oriented services; and
- employing traditional marketing strategies, including participation in
trade shows and conferences, advertising in industry publications, flyers
and broker loyalty programs.
We believe that rapid expansion of our national sales force and the
resulting increase in revenues attributed them is critical to our success.
CONSUMER DIRECT CHANNEL
We recently changed our consumer direct channel strategy by significantly
narrowing our target group of consumers. During the eight months ended
December 31, 1999, our primary marketing strategy included affiliations and
business alliances with general interest websites as well as websites catering
to homebuyers and real estate agents. We entered into a number of marketing
arrangements with websites such as XOOM, AskJeeeves, Homeseekers.com,
CoxInteractive Media and others. We incurred $6.2 million of marketing expense
in pursuit of this strategy. However, these marketing programs did not result in
the volume increases we expected and the resulting customer acquisition costs
per loan were prohibitive. Therefore, we discontinued the majority of these
programs and affiliations late in the period ended December 31, 1999, and will
be winding them down in the first quarter of calendar 2000.
Our new strategy includes selectively marketing our services through
affinity arrangements and private label arrangements that target specific
consumer groups. In private label arrangements, we will create websites to
prominently display our partners' names and logos with a unique appearance and
operate the websites.
MORTGAGE OPERATIONS
While we currently make loans primarily in California, we are licensed to
originate and fund mortgages in 49 states and the District of Columbia. We
expect that the proportion of loans we make outside of California will increase
as a result of the expansion of our nationwide sales force.
LOAN PRODUCT TYPES
FiNet.com offers consumers a variety of new and traditional mortgage
products through its nationwide network of lenders, which includes our Monument
Mortgage subsidiary. Monument Mortgage offers consumers and mortgage broker
businesses a wide array of first mortgage products, including 15 and 30-year
fixed rate loans, balloon loans and adjustable rate loans. Monument Mortgage
also offers second
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mortgages and home equity lines of credit. The following is a description of the
types of mortgage loans currently offered by Monument Mortgage.
CONFORMING MORTGAGE LOANS
Conforming mortgage loans are mortgage loans that conform to the
underwriting standards established by one of the government-sponsored mortgage
entities, Fannie Mae or Freddie Mac, and are originated and generally sold by us
directly to Fannie Mae or Freddie Mac.
JUMBO MORTGAGE LOANS
Jumbo mortgage loans do not satisfy the criteria to be conforming loans
solely because they exceed the maximum loan size, currently $252,700 for
single-family homes. We sell all the jumbo mortgage loans we originate to
institutional investors such as Bank of America or privately sponsored mortgage
conduits such as GE Capital Mortgage and GMAC/RFC, among others.
ALTERNATIVE A MORTGAGE LOANS
Alternative A mortgage loans fail to satisfy one or more elements of the
jumbo or Fannie Mae/ Freddie Mac loan underwriting criteria, such as those
relating to documentation, employment history, income verification,
loan-to-value ratios, credit history, qualifying ratios or borrower net worth.
We originate mortgage loans that do not satisfy one or more of the underwriting
criteria but which, in our estimation, based primarily on the borrower's credit
score and loan-to-value ratios for the property, present a risk profile
comparable to conforming loans. We generally sell these loans to GMAC/RFC and
IndyMac.
HOME EQUITY AND SECOND MORTGAGE LOANS
Home equity and second mortgage loans are secured by second liens on the
related property. Home equity mortgage loans take the form of a line of credit
while second mortgage loans are "closed-end" loans. Both types of loans are
designed primarily for high credit quality borrowers and are underwritten
according to the standards of the investor to which the loans will be sold. Home
equity lines generally provide for either a 5-year or 15-year draw period,
during which the borrower may make cash withdrawals, and a 10-year repayment
period during which the amount outstanding at the end of the draw period is
amortized. Only interest payments are made during the draw period. Second
mortgage loans are "closed-end," that is they are fixed in amount at the time of
origination and typically amortize over the term of the loan or have a balloon
payment feature. Home equity lines generally bear adjustable interest rates
while second mortgage loans typically bear fixed interest rates. Both types of
loans are frequently originated in conjunction with our origination of a
first-lien mortgage loan on the related property. We generally sell these loans
to Homecomings, a GMAC/RFC subsidiary.
SUB-PRIME MORTGAGE LOANS
This category consists of mortgage loans for borrowers who have impaired or
limited credit profiles or higher debt-to-income ratios than would be acceptable
for sale of such loans to one of the agencies or private-sponsored mortgage
conduits. Such mortgage loans may also fail to satisfy the underwriting criteria
of the government-sponsored entities in other ways. We categorize these mortgage
loans based on the borrower's credit profile as "A-" or "B" or loans which are
generally considered "non-prime" mortgage loans in the secondary mortgage
market. We do not originate mortgage loans that our automated underwriting
system would categorize as "C" or "D" loans. We currently sell the "A-" or "B"
loans we originate to investors such as GMAC/RFC.
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LOAN ORIGINATION
The following table summarizes our originations for the categories of
mortgage loans by type in the periods indicated for our ongoing businesses.
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ENDED
DECEMBER 31 FISCAL YEAR ENDED APRIL 30
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1999 1998 1999 1998 1997
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CONFORMING MORTGAGE LOANS
Number of loans................................ 2,546 3,437 4,660 2,530 1,903
Volume (in millions of dollars)................ $371.9 $514.3 $705.6 $359.6 $247.8
% of category volume we funded................. 85% 85% 84% 100% 100%
% of total loan volume......................... 79% 81% 75% 70% 72%
JUMBO MORTGAGE LOANS
Number of loans................................ 358 318 415 164 183
Volume (in millions of dollars)................ $112.3 $101.5 $148.7 $ 52.7 $ 55.9
% of category volume we funded................. 81% 54% 51% 100% 100%
% of total loan volume......................... 11% 8% 16% 10% 16%
ALTERNATIVE A MORTGAGE LOANS
Number of loans................................ 128 247 279 340 203
Volume (in millions of dollars)................ $ 26.4 $ 49.7 $ 55.0 $ 69.2 $ 33.2
% of category volume we funded................. 100% 100% 100% 100% 100%
% of total loan volume......................... 4% 6% 6% 13% 10%
HOME EQUITY MORTGAGE LOANS
Number of loans................................ 186 230 311 412 297
Volume (in millions of dollars)................ $ 8.2 $ 8.3 $ 11.8 $ 15.3 $ 10.5
% of category volume we funded................. 100% 97% 100% 100% 100%
% of total loan volume......................... 6% 5% 1% 3% 3%
SUB-PRIME MORTGAGE LOANS
Number of loans................................ -- -- 104 128 32
Volume (in millions of dollars)................ -- -- $ 17.2 $ 19.3 $ 4.2
% of category volume we funded................. -- -- 100% 100% 100%
% of total loan volume......................... -- -- 2% 4% 1%
FHA/VA
Number of loans................................ 2 -- 4 2 6
Volume (in millions of dollars)................ $ 0.2 -- $ 0.5 $ 0.3 $ 0.6
% of category volume we funded................. 100% -- 100% 100% 100%
% of total loan volume......................... * -- * * *
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* Less than one percent
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The following table summarizes originations for the categories of mortgage
loans by type in the periods indicated for our discontinued businesses.
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EIGHT MONTHS
ENDED
DECEMBER 31 FISCAL YEAR ENDED APRIL 30
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1999 1998 1999 1998 1997
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CONFORMING MORTGAGE LOANS
Number of loans.................................... -- 560 551 -- --
Volume (in millions of dollars).................... -- $ 64.6 $ 63.5 -- --
100% funded through mortgage bank.................. -- 100% 100% -- --
% of total loan volume............................. -- 15% 16.0% -- --
SUB-PRIME MORTGAGE LOANS
Number of loans.................................... -- 542 801 1,335 500
Volume (in millions of dollars).................... -- $ 41.1 $ 64.7 $ 93.4 $35.4
100% funded through mortgage bank.................. -- 100% 100% 100% 100%
% of total loan volume............................. -- 14% 17% 100% 100%
FHA/VA
Number of loans.................................... -- 2,702 2,702 -- --
Volume (in millions of dollars).................... -- $260.1 $260.1 -- --
100% funded through mortgage bank.................. -- 100% 100% -- --
% of total loan volume............................. -- 71% 67% -- --
</TABLE>
The following table summarizes our originations of mortgage loans by purpose
in the periods indicated for our ongoing businesses.
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED
DECEMBER 31 FISCAL YEAR ENDED APRIL 30
---------------------- ------------------------------------
1999 1998 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PURCHASE
Number of loans................................ 1,617 1,036 1,405 1,080 1,171
Volume (in millions of dollars)................ $275.2 $171.4 $233.2 $167.7 $180.4
% of category volume we funded................. 89% 88% 90% 100% 100%
% of total loan volume......................... 50% 24% 25% 32% 51%
REFINANCING
Number of loans................................ 1,401 2,917 4,018 2,010 1,126
Volume (in millions of dollars)................ $234.9 $492.6 $691.6 $330.4 $160.6
% of category volume we funded................. 80% 79% 76% 100% 100%
% of total loan volume......................... 44% 69% 74% 64% 46%
HOME EQUITY MORTGAGE LOANS
Number of loans................................ 202 279 380 486 327
Volume (in millions of dollars)................ $ 8.9 $ 9.8 $ 14.0 $ 18.3 $ 11.2
% of category volume we funded................. 98% 98% 99% 100% 100%
% of total loan volume......................... 6% 7% 1% 4% 3%
</TABLE>
12
<PAGE>
The following table summarizes our originations of mortgage loans by purpose
in the periods indicated for our discontinued businesses.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
DECEMBER 31 FISCAL YEAR ENDED APRIL 30
---------------------- ------------------------------------
1999 1998 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PURCHASE
Number of loans.................................. -- 1,564 1,725 463 182
Volume (in millions of dollars).................. -- $156.7 $165.0 $27.1 $10.1
100% funded through mortgage bank................ 100% 100% 100% 100%
% of total loan volume........................... -- 88% 42% 29% 29%
REFINANCING
Number of Loans.................................. -- 2,177 2,329 872 318
100% funded through mortgage bank................ 100% 100% 100% 100%
Volume (in millions of dollars).................. -- $207.4 $223.3 $66.3 $25.3
% of total loan volume........................... -- 12% 58% 71% 71%
OTHER
Number of Loans.................................. 63 -- -- --
Volume (in millions of dollars).................. $ 1.7 -- -- --
100% funded through mortgage bank................ 100% -- -- --
% of total loan volume........................... 2% -- -- --
</TABLE>
- ------------------------
* Less than one percent
The following table summarizes our originations of mortgage loans by channel
in the periods indicated for our ongoing businesses.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
DECEMBER 31 FISCAL YEAR ENDED APRIL 30
---------------------- ------------------------------------
1999 1998 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSUMER CHANNEL
Volume (in millions of dollars)................ $102.3 $144.1 $265.3 $ 24.7 $ 13.5
% of total loan volume......................... 20% 21% 28% 5% 4%
BUSINESS CHANNEL
Volume (in millions of dollars)................ $416.7 $529.7 $673.5 $491.7 $338.7
% of total loan volume......................... 80% 79% 72% 95% 96%
</TABLE>
The following table summarizes our originations of mortgage loans by channel
in the periods indicated for our discontinued businesses.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
DECEMBER 31 FISCAL YEAR ENDED APRIL 30
---------------------- ------------------------------------
1999 1998 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSUMER CHANNEL
Volume (in millions of dollars).................. -- $ 47.9 $ 49.8 $ 9.1 --
% of total loan volume........................... -- 13% 13% 10% --
BUSINESS CHANNEL
Volume (in millions of dollars).................. -- $317.9 $338.5 $84.3 $35.4
% of total loan volume........................... -- 87% 87% 90% 100%
</TABLE>
13
<PAGE>
GEOGRAPHIC CONCENTRATION
The following table summarizes our loan originations by state in the periods
indicated for our ongoing businesses.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
DECEMBER 31 FISCAL YEAR ENDED APRIL 30
---------------------- ------------------------------------
1999 1998 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CALIFORNIA
Number of loans................................ 2,681 3,476 4,856 2,826 1,846
Volume (in millions of dollars)................ $448.8 $578.8 $820.7 $428.1 $264.2
% of total loan volume......................... 83% 86% 87% 83% 75%
WASHINGTON
Number of loans................................ 75 191 211 46 147
Volume (in millions of dollars)................ $ 10.9 $ 23.5 $ 26.1 $ 5.9 $ 18.3
% of total loan volume......................... 2% 3% 3% 1% 5%
COLORADO
Number of loans................................ 85 259 319 231 136
Volume (in millions of dollars)................ $ 10.6 $ 34.6 $ 42.5 $ 28.0 $ 17.5
% of total loan volume......................... 3% 5% 5% 5% 5%
OREGON
Number of loans................................ 82 112 139 213 146
Volume (in millions of dollars)................ $ 10.9 $ 14.8 $ 18.1 $ 23.3 $ 14.2
% of total loan volume......................... 3% 2% 2% 5% 4%
NEVADA
Number of loans................................ 15 9 22 83 119
Volume (in millions of dollars)................ $ 2.3 $ 2.3 $ 4.1 $ 10.1 $ 14.0
% of total loan volume......................... *% *% *% 2% 4%
ALL OTHER STATES
Number of loans................................ 282 185 256 177 230
Volume (in millions of dollars)................ $ 35.5 $ 19.8 $ 27.3 $ 21.0 $ 24.0
% of total loan volume......................... 9% 4% 3% 4% 7%
</TABLE>
- ------------------------
* Less than one percent
14
<PAGE>
The following table summarizes our originations of mortgage loans by state
in the periods indicated for our discontinued businesses.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
DECEMBER 31 FISCAL YEAR ENDED APRIL 30
---------------------- ------------------------------------
1999 1998 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CALIFORNIA
Number of loans.................................. -- 1,253 1261 -- --
Volume (in millions of dollars).................. -- $140.7 $142.2 -- --
% of total loan volume........................... -- 33% 36% -- --
GEORGIA
Number of loans.................................. -- 471 474 -- --
Volume (in millions of dollars).................. -- $ 45.1 $ 45.6 -- --
% of total loan volume........................... -- 12% 12% -- --
FLORIDA
Number of loans.................................. -- 351 388 210 80
Volume (in millions of dollars).................. -- $ 30.2 $ 33.8 $14.5 $ 4.7
% of total loan volume........................... -- 9% 9% 16% 13%
NEVADA
Number of loans.................................. -- 298 299 -- --
Volume (in millions of dollars).................. -- $ 38.7 $ 39.0 -- --
% of total loan volume........................... -- 8% 10% -- --
PENNSYLVANIA
Number of loans.................................. -- 175 228 360 114
Volume (in millions of dollars).................. -- $ 10.8 $ 14.5 $20.5 $ 6.3
% of total loan volume........................... -- 5% 4.0% 22.0% 18.0%
NEW JERSEY
Number of loans.................................. -- 113 145 275 123
Volume (in millions of dollars).................. -- $ 10.2 $ 13.0 $23.3 $10.0
% of total loan volume........................... -- 3% 3% 25% 28%
ALL OTHER STATES
Number of loans.................................. -- 1,143 1,259 490 183
Volume (in millions of dollars).................. -- $ 90.1 $100.2 $35.1 $14.4
% of total loan volume........................... -- 30% 26% 37% 41%
</TABLE>
UNDERWRITING
If Monument Mortgage chooses to have a loan funded and closed by another
lender, that lender is responsible for underwriting the loan and may choose to
re-underwrite the loan. If Monument Mortgage funds a loan direclty, we use the
streamlined underwriting process by accepting the consumer's automated
underwriting results. Because we do not hold mortgage loans for investment, we
underwrite each mortgage loan to criteria provided by the investor we expect to
purchase the loan. By using automated underwriting systems accepted by our
investors, we reduce the risk of an investor rejecting the loan for underwriting
reasons.
Mortgage investors' underwriting criteria generally include such items as
the borrower's mortgage, installment loan payments and credit history,
employment history, capacity to pay, outstanding judgments, charge-offs and
repossessions involving the borrower, and involvement in bankruptcies by the
borrower and foreclosures. Since loans are secured by a mortgage lien, an
appraisal of the property securing the loan is also required.
To maintain the integrity of the underwriting process, we do not permit our
loan production personnel, including loan originators and Internet service
representatives, to underwrite the mortgage
15
<PAGE>
loans which they originate. All underwriting reviews and decisions for loans
underwritten by us are conducted by separate underwriters who have no other
involvement with the loans.
COMPLIANCE/QUALITY CONTROL
COMPLIANCE
Our legal/compliance team is responsible for compliance and licensing. This
centralized compliance function allows us to control and supervise regulatory
compliance and offer consistency to our customers. Additionally, the compliance
group develops loan documents for new products and maintains lending and broker
licenses.
QUALITY ASSURANCE
Prior to funding a loan, we perform a pre-closing audit to ensure the loan
meets investor requirements. The pre-closing audit includes the following items:
- a new credit report is obtained;
- a cross reference check is performed to determine if the borrower or
property has been previously submitted for a loan;
- a verbal verification of current employment is completed; and
- for most self-employed borrowers, the IRS is contacted to confirm annual
income.
QUALITY CONTROL
Our quality control personnel continuously sample closed loans to verify
their compliance with legal documentation requirements and for accuracy and
potential fraud. These quality control reviews enable us to monitor, evaluate
and improve the overall quality of loan production and to identify and
communicate to the legal/compliance team and management existing and potential
underwriting problems.
We currently utilize the services of an independent quality control
provider. Each month our quality control provider reviews a random 10% sample of
loans funded by us. The review includes:
- a credit underwriting review;
- a complete loan package re-verification;
- a loan program compliance review; and
- a federal regulatory compliance review.
Every loan selected for review undergoes a complete re-verification of
employment, deposit, mortgage and rental history. A new residential mortgage
credit report is ordered on 10% of the selected loans, while a new review
appraisal is ordered on another 10% of the selected loans. This review also
includes procedures intended to detect evidence of fraudulent documentation
and/or imprudent activity during the processing, funding, servicing or selling
of the mortgage loan. Verification of occupancy and applicable information is
made by regular mail. Over each 12-month period, our quality control provider is
required to include loans of all product types, all states of operation and all
loans with high-risk characteristics. Its quality control reports include
individual loan overviews, loan group overviews and key trends or patterns
summarized on a monthly and year-to-date basis. We evaluate our provider's
quality control reports on a regular basis and address any deficiencies
specified in the reports. To date, these quality control reviews have not
uncovered any material deficiencies.
16
<PAGE>
REPURCHASES
Our agreements to sell loans to institutional lenders generally require us
to repurchase any loan if the representations made in the agreement are
materially inaccurate. Such representations are customary in sales agreements
and generally relate to the qualification of the borrower. See "Risk Factors--If
we have to repurchase loans originated for or sold to lenders, our operating
results could be materially adversely affected."
FINANCING AND SALE OF LOANS AND SERVICING RIGHTS
WAREHOUSE FINANCING
We use our secured $75 million revolving credit facility as well as a
$15 million purchase repurchase credit facility to fund loan originations and
finance originated loans until they are sold. During the eight month period
ending December 31, 1999, 42% of our loans funded by Monument Mortgage were sold
to Fannie Mae. We are required to comply with various operating and financial
covenants including covenants relating to:
- net worth;
- maximum debt limits;
- debt to equity ratio;
- rate of liability growth
- changes in our executive management; and
- continued quotation on Nasdaq.
At December 31, 1999, our liability growth rate exceeded the permitted
amount in our primary warehouse lending agreement. Subsequent to December 31,
1999, the lender waived the default. This facility expires on May 31, 2000. At
December 31, 1999, the outstanding balance under our facilities was
$80.5 million. We are in the process of obtaining additional funding facilities.
INTEREST RATE RISK MANAGEMENT
Prior to the sale of originated mortgage loans, we bear the market risk on
the value of the loans. If market interest rates rise between the time we commit
to originate a loan at a specific rate and the time such loans are priced for
sale, the market price of the loan declines, resulting in a loss on the sale of
the loan. To protect against such losses, we attempt to manage our interest rate
risk exposure through hedging transactions using a combination of forward sales
of mortgage-backed securities and forward whole-loan sales to fix the sales
price of loans we expect to close. Forward sales means sales of loans with
settlement dates more than five days in the future. Before entering into forward
sales, forward commitments or hedging, we perform an analysis of our loans with
committed interest rates, taking into account such factors as the estimated
portion of such loans that will ultimately be funded, note rate, interest rates,
inventories of loans and applications and other factors to determine the type
and amount of forward commitment and hedging transactions. We attempt to make
forward commitments for or hedge substantially all of our estimated interest
rate risk on our loans. We do not believe that hedging our interest rate risk
with respect to our non-prime loans is cost effective because these loans
generally have higher interest spreads and generally lack sensitivity to
interest rate changes due to their credit characteristics and the short period
of time we hold them. We believe that we have implemented a cost-effective
hedging program to provide a level of protection against changes in the market
value of our fixed-rate mortgage loans held for sale. We utilize the services of
a nationally known risk management consultant, Tuttle & Co., to assist us. An
effective hedging strategy is complex, and no hedging strategy can completely
insulate us against interest rate changes.
17
<PAGE>
LOAN SALES
We customarily sell all loans we fund to a number of investors, including:
the government-sponsored mortgage entities, institutional investors, and
national privately-sponsored mortgage conduits. A primary component of our
business strategy is to seek the most efficient method of selling our mortgage
loans. We evaluate the sale of each mortgage loan type and compare prices
available for each alternative method of sale, given current market conditions
at the time and the risk characteristics of the mortgage loan type to determine
which method of sale to utilize.
We currently sell our conforming loans through concurrent transactions or
assignments of trade or whole-loan sales. Concurrent transactions involve a sale
of the underlying mortgage loan directly to Fannie Mae or Freddie Mac with a
concurrent sale of the servicing rights to an independent servicer. Assignment
of trade sales are sales of conforming loans to a third party along with an
assignment of the associated mortgage backed security commitment/trade. The
third party then exchanges the loans with Fannie Mae or Freddie Mac for mortgage
backed securities issued by them, which are then delivered against the assigned
trade. In a whole-loan sale, individual loans are underwritten to the standards
of and sold to a specific buyer on a forward commitment or over-the-counter
basis. Jumbo and Alternative Mortgage loans are currently sold in whole-loan
sales on a forward commitment basis. We sell our non-prime loans, home equity
lines and closed-end second mortgage loans through whole-loan sales.
The sale of mortgage loans may generate a cash and an accounting gain or
loss. Gains or losses result primarily from two factors. First, we may originate
a loan at a price that may be higher or lower than we would receive if we
immediately sold the loan in the secondary market. These pricing differences
occur principally as a result of competitive pricing conditions in the primary
loan origination market. Second, gains or losses may result from changes in
interest rates that cause changes in the market value of the loans from the time
the price commitment is given to the customer until the time that the loan is
sold to the investor. We apply interest rate risk management techniques to
reduce the net effect of interest rate changes on the gain or loss on loan
sales.
We sell some of our loans on a forward commitment or other deferred delivery
and payment basis and have credit risk exposure to the extent purchasers are
unable to meet the terms of their forward purchase contracts. As is customary in
the marketplace, none of the forward payment obligations of any of our
counterparties is currently secured or subject to margin requirements, although
we attempt to limit our credit exposure on forward sales arrangements by
entering into forward sales contracts exclusively with institutions that we
believe are sound credit risks, and by limiting our exposure to any single
counterparty.
SALES OF SERVICING RIGHTS
When a loan is originated, a corresponding right to service the loan is
created. Although in fiscal 1999 and 1998 we had a small loan servicing
portfolio, our current strategy is to realize the value of this right by selling
our loans without retaining the right to service the loan or by selling the
servicing rights separately from the loan. As a result, we minimize risk
associated with defaults and early prepayments of those loans. However, we
service the loans we close between the date of funding the loan and the date we
sell the loan and the related servicing in the secondary market. We sold our
loan servicing portfolio in August 1999, and we have no plans for retaining
servicing rights on loans we underwrite, fund and close.
RECOURSE
By selling all the loans we close, we reduce our exposure to default risk
(other than first-payment defaults by customers) and most of the prepayment risk
normally inherent in the mortgage lending business. However, in connection with
whole-loan sales and exchanges, we make representations and warranties to the
buyers of the loans relating to, among other things, compliance with laws,
regulations and program standards and accuracy of information. In the event of a
breach of these representations and warranties, we may be required to repurchase
these mortgage loans and indemnify the investors for
18
<PAGE>
damages caused by the breach. If a repurchase request is made, we would either
attempt to remedy the deficiency and have the investors rescind the rejection of
the mortgage loan or refinance or sell the mortgage loan, sometimes at a loss.
In addition, in connection with some non-prime loan sales, we may be required to
return a portion of the premium received upon the sale of the loan if the loan
is prepaid by the borrower within the first year after sale. We have been able
to minimize the risks of loan rejection and repurchase of loans made by Monument
Mortgage by using automated underwriting systems and by implementing a stringent
quality assurance program that monitors the most important stages of the
mortgage loan closing process. We may be obligated, however, to repurchase loans
made by some of the companies we acquired. See "Risk Factors--If we have to
repurchase loans originated for or sold to lenders, our operating results could
be materially adversely affected."
MORTGAGE BANKING REGULATION
Our operations are subject to extensive regulation by federal and state
authorities. For example, the United States Department of Housing and Urban
Development, or HUD, regulates certain aspects of the mortgage lending business,
as do the Federal Reserve Board and the Federal Trade Commission. The Real
Estate Settlement Procedures Act of 1974, or RESPA, and the Truth in Lending
Act, Federal statutes, require that certain disclosures, such as good faith
estimates of settlement charges, a Truth-in-Lending Statement and a HUD-1
settlement statement be provided to borrowers and that certain information, such
as the HUD Settlement Costs booklet, also be provided to borrowers. The Federal
Fair Housing Act and the Equal Credit Opportunity Act prohibit discrimination
and various state statutes prohibit unfair and deceptive trade practices, and
impose disclosure and other requirements in connection with the mortgage loan
origination process. If we fail to comply with such regulations, possible
consequences could include loss of approved status, demands for indemnification,
class action lawsuits and administrative enforcement actions.
Additionally, RESPA contains certain prohibitions regarding the giving or
taking of a fee, kickback, or anything of value for the referral of business to
any specific person or organization. However, the payment of reasonable
compensation for the provision of goods, services and facilities is generally
not prohibited.
In California, regulation and licensing of mortgage brokers and lenders
falls under the California Department of Real Estate or the California
Department of Corporations. Other than banking industry employees and other
persons who are exempt from the licensing requirements of the California
Department of Real Estate and California Department of Corporations, individuals
engaged directly in the origination of loans or the dissemination of certain
information are required to be licensed by the California Department of Real
Estate or the California Department of Corporations. We and some of our
subsidiaries are also required to be licensed in other states in which we have
offices or operate. Although we have the licenses required in California and 48
other states and believe that we will be able to obtain licenses required in the
remaining state, we cannot be sure that we will successfully comply with the
many government regulations and licensing requirements to which we are subject.
If we fail to comply with these legal requirements, it could have a material
adverse effect on our business, financial condition and results of operations.
COMPETITION
The e-mortgage market is new, rapidly evolving and intensely competitive.
Because the barriers to entry are minimal, we expect competition to intensify in
the future. We believe we compete based on service and price.
In addition, the residential mortgage loans business is highly competitive.
We currently compete with a variety of other companies offering mortgage
services, including:
- various on-line mortgage brokers, including E-LOAN Inc., iOwn.com,
Mortgage.com, Quicken Mortgage and Keystroke Financial;
19
<PAGE>
- mortgage companies that offer products through on-line search engines,
such as Yahoo! and Microsoft Corporation's Home Advisor website;
- mortgage banking companies, commercial banks, savings associations, credit
unions and other financial institutions which still originate the vast
majority of mortgage loans; and
- mortgage brokers.
Many of our mortgage banking and mortgage brokerage competitors have longer
operating histories or significantly greater financial, technical, marketing and
other resources than we do. Some of our on line competitors are spending
substantial funds on mass marketing and branding their mortgage services. In
addition, some of our competitors offer a wider range of services and financial
products to customers and have the ability to respond more quickly to new or
changing opportunities. As a result, many have greater name recognition and more
extensive customer bases and can offer more attractive terms to customers,
including more aggressive loan pricing policies.
INTELLECTUAL PROPERTY
Trademarks and other proprietary rights are important to our success and our
competitive position. We currently hold a number of trademarks, service marks,
patents and copyrights. Although we seek to protect our trademarks and other
proprietary rights through a variety of means, we may not have taken adequate
steps to protect these rights. We will continue to license content from third
parties in the future and it is possible that we could be subjected to
infringement actions based upon the content licensed from these third parties.
Any claims brought against us, regardless of their merit, could result in costly
litigation and the diversion of our financial resources and technical and
management personnel. Further, if such claims are proved valid, through
litigation or otherwise, we may be required to change our trademarks or other
proprietary marks and pay financial damages, which could adversely affect our
business.
We currently enter into confidentiality or license agreements with our new
employees, consultants and corporate partners to control access to and
distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our proprietary rights. The steps we have taken may not prevent misappropriation
of our proprietary rights, particularly in foreign countries where laws or law
enforcement practices may not protect our proprietary rights as fully as in the
United States.
EMPLOYEES
As of February 29, 2000, we had 126 full-time and 7 part-time employees. 28
employees comprise the consumer direct division and 53 employees comprise the
business-to-business division. Fify-two employees comprise marketing,
technology, administration and support areas. None of our employees is
represented by a union. Management believes that its relations with employees
are good.
20
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding FiNet.com's
executive officers and directors as of March 1, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------------
<S> <C> <C>
Rick Cossano................................. 43 President, Chief Executive Officer, Member of
the Board of Directors
L. Daniel Rawitch............................ 41 Vice Chairman of the Board
W. Robert Snow............................... 41 Executive Vice President--Business to Business
Gary A. Palmer............................... 46 Executive Vice President--Chief Financial
Officer
S. Lewis Meyer(1)(2)......................... 54 Director
Stephen J. Sogin, Ph.D.(2)................... 55 Director
Richard E. Wilkes(1)(2)...................... 53 Director
Antonio P. Falcao(1)......................... 27 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
RICK COSSANO has served as President, Chief Executive Officer and a member
of the Board of Directors since February 2000. Prior to joining FiNet.com,
Mr. Cossano was the President and Chief Operating Officer of LandSafe
Title, Inc. from 1996 to 2000 and the Executive Vice President of the Wholesale
Lending Division and Consumer Markets Division for Countrywide Home Loans from
1993 to 1996.
L. DANIEL RAWITCH has served as Vice Chairman of the Board since May 1999.
He also served us in various other positions, including as President of
FiNet.com from October 1998 to May 1999 and as its Chief Executive Officer from
May 1995 to October 1998. Prior to joining FiNet.com, he served as Chief
Executive Officer of Residential Pacific Mortgage, Inc., from 1989 until it was
acquired by FiNet.com in August 1994.
W. ROBERT SNOW has served as FiNet.com's Executive Vice
President-Business-to-Business since February 2000. Prior to joining FiNet.com,
he was Regional Vice President for Countrywide Home Loans from March 1996 to
December 1999. From 1992 to 1996, Mr. Snow served as Wholesale Operations
Manager for First Franklin Financial Corporation.
GARY A. PALMER has served as FiNet.com's Executive Vice President--Chief
Financial Officer since December 1998. Prior to joining FiNet.com, he was an
independent financial consultant from January 1997 to December 1998. From
October 1995 to December 1997, he served as Executive Vice President, Chief
Financial Officer and Secretary of Southern Pacific Funding Corporation. Prior
to that, Mr. Palmer served as Senior Vice President and Treasurer of Gentra
Capital Corporation. Mr. Palmer received his B.S. degree in Business
Administration from the University of Vermont and his M.B.A. degree from the
University of North Carolina at Chapel Hill.
S. LEWIS MEYER has served as a director since January 1997. Since
June 1993, Dr. Meyer has served as President and Chief Executive Officer of
Imatron Inc., a company engaged in designing, manufacturing and marketing a high
performance tomography scanner. From April 1991 until joining Imatron,
Dr. Meyer was Vice President, Operations of Otsuka Electronics (U.S.A.), Inc.
From August 1990 to April 1991, he was a founding partner of Medical Capital
Management, a company engaged in providing consulting services to medical
equipment manufacturers, imaging services providers and related medical
professionals. Before that, he was Founder, President and Chief Executive
Officer of American Health Services Corp. (now Insight Health Services), a
developer and operator of diagnostic imaging and treatment centers. Dr. Meyer is
also a director of BSD Medical Corporation. Dr. Meyer received his B.S. degree
in
21
<PAGE>
Physics from the University of the Pacific and his M.S. and Ph.D. degrees in
Physics from Purdue University.
STEPHEN J. SOGIN has served as a director since March 1990. Dr. Sogin is a
venture capitalist. From December 1984 until January 1995, he was a general
partner of Montgomery Medical Ventures. In July 1997, Dr. Sogin consented to a
cease and desist order issued by the SEC involving his late filing of Forms 3, 4
and 5 which he was required to file in his capacity as a general partner of
Montgomery Medical Ventures II. None of the SEC's findings involve charges that
Dr. Sogin received improper gains or personal benefits as a result of these
violations. Dr. Sogin has advised FiNet.com that the trades in question were
conducted by the partnership (Montgomery Medical Ventures II) and none of these
trades were executed by him personally. Dr. Sogin is also a director of
Osteotech, Inc. Dr. Sogin received his B.S., M.S. and Ph.D. degrees in
microbiology from the University of Illinois.
RICHARD E. WILKES has served as a director since November 1998. Since
April 1999 he has been President and Chief Executive Officer of IMX, Inc., a
company engaged in the business of electronic trading of mortgages. Prior to
that he was a principal in Mortgage Outsource Services, a provider of pre- and
post-closing services to the residential mortgage industry. In October 1995,
Mr. Wilkes founded Group Millennium, a consulting company specializing in
mergers and acquisitions and strategic planning for the mortgage banking
industry. From 1989 to 1995, Mr. Wilkes was employed by MacAndrews and Forbes
Holdings, Inc.
ANTONIO P. FALCAO has served as a director since February 1999. Since 1994,
Mr. Falcao has been the Chief Financial Officer for several companies of the A.
Amorim Group, a business group based in Portugal that owns Banco Nacional de
Credito Imobiliario, a Portuguese real estate bank. The A. Amorim Group, which
is affiliated with Americo Ferreira Amorim, one of our largest stockholders,
also has interests in the cork, textile, hotel, oil, finance and
telecommunications industries. Mr. Falcao received his degree in Finance and
Economics from the University of Oporto.
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
See the Notes to our Consolidated Financial Statements for financial
information of the two business segments or channels we operate in: the
business-to-business channel and the consumer direct channel.
BUSINESS RISKS
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 2. DESCRIPTION OF PROPERTY
We relocated our headquarters and operations to in San Ramon, California,
from Walnut Creek, California, where our current facility occupies approximately
39,335 square feet of space. In addition to housing the administrative offices,
this facility houses operations of both our business-to-business and our
consumer-direct segments. The lease for this facility expires in April 2004.
We have an east coast facility located in East Norriton, Pennsylvania which
occupies approximately 3,705 square feet of space. This facility houses
operations for the consumer-direct segment. The leases for this facility expire
in November 2000 and June 2002.
We believe that our facilities are adequate to support anticipated
operations.
ITEM 3. LEGAL PROCEEDINGS
On January 14, 1998, prior to our acquisition of Mical, a lawsuit was filed
against Mical in the United States District Court for the Middle District of
Georgia. The complaint alleges, among other things, that in
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connection with residential mortgage loan closings, Mical made certain payments
to mortgage brokers in violation of the RESPA and induced mortgage brokers to
breach their alleged fiduciary duties to their customers. The plaintiffs seek
unspecified compensatory and punitive damages as to certain claims. We believe
that our compensation programs for mortgage brokers comply with applicable laws
and with long standing industry practices. We intend to defend vigorously
against this action and believe that the ultimate resolution will not have a
material adverse effect on our business, results of operations and financial
condition.
On April 16, 1999, a lawsuit was filed in the Superior Court of the State of
California, County of San Francisco by a former director and officer of
FiNet.com against FiNet.com and one of its then current and now former
directors. The complaint alleges, among other things, that the plaintiff and our
then current director entered into an oral contract, wherein they agreed to
share all profits from bonus shares that were issued to either party under
certain specific circumstances. It is further alleged that we issued to our
current director 1,800,000 shares of stock and that our then current director
failed to provide the plaintiff one-half of the stock, or 900,000 shares. The
plaintiff seeks to recover 900,000 shares of our common stock and punitive
damages as to certain of the claims. FiNet.com and our then current director
have each filed a general denial of all claims. We intend to defend vigorously
against the action and believe that the ultimate resolution will not have a
material adverse effect on our business, results of operations or financial
condition.
On December 16, 1999, a lawsuit was filed in the Judicial District Court of
Dallas County, Texas, by FC Capital Corp. d/b/a FirstCity Capital Corporation.
The complaint alleges breach of contract by Coastal for failure to repurchase
loans in accordance with the terms and condition of a Purchase Agreement entered
into by First City and Coastal in March 1998. The plaintiff has named Finet as a
defendant alleging that Finet assumed all of Coastal's debts and obligations
when Finet acquired Coastal in April 1998. The plaintiff seeks to recover actual
damages in the amount of $1.7 million and premium rebates in the approximate
amount of $26,000. The action was removed to the United State District Court,
Northern District of Texas, Dallas Division on January 18, 2000, and we have
since filed procedural motions. We intend to defend vigorously against the
action and believe that the ultimate resolution will not have a material adverse
effect on our business, results of operations or financial condition.
FiNet.com and certain subsidiaries are defendants in various legal
proceedings involving matters generally incidental to their business. We do not
expect that the aggregate liability or loss, if any, resulting therefrom or from
the matters described above will have a material adverse effect on our business,
results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock has traded on the Nasdaq SmallCap Market since June 1, 1999
under the symbol "FNCM". Prior to that, our common stock traded on the Nasdaq
SmallCap Market under the symbol "FNHC." The following table sets forth the high
and low sale prices of our common stock on Nasdaq for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
FISCAL YEAR ENDED APRIL 30, 1998
Fourth quarter.............................................. $4.25 $2.88
Third quarter............................................... 7.63 3.50
Second quarter.............................................. 8.00 2.57
First quarter............................................... 6.38 2.19
FISCAL YEAR ENDED APRIL 30, 1999
Fourth quarter.............................................. 18.25 0.81
Third quarter............................................... 1.75 0.63
Second quarter.............................................. 3.03 0.41
First quarter............................................... 4.19 2.13
EIGHT MONTHS ENDED DECEMBER 31, 1999
Quarter ended July 31, 1999................................. 9.50 2.78
Quarter ended October 31, 1999.............................. 4.13 1.97
Two Months ended December 31, 1999.......................... 3.22 1.03
</TABLE>
As of March 15, 2000, there were approximately 492 holders of record of our
common stock. On March 15, 2000, the last reported sale price of our common
stock on the Nasdaq Market was $1.84.
DIVIDENDS
We have not paid, and we do not currently intend to pay, cash dividends on
our common stock. The current policy of our Board of Directors is to retain
earnings, if any, to provide funds for operation and expansion of our business.
The payment of cash dividends in the future will be at the discretion of the
Board of Directors and will depend upon, among other things, our earnings,
capital requirements and financial position. In addition, our ability to pay
dividends may be limited under future loan agreements which restrict or prohibit
the payment of dividends.
RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, we have issued the securities set forth below
which were not registered under the Securities Act of 1933.
Except for sales pursuant to Regulation S, which were made in compliance
with Regulation S, the sales of the following securities were made in reliance
upon the exemption from the registration provisions of the Securities Act under
Section 4(2) thereof or Regulation D promulgated thereunder, as transactions by
an issuer not involving a public offering. The purchasers of the securities
described below made representations that they acquired the securities for their
own account and not with a view toward distribution thereof to the public. The
certificates evidencing the securities bear legends stating that the shares may
not be offered, sold or otherwise transferred other than pursuant to an
effective registration statement under the Securities Act, or an exemption from
such registration requirements.
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<PAGE>
In March 1997, we issued 1,000,000 shares of common stock and a warrant to
purchase 600,000 shares of common stock to an accredited investor in a private
placement for an aggregate purchase price of $600,000. In addition, we issued a
warrant to purchase 50,000 shares of common stock to the placement agent for the
transaction.
In April 1997, we issued 3,991,250 shares of common stock and warrants to
purchase 743,125 shares of common stock in a private placement to accredited
investors for an aggregate purchase price of $3,991,250. In addition, we issued
a warrant to purchase 399,125 shares of common stock to the placement agent for
the transaction.
In October 1997, we issued 1,300,000 shares of common stock and warrants to
purchase 1,300,000 shares of common stock for an aggregate purchase price of
$3,500,000 in a private placement.
In March and May of 1998, we issued $7,000,000 principal amount of the
registrant's 3% Subordinated Convertible Debentures and warrants to purchase
175,000 shares of common stock to accredited investors in a private placement.
In a restructuring of this transaction in January 1999, the debentures were
converted into 9,533,333 shares of common stock and warrants to purchase 840,000
shares of common stock.
In September 1998, we issued 250 shares of our Series A Convertible
Preferred Stock and warrants to purchase 250,000 shares of common stock at an
exercise price of $1.00 per share to accredited investors in a private placement
for an aggregate purchase price of $2,500,000. The Series A Convertible
Preferred Stock was redeemed in January 1999 and February 1999.
In November 1998, we issued 2,500,000 shares of common stock in a private
placement to an accredited investor for an aggregate purchase price of
$2,000,000.
In January 1999, we issued 1,000,000 shares of common stock to an existing
stockholder pursuant to an indemnity agreement.
During the third quarter of our 1999 fiscal year, we issued 22,740,000
shares of common stock and warrants to purchase 122,675 shares of common stock
to accredited investors in a series of private placements for an aggregate
purchase price of $12,431,000. In addition, we issued warrants to purchase
2,449,867 shares of common stock to the placement agents for such transactions.
One such placement agent received placement agent fees of $812,358 in connection
with the transactions.
In May and June 1999, we issued 3,347,039 shares of common stock in a
private placement to accredited investors for an aggregate purchase price of
$13,020,000.
In June 1999, we issued 7,712,081 shares of common stock in a private
placement to accredited investors for an aggregate purchase price of
$30,000,000.
In August 1999, we purchased certain assets and operations of
Lowestrate.com, for a total purchase price of 1,400,000 shares of FiNet.com
common shares. 560,000 of these shares were issued to the seller at the closing.
The remaining 840,000 shares were placed in escrow subject to release to
Lowestrate if the contingencies are resolved.
In October 1999, we issued 600,000 shares of FiNet common stock in
connection with our purchase of the remaining 50% interest of a limited
liability corporation.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and notes to our
consolidated financial statements and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," which appear elsewhere in
this Annual Report on Form 10-K. The following table provides selected
historical consolidated financial information of FiNet.com. We prepared this
information using the consolidated financial statements of
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<PAGE>
FiNet.com as of the dates indicated and for the eight months ended December 31,
1999, and each of the fiscal years in the five year period ended April 30, 1999.
We derived the consolidated statement of operations and balance sheet data as of
the eight months ended December 31, 1999, and for each of the fiscal years in
the five year period ended April 30, 1999 from FiNet.com's financial statements
audited by Ernst & Young, LLP (1999), Reuben E. Price (1998, 1997), Deloitte &
Touche (1996, 1995), independent public accountants for FiNet.com.
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED FISCAL YEAR ENDED APRIL 30
DECEMBER 31 ----------------------------------------------------
1999 1999 1998 1997 1996(2) 1995(2)
------------ -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 6,070 $ 22,413 $ 15,160 $12,344 $ 6,375 $ 5,237
Cost of revenues......................... 8,423 35,064 14,718 9,316 4,591 3,068
-------- -------- -------- ------- ------- -------
Gross profit............................. (2,353) (12,651) 442 3,028 1,784 2,169
Operating expenses....................... 22,975 20,906 9,175 5,775 1,444 1,923
-------- -------- -------- ------- ------- -------
Income (loss) from operations............ (25,328) (33,557) (8,733) (2,747) 340 246
-------- -------- -------- ------- ------- -------
Net income (loss)........................ (25,328) (36,538) (9,379) (2,778) 326 237
In-substance preferred stock dividend.... -- 705 -- -- -- --
-------- -------- -------- ------- ------- -------
Net income (loss) for common
stockholders........................... $(25,328) $(37,243) $ (9,379) $(2,778) $ 326 $ 237
PER SHARE DATA:
Basic and diluted earnings (loss) per
common share........................... $ (0.28) $ (0.79) $ (0.31) $ (0.19) $ 0.04 $ 2.37
Weighted average number of basic shares
outstanding(1)......................... 89,517 46,867 30,433 14,313 8,400 100
Cash dividends per common share.......... $ -- $ -- $ -- $ -- $ 4.45 $ 2.10
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 18,626 $ 4,202 $ 1,993 $ 1,147 $ 672 $ 392
Mortgage loans held for sale, net........ 78,691 33,438 63,034 24,244 10,675 3,196
Total assets............................. 119,808 45,255 101,468 33,070 25,215 15,091
Warehouse and other lines of credit...... 80,453 33,038 86,659 26,902 19,732 11,109
Total liabilities........................ 89,435 38,567 98,109 30,596 22,629 12,184
</TABLE>
- ------------------------
(1) See Note 2 to the consolidated financial statements for an explanation of
the determination of the number of shares used in computing per share data.
(2) Selected financial data for the fiscal years ended April 30, 1996 and 1995
do not include data for our Coastal subsidiary which was acquired in a
pooling transaction on April 30, 1998, because its inclusion is not
meaningful in assessing trends of FiNet.com and its business was
discontinued in fiscal 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
WE HAVE MADE FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K
THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS INCLUDE
INFORMATION CONCERNING OUR POSSIBLE OR ASSUMED FUTURE RESULTS OF OPERATIONS.
ALSO, WHEN WE USE SUCH WORDS AS "BELIEVE," "EXPECT," "ANTICIPATE," "PLAN,"
"COULD," "INTEND" OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD-LOOKING
STATEMENTS. YOU SHOULD NOTE THAT AN INVESTMENT IN OUR SECURITIES INVOLVES
CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT OUR FUTURE FINANCIAL RESULTS.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
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<PAGE>
FACTORS, INCLUDING THOSE SET FORTH IN "FACTORS THAT MAY AFFECT FUTURE
PERFORMANCE" AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS.
OVERVIEW
FiNet.com is a full service, on-line mortgage banker that offers an
easy-to-use, one stop mortgage source for consumers and mortgage brokers. We
operate one of the first sites on the Internet that enables the consumer to
apply for and receive credit approval on-line, and to electronically search,
analyze and select from a wide variety of mortgage loan products and rates
offered by us and other lenders. We make the mortgage process easier and more
understandable, while maintaining quality service by controlling the consumer's
entire mortgage lending experience. We also provide on-line and e-commerce
technologies and loan process management tools to mortgage broker businesses to
enable them to compete more effectively with on-line and other national lenders
and brokers, and help their customers make better informed borrowing decisions.
We earn revenues through both the origination and sale of mortgage loans. As
a retail originator of loans, we generate loan origination income and
loan-related fees through loans funded and brokered by us. Our loan origination
income consists of origination points paid to us by borrowers or discount points
paid to us by wholesale lenders. Our loan-related fees consist of application,
documentation and processing fees paid by borrowers.
On the loans that we sell, we generate revenues from net premium income and
interest income. Net premium income consists of the net gain on the sale of
mortgage loans and mortgage servicing rights. This net gain is recognized based
upon the difference between the combined selling price of the loans and their
related servicing rights, on the one hand, and the carrying value of the
mortgage loans and servicing rights sold, on the other. Interest income consists
of the interest we receive on our mortgage loans held for sale.
Our costs and expenses consist largely of:
- interest paid under our warehouse credit facilities;
- loan-related expenses, consisting of fees paid to third parties for
appraisal and credit report services and reserves for potential loan
repurchase and premium recapture obligations;
- salaries, commissions and benefits paid to employees;
- general and administrative expenses such as occupancy costs, office
expenses and professional services; and
- depreciation and amortization expense related principally to our
facilities, computers and goodwill associated with our acquisitions.
Seasonality affects the mortgage industry because loan originations are
typically at their lowest levels during the first and fourth calendar quarters
due to a reduced level of home buying activity during the winter months. Loan
originations generally increase during the warmer months beginning in March and
continuing through October. As a result, we may report earnings in these
calendar quarters that are generally lower than that of the second and third
calendar quarters. However, due to significant refinance activity during 1997
and 1998, which was generally affected more by changes in interest rates than by
seasons, the expected seasonal patterns are not evident in our historical
financial statements. In the future, our expenses are also likely to vary
quarter-to-quarter based upon fluctuations in the volume of loans we originate
due to seasonality and other factors.
Economic and interest rate cycles also affect the mortgage industry, as loan
originations typically fall in rising interest rate environments. During such
periods, refinancing originations decrease as higher
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<PAGE>
interest rates provide reduced economic incentives for borrowers to refinance
their existing mortgages. Due to stable and decreasing interest rate
environments in prior years, our historical performance during those periods may
not be indicative of results in rising interest rate environments such as 1999.
In addition, our recent growth may distort some of our ratios and financial
statistics and may make period-to-period comparisons difficult. In light of this
growth, our historical earnings performance may be of little relevance in
predicting future performance. Furthermore, our financial statistics may not be
indicative of our results in future periods.
On April 30, 1998, we acquired Coastal Federal Mortgage in a transaction
accounted for as a pooling of interests. Our results of operations and financial
position for the fiscal years ended April 30, 1998 and 1997 have been restated
to include Coastal's results. Coastal's results for years prior to fiscal 1997
have not been included in our consolidated results, as they are not meaningful
in assessing our historical trends. On May 19, 1998, we acquired Mical in a
transaction accounted for as a purchase. Mical's results of operations are
included in our financial statements since the date of acquisition. Due to
significant operating problems and losses at Coastal and Mical, our new
management elected to close both units during fiscal 1999.
IMPACT OF OUR DISCONTINUED UNITS--MICAL, COASTAL AND OUR SERVICING BUSINESS
We incurred significant losses at both our Mical and Coastal subsidiaries
during fiscal 1999. New management elected to discontinue the businesses of both
of these subsidiaries in the last half of fiscal 1999. In addition, management
determined that servicing loans would not be a part of on-going operations and
began preparing our servicing portfolios for sale. The following table
summarizes the impact these discontinued business units had on our consolidated
operating results for the last three fiscal years ended April 30, and for the
eight months ended December 31, 1999:
<TABLE>
<CAPTION>
EIGHT MONTHS FISCAL YEARS ENDED APRIL 30
ENDED ------------------------------
DECEMBER 31, 1999 1999 1998 1997
----------------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:.......................................... $ 122 $ 10,865 $9,344 $7,623
Cost of revenues................................... 1,814 21,165 2,200 1,124
------- -------- ------ ------
Gross (loss) profit................................ (1,692) (10,300) 7,144 6,499
Other expenses:
General and administrative....................... 1,211 2,945 5,011 3,519
Marketing and advertising........................ 6 434 288 307
Special charges.................................. 352 4,236 -- --
Depreciation and amortization.................... -- 180 139 106
Other............................................ 76 434 926 853
------- -------- ------ ------
Total expenses..................................... 1,645 8,229 6,364 4,785
------- -------- ------ ------
Income (loss) from operations...................... (3,337) (18,529) 780 1,714
Other interest expense............................. -- 207 6 9
------- -------- ------ ------
Income (loss) before income taxes.............. (3,337) (18,736) 774 1,705
Income tax expense................................. -- 1 226 225
------- -------- ------ ------
Net (loss) income.............................. $(3,337) $(18,737) $ 548 $1,480
======= ======== ====== ======
</TABLE>
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RESULTS OF OPERATIONS
EIGHT MONTHS ENDED DECEMBER 31, 1999 COMPARED TO EIGHT MONTHS ENDED DECEMBER 31,
1998
REVENUES AND VOLUMES
Total loan volume for FiNet's production units is summarized below.
<TABLE>
<CAPTION>
FOR THE EIGHT
MONTHS ENDED
DECEMBER 31
-------------------------
1999 1998
--------- ---------
(IN THOUSANDS)(UNAUDITED)
<S> <C> <C>
Business-to-Business................................. $428,400 $144,100
Consumer-direct...................................... 90,600 529,700
-------- --------
Total Loan Volume................................ $519,000 $673,800
======== ========
</TABLE>
Loan volume decreased $154.8 million, or 23%, to $519.0 million for the
eight months ended December 31, 1999 from $673.8 million for the eight months
ended December 31, 1998. Revenues decreased $10.8 million, or 64%, to
$6.1 million for the eight months ended December 31, 1999 from $16.9 million for
the eight months ended December 31, 1998. The volume decrease was attributable
primarily to the volume of the discontinued business units that were no longer
operating in the eight months ended December 31, 1999. Additionally,
business-to-business segment volumes decreased in our continuing units. Mortgage
lending rates have increased in the current fiscal year relative to the prior
fiscal year, slowing mortgage industry originations. In addition, price
decreases negatively impacted revenues since they were not offset by volume
increases. We expect to increase revenues through the planned expansion of our
sales force and increased emphasis on the business-to-business segment. However,
there can be no assurance that increased revenues will be achieved.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased $6.3 million, or 43%, to $8.4 million for the
eight months ended December 31, 1999 from $14.7 million for the eight months
ended December 31, 1998. However, as a percentage of revenues, cost of revenues
increased, decreasing our gross profit to (39)% of revenues. Production
personnel costs, the primary component of cost of revenues in our continuing
businesses, were not decreased proportionately with volume decreases resulting
in a negative impact on margins.
Gross profit was also negatively affected by an increase in loan loss
provisions of $807,000 to $1.5 million from $693,000 for the for the eight
months ended December 31, 1998. The increase is due to additional reserves
provided at both our discontinued subsidiaries and our on-going businesses. Our
discontinued subsidiaries continue to incur losses related to loans previously
sold (off-balance sheet risk). Our on-going business required increased reserves
due to increased volumes and slower sales of mortgages originated. We also
recorded $433,000 of expense related to the sale of our servicing portfolio
which was completed during the eight months ended December 31, 1999.
The Company records provisions for losses to reflect market valuation
allowances on mortgages held for sale and mortgage loans previously sold
(off-balance sheet risk) and provisions for doubtful accounts receivable. The
Company evaluates the collectibility of its accounts receivable primarily on a
receivable by receivable basis, as accounts receivable is composed of amounts
that do not necessarily carry similar risk characteristics, such as amounts
heldback by purchasers on sales of mortgage loans and amounts heldback on sales
of servicing rights. Additionally, the Company maintains communications with
such purchasers and others from whom receivables are due and in certain
circumstances, determines the allowance necessary based on agreed upon amounts.
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<PAGE>
The Company determines its market valuation allowance relating to mortgages
held for sale and mortgages that have been sold primarily on a loan by loan
basis. The allowance is based on factors such as market values, bids received,
industry loss experience and the Company's prior loss experience, if any, as
well as risk characteristics of the loan portfolio.
Warehouse interest expense decreased $4.3 million or 81% to $1.0 million for
the eight months ended December 31, 1999 from $5.3 million for the eight months
ended December 31, 1998 primarily due to the volume decrease. In addition, we
employed our excess cash to fund our mortgage inventory during a portion of the
eight month period, whereas for the period ended December 31, 1998, we financed
over 95% of our mortgage inventory. Also, in fiscal 1999, our primary warehouse
lender allowed certain excess cash balance accounts to be offset against amounts
due on warehouse borrowings, thereby further reducing our warehouse interest
expense for the current fiscal period compared to the comparable period of the
prior year. The decrease in inventory financing in the period ended
December 1999 compared to the 1998 period resulted in lower warehouse facility
borrowings, contributing to the decrease in interest expense.
OPERATING EXPENSES
GENERAL AND ADMINISTRATIVE
Personnel costs and other general and administrative costs of our continuing
businesses increased $3.8 million, or 37%, to $14.0 million in the eight months
ended December 31, 1999 from $10.2 million in the eight months ended
December 31, 1998. Decreases attributable to the discontinued units were offset
by significant increases in personnel costs as well as professional fees at the
continuing units. Personnel costs have increased as FiNet increased its
management team and hired additional sales and production employees in
anticipation of increased volumes. In addition, general and administrative
expenses have increased significantly as the result of our spending associated
with becoming Year 2000 compliant.
MARKETING AND ADVERTISING
We initiated a number of marketing relationships in the eight months ended
December 31, 1999 designed to attract prospective customers to our website. As a
result, marketing and advertising increased $5.4 million to $6.2 million for the
eight months ended December 31, 1999 from $755,000 in the eight months ended
December 31, 1998. FiNet intends to significantly decrease its spending on
branding over the subsequent twelve months relative to spending incurred in the
current eight month period.
SPECIAL CHARGES.
Special charges of $1.4 million and $4.9 million were established in the
eight month period ended December 31, 1999 and fiscal 1999. The special charges
include $3.8 million of goodwill write off and restructuring charges associated
with the discontinuance of the business of Mical for fiscal 1999, $690,000
writedown of purchased software for fiscal 1999 and $405,000 to liquidate
certain assets and liabilities in connection with the discontinuance of the
business of Coastal for fiscal 1999. During the eight months ended December 31,
1999, the Company expensed $1.4 million net book value of fixed assets as a
result of a relocation of the corporate headquarters and primary operations.
DEPRECIATION AND AMORTIZATION.
Depreciation and amortization expenses for the eight months ended
December 31, 1999 increased by $180,000 or 30%, to $777,000 from $597,000 is
fiscal 1999. The increase was due primarily to the amortization of the goodwill
associated with the purchase of certain assets and operations of Lowestrate, and
increased depreciation associated with our purchases of property, plant and
equipment.
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<PAGE>
OTHER INTEREST EXPENSE
Other interest expense decreased $2.7 million to zero for the eight months
ended December 31, 1999 from $2.7 million for the eight months ended
December 31, 1998. During the eight months ended December 31, 1998, we incurred
other interest expense as we amortized our 3% subordinated convertible debt
discount. We also incurred interest expense related to certain notes payable, a
working capital line of credit, and borrowings for the previous purchase of
servicing assets. These obligations were reduced to zero during the eight months
ended December 31, 1999; therefore, we did not incur material interest expense
other than warehouse interest expense during the eight months ended
December 31, 1999.
INCOME TAXES
As of December 31, 1999, we had approximately $75 million of federal and
state net operating loss carryforwards for tax reporting purposes available to
offset future taxable income. Our federal net operating loss carryforwards begin
to expire in 2004. A valuation allowance has been recorded for the entire
deferred tax asset at December 31, 1999 as a result of uncertainties regarding
the realization of the asset due to the lack of our earnings history.
NET LOSS
Net loss for the eight months ended December 31, 1999 increased by
$12.8 million, or 102%, to $25.3 million from $12.5 million for the eight months
ended December 31, 1998, due to investments in technology, marketing and
expenses associated with the relocation of our corporate headquarters.
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES AND VOLUMES
Loan volume increased by $718 million, or 118%, to $1,328 million in fiscal
1999 from $610 million in fiscal 1998 as a result of a significant increase in
the number of loans funded through our mortgage banking subsidiaries, volume
attributable to acquired operations, and significant refinancing activity
stimulated by relatively low interest rates. Refinancings accounted for 69% of
our loan volume in fiscal 1999, compared to 65% in fiscal 1998.
Revenues for fiscal 1999 increased by $7.2 million, or 47%, to
$22.4 million from $15.2 million in fiscal 1998. This increase resulted
primarily from the incremental volume of funded loans from Mical and increased
volumes of originated loans generated by our Interloan.com website, both of
which were purchased in the first quarter of fiscal 1999. Loans originated by
mortgage brokers and funded by us accounted for $4.4 million in additional
revenues, or 61% of the increase for the year. Loans we originated, most of
which were funded by other lenders, accounted for $2.5 million in additional
revenues, or 34% of the increase for the year.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues for fiscal 1999 increased by $20.4 million, or 139%, to
$35.1 million from $14.7 million in fiscal 1998. This increase resulted
primarily from an increase in direct costs associated with increased volumes of
funded loans from the purchase of Mical, increased indirect production expenses
from the purchases of the Interloan.com website and Mical, and provisions for
losses on mortgages held for sale and receivables. Increased volumes of funded
loans accounted for $7.7 million in additional costs, or 38% of the increase for
the year. Indirect production expenses accounted for $5.9 million in additional
costs, or 29% of the increase for the year.
Provisions for losses increased by $5.8 million to $6.5 million in fiscal
1999 from $718,000 in fiscal 1998. We record provisions for losses to reflect
market valuation allowances on mortgages held for sale and mortgage loans
previously sold (off-balance sheet risk) and provisions for doubtful accounts
receivable. We
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evaluate the collectibility of its accounts receivable primarily on a receivable
by receivable basis, as accounts receivable is composed of amounts that do not
necessarily carry similar risk characteristics, such as amounts heldback by
purchasers on sales of mortgage loans and amounts heldback on sales of servicing
rights. Additionally, we maintain communications with such purchasers and others
from whom receivables are due and in certain circumstances, determines the
allowance necessary based on agreed upon amounts.
We determine our market valuation allowance relating to mortgages held for
sale and mortgages that have been sold primarily on a loan by loan basis. The
allowance is based on factors such as market values, bids received, industry
loss experience and our prior loss experience, if any, as well as risk
characteristics of the loan portfolio.
The increase in provision for losses of $2.2 million, or 38%, was
attributable to the provision for doubtful accounts recorded at our Mical
Mortgage subsidiary. We acquired Mical in a business combination accounted for
as a purchase in May 1998. Accordingly, the provision for doubtful accounts of
Mical is included in our results of operations only subsequent to the
acquisition date--only for fiscal 1999, and accounts for the entire increase.
The remaining increase in the provision for losses relates to increased
provisions for losses on mortgages held for sale and mortgages previously sold
(off-balance sheet risk). This increase was attributable primarily to our Mical
Mortgage subsidiary but additionally to provisions for loan losses recorded by
our Coastal Federal Mortgage subsidiary. Loans originated at Mical and at
Coastal, acquired in May and April 1998, had risk characteristics and loss
recourse provisions that were dissimilar from our risk characteristics and sale
recourse provisions prior to these acquisitions.
Gross profit for fiscal 1999 decreased by $13.1 million to a loss of
$12.7 million from a profit of $442,000 in fiscal 1998 as a result of the
increase in our cost of revenues.
OPERATING EXPENSES
GENERAL AND ADMINISTRATIVE. General and administrative expenses for fiscal
1999 increased by $5.8 million, or 98%, to $11.7 million from $5.9 million in
fiscal 1998. This increase resulted primarily from the acquisition of Mical and
increased expenses.
MARKETING AND ADVERTISING. Marketing and advertising expenses for fiscal
1999 increased by $1.3 million, or 141%, to $2.2 million from $921,000 in fiscal
1998. This increase resulted primarily from Internet advertising expenses.
SPECIAL CHARGES. Special charges of $4.9 million were established in fiscal
1999 and include $3.8 million of goodwill writeoff and restructuring charges
associated with the discontinuance of the business of Mical, a $690,000
writedown of purchased software and $405,000 to liquidate certain assets and
liabilities in connection with the discontinuance of the business of Coastal.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
fiscal 1999 increased by $164,000, or 34%, to $646,000 from $482,000 in fiscal
1998. The increase was due primarily to the increase in assets acquired with the
purchase of Mical.
OTHER. Other operating expense for fiscal 1999 increased by $625,000, or
71%, to $1.5 million from $875,000 in fiscal 1998. This increase resulted
primarily from charges recorded to value warrants issued when our 3% Convertible
Debentures were converted to common stock.
OTHER INTEREST EXPENSE
Other interest expense for fiscal 1999 increased by $2.6 million, or 619%,
to $3.0 million from $420,000 for fiscal 1998. The increase was primarily the
result of amortization of the imputed interest and debt issuance costs on our 3%
Convertible Subordinated Debentures, which were issued in March and May 1998.
The debt was redeemed in January 1999 and the discount has been fully amortized.
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INCOME TAXES
As of April 30, 1999, we had approximately $49 million of federal and state
net operating loss carryforwards for tax reporting purposes available to offset
future taxable income. Our federal net operating loss carryforwards begin to
expire in 2004. A valuation allowance has been recorded for the entire deferred
tax asset at April 30, 1999 as a result of uncertainties regarding the
realization of the asset due to the lack of our earnings history.
NET LOSS
Net loss for fiscal 1999 increased by $27.1 million, or 288%, to
$36.5 million from $9.4 million for fiscal 1998, primarily due to the purchases
of Mical and Coastal, increased marketing expenses associated with the purchase
of Interloan.com, and expenses associated with financing transactions.
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES AND VOLUMES
Loan volume increased by $222 million, or 53%, to $610 million in fiscal
1998 from $388 million in fiscal 1997 as a result of a significant increase in
the number of loans funded through our mortgage banking subsidiaries and
significant refinancing activity stimulated by relatively low interest rates.
Refinancings accounted for 65% of our origination volume in fiscal 1998 compared
to 48% in fiscal 1997.
Revenues for fiscal 1998 increased by $2.9 million, or 24%, to
$15.2 million from $12.3 million in fiscal 1997. This increase resulted
primarily from increased volumes of funded loans. Loans originated by mortgage
brokers and funded by us accounted for $2.0 million in additional revenues, or
69% of the increase for the year. The volume of loans we originated and funded
accounted for $200,000 in additional revenues, or 7% of the increase for the
year.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues for fiscal 1998 increased by $5.4 million, or 58%, to
$14.7 million from $9.3 million in fiscal 1997. This increase resulted primarily
from an increase in direct and indirect costs due to increased volumes of funded
loans. Funded loans accounted for $1.3 million in additional costs, or 24% of
the increase for the year. Indirect production expenses accounted for
$3.6 million in additional costs, or 67% of the increase for the year.
Gross profit for fiscal 1998 decreased by $2.6 million to $442,000 from
$3.0 million in fiscal 1997 as a result of an increase in our cost of revenues.
OPERATING EXPENSES
GENERAL AND ADMINISTRATIVE. General and administrative expenses for fiscal
1998 increased by $1.4 million, or 31%, to $5.9 million from $4.5 million in
fiscal 1997. This increase resulted primarily from the addition of new employees
in our technology and customer service departments.
MARKETING AND ADVERTISING. Marketing and advertising expenses for fiscal
1998 increased by $254,000, or 38%, to $921,000 from $667,000 in fiscal 1997.
This increase resulted primarily from increased advertising expenses associated
with the increased level of loan fundings and the introduction of new products.
SPECIAL CHARGES. In fiscal 1998, we recorded special charges of
$1.0 million to writeoff intangible assets that we determined would no longer be
employed in future operations.
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DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
fiscal 1998 increased by $377,000 to $482,000 from $105,000, in fiscal 1997. The
increase was primarily due to depreciation of fixed assets acquired to support
increased business activity and staff expansion.
OTHER. Other operating expense for fiscal 1998 increased by $323,000, or
59%, to $875,000 from $552,000 in fiscal 1997. This increase resulted primarily
from expenses related to the acquisition of Mical and Coastal.
OTHER INTEREST EXPENSE
Other interest expense for fiscal 1998 increased by $302,000, or 256%, to
$420,000 from $118,000 in fiscal 1997. This increase was the result of
amortization of the imputed interest and debt issuance costs on our 3%
Convertible Subordinated Debentures, which were issued in March 1998.
INCOME TAXES
As of April 30, 1998, we had approximately $31 million of federal and state
net operating loss carryforwards for tax reporting purposes available to offset
future taxable income. Our federal net operating loss carryforwards begin to
expire in 2004. A valuation allowance has been recorded for the entire deferred
tax asset at April 30, 1998 as a result of uncertainties regarding the
realization of the asset due to the lack of our earnings history.
NET LOSS
Net loss for fiscal 1998 increased by $6.6 million, or 236%, to
$9.4 million from $2.8 million for fiscal 1997, primarily due to an increase in
the number of employees and office space in anticipation of growing the
business, consulting expenses related to the acquisition of Monument in the
prior fiscal year, expenses in anticipation of the Mical and Coastal
acquisitions, and intangible asset write downs.
FINANCIAL CONDITION
DECEMBER 31, 1999 COMPARED TO APRIL 30, 1999
Historically we have experienced operating losses and have relied on
external sources of debt and equity financing to fund operations, to service
debt and to complete acquisitions and to make capital investments. Equity
increases, primarily from private placements of common stock and warrant
exercises, partially offset by operating losses have increased stockholders'
equity to $30.4 million at December 31, 1999 from $6.7 million at April 30,
1999.
Our cash increased by $14.4 million to $18.6 million at December 31, 1999
from $4.2 million at April 30, 1999, primarily as the result of cash received
from private placements, partially offset by our use of cash to fund some of our
mortgage origination activities and to make capital investments. In addition, we
recorded $10.4 million of restricted cash, relating primarily to receipts from
sales of mortgage loans, which could only be used to reduce warehouse
borrowings.
Mortgages held for sale increased by $45.3 million, or 136%, to
$78.7 million at December 31, 1999 from $33.4 million at April 30, 1999. This
increase was due to an increase in the volume of originations late in the period
and slower than expected settlements.
Mortgage servicing rights decreased from $2.7 million at April 30, 1999 to
zero at December 31, 1999. The servicing portfolio was sold during in the eight
months ended December 31, 1999. We received cash of $2.0 million; we recorded
$433,000 of additional expense in "Cost of Revenues", and the balance due is
recorded in "Accounts receivable" on our Consolidated Balance Sheet at
December 31, 1999. We expect to collect substantially all of the balance due on
this sale during the six months ended June 30, 2000.
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Warehouse borrowings increased $47.5 million, or 144%, from $33.0 million at
April 30, 1999 to $80.5 million at December 31, 1999 as our loan originations
increased late in the period ended December 31, 1999.
Accrued expenses increased as we increased our spending on professional
services relating to the implementation of computer systems and related
infrastructure.
Improvement in our financial condition is dependent on our ability to
significantly grow our loan origination volumes, to achieve highly efficient
operating processes and procedures, and to manage warehouse interest expense and
operating expenses given the level of volumes. Our financial condition is
further dependent on economic conditions such as the general health of the
economy and demand for mortgage loans. There can be no assurance that we will be
able to improve our financial condition through profitable operations.
LIQUIDITY AND CAPITAL RESOURCES
The nature of the mortgage lending business requires us to advance cash on a
daily basis to fund newly originated loans to our borrowers. The majority of
these funds are provided through conventional mortgage warehouse lines of
credit, "purchase-repurchase" agreements, and our cash balances. Additional cash
resources, obtained primarily through private placements of our common stock and
other debt and equity offerings are used to fund ongoing expenses such as
administration and marketing, to invest in product development and geographic
expansion, and to satisfy debt and other obligations as they come due.
Currently, cash generated by operations is not sufficient to meet our operating
requirements.
Adequate credit facilities and other sources of funding, which permit us to
fund mortgage loans, are essential to our ability to close loans through our
mortgage banking subsidiaries. We borrow money to fund our loan closings and
repay these borrowings as the loans and the accompanying servicing rights are
sold. Upon the sale of loans and servicing rights and the subsequent repayment
of the borrowings, our credit facilities become available to fund additional
loan closings.
On August 9, 1999 we entered into a new, $75 million committed warehouse
borrowing agreement with GMAC/RFC which expires on May 31, 2000. The new
agreement replaced the existing $35 million extended agreement. The new facility
may be used for the origination or the acquisition of mortgage loans and is
secured by mortgages loans that have been funded using the facility. Borrowings
under this agreement bear interest at LIBOR plus 1.75%. As of December 31, 1999,
$73.2 million was outstanding on this facility. The agreement contains a number
of operating and financial covenants that, among other things, require us to
maintain a minimum current ratio, a minimum ratio of total liabilities to
tangible net worth and maintain a minimum level of tangible net worth. The
agreement also contains covenants that limit our ability to:
- change executive management;
- transfer or sell assets;
- rapidly grow liabilities;
- pay dividends;
- enter into transactions with our affiliates; or
- enter into a merger, consolidate or sell substantially all of our assets.
The events of default contained in our revolving warehouse facility are
typical of facilities of its type. At December 31, 1999, we were in default of
our primary warehouse lending agreement, as were in violation of the liability
growth covenant. Subsequent to December 31, 1999, the lender waived the default.
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Our available credit lines also include Fannie Mae's "As Soon as
Pooled/Early Purchase Option" (the "ASAP Plus" program). Under the ASAP Plus
program, Fannie Mae funds us on the loans we deliver to them upon receipt of
appropriate mortgage collateral. Fannie Mae subsequently purchases the mortgage
loans for cash upon receipt of complete and accurate mortgage pool and other
documentation. At December 31, 1999, $7.3 million was outstanding on this
facility.
During the eight months ended December 31, 1999, operating activities,
including daily operating expenditures, repayment of warehouse borrowings and
funding new originations, used $27.9 million in cash compared to cash used by
operations of $12.9 million during the same period of the prior year.
Investing activities used cash of $1.5 million during the eight months ended
December 31, 1999, consisting primarily of investments in property, plant and
equipment partially offset by proceeds from the sale of our servicing portfolio
and proceeds from the sale of marketable equity securities. We do not intend to
purchase additional mortgage servicing rights. We expect our level of capital
spending for calendar 2000 to decrease somewhat as we will not incur
infrastructure upgrades required for Year 2000 compliance.
Cash provided by financing activities was $43.8 million for the eight months
ended December 31, 1999, attributable mainly to private placements of our common
stock.
We expect that cash flow from the sale of mortgage loans will increase as we
intend to increase both fundings and sales through additional marketing and
sales efforts in our business-to-business segment.
If we continue to maintain at least our current level of working capital
borrowing resources, we believe that our existing cash balances and funds
available under our revolving warehouse facilities and Fannie Mae ASAP Program
will be sufficient to meet our liquidity requirements for the next 12 months. We
do, however, expect that in the future we will need to arrange for additional
sources of capital through the issuance of debt or equity or additional
warehouse facilities. We have no commitments for any additional financings, and
we cannot be sure that we will be able to obtain any such additional financing
at the times required and on terms and conditions acceptable to us. In such
event, our growth could slow and operations could be adversely affected. See
also Note 6 to the consolidated financial statements.
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FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
The risks described below could materially adversely affect our business,
results of operations and financial condition, which, in turn, could cause the
price of our shares to decline, resulting in a loss of all or part of your
investment. We cannot predict which, if any, of these risks may actually occur,
or the extent to which any occurrence, circumstance or event will actually
affect our business, results of operations or financial condition, and the
trading price of our shares.
BECAUSE WE EXPECT CONTINUED LOSSES IN THE FUTURE, OUR BUSINESS, FINANCIAL
CONDITION AND GROWTH PROSPECTS COULD BE MATERIALLY ADVERSELY AFFECTED.
We have incurred net losses of $9.4 million, $36.5 million and
$25.3 million for fiscal 1998 and 1999 and the eight months ended December 31,
1999, respectively, and, at December 31, 1999, we had an accumulated deficit of
approximately $73.2 million. Although we cannot predict future results of
operations with any degree of certainty, we expect to continue to incur losses
because of the current state of the mortgage market and our plans to continue to
invest in information technology, marketing and geographic expansion of our
business. While we do not believe these losses will exhaust our credit lines or
available capital resources in the year ending December 31, 2000, we may not be
able to implement our business plans, and our business, results of operations
financial condition and growth prospects could be materially adversely affected.
IF OUR NEW MANAGEMENT IS NOT ABLE TO EXPAND AND IMPROVE OUR OPERATIONS, OUR
BUSINESS WOULD SUFFER.
Since December 1999, we have replaced most of our management team. Our new
officers have not previously worked together, and we cannot be sure that they
will be able to work together to improve and expand our operations. On
February 1, 2000, Rick Cossano became our President and Chief Executive Officer
replacing Mark Korell, who retired effective January 15, 2000. Robert Snow,
became our Executive Vice President, Business to Business, on January 31, 2000,
replacing Kevin Gillespie, Executive Vice President, Sales and Marketing, who
resigned effective December 20, 1999. Michael Quinn will become our Senior Vice
President, Director of Capital Markets on April 1, 2000, replacing Michael
Conway, who was terminated as Executive Vice President, Capital Markets,
effective January 31, 2000. In addition, Christos Skeadas, Executive Vice
President--Chief Technology Officer, and Thomas Porter, Executive Vice
President--Administration have recently resigned. If the new management team is
not able to work together and improve and expand our operations, our financial
condition, profitability and growth prospects would be materially adversely
affected.
THE LOSS OF ANY OF OUR KEY PERSONNEL WOULD LIKELY HAVE AN ADVERSE EFFECT OUR
BUSINESS.
We believe that our future success will depend to a significant extent on
the continued services of our new senior management and other key personnel. The
loss of the services of key employees or delay in recruiting candidates to fill
our currently vacant management positions or any other key position which may
become vacant could have a material adverse effect on our business, results of
operations and financial condition.
IF WE ARE UNABLE TO MANAGE GROWTH IN OUR BUSINESS, OUR RESULTS OF OPERATIONS MAY
NOT IMPROVE.
We anticipate that we will need to expand our employee base, facilities and
infrastructure in order to be able to compete successfully and take advantage of
market opportunities. If we are unable to manage the expansion of our business
effectively, our business, results of operations and financial condition may not
improve and could deteriorate. We expect this expansion to place significant
strain on our management, operational and financial resources. Our current
personnel, systems, procedures and controls are not adequate to support
anticipated growth of our operations. To manage this expected growth, we will
need to improve our mortgage processing, operational and financial systems,
information processing capacity,
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procedures and controls. We may be unable to hire, train, retain or manage
necessary personnel, or to identify and take advantage of existing and potential
strategic relationships and market opportunities.
IF THERE IS A FURTHER DECREASE IN DEMAND FOR MORTGAGES, OUR BUSINESS COULD
SUFFER.
Demand for mortgages is typically adversely affected by periods of economic
slowdown or recession, rising interest rates, declining demand for consumer
credit, declining home sales, declining real estate values and decreased ability
of borrowers to make loan payments. These factors tend to decrease demand for
mortgage loans of the types we originate and could increase the rates of
delinquencies and foreclosures on loans we hold. These changes would likely have
a material adverse affect on our business, results of operations and financial
condition.
IF WE ARE UNABLE TO DIFFERENTIATE OURSELVES FROM OUR COMPETITION IN OUR
INDUSTRY, OUR BUSINESS PROSPECTS COULD BE HARMED.
The e-mortgage market is new, rapidly evolving and intensely competitive.
Because the barriers to entry are minimal, we expect competition to intensify in
the future. In addition, the residential mortgage loan business is highly
competitive. We currently compete with a variety of other companies offering
mortgage services, including:
- various on-line mortgage brokers, including E-LOAN Inc., iOwn.com,
Mortgage.com, Quicken Mortgage and Keystroke Financial;
- mortgage companies that offer products through on-line search engines,
such as Yahoo! and Microsoft Corporation's Home Advisor website;
- mortgage banking companies, commercial banks, savings associations, credit
unions and other financial institutions which still originate the vast
majority of mortgage loans; and
- mortgage brokers.
Many of our mortgage banking and mortgage brokerage competitors have longer
operating histories or significantly greater financial, technical, marketing and
other resources than we do. Some of our on-line competitors are spending
substantial funds on mass marketing and branding their mortgage services. In
addition, some of our competitors offer a wider range of services and financial
products to customers and have the ability to respond more quickly to new or
changing opportunities. As a result, many have greater name recognition and more
extensive customer bases and can offer more attractive terms to customers,
including more aggressive loan pricing policies. We cannot be sure that we will
be able to compete successfully against current and future competitors. If we
are unable to do so it will have a material adverse effect on our business,
results of operations and financial condition.
IF INTEREST RATES CONTINUE TO RISE, OUR RESULTS OF OPERATIONS COULD BE
MATERIALLY ADVERSELY AFFECTED.
Rising interest rates generally discourage refinancing of residential
mortgages and reduce the number of new home sales. Any further increase in
interest rates or an adverse change in the residential real estate market or
general economic conditions, both of which are outside our control, could have a
material adverse effect on our business, results of operations and financial
condition.
The effect of interest rate changes tends to be greater on the market for
refinancing loans than it is on the market for purchase loans, since refinancing
a mortgage loan is voluntary and motivated primarily by a homeowner's desire to
lower financing costs, whereas new home purchasers are motivated by a need or
desire for a new home. Accordingly, the annual volume of new mortgage refinance
loans is quite volatile. Approximately 44% of the loans we originated and/or
funded during the eight months ended December 31, 1999 were loans to refinance
mortgage debt, compared to 69% during the eight months ended
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December 31, 1998. We cannot predict future interest rate trends, their impact
on our business, or our ability to manage this business mix.
The value of the loans we make is based, in part, on market interest rates,
and our business, results of operations and financial condition may be
materially adversely affected if interest rates change rapidly or unexpectedly.
If interest rates rise after we fix a price for a loan but before we sell the
loan into the secondary market, the value of that loan will decrease. If we
delay in selling our loans into the secondary market, our interest rate exposure
increases and we could incur a loss on the sale. While we use various hedging
strategies to provide some protection against interest rate risks, no hedging
strategy can protect us completely. The nature and timing of hedging
transactions influences the effectiveness of hedging strategies and poorly
designed strategies or improperly executed transactions may increase rather than
decrease risk. In addition, hedging strategies involve transaction and other
costs. There is a risk that our hedging strategy and the hedges that we make
will not adequately offset the risks of interest rate volatility and that our
hedges will result in losses.
IF WE FAIL TO MAINTAIN CREDIT FACILITIES TO FINANCE OUR MORTGAGE LENDING
ACTIVITIES, OUR GROWTH PROSPECTS COULD BE SEVERELY LIMITED.
To the extent that we are unable to access adequate capital to fund loans,
we may have to curtail or cease our loan funding activities entirely. This would
have a material adverse effect on our business, results of operations and
financial condition. Because we are not a bank, we are dependent upon
specialized mortgage credit facilities from other lenders to finance our
mortgage lending activities. In August 1999, we entered into a $75 million
committed warehouse borrowing agreement with GMAC/RFC which replaced an existing
$35 million agreement with GMAC/RFC. In the agreement, which expires on May 31,
2000, we make numerous representations, warranties and operating and financial
covenants. A material breach by FiNet.com of any of these representations,
warranties or covenants could result in the termination of the agreement and an
obligation to repay the entire amount outstanding under the agreement. In the
past, we have had to obtain waivers from GMAC/RFC's for defaults under the
agreement. At December 31, 1999, we were in default of our primarily warehouse
lending agreement, as we were in violation of certain financial and other
covenants. Subsequent to December 31, 1999, the lender waived the defaults.
During January 2000, the defaults were cured. However, we cannot assure you that
we will be able obtain a waiver of from GMAC/RFC of any future defaults, should
they occur, or that financing will continue to be available on favorable terms
or at all.
IF WE ARE UNABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGE IN E-COMMERCE AND
IMPROVE OUR PRODUCTS AND SERVICES, OUR BUSINESS COULD BE MATERIALLY ADVERSELY
AFFECTED.
The Internet and e-commerce are characterized by rapid technological change,
changes in user and customer requirements and preferences, frequent new product
and service introductions embodying new technologies, and the emergence of new
industry standards and practices that could render existing technology and
systems obsolete. There can be no assurance that we will successfully use new
technologies effectively or adapt our websites, technology and
transaction-processing systems to customer requirements or emerging industry
standards. If we are unable to license and internally develop leading
technologies useful in our business, enhance our existing services, develop new
services and technology that address the increasingly sophisticated and varied
needs of our customers, and respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis, we will
not remain competitive and our business, our results of operations and financial
condition could be materially adversely affected.
IF WE ARE UNABLE TO ATTRACT QUALIFIED PERSONNEL, OUR BUSINESS COULD SUFFER.
Our ability to grow and our future success depends on our ability to
identify, attract, hire, train, retain and motivate other highly skilled
technical, managerial, sales and marketing, customer service and
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professional personnel. Competition for such employees is intense, especially in
the e-commerce sector, and there is a risk that we will not be able to
successfully attract, assimilate or retain sufficiently qualified personnel. If
we fail to retain and attract the necessary technical, managerial, sales and
marketing, customer service personnel and experienced professionals, our
business, results of operations and financial condition could be materially
adversely affected.
IF CONSUMERS AND MORTGAGE BROKER BUSINESSES DO NOT EMBRACE ON-LINE MORTGAGE
FINANCING AND SALES, OUR BUSINESS WOULD BE MATERIALLY ADVERSELY AFFECTED.
Our success depends upon the acceptance of on-line mortgage financing by
consumers, mortgage brokers and other real estate service providers. If the
market for on-line mortgage financing fails to develop, or develops more slowly
than expected, our business, results of operations and financial condition would
be materially adversely affected. In addition, if there are insufficient
communications services to support the Internet, it could result in slower
response times which would adversely affect usage of the Internet. Even if use
of the Internet for on-line financing gains acceptance, we may be unable, for
technical or other reasons, to develop and introduce new products and services
or enhancements in a timely manner, and such products and services and
enhancements may not gain widespread market acceptance. Any of these factors
could have a material adverse effect on our business, results of operations and
financial condition.
IF THERE IS A RECESSION, NATURAL DISASTER OR OTHER DISRUPTION IN THE CALIFORNIA
ECONOMY, OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED.
We are particularly vulnerable to recessions and conditions affecting the
California economy. Of the loans we originated and/or funded in the eight months
ended December 31, 1999, 83% were for properties located in California. No other
state represented more than 3% of our closed loans during such period. While we
expect to expand our business in other states, a concentration of loans in
California is likely to continue for the foreseeable future.
There have been times in the past, most recently in 1991 and 1992, when the
California economy suffered a recession more severe than the rest of the
country. If such a recession were to occur again, our business, results of
operations and financial condition would be materially adversely affected. In
addition, California historically has been vulnerable to natural disasters, such
as earthquakes and mudslides, which are not typically covered by standard hazard
insurance policies. These natural disasters often result in increased loan
delinquencies or defaults which could adversely effect on our business, results
of operations and financial condition.
IF WE HAVE TO REPURCHASE LOANS ORIGINATED FOR OR SOLD TO LENDERS, OUR RESULTS
COULD BE MATERIALLY ADVERSELY AFFECTED.
There is a risk that we will not have sufficient funds to repurchase loans
upon demand or that such repurchases will have a material adverse effect on our
business, results of operations and financial condition. Under agreements with
some of our lenders, they may require us to repurchase loans that we originate
for them, or they purchase from us, in the event of material misrepresentations
by us or inaccuracies in the borrowers' loan documents. In the eight months
ended December 31, 1999, our Coastal Federal Mortgage, Mical Mortgage and
Monument Mortgage subsidiaries were required to repurchase approximately $0,
$6.5 million and $465,000 principal amount of loans, respectively. It is
possible that future demands will be made to purchase loans originated and sold
by these subsidiaries. As of December 31, 1999, we held approximately $220,000
aggregate principal amount of loan in foreclosure. As a result of repurchases,
we occasionally are required to hold foreclosed residential real estate in
inventory until it can be resold. Future foreclosures could have a material
adverse effect on our business, results of operations and financial condition.
If interest rates rise and the economy declines, the rate of mortgage
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loan foreclosures may rise. Depending on the circumstances of the transaction,
we may or may not be able to sell the property for more than the outstanding
loan balance.
PROBLEMS AND RISKS RELATED TO POTENTIAL ACQUISITIONS AND ALLIANCES MAY HARM OUR
BUSINESS.
To implement our growth strategy we may acquire or enter into alliances with
companies with complementary services, technologies and businesses. In
connection with any such acquisition, we may fail to successfully integrate the
operations of the acquired company. For example, as described more completely
below under "We may incur additional losses from the discontinued operations of
Coastal Federal Mortgage and Mical Mortgage," we incurred significant losses
following our acquisitions of Mical Mortgage and Coastal Federal Mortgage, and
they have discontinued their operations. Any future alliances we pursue may not
be successful. Also, acquisitions or alliances could divert our management's
attention from other business matters, or we could lose key employees of
acquired companies or alliance businesses.
THE DISCONTINUATION OF FEDERAL PROGRAMS THAT PURCHASE LOANS OR ANY CHANGE IN OUR
ELIGIBILITY TO PARTICIPATE IN SUCH PROGRAMS WOULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR BUSINESS.
If the mortgage programs administered by Fannie Mae, Freddie Mac and Ginnie
Mae or our eligibility to participate in them were terminated or significantly
curtailed, our business, results of operations and financial condition would be
materially adversely affected. We fund our mortgage loan operations in part by
selling the mortgage loans that we fund to these mortgage programs which pool
the loans into mortgage-backed securities. Our ability to sell mortgage loans
depends upon the continuation of programs administered by these entities, as
well as our continued eligibility to participate in these programs.
We also depend upon private mortgage investors, such as GMAC/RFC, GE Capital
Mortgage and IndyMac, to purchase mortgage loans that we originate which do not
qualify for inclusion in the federal programs described above. If private
investors reduce their purchases of these mortgage loans, the market and price
for such mortgage loans will be adversely affected, which would have a material
adverse effect on our business, results of operations and financial condition.
We depend on automated underwriting and other services offered by government
sponsored and other mortgage investors, including Fannie Mae's Desktop
Underwriter, Freddie Mac's Loan Prospector, GMAC/RFC's AssetWise and GE Capital
Mortgage's Good Decisions. These services help ensure that our mortgage services
can be offered efficiently and timely. We currently have an agreement with
Fannie Mae that allows us to use their automated underwriting services and
enables us to sell them qualified first mortgages. We expect to continue to
process a significant portion of our conforming loans using the Fannie Mae
system. However, our agreements with Fannie Mae and other mortgage investors can
be terminated by either party at any time. There is a risk that we will not
remain in good standing with Fannie Mae and other mortgage investors or that
Fannie Mae and other mortgage investors will terminate our relationship. The
termination of our agreement with Fannie Mae would materially adversely impact
our ability to originate loans.
WE MAY INCUR ADDITIONAL LOSSES FROM THE DISCONTINUED BUSINESS OF COASTAL FEDERAL
MORTGAGE AND MICAL MORTGAGE.
In April 1998, we acquired Coastal Federal Mortgage, and in May 1998, we
acquired Mical Mortgage Inc. Our results of operations include net losses from
the acquisitions of both of these units and from their operating activities.
Although these business units were discontinued in April 1999, they may incur
additional losses, which would be included in our consolidated results. We
reported net losses associated with Coastal and Mical during fiscal 1999 and for
the eight months ended December 31, 1999 of $16.9 million and $2.9 million,
respectively.
41
<PAGE>
IF OUR QUARTERLY REVENUES AND OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, THE
PRICE OF OUR COMMON STOCK IS LIKELY TO BE VOLATILE.
Our quarterly revenues and operating results are likely to continue to vary
substantially from quarter to quarter due to a number of factors, including the
following:
- fluctuations in interest rates;
- seasonal or other economic factors affecting demand for mortgages;
- changes in our pricing policies or our competitors' pricing policies for
mortgage origination and processing fees;
- the introduction of new products and services by us or our competitors;
- the level of consumer interest and confidence in the Internet as a means
of accessing financial products and services;
- any termination or restructuring of agreements with key service providers;
and
- technical difficulties or service interruptions affecting our Internet
websites or operational data processing systems.
Fluctuation in our quarterly results may cause the price of our common stock
to be volatile.
We anticipate that as the on-line mortgage origination industry matures, our
business will also be increasingly susceptible to the same seasonal and cyclical
factors that affect the mortgage industry as a whole. Accordingly, we believe
period-to-period comparisons of our operating results are not meaningful and our
results for any period should not be relied upon as an indication of future
performance. Our operating results may fail to meet our expectations or those of
analysts who follow us. Any such failure could cause our stock price to decline
substantially.
OUR STOCK PRICE COULD BE HIGHLY VOLATILE.
The trading prices of Internet and e-commerce stocks have recently
experienced extreme price and volume fluctuations. These fluctuations often
appear to be unrelated or disproportionate to the operating performance of
Internet and e-commerce companies. The valuations of many Internet and
e-commerce stocks are extraordinarily high based on conventional valuation
standards such as price-to-earnings and price-to-sales ratios. These trading
prices and valuations may not be sustained. Any negative change in the public's
perception of the prospects of Internet or e-commerce companies could further
depress our stock price regardless of our future results. In the past,
securities class action litigation often has been brought against companies
following declines in the market price of their securities. If litigation of
this type were brought against us, it could be very costly and could divert
management's attention and resources from our business.
IF THERE ARE INTERRUPTIONS OR DELAY IN OBTAINING APPRAISAL, CREDIT REPORTING,
TITLE SEARCHES AND OTHER UNDERWRITING SERVICES FROM THIRD PARTIES, WE MAY
EXPERIENCE CUSTOMER DISSATISFACTION AND DIFFICULTIES CLOSING LOANS.
If we are unsuccessful in securing the timely delivery of ancillary services
such as appraisals, credit reporting and title searches, we will likely
experience increased customer dissatisfaction, and our business, results of
operations and financial condition could be materially adversely affected. We
rely on other companies to perform certain aspects of the loan underwriting
process, including appraisals, credit reporting and title searches. If the
provision of these ancillary services were interrupted or delayed, it could
cause delays in the processing and closing of loans for our customers. The value
of the service we offer and the ultimate success of our business are dependent
on our ability to secure the timely provision of these ancillary services by the
third parties with whom we have business relationships.
42
<PAGE>
IF WE FAIL TO COMPLY WITH EXTENSIVE FEDERAL AND STATE LAWS REGULATING OUR
INDUSTRY, WE COULD BE SUBJECT TO PENALTIES, DISQUALIFICATIONS, LAWSUITS OR
ENFORCEMENT ACTIONS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our operations are subject to extensive regulation by federal and state
authorities. If we fail to comply with such regulations, possible consequences
could include loss of approved status, demands for indemnification, class action
lawsuits, administrative enforcement actions and other civil and criminal
sanctions, and could have a material adverse effect on our business, results of
operations and financial condition. See "Business--Mortgage Banking Regulation,"
at page 19 of our Annual Report on Form 10-K for the year ended April 30, 1999.
IF OUR COMPUTER SYSTEMS FAIL, OUR BUSINESS WOULD BE MATERIALLY ADVERSELY
AFFECTED.
Any interruption in the availability of our websites, transaction-processing
systems or network infrastructure could materially adversely affect our
business, results of operations and financial condition. Such interruptions
could result from events such as fires, floods, earthquakes, power losses,
telecommunications failures, computer viruses and electronic breaches. Our
insurance policies may not adequately compensate us for losses that may occur in
the event of a failure of our computer systems or other interruptions in our
business.
Our websites must accommodate a high volume of traffic and deliver
frequently updated information, the accuracy and timeliness of which is critical
to our business. In the past, we have experienced periodic system interruptions,
which we believe will continue to occur from time to time. Any substantial
increase in the volume of traffic on our websites will require us to expand and
upgrade further our technology, transaction-processing systems and network
infrastructure. We cannot be sure that we will be able to accurately project the
rate or timing of increases, if any, in the use of our websites or expand and
upgrade our systems and infrastructure to accommodate such increases in a timely
manner. In addition, our users depend on Internet service providers, on-line
service providers and other website operators for access to our websites. Many
of them have experienced significant outages in the past, and could experience
outage delays and other difficulties due to system failures unrelated to our
systems. Moreover, the Internet infrastructure may not be able to support
continued growth in its use. Any of these problems would materially adversely
affect our business, results of operations and financial condition.
IF OUR ELECTRONIC SECURITY DEVICES ARE BREACHED, OUR BUSINESS WOULD BE
MATERIALLY ADVERSELY AFFECTED.
If any compromise in our security devices were to occur, it could have a
material adverse effect on our business, results of operations and financial
condition. The secure transmission of confidential information through
e-commerce is critical to our underwriting process. We rely on certain
encryption and authentication technology licensed from third parties to provide
secure transmission of confidential information, such as consumers' financial
statements. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography, or other events or developments
will not result in a compromise or breach of the algorithms we use to protect
transaction data. We may be required to spend significant capital and other
resources to protect against such security breaches or to alleviate problems
caused by such breaches. Concerns over the security of transactions conducted on
the Internet and the privacy of users may also inhibit the growth of the
Internet generally, and e-commerce in particular. To the extent that our
activities involve the storage and transmission of proprietary information, such
as consumers' financial statements and profile information, security breaches
could damage our reputation and expose us to a risk of loss or litigation and
possible liability. There can be no assurance that our security measures will
prevent security breaches or that a failure to prevent such security breaches
will not have a material adverse effect on our business, financial condition and
results of operations.
43
<PAGE>
IF OUR SHARES OUR DELISTED, THE LIQUIDITY FOR OUR SHARES COULD BE IMPAIRED.
In December 1998, we received notice from Nasdaq that we had not met
required financial ratio criteria for continued listing on the Nasdaq. Nasdaq
requested that we maintain a minimum net worth of $2 million and submit to
Nasdaq certain periodic financial reporting until July 1999. We have complied
with Nasdaq's special reporting request and required ratio criteria.
If we fail to meet the NASD's continued listing requirements, including,
among others, net tangible assets or market capitalization, minimum bid price
and various corporate governance requirements, our shares could be delisted from
the Nasdaq SmallCap Market. In such event, trading, if any, in our common stock
would thereafter be conducted in the over-the-counter markets in the so-called
"pink sheets" or the NASD's "Electronic Bulletin Board." Consequently, the
liquidity of our shares could be impaired, not only in the number of shares
which could be bought and sold, but also through delays in the timing of the
transactions, reductions in the number and quality of security analysts' and the
news media's coverage of the company, and lower prices for our shares than might
otherwise be attained.
IF OUR SHARES ARE DELISTED, OUR SHARES COULD BECOME SUBJECT TO THE SEC'S "PENNY
STOCK RULE".
If our shares were delisted from Nasdaq, they could become subject to
Rule 15g-9 under the Securities Exchange Act of 1934, which imposes additional
sales practice requirements on broker-dealers which sell such securities to
persons other than established customers and "accredited investors" (generally,
individuals with net worth in excess of $1,000,000 or annual incomes exceeding
$200,000 or $300,000 together with their spouses). For transactions covered by
this rule, a broker-dealer must make a special suitability determination for the
purchase and have received the purchaser's written consent to the transaction
prior to sale. Consequently, the rule may adversely affect the ability of
broker-dealers to sell our shares and may adversely affect the ability of
purchasers in this offering to sell any of the securities acquired in the
secondary market. If our shares become subject to this rule, market liquidity
for our shares could be severely adversely affected.
YEAR 2000 COMPLIANCE
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As as result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information and technology and non-information technology systems and believes
those systems successfully responded to the Year 2000 date change. The Company
expensed approximately $597,000 during the eight months ended December 31, 1999
in connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products, its
internal systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
MATERIAL SUBSEQUENT EVENTS
Effective January 31, 2000, we appointed Robert Snow, Executive Vice
President--Business to Business.
Effective January 31, 2000, Michael Conway, our Executive Vice
President--Capital Markets, was terminated by the Company. Subsequent to his
termination, Mr. Conway initiated arbitration proceedings in which it is alleged
that he was wrongfully terminated. A mediation is scheduled to resolve the
matter.
Effective February 29, 2000, Thomas Porter, our Executive Vice
President--Administration, resigned. Effective March 3, 2000, Christos Skeadas,
our Executive Vice President--Chief Technology Officer,
44
<PAGE>
resigned. Effective April 1, 2000, we have appointed Michael Quinn, Senior Vice
President, Director of Capital Markets.
As of December 31, 1999, our growth and change in Chief Executive Officers
violated certain covenants in our primary warehouse lending agreement.
Subsequent to December 31, 1999, the lender waived the defaults.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FiNet's primary exposure to market risk is interest rate risk. From the time
we extend an interest rate commitment to the borrower until the loan is priced
for sale to an investor, we are subject interest rate risk. If interest rates
rise during that period, the price at which the loan can be sold to an investor
declines, resulting in a lower sales price for the loan. We attempt to mitigate
such reductions and manage our interest rate risk exposure through hedging
transactions using a combination of forward sales of mortgage-backed securities
and forward whole-loan sales to fix the sales price of loans we expect to fund.
Before entering into hedging transactions, we analyze our loans with committed
interest rates (pipeline loans). We consider factors such as the estimated
portion of loans that will ultimately be funded, note rates, interest rates,
inventory of loans and applications and other factors to determine the type and
amount of forward commitment and hedging transactions.
FiNet attempts to make forward commitments for, or hedge substantially, all
of its estimated interest rate risk on the loans. We have mandatory and optional
forward commitments at December 31, 1999 and April 30, 1999 and 1998 aggregating
$110.2 million, $43.8 million and $46.4 million, respectively. These commitments
covered the market risk associated with mortgage loans held for sale to
investors of $78.7 million, $33.4 million and $63.0 million, respectively, and
our pipeline loans for which interest rates were committed at December 31, 1999
and April 30, 1999 and 1998 of $36.5 million, $25.6 million and $87.3 million,
respectively. We attempt to limit our credit exposure on forward sales
arrangements by entering into forward sales contracts exclusively with
institutions that we believe are sound credit risks and by limiting exposure to
any single institution.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<S> <C>
Index to Consolidated Financial Statements.................. 45
Independent Auditors' Reports............................... 46
Report of Management........................................ 49
Consolidated Balance Sheets at December 31, 1999 and April
30, 1999 and 1998......................................... 50
Consolidated Statements of Operations for the eight months
ended December 31, 1999 and 1998 and for the years ended
April 30, 1999, 1998 and 1997............................. 51
Consolidated Statements of Changes in Stockholders' Equity
for the eight months ended December 31, 1999 and the years
ended April 30, 1999, 1998 and 1997....................... 52
Consolidated Statements of Cash Flows for the eight months
ended December 31, 1999 and 1998 and the years ended
April 30, 1999, 1998, and 1997............................ 53
Notes to Consolidated Financial Statements.................. 54
</TABLE>
45
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
FiNet.com, Inc.
We have audited the accompanying consolidated balance sheets of
FiNet.com, Inc., and subsidiaries as of December 31, 1999 and April 30, 1999,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the eight months ended December 31, 1999 and for the
year ended April 30, 1999. These financial statements are the responsibility of
FiNet.com, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial position of
FiNet.com, Inc. as of December 31, 1999 and April 30, 1999 and the consolidated
results of their operations and their cash flows for the eight months ended
December 31, 1999 and the year ended April 30, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Francisco, California
February 22, 2000, except for
Note 6 as to which the date is
March 30, 2000
46
<PAGE>
REUBEN E. PRICE & CO.
PUBLIC ACCOUNTANCY CORPORATION
703 MARKET STREET
SAN FRANCISCO, CA 94103
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
FiNet.com, Inc.
Walnut Creek, CA
We have audited the accompanying consolidated balance sheet of
FiNet.com, Inc. (formerly Finet Holdings Corporation) and subsidiaries as of
April 30, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the fiscal years ended April 30, 1998
and 1997. The consolidated financial statements give retroactive effect to the
merger of FiNet.com, Inc. and Coastal Federal Mortgage Company on April 30,
1998, which has been accounted for using the pooling of interests method as
described in the notes to the consolidated financial statements. These
consolidated 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 did not audit the 1998 and 1997 financial
statements of Coastal Federal Mortgage Company, which statements reflect total
assets and revenues of approximately 10 percent and 53 percent, respectively, of
the related consolidated totals as of April 30, 1998. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Coastal Federal Mortgage
Company, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, based on our audits and the report of other auditors, the
consolidated statements referred to above present fairly, in all material
respects, the financial position of FiNet.com, Inc. and subsidiaries as of
April 30, 1998, the consolidated results of their operations and their cash
flows for the fiscal years ended April 30, 1998 and 1997 in conformity with
generally accepted accounting principles.
/s/ REUBEN E. PRICE & CO.
San Francisco, CA
August 12, 1998
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Coastal Federal Mortgage Company
We have audited the balance sheet of Coastal Federal Mortgage Company as of
April 30, 1998, and the related statements of income, stockholders' equity and
cash flows for each of the years in the two year period then ended (not
presented separately herein). 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of Coastal Federal Mortgage
Company as of April 30, 1998, and the results of its operations and its cash
flows for each of the years in the two year period then ended, in conformity
with generally accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP
Florham Park, New Jersey
July 9, 1998
With respect to Note C
July 31, 1998
48
<PAGE>
REPORT OF MANAGEMENT
To Our Stockholders:
Management of the Company is responsible for the preparation, integrity and
objectivity of the consolidated financial statements, and the other financial
information presented in the annual report. To meet these responsibilities we
maintain a system of internal control that is designed to provide reasonable
assurance as to the integrity and reliability of the financial statements, the
protection of Company and customer assets from unauthorized use, and the
execution and recording of transactions in accordance with management's
authorization. The system is augmented by careful selection of our managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuming that employees
adhere to the highest standards of personal and professional integrity. Although
no cost-effective internal control system will preclude all errors and
irregularities, we believe the Company's system of internal control is adequate
to accomplish the objectives set forth above.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and necessarily include some amounts
that are based on estimates and our best judgments. The financial statements
have been audited by the independent accounting firm of Ernst & Young, LLP, who
were given unrestricted access to all the Company's financial records and
related data. We believe that all representations made to Ernst & Young LLP
during their audit were valid and appropriate.
The Board of Directors through its Audit Committee, which is comprised
entirely of nonmanagement directors, has an oversight role in the area of
financial reporting and internal control. The Audit Committee periodically meets
with Ernst & Young LLP, our internal auditors and Company management to discuss
accounting, auditing, internal controls over financial reporting and other
matters.
49
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30
DECEMBER 31 -------------------
1999 1999 1998
----------- -------- --------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 18,626 $ 4,202 $ 1,993
Restricted cash............................................. 10,403 -- --
Marketable securities....................................... 2,674 -- --
Accounts receivable, net of allowances of $1,793, $2,150,
and $36................................................... 1,863 2,245 26,186
Notes receivable............................................ 500 -- --
Mortgages held for sale, net................................ 78,691 33,438 63,034
Mortgage servicing rights................................... -- 2,693 5,478
Furniture, fixtures and equipment, net...................... 4,471 1,575 1,441
Other assets................................................ 2,580 1,102 3,336
-------- ------- --------
Total assets.............................................. $119,808 $45,255 $101,468
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse and other lines of credit......................... $ 80,453 $33,038 $ 86,659
Accounts payable............................................ 2,379 517 2,951
Notes payable and capitalized leases........................ 141 481 860
Accrued expenses and other liabilities...................... 6,462 4,531 2,139
Convertible subordinated debentures......................... -- -- 5,500
-------- ------- --------
Total liabilities......................................... 89,435 38,567 98,109
Commitments and contingencies...............................
Stockholders' equity:
Common stock, par value $.01 per share (150,000 shares
authorized, 93,441, 78,638 and 32,052 shares issued and
outstanding at December 31, 1999 and April 30, 1999 and
1998, respectively)....................................... 934 786 321
Additional paid-in capital.................................. 100,943 53,782 13,675
Accumulated deficit......................................... (73,208) (47,880) (10,637)
Accumulated comprehensive income............................ 1,704 -- --
-------- ------- --------
Total stockholders' equity................................ 30,373 6,688 3,359
-------- ------- --------
Total liabilities and stockholders' equity.................. $119,808 $45,255 $101,468
======== ======= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
50
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
DECEMBER 31 YEARS ENDED APRIL 30
---------------------- ------------------------------
1999 1998 1999 1998 1997
-------- ----------- ---- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................... $ 6,070 $ 16,859 $ 22,413 $15,160 $12,344
Cost of revenues............................ 8,423 14,735 35,064 14,718 9,316
-------- -------- -------- ------- -------
Gross (loss) profit......................... (2,353) 2,124 (12,651) 442 3,028
Operating expenses
General and administrative................ 13,973 10,150 11,661 5,887 4,451
Marketing and advertising................. 6,200 755 2,205 921 667
Special charges........................... 1,385 -- 4,926 1,010 --
Depreciation and amortization............. 777 597 646 482 105
Other..................................... 575 347 1,468 875 552
-------- -------- -------- ------- -------
Total expenses.......................... 22,910 11,849 20,906 9,175 5,775
-------- -------- -------- ------- -------
Loss from operations........................ (25,263) (9,725) (33,557) (8,733) (2,747)
Other interest expense...................... -- 2,749 2,976 420 118
-------- -------- -------- ------- -------
Loss before income taxes and extraordinary
gain...................................... (25,263) (12,474) (36,533) (9,153) (2,865)
Income tax expense.......................... 65 -- 5 226 225
-------- -------- -------- ------- -------
Loss before extraordinary gain.............. (25,328) (12,474) (36,538) (9,379) (3,090)
Extraordinary gain on liabilities subject to
compromise................................ -- -- -- -- 312
-------- -------- -------- ------- -------
Net loss.................................... (25,328) (12,474) (36,538) (9,379) (2,778)
In-substance preferred dividend............. -- 353 705 -- --
-------- -------- -------- ------- -------
Net loss attributable to common
stockholders.............................. $(25,328) $(12,827) $(37,243) $(9,379) $(2,778)
======== ======== ======== ======= =======
Loss per share attributable to common
stockholders:
Basic and diluted net loss per share
before extraordinary item............... $ (0.28) $ (0.37) $ (0.79) $ (0.31) $ (0.21)
Extraordinary gain on liabilities subject
to compromise........................... -- -- -- -- 0.02
-------- -------- -------- ------- -------
Basic and diluted net loss per common
share................................... $ (0.28) $ (0.37) $ (0.79) $ (0.31) $ (0.19)
======== ======== ======== ======= =======
Weighted average common shares used in
computing basic and diluted net loss per
common share.............................. 89,517 34,316 46,867 30,433 14,313
======== ======== ======== ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
51
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID COMMON ACCUMULATED
-------------------------------- IN STOCK COMPREHENSIVE
SHARES AMOUNT SUBSCRIBED CAPITAL SUBSCRIPTION INCOME
-------- -------- ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance April 30, 1996.................. 9,650 $ 97 $ -- $ 1,478 $ -- $ --
Issue of common shares:
Common stock offerings................ 11,992 80 40 7,233 (2,693) --
Reverse acquisition................... 6,412 64 -- (3,455) -- --
Debt & note payable conversion........ 2,314 23 -- 1,136 -- --
Liabilities subject to compromise
settlements......................... 230 2 -- 113 -- --
Common stock rights................... 2,403 24 -- (24) -- --
Warrants/stock options exercised...... 3 -- -- -- -- --
Repurchase of common shares............. (3,000) (30) -- (150) -- --
Distributions to stockholders........... -- -- -- -- -- --
Net loss................................ -- -- -- -- -- --
------ ---- ---- -------- ------- ------
Balance, April 30, 1997................. 30,004 260 40 6,331 (2,693) --
Proceeds of subscription receivable..... -- 40 (40) -- 2,693 --
Issue of common shares:
In connection with acquisitions:
Real Estate Office Software......... 150 2 -- 373 -- --
iQualify, Inc....................... 50 1 -- 180 -- --
NDS................................. 202 2 -- 806 -- --
Private placement..................... 1,300 13 -- 3,887 -- --
Settlement of liabilities............. 232 2 -- 355 -- --
Employee bonuses...................... 9 -- -- 35 -- --
Warrants/stock options exercised........ 105 1 -- 157 -- --
Paid in capital related to imputed
interest on issue of convertible
debt.................................. -- -- -- 1,551 -- --
Net loss................................ -- -- -- -- -- --
------ ---- ---- -------- ------- ------
Balance, April 30, 1998................. 32,052 321 -- 13,675 -- --
Issue of common shares:
Private placements of common shares... 34,138 341 -- 28,196 -- --
Costs of equity offerings............. -- -- -- (762) -- --
In connection with acquisitions:
Mical Mortgage, Inc................. 465 5 -- 1,798 -- --
Interloan.com....................... 100 1 -- 74 -- --
Real Estate Office Software......... 50 -- -- 246 -- --
Conversion of convertible subordinated
debentures.......................... 9,533 95 -- 5,405 -- --
Warrants/stock options exercised...... 1,500 15 -- 1,432 -- --
Employee/other compensation........... 800 8 -- 1,120 -- --
Paid in capital related to imputed
interest on issue of convertible
debentures............................ -- -- -- 423 -- --
Paid in capital and in-substance
dividend on preferred stock........... -- -- -- 705 -- --
Warrants issued with subordinated
convertible debentures................ -- -- -- 269 -- --
Warrants issued upon conversion of
debentures............................ -- -- -- 739 -- --
Issue of preferred stock................ -- -- -- 2,500 -- --
Costs of preferred stock issue.......... -- -- -- (214) -- --
Redemption of preferred stock........... -- -- -- (2,500) -- --
Warrants issued for services............ -- -- -- 676 -- --
Net loss................................ -- -- -- -- -- --
------ ---- ---- -------- ------- ------
Balance, April 30, 1999................. 78,638 786 -- 53,782 -- --
Issue of common shares:
Private placements of common shares... 11,058 111 -- 41,890 -- --
Costs of equity offerings............. -- -- -- (729) -- --
In connection with acquisitions:
Homeseekers......................... 600 6 -- 1,457 -- --
Lowestrate.......................... 560 6 -- 1,815 -- --
Warrants/stock options exercised...... 2,126 21 -- 2,152 -- --
Employee/other compensation........... 459 4 -- 576 -- --
Other comprehensive income.............. -- -- -- -- -- 1,704
Net loss................................
------ ---- ---- -------- ------- ------
Balance, December 31, 1999.............. 93,441 $934 $ -- $100,943 $ -- $1,704
====== ==== ==== ======== ======= ======
<CAPTION>
ACCUMULATED
(DEFICIT) TOTAL
------------ --------
<S> <C> <C>
Balance April 30, 1996.................. $ 2,261 $ 3,836
Issue of common shares:
Common stock offerings................ -- 4,660
Reverse acquisition................... -- (3,391)
Debt & note payable conversion........ -- 1,159
Liabilities subject to compromise
settlements......................... -- 115
Common stock rights................... -- --
Warrants/stock options exercised...... -- --
Repurchase of common shares............. -- (180)
Distributions to stockholders........... (741) (741)
Net loss................................ (2,778) (2,778)
-------- --------
Balance, April 30, 1997................. (1,258) 2,680
Proceeds of subscription receivable..... -- 2,693
Issue of common shares:
In connection with acquisitions:
Real Estate Office Software......... -- 375
iQualify, Inc....................... -- 181
NDS................................. -- 808
Private placement..................... -- 3,900
Settlement of liabilities............. -- 357
Employee bonuses...................... -- 35
Warrants/stock options exercised........ -- 158
Paid in capital related to imputed
interest on issue of convertible
debt.................................. -- 1,551
Net loss................................ (9,379) (9,379)
-------- --------
Balance, April 30, 1998................. (10,637) 3,359
Issue of common shares:
Private placements of common shares... -- 28,537
Costs of equity offerings............. -- (762)
In connection with acquisitions:
Mical Mortgage, Inc................. -- 1,803
Interloan.com....................... -- 75
Real Estate Office Software......... -- 246
Conversion of convertible subordinated
debentures.......................... -- 5,500
Warrants/stock options exercised...... -- 1,447
Employee/other compensation........... -- 1,128
Paid in capital related to imputed
interest on issue of convertible
debentures............................ -- 423
Paid in capital and in-substance
dividend on preferred stock........... (705) --
Warrants issued with subordinated
convertible debentures................ -- 269
Warrants issued upon conversion of
debentures............................ -- 739
Issue of preferred stock................ -- 2,500
Costs of preferred stock issue.......... -- (214)
Redemption of preferred stock........... -- (2,500)
Warrants issued for services............ -- 676
Net loss................................ (36,538) (36,538)
-------- --------
Balance, April 30, 1999................. (47,880) 6,688
Issue of common shares:
Private placements of common shares... -- 42,001
Costs of equity offerings............. -- (729)
In connection with acquisitions:
Homeseekers......................... -- 1,463
Lowestrate.......................... -- 1,821
Warrants/stock options exercised...... -- 2,173
Employee/other compensation........... -- 580
Other comprehensive income.............. -- 1,704
Net loss................................ (25,328) (25,328)
-------- --------
Balance, December 31, 1999.............. $(73,208) $ 30,373
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
52
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED
DECEMBER 31 YEARS ENDED APRIL 30
---------------------- ------------------------------
1999 1998 1999 1998 1997
-------- ---- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. ($25,328) ($12,827) ($36,538) ($9,379) ($2,778)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 826 2,322 2,476 1,549 543
Imputed interest from convertible debentures............ -- 2,156 2,502 287 --
Write down of goodwill and other asset valuation
adjustments........................................... 989 -- 4,958 1,728 164
Gain on sale of mortgage servicing rights............... -- (420) (420) -- --
Gain on sale of marketable securities................... (366) -- -- -- --
Expenses paid for issuance of common stock or
warrants.............................................. -- -- 1,804 392 52
Expense from warrants issued upon conversion of
debentures............................................ -- -- 739 -- --
Extraordinary gain on liabilities subject to
compromise............................................ -- -- -- -- (312)
Changes in operating assets and liabilities:
Increase (decrease) in restricted cash.................. (10,003) -- -- -- --
(Increase) decrease in mortgage loans held for sale..... (45,253) 55,395 71,596 (38,562) (6,130)
(Increase) decrease in receivables from sales of
mortgage loans, servicing rights and other
receivables........................................... 591 (1,561) 23,911 (20,496) 8,412
(Increase) decrease in originated mortgage servicing
rights................................................ -- -- 382 (1,248) (876)
(Increase) decrease in other assets..................... (121) 1,242 724 317 (498)
Net increase (decrease) in warehouse borrowings......... 47,415 (54,747) (91,494) 58,357 (345)
Increase (decrease) in accounts payable and accrued
expenses.............................................. 3,703 (4,465) (6,175) 3,006 106
Other operating......................................... (322) 6 309 (229) --
-------- -------- -------- ------- -------
Net cash used in operating activities................. (27,869) (12,899) (25,226) (4,278) (1,662)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights..................... -- -- -- (4,515) (287)
Proceeds from sale of mortgage servicing rights........... 1,984 1,509 1,509 497 --
Proceeds on sale of marketable securities................. 872
Acquisition of mortgage loans held for investment......... -- -- -- -- (87)
Purchase of furniture, fixtures and equipment............. (4,338) (793) (338) (647) (265)
Acquisition of purchased technology and intangibles....... -- (481) (1,007) (67)
Cash acquired in acquisition.............................. -- 185 185 -- --
Pre-acquisition advances to affiliates, net of payments... -- -- -- (1,930) (717)
Other..................................................... -- -- -- 110 234
-------- -------- -------- ------- -------
Net cash provided by (used in) investing activities... (1,482) 901 875 (7,492) (1,189)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 41,852 14,273 27,775 6,582 4,438
Proceeds from issuance of convertible preferred stock..... -- 2,286 2,286 -- --
Proceeds from issuance of convertible debt................ -- 1,384 1,384 5,058 --
Repurchase of common stock................................ -- -- -- (180)
Proceeds from advances on note payable and line of
credit.................................................. -- 1,400 1,400 2,550 1,950
Proceeds from the exercise of common stock warrants and
options................................................. 2,173 197 1,447 219 --
Redemption of convertible debt............................ -- -- (1,500) -- --
Redemption of convertible preferred stock................. -- -- (2,500) -- --
Repayment of note payable, capitalized leases and line of
credit.................................................. (250) (2,572) (3,732) (1,665) (2,305)
Repayments of loans and distributions to former
stockholders............................................ -- -- -- (129) (1,707)
Proceeds from notes payable to officers................... -- -- -- -- 625
Other financing........................................... -- 455 -- -- --
-------- -------- -------- ------- -------
Net cash provided by financing activities............. 43,775 17,423 26,560 12,615 2,821
-------- -------- -------- ------- -------
Net increase (decrease) in cash............................. 14,424 5,425 2,209 845 (30)
Cash and cash equivalents at beginning of period............ 4,202 1,993 1,993 1,148 1,178
-------- -------- -------- ------- -------
Cash and cash equivalents at end of period.................. $ 18,626 $ 7,418 $ 4,202 $ 1,993 $ 1,148
======== ======== ======== ======= =======
Supplemental disclosures:
Interest paid............................................. $ 625 $ 5,168 $ 6,812 $ 1,877 $ 1,966
Taxes paid................................................ $ 65 $ -- $ 2 $ 57 $ 351
</TABLE>
See accompanying notes to the consolidated financial statements.
53
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. THE COMPANY
ORGANIZATION
FiNet.com ("FiNet" or "the Company") is a provider of mortgage services to
mortgage broker businesses and consumers, including online mortgage services.
The Company primarily markets its business to business services through mortgage
brokers, and to consumers through marketing agreements with general interest
websites and co-branding arrangements with financial services websites. FiNet
operates its consumer-direct and business-to-business segments through Monument
Mortgage, Inc. ("Monument"), which is licensed to originate and fund mortgage
loans in 49 states and the District of Columbia. The majority of Monument's
business activity is carried out in California.
Effective June 1, 1999, the Company changed its name from Finet Holdings
Corporation to FiNet.com, Inc.
RISKS AND UNCERTAINTIES
The Company has a limited operating history under its current business
model, and its prospects are subject to the risks, expenses and uncertainties
frequently encountered by companies in the new and rapidly evolving markets for
Internet products and services. These risks include the failure to develop and
extend the Company's online service brands, the rejection of the Company's
services by consumers, vendors and/or advertisers, and the inability of the
Company to maintain and increase the levels of traffic on its online services,
as well as other risks and uncertainties.
FiNet is substantially dependent on its mortgage finance partners, and the
termination of one or more of these relationships would adversely affect FiNet's
business. Through Monument Mortgage, Inc., the Company funds and closes mortgage
loans. As a non-depository mortgage banker, Monument Mortgage is dependent on
specialized mortgage credit facilities to finance its mortgage lending
activities. At December 31, 1999, the Company's rapid growth in liabilities
violated a covenant with our primary warehouse lender. The lender subsequently
waived the default. This facility expires on May 31, 2000. The Company expects
to continue its lending relationship with its primary warehouse lender; however,
no assurances can be made that this relationship will continue. The inability to
obtain warehouse lending would cause a material adverse affect on the Company's
results of operations and financial position.
The Company experienced net losses for the eight months ended December 31,
1999 and the years ended April 30, 1999, 1998, and 1997 and had an accumulated
deficit at December 31, 1999 of $73,208,000. Net losses are expected for the
foreseeable future. Equity capital has been raised to finance operations. The
Company's cash on hand at December 31, 1999 was $18,626,000. Future capital
requirements depend on many factors including the Company's ability to execute
its business plan. The Company may need to raise additional capital through the
issuance of debt or equity to execute its business plan. There can be no
assurance that the Company will be able to raise additional capital, or that
such capital will be available at all on satisfactory terms. Failure to raise
additional capital when needed could have a material adverse effect on the
Company's business, results of operations and financial condition.
54
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of FiNet and its
wholly-owned subsidiaries. All significant intercompany transactions have been
eliminated. Certain reclassifications have been made to prior year financial
statements to conform to the presentation for the eight months ended
December 31, 1999 .
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash balances and instruments with
maturities of three months or less at the time of purchase. At December 31, 1999
the Company had restricted cash of $10,403,000 relating to amounts received for
settlements on sales of mortgage loans that had not yet been applied to reduce
the warehouse line of credit. This amount may only be used to pay down the
warehouse line and is therefore restricted as to use.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale, net of related discounts and premiums, are
carried at the lower of aggregate cost or market value. Market valuation
adjustments of $2,937,000, $3,851,000 and $396,000 at December 31, 1999, April
30, 1999 and 1998, respectively, were required and recorded in a valuation
allowance by charges to "Cost of Revenue". Pursuant to the mortgage terms for
the loans, the borrowers have pledged the underlying real estate as collateral
for the loans.
MORTGAGE SERVICING RIGHTS
Originated loan servicing is recorded based on its relative fair value when
separated from the underlying loan and retained by the Company. Purchased loan
servicing is recorded at cost, which is not in excess of the future net cash
flows related to the servicing profile. Impairment of mortgage servicing rights
is determined using the estimated fair value of the servicing rights based on
third party appraisals or written bids. The appraisals use a discounted cash
flow analysis on a disaggregated portfolio basis stratified by loan type,
investor type, and interest rate to determine fair value. Any indicated
impairment is recorded using a valuation allowance.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment, including furniture and equipment under
capital leases, are stated at cost. Depreciation and amortization, which
includes the amortization of assets recorded under capital leases, is computed
straight-line over their estimated useful lives of three to seven years. The
cost of repairs and maintenance of furniture, fixtures and equipment is charged
to operating expense.
55
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Lending transaction fees are deferred until the related loan is sold. Upon
sale of the loan, deferred transaction fee income is recognized and included in
gain on sale of mortgage loans. Discounts and premiums from the origination of
mortgage loans held for sale are deferred and recognized as adjustments to gain
or loss upon sale.
Loan servicing fees represent fees earned for servicing loans for various
investors. The fees are either based on a contractual percentage of the
outstanding principal balance or a fixed dollar amount per loan. Fees are
credited to income when the related payments are received.
Loan brokerage fees represent fees earned by the Company's consumer-direct
segment for processing of mortgage loan applications for third party lenders.
The fees for providing these services are recognized at such time as the loans
are funded by the lender.
Direct loan origination costs and other production costs attributable to
inventory as well as other costs associated with revenues earned during the
period are included in "Cost of revenues" in the Company's Consolidated
Statement of Operations.
The Company's revenue components are (in thousands):
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED
DECEMBER 31 1999 YEARS ENDED APRIL 30
---------------------- ------------------------------
1999 1998 1999 1998 1997
-------- ----------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Warehouse interest income................... $2,016 $ 5,050 $ 6,009 $ 3,247 $ 2,433
Gain on sale of servicing rights and
mortgage loans............................ 1,969 8,922 11,847 10,187 9,022
Loan servicing fees......................... 305 924 1,319 823 589
Loan brokerage fees......................... 797 1,702 2,895 418 94
Other....................................... 983 261 343 485 206
------ ------- ------- ------- -------
Total revenues............................ $6,070 $16,859 $22,413 $15,160 $12,344
====== ======= ======= ======= =======
</TABLE>
MARKETING AND ADVERTISING COSTS
All marketing and advertising costs are charged to operating expenses as
incurred.
INCOME TAXES
The Company and its subsidiaries file consolidated federal and separate or
combined tax returns for certain states. State and local income taxes are filed
according to the taxable activities of the Company.
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," the Company uses the
liability method of accounting for income taxes. Under the liability method,
deferred tax assets and liabilities are recognized for the expected future tax
consequences of existing differences between financial reporting and tax
reporting bases of assets and
56
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liabilities, as well as for operating losses and tax credit carry-forwards,
using enacted tax laws and rates. Deferred tax assets are recognized to the
extent that management believes, based on available evidence, that it is more
likely than not that they will be realized. Deferred tax expense represents the
net change in the deferred tax asset or liability balance during the year. This
amount, together with income taxes currently payable or refundable for the
current year, represents the total income tax expense for the year.
LOSS PER SHARE
The Company computes basic net loss and diluted net loss per share in
accordance with SFAS No. 128, "Earnings per Share." Under the provisions of SFAS
No. 128, basic net loss per share is computed by dividing the net loss available
to common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed by
dividing the net loss available to common stockholders for the period by the
weighted average number of common and common equivalent shares outstanding
during the period, to the extent such common equivalent shares are dilutive.
Since the common equivalent shares for all years were antidilutive (,i.e. reduce
net loss per share), basic and diluted loss per share are the same.
The Company has excluded all outstanding warrants and options to purchase
common stock and shares potentially issuable upon conversion of convertible
subordinated debentures existing at December 31, 1999 and April 30, 1999 and
1998 from the calculation of loss per share, because their inclusion would be
antidilutive (,i.e. reduce the net loss per share) for all periods presented.
The number of options to purchase common stock that were excluded are
11,874,828; 7,512,000; 737,875 and 558,875 for the eight months ended
December 31, 1999 and for the fiscal years ended April 30, 1999, 1998 and 1997,
respectively. Warrants to purchase common stock of 14,801,000, 16,421,000;
10,596,000 and 6,907,000 for the eight months ended December 31, 1999 and for
the fiscal years ended April 30, 1999, 1998 and 1997, respectively, and
2,659,000 shares potentially issuable upon conversion of subordinated debentures
at April 30, 1998 were also excluded.
COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," at
April 30, 1999. The Company is required to display comprehensive income (loss)
and its components as part of the financial statements. Other comprehensive
income (loss) includes certain changes in equity that are excluded from net
income (loss). The Company recorded other comprehensive income related to
unrealized gains on the appreciation of Marketable Equity Securities.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principals Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provision of SFAS No. 123, "Accounting for Stock-Based Compensation."
Under APB No. 25, compensation expense is based on the excess of the estimated
fair value of the Company's stock over the exercise price, if any, on the grant
date.
57
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". However, the
effective date for this pronouncement was delayed for one year from the original
required date of fiscal years beginning after June 15, 1999. SFAS No. 133 will
require the Company to record all derivatives on the balance sheet at fair
value. Changes in derivative fair values will either be recognized in earnings
as offsets to the changes in fair value of related hedged assets, liabilities
and firm commitments or, for forecasted transactions, deferred and recorded as a
component of comprehensive income in stockholders' equity until the hedged
transactions occur and are recognized in earnings. The ineffective portion of a
hedging derivative's change in fair value will be immediately recognized in
earnings. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," to defer the effective date of SFAS 133 until fiscal years
beginning after June 15, 2000. The Company anticipates engaging in hedging
activity in the future, and, therefore, expects to be impacted by the
pronouncement. The impact of FAS No. 133 on the Company's consolidated financial
statements, however, will depend on a variety of factors, including the level of
future hedging activity, the types of hedging instruments used and the
effectiveness of such instruments.
NOTE 3. ACQUISITIONS AND DISPOSITIONS
On August 20, 1999, FiNet acquired certain operations and assets of
Lowestrate.com, Inc. ("Lowestrate"). The assets included the trademark
"Lowestrate.com" and the related website and certain equipment and software. The
acquired assets and operations will be used in the Company's consumer-direct
segment. As consideration for the purchase, the Company issued 1,400,000 shares
of its common stock. Of these shares, 560,000 were issued to the seller at the
closing and were valued at approximately $1,820,000. The purchase price of these
assets and operations, including expenses was $1,997,000. The entire purchase
price was allocated to goodwill and is being amortized over 36 months.
Amortization expense recorded for the eight months ended December 31, 1999 was
$240,000. The remaining 840,000 shares were placed in escrow subject to release
to Lowestrate if the contingencies are resolved. The acquisition was accounted
for as a purchase. Certain ancillary agreements were entered into in connection
with the acquisition, including a $500,000 non interest-bearing loan due in one
year to the seller of Lowestrate, secured by 200,000 of the escrowed shares. The
$500,000 note is included in the Company's "Accounts Receivable" on its
Consolidated Balance Sheet at December 31, 1999.
Subsequent to the asset and operations purchase date and until appropriate
licensing requirements were completed, Monument performed certain processing and
marketing services for Lowestrate and recorded fees and expenses related to
these services. As licenses were obtained in each state, lending activities in
that state were transferred to Monument and FiNet's results of operations
include those activities.
On October 28, 1999, the Company acquired its partners' 50% interest in a
joint venture. As consideration for the purchase, the Company issued 600,000
shares of its common stock valued at $1,462,000. The only asset of the joint
venture was 300,000 common shares of HouseSeekers.com equity securities which
became marketable during 1999. The joint venture had no operating activities.
58
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 3. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
The securities are classified as "available for sale" and are valued at
market. Of the original 300,000 shares, the Company sold 96,000 shares a in 1999
and recognized a realized gain on the sale of $366,000 which is included in
"Revenue" in the Statement of Operations. As of December 31, 1999, the Company
held 204,000 shares valued at $2,674,000, which represents the closing bid price
of the stock as of December 31, 1999. The Company recognized $1,704,000 of
unrealized gains on the marketable equity securities for the eight month period
ended December 31, 1999 and this amount has been included in Other Comprehensive
Income in the Statement of Changes in Stockholders' Equity.
On May 19, 1998, the Company acquired all of the issued and outstanding
shares of Mical Mortgage, Inc. ("Mical"), a non-public mortgage banker with
offices in San Diego, California and Las Vegas, Nevada, in exchange for 552,000
shares of FiNet's common stock. At the purchase date, 431,930 of these shares
were issued and were valued at $1,674,000. The remaining shares are issuable by
FiNet upon the resolution of specified contingencies related to the acquisition
and will be recognized as additional purchase price if and when the
contingencies are resolved. The acquisition was accounted for as a purchase.
Accordingly, the results of Mical's operations have been included in the
Company's consolidated financial statements subsequent to the acquisition date.
The excess of the purchase price over the fair value of the net assets acquired
of $3,332,000, net of purchase accounting adjustments, was recorded as goodwill.
The Company discontinued the operations of Mical during fiscal 1999 and expensed
the remaining unamortized goodwill relating to this acquisition. (See Note 13.)
On April 30, 1998, FiNet acquired all the issued and outstanding common
shares of Coastal Federal Mortgage Company ("Coastal"), a non-public, sub prime
mortgage banker with offices in New Jersey, Pennsylvania and Florida, in
exchange for 1,250,000 shares of its common stock. This transaction was
accounted for as a pooling of interests and, consequently, the consolidated
financial statements of FiNet have been restated to include the balance sheet
and statements of operations of Coastal for all periods reported. The Company
discontinued the operations of Coastal during fiscal 1999 and recorded $405,000
in "Special charges" in the Consolidated Statement of Operations related to
liquidating the assets and satisfying the liabilities of Coastal.
On February 9, 1998, the Company acquired all of the issued and outstanding
stock of iQualify, Inc., a software developer whose principal asset is the
iQualify software currently used by FiNet, for a consideration of 50,000 shares
of FiNet common stock valued at $180,000, plus certain future usage-based
payments. The acquisition was accounted for as a purchase.
In December 1997, the Company completed the purchase of substantially all of
the assets of Real Estate Office Software, Inc. ("REOS"), a Nevada corporation.
REOS is a software development and marketing company whose primary product is a
proprietary realtor productivity tool called the Real Estate Office. The total
purchase price was $1,261,000, consisting of cash of $641,000 and 200,000 shares
of FiNet's common stock valued at $620,000. In January 1999, management
determined that REOS no longer fit the strategic direction of the Company and
that the purchased technology was permanently impaired based on projected future
cash flows. Accordingly, the Company expensed the remaining recorded value of
REOS of $690,000 in "Special charges" in the Company's Consolidated Statement of
Operations.
On December 31, 1996, FiNet acquired all of the outstanding common stock of
Monument in exchange for 8.4 million common shares of the Company and a cash
payment of $1,000,000. For accounting purposes, the cash payment was deemed a
dividend payment to Monument stockholders and
59
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 3. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
the common shares issued in the acquisition have been treated as a
recapitalization of Monument, with Monument as the reverse acquisition acquirer.
The historical financial statements prior to December 31, 1996 are those of
Monument and are deemed to be those of the reporting entity. Since the Company's
operations were minimal or dormant during the year ended December 31, 1996, the
reverse acquisition was considered a capital transaction rather than a business
combination. Following the reverse acquisition, the Company changed its fiscal
year end from December 31 to April 30 to conform to the fiscal year end of
Monument.
NOTE 4. MORTGAGE SERVICING RIGHTS
Mortgage servicing rights and the related valuation allowance activity was
as follows:
<TABLE>
<CAPTION>
EIGHT
MONTHS FISCAL YEARS ENDED
ENDED APRIL 30
DECEMBER 31 ------------------------------
1999 1999 1998 1997
----------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period............ $2,693 $5,478 $ 579 $156
Additions................................. -- 1,192 5,763 463
Sales..................................... (2,539) (1,825) (268) --
Scheduled amortization.................... -- (1,199) (596) (40)
Impairment additions charged to
operations.............................. (154) (1,703) -- --
Impairment reductions credited to
operations.............................. -- 750 -- --
------ ------ ------ ----
Ending balance............................ $ -- $2,693 $5,478 $579
====== ====== ====== ====
</TABLE>
In connection with mortgage servicing activities, the Company segregates
escrow and custodial funds in a separate trust account and excludes this balance
of $571,000, $3.7 million and $16.0 million at December 31, 1999 and April 30,
1999 and 1998, respectively, from its balance sheet.
NOTE 5. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30
DECEMBER 31 -------------------
1999 1999 1998
----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Furniture and fixtures.......................... $1,110 $ 315 $ 1,010
Computer equipment.............................. 3,313 2,650 1,855
Office equipment................................ 194 1,622 225
Leasehold improvements.......................... 260 243 205
------ ------ -------
Total cost...................................... 4,877 4,830 3,295
Less accumulated depreciation and
amortization.................................. (406) (3,255) (1,854)
------ ------ -------
Net furniture, fixtures and equipment........... $4,471 $1,575 $ 1,441
====== ====== =======
</TABLE>
60
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 5. FURNITURE, FIXTURES AND EQUIPMENT (CONTINUED)
During the eight months ended December 31, 1999, the Company recorded
$1,385,000 of expense relating to the retirement of fixed assets in connection
with a relocation of its corporate headquarters and primary operations. See
Note 13, "Special Charges". These assets were used in the business-to-business
and consumer-direct segments and for the corporate group.
NOTE 6. BORROWING ARRANGEMENTS
Borrowing arrangements consist of the following:
<TABLE>
<CAPTION>
APRIL 30
DECEMBER 31 -------------------
1999 1999 1998
----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
WAREHOUSE AND OTHER LINES OF CREDIT
Warehouse lines of credit:
$75 million committed, $35 million uncommitted, and $55
million committed, respectively, bearing interest at
LIBOR + variable spread, expires May 31, 2000........... $73,125 $30,906 $55,000
$25 million uncommitted gestation, bearing interest at
LIBOR + 2.5%, expired December 31, 1998................. -- -- $22,552
$10 million and $24 million committed at April 30, 1999
and 1998, respectively, bearing interest at LIBOR +
2.5%, expired December 31, 1998......................... -- 1,001 7,707
Purchase/Repurchase agreements:
$15 million, bearing interest at Fed Funds + 0.70%, no
expiration date......................................... 7,316 -- --
$10 million, bearing interest at prime.................... -- 138 --
$10 million, bearing interest at prime.................... 12 993 --
------- ------- -------
80,453 33,038 85,259
Servicing acquisition financing............................. -- -- 400
Revolving line of credit.................................... -- -- 1,000
------- ------- -------
$80,453 $33,038 $86,659
======= ======= =======
NOTES PAYABLE AND CAPITALIZED LEASES:
$1.0 million original note................................ $ -- $ -- $ 500
Notes and capital leases (various rates).................. 141 481 360
------- ------- -------
141 481 860
======= ======= =======
3% CONVERTIBLE SUBORDINATED DEBENTURES...................... $ -- $ -- $ 5,500
======= ======= =======
</TABLE>
WAREHOUSE LINES OF CREDIT
In August, 1999, the Company entered into a new lending agreement with its
primary warehouse lender, GMAC/RFC. The new agreement provides the Company with
a committed $75 million warehouse borrowing facility that carries an interest
rate of LIBOR plus 1.75%. The agreement expires on May 31, 2000. For the eight
month period ended December 31, 1999, the Company recorded warehouse interest
61
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 6. BORROWING ARRANGEMENTS (CONTINUED)
expense of $1,002,000. For the years ended April 30, 1999, 1998 and 1997, the
Company recorded interest expense of $6,587,000, $2,710,000 and $1,874,000,
respectively. Borrowings under this warehouse facility are secured by the
mortgages held for sale thereby financed. At December 31, 1999, and April 30,
1999 and 1998, LIBOR was 6.49%, 4.90%, and 5.69%, respectively, and the prime
rate was 8.5%, 7.75%, and 8.5%, respectively.
The Company's available credit lines also include a $15 million
purchase/repurchase agreement with Fannie Mae's "As Soon as Pooled/Early
Purchase Option" (the "ASAP Plus" program). Under the ASAP Plus program, Fannie
Mae funds the Company on the loans delivered to them upon receipt of appropriate
mortgage collateral. Fannie Mae subsequently purchases the mortagage loans for
cash upon receipt of complete and accurate mortgage pool and other
documentation. At December 31, 1999, the Company had $7.3 million of borrowings
outstanding on the ASAP Program.
WAREHOUSE FACILITY COVENANTS
The agreement for the warehouse line of credit contains various financial
covenants including minimum net worth, current ratio, tangible net worth, and
leverage ratio requirements. Should an event of default occur, as defined in the
Agreement, outstanding principal and interest are due on demand. At April 30,
1999, the Company was in default under various financial covenants related to
its non-primary warehouse lenders. The Company is negotiating the closure of
these warehouse lines. At December 31, 1999, the Company was in default of its
primary warehouse lending agreement, as a liability growth rate covenant was
violated. Subsequent to December 31, 1999, the lender waived the default. This
facility expires on May 31, 2000.
3% SUBORDINATED CONVERTIBLE DEBENTURES
The Company issued $7,000,000 of 3% Subordinated Convertible Debentures in a
private placement with interest payable in common stock of FiNet when converted,
or in cash at maturity, redemption or retirement. The Company also issued
175,000 detachable warrants for purchase of the Company's common stock in
connection with the debenture issuance. These debentures were issued in three
separate tranches, with the first two tranches issued in fiscal 1998 totaling
$5,500,000, and the third tranch issued in fiscal 1999 totaling $1,500,000. The
debentures were convertible into the Company's common stock at the lesser of
$5.00 per common share or 78% of the determined market price prior to
conversion.
The Company recorded $1,974,000 as additional paid in capital for the
discount deemed related to imputed interest for the preferential conversion
feature on the debentures. This discount was amortized to interest expense over
the period from the date of issue to the date debentures first became
convertible. Interest expense of $1,687,000 and $287,000 in fiscal years 1999
and 1998, respectively, was recognized in connection with the discount
amortization and is included in other interest expense. Additionally, the
Company recorded $269,000 in fiscal 1999 as a discount and additional paid in
capital for the deemed fair value of the 175,000 detachable warrants. This
discount was fully amortized to interest expense during fiscal 1999.
In January 1999, $1,100,000 of the total $7,000,000 debentures were
converted into 2,200,000 common shares at a conversion price of fifty cents per
share, and an additional $4,400,000 of debentures were converted into 7,333,333
common shares at a conversion price of sixty cents per share. The remaining
62
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 6. BORROWING ARRANGEMENTS (CONTINUED)
$1,500,000 of debentures were redeemed for cash at 100 percent of face value. In
connection with the redemption, the Company also issued 840,000 5-year warrants
exercisable at $1.50 per share, to the debenture holders. Expense of $739,000
was recorded for the deemed fair value of these warrants and is included in
"Other expense" in the Company's Consolidated Statements of Operations.
Additionally, capitalized debt issuance costs of $546,000 were expensed in
fiscal 1999 and are included in "Other interest expense" on the Company's
Consolidated Statements of Operations.
NOTE 7. LIABILITIES SUBJECT TO COMPROMISE
Prior to the December 31, 1996 reverse acquisition, FiNet had incurred
$969,000 of unsecured trade creditor accounts payable. The Company had settled a
majority of these claims by April 30, 1997. The creditors agreed to accept, on
average, 33.8% of what they were owed. The payments were made in the form of
cash and shares of the Company's common stock. The reduction of this liability
gave rise to extraordinary gain of $312,000 for the year ended April 30, 1997.
The balance of liabilities subject to compromise was $239,000 at December 31,
1999, and $438,000 at April 30, 1999 and April 30, 1998, respectively.
NOTE 8. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities and certain equipment under non-cancelable
operating and capital leases. Future minimum payments consist of the following
at December 31, 1999:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING CAPITAL
- ----------- --------- --------
(IN THOUSANDS)
<S> <C> <C>
2000...................................................... $2,091 $ 71
2001...................................................... 1,711 --
2002...................................................... 1,574 --
2003...................................................... 1,498 --
2004...................................................... 502 --
------ ------
Total minimum lease payments.............................. $7,376 $ 71
====== ------
Less amount representing interest......................... (--)
------
Present value of minimum lease payments................... $ 71
======
</TABLE>
Rent expense for the eight months ended December 31, 1999 and for fiscal
years 1999, 1998, and 1997, was $1,012,000, $867,000, $601,000 and $514,000,
respectively.
LITIGATION
On January 14, 1998, prior to the Company's acquisition of Mical, a lawsuit
was filed against Mical in the United States District Court for the Middle
District of Georgia. The complaint alleges, among other things, that in
connection with residential mortgage loan closings, Mical made certain payments
to mortgage brokers in violation of the Real Estate Settlement Procedures Act
and induced mortgage brokers
63
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
to breach their alleged fiduciary duties to their customers. The plaintiffs seek
unspecified compensatory and punitive damages as to certain claims. Management
believes that its compensation programs for mortgage brokers comply with
applicable laws and with long standing industry practices. The Company intends
to defend vigorously against this action and believes that the ultimate
resolution will not have a material adverse effect on its business, results of
operations and financial condition.
On April 16, 1999, a lawsuit was filed in the Superior Court of the State of
California, County of San Francisco by a former director and officer of
FiNet.com against FiNet.com and one of its then current and now former
directors. The complaint alleges, among other things, that the plaintiff and the
Company's then current director entered into an oral contract, wherein they
agreed to share all profits from bonus shares that were issued to either party
under certain specific circumstances. It is further alleged that the Company
issued to the current director 1,800,000 shares of stock and that the Company's
then current director failed to provide the plaintiff one-half of the stock, or
900,000 shares. The plaintiff seeks to recover 900,000 shares of the Company's
common stock and punitive damages as to certain of the claims. FiNet.com and the
Company's then current director have each filed a general denial of all claims.
The Company intends to defend vigorously against the action and believes that
the ultimate resolution will not have a material adverse effect on its business,
results of operations or financial condition.
On December 16, 1999, a lawsuit was filed in the Judicial District Court of
Dallas County, Texas, by FC Capital Corp. d/b/a FirstCity Capital Corporation.
The complaint alleges breach of contract by Coastal for failure to repurchase
loans in accordance with the terms and condition of a Purchase Agreement entered
into by the parties in March 1998. The plaintiff has named Finet as a defendant
alleging that Finet assumed all of Coastal's debts and obligations when Finet
acquired Coastal in April 1998. The plaintiff seeks to recover actual damages in
the amount of $1.7 million and premium rebates in the approximate amount of
$26,000. The action was removed to the United State District Court, Northern
District of Texas, Dallas Division on January 18, 2000 and the Company has since
filed procedural motions. Management intends to defend vigorously against the
action and believe that the ultimate resolution will not have a material adverse
effect on the Company's business, results of operations or financial condition.
The Company and certain subsidiaries are defendants in various other legal
proceedings. Although it is difficult to predict the outcome of such cases,
after reviewing with counsel all such proceedings, management does not expect
the aggregate liability, if any, resulting therefrom, will have a material
adverse effect on the consolidated financial position or results of operations
of the Company and its subsidiaries.
NOTE 9. MORTGAGE BANKING ACTIVITIES AND RELATED RISKS
In the normal course of business, companies in the mortgage banking industry
encounter certain economic and regulatory risks including: interest rate risk,
market risk, credit risk and repurchase risk.
The Company's commitments to extend credit (pipeline loans) for which
interest rates were committed to borrowers, subject to loan approval, totaled
approximately $36,458,000, $25,604,000 and $87,300,000 as of December 31, 1999
and April 30, 1999 and 1998, respectively. Until a rate commitment is extended
by the Company to a borrower, there is no market risk to the Company. If market
interest rates rise between the time the Company commits to originate a loan at
a specific rate and the time such loans are priced for sale, the market price of
the loan declines, resulting in a loss on the sale of the loan.
64
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 9. MORTGAGE BANKING ACTIVITIES AND RELATED RISKS (CONTINUED)
To protect against such losses, the Company attempts to manage its interest
rate risk exposure through hedging transactions using a combination of forward
sales of mortgage-backed securities and forward whole-loan sales to fix the
sales price of loans the Company expects to fund. Forward sales are sales of
loans with settlement dates more than five days in the future. Before entering
into hedging transactions, the Company performs an analysis of the loans with
committed interest rates. This analysis includes taking into account such
factors as the estimated portion of such loans that will ultimately be funded,
note rate, interest rates, inventory of loans and applications, and other
factors to determine the type and amount of forward commitment and hedging
transactions. The Company attempts to make forward commitments for, or hedge
substantially, all of its estimated interest rate risk on the loans. The Company
does not believe that hedging its interest rate risk with respect to the
non-prime loans is cost effective because these loans generally have higher
interest rate spreads and generally lack sensitivity to interest rate changes
due to their credit characteristics and the short period of time held by the
Company. The Company had mandatory and optional forward commitments at
December 31 and at April 30, 1999 and 1998 aggregating $110,233,000, $43,829,000
and $46,400,000, respectively. These commitments covered the market risk
associated with the mortgage loans held for sale to investors of $78,691,000,
$33,438,000 and $63,034,000, respectively, and the pipeline loans for which
interest rates were committed of $36,458,000, $25,604,000 and $87,300,000,
respectively.
As is customary in the marketplace, none of the forward payment obligations
of any of the Company's counterparties are currently secured or subject to
margin requirements. The Company attempts to limit its credit exposure on
forward sales arrangements by entering into forward sales contracts exclusively
with institutions that the Company believes are sound credit risks, and by
limiting its exposure to any single counterparty.
Fees paid to investors are deferred and subsequently expensed as the loans
are delivered to the investor in proportion to the percentage relationship of
loans delivered to the total commitment amount. Any remaining fee is recognized
as a period expense at the expiration of its commitment period, or earlier if
exercise of the commitment is deemed remote.
The Company reduces its exposure to default risk (other than first-payment
defaults by customers) and most of the prepayment risk normally inherent in the
mortgage lending business by selling all funded loans. However, in connection
with loan sales and bulk servicing sales, the Company makes representations and
warranties relating to credit information, loan documentation and collateral. To
the extent that the Company does not comply with such representations and
warranties, or there are early payment defaults, the Company may be required to
repurchase the loans or indemnify the purchasers for any losses. For the eight
months ended December 31, 1999, and the years ended April 30, 1999, 1998, and
1997, the Company repurchased loans totaling $6,982,820, $10,034,000, $347,000,
and zero, respectively, which resulted in losses of $1,572,000, $759,000,
$347,000, and zero, respectively.
65
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair values of financial
instruments are made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by using available market information and
appropriate methodologies. However, considerable judgment is necessarily
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein may not be indicative of the amounts
that could be realized in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts disclosed in the following paragraph.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
such value:
- Cash, accounts receivable, and warehouse and other lines of credit. The
carrying amounts of these assets and liabilities approximate fair value
because of the short maturity of those instruments.
- Mortgages held for sale. Fair values for mortgages held for sale are based
on management's estimate of the ultimate realizable value.
- Mortgage servicing rights. Fair values for mortgage servicing rights are
based on third party appraisals and written bids to purchase the servicing
portfolios.
- Notes payable. The carrying value is considered to be a reasonable
estimate of fair value based on interest rates of similar financial
instruments in the marketplace.
- Loan commitments to fund (i.e. pipeline loans) and loan commitments to
sell. The fair value for the pipeline loans, allowing for estimated
fallout based on historical experience, and loan commitments to sell, are
based on quoted market prices.
The carrying values and the estimated fair values of our financial
instruments at December 31, 1999 and April 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 APRIL 30, 1999 APRIL 30, 1998
--------------------- --------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Mortgages held for sale........... $78,691 $78,691 $33,438 $33,438 $63,034 $63,363
Mortgage servicing rights......... -- -- 2,693 2,693 5,478 5,478
Liabilities:
Notes payable..................... 70 70 300 300 860 860
Off Balance Sheet:
Loan commitments to fund.......... -- 881 -- 395 -- (34)
Loan commitments to sell.......... -- 243 -- 98 -- 43
</TABLE>
NOTE 11. STOCKHOLDERS' EQUITY
The Company recorded $1,704,000 of "Other comprehensive income" relating to
unrealized gains on marketable equity securities held as available for sale at
December 31, 1999. (See Note 3)
66
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 11. STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 1999, the Company had outstanding warrants as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE YEAR OF
WARRANTS ISSUED PER SHARE EXPIRATION
- --------------------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C>
12,889 $0.50-1.50 2001-2008
100 1.51-3.00 2003
754 3.01-4.50 2000-2007
1,058 4.51-5.00 2001-2002
------
14,801
======
</TABLE>
In September 1998, the Company issued 250 shares of its $2,500 Series A
Convertible Preferred Stock ("Preferred") in a private placement generating
$2,286,250 of proceeds, net of expenses. In addition, the Company issued
Warrants to the Preferred investors to purchase 250,000 shares of the Company's
common stock at $1.00 per share. The Company recorded a perferred stock discount
of $705,000 upon issuance of the preferred stock. This discount was amortized to
the date the preferred stock first became convertible. The entire discount was
amortized in fiscal 1999 and is reported as "In-substance preferred dividend" on
the Company's 1999 Consolidated Statement of Operations. In the third and fourth
quarters of fiscal 1999, the $2,500,000 Series A Convertible Preferred stock was
redeemed at face value.
NOTE 12. STOCK OPTIONS
1989 STOCK OPTION PLAN (EXPIRED)
The Company's 1989 Stock Option Plan (the "1989 Plan") provided for the
grant of options to officers, directors, other key employees and consultants of
the Company to purchase up to an aggregate of 1,750,000 shares of common stock.
The 1989 Plan was administered by the Company's Board of Directors. The Board of
Directors were authorized to determine the terms of options granted under the
1989 Plan, including the number of shares subject to the option, exercise price,
term and exercisability. Options granted under the 1989 Plan could be incentive
stock options or nonqualified stock options.
The exercise price of incentive stock options could not be less than 100% of
the fair market value of the common stock as of the date of grant (110% of the
fair market value in the case of an optionee who owns more than 10% of the total
combined voting power of all classes of the Company's capital stock). Options
could not be exercised more than ten years after the date of grant (five years
in the case of 10% stockholders).
Upon termination of employment, the optionee generally has the right to
exercise, for 90 days following the termination date, any outstanding option to
the extent it was exercisable on the date of termination, after which all
unexercised options lapse. In the event of an optionee's death or disability,
the optionee could exercise any outstanding option, to the extent it is
exercisable, for one year following the termination date.
67
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 12. STOCK OPTIONS (CONTINUED)
1998 STOCK OPTION PLAN
The Company's 1998 Stock Option Plan (the "1998 Plan") provides for the
grant of options to officers, employee directors, other employees and
consultants of FiNet.com to purchase up to an aggregate of 10,000,000 shares of
common stock. The 1998 Plan is administered by the Company's Board of Directors.
The Company's Board of Directors determines the terms of options granted under
the 1998 Plan, including the number of shares subject to the option, exercise
price, term and exercisability. Options granted under the 1998 Plan may be
incentive stock options or nonqualified options. In general, the 1998 Plan has
the same terms and conditions as the 1989 Plan. As of December 31, 1999,
4,601,572 options, were available for grant under the 1998 plan.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The Company's 1998 Non-Employee Directors' Stock Option Plan (the
"Directors' Plan") provides for an automatic grant of an option to purchase
40,000 shares of common stock to non-employee directors upon their election or
appointment to the Company's Board of Directors and 60,000 shares for subsequent
annual grants. The aggregate number of shares that can be purchased under the
Directors' Plan is 1,000,000. The exercise price of the options is 85% of the
fair market value of the common stock on the date of grant. The Directors' Plan
is administered by the Company's Board of Directors. The initial option grant
vests 100% on grant. Subsequent annual grants under the Directors' Plan become
exercisable in four equal annual installments, commencing on the first
anniversary of the date of grant. To the extent that an option is not
exercisable on the date that a director ceases to be a director of the Company,
the unexercisable portion lapses. As of December 31, 1999, 760,000 options were
available for grant under this plan.
STOCK BONUS INCENTIVE PLAN
The Company's Stock Bonus Incentive Plan (the "Stock Bonus Plan") provides
for the grant of bonus shares to any of the Company's employees, directors,
officers and to consultants or advisers to the Company. The Company's Board of
Directors has authorized up to an aggregate of 875,000 shares of common stock
for issuance as bonus awards under the Stock Bonus Plan. The Stock Bonus Plan is
currently administered by the Company's Board of Directors. Each grant of bonus
shares becomes exercisable according to a schedule to be established by the
Company's Board of Directors at the time of grant.
OTHER AGREEMENTS
Pursuant to an employment agreement with a former executive officer, the
Company granted options to the executive officer to purchase 720,236 shares of
common stock at with prices ranging from $3.313 to $9.1250 which will expire in
2000.
In December 1999, the Company entered into an employment agreement with a
new executive officer. Pursuant to the agreement, the Company granted the
executive officer 2,250,000 options in addition to 750,000 options granted to
him under the 1998 Stock Option Plan. The options are exercisable at $1.03 and
will expire in 2009.
68
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 12. STOCK OPTIONS (CONTINUED)
1999 EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan under which 500,000 shares
of common stock have been reserved for issuance. Under this plan, FiNet's
employees, subject to certain restrictions, may purchase shares of common stock
at 85% of the fair market value at either the date of enrollment or the date of
purchase, whichever is less. The Company implemented this plan in the first
quarter of 2000.
The Company has elected to follow Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations,
which require compensation expense for options to be recognized when the market
price of the underlying stock exceeds the exercise price on the date of grant.
compensation expense recognized in income under APB 25 for the eight months
ended December 31, 1999 was $184,000. There was no such expense recognized for
the fiscal years ended April 30, 1999, 1998 and 1997.
Statement of Financial Account Standards No. 123 (SFAS 123), "Accounting for
Stock Based Compensation," permits companies to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant. In
management's opinion, the existing stock option valuation models do not
necessarily provide a reliable single measure of the fair value of stock-based
awards. Therefore, as permitted, the Company will continue to apply the existing
account rules under APB No. 25 and provide pro forma net income and pro forma
earnings per share (EPS) disclosures for stock-based awards made during the
eight months ended December 31, 1999 and fiscal years ended April 30, 1999, 1998
and 1997 as if the fair-value-based method defined in SFAS NO.123 had been
applied.
<TABLE>
<CAPTION>
EIGHT MONTHS FISCAL YEARS ENDED APRIL 30
ENDED ------------------------------
PRO FORMA STATEMENT OF OPERATIONS DECEMBER 31, 1999 1999 1998 1997
- --------------------------------- ----------------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Estimated stock-based compensation............... $ 2,310 $ 1,715 $ 200 $ 125
Net (loss) as reported........................... (25,328) (36,538) (9,379) (2,778)
-------- -------- ------- -------
Pro forma net (loss)............................. $(27,638) $(38,253) $(9,579) $(2,903)
======== ======== ======= =======
(Loss) per share as reported..................... (.28) (0.79) (0.31) (0.19)
Pro forma (loss) per share....................... (.31) (0.83) (0.32) (0.20)
</TABLE>
The fair value of options at the date of grant was estimated using the
Black-Scholes model with the following assumptions for the eight months ended
December 31, 1999 and fiscal years 1999, 1998 and 1997, respectively: risk-free
interest rates of 5.38% to 6.52%; 4.78% to 5.53%; 5.5%; and 6.6% to 6.7%
volatility of 132.86%; 141%; 50% and 50%; a dividend growth rate of zero was
used since the Company does not intend to pay dividends on its common stock; and
the expected lives equal to .53 years over the vesting period for the eight
months ended December 31, 1999, one year over the vesting period for fiscal
1999, and the remaining option terms for fiscal years 1998 and 1997.
69
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 12. STOCK OPTIONS (CONTINUED)
The weighted-average grant-date fair value and exercise price of options
granted during the eight months ended December 31, 1999 and fiscal years 1999,
1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES FAIR VALUE EXERCISE PRICE
--------- ---------- --------------
<S> <C> <C> <C>
EIGHT MONTHS ENDED DECEMBER 31, 1999
Granted
Price = Market Value................... 5,253,236 $2.04 $2.37
Price > Market Value................... -- -- --
Price < Market Value................... 205,000 $2.94 $2.43
FISCAL 1999
Granted
Price = Market Value................... 7,533,020 $0.88 $0.99
Price > Market Value................... 7,500 $0.85 $1.13
Price < Market Value................... 80,000 $1.08 $1.35
FISCAL 1998
Granted
Price = Market Value................... 148,000 $2.85 $4.44
Price > Market Value................... -- -- --
Price < Market Value................... 40,000 $2.83 $0.50
FISCAL 1997
Granted
Price = Market Value................... -- -- --
Price > Market Value................... -- -- --
Price < Market Value................... 120,000 $0.80 $0.50
</TABLE>
70
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 12. STOCK OPTIONS (CONTINUED)
The following table summarizes stock option plan activity for the eight
months ending December 31, 1999, fiscal years 1999, 1998 and 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EMPLOYEE STOCK OPTION SUMMARY OPTIONS EXERCISE PRICE EXERCISE PRICE
- ----------------------------- ---------- -------------- --------------
<S> <C> <C> <C>
Outstanding at May 1, 1996.............................. 468,042 $0.06-0.50 $0.06
Granted................................................. 120,000 0.50-0.50 0.50
Exercised............................................... (3,167) 0.06-0.06 0.06
Expired / Canceled...................................... (26,000) 0.06-0.06 0.06
----------
Outstanding at May 1, 1997.............................. 558,875 0.06-0.50 0.15
Granted................................................. 188,000 0.50-5.50 4.18
Exercised............................................... -- -- --
Expired / Canceled...................................... (9,000) 3.00 2.81
----------
Outstanding at May 1, 1998.............................. 737,875 0.06-5.50 1.15
Granted................................................. 7,620,520 0.50-3.25 0.99
Exercised............................................... (383,035) 0.06-0.75 0.07
Expired / Canceled...................................... (462,866) 0.50-3.25 1.19
----------
Outstanding at April 30, 1999........................... 7,512,494 0.06-5.50 1.03
Granted................................................. 5,458,236 1.03-9.13 2.38
Exercised............................................... (237,914) 0.50-1.13 0.71
Expired / Canceled...................................... (857,988) 0.75-6.69 2.56
----------
Outstanding at December 31, 1999........................ 11,874,828 $0.06-9.13 $1.55
==========
</TABLE>
71
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 12. STOCK OPTIONS (CONTINUED)
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ---------------------------------
REMAINING NUMBER
SHARES CONTRACTUAL LIFE WEIGHTED-AVERAGE EXERCISABLE AS WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE OF 12/31/1999 EXERCISE PRICE
- ------------------------ ------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
0.06$00-$0.5000..... 185,634 3.40 $0.3444 185,555 $0.3446
0.5630............. 1,290,000 8.78 0.5630 558,750 0.5630
0.750.6560-$00............. 1,685,055 8.80 0.7222 543,000 0.7154
1.000.8750-$00............. 22,292 8.87 0.8987 17,720 0.8812
1.0310............. 5,707,986 9.57 1.0310 1,441,046 1.0310
2.461.0625-$90............. 1,282,250 9.43 1.9647 278,125 2.0311
4.502.5630-$00............. 1,211,161 9.23 3.5708 276,769 3.6854
6.684.6250-$80............. 203,125 9.42 5.1646 82,183 4.8053
7.627.6250-$50............. 39,602 9.38 7.6250 7,921 7.6250
9.1250............. 247,723 9.36 9.1250 49,545 9.1250
---------- ---------
0.06$00-$9.1250..... 11,874,828 9.22 $1.5468 3,440,614 $1.3836
========== =========
</TABLE>
72
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 13. SPECIAL CHARGES
In connection with the Company's relocation of its headquarters and
operating facilities from Walnut Creek, California to San Ramon, California,
$1,385,000 of expense was recorded to write-off fixed furniture fixtures and
equipment that would no longer be employed in the new location.
In addition, the Company recorded nonrecurring charges associated with
discontinued business units during the eight months ended December 31, 1999 and
during fiscal year 1999. During the third quarter of fiscal year 1999, the
Company's Board of Directors approved a plan to cease Mical's operations and
close its facilities. The Company assessed the remaining goodwill balance and
determined that the amount was not recoverable from future cash flow. Goodwill
of $3,189,000, net of purchase accounting adjustments and recorded amortization,
was expensed as part of these special charges in fiscal year 1999. Approximately
130 employees were terminated during fiscal year 1999 as a result of the Mical
closure. The Company also recorded a special charge expense of $642,000 during
the third quarter of fiscal year 1999 to recognize exit costs primarily for
severance and occupancy lease costs net of recovery from subleases. During the
eight months ended December 31, 1999, $352,000 was recorded as expense
associated with the write off of the remaining furniture fixtures and equipment
of Mical.
Except for the items detailed above totaling $352,000 for the eight months
ended December 31, 1999 and $642,000 for the fiscal year ended April 30, 1999,
all other financial statement effects of winding down Mical are included in
results from operations as incurred. At December 31, 1999, the balance of the
special charge accrual was $202,000, which represents lease costs of vacated
space that the Company expects to incur subsequent to December 31, 1999.
During the year ended April 30, 1999, the Company also recorded nonrecurring
expenses of $405,000 to liquidate certain assets and settle certain liabilities
in connection with closing Coastal and $690,000 to expense the unamortized
balance of its Real Estate Office Software (REOS) technology. Management closed
Coastal and expensed the remaining balance of REOS upon determining that the
Company would no longer employ these assets in its future strategic direction.
In fiscal year 1998, the Company wrote off $1,010,000 relating to software
services and loan leads. Management determined that these assets were
permanently impaired, as they did not fit the Company's strategic plans and
would no longer be employed in future operations.
72
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 14. INCOME TAXES
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
APRIL 30
EIGHT MONTHS ------------------------------
ENDED
DECEMBER 31, 1999 1999 1998 1997
----------------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current Federal........................... $-- $-- $236 $219
Current State............................. 65 5 80 71
--- --- ---- ----
65 5 316 290
Deferred Federal.......................... -- -- (70) (50)
Deferred State............................ -- -- (20) (15)
--- --- ---- ----
-- -- (90) (65)
--- --- ---- ----
Total..................................... $65 $ 5 $226 $225
=== === ==== ====
</TABLE>
The reconciliation of the provision for income taxes computed at U.S. statutory
income tax rates to pretax income is as follows:
<TABLE>
<CAPTION>
EIGHT
MONTHS
ENDED FISCAL YEARS ENDED APRIL 30
DECEMBER 31 --------------------------------------
1999 1999 1998 1997
----------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal statutory income tax rate...................... (34.0)% (34.0)% (34.0)% (34.0)%
State and local imcome taxes, net of federal tax
effect............................................... 0.2 -- .4
Non-deductible goodwill................................ -- 4.0 -- 1.3
Valuation allowance.................................... 33.5 20.8 36.5 40.5
Prior period adjustment................................ -- 5.0 -- --
Other, net............................................. 0.6 4.2 (1.7) --
----- ----- ----- -----
Effective Tax Rate................................... 0.3% 0.0% 2.3% 7.8%
===== ===== ===== =====
</TABLE>
73
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 14. INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax liabilities and assets
as of December 31, 1999, April 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
APRIL 30
DECEMBER 31 -------------------
1999 1999 1998
----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
DEFERRED TAX LIABILITIES:
Originated mortgage servicing rights...................... $ -- $ 47 $ 460
Marketable Securities..................................... 764 -- --
Depreciation.............................................. 41 126 (113)
-------- -------- --------
Total deferred tax liabilities............................ 805 173 573
-------- -------- --------
DEFERRED TAX ASSETS:
Net operating loss carryforwards.......................... 28,848 18,736 12,366
Loan loss and other reserves.............................. 2,138 2,597 --
Goodwill and other intangibles............................ 396 310 1,116
Deferred revenue.......................................... 175 202 --
Other..................................................... 852 90 432
-------- -------- --------
Total deferred tax assets................................... 32,409 21,935 13,914
-------- -------- --------
Valuation allowance......................................... (31,604) (21,762) (13,341)
Net deferred tax asset...................................... 805 173 573
-------- -------- --------
Total net deferred tax liabilities and assets............... $ -- $ -- $ --
======== ======== ========
</TABLE>
Deferred tax assets are recognized to the extent that management believes,
based on available evidence, that it is more likely than not that they will be
realized. Due to the uncertainty surrounding the Company's ability to realize
the benefits associated with its net operating losses, a valuation allowance was
established against its net deferred tax asset. During the eight months ended
December 31, 1999 and during fiscal year 1999, the valuation allowance was
increased by $9,842,000 and $8,421,000, respectively. A portion of the valuation
allowance relates to deductions from the exercise of stock options. If realized,
the benefit from the reduction of that portion of the valuation allowance will
be credited to equity.
At December 31, 1999, the Company has federal net operating loss
carryforwards (NOLs) of approximately $75 million. The NOLs expire in the years
2004 through 2019. The Company has smaller state tax loss carryforwards. Due to
ownership changes, these carryforwards are subject to substantial annual
limitations as provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation could result in the expiration
of a significant portion of the NOLS before full utilization.
74
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 15. NON-CASH INVESTING AND FINANCING ACTIVITIES
The following table presents non-cash investing and financing information
for the eight months ended December 31, 1999 and for fiscal 1999 and 1998:
<TABLE>
<CAPTION>
EIGHT MONTHS FISCAL YEAR ENDED
ENDED APRIL 30
DECEMBER 31 -------------------
1999 1999 1998
------------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Common stock and warrants issued for expenses............... $ 580 $ 1,804 $ 392
Common stock issued to purchase certain assets and
operations of Lowestrate.com.............................. 1,821 -- --
Common stock issued to purchase the remaining 50% interest
of a joint venture not already owned...................... 1,463 -- --
Common stock issued for purchased technology and
intangibles............................................... -- 320 1,364
Warrants issued upon conversion of convertible debt......... -- 739 --
Common stock issued upon debenture conversion............... -- 5,500 --
In-substance dividend on preferred stock discount........... -- 705 --
3% convertible debenture discount........................... -- 423 --
Acquired in acquisition:
Furniture, fixtures & equipment........................... -- 505 --
Mortgages held for sale................................... -- 84,598
Other assets.............................................. -- 3,995 --
Accounts payable and other accrued expenses............... -- 9,829 --
Debt...................................................... -- 82,634 --
</TABLE>
NOTE 16. SEGMENT DATA
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires certain disclosures about
operating segments in a manner that is consistent with how management evaluates
the performance of the segment. The Company has identified two
75
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 16. SEGMENT DATA (CONTINUED)
reportable business segments: business-to-business and business-to-consumer.
Information related to the Company's reportable operating segments is shown
below (in thousands):
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED
DECEMBER 31 FISCAL YEARS ENDED APRIL 30
---------------------- ------------------------------
1999 1998 1999 1998 1997
-------- ----------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Business-to-business.................... $ 4,408 $ 13,717 $ 19,411 $ 14,394 $12,189
Business-to-consumer.................... 1,054 3,142 3,002 766 155
-------- -------- -------- -------- -------
Segment Revenue........................... 5,462 16,859 $ 22,413 $ 15,160 $12,344
Corporate............................... 608 -- -- -- --
-------- -------- -------- -------- -------
Segment revenue......................... $ 6,070 $ 16,859 $ 22,413 $ 15,160 $12,344
======== ======== ======== ======== =======
Operating income (loss)
Business-to-business.................... $(14,716) $ (475) $(17,455) $ (508) $(1,061)
Business-to-consumer.................... (4,769) (2,642) (4,642) (4,485) (683)
-------- -------- -------- -------- -------
Segment operating income.................. (19,485) (3,117) (22,097) (4,993) (1,744)
Corporate............................... (5,843) (6,608) (11,460) (3,740) (1,003)
-------- -------- -------- -------- -------
Loss from operations $(25,328) $ (9,725) $(33,557) $ (8,733) $(2,747)
======== ======== ======== ======== =======
Capital expenditures
Business-to-business.................... $ 3,687 $ 167 $ 116 $ 1,486 $ 128
Business-to-consumer.................... 217 87 75 55 83
-------- -------- -------- -------- -------
Segment Capital expenditures.............. 3,904 254 191 1,541 211
Corporate............................... 434 539 703 113 121
-------- -------- -------- -------- -------
$ 4,338 $ 793 $ 894 $ 1,654 $ 332
======== ======== ======== ======== =======
Identifiable assets
Business-to-business.................... $101,837 $ 14,583 $ 91,174 $ 5,505
Business-to-consumer.................... 5,990 3,782 3,362 3,544
-------- -------- -------- -------
Segment Identifiable assets............... 107,827 18,365 94,536 9,049
Corporate............................... 11,981 26,890 6,932 5,201
-------- -------- -------- -------
$119,808 $ 45,255 $101,468 $14,250
======== ======== ======== =======
Long-lived assets
Business-to-business.................... 3,800 $ 624 $ 783 $ 424
Business-to-consumer.................... 223 311 452 273
-------- -------- -------- -------
Segment long-lived assets................. 4,023 935 1,235 697
Corporate............................... 448 640 206 400
-------- -------- -------- -------
$ 4,471 $ 1,575 $ 1,441 $ 1,097
======== ======== ======== =======
</TABLE>
76
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 17. RELATED PARTY TRANSACTIONS
MICAL MORTGAGE, INC.
During fiscal year 1998, and in anticipation of the May 19, 1998 acquisition
of Mical, FiNet advanced $1.9 million to Mical and utilized the Company's
available warehouse lines of credit to fund $42.8 million of loans originated by
Mical. Subsequently, these loans were sold and the proceeds used to repay the
associated warehouse debt.
IQUALIFY
On February 9, 1998, the Company purchased the outstanding common stock of
iQualify, Inc., a software developer, from T. Lee Decker and James Noack, former
employees and officers of FiNet, for a consideration of 50,000 shares of the
Company's common stock.
CONSULTING AGREEMENTS
The Company entered into a consulting agreement with James Umphryes, a
former Monument stockholder. The contract term is three years beginning
January 1, 1997 at a monthly fee of $15,000 for a total contract cost of
$540,000. For the eight months ended December 31, 1999 and for fiscal year 1999,
1998, and 1997, the Company incurred consulting fee expense relating to this
agreement of $120,000, $180,000, $180,000 and $60,000, respectively.
The Company and Dr. Lewis Meyer, a director of the Company, entered into a
consulting agreement in June 1998. Pursuant to the agreement, Dr. Meyer received
$25,000. In addition, Dr. Meyer paid FiNet $10,000 for warrants to purchase
1,000,000 shares of common stock at an exercise price of $1.25 per share. Twenty
percent of the shares became exercisable on the date of grant, and the remaining
shares become exercisable in quarterly installments over four years, as long as
Dr. Meyer's service with FiNet continues.
LOANS TO OFFICERS
An adjustable rate, second mortgage loan in the amount of $356,000 was made
to Michael Conway, a former executive officer of FiNet. The loan carries an
initial interest rate of 7.25% and is secured by a second residence. The loan
was sold in the secondary market.
A fixed rate, fifteen year second mortgage loan in the amount of $223,000
was made to Christos Skeadas, a former executive of FiNet. The loan carries an
interest rate of 10.5% and matures on November 14, 2014.
A fixed rate, third mortgage loan in the amount of $20,000 was made to
Christos Skeadas, a former executive of FiNet. The loan carries an interest rate
of 7%. The principal amount and all accrued interest are due in a single payment
on November 12, 2000.
OTHER
During fiscal year 1999, warrants to purchase 700,000 common shares at $1.25
per share were purchased by two officers for cash consideration of $7,000.
In April 1999, the Company entered into a Lender Subscriber Agreement with
IMX, Inc. of which Richard Wilkes, a director of the Company, is president and
chief executive officer and of which FiNet's
77
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 17. RELATED PARTY TRANSACTIONS (CONTINUED)
chief executive officer, Mark Korell, is a minority shareholder. Pursuant to the
agreement, IMX will provide to the Company certain software and brokerage
services.
On February 3, 1999, the Company and Jan C. Hoeffel, a current director and
the Company's former president, entered into a letter agreement concerning the
termination of his employment as a corporate officer. Pursuant to the agreement,
Mr. Hoeffel's employment terminated as of February 28, 1999. In consideration
for the issuance to him of 300,000 unregistered shares of common stock,
Mr. Hoeffel agreed to forfeit any and all anti-dilution rights previously
granted him by the Company, and to surrender to the Company a warrant entitling
him to purchase 300,000 shares of common stock.
NOTE 18. VALUATION ALLOWANCES
Valuation allowances consist of the following:
<TABLE>
<CAPTION>
BALANCE
AT CHARGED TO BALANCE AT
BEGINNING COSTS AND ACQUIRED END OF
DESCRIPTION OF PERIOD EXPENSES BUSINESS DEDUCTIONS PERIOD
- ----------- --------- ---------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MARKET VALUATION ALLOWANCE:
Eight months ended December 31, 1999..... $3,851 $1,518 $ -- $(2,432) $2,937
Year ended April 30, 1999................ 396 4,344 542 (1,431) 3,851
Year ended April 30, 1998................ 311 718 -- (633) 396
Year ended April 30, 1997................ 135 226 -- (50) 311
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Eight months ended December 31, 1999..... $2,150 $ 30 $ -- $ (387) $1,793
Year ended April 30, 1999................ 36 2,150 -- (36) 2,150
Year ended April 30, 1998................ 56 -- -- (20) 36
Year ended April 30, 1997................ 20 36 -- -- 56
</TABLE>
NOTE 19. EMPLOYEE BENEFIT PLAN
The Company has a salary reduction 401(k) retirement savings plan (the
"Plan") covering all employees meeting certain eligibility requirements.
Employees may contribute up to 15% of their eligible compensation, subject to an
annual limit. The Plan provides that, at the Company's discretion, the Company
may make employer contributions. There were no employer contributions for the
eight months ended December 31, 1999 or during fiscal years 1999, 1998 or 1997.
NOTE 20. YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $597,000 during the eight months ended December 31, 1999
in connection with remediating its systems. The Company is not aware
78
<PAGE>
FINET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 20. YEAR 2000 (CONTINUED)
of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its mission critical computer applications
and those of its suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
79
<PAGE>
ITEM 9. CHANGES IN OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 12, 1999, FiNet dismissed Reuben E. Price & Co. as its
independent accountant and, on February 12, 1999, appointed Ernst & Young LLP to
that position.
The reports of Reuben E. Price on FiNet's financial statements for the past
two fiscal years contained no adverse opinion or disclaimer, or were qualified
as to uncertainty, audit scope, or accounting principles.
The change in accountants was made in light of the recently expanded scope
of our operations and the attendant requirement for the accounting services of a
larger firm of national scope and stature. The decision to change independent
accountants was recommended by management and was approved by FiNet's Audit
Committee and Board of Directors.
During the Company's fiscal years ended April 30 1998 and 1997 and the
subsequent interim period prior to the change in accountants, there were no
disagreements with Reuben E. Price on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
80
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by reference
from our definitive proxy statement, to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by reference
from our definitive proxy statement, to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is hereby incorporated by reference
to our definitive proxy statement, to be filed pursuant to Regulation 14A within
120 days after the end of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by reference
to our definitive proxy statement, to be filed pursuant to Regulation 14A within
120 days after the end of the fiscal year.
80
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1 FINANCIAL STATEMENTS
The information required by this Item appears in Item 8 of this Annual
Report on Form 10-K.
(A)2 FINANCIAL STATEMENT SCHEDULES
See the Note 18 to the Company's Consolidated Financial Statements for the
required information about Valuation and Qualifying Accounts. All other
schedules are omitted because they are not applicable.
(A)3 EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
3.1(1) Certificate of Amendment to the registrant's Restated
Certificate of Incorporation, dated as of October 29, 1997
3.2(2) Certificate of Amendment to the registrant's Restated
Certificate of Incorporation, dated as of May 28, 1999
3.3(3) Bylaws, as amended to date
4.1(4) Form of Common Stock Purchase Agreement between the
registrant and Jose Maria Salema Garcao, dated December 16,
1996
4.2(4) Form of Warrant Purchase Agreement between the registrant
and Jose Maria Salema Garcao dated December 16, 1996
4.3(4) Form of Warrant issued to Jose Maria Salema Garcao dated
December 16, 1996
4.4(4) Common Stock Purchase Agreement between the registrant and
investors in the private placement concluded December 31,
1996
4.5(4) Form of Warrant Purchase Agreement between the registrant
and Jose Maria Salema Garcao dated December 30, 1996
4.6(4) Form of Warrant issued to Jose Maria Salema Garcao dated
December 30, 1996
4.7(4) Form of Common Stock Purchase Agreement between the
registrant and Jose Maria Salema Garcao dated March 21, 1997
4.8(4) Form of Warrant Purchase Agreement between the registrant
and Jose Maria Salema Garcao dated March 21, 1997
4.9(4) Form of Warrant issued to Jose Maria Salema Garcao dated
March 21, 1997
4.10(4) Form of Stock Purchase Agreement between the registrant and
investors in the private placement concluded April 30, 1997
4.11(4) Form of Warrant Purchase Agreement between the registrant
and Jose Maria Salema Garcao dated April 30, 1997
4.12(4) Form of Warrant Issued to investors in the private placement
concluded April 30, 1997
4.13(4) Form of Common Stock Purchase Agreement between the
registrant and investors in the private placement concluded
October 31, 1997
4.14(4) Form of Common Stock Purchase Warrant issued to investors in
the private placement concluded October 31, 1997
4.15(5) Form of Common Stock Purchase Agreement between the
registrant and investors in the private placement concluded
December 23, 1998
4.16(5) Form of Common Stock Purchase Warrant issued to investors in
the private placement concluded December 23, 1998
4.17(6) Restructuring Agreement and Amendment, dated January 15,
1999, among the registrant and the investors in the
debenture offering concluded May 26, 1998
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
4.18(7) Form of Registration Rights Agreement between the registrant
and investors in the debenture offering concluded May 26,
1998
4.19(8) Form of Warrant issued to the investors in the debenture
offering concluded May 26, 1998
4.20(5) Form of Stock Purchase Agreement among the registrant and
the investors in the private placement concluded on May 10,
1999 and May 20, 1999
4.21(5) Form of Stock Purchase Agreement among the registrant and
the investors in the private placement concluded on June 28,
1999
4.22(10) Registration Rights Agreement, dated August 20, 1999 between
the registrants and Lowestrate.com, Inc.
4.23(11) Agreement for the Withdrawal of a Member and Amending the
Operating Agreement among the registrant, the selling
stockholder and Monument Mortgage, Inc. dated October 28,
1999.
10.1(4) Merger Agreement and Plan of Reorganization between the
registrant and Monument Mortgage, Inc., dated December 20,
1996
10.2(4) Consulting Agreement between the registrant and James
Umphryes, dated January 1, 1997
10.3(5) 1989 Stock Option Plan
10.4(4) Asset Purchase Agreement between the registrant and Real
Estate Office Software, Inc., dated August 30, 1997
10.5(4) Stock Purchase Agreement between the registrant and Coastal
Federal Mortgage Company, dated April 30, 1998
10.6(4) Stock Purchase Agreement between the registrant and MICAL
Mortgage, Inc., dated May 19, 1998
10.7(5) 1998 Stock Option Plan
10.8(5) 1998 Stock Bonus Incentive Plan
10.9(5) 1998 Non-Employee Directors' Stock Option Plan
10.10(5) 1999 Employee Stock Purchase Plan
10.11(5) Employment Agreement between the registrant and L. Daniel
Rawitch, as amended to date
10.12(5) Employment Agreement between the registrant and Michael G.
Conway, as amended to date
10.13(5) Employment Agreement between the registrant and Gary A.
Palmer, dated February 25, 1999
10.14(5) Employment Agreement between the registrant and Christos
Skeadas, dated April 19, 1999
10.15(5) Employment Agreement between the registrant and Kevin
Gillespie, dated March 5, 1999
10.16(5) Employment Agreement between the registrant and Thomas L.
Porter, as amended to date
10.17(5) Employment Termination Agreement between the registrant and
Jan C. Hoeffel, dated February 3, 1999
10.18(5) Employment Agreement between the registrant and Mark L.
Korell, as amended to date
10.19(10) Asset Purchase Agreement dated August 20, 1999 between the
registrant, Lowestrate.com, Inc. and Robert J. Ross.(10)
10.20(10) Loan and Security Agreement, dated August 20, 1999 between
registrant and Lowestrate.com, Inc.(10)
10.21(10) Employment Agreement dated August 20, 1999 between
registrant and Robert J. Ross(10)
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.22 First Amended and Restated Warehousing Credit and Security
Agreement, dated August 9, 1999 between Monument Mortgage,
Inc., subsidiary of the registrant and Residential Funding
Corporation.
10.23 First Amendment to First Amended and Restated Warehousing
Credit and Security Agreement, dated December 31, 1999
between Monument Mortgage, Inc., subsidiary of the
registrant and Residential Funding Corporation.
10.24 Employment Agreement between the registrant and Rick
Cossano, dated December 28, 1999.
16.1(9) Letter from Former Certifying Accountant
21.1(5) List of Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2 Consent of Reuben E. Price & Co.
24.1 Power of Attorney (see page 89)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to Exhibit 3.2 of the registrant's Annual Report
on Form 10-KSB for the fiscal year ended April 30, 1998, filed on
August 13, 1998.
(2) Incorporated by reference to Exhibit 3 of the registrant's Current Report on
Form 8-K filed on June 2, 1999.
(3) Incorporated by reference to Exhibit 3 of the registrant's Current Report on
Form 8-K filed on November 24, 1999.
(4) Incorporated by reference to the Exhibit of the same number filed with the
registrant's Annual Report on Form 10-KSB for the fiscal year ended
April 30, 1998, filed on August 13, 1998.
(5) Filed with the registrant's Registration Statement on Form S-1 filed on
July 2, 1999.
(6) Incorporated by reference to Exhibit 7.1 of the registrant's Current Report
on Form 8-K filed on February 11, 1999.
(7) Incorporated by reference to Exhibit 4.2 of the registrant's Current Report
on Form 8-K filed with the SEC on April 6, 1998.
(8) Incorporated by reference to Exhibit 7.2 of the registrant's Current Report
on Form 8-K filed on February 11, 1999.
(9) Incorporated by reference to Exhibit 16 of the registrant's Current Report
on Form 8-K filed on February 19, 1999.
(10) Incorporated by reference from the registrant's Current Report on Form 8-K
filed on August 27, 1999.
(11) Incorporated by reference on Exhibit 4.1 of the registrant's Registration
on Form S-3 filed on December 30, 1999.
83
<PAGE>
(B) REPORTS ON FORM 8-K
During the two months ended December 31, 1999, we filed two Current Reports
on Form 8-K:
<TABLE>
<CAPTION>
DATE ITEM DESCRIPTION
- ---- -------- -----------
<S> <C> <C>
November 9, 1999............... 5 Company headquarters relocation
8 Change in year end
December 15, 1999.............. 5 Retirement of Mark Korrell, Chairman, Chief Executive
Officer and Director
</TABLE>
84
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, FiNet.com, Inc., a corporation organized
and existing under the laws of the State of Delaware, has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized,
in the City of San Ramon, State of California, on the 30th day of March 2000.
FINET.COM, INC.
By: /s/ RICK COSSANO
-----------------------------------------
Rick Cossano
PRESIDENT, CHIEF EXECUTIVE OFFICER,
AND MEMBER OF THE BOARD OF DIRECTORS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Rick Cossano and Gary A. Palmer, jointly and
severally, his attorney-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any amendments to this Annual Report on
Form 10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virture hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE OFFICE DATE
--------- ------ ----
<C> <S> <C>
Chairman of the Board,
/s/ RICK COSSANO President and Chief
- ------------------------------ Executive Officer March 30, 2000
Rick Cossano (Principal Executive
Officer)
/s/ L. DANIEL RAWITCH
- ------------------------------ Vice Chairman March 30, 2000
L. Daniel Rawitch
Executive Vice
/s/ GARY A. PALMER President--Chief
- ------------------------------ Financial Officer March 30, 2000
Gary A. Palmer (Principal Financial and
Accounting Officer)
/s/ ANTONIO P. FALCAO
- ------------------------------ Director March 30, 2000
Antonio P. Falcao
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE OFFICE DATE
--------- ------ ----
<C> <S> <C>
/s/ RICHARD E. WILKES
- ------------------------------ Director March 30, 2000
Richard E. Wilkes
/s/ STEPHEN J. SOGIN
- ------------------------------ Director March 30, 2000
Stephen J. Sogin
/s/ S. LEWIS MEYER
- ------------------------------ Director March 30, 2000
S. Lewis Meyer
</TABLE>
85
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
3.1(1) Certificate of Amendment to the registrant's Restated
Certificate of Incorporation, dated as of October 29, 1997
3.2(2) Certificate of Amendment to the registrant's Restated
Certificate of Incorporation, dated as of May 28, 1999
3.3(3) Bylaws, as amended to date
4.1(4) Form of Common Stock Purchase Agreement between the
registrant and Jose Maria Salema Garcao, dated December 16,
1996
4.2(4) Form of Warrant Purchase Agreement between the registrant
and Jose Maria Salema Garcao dated December 16, 1996
4.3(4) Form of Warrant issued to Jose Maria Salema Garcao dated
December 16, 1996
4.4(4) Common Stock Purchase Agreement between the registrant and
investors in the private placement concluded December 31,
1996
4.5(4) Form of Warrant Purchase Agreement between the registrant
and Jose Maria Salema Garcao dated December 30, 1996
4.6(4) Form of Warrant issued to Jose Maria Salema Garcao dated
December 30, 1996
4.7(4) Form of Common Stock Purchase Agreement between the
registrant and Jose Maria Salema Garcao dated March 21, 1997
4.8(4) Form of Warrant Purchase Agreement between the registrant
and Jose Maria Salema Garcao dated March 21, 1997
4.9(4) Form of Warrant issued to Jose Maria Salema Garcao dated
March 21, 1997
4.10(4) Form of Stock Purchase Agreement between the registrant and
investors in the private placement concluded April 30, 1997
4.11(4) Form of Warrant Purchase Agreement between the registrant
and Jose Maria Salema Garcao dated April 30, 1997
4.12(4) Form of Warrant Issued to investors in the private placement
concluded April 30, 1997
4.13(4) Form of Common Stock Purchase Agreement between the
registrant and investors in the private placement concluded
October 31, 1997
4.14(4) Form of Common Stock Purchase Warrant issued to investors in
the private placement concluded October 31, 1997
4.15(5) Form of Common Stock Purchase Agreement between the
registrant and investors in the private placement concluded
December 23, 1998
4.16(5) Form of Common Stock Purchase Warrant issued to investors in
the private placement concluded December 23, 1998
4.17(6) Restructuring Agreement and Amendment, dated January 15,
1999, among the registrant and the investors in the
debenture offering concluded May 26, 1998
4.18(7) Form of Registration Rights Agreement between the registrant
and investors in the debenture offering concluded May 26,
1998
4.19(8) Form of Warrant issued to the investors in the debenture
offering concluded May 26, 1998
4.20(5) Form of Stock Purchase Agreement among the registrant and
the investors in the private placement concluded on May 10,
1999 and May 20, 1999
4.21(5) Form of Stock Purchase Agreement among the registrant and
the investors in the private placement concluded on June 28,
1999
10.1(4) Merger Agreement and Plan of Reorganization between the
registrant and Monument Mortgage, Inc., dated December 20,
1996
10.2(4) Consulting Agreement between the registrant and James
Umphryes, dated January 1, 1997
10.3(5) 1989 Stock Option Plan
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.4(4) Asset Purchase Agreement between the registrant and Real
Estate Office Software, Inc., dated August 30, 1997
10.5(4) Stock Purchase Agreement between the registrant and Coastal
Federal Mortgage Company, dated April 30, 1998
10.6(4) Stock Purchase Agreement between the registrant and MICAL
Mortgage, Inc., dated May 19, 1998
10.7(5) 1998 Stock Option Plan
10.8(5) 1998 Stock Bonus Incentive Plan
10.9(5) 1998 Non-Employee Directors' Stock Option Plan
10.10(5) 1999 Employee Stock Purchase Plan
10.11(5) Employment Agreement between the registrant and L. Daniel
Rawitch, as amended to date
10.12(5) Employment Agreement between the registrant and Michael G.
Conway, as amended to date
10.13(5) Employment Agreement between the registrant and Gary A.
Palmer, dated February 25, 1999
10.14(5) Employment Agreement between the registrant and Christos
Skeadas, dated April 19, 1999
10.15(5) Employment Agreement between the registrant and Kevin
Gillespie, dated March 5, 1999
10.16(5) Employment Agreement between the registrant and Thomas L.
Porter, as amended to date
10.17(5) Employment Termination Agreement between the registrant and
Jan C. Hoeffel, dated February 3, 1999
10.18(5) Employment Agreement between the registrant and Mark L.
Korell, as amended to date
16.1(9) Letter from Former Certifying Accountant
21.1(5) List of Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2 Consent of Reuben E. Price & Co.
24.1 Power of Attorney (see page 89)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to Exhibit 3.2 of the registrant's Annual Report
on Form 10-KSB for the fiscal year ended April 30, 1998, filed on
August 13, 1998.
(2) Incorporated by reference to Exhibit 3 of the registrant's Current Report on
Form 8-K filed on June 2, 1999.
(3) Incorporated by reference to Exhibit 3.2 of the registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1993.
(4) Incorporated by reference to the Exhibit of the same number filed with the
registrant's Annual Report on Form 10-KSB for the fiscal year ended
April 30, 1998, filed on August 13, 1998.
(5) Filed with the registrant's Registration Statement on Form S-1 filed on
July 2, 1999.
(6) Incorporated by reference to Exhibit 7.1 of the registrant's Current Report
on Form 8-K filed on January 19, 1999.
(7) Incorporated by reference to Exhibit 4.2 of the registrant's Current Report
on Form 8-K filed with the SEC on April 6, 1998.
(8) Incorporated by reference to Exhibit 7.2 of the registrant's Current Report
on Form 8-K filed on January 19, 1999.
(9) Incorporated by reference to Exhibit 16 of the registrant's Current Report
on Form 8-K filed on February 19, 1999.
87
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FIRST AMENDED AND RESTATED
WAREHOUSING CREDIT AND SECURITY AGREEMENT
(SINGLE FAMILY MORTGAGE LOANS)
BETWEEN
MONUMENT MORTGAGE, INC.,
a California corporation
AND
RESIDENTIAL FUNDING CORPORATION,
a Delaware corporation
-----------------------------------
Dated as of August 9, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Other Definitional Provisions. . . . . . . . . . . . . . . . . . . . . 12
2. THE CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.1 The Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2 Procedures for Obtaining Advances. . . . . . . . . . . . . . . . . . . 13
2.3 Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.4 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.5 Principal Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.6 Expiration of Commitment . . . . . . . . . . . . . . . . . . . . . . . 19
2.7 Method of Making Payments. . . . . . . . . . . . . . . . . . . . . . . 19
2.8 Commitment Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.9 Warehousing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.10 Miscellaneous Charges. . . . . . . . . . . . . . . . . . . . . . . . . 21
2.11 Interest Limitation. . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.12 Increased Costs; Capital Requirements. . . . . . . . . . . . . . . . . 21
3. COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . . . . . 22
3.2 Release of Security Interest in Collateral . . . . . . . . . . . . . . 24
3.3 Delivery of Additional Collateral or Mandatory Prepayment. . . . . . . 26
3.4 Release of Collateral. . . . . . . . . . . . . . . . . . . . . . . . . 26
3.5 Collection and Servicing Rights. . . . . . . . . . . . . . . . . . . . 27
3.6 Return of Collateral at End of Commitment. . . . . . . . . . . . . . . 27
i
<PAGE>
4. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.1 Initial Advance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.2 Each Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . 32
5.1 Organization; Good Standing; Subsidiaries. . . . . . . . . . . . . . . 32
5.2 Authorization and Enforceability . . . . . . . . . . . . . . . . . . . 32
5.3 Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.4 Financial Condition. . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.5 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.6 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.7 Regulation U . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.8 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . 34
5.9 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.10 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.11 Title to Properties. . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.12 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.13 Eligibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.14 Place of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.15 Special Representations Concerning Collateral. . . . . . . . . . . . . 36
5.16 No Adverse Selection . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.17 Year 2000 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . 39
6. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.1 Payment of Note. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.2 Financial Statements and Other Reports . . . . . . . . . . . . . . . . 39
6.3 Maintenance of Existence; Conduct of Business. . . . . . . . . . . . . 41
6.4 Compliance with Applicable Laws. . . . . . . . . . . . . . . . . . . . 42
ii
<PAGE>
6.5 Inspection of Properties and Books . . . . . . . . . . . . . . . . . . 42
6.6 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
6.7 Payment of Debt, Taxes, etc. . . . . . . . . . . . . . . . . . . . . . 43
6.8 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.9 Closing Instructions . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.10 Subordination of Certain Indebtedness. . . . . . . . . . . . . . . . . 44
6.11 Other Loan Obligations . . . . . . . . . . . . . . . . . . . . . . . . 44
6.12 Use of Proceeds of Advances. . . . . . . . . . . . . . . . . . . . . . 44
6.13 Special Affirmative Covenants Concerning Collateral. . . . . . . . . . 44
7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7.1 Contingent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 46
7.2 Sale or Pledge of Servicing Contracts. . . . . . . . . . . . . . . . . 46
7.3 Merger; Sale of Assets; Acquisitions . . . . . . . . . . . . . . . . . 46
7.4 Deferral of Subordinated Debt. . . . . . . . . . . . . . . . . . . . . 46
7.5 Loss of Eligibility. . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.6 Current Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.7 Debt to Tangible Net Worth Ratio of Company. . . . . . . . . . . . . . 46
7.8 Minimum Tangible Net Worth of Company. . . . . . . . . . . . . . . . . 46
7.9 Liability Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.10 Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.11 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . 47
7.12 Acquisition of Recourse Servicing Contracts. . . . . . . . . . . . . . 47
7.13 Gestation Facilities . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.14 Sale of Stock of Guarantor . . . . . . . . . . . . . . . . . . . . . . 47
7.15 Special Negative Covenants Concerning Collateral . . . . . . . . . . . 47
8. DEFAULTS; REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
iii
<PAGE>
8.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . 48
8.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
8.3 Application of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . 56
8.4 Lender Appointed Attorney-in-Fact. . . . . . . . . . . . . . . . . . . 57
8.5 Right of Set-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
9. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
10. REIMBURSEMENT OF EXPENSES; INDEMNITY . . . . . . . . . . . . . . . . . . . . 58
11. FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
12. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
12.1 Terms Binding Upon Successors; Survival of Representations . . . . . . 59
12.2 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
12.3 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
12.4 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
12.5 Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
12.6 Relationship of the Parties. . . . . . . . . . . . . . . . . . . . . . 60
12.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
12.8 Operational Reviews. . . . . . . . . . . . . . . . . . . . . . . . . . 61
12.9 Consent to Credit References. . . . . . . . . . . . . . . . . . . . . . 61
12.10 Consent to Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . 61
12.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
12.12 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
12.13 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . 62
</TABLE>
iv
<PAGE>
EXHIBITS
Exhibit A Promissory Note
Exhibit B Guaranty
Exhibit C-SF Request for Advance Against Single Family Mortgage
Loans
Exhibit D-SF Procedures and Documentation for
Warehousing Single Family Mortgage Loans
Exhibit E Schedule of 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 L Commitment Summary Report
Exhibit M Terms Applicable to Advances Against Eligible
Loans
Exhibit N Fiscal Year 2000 Losses
Exhibit O RFConnects Pledge Agreement
v
<PAGE>
THIS FIRST AMENDED AND RESTATED WAREHOUSING CREDIT AND SECURITY
AGREEMENT, dated as of August 9, 1999 between MONUMENT MORTGAGE, INC., a
California corporation, (the "Company"), having its principal office at 3021
Citrus Circle, Suite 150, Walnut Creek, California 94598 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 have entered into a Warehousing
Credit and Security Agreement (Single Family Mortgage Loans) dated as of March
22, 1995 and amended by a First Amendment to Warehousing Credit and Security
Agreement dated as of July 27, 1995, the Second Amendment to Warehousing Credit
and Security Agreement dated as of December 15, 1995, the Third Amendment to
Warehousing Credit and Security Agreement dated as of February 29, 1996, the
Fourth Amendment to Warehousing Credit and Security Agreement dated as of June
11, 1996, the Fifth Amendment to Warehousing Credit and Security Agreement dated
as of December 12, 1996, the Sixth Amendment to Warehousing Credit and Security
Agreement dated as of July 23, 1997, the Seventh Amendment to Warehousing Credit
and Security Agreement dated as of November 14, 1997, the Eighth Amendment to
Warehousing Credit and Security Agreement dated as of February 20, 1998, the
Ninth Amendment to Warehousing Credit and Security Agreement dated as of March
5, 1998, and the Tenth Amendment to Warehousing Credit and Security Agreement
dated as of April 15 1998 (as so amended, the "Existing Agreement");
WHEREAS, the Company and the Lender desire to set forth herein the terms
and conditions upon which the Lender shall provide warehouse 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:
"ADVANCE" means a disbursement by the Lender under the Commitment
pursuant to Section 2.1 of this Agreement.
"ADVANCE REQUEST" has the meaning set forth in Section 2.2(a)
hereof.
"AFFILIATE" has the meaning set forth in Rule 12b-2 of the General
Rules and Regulations under the Exchange Act.
"AGENCY SECURITY" means a Mortgage-backed Security issued or
guarantied by Fannie Mae, Freddie Mac or Ginnie Mae.
1
<PAGE>
"AGREEMENT" means this First Amended and Restated 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.
"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.
"BUSINESS DAY" means any day excluding Saturday or Sunday and
excluding any day on which national banking associations are closed for
business.
"CALENDAR QUARTER" means the three (3) month period beginning on
any January 1, April 1, July 1 or October 1.
"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.
"CHECK DISBURSEMENT ACCOUNT" means a demand deposit account
maintained at the Funding Bank in the name of the Company and under the
control of the Lender for the clearing of checks written by the Company
to fund Advances.
"CLOSING DATE" means August 9, 1999.
"COLLATERAL" has the meaning set forth in Section 3.1 hereof.
"COLLATERAL DOCUMENTS" means, with respect to each Mortgage Loan:
(a) the Mortgage Note, the Mortgage, and all other documents executed in
connection with or otherwise relating to the Mortgage Loan, (b) as
applicable -- the original lender's ALTA Policy of Title Insurance or its
equivalent, documents evidencing the FHA Commitment to Insure or the VA
Guaranty, the appraisal, Private Mortgage Insurance, the Regulation Z
Statement, certificates of casualty or hazard insurance, credit
information on the maker(s) of the Mortgage Note, the HUD-1 or
corresponding purchase advice, and (c) any other documents that are
customarily desired for inspection or transfer incidental to the purchase
of any Mortgage Note by an Investor or which are customarily executed by
the seller of a Mortgage Note to an Investor.
"COLLATERAL VALUE" means (a) with respect to any Eligible Loan as
of the date of determination, the lesser of (i) the amount of any Advance
made against such Eligible Loan
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under Section 2.1(c) hereof or (ii) the Fair Market Value of such
Eligible Loan; (b) in the event Pledged Mortgages have been exchanged for
Agency Securities, the lesser of (i) the amount of any Advances
outstanding against the Eligible Loans backing such Agency Securities or
(ii) the Fair Market Value of such Pledged Securities; and (c) with
respect to cash, the amount of such cash.
"COMMITMENT" has the meaning set forth in Section 2.1(a) hereof.
"COMMITMENT AMOUNT" means $75,000,000.
"COMMITMENT FEE" means a fee payable by the Company in
consideration of the Lender's issuance of the Commitment. The amount of
the Commitment Fee, if any, is set forth in Section 2.8 hereof.
"COMMITTED PURCHASE PRICE" means for an Eligible Loan the product
of the Mortgage Note Amount multiplied by (a) the price (expressed as a
percentage) as set forth in a Purchase Commitment for such Eligible Loan
or (b) in the event such Eligible Loan is to be used to back an Agency
Security, the price (expressed as a percentage) as set forth in a
Purchase Commitment for such Agency Security.
"COMPANY" has the meaning set forth in the first paragraph of this
Agreement.
"CREDIT SCORE" means a mortgagor's overall consumer credit rating,
represented by a single numeric credit score calculated using the Fair,
Isaac consumer credit scoring system, provided by a credit repository
acceptable to the Lender and the Investor that issued the Purchase
Commitment covering the related 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 Subordinated Debt not due within one year of such
date and deferred taxes arising from capitalized excess servicing fees
and capitalized servicing rights.
"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
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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 as a Designated Bank, but only for as long as the Lender
has an agreement under which the Lender can receive a Depository Benefit.
"DESIGNATED BANK CHARGES" means any fees, interest or other
charges that would otherwise be payable to a Designated Bank in
connection with Eligible Balances maintained at 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.
"ELECTRONIC ADVANCE REQUEST" means an electronic transmission
through RFConnects Delivery containing the same information as EXHIBIT
C-SF to this Agreement, together with a list of the Mortgage Loans to be
funded with the Advance sent to the Lender by facsimile.
"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.
"ELIGIBLE LOAN" means a Single Family Mortgage Loan secured by a
Mortgage on real property located in one of the states of the United
States or the District of Columbia that is designated as such on EXHIBIT
M attached hereto and made a part hereof.
"ELIGIBLE MORTGAGE POOL" means a Mortgage Pool for which (a) an
Approved Custodian has issued its initial certification (on the basis of
which an Agency Security is to be issued), (b) there exists a Purchase
Commitment covering such Agency Security, and (c) such Agency 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.
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"FAIR MARKET VALUE" means at any time for an Eligible Loan or the
related Agency Security (if such Eligible Loan is to be used to back an
Agency Security), (a) if such Eligible Loan or the related Agency
Security is covered by a Purchase Commitment, the Committed Purchase
Price, or (b) otherwise, the market price for such Eligible Loan or
Agency Security, determined by the Lender based on market data for
similar Mortgage Loans or Agency Securities and such other criteria as
the Lender deems appropriate.
"FANNIE MAE" means Fannie Mae, a corporation created under the
laws of the United States, and any successor thereto.
"FHA" means the Federal Housing Administration 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.
"FISCAL QUARTER" means the 3 month period beginning on any
February 1, May 1, August 1, or November 1.
"FREDDIE MAC" means Freddie Mac, a corporation created under the
laws of the United States, 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 or in such
other statements by such other entity as may be approved by a significant
segment of the accounting profession, which are applicable to the
circumstances as of the date of determination.
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"GESTATION AGREEMENT" means an agreement under which the Company
agrees to sell or finance (a) a Pledged Mortgage prior to the date of
purchase by an Investor, or (b) a Mortgage Pool prior to the date an
Agency Security backed by such Mortgage Pool is issued.
"GINNIE MAE" means the Government National Mortgage Association,
an agency of the United States government, and any successor thereto.
"GUARANTOR" means FiNET.COM, INC., a Delaware corporation and any
other Person that hereafter guarantees all or any portion of the
Company's Obligations. If more than one Person is named as Guarantor,
the term "Guarantor" shall mean each of such Persons and all of them.
"GUARANTY" means a guaranty of all or any portion of the Company's
Obligations. If more than one Guaranty is executed and delivered to the
Lender, the term "Guaranty" shall mean each of such Guaranties and all of
them.
"HEDGING ARRANGEMENTS" means, with respect to any Person, any
agreements or other arrangement (including, without limitation, interest
rate swap agreements, interest rate cap agreements and forward sale
agreements) entered into by such Person to protect itself against changes
in interest rates or the market value of assets.
"HUD" means the Department of Housing and Urban Development and
any successor thereto.
"HUD 203(k) MORTGAGE LOAN" means an FHA insured closed-end First
Mortgage Loan secured by a First Mortgage, of which a portion 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).
"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 Fannie Mae, Freddie Mac or a financially
responsible private institution which is deemed acceptable by the Lender
from time to time in its sole discretion with respect to a particular
category of Pledged Mortgages.
"LENDER" has the meaning set forth in the first
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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 of certain U.S. banks
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 Bloomberg L.P.
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).
"LOAN DOCUMENTS" means this Agreement, the Note, the Guaranty, 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.
"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.
"MARGIN STOCK" has the meaning assigned to that term in Regulation
U of the Board of Governors of the Federal Reserve System as in effect
from time to time.
"MATURITY DATE" shall mean the earlier of: (a) the close of
business on August 8, 2000, 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.
"MISCELLANEOUS CHARGES" has the meaning set forth in Section 2.10
hereof.
"MORTGAGE" means a mortgage or deed of trust on improved
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and substantially completed 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).
"MORTGAGE-BACKED SECURITIES" means securities that are secured or
otherwise backed by Mortgage Loans.
"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 [or other
note evidencing an Eligible Loan] (whether or not an additional amount is
available to be drawn thereunder).
"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.
"NASDAQ" means National Association of Securities Dealers
Automated Quotation system.
"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), whether or not
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
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maintained at the Funding Bank in the name of the Company and designated
for funding that portion of each Eligible Loan not funded by an Advance
made against such Eligible Loan 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
liability companies, 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.
"PURCHASE COMMITMENT" means a written commitment, in form and
substance satisfactory to the Lender, issued in favor of the Company by
an Investor pursuant to which that Investor commits to purchase Mortgage
Loans or Mortgage-backed Securities.
"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.
"RFCONNECTS DELIVERY" means the Lender's proprietary service to
support the electronic exchange of information between the Lender and the
Company, including, but not limited to, Advance Requests, shipping
requests, payoff requests, activity reports and exception reports.
"RFCONNECTS PLEDGE AGREEMENT means a pledge agreement in the form
of EXHIBIT O to the Agreement.
"SECOND MORTGAGE" means a Mortgage which constitutes a second Lien
on the property covered thereby.
"SECOND MORTGAGE LOAN" means a Mortgage Loan secured by a Second
Mortgage.
"SERVICING CONTRACT" means, with respect to any Person,
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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 serviced by such Person under
Servicing Contracts.
"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.
"SUBLIMIT" means the aggregate amount of Advances (expressed as a
dollar amount or as a percentage of the Commitment Amount) that is
permitted to be outstanding at any one time against a specific type of
Eligible Loan.
"SUBORDINATED DEBT" means (a) all indebtedness of the Company for
borrowed money which is effectively subordinated in right of payment to
all other present and future Obligations either (i) pursuant to a
Subordination of Debt Agreement in the form of EXHIBIT F hereto or (ii)
otherwise on terms acceptable to the Lender, and (b) solely for purposes
of Section 7.4 hereof, all indebtedness of the Company which is required
to be subordinated by Section 4.1(b) or Section 6.10 hereof.
"SUBSIDIARY" means any corporation, association or other business
entity in which more than fifty percent (50%) of the total voting power
or shares of stock entitled to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly
or indirectly, by any Person or one or more of the other Subsidiaries of
that Person or a combination thereof.
"TANGIBLE NET WORTH" means with respect to any Person at any date,
the excess of the total assets of such Person 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 that portion of
Subordinated Debt not due within one year of such date; provided that,
for purposes of calculating Tangible Net Worth, there shall be excluded
from total assets advances or loans to shareholders, officers, employees
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
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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 sole discretion.
"TITLE I MORTGAGE LOAN" means an FHA co-insured closed-end First
Mortgage Loan or Second Mortgage Loan 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.
"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 FEE" has the meaning set forth in Section 2.9 hereof.
"WAREHOUSING PERIOD" means, for any Eligible Loan, the maximum
number of days an Advance against that type of Eligible Loan is permitted
to remain outstanding as set forth on EXHIBIT M attached to this
Agreement.
"WEIGHTED AVERAGE PURCHASE COMMITMENT PRICE" shall mean the
weighted average of the Committed Purchase Prices of the unfilled
Purchase Commitments (expressed as a percentage) for Mortgage Loans or
Mortgage-backed Securities of the same type, interest rate and term.
"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, from the time of such Advance until the time of subsequent
delivery of the Collateral Documents as provided in such Section and the
Exhibit referenced therein.
"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 Advances.
"YEAR 2000 PROBLEM" means the risk that computer
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applications may not be able to properly perform date-sensitive functions
after December 31, 1999.
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 COMMITMENT.
2.1(a) Subject to the terms and conditions of this
Agreement and provided no Default or Event of Default 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. Effective
as of the date of this Agreement, all outstanding loans made
pursuant to the Warehousing Credit and Security Agreement shall
for all purposes be deemed to be Advances made under this
Agreement. All Advances under this Agreement shall constitute a
single indebtedness, and all of the Collateral shall be security
for the Note and for the performance of all the Obligations.
2.1(b) Advances shall be used by the Company solely for
the purpose of funding the acquisition or origination of Eligible
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 Eligible Loans as Collateral therefor. The
limitations on the use of Advances set forth on EXHIBIT M attached
hereto and made a part hereof shall be applicable. In addition,
the following limitations on the use of Advances shall be
applicable:
(1) No Advance shall be made against any Mortgage
Loan which was closed more than 90 days
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prior to the date of the requested Advance.
(2) No Advance shall be made against a Mortgage
Loan other than a Mortgage Loan secured by a Mortgage on
real property located in one of the states of the United
States or the District of Columbia.
2.1(c) No Advance shall exceed the following amount
applicable to the type of Eligible Loan at the time it is pledged
to secure an Advance hereunder:
(1) For an Eligible Loan pledged hereunder, the
amount set forth on EXHIBIT M attached hereto and made a
part hereof.
2.2 PROCEDURES FOR OBTAINING ADVANCES.
2.2(a) To obtain an Advance, the Company must comply with
the conditions set forth in Sections 4.1 and 4.3 of this
Agreement, the procedures set forth in this Section 2.2(a), and
the procedures and documentation required under the EXHIBIT D for
the type of Mortgage Loan for which the Company is requesting the
Advance. The Company will request an Advance either by delivering
to Lender a completed and signed advance request in the applicable
form of EXHIBIT C or by sending to Lender an Electronic Advance
Request, together with a list of Mortgage Loans for which the
request is being made and a completed and signed RFConnects Pledge
Agreement sent by facsimile (each an "Advance Request"), each no
later than 1 Business Day prior to the Business Day the requested
Advance is to be made. The current forms of the EXHIBIT C and
EXHIBIT D referred to above are attached to this Agreement. The
Lender is entitled, upon not less than 3 Business Days' prior
Notice to the Company, to modify any of those Exhibits or the form
of Electronic Advance Request to conform to current legal
requirements or Lender's lending practices. Exhibits and
Electronic Advance Requests so modified automatically become a
part of this Agreement.
2.2(b) In the case of a Wet Settlement Advance, the
Company shall follow the procedures 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. In the
case of a Mortgage Loan financed through a Wet Settlement Advance,
the Company shall cause all Collateral Documents required to be
delivered to the Lender pursuant to EXHIBIT D-SF within 7 Business
Days after the date of the Wet Settlement Advance relating
thereto.
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2.2(c) Before funding, the Lender shall have a reasonable
time (one (1) Business Day 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 the Company shall deliver to the Lender promptly upon request,
or if the recorded Collateral Documents have not yet been returned
from the recording office, immediately upon receipt by the Company
of such recorded Collateral Documents, and 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, (2) the original lender's
ALTA Policy of Title Insurance or an equivalent thereto, and (3)
any other documents relating to a Pledged Mortgage which the
Lender may 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 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 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 an Advance, the Lender shall cause the
Funding Bank to credit either the Wire Disbursement Account or the
Check Disbursement Account upon compliance by the Company 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 the Company.
2.2(f) If, pursuant to the authorization given by the
Company in the Funding Bank Agreement, for the purpose of funding
a Mortgage Loan against which the Lender has made an Advance in
accordance with a Request for Advance (i) the Lender debits the
Company's Operating Account at the Funding Bank to the extent
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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 Check Disbursement Account at the Funding Bank, and
such debit or direction results in an overdraft, the Lender may
make an additional Advance to fund such overdraft.
2.3 NOTE. The Company's Obligations shall be evidenced by the
promissory note (the "Note") dated as of the date hereof substantially in
the form of EXHIBIT A attached hereto. The term "Note" shall include all
extensions, renewals and modifications of the Note and all substitutions
therefor. All terms and provisions of the Note are hereby incorporated
herein.
2.4 INTEREST.
2.4(a) Except as otherwise provided in Section 2.4(e)
hereof, the unpaid amount of each Advance against an Eligible Loan
shall bear interest at the rate(s) per annum set forth on EXHIBIT
M attached hereto and made a part hereof.
2.4(b) 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
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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(c) 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 first day of each month, commencing with the first
month following the Closing Date and on the Maturity Date.
2.4(d) 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 of
interest applicable to such Advance, 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(e) 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 the Advance or, if no rate is applicable, the
highest rate then applicable to any outstanding Advances.
2.4(f) The floating rates of interest provided for in
this Agreement will be adjusted as of the effective date of each
change in the applicable index. The Lender's determination of
such rates as of any date of determination shall be conclusive and
binding, absent manifest error.
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) The Company shall pay the Lender, without
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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 Operating Account for, the amount of any outstanding
Advance against a specific Pledged Mortgage, upon the earliest
occurrence of any of the following events:
(1) 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.
(2) Ten (10) Business Days elapse from the date a
Collateral Document was delivered to the Company for
correction or completion under a Trust Receipt, if such
Collateral Document has not been returned to the Lender.
(3) 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 60 days or more.
(4) If the outstanding Advances against Pledged
Mortgages of a specific Mortgage Loan type exceed the
aggregate Purchase Commitments for such Mortgage Loan type.
(5) For a Mortgage Loan covered by a Purchase
Commitment at the time pledged hereunder, 3 Business Days
after the mandatory delivery date of the related Purchase
Commitment and the specific Pledged Mortgage or the Pledged
Security backed thereby 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 or Pledged Security is eligible
for delivery to an Investor under a comparable Purchase
Commitment acceptable to the Lender.
(6) Upon sale or other disposition of the Pledged
Mortgage or, if a Pledged Mortgage is included in an
Eligible Mortgage Pool, upon sale or other disposition of
the related Agency Security.
(7) On the date on which the Company knows, or
has reason to know, or receives notice from the Lender,
that one or more of the representations and warranties set
forth in Section 5.15 were
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inaccurate or incomplete in any material respect on any
date when made or deemed made.
2.5(d) Upon Notice to the Company by the Lender, the
Company shall pay to the Lender, and the Company authorizes the
Lender to cause the Funding Bank to charge the Company's Operating
Account for, the amount of any outstanding Advance against a
specific Pledged Mortgage upon the earliest occurrence of any of
the following events:
(1) For any Pledged Mortgage, the Warehouse
Period elapses.
(2) On the date the payment of a Lien prior to a
Pledged Mortgage is delinquent for a period of 60 days.
(3) Forty-five (45) days elapse from the date the
Pledged Mortgage was delivered to an Investor or an
Approved Custodian for examination and purchase or
inclusion in a Mortgage Pool, without the purchase being
made or an Eligible Mortgage Pool being initially
certified, or upon rejection of the Pledged Mortgage as
unsatisfactory by an Investor or an Approved Custodian.
(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, 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) With respect to any Pledged Mortgage, any of
the items described in Section 2.2(d), upon examination by
the Lender, are found not to be in compliance with the
requirements of this Agreement or the related Purchase
Commitment.
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
Sections 2.5(c) and 2.5(d), 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 Company shall be
obligated to pay to the Lender, without the necessity of prior
demand or
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notice from the Lender, and the Company authorizes the Lender to
cause the Funding Bank to charge the Company's Operating Account
for the amount of such prepayment, to be applied to such Advance.
2.5(g) 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. The Company shall
give Notice to the Lender (telephonically, to be followed by
written notice or via RFConnects Delivery) 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 from such
proceeds and such Pledged Mortgages or Pledged Securities shall be
considered to have been redeemed from pledge. The Lender is
entitled to rely upon the Company's affirmation that deposits in
the Cash Collateral Account 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 Operating Account for an amount equal to such
deficiency. Provided no Default or 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 from
time to time.
2.7(b) After the occurrence and during the continuance of
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 Operating Account for any
Obligations due and owing the Lender.
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2.7(c) All payments of interest and fees
hereunder shall be made by means of a direct debit by the Lender to the
Operations Account, to the extent of funds available therein. The Lender shall
provide the Company with an account analysis statement showing such interest and
fees no later than the date of such debit.
2.8 COMMITMENT FEES. The Company agrees to pay to the Lender a
Commitment Fee in the amount of 0.25% per annum of the Commitment Amount
which Commitment Fee shall 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; provided, that the first eight
(8) payments of the Commitment Fee (if the Commitment is extended for a
sufficient period) shall be reduced by $17,500 each. 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 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. 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 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 $20.00
for each Mortgage Loan pledged as Collateral for such Advance.
Warehousing Fees are due when incurred, but shall not be delinquent if
paid within 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, costs for UCC, tax lien and judgment
searches conducted by the Lender, filing fees, charges for wire
transfers, check processing charges, charges
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for security delivery fees, charges for overnight delivery of Collateral
to Investors, the Funding Bank's service fees and overdraft charges and
Designated Bank Charges. Miscellaneous Charges are due when incurred,
but shall not be delinquent if paid within 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 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 jurisdiction 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
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<PAGE>
credit extended by, or any other acquisition of funds by, any
office of the Lender which 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 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 Note and for the performance of all of the Company's Obligations, the
Company hereby assigns and transfers to the Lender all right, title and
interest in and to and 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 or securing 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 in respect of which Wet
Settlement Advances have been made by the Lender (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
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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
(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, payments, intangibles and other 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 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(e) All right, title and interest of the Company in
and to any Hedging Arrangements entered into to protect the
Company against changes in the value of Pledged Mortgages or
Pledged Securities, including, without limitation, all rights to
payment arising under such Hedging Arrangements.
3.1(f) All now existing or hereafter acquired cash
delivered to or otherwise in the possession of the Lender, the
Funding Bank, or the Lender's agent, bailee or custodian or
designated on the books and records of the Company as assigned and
pledged to the Lender.
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3.1(g) 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 Freddie Mac or Fannie Mae 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 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
Agency 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.
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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 and credited to an
account of the Lender. The Lender shall have the right to cause
delivery of the Pledged Securities to be made to the Investor or
the Pledged Securities credited to the account 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 with
respect to Pledged Securities issued in book entry form or issued
in certificated form and delivered to a clearing corporation,
pursuant to which such Pledged Securities are registered in the
name of such financial institution, 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.
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 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 amount (the "Release Amount") to be
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paid by the Company to obtain the release of the Lender's security
interest in a Pledged Mortgage shall be (i) prior to the
occurrence of an Event of Default, the principal amount 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
amount of the Advances then outstanding hereunder, the Lender may
request, and the Company shall within 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 amount of Advances
outstanding hereunder, and/or (b) repay the 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.
3.4(a) The Lender may deliver documents relating to the
Collateral 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 receipt of Notice from the Company under
Section 2.5(g) hereof, and repayment of the Release Amount with
respect to a Pledged Mortgage identified by the Company, any
Collateral Documents relating to the redeemed Pledged Mortgage or
Mortgage Loan backing a Pledged Security which have not been
delivered to an Investor or Approved Custodian shall be released
by the Lender to the Company.
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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 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 Advances,
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 at the Company's expense.
The receipt of the Company for any Collateral released or delivered to
the Company pursuant to any provision of this Agreement shall be a
complete and full acquittance for the Collateral so returned, and the
Lender shall 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 Note and this Agreement duly executed by
the Company.
(2) The Company's articles or certificate of
incorporation as certified by the Secretary of State of the
Company's incorporation, bylaws
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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 or certificate of
incorporation or bylaws since those delivered in connection
with the Existing Agreement, and certificates of good
standing dated no less recently than 90 days prior to the
date of this Agreement and a certification from the
Franchise Tax Board of the State of California stating that
the Company is in good standing with the Franchise Tax
Board.
(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 April 30, 1999 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
and containing a footnote concerning a subsequent cash
equity investment of $6,000,000 or more.
(6) Financial statements of the Company (and, if
applicable, its Subsidiaries, on a consolidated basis)
containing a balance sheet as of May 31, 1999 and June 30,
1999, 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) The Guaranty, in the form attached hereto
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as EXHIBIT B, duly executed by the Guarantor.
(8) Copies of the Guarantor's articles or
certificate of incorporation as certified by the Secretary
of State of the State of Guarantor's incorporation and
bylaws, and certificates of good standing issued by the
Secretary of State dated no less recently than 90 days
prior to the date of this Agreement.
(9) A resolution of the board of directors of the
Guarantor, certified as of the date of the Agreement by its
corporate secretary, authorizing the execution, delivery
and performance of the Guaranty, and all other instruments
or documents to be delivered by the Guarantor pursuant to
this Agreement.
(10) A certificate of the Guarantor's corporate
secretary as to the incumbency and authenticity of the
signatures of the officers of the Guarantor executing the
Guaranty 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).
(11) Financial statements of the Guarantor
containing a balance sheet as of April 30, 1999 and related
statements of income, changes in stockholders' equity and
cash flows for the period ended on the above 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, and containing a footnote
concerning a subsequent cash equity investment of
$13,000,000 or more.
(12) Financial statements of the Guarantor
containing a balance sheet as of May 31, 1999, and related
statements of income, changes in stockholders' equity and
cash flows for the period ended on the above date, all
prepared in accordance with GAAP applied on a basis
consistent with prior periods and reviewed by independent
certified public accountants of recognized standing
acceptable to the Lender.
(13) A favorable written opinion of counsel to the
Company and the Guarantor (or of separate counsel at the
option of the Company and the Guarantor), dated as of the
date of this Agreement
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substantially in the form of EXHIBIT H attached hereto,
addressed to the Lender.
(14) Uniform Commercial Code, tax lien and
judgment searches of the appropriate public records for the
Company and the Guarantor, which searches shall not have
disclosed the existence of any prior Lien on the Collateral
other than in favor of the Lender or as permitted
hereunder.
(15) 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.
(16) 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.
(17) Executed financing statements in recordable
form covering the Collateral and ready for filing in all
jurisdictions required by the Lender.
(18) Receipt by the Lender of any fees due on the
date hereof, including, but not limited to, Commitment Fees
and document production fees.
(19) 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.
4.1(b) All directors, officers and shareholders of the
Company, all Affiliates of the Company or of any Subsidiary of the
Company, and the Guarantor, to whom or to any of whom the Company
shall be indebted as of the date of this Agreement, which
indebtedness has a term of more than one (1) year or is in excess
of $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.
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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 sole 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, Collateral Documents, and documents relating to
Wet Settlement Advances, called for under, 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 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.
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 Default or Event of
Default hereunder.
4.2(e) The Guarantor shall have performed all agreements
to be performed by the Guarantor under the Guaranty.
4.2(f) The Company shall not have incurred any material
liabilities, direct or contingent, other than in the ordinary
course of its business, since the Statement Date.
4.2(g) The Lender shall have received from counsel for
the Company or for the Guarantor or both, 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.
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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, 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
Note and all other Loan Documents to which the Company is party and to
make the borrowings hereunder. The Guarantor has the power and legal
capacity to execute, deliver and perform the Guaranty. The execution,
delivery and performance by the Company of this Agreement, the Note 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
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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 Note and all other Loan
Documents contemplated hereby or thereby constitute legal, valid, and
binding obligations of the Company or of the Guarantor, respectively,
enforceable in accordance with their respective terms, except as limited
by bankruptcy, insolvency or other such laws affecting the enforcement of
creditors' rights and by general principles of equity.
5.3 APPROVALS. The execution and delivery of this Agreement,
the Note and all other Loan Documents and the performance of the
Company's obligations hereunder and thereunder 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 of 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 of 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.
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5.5 LITIGATION. There are no actions, claims, suits or
proceedings pending or, to the knowledge of the Company, threatened or
reasonably anticipated against or affecting the Company or any Subsidiary
of the Company in any court or before any arbitrator or before any
government commission, board, bureau or other administrative agency
which, if adversely determined, may reasonably be expected to result in
any material and adverse change in the business, operations, assets or
financial condition of the Company as a whole, or which would affect the
validity or enforceability of this Agreement, the Note or any other Loan
Document.
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 Note or any other
Loan Document.
5.7 REGULATION 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
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own right or as transferee of the assets of, or as successor to, any
other Person. No tax Liens have been filed and no material claims are
being asserted with respect to any such taxes, fees or charges.
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 terminate any such
Plan, and no condition exists which presents a material risk to the
Company or a Subsidiary of the Company of
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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) Fannie Mae approved seller/servicer of Mortgage
Loans, eligible to originate, purchase, hold, sell, and service
Mortgage Loans to be sold to Fannie Mae.
5.13(b) Freddie Mac approved seller/servicer of Mortgage
Loans, eligible to originate, purchase, hold, sell and service
Mortgage Loans to be sold to Freddie Mac.
5.13(c) HUD approved mortgagee.
5.13(d) RFC approved seller/servicer of Mortgage Loans,
eligible to originate, purchase, hold, sell and service Mortgage
Loans to be sold to RFC.
5.14 PLACE OF BUSINESS. The principal place of business of the
Company is 3021 Citrus Circle, Suite 150, Walnut Creek, California 94598.
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 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 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
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closing held not more than 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, 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, other than an open-ended Pledged Loan secured by a Second
Mortgage, has been fully advanced in the face amount thereof, each
First Mortgage is a first Lien on the premises described therein
and each Second Mortgage is secured by a second Lien on the
premises described therein, and has or will have 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.
5.15(d) No default has occurred and is continuing for more
than 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(c)(3) 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.
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 Company 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
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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 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,
agency or other Person issuing or guaranteeing such
Mortgage-backed Security.
5.15(i) For Pledged Mortgages which will be used to back
Ginnie Mae Mortgage-backed Securities, the Company has received
from Ginnie Mae 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 Ginnie Mae sufficient to permit the issuance of Ginnie
Mae 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 Ginnie Mae 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
Ginnie Mae 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.
5.15(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.
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5.16 NO ADVERSE SELECTION. The Company has not selected the
Collateral in a manner so as to affect adversely the Lender's interests.
5.17 YEAR 2000 COMPLIANCE. The Company has conducted a
comprehensive review and assessment of the Company's computer
applications and made inquiry of the Company's key suppliers, vendors,
customers, and Investors with respect to the "Year 2000 Problem" and,
based on that review and inquiry, the Company does not believe the Year
2000 Problem will result in a material adverse change in the Company's
business condition (financial or otherwise), operations, properties or
prospects, or ability to repay the credit.
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 NOTE. Punctually pay or cause to be paid all
Obligations payable hereunder and under the Note in accordance with the
terms hereof and thereof.
6.2 FINANCIAL STATEMENTS AND OTHER REPORTS. Deliver to the
Lender:
6.2(a) As soon as available and in any event within 30
days after the end of each calendar month of the Company,
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 fiscal year to the end of such calendar
month, and the related balance sheet as of the end of the
immediately preceding 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 30
days after the end of each calendar month, consolidating
statements of income and changes in stockholders' equity of the
Guarantor and its Subsidiaries for the immediately preceding month
and for the period from the beginning of the fiscal year to the
end of such calendar month, and the related balance sheet as at
the end of the immediately preceding month, all in reasonable
detail and certified as to the fairness of presentation by the
chief financial officer of the Guarantor, subject, however, to
year-end audit adjustments and the absence of footnotes.
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6.2(c) As soon as available and in any event within 90
days after the end of each fiscal year of the Company, statements
of income, changes in stockholders' equity and cash flows of the
Guarantor and its Subsidiaries, the related balance sheets as of
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 of an accounting firm
reasonably satisfactory to the Lender, or other independent
certified public accountants of recognized standing selected by
the Guarantor 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 Subsidiaries) as of the end of,
and for, such year.
6.2(d) 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
7.6, 7.7, 7.8, 7.9, 7.10, 7.11, 8.1(r), 8.1(s), 8.1(t) and 8.1(u)
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, Ginnie Mae, or Investor net worth requirements; (3)
certifying that the representation set forth in Section 5.17
hereof is true and correct as of the date of such certificate or,
if such representation is not true and correct as of such date,
specifying the nature of the problem and what action the Company
has taken, is taking and proposes to take with request thereto,
and (4) 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
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or exists, specifying the nature and period of the existence
thereof and what action the Company has taken, is taking and
proposes to take with respect thereto.
6.2(e) Reports in respect of the Pledged Mortgages and
Pledged Securities, 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(f) 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 Ginnie Mae,
Fannie Mae or Freddie Mac and copies of the Mortgage Bankers'
Financial Reporting Forms (Freddie Mac Form 1055/Fannie Mae Form
1002) which the Company is required to have filed, as the Lender
may reasonably request.
6.2(g) Copies of any and all press releases by the
Company or the Guarantor related to their business activities.
6.2(h) Prior to the beginning of each fiscal year,
projected financial statements of the Guarantor as at the end of
each Fiscal Quarter during such fiscal year, including a balance
sheet and statements of income and cash flow, in reasonable detail
and in form and substance satisfactory to the Lender.
6.2(i) 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.
6.3 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, 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 for maintaining the
Company's eligibility as lender, seller/servicer and issuer described
under Section 5.13 hereof; not change the nature or character of its
business or engage in any business in which it was not engaged on the
date of this Agreement; and not change its name, state of incorporation
or principal place of business.
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
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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
accountants held in accordance with this authorization.
6.6 NOTICE. Give prompt Notice to the Lender of (a) any
action, suit or proceeding instituted by or against the Company or any of
its Subsidiaries in any federal or state court or before any commission
or other regulatory body (federal, state or local, domestic or foreign)
which action, suit or proceeding has at issue in excess of $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 and continuation thereof for 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 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, (f) any asset or stock acquisitions
in excess of $1,000,000 by either the Company or the Guarantor, (g) any
agreements by either the Company or the Guarantor for a committed
warehousing line of credit; or (h) any other action, event or condition
of any nature which may lead to or result in a material adverse effect
upon the business, operations, assets, or financial condition of the
Company and its Subsidiaries or which, with or without notice or lapse of
time or both, would constitute a default under any other agreement,
instrument or indenture to which the Company or any of its
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Subsidiaries is a party or to which the Company or any of its
Subsidiaries, its properties, or assets may be subject.
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 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 requirements
applicable to a lender, seller/servicer and issuer described under
Section 5.13 hereof, and (b) liability insurance and fire and other
hazard insurance on its properties, with responsible insurance companies
approved by the Lender, in such amounts and against such risks as is
customarily carried by similar businesses operating in the same vicinity;
and (c) within 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.
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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, or to any
Guarantor, which indebtedness has a term of more than one (1) year or is
in excess of $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.
6.11 OTHER LOAN OBLIGATIONS. Perform all material obligations
under the terms of each loan agreement, note, mortgage, security
agreement or debt instrument by which the Company is bound or to which
any of its property is subject, and promptly notify the Lender in writing
of a declared default 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 and the Company
hereby agrees to give the Lender at least 10 days Notice before entering
into any additional lines of credit or agreements.
6.12 USE OF PROCEEDS OF ADVANCES. Use the proceeds of each
Advance solely for the purpose set forth in Section 2.1(b) for Advances
of that type.
6.13 SPECIAL AFFIRMATIVE COVENANTS CONCERNING COLLATERAL.
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.
6.13(b) Service or cause to be serviced all Mortgage Loans
in accordance with 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 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.
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6.13(c) Execute and deliver to the Lender such Uniform
Commercial Code financing statements with respect to the
Collateral as the Lender may request. The Company shall also
execute and deliver to the Lender such further instruments of
sale, pledge or assignment or transfer, and such powers of
attorney, as required by the Lender, and shall do and perform all
matters and things necessary or desirable to be done or observed,
for the purpose of effectively creating, maintaining and
preserving the security and benefits intended to be afforded the
Lender under this Agreement. The Lender shall have all the rights
and remedies of a secured party under the Uniform Commercial Code
of Minnesota, or any other applicable law, in addition to all
rights provided for herein.
6.13(d) Notify the Lender within 2 Business Days of any
default under, 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 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 3 Business Days prior to 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 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.
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:
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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.
7.3 MERGER; SALE OF ASSETS; ACQUISITIONS. Liquidate, dissolve,
consolidate or merge or sell any substantial part of its assets, or
acquire any substantial part of the assets of another.
7.4 DEFERRAL OF SUBORDINATED DEBT. Pay in advance of the
stated maturity thereof any Subordinated Debt of the Company or, if a
Default or Event of Default hereunder shall have occurred, make any
payment of any kind thereafter on such Subordinated Debt until all
Obligations have been paid and performed in full and any applicable
preference period has expired.
7.5 LOSS OF ELIGIBILITY. Take any action that would cause the
Company to 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 CURRENT RATIO. Permit the ratio of current assets to
current liabilities of the Company and its Subsidiaries, determined on a
consolidated basis in accordance with GAAP, at any time to exceed 1.01 to
1.
7.7 DEBT TO TANGIBLE NET WORTH RATIO OF COMPANY. Permit the
ratio of Debt (excluding, for this purpose only, Debt arising under the
Hedging Arrangements, to the extent of assets arising under the same
Hedging Arrangements) to Tangible Net Worth of the Company (and its
Subsidiaries, on a consolidated basis) at any time to exceed 10 to 1.
7.8 MINIMUM TANGIBLE NET WORTH OF COMPANY. Permit Tangible Net
Worth of the Company (and its Subsidiaries, on a consolidated basis) at
any time to be less than $10,000,000, plus at least 37.5% of the net
proceeds of any shares of stock of the Guarantor sold on or after the
Closing Date.
7.9 LIABILITY GROWTH. Permit the liabilities of the Company
and its Subsidiaries determined in accordance with GAAP, at the end of
any Fiscal Quarter to exceed 150% of such
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liabilities at the end of the preceding Fiscal Quarter.
7.10 DIVIDENDS. For each fiscal year, declare or pay dividends
in excess of 25% of the Company's net income earned in such fiscal year
as determined on a fiscal year-to-date basis, less dividends previously
declared in such fiscal year. Any Dividends declared based on the
Company's net income for any fiscal year must be paid by the end of the
second quarter of the next succeeding fiscal year.
7.11 TRANSACTIONS WITH AFFILIATES. Directly or indirectly (a)
make any loan, advance, extension of credit or capital contribution to
any of its Affiliates, (b) transfer, sell, pledge, assign or otherwise
dispose of any of its assets to or on behalf of such Affiliates, (c)
merge or consolidate with any of its Affiliates, or purchase or acquire
assets from any of its Affiliates other than purchasers of Mortgage Loans
on the date of origination from wholly-owned Subsidiaries in the ordinary
course of business and on terms no less favorable to the Company than
those that could be obtained in a transaction with an unaffiliated
Person, or (d) pay management fees in excess of $1,000,000 per month to
or on behalf of such Affiliates.
7.12 ACQUISITION OF RECOURSE SERVICING CONTRACTS. Acquire
Servicing Contracts under which the Company is obligated to repurchase or
indemnify the holder of the Mortgage Loans as a result of defaults on the
Mortgage Loans at any time during the term of such Mortgage Loans.
7.13 GESTATION FACILITIES. Directly or indirectly sell or
finance Pledged Mortgages under any Gestation Agreements.
7.14 SALE OF STOCK OF GUARANTOR. The Guarantor shall contribute
to the Company in the form of a capital contribution an amount equal to
not less than 37.5% of the net proceeds obtained from the sale of any
shares of stock of the Guarantor.
7.15 SPECIAL NEGATIVE COVENANTS CONCERNING COLLATERAL.
7.15(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 Pledged Securities.
7.15(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.
7.15(c) The Company shall not make any
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compromise, adjustment or settlement in respect of any of the
Collateral or accept other than cash in payment or liquidation of
the Collateral.
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 to pay the principal of any Advance when
due, whether at stated maturity, by acceleration, or otherwise; or
failure to pay any installment of interest on any Advance or any
other amount due under this Agreement within 10 days after the due
date; or failure to pay, within any applicable grace period, any
other Obligations of the Company due 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; breach or default
with respect to any other material term of any other indebtedness
or of any loan agreement, mortgage, indenture or other agreement
relating thereto, if the effect of such breach or default is to
cause, or to permit the holder or holders thereof (or a trustee on
behalf of such holder or holders) to cause, indebtedness of the
Company or its Subsidiaries in the aggregate amount of $100,000 or
more to become or be declared due prior to its stated maturity
(upon the giving or receiving of notice, lapse of time, both, or
otherwise); or
8.1(c) Failure of the Company to perform or comply with
any term or condition applicable to it contained in Sections 6.3
(with respect to corporate existence) or 0, or in any Section of
Article 7 of this Agreement; PROVIDED, that if the Company fails
to comply with Section 7.8 hereof at any time solely because of a
determination by the Lender to deem any assets that were
previously included in the calculation of Tangible Net Worth
unacceptable for purposes of such calculating under its
discretionary right to do so, no Event of Default shall occur if
the Company increases its Tangible Net Worth by the value of such
assets within 15 days after the Lender notifies the Company of
such determination; or
8.1(d) Any of the Company's representations or warranties
made or deemed made herein or in any other Loan Document (other
than the representations and
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warranties set forth in Section 5.15 hereof), 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;
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 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 or any Guarantor in an involuntary case under any
applicable bankruptcy, insolvency or other similar law in respect
of the Company, any Subsidiary of the Company or any Guarantor now
or hereafter in effect, which decree or order is not stayed; the
Company, any Subsidiary of the Company or any Guarantor 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 or any Guarantor 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 or any Guarantor 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 of any Guarantor, or over all or a substantial part of
their respective property, shall have been entered; or the
involuntary appointment of an interim or permanent receiver,
trustee or other custodian of the Company, any Subsidiary of the
Company or any Guarantor for all or a substantial part of their
respective property; or the issuance of a warrant of attachment,
execution or similar process against any substantial part of the
property of the Company, any Subsidiary of the Company or any
Guarantor, and the continuance of any such events in Subsection
(2) above for 60 days unless dismissed, bonded off or discharged;
or
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8.1(g) The Company, any Subsidiary of the Company or any
Guarantor 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 or any Guarantor of any assignment for the benefit of
creditors; or the inability or failure of the Company, any
Subsidiary of the Company or any Guarantor, or the admission by
the Company, any Subsidiary of the Company or any Guarantor 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 $500,000; or
8.1(i) Any money judgment, writ or warrant of attachment,
or similar process involving in any case an amount in excess of
$100,000 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 30 days or in any event later than 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 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 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
$100,000 (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
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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 $100,000; or
8.1(m) The Company or the Guarantor shall purport to
disavow its obligations hereunder or under the Guaranty, as the
case may be, or shall contest the validity or enforceability
hereof or of the Guaranty; or the Lender's security interest on
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 10 days of the date of such impairment; or
8.1(n) Mark L. Korell shall cease to be the chairman and
chief executive officer of the Guarantor; or
8.1(o) Any Lien for any taxes, assessments or other
governmental charges (i) is filed against the Company or any of
its property, or is otherwise enforced against the Company or any
of its property, or (ii) obtains priority that is equal or greater
than the priority of the Lender's security interest in any of the
Collateral; or
8.1(p) A material adverse change occurs, or is reasonably
likely to occur, in the business condition (financial or
otherwise), operations, properties or prospects of the Company, or
in the ability of the Company to repay the Obligations; PROVIDED,
that the Company's anticipated losses for its fiscal year ending
April 30, 2000 described on EXHIBIT N hereto shall not constitute
a material adverse change for purposes of this Section 8.1(p); or
8.1(q) The Guarantor is removed from the NASDAQ list of
publicly held corporations; or
8.1(r) The Guarantor has an aggregate net loss for the
portion of any fiscal year ending on the last day of any Fiscal
Quarter greater than the "Permitted Cumulative Loss" for such
portion of such fiscal year, as set forth on EXHIBIT N hereto; or
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8.1(s) The ratio of Debt (excluding, for this purpose
only, Debt arising under Hedging Arrangements, to the extent of
units arising under the same Hedging Arrangements) to Tangible Net
Worth of the Company (and its Subsidiaries, on a consolidated
basis) at any time exceeds 10 to 1.
8.1(t) The Tangible Net Worth of the Guarantor (and its
Subsidiaries, on a consolidated basis) is at any time less than
$13,000,000 plus 75% of the net proceeds of any shares of stock of
the Guarantor sold on or after the Closing Date.
8.1(u) The liabilities of the Guarantor (and its
Subsidiaries, on a consolidated basis), determined in accordance
with GAAP at the end of any Fiscal Quarter, exceed 150% of such
liabilities at the end of the preceding Fiscal Quarter.
8.1(v) The Company's approval as an RFC seller is
terminated, or the Company loses any of its other approvals as a
lender or a seller set forth in Section 5.13 of the Agreement; or
8.1(w) Either the Company or the Guarantor receive
outside financing for warehousing Subprime Mortgage Loans.
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 Note 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
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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 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; and
obtain access to the Company's data processing equipment,
computer hardware and software relating to the Collateral
and to use all of the foregoing and the information
contained therein in any manner the Lender deems necessary
for the purpose of effectuating its rights under this
Agreement and any other Loan Document.
(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,
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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 10 days' notice of any such public sale or of
the date after which any private sale may be held. The
Company agrees that 10 days' notice shall be reasonable
notice. The Lender may, without notice or publication,
adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and
place fixed for the sale, and such sale may be made at any
time or place to which the same may be so adjourned. In
case of any sale of all or any part of the Collateral on
credit or for future delivery, the Collateral so sold may
be retained by the Lender until the selling price is paid
by the purchaser thereof, but the Lender shall not incur
any liability in case of the failure of such purchaser to
take up and pay for the Collateral so sold and, in case of
any such failure, such Collateral may again be sold upon
like notice. 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 Note or
against the Guarantor under the Guaranty or both.
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. 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. Any sale of
Collateral pursuant to the terms of a Purchase
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Commitment, or any other disposition of Collateral arranged by the
Company, whether before or after the occurrence of an Event of
Default, 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 Pledged Mortgages or Pledged 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 Note.
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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 Lender is hereby granted a license or other
right to use, without charge, the Company's computer programs,
other programs, labels, patents, copyrights, rights of use of any
name, trade secrets, trade names, trademarks, service marks and
advertising matter, or any property of a similar nature, as it
pertains to the Collateral, in advertising for sale and selling
any Collateral, and the Company's rights under all licenses and
all other agreements related to the foregoing shall inure to the
Lender's benefit until the Obligations are paid in full.
8.2(j) 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 Fannie
Mae, Freddie Mac or any other Investor in order to obtain the
consent of Fannie Mae, Freddie Mac 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 to the
Obligations in such order as the Lender, in its sole and absolute
discretion, shall determine from and
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after the indefensible payment to the Lender of all of the Obligations,
any remaining proceeds shall be paid:
FIRST, to the payment of the costs and expenses of such sale or
enforcement, including reasonable compensation to the Lender's agents and
counsel, and all expenses, liabilities and advances made or incurred by
or on behalf of the Lender in connection therewith;
SECOND, to the payment of the Obligations in such order as the
Lender, in its sole discretion, determines; 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 sale, disposition or other enforcement are
insufficient to cover the costs and expenses of the sale, and the payment
in full of all Obligations, the Company will 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.
8.5 RIGHT OF SET-OFF. If the Company shall default in the
payment of the Note, any interest accrued thereon, or any other sums
which may become payable hereunder when due, or in the performance of any
of its other obligations or liabilities under this Agreement, the Lender
shall have the right, at any time and from time to time, without notice,
to set-off and to appropriate or apply any and all 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 Note and this Agreement,
irrespective of whether or not the Lender shall have made any demand
hereunder and whether or not said
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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, by telecopy or by
overnight courier, or if mailed, on the date of receipt as noted on the return
receipt, addressed as follows:
if to the Company: Monument Mortgage, Inc.
3021 Citrus Circle
Suite 150
Walnut Creek, California 94598
Attn: Chief Financial Officer
Telecopier No.: (925) 944-7040
if to the Lender: Residential Funding Corporation
1646 North California Blvd.
Suite 400
Walnut Creek, CA 94596
Attention: Graham Shipman, Director
Telecopier No.: (925) 935-6424
10. REIMBURSEMENT OF EXPENSES; INDEMNITY.
The Company shall: (a) pay a documentation production fee of $5,000 in
connection with the preparation and negotiation of this Agreement; (b) pay such
additional documentation production fees as the Lender may require and all
out-of-pocket costs and expenses of the Lender, including, without limitation,
reasonable fees, service charges and disbursements of counsel (including
allocated costs of internal counsel), in connection with the amendment,
enforcement and administration of this Agreement, the Note, 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 Note from and against, any and all present and future stamp,
documentary and other similar taxes with respect to the foregoing matters and
save the Lender and the holder or holders of the Note harmless from and against
any and all liabilities with respect to or resulting from any delay or omission
to pay such taxes; and (d) indemnify, pay and hold harmless the Lender and any
of its officers, directors, employees or agents and any subsequent holder of the
Note (collectively called the "Indemnitees") from and against any and all
liabilities,
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obligations, losses, damages, penalties, judgments, suits, costs, expenses and
disbursements of any kind or nature whatsoever (including without limitation,
the reasonable fees and disbursements of counsel of the Indemnitees (including
allocated costs of internal counsel) in connection with any 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 Note, or any other Loan Document or any of the transactions
contemplated hereby or thereby (the "Indemnified Liabilities"); provided,
however, that the Company shall have no obligation hereunder with respect to
Indemnified Liabilities arising from the goss negligence 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 Note. 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 representations, warranties, covenants and
agreements herein contained on the part of the Company shall survive the
making of any Advance and the execution of the Note, and shall be
effective so long as the Commitment is outstanding or there remain any
Obligations to be paid or performed.
12.2 ASSIGNMENT. This Agreement cannot be assigned by the
Company. This Agreement and the Note, along with the Lender's security
interest in any or all of the Collateral,
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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 Note and
its security interest in the Collateral so assigned.
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, 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. 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 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
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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 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 business.
12.9 CONSENT TO CREDIT REFERENCES. The Company hereby consents to
the disclosure of information regarding the Company and its relationships
with the Lender to Persons making credit inquiries to the Lender. This
consent is revocable by the Company at any time upon Notice to the Lender
as provided in Section 0 hereof.
12.10 CONSENT TO JURISDICTION. The Company hereby agrees that any
action or proceeding under the Loan Documents, the Note 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.
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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 Note 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.
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) FULLY WAIVES ANY RIGHT TO TRIAL BY
JURY TO THE EXTENT THAT ANY SUCH RIGHT NOW EXISTS OR HEREAFTER ARISES.
THE LENDER AND THE COMPANY EACH GIVES THIS WAIVER OF RIGHT TO JURY TRIAL
KNOWINGLY AND VOLUNTARILY. 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 FOR WHICH THE RIGHT OF A JURY TRIAL WOULD
OTHERWISE ACCRUE. THE LENDER AND THE COMPANY ARE EACH HEREBY AUTHORIZED
AND REQUESTED TO SUBMIT THIS AGREEMENT TO ANY COURT HAVING JURISDICTION
OVER THE SUBJECT MATTER AND THE PARTIES HERETO, SO AS TO SERVE AS
CONCLUSIVE EVIDENCE OF THIS 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.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
MONUMENT MORTGAGE, INC.,
a California corporation
By:
----------------------------------
Its:
----------------------------------
RESIDENTIAL FUNDING CORPORATION,
a Delaware corporation
By:
----------------------------------
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Its: Director
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On , 1999 before me, a Notary Public, personally
appeared , the of
MONUMENT MORTGAGE, INC., a California 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 , 1999 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:
---------------
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EXHIBIT A
PROMISSORY NOTE
$75,000,000 Date: June 30, 1999
FOR VALUE RECEIVED, the undersigned, MONUMENT MORTGAGE, INC., a
California corporation (herein called the "Company"), hereby promises to pay to
the order of RESIDENTIAL FUNDING CORPORATION, a Delaware corporation (the
"Lender" or, together with its successors and assigns, the "Holder") whose
principal place of business is 8400 Normandale Lake Blvd., Suite 600,
Minneapolis, Minnesota 55437, or at such other place as the Holder may
designate from time to time, the principal sum of $75,000,000 or so much thereof
as may be outstanding from time to time pursuant to the First Amended and
Restated Warehousing Credit and Security Agreement described below, and to pay
interest on said principal sum or such part thereof as shall remain unpaid from
time to time, from the date of each Advance until repaid in full, and all other
fees and charges due under the Agreement, at the rates and at the times set
forth in the Agreement. All payments hereunder shall be made in lawful money of
the United States and in immediately available funds.
This Note is given to evidence an actual warehouse line of credit in the
above amount and is the Note referred to in that certain First Amended and
Restated Warehousing Credit and Security Agreement (the "Agreement") dated the
date hereof between the Company and the Lender, as the same may be amended or
supplemented from time to time, and is entitled to the benefits thereof.
Reference is hereby made to the Agreement (which is incorporated herein by
reference as fully and with the same effect as if set forth herein at length)
for a description of the Collateral, a statement of the covenants and
agreements, a statement of the rights and remedies and securities afforded
thereby and other matters contained therein. Capitalized terms used herein,
unless otherwise defined herein, shall have the meanings given them in the
Agreement.
This Note may be prepaid in whole or in part at any time without premium
or penalty.
Should this Note be placed in the hands of attorneys for collection, the
Company agrees to pay, in addition to principal and interest, fees and charges
due under the Agreement, any and all costs of collecting this Note, including
reasonable attorneys' fees and expenses.
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The Company hereby waives demand, notice, protest and presentment.
This Note shall be construed and enforced in accordance with the laws of
the State of Minnesota, without reference to its principles of conflicts of law.
IN WITNESS WHEREOF, the Company has executed this Note as of the day and
year first above written.
MONUMENT MORTGAGE, INC.,
a California corporation
By:
---------------------------------
Its:
--------------------------------
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _____________, ____________, before me, a Notary Public, personally
appeared ____________________, the _________________ of MONUMENT MORTGAGE, INC.,
a California 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:
--------------
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EXHIBIT B
GUARANTY
THIS GUARANTY, made and entered into as of this 30th day of June 1999, by
FiNET.COM, INC., a Delaware corporation (the "Guarantor"), to RESIDENTIAL
FUNDING CORPORATION, a Delaware corporation (the "Lender"), having its principal
office at 8400 Normandale Lake Blvd., Suite 600, Minneapolis, Minnesota 55437.
RECITALS
A. MONUMENT MORTGAGE, INC., a California corporation (the "Company")
and the Lender have agreed that the Lender will extend a warehouse
line of credit to the Company in the principal amount of
$75,000,000 (the "Loan") to finance the making and purchasing of
Mortgage Loans.
B. The Loan is evidenced by a Warehousing Promissory Note dated of
even date herewith from the Company to the Lender, as the same may
be amended, supplemented or otherwise modified from time to time,
including any other instruments executed and delivered in renewal,
extension, rearrangement or otherwise in replacement of such
Promissory Note (the "Note") and by a First Amended and Restated
Warehousing Credit and Security Agreement of even date herewith,
as the same may be amended, supplemented or otherwise modified
from time to time, including any other instruments executed and
delivered in renewal, extension, rearrangement or otherwise in
replacement of such agreement (the "Agreement").
C. The Guarantor is the sole shareholder of the Company and will
derive benefit from the Loan.
D. As a condition to making the Loan, the Lender has required that
the Guarantor execute and deliver this Guaranty. In order to
induce the Lender to make Advances under the Agreement, to accept
the Notes and the Agreement, the Guarantor has agreed to give this
Guaranty.
E. The Lender has refused to make Advances under the Agreement unless
this Guaranty is executed by the Guarantor and delivered to
Lender.
AGREEMENT
NOW, THEREFORE, in consideration of the recitals and other good and
valuable consideration, the receipt and sufficiency of
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which is hereby acknowledged, the Guarantor hereby covenants and agrees with the
Lender as follows:
1. Unless otherwise defined herein, all capitalized terms used herein
shall have the meanings ascribed to such terms in the Agreement.
2. The Guarantor hereby irrevocably, unconditionally and absolutely
guarantees to the Lender the due and prompt payment, and not just the
collectibility, of the principal of, and interest, fees and late charges and all
other indebtedness, if any, on the Notes when due, whether at maturity, by
acceleration or otherwise all at the times and places and at the rates described
in, and otherwise according to the terms of the Notes and the Agreement, whether
now existing or hereafter created or arising.
3. The Guarantor further hereby irrevocably, unconditionally and
absolutely guarantees to the Lender the due and prompt performance by the
Company of all duties, agreements and obligations of the Company contained in
the Notes and the Agreement, and the due and prompt payment of all costs and
expenses incurred, including, without limitation, attorneys' fees, court costs
and all other litigation expenses (including but not limited to expert witness
fees, exhibit preparation, and courier, postage, communication and document
copying expenses), in enforcing the payment and performance of the Notes and the
Agreement and this Guaranty (the payment and performance of the items set forth
in Paragraphs 2 and 3 of this Guaranty are collectively referred to as the
"Guaranteed Debt").
4. In the event the Company shall at any time fail to pay the Lender
any principal of or interest on or other sums constituting any Guaranteed Debt
when due, whether by acceleration or otherwise, the Guarantor promises to pay
such amount to the Lender forthwith, together with all collection costs and
expenses, including, without limitation, attorneys' fees, court costs and all
other litigation expenses (including but not limited to expert witness fees,
exhibit preparation, and courier, postage, communication and document copying
expenses). Any sum required to be paid by the Guarantor to the Lender pursuant
to this Guaranty shall bear interest from the date such sum becomes due until
paid at a per annum rate equal to the Default Rate.
5. The Guarantor hereby authorizes the Lender, following the
occurrence of an Event of Default, without notice or demand, to apply any
property, balances, credits, accounts or moneys of the Guarantor then in the
possession of Lender, or standing to the credit of the Guarantor, to the payment
of such Guaranteed Debt.
6. The Guarantor does hereby (a) agree to any modifications of any
terms or conditions of any Guaranteed Debt
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and/or to any extensions or renewals of time of payment or performance by the
Company; (b) that it shall not be necessary for the Lender to resort to legal
remedies against the Company before proceeding hereunder, nor to take any action
against any other Person obligated (an "Obligor") for payment or performance of
the Guaranteed Debt or against any collateral for the Guaranteed Debt before
proceeding against the Guarantor; (c) agree that no release of the Company or
any other guarantor or Obligor, and no release, exchange or nonperfection of any
collateral for the Guaranteed Debt, whether by operation of law or by any act or
failure to act by the Lender, with or without notice to the Guarantor, shall
release the Guarantor; (d) waive presentment, demand, notice of demand,
dishonor, notice of dishonor, protest, and notice of protest and any other
notice with respect to any Guaranteed Debt and this Guaranty, and promptness in
commencing suit against any party thereto or liable thereon and/or in giving any
notice to or making any claim or demand hereunder upon the Guarantor; (e) waive
any defense arising by reason of any disability or other defense of the Company
for payment of the Guaranteed Debt or any part thereof or by reason of the
cessation from any cause whatsoever of the liability of the Company therefor
other than full payment of the Guaranteed Debt; or (f) waive, to the extent
permitted by law, all benefit of valuation, appraisement, and exemptions under
the laws of the State of Minnesota or any other state or territory of the United
States.
7. The obligations of the Guarantor hereunder shall be primary,
absolute and unconditional, and shall remain in full force and effect without
regard to, and shall not be impaired or affected by: (a) the genuineness,
validity, regularity or enforceability of, or any amendment or change in the
Agreement or the Notes, or any change in or extension of the manner, place or
terms of payment of, all or any portion of the Guaranteed Debt; (b) the taking
or failure to take any action to enforce the Agreement or the Notes, or the
exercise or failure to exercise any remedy, power or privilege contained therein
or available at law or otherwise, or the waiver by the Lender of any provisions
of the Agreement or the Notes; (c) any impairment, modification, change, release
or limitation in any manner of the liability of the Company or its estate in
bankruptcy, or of any remedy for the enforcement of the Company's liability,
resulting from the operation of any present or future provision of the
bankruptcy laws or any other statute or regulation, or the dissolution,
bankruptcy, insolvency, or reorganization of the Company; (d) the merger or
consolidation of the Company, or any sale or transfer by the Company of all or
part of its assets or property; (e) any claim the Guarantor may have against
any other Obligor, including any claim of contribution; (f) the release, in
whole or in part, of any other guarantor (if more than one), the Company or any
other Obligor; (g) any settlement or compromise with any Obligor with respect to
any Guaranteed Debt and/or the subordination of the payment of the Guaranteed
Debt or any part thereof to the
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payment of any other debts or claims which may at any time be due and owing to
the Lender and/or any other Person; or (h) any other action or circumstance
which (with or without notice to or knowledge of the Guarantor) may or might in
any manner or to any extent vary the risks of the Guarantor hereunder or
otherwise constitute a legal or equitable discharge or defense, it being
understood and agreed bythe Guarantor that the obligations under this Guaranty
shall not be discharged except by the full payment and performance of the
Guaranteed Debt.
8. The Lender shall have the right to determine how, when and what
application of payments and credits, if any, whether derived from the Company or
from any other source, shall be made on the Guaranteed Debt and any other
indebtedness owed by the Company and/or any other Obligor to the Lender. The
Lender shall be under no obligation to marshal any assets in favor of the
Guarantor or in payment of all or any part of the Guaranteed Debt.
9. The obligations of the Guarantor hereunder shall continue to be
effective, or be automatically reinstated, as the case may be, if at any time
the performance or the payment, as the case may be, in whole or in part, of any
of the Guaranteed Debt is rescinded or must otherwise be restored or returned by
the Lender (as a preference, fraudulent conveyance or otherwise) upon the
insolvency, bankruptcy, dissolution, liquidation or reorganization of the
Company, the Guarantor or any other person or upon or as a result of the
appointment of a custodian, receiver, trustee or other officer with similar
powers with respect to the Company, the Guarantor or any other person, or any
substantial part of its property, or otherwise, all as though such payments had
not been made. If an Event of Default shall at any time have occurred and be
continuing or shall exist and declaration of default or acceleration under or
with respect to this Guaranty or any Guaranteed Debt shall at such time be
prevented by reason of the pendency against the Guarantor or the Company or any
other Person of a case or proceeding under a bankruptcy or insolvency law, the
Guarantor agrees that, for purposes of this Guaranty and its obligations
hereunder, this Guaranty and such obligations shall be deemed to have been
declared in default or accelerated with the same effect as if this Guaranty and
such obligations had been declared in default and accelerated in accordance with
their respective terms and the Guarantor shall forthwith perform or pay, as the
case may be, as required hereunder in accordance with the terms hereunder
without further notice or demand.
10. The Guarantor hereby irrevocably waives any claim or other rights
that the Guarantor may now or hereafter acquire against the Company that arises
from the existence, payment, performance or enforcement of the Guarantor's
obligations hereunder, including any right of subrogation, reimbursement,
exoneration, contribution or indemnification, any right to participate in any
claim or remedy of the Lender against the
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<PAGE>
Company or any collateral that the Lender now has or hereafter acquires, whether
or not such claim, remedy or right arises in equity or under contract, statute
or common law, including the right to take or receive from the Company directly
or indirectly, in cash or other property or by set-off or in any manner, payment
or security on account of such claim or other rights. If any amount shall be
paid to the Guarantor in violation of the preceding sentence and the Guaranteed
Debt shall not have been paid and performed in full, such amount shall be deemed
to have been paid to the Guarantor for the benefit of, and held in trust for,
the Lender and shall forthwith be paid to the Lender to be credited and applied
to the Guaranteed Debt, whether matured or unmatured. Notwithstanding the
blanket waiver of subrogation rights as set forth above, the Guarantor hereby
specifically acknowledges that any subrogation rights which the Guarantor may
have against the Company or any collateral that the Lender now has or hereafter
acquires may be destroyed by a nonjudicial foreclosure of the collateral.
Without limiting the foregoing, the Guarantor waives all rights and defenses
arising out of an election of remedies by the Lender, even though that election
of remedies, such as a nonjudicial foreclosure with respect to security for any
Guaranteed Debt, has destroyed the Guarantor's rights of subrogation and
reimbursement against the Company by the operation of Section 580d of the
California Code of Civil Procedure or otherwise. The Guarantor acknowledges
that the Guarantor will receive direct and indirect benefits from the
arrangements contemplated by the Agreement and the Notes and that the waivers
set forth in this Section are knowingly made in contemplation of such benefits.
11. The Guarantor waives any and all rights, benefits and defenses
available to sureties and creditors which might otherwise be available to the
Guarantor under Sections 2787 to 2855 inclusive, 2899 and 3433 of the California
Civil Code, as amended or recodified from time to time, and the benefit of any
statute of limitations affecting the liability of the Guarantor hereunder or the
enforcement hereof, including, without limitation any rights arising under
Section 359.5 of the California Code of Civil Procedure. Additionally, the
Guarantor waives the right to require the Lender to comply with the provisions
of Section 9504 of the California Commercial Code, as amended or recodified from
time to time. The Guarantor also waives all rights and defenses that the
Guarantor may have because any Guaranteed Debt is secured by real property.
This means, among other things: (1) the Lender may collect from the Guarantor
without first foreclosing on any real or personal property collateral pledged by
the Company or any other Obligor; (2) if the Lender forecloses on any real
property collateral pledged by the Company or any other Obligor: (a) the amount
of the Guaranteed Debt may be reduced only by the price for which that
collateral is sold at the foreclosure sale, even if the collateral is worth more
than the sale price; and (b) the Lender may collect from the Guarantor even if
the Lender, by foreclosing
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<PAGE>
on the real property collateral, has destroyed any right the Guarantor may have
to collect from the Company. This is an unconditional and irrevocable waiver of
any rights and defenses the Guarantor may have because the Guaranteed Debt is
secured by real property. These rights and defenses include, but are not
limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726
of the California Code of Civil Procedure.
12. No postponement or delay on the part of the Lender in the
enforcement of any right hereunder shall constitute a waiver of such right and
all rights of the Lender hereunder shall be cumulative and not alternative and
shall be in addition to any other rights granted to the Lender in any other
agreement or by law.
13. If any provision hereof shall be or 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 and this Guaranty shall be so construed.
14. This Guaranty shall be governed in all respects by the laws of the
State of Minnesota, other than its principles of conflicts of law, and shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective heirs, executors, administrators, personal representatives,
successors and assigns.
15. The Guarantor hereby agrees that any action or proceeding under
this Guaranty may be commenced against the Guarantor in any court of competent
jurisdiction within the State of Minnesota, by service of process upon the
Guarantor by first class registered or certified mail, return receipt requested,
addressed to the Guarantor at the Guarantor's address last known to the Lender.
The Guarantor agrees that any such suit, action or proceeding arising out of or
relating to this Guaranty may be instituted in the District Court of Hennepin
County, Minnesota or in the United States District Court for the District of
Minnesota, at the option of the Lender; and the Guarantor hereby waives any
objection to the jurisdiction or venue of any such court with respect to, or the
convenience of any such 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 Guarantor in any other jurisdiction
or court.
16. The Guarantor hereby represents and warrants to the Lender as
follows:
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(a) Organization and Qualification. The Guarantor is a corporation
duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation. The Guarantor is duly
qualified to do business as a foreign corporation and in good
standing in all jurisdictions in which the ownership of its
properties or the nature of its activities, or both, makes such
qualification necessary.
(b) Authority and Authorization. The Guarantor has full corporate
power and authority to execute, deliver and carry out the
provisions of this Guaranty and to perform its obligations
hereunder, and all such action has been duly and validly
authorized by all necessary corporate proceedings on its part.
(c) Financial Statements. All financial statements and data which
have heretofore been given to the Lender with respect to the
Guarantor fairly and accurately represent the financial condition
of the Guarantor as of the date hereof, and, since the date
thereof, there has been no material adverse change in the
financial condition of the Guarantor. The Guarantor shall
promptly deliver to the Lender, or to the Company in time for the
Company to deliver the same to the Lender, all financial
statements and tax returns of the Guarantor required by the
Agreement.
(d) Address. The address of the Guarantor as specified below is true
and correct and until the Lender shall have actually received a
written notice specifying a change of address and specifically
requesting that notices be issued to such changed address, the
Lender may rely on the address stated as being accurate.
(e) No Default. The Guarantor is not in default with respect to any
order, writ, injunction, decree or demand of any court or other
governmental authority, in the payment of any material debt for
borrowed money or under any material agreement evidencing or
securing any such debt.
(f) Solvent. The Guarantor is now solvent, and no bankruptcy or
insolvency proceedings are pending or to the best of the
Guarantor's knowledge contemplated by or against the Guarantor.
(g) Relationship to the Company. The value of the consideration
received and to be received by the Guarantor is reasonably worth
at least as much as the liability and obligation of the Guarantor
incurred or arising under this Guaranty. The Guarantor has had
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<PAGE>
full and complete access to the Agreement and the Notes and all
other loan documents relating to the Obligations and the
Guaranteed Debt, has reviewed them and is fully aware of the
meaning and effect of their contents. The Guarantor is fully
informed of all circumstances which bear upon the risks of
executing this Guaranty and which a diligent inquiry would reveal.
The Guarantor has adequate means to obtain from the Company on a
continuing basis information concerning the Company's financial
condition, and is not depending on the Lender to provide such
information, now or in the future. The Guarantor agrees that the
Lender shall not have any obligation to advise or notify the
Guarantor or to provide the Guarantor with any data or
information. The execution and delivery of this Guaranty is not
given in consideration of (and the Lender has not in any way
implied that the execution of this Guaranty is given in
consideration of) the Lender's making, extending or modifying any
loan to the Guarantor or to any other financial accommodation to
or for the Guarantor.
(h) Litigation. There is not now pending against or affecting the
Guarantor, nor to the knowledge of the Guarantor is there
threatened, any action, suit or proceeding at law or in equity or
by or before any administrative agency that, if adversely
determined, would materially impair or affect the financial
condition of the Guarantor.
(i) Taxes. The Guarantor has filed all federal, state, provincial,
county, municipal and other income tax returns required to have
been filed by the Guarantor and has paid all taxes that have
become due pursuant to such returns or pursuant to any assessments
received by the Guarantor, and the Guarantor does not know of any
basis for any material additional assessment against it in respect
of such taxes.
17. Neither the death nor the release of any person or party to this
Guaranty or any other guaranties of the Agreement and the Notes shall affect or
release the liability of the Guarantor. The obligations of the Guarantor
hereunder shall be in addition to any obligations of the Guarantor under any
other guaranties of the Guaranteed Debt and/or any obligations of the Company or
any other Persons heretofore given or hereafter to be given to the Lender, and
this Guaranty shall not affect or invalidate any such other guaranties. The
liability of the Guarantor to the Lender shall at all times be deemed to be the
aggregate liability of the Guarantor under the terms of this Guaranty and of any
other guaranties heretofore or hereafter given by the Guarantor to the Lender.
8
<PAGE>
18. No amendment or waiver of any provision of this Guaranty nor
consent to any departure by the Guarantor therefrom shall in any event be
effective unless the same shall be in writing and signed by the Lender, and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given. No notice to or demand on the Guarantor
shall in any case entitle it to any other or further notice or demand in similar
or other circumstances.
19. All notices that may be required or otherwise provided for or
contemplated under the terms of this Guaranty for any party to serve upon or
give to any other shall, whether or not so state, be in writing, and if not so
in writing shall not be deemed to have been given, and be either personally
served, sent by reputable overnight courier service, or sent with return receipt
requested by registered or certified mail with postage (including registration
or certification charges) prepaid, sent to the following address:
(a) If to the Guarantor, addressed to the address indicated
immediately following the Guarantor's signature;
(b) If to the Lender, addressed to the Lender at its address at
1646 North California Blvd., Suite 400, Walnut Creek, California 94596,
Attention: Graham Shipman, Director.
Such addresses may be changed from time to time by written notice to the other
parties given in the same manner. Any matter so served upon or sent to the
Guarantor or the Lender in the manner aforesaid shall be deemed sufficiently
given for all purposes hereunder (i) upon personal delivery, if personally
delivered, (ii) on the date following delivery to the courier service, if sent
by courier service, (iii) upon electronic confirmation of receipt, if sent by
facsimile, and (iv) on the date of receipt as noted on the return receipt, if
sent by registered or certified mail, except that notices of changes of address
shall not be effective until actual receipt.
20. Any indebtedness of the Company now or hereafter held by the
Guarantor is hereby subordinated to the indebtedness of the Company to the
Lender, and such indebtedness of the Company to the Guarantor shall, if the
Lender so requests, be collected, enforced and received by the Guarantor as
trustee for the Lender and be paid over to the Lender on account of the
indebtedness of the Company to the Lender, but without reducing or limiting in
any manner the liability of the Guarantor under the other provisions of the
Guaranty. The Guarantor acknowledges that, with respect to the indebtedness
guaranteed hereunder, the Guarantor has irrevocably waived all rights to
subrogation, reimbursement, and/or indemnification against the Company.
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<PAGE>
21. This Guaranty is intended as a final expression of this agreement
of guaranty and is intended also as a complete and exclusive statement of the
terms of this agreement. No agreement or understanding entered into prior to
the date hereof with respect to the subject matter hereof shall be binding upon
the Guarantor unless expressed herein. No course of prior dealings between the
Guarantor and the Lender, no usage of the trade, and no parole or extrinsic
evidence of any nature, shall be used or be relevant to supplement, explain,
contradict or modify the terms and/or provisions of this Guaranty.
22. Time is of the essence hereof.
23. THE GUARANTOR, BY ITS EXECUTION AND DELIVERY HEREOF, AND THE
LENDER, BY ITS ACCEPTANCE HEREOF, HEREBY (i) COVENANTS AND AGREES NOT TO ELECT A
TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND (ii) WAIVES ANY RIGHT
TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER
EXIST. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN, KNOWINGLY AND
VOLUNTARILY, BY THE GUARANTOR AND BY 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 IS HEREBY AUTHORIZED AND
REQUESTED TO SUBMIT THIS WAIVER TO ANY COURT HAVING JURISDICTION OVER THE
SUBJECT MATTER AND THE PARTIES HERETO, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF
THE FOREGOING WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, THE GUARANTOR HEREBY
CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF THE LENDER, INCLUDING THE LENDER'S
COUNSEL, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO THE GUARANTOR OR ITS
REPRESENTATIVES OR AGENTS THAT THE LENDER WILL NOT SEEK TO ENFORCE THIS WAIVER
OF RIGHT TO JURY TRIAL PROVISION.
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<PAGE>
IN WITNESS WHEREOF, the Guarantor has executed this Guaranty with the
intent to be legally bound as of the date first above written.
FiNET.COM, INC.,
a Delaware corporation
By:
---------------------------------
Its:
--------------------------------
Address: 3021 Citrus Circle
Walnut Creek, CA 94596
Telephone No.: (925) 906-5870
Telecopier No.:
---------------------
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _________________, 1999 before me, a Notary Public, personally
appeared ____________________________, the __________________of FiNET.COM, INC.,
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:
--------------
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<PAGE>
EXHIBIT C-SF
REQUEST FOR ADVANCE SINGLE FAMILY MORTGAGE LOAN
Mortgage Company: MONUMENT MORTGAGE, INC.
Mortgagor: ________________________ Loan Number: ___________________________
________________________ Reviewed By: ___________________________
Address: ________________________ Warehouse Date: ___________________________
________________________ Effective Date: ___________________________
Status: Committed _______________ Loan Type: Prime _______FHA_____ VA_______
Uncommitted _____________ Subprime ___________ Grade_____
Wet Settlement __________ "D" ___________________________
Received ________________ High LTV ____ Credit Score ____
Open-end Second _________ Title I _______________________
Closed-end Second _______ HUD 203(K) ____________________
3rd Party Originated ____ RFC ___________________________
Section 32 ______________ Fixed _________ Term___________
ARM ___________ Type __________
Balloon ________ Type _________
Mortgage Note Amount: _______________ Interest Rate: __________________________
Mortgage Note Date: _________________ Requested Warehouse Amt: ________________
Investor: ___________________________ Expiration Date: ________________________
Purchase Commitment No: _____________ Title Company: __________________________
Committed Purchase Price: ___________ Address: _____________________________
Phone No.: ____________________________
METHOD OF ADVANCE
( ) Check Funding/Disbursement
Check No: ________________________ Amount: ___________________________
Checking Account No: _____________
( ) Wire Transfer
Amount of Wire: __________________ Date of Wire: __________________
Credit Acct. No.: ________________ Credit Acct. Name: ________________
ABA No.: _________________________ Bank Name: _______________________
Account to Debit: ________________ City & State: ________________
Ref: ________________ Advise: ___________________ Phone: _______________
REQUIRED DOCUMENTATION
Attached please find the following documents in connection with the above
request (Please check attached documents below):
Right
( ) Original and 1 copy of Mortgage Note
( ) Certified copy of Mortgage
( ) Section 32 Compliance Documents (if applicable)
( ) *Copy of Investor Purchase Commitment (or satisfactory evidence thereof)
( ) *HUD 203(K) Maximum Mortgage Worksheet (HUD 203(K) Mortgage Loans only)
( ) *Evidence of initial Advance amount (open-end Second Mortgage Loans)
( ) *Copy of EquityWise Certificate (Required for High LTV Loans)
( ) *Copy of HUD-1 Settlement Statement or equivalent
(Title I Mortgage Loans only)
Left
( ) *Request for Advance (original and 1 copy)
( ) *Copy of settlement or funding check (if applicable)
( ) Recordable assignment of Mortgage
( ) Certified copies of interim assignments of Mortgage (if applicable)
Please Note: Items designated with the "*" are required prior to a Wet
Settlement Advance.
<PAGE>
For the new value this day received, MONUMENT MORTGAGE, INC. (the "Company"),
hereby creates and grants in favor and for the benefit of RESIDENTIAL FUNDING
CORPORATION (the "Lender"), a security interest in and to the Mortgage Loan
described above, together with all related Collateral, as more particularly
described in the First Amended and Restated Warehousing Credit and Security
Agreement (as amended, supplemented or otherwise modified) between the Company
and the Lender.
MONUMENT MORTGAGE, INC.
Authorized Signature:
---------------------------------
<PAGE>
EXHIBIT D-SF
PROCEDURES AND DOCUMENTATION FOR
WAREHOUSING SINGLE FAMILY MORTGAGE LOANS
The Company must satisfy the following procedures and documentation
requirements for Advances under the Agreement. All documents must be
satisfactory to the Lender in its sole discretion. The HUD, Fannie Mae and
Freddie Mac form numbers referred to in this Exhibit are for convenience only.
The Company must use the equivalent forms required at the time of delivery of
the Mortgage Loans or Mortgage-backed Securities. All Advance Requests and
Collateral Documents must be submitted to the Lender in a top tabbed, legal size
manila file folder, hole-punched and acco-fastened in the order specified in the
Advance Request. Each folder must be labelled with the mortgagor name(s),
Company loan number and Company name. If a Wet Settlement Advance is being
requested, the Advance Request and required Collateral Documents should be
submitted in accordance with the above instructions. The remaining Collateral
Documents must be submitted with a cover letter identifying the mortgagor
name(s) and Company loan number.
I. Prior to making a Wet Settlement Advance, the Lender must receive the
following:
(1) Estimate of the amount of the requested Advance 1 BUSINESS DAY
prior to the date the requested Advance is to be made.
(2) Copy of settlement or funding check issued to the escrow/title
company, if applicable.
(3) Either an Electronic Advance Request (including RFConnects Pledge
Agreement and list of Mortgage Loans) or an original, written
Advance Request against Single Family Mortgage Loans (Exhibit
C-SF) and 1 copy of same.
(4) Copy of the Purchase Commitment or satisfactory evidence thereof
and, for each High LTV Mortgage Loan, a copy of the EquityWise
Certificate.
(5) Evidence of initial Advance amount (open-end Second Mortgage Loans
only).
(6) A copy of the HUD-1 Settlement Statement or equivalent (Title I
Mortgage Loans only).
(7) A copy of HUD 203(K) Maximum Mortgage Worksheet (HUD 203(K)
Mortgage Loans only).
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<PAGE>
The following must be received by the Lender within 7 BUSINESS DAYS of
the date the Wet Settlement Advance is to be made:
(8) Original signed Mortgage Note, endorsed by the Company in blank
with corresponding interim endorsements, if applicable, and 1 copy
of same.
(9) Copy of the Mortgage certified true by the escrow/title company.
(10) Copies of all interim assignments of the Mortgage certified true
by the escrow/title company (recorded or sent for recordation).
Mortgage Note must bear corresponding endorsements.
(11) An assignment of the Mortgage, endorsed by the Company in blank,
in recordable form but unrecorded.
(12) Completed Company Worksheet Concerning Applicability of Section 32
of Regulation Z (12 CFR Section 226.32) and, if Section 32
applies, copies of the disclosure and other related documentation
delivered to the mortgagor, or executed by the mortgagor,
evidencing compliance with Section 32 (if applicable).
II. Prior to the making of an Advance (other than a Wet Settlement Advance),
the Lender must receive all of the Collateral Documents listed in Section
I above.
III. Only the Lender will deliver the Mortgage Notes and other original
Collateral Documents evidencing Pledged Mortgages or Pledged Securities
and related pool documents to the Investor or pool custodian, unless
otherwise agreed in writing.
A. The following procedures must be followed for deliveries of Pledged
Mortgages:
No later than 1 BUSINESS DAY prior to the requested shipment date, the
Lender must receive the following:
(1) Signed shipping instructions or authenticated shipping
instructions sent via RFConnects Delivery for the delivery of the
Pledged Mortgages including the following:
(a) Name and address of the office of the Investor to which the
loan documents are to be shipped, the desired shipping date
and the preferred method of delivery;
(b) Instructions for endorsement of the Mortgage Note;
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<PAGE>
(c) Names of mortgagor(s), Mortgage Note Amounts of Pledged
Mortgages to be shipped and the Company's loan number; and
(d) Commitment number and expiration date of the Purchase
Commitment.
(2) For deliveries of Pledged Mortgages to Fannie Mae for cash
purchase, the following additional documents are required:
(a) Copy of Loan Schedule (Fannie Mae Form 1068 or 1069)
showing the Lender's designated Fannie Mae payee code as
recipient of the loan purchase proceeds.
(3) For deliveries of Pledged Mortgages to Freddie Mac for cash
purchase, the following additional documents are required:
(a) Original completed Warehouse Lender Release of Security
Interest (Freddie Mac Form 996) to be executed by the
Lender, designating the Lender as the Warehouse Lender and
showing the Cash Collateral Account designated by the
Lender as the receiving account for loan purchase proceeds.
(b) Copy of Wire Transfer Authorization for a Cash Warehouse
Delivery (Freddie Mac Form 987), designating the Lender as
the Warehouse Lender and showing the Cash Collateral
Account designated by the Lender as the receiving account
for loan purchase proceeds.
B. In the event Pledged Mortgages are delivered to a pool custodian, other
than an Approved Custodian, payment of the related Advance is required
within 2 BUSINESS DAYS of shipment.
The following procedures are to be followed for deliveries of Pledged
Mortgages to Approved Custodians:
No later than 1 BUSINESS DAY prior to the requested shipment date and no
later than 1 BUSINESS DAY prior to required delivery date to the Approved
Custodian, the Lender must receive the following:
(1) Signed shipping instructions or authenticated shipping
instructions sent via RFConnects Delivery for the delivery of the
Pledged Mortgages to the Approved Custodian including the
following:
(a) Name and address of the office of the Approved Custodian to
which the loan documents are to be shipped, the desired
shipping date and the preferred method of delivery;
(b) Instructions for endorsement of the Mortgage Note;
(c) Names of mortgagor(s) and Mortgage Note Amounts of
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<PAGE>
Pledged Mortgages to be shipped and the Company's loan
number; and
(d) Commitment number and expiration date of the Purchase
Commitment for the Pledged Securities.
(2) For Fannie Mae Mortgage-backed Securities issuance, the following
additional documents are required:
(a) Copy of Schedule of Mortgages (Fannie Mae Form 2005 or
2025).
(b) Copy of Delivery Schedule (Fannie Mae Form 2014),
instructing Fannie Mae to issue the Mortgage-backed
Securities in the name of the Company with the Lender as
pledgee and to deliver the Mortgage-backed Securities to
the Lender's custody account at The Chase Manhattan Bank
(CHASE NYC/CUST/G55026) and bearing the following
instructions: "These instructions may not be changed
without the prior written consent of Residential Funding
Corporation, Preston A. Lyvers, Managing Director or
Michele Troughton, Director."
(3) For Freddie Mac Mortgage-backed Securities issuance, the following
additional documents are required:
(a) Copy of Settlement Information and Delivery Authorization
(Freddie Mac Form 939), designating the Lender as the
Warehouse Lender and instructing Freddie Mac to deliver the
Mortgage-backed Securities to the Lender's custody account
at The Chase Manhattan Bank (CHASE NYC/CUST/G55026).
(b) Original Warehouse Lender Release of Security Interest
(Freddie Mac Form 996) to be executed by the Lender,
designating the Lender as the Warehouse Lender and
instructing Freddie Mac to deliver the Mortgage-backed
Securities to the Lender's custody account at The Chase
Manhattan Bank (CHASE NYC/CUST/G55026).
(4) For Ginnie Mae Mortgage-backed Securities issuance, the following
additional documents are required:
(a) Signed original Schedule of Mortgages (HUD Form 11706).
(b) Signed original Schedule of Subscribers (HUD Form 11705)
instructing Ginnie Mae to issue the Mortgage-backed
Securities in the name of the Company and designating The
Chase Manhattan Bank as Agent for the Lender as the
subscriber, using the following language: THE CHASE
MANHATTAN BANK AS AGENT FOR RESIDENTIAL FUNDING CORPORATION
SEG ACCT MANUF/CUST/G55026). The following instructions
must also be included on the form: "These instructions may
not be changed without the prior written consent of
Residential Funding Corporation, Preston A. Lyvers,
Managing Director or Michele Troughton, Director."
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<PAGE>
(c) Completed original Release of Security Interest (HUD Form
11711A) to be executed by the Lender.
(5) No later than 2 BUSINESS DAYS prior to the Settlement Date for the
Mortgage-backed Securities, the Lender must receive signed
Securities Delivery Instructions form attached hereto as Schedule
I.
Upon instruction by the Company, the Lender will complete the endorsement of the
Mortgage Note and make arrangements for the delivery of the original Collateral
Documents evidencing Pledged Mortgages or Pledged Securities and related
original pool documents with the appropriate bailee letter to the Investor,
Approved Custodian, or other pool custodian. Upon receipt of Mortgage-backed
Securities, the Lender will cause those Mortgage-backed Securities to be
delivered to the Investor which issued the Purchase Commitment. Mortgage-backed
Securities will be released to the Investor only upon payment of the purchase
proceeds to the Lender. Cash proceeds of sales of Pledged Mortgages and Pledged
Securities will be applied to related Advances outstanding under the Commitment.
Provided no Default exists, the Lender will return any excess proceeds of the
sale of Mortgage Loans or Mortgage-backed Securities to the Company, unless
otherwise instructed in writing.
5
<PAGE>
SCHEDULE I
RESIDENTIAL FUNDING CORPORATION
WAREHOUSING LENDING DIVISION
SECURITY DELIVERY INSTRUCTIONS
INSTRUCTIONS MUST BE RECEIVED 2 BUSINESS DAYS IN ADVANCE OF
PICK-UP/DELIVERY
BOOK-ENTRY DATE: ______________________ SETTLEMENT DATE: ____________
ISSUER:________________________________ SECURITY: $__________________
NO. OF CERTIFICATES: __________________ 1) __________
2) __________
3) __________
CUSIP #______________
Pool #_______________ MI#_________________ Coupon Rate: ________________
Issue Date:(M/D/Y) _________________________ Maturity Date:(M/D/Y)_________
POOL TYPE (circle one):
Ginnie Mae: Ginnie Mae I Ginnie Mae II
Freddie Mac: FIXED ARM DISCOUNT NOTE
Fannie Mae: FIXED ARM DISCOUNT NOTE DEBENTURES REMIC
DELIVER TO:_______________________________ ( ) Versus Payment
_______________________________ DVP AMT. $___________________
_______________________________ ( ) Free Delivery
DELIVER TO:_______________________________ ( ) Versus Payment
_______________________________ DVP AMT. $___________________
_______________________________ ( ) Free Delivery
DELIVER TO:_______________________________ ( ) Versus Payment
_______________________________ DVP AMT. $___________________
_______________________________ ( ) Free Delivery
- ------------------------------------------------------------------------------
AUTHORIZED SIGNATURE:
---------------------------------------------------------
TITLE:
----------------------------------------------------------------
<PAGE>
EXHIBIT E
SCHEDULE OF SERVICING PORTFOLIO
<TABLE>
<CAPTION>
UNPAID PRINCIPAL BALANCE
OF LOANS SERVICED AS OF
INVESTOR NAME DATE OF THIS AGREEMENT
- ------------- -----------------------
<S> <C>
(to be completed by Company)
RFC $34,639,571.61
FNMA 35,189,947.98
FNMA MBS $109,620,085.60
GE CAPITAL $5,992,431.98
INDYMAC 00.00
FHLMC $147,252,197.05
TOTAL $332,694,234.22
</TABLE>
<PAGE>
EXHIBIT F
RESIDENTIAL FUNDING CORPORATION
SUBORDINATION OF DEBT AGREEMENT
_______________, 19____
To: Residential Funding Corporation
8400 Normandale Lake Blvd., Suite 600
Minneapolis, Minnesota 55437
(hereinafter referred to as the "Lender")
The undersigned (hereinafter referred to as the "Creditor"), creditor of
MONUMENT MORTGAGE, INC., a California corporation (hereinafter referred to as
the "Company"), desires that the Lender extend or continue to extend such
financial accommodations to the Company as the Company may require and as the
Lender may deem proper. For the purpose of inducing the Lender to grant,
continue or renew such financial accommodations, and in consideration thereof,
the Creditor agrees as follows:
1. That at the present time the Company is indebted to the Creditor in the
principal amounts set forth below:
PRINCIPAL AMOUNT
TYPE OF FACILITY OF DEBT FROM THE
OR LOAN COMPANY
----------------------------- -----------------------------
----------------------------- -----------------------------
----------------------------- -----------------------------
----------------------------- -----------------------------
(Notes, if any, are to be delivered to the Lender)
2. That all claims of the Creditor against the Company now or hereafter
existing are and shall be at all times subject and subordinate to any and all
claims now or hereafter which the Lender may have against the Company (and all
extensions, renewals, modifications, replacements and substitutions of or for
the same), for so long as any such claim or claims of the Lender shall exist.
3. That the Creditor shall not (a) except to the extent expressly permitted
in Section 4 hereof, receive payment of or collect, in whole or in part, or sue
upon, any claim or claims now
1
<PAGE>
or hereafter existing which the Creditor may hold against the Company; (b) sell,
assign, transfer, pledge, hypothecate or encumber such claim or claims except
subject expressly to this Agreement; (c) enforce any lien the Creditor may now
or in the future have on any debt owing by the Company to the Creditor; and/or
(d) join in any petition in bankruptcy, assignment for the benefit of creditors
or creditors' agreement, except as directed by the Lender, so long as any claim
of the Lender against the Company, or commitment of the Lender to extend credit
to the Company, is in existence.
4. So long as no event described in clauses (a) through (d) of Section 6
below (a "Liquidation Event") shall have occurred and no default shall have
occurred in payment or performance of any obligation of the Company to the
Lender, regularly scheduled payments of interest and principal on the claims of
the Creditor may be made as and when the same become due and payable (it being
understood that no prepayment shall be made of such claims and no modification
or acceleration, for default or otherwise, of such maturity dates shall be
permitted). After the occurrence of a Liquidation Event or of default in
payment or performance of any obligation of the Company to the Lender, no
interest and no principal payments on the claims of the Creditor shall be made
without the prior written consent of the Lender. The subordination of claims of
the Creditor hereunder shall remain in effect so long as there shall be
outstanding any obligation of the Company to the Lender (for this purpose, the
Company shall be deemed obligated to the Lender so long as the Lender shall have
outstanding any commitment to make any loan to the Company, whether or not any
such loan shall have been made or advanced).
5. In the event that any Creditor receives a payment from the Company in
violation of the terms of this Agreement, such Creditor (a) shall hold such
money in trust for the benefit of Lender, (b) shall segregate such payment from
(and shall not commingle such payment with any of) the other funds of such
Creditor, and (c) shall forthwith remit such payment to Lender in the exact form
received (but with any necessary endorsement).
6. In case of (a) any assignment by the Company for the benefit of
creditors, (b) any bankruptcy proceedings instituted by or against the Company,
(c) the appointment of any receiver for the Company's business or assets, or (d)
any dissolution or winding up of the affairs of the Company, the Company and any
assignee, trustee in bankruptcy, receiver, or other person or persons in charge,
are hereby directed to pay to the Lender the full amount of the Lender's claim
against the Company before making any payment of principal or interest to the
Creditor and the Creditor hereby sells, transfers, sets over and assigns to the
Lender all claims the Creditor may now or hereafter have against the Company and
in any security therefor, and the proceeds thereof, and all
2
<PAGE>
rights to any payments, dividends or other distributions arising therefrom. If
the Creditor does not file a proper claim or proof of debt in the form required
in such proceeding prior to thirty (30) days before the expiration of the time
to file such claim in such proceedings, then the Lender has the right (but no
obligation) to do so and is hereby authorized to file an appropriate claim or
claims for and on behalf of the Creditor.
7. For violation of this Agreement, the Creditor shall be liable to the
Lender for all loss and damage sustained by reason of such breach, and upon any
such violation, the Lender may accelerate the maturity of its claims against the
Company, at the Lender's option.
8. The Creditor will, at any time and from time to time, promptly execute
and deliver all further instruments and documents, and take all further action,
that may be reasonably necessary in order to protect any right or interest
granted hereby or to enable the Lender to exercise and enforce its rights and
remedies hereunder.
9. The Creditor will not amend, extend or in any way modify the terms of its
claims against the Company, as such terms exist as of the date of this
Agreement, without the prior written consent of the Lender. The Creditor agrees
to provide to the Lender, upon the occurrence thereof, notice of the existence
of any event of default (however defined or described) under any document or
agreement relating to its claims against the Company, or any condition, act or
event, which with the giving of notice or the passage of time or both would
constitute an event of default (however defined or described) thereunder.
10. All rights and interest of the Lender hereunder, and all agreements and
obligations of the Creditor hereunder, shall remain in full force and effect
irrespective of:
(a) any sale, assignment, pledge, encumbrance or other disposition of
the claims of the Lender against the Company (the "Senior Claims") and/or any
document or instrument executed in connection therewith;
(b) any change in the time, manner or place of payment of, or in any
other terms of, all or any of the Senior Claims, or any refinancing thereof, or
any other amendment, modification, extension or renewal of or waiver of or any
consent to departure from any document or instrument relating thereto,
including, without limitation, changes in the terms of the repayment of loan
proceeds, modifications, extensions or renewals of payment dates, changes in
interest rate or the advancement of additional funds by the Lender in its
discretion; or
3
<PAGE>
(c) any exchange, release or nonperfection of any collateral, or any
release or amendment or waiver of or consent to departure from any guaranty, for
all or any of the Senior Claims.
11. This Agreement shall continue to be effective or be reinstated, as the
case may be, if at any time any payment or performance of all or any portion of
the Senior Claims is rescinded or must otherwise be returned by the Lender or
any other party to the documents relating thereto upon the insolvency,
bankruptcy or reorganization of any such party or otherwise, all as though such
payment had not been made.
12. The Creditor hereby waives promptness, diligence, notice of acceptance
and any other notice with respect to this Agreement and any requirement that the
Lender protect, secure, perfect or insure any security interest or lien or any
property subject thereto or exhaust any right or take any action against the
Creditor or any other person or entity or any collateral.
13. No failure on the part of the Lender to exercise, and no delay in
exercising, any right hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any right hereunder preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
14. No amendment or waiver of any provision of this Agreement nor consent to
any departure by the Creditor therefrom shall in any event be effective unless
the same shall be in writing and signed by the Lender, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
15. The Creditor agrees to pay upon demand, to the Lender the amount of any
and all expenses, including the reasonable fees and expenses of its counsel and
all court costs and other reasonable litigation expenses, including but not
limited to expert witness fees, document copying expenses, exhibit preparation
costs, and courier, postage and communication expenses, which the Lender may
incur in connection with the exercise or enforcement of any of its rights or
interest hereunder.
16. All notices, request and demands that may be required or otherwise
provided for or contemplated under the terms of this Agreement shall, whether or
not so stated, be in writing, and shall be given by any of the following means:
(a) personal delivery; (b) reputable overnight courier service; or (c)
registered or certified first class mail, return receipt requested. Any notice,
request or demand sent pursuant to clause (a) above shall be deemed received
upon personal delivery, and if sent pursuant to clause (b) shall be deemed
received on the next
4
<PAGE>
business day following delivery to the courier service, and if sent pursuant to
clause (c) shall be deemed received three (3) days following deposit in the
mail.
The addresses for notices are as follows:
If to the Creditor, addressed to:
If to the Lender, addressed to :
Residential Funding Corporation
1646 North California Blvd.
Suite 400
Walnut Creek, CA 94596
Attention: Graham Shipman, Director
Telecopier No.: (925) 988-2311
Such addresses may be changed by written notice to the other
parties given in the manner provided above.
17. This Agreement shall be governed in all respects by the laws of the State
of Minnesota and shall be binding upon and shall inure to the benefit of the
Creditor, the Lender and the Company, and their respective heirs, executors,
administrators, personal representatives, successors and assigns. This
Agreement and any claim or claims of the Lender pursuant hereto may be assigned
by the Lender, in whole or in part, at any time, without notice to the Creditor
or the Company.
(Creditor)
5
<PAGE>
[THE FOLLOWING ACKNOWLEDGEMENT IS TO BE USED FOR A CORPORATION.]
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _______________, 19___ before me, a Notary Public, personally appeared
_____________________, the ____________ of _________________________, 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:
[THE FOLLOWING ACKNOWLEDGEMENT IS TO BE USED FOR AN INDIVIDUAL.]
STATE OF _______________ )
) ss
COUNTY OF ______________ )
The foregoing instrument was acknowledged before me this _____ day of
_________________, 19__, by .
Notary Public
My Commission Expires:
6
<PAGE>
ACCEPTANCE OF SUBORDINATION OF DEBT
AGREEMENT BY THE COMPANY
The Company named in the Subordination of Debt Agreement set forth
hereinbefore, hereby (i) represents and warrants to the Lender that it is
presently indebted to the Creditor executing said Subordination of Debt
Agreement in the aggregate principal amount of
Dollars ($ ); and (ii) accepts and consents to the
Subordination of Debt Agreement, and agrees to be bound by all of the provisions
thereof and to recognize all priorities and other rights granted thereby to
RESIDENTIAL FUNDING CORPORATION, a Delaware corporation, its successors and
assigns, and to perform in accordance therewith.
MONUMENT MORTGAGE, INC.,
a California corporation
By:
Its:
Dated:
7
<PAGE>
EXHIBIT G
SUBSIDIARIES
<TABLE>
<CAPTION>
States
Qualified
to do
Name Incorporated Business Owned (%)
- ---- ------------ ---------- ---------
<S> <C> <C> <C>
(to be completed by Company)
None
</TABLE>
<PAGE>
EXHIBIT H
FORM OF OPINION OF COUNSEL
Residential Funding Corporation
Attention: Sandra L. Oakes
8400 Normandale Lake Blvd., Suite 600
Minneapolis, Minnesota 55437
Re: $75,000,000 Loan (the "Loan") under Warehousing Credit and Security
Agreement (the "Agreement") by and between RESIDENTIAL FUNDING
CORPORATION, a Delaware corporation (the "Lender") and MONUMENT MORTGAGE,
INC., a California corporation (the "Company"), guaranteed by FiNET.COM,
INC., a Delaware corporation (the "Guarantor") and secured by the
"Collateral" (as defined in the Agreement).
Gentlemen:
We are special counsel to the Company and to the Guarantor in connection
with the Loan.(1) As counsel, we have prepared and/or examined the following
documents:
1. Executed copy of the Promissory Note, dated June 30, 1999, made by the
Company payable to the order of the Lender, in the principal amount of
$75,000,000.
2. Executed copy of the First Amended and Restated Warehousing Credit and
Security Agreement by and between the Company and the Lender, dated June
30, 1999 (the "Agreement").
3. Undated UCC Financing Statements perfecting a security interest in
collateral, tangible and intangible.
4. Executed copy of the Guaranty, dated June 30, 1999 (the "Guaranty"), made
by the Guarantor to the Lender.
5. The Articles of Incorporation of the Company, together with amendments
thereto, as certified by the Secretary of State of the State of
California.
6. The Bylaws of the Company, as certified on ___________________, 19___ by
the Secretary of the Company as then being complete, accurate and in
effect.
- -----------------------
(1) The form of opinion should be modified as necessary if separate
counsel is employed for Company and for Guarantor.
1
<PAGE>
7. Resolutions of the Board of Directors of the Company, adopted at a
meeting held on ____________________, 19____, as certified by the
Secretary of the Company on __________________, 19____ as then being
complete, accurate and in effect, authorizing the borrowing of the Loan
and the execution and delivery of and performance under the Agreement.
8. Certificate of Good Standing for the Company, dated __________________,
19____, issued by the Secretary of State of the State of California.(2)
9. The Articles of Incorporation of the Guarantor, together with amendments
thereto, as certified by the Secretary of State of the State of
California.
10. The By-laws of the Guarantor, as certified on __________________, 19____
by the Secretary of the Guarantor as then being complete, accurate and in
effect.
11. Resolutions of the Board of Directors of the Guarantor, adopted at a
meeting held on __________________, 19____, as certified by the Secretary
of the Guarantor on __________________, 19____ as then being complete,
accurate and in effect, authorizing the execution and delivery of and
performance under the Guaranty.
12. Certificate of Good Standing for the Guarantor, dated _________________,
19____, issued by the Secretary of State of the State of California.(3)
The above enumerated items, numbered 1, 2 and 3 are collectively referred
to as the "Loan Documents."
The opinions which follow are subject to the following assumptions,
limitations and qualifications:
A. We have assumed the genuineness of all signatures, other than
- ------------------
(2) A certificate of good standing, dated as of a date within ninety
(90) days of the date of the Agreement, for the state where the Company is
incorporated and for each state where the Company is transacting business as a
foreign corporation should be listed.
(3) A certificate of good standing, dated as of a date within ninety
(90) days of the date of the Agreement, for the state where the Guarantor is
incorporated and for each state where the Guarantor is transacting business as a
foreign corporation should be listed.
2
<PAGE>
of the Company and the Guarantor, the authenticity of all documents
submitted to us as originals, and the conformity with the original
documents of all documents submitted to us as reproduced copies, and
the authenticity of all such latter documents.
B. We have assumed the organization, existence, good standing and capacity
of all persons and entities other than the Company and the Guarantor, and
that such parties, other than the Company and the Guarantor, have the
right, power and authority to execute and deliver the Loan Documents and
to perform thereunder.
C. We have assumed that the Lender's obligations under the Agreement are
within the powers of the Lender and have been duly and validly authorized
and that the Agreement has been duly executed and validly delivered by
the Lender.
D. As to various questions of fact material to this opinion, we have made
such factual inquiries of the Company and the Guarantor, and have
examined such other documents and made such examinations of applicable
laws, as we have deemed necessary for purposes of the opinions expressed
herein. However, where we state that a matter is to the best of our
knowledge, we have relied upon the written statements of the Guarantor
and the officers of the Company, with no inquiry as to the facts other
than as necessary to establish that such reliance was reasonable on our
part.
Based upon such examinations and investigations, and such other
investigations and examinations as we have deemed necessary for the purposes of
the opinions expressed herein, and subject to the assumptions stated above in
paragraphs A through D, inclusive, and in our capacity as special counsel for
the Company and the Guarantor, we are of the opinion that:
[OPINIONS CONCERNING COMPANY]
1. The Company AND EACH SUBSIDIARY OF THE COMPANY(4) is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated and has the full legal power and
authority to own its property and to carry on its business as currently
conducted.
2. The Company AND EACH SUBSIDIARY OF THE COMPANY is duly
- -------------------------
(4) In the alternative, state that the Company has no Subsidiaries.
3
<PAGE>
qualified to do business as a foreign corporation and is in good standing
in all jurisdictions where the ownership of its property or the conduct
of its business makes such qualification necessary.
3. The Company has the power and authority to execute, deliver and perform
the Loan Documents. The execution, delivery and performance of the Loan
Documents by the Company, including without limitation, the borrowings
under the Agreement and the pledge of the Collateral, have been duly and
validly authorized by all necessary actions on the part of the Company.
4. The Loan Documents have been duly executed and delivered by the Company.
The Loan Documents constitute the legal, valid and binding obligations of
the Company and are enforceable in accordance with their respective terms
against the Company, except that enforceability may be limited by
applicable bankruptcy, insolvency, reorganization or other similar laws
affecting the rights of creditors, and general principles of equity.
5. Upon delivery to the Lender of those items of Collateral, consisting of
promissory notes secured by mortgages or deeds of trust ("Pledged
Mortgages") or mortgage-backed securities ("Pledged Securities"), or in
the case of Pledged Securities 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) or its nominee, upon (a)
registration of such Pledged Securities in the name of a securities
intermediary (as such term is defined in the Uniform Commercial Code) in
an account containing only customer securities, (b) the notation of
Lender's security interest in such Pledged Securities on the records of
such securities intermediary, by book entry or otherwise, and (c) the
sending by such securities intermediary to the Lender of confirmation of
such notation, the Lender will have a valid and perfected security
interest therein. We assume, in giving this opinion, that such items of
Collateral will be owned by the Company and that, at the time the
Lender's security interest is noted on the records of any securities
intermediary, such Pledged Securities will be free of any interest
created through the Federal Reserve Bank, clearing corporation and/or
securities intermediary. With respect to Pledged Mortgages, the laws of
certain jurisdictions may require the recordation of an assignment of
such deeds of trust or mortgages in order to perfect a security interest
in the deed of trust or mortgage (as opposed to the notes secured
thereby). If the Lender does not record its assignment of deeds of trust
or mortgages in such jurisdictions, we express no opinion as to the
Lender's
4
<PAGE>
perfected security interest in such deeds of trust and mortgages (as
opposed to the notes secured thereby) constituting part of the
Collateral.
6. The execution, delivery and performance by the Company of the Loan
Documents, will not (i) conflict with or violate any provision of the
Articles of Incorporation or By-laws of the Company; (ii) require any
license, approval or other action by any governmental authority that has
not been obtained; (iii) to the best of our knowledge, result in the
creation of any lien, charge or encumbrance upon any property or assets
of the Company other than in favor of the Lender; (iv) to the best of our
knowledge, result in a violation or breach of any term or provision,
constitute a default under, or result in or require the acceleration of
any indebtedness of the Company pursuant to, any agreement or other
instrument to which the Company may be bound or to which the Company or
any of its property may be subject; or (v) result in any violation of the
provisions of any law or, to the best of our knowledge, any order of any
court or any governmental agency, to which the Company may be bound or to
which the Company or any of its property may be subject.
7. To the best of our knowledge, there are no actions, suits, or proceedings
pending or threatened against or affecting the Company, in any court or
before any arbitrator or governmental authority 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.
8. The making of the Advances as contemplated by the Agreement will not
violate Regulation U of the Board of Governors of the Federal Reserve
System.
9. 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.
[OPINIONS CONCERNING THE GUARANTOR]
10. The Guarantor has the power and authority to execute, deliver and perform
the Guaranty. The execution, delivery and performance of the Guaranty
have been duly and validly authorized by all necessary actions on the
part of the Guarantor.
11. The Guarantor is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is
incorporated; has the full legal power and authority to own its property
and to carry on its
5
<PAGE>
business as currently conducted; and is duly qualified to do business as
a foreign corporation and is in good standing in all jurisdictions where
the ownership of its property or the conduct of its business makes such
qualification necessary.
12. The Guaranty has been duly executed and delivered by the Guarantor. The
Guaranty constitutes the legal, valid and binding obligation of the
Guarantor and is enforceable in accordance with its terms against the
Guarantor, except that enforceability may be limited by applicable
bankruptcy, insolvency, reorganization or other similar laws affecting
the rights of creditors, and general principles of equity.
13. The execution, delivery and performance by the Guarantor of the Guaranty
will not (a) conflict with or violate any provision of the Articles of
Incorporation or Bylaws of the Guarantor; (b) require any license,
approval or other action by any governmental authority that has not been
obtained; (c) to the best of our knowledge, result in the creation of any
lien, charge or encumbrance upon any property or assets of the Guarantor
other than in favor of the Lender; (d) result in a violation or breach of
any term or provision, constitute a default under, or result in or
require the acceleration of any indebtedness of the Guarantor pursuant
to, any agreement or other instrument to which the Guarantor may be bound
or to which the Guarantor or any of its respective property may be
subject; or (e) result in any violation of the provisions of any law or,
to the best of our knowledge, any order of any court or any governmental
agency, to which the Guarantor may be bound or to which the Guarantor or
any of its respective property may be subject.
14. To the best of our knowledge, there are no actions, suits, or proceedings
pending or threatened against or affecting the Guarantor, in any court or
before any arbitrator or governmental authority which, if adversely
determined, may reasonably be expected to result in any material adverse
change in the financial condition of the Guarantor.
This opinion may be relied upon by you and your successors and assigns
and by any participant in the Loan.
All capitalized terms used herein, not otherwise defined herein, shall
have the meanings given such terms in the Agreement.
Very truly yours,
------------------------------------
By:
---------------------------------
6
<PAGE>
EXHIBIT I-SF
OFFICER'S CERTIFICATE
Reference is made to that certain First Amended and Restated Warehousing
Credit and Security Agreement (Single Family Mortgage Loans) between MONUMENT
MORTGAGE, INC., a California corporation (the "Company") and RESIDENTIAL FUNDING
CORPORATION, a Delaware corporation (the "Lender"), dated as of August 9, 1999
(as the same may be amended, modified, supplemented, renewed or restated from
time to time, the "Agreement"). All capitalized terms used herein and all
Section numbers given herein refer to those terms and Sections set forth in the
Agreement. This Officer's Certificate is submitted to the Lender pursuant to
Section 6.2(d) of the Agreement.
The undersigned hereby certifies to the Lender that as of the close of
business on , 19 ("Statement Date",) and with respect
to the Company and its Subsidiaries on a consolidated basis:
1. As illustrated in the attached calculations supporting this Officer's
Certificate, the Company met the covenants set forth in Sections 7.6,
7.7, 7.8, 7.9, 7.10 and 7.11 and the Guarantor satisfied the requirements
of Sections 8.1(r), 8.1(s), 8.1(t) and 8.1(u), or if the Company did not
meet any of such covenants, a detailed explanation is attached setting
forth the nature and period of the existence of the Default and the
action the Company has taken, is taking, and proposes to take with
respect thereto.
2. No Servicing Contracts have been sold or pledged by the Company except as
permitted under the terms of the Agreement.
3. No recourse Servicing Contracts have been acquired by the Company.
4. No payments in advance of the scheduled maturity date have been made with
respect to any Subordinated Debt. The Company has incurred no Debt
required to be subordinated pursuant to Section 0.
5. The Company was in compliance with the applicable HUD, Ginnie Mae or
Investor net worth requirements, and in good standing with VA, HUD,
Ginnie Mae and each Investor.
1
<PAGE>
6. The representation set forth in Section 5.17 of the Agreement is true and
correct as of the date of this Officer's Certificate, or, if such
representation is not true and correct as of such date, the nature of the
problem and the action the Company has taken, is taking and proposes to
take with respect thereto are specified in the statement attached hereto.
7. I have reviewed the terms of the Agreement and have made, or caused to be
made under my supervision, a review in reasonable detail of the
transactions and conditions of the Company (and, if applicable, its
Subsidiaries) and such review has not disclosed the existence, and I have
no knowledge of the existence, of any Default or Event of Default, or if
any Default or Event of Default existed or exists, a detailed explanation
is attached specifying the nature and period of the existence of the
Default and the action the Company has taken, is taking and proposes to
take with respect thereto.
8. Pursuant to Section 6.2 of the Agreement, enclosed are the financial
statements of the Company as of the Statement Date. The financial
statements for the period ending on the Statement Date fairly present the
financial condition and results of operations of the Company (and, if
applicable, its Subsidiaries) as of the Statement Date.
Dated:
-----------------------------
MONUMENT MORTGAGE, INC.,
a California corporation
By:
---------------------------------
Its:
----------------------------------
2
<PAGE>
CALCULATIONS SUPPORTING OFFICER'S CERTIFICATE
Company Name: MONUMENT MORTGAGE, INC. and its Subsidiaries
Statement Date:_________________________________________
All financial calculations set forth herein are as of the Statement Date.
I. TANGIBLE NET WORTH
A. Tangible Net Worth of the Company is:
Excess of total assets over total liabilities: $________
Plus: Subordinated Debt not due within one year
of the Statement Date (or any portion
thereof): $________
Minus: Advances to owners, officers,
employees or Affiliates: $________
Minus: Investments in Affiliates: $________
Minus: Assets pledged to secure liabilities
not included in Debt: $________
Minus: Intangible assets: $________
Minus: Any other HUD nonacceptable assets: $________
Minus: Other assets unacceptable to the
Lender: $________
TANGIBLE NET WORTH $________________
B. Requirements of Section 0 of the Agreement:
MINIMUM TANGIBLE NET WORTH OF $10,000,000.
C. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
II. DEBT OF THE COMPANY
Total liabilities $________
Minus: Debt arising under Hedging Arrangements
(to the extent of offsetting assets) $________
Minus: Subordinated Debt not due within one year
of the Statement Date (or any portion
thereof): $________
Minus: Deferred taxes arising from capitalized
excess servicing fees and
capitalized servicing rights: $________
DEBT $________________
3
<PAGE>
III. RATIO OF DEBT TO TANGIBLE NET WORTH
A. The ratio of Debt to Tangible Net Worth (II to I.A.) is:
________ to 1
B. Requirements of Section 7.7 of the Agreement:
The ratio of Debt to Tangible Net Worth shall not
exceed 10 to 1.
C. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
IV. DIVIDENDS
A. The dividends declared or paid by the Company with respect to the
current fiscal year was: $________
B. Net Income of the Company with respect to the current fiscal year
was: $________
C. Requirements of Section 0 of the Agreement:
No dividends shall be declared or paid in excess of 25% of the
Company's net income.
D. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
V. CURRENT RATIO
A. Current assets of the Company was: $________
B. Current liabilities of the Company was: $________
C. Ratio of current assets to current liabilities
was: ____ to 1.0
D. Requirements of Section 7.6 of the Agreement:
The current ratio shall not be less than 1.01 to 1.00.
E. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
VI. LIABILITY GROWTH
A. Liabilities at end of most recent Fiscal
Quarter was: $________
B. Liabilities at the end of prior Fiscal
Quarter was: $________
4
<PAGE>
C. Requirements of Section 7.9 of the Agreement:
Liabilities at the end of the most recent Fiscal Quarter shall not
exceed 150% of liabilities at the end of the prior Fiscal Quarter.
D. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
VII. TRANSACTIONS WITH AFFILIATES
A. Loans, advances, and extensions of credit made by the Company to
its Affiliates total: $________
B. Capital contributions made by the Company to its Affiliates total:
$________
C. Management fees paid to Affiliates during the current fiscal year
total: $________
D. Transfers, sales, pledges, assignments or other dispositions of
assets made by the Company to its Affiliates total: $________
E. Requirements of Section 0 of the Agreement:
1. Loans, advances, extensions of credit or capital
contributions shall not exceed $1,000,000.
COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
2. No transfers, sales, pledges assignments or other
dispositions of assets by the Company to Affiliates.
COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
3. No merger, consolidation, purchase or acquisition of assets
by the Company to Affiliates.
COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
4. Management fees paid by the Company to Affiliates shall not
exceed $1,000,000 per month.
COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
VIII. GUARANTOR'S NET LOSS
A. Guarantor's net loss through the end of the most recently
completed Fiscal Quarter was: $________
B. Guarantor's Permitted Cumulative Loss was: $________
5
<PAGE>
C. Requirements of Section 8.1(r) of the Agreement:
Guarantor's Net Loss shall not exceed the Permitted Cumulative
Loss.
D. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
IX. GUARANTOR'S TANGIBLE NET WORTH
A. Tangible Net Worth of the Guarantor is:
Excess of total assets over total liabilities: $________
Plus: Subordinated Debt not due within one year
of the Statement Date (or any portion
thereof): $________
Minus: Advances to owners, officers,
employees or Affiliates: $________
Minus: Investments in Affiliates: $________
Minus: Assets pledged to secure liabilities
not included in Debt: $________
Minus: Intangible assets: $________
Minus: Any other HUD nonacceptable assets: $________
Minus: Other assets unacceptable to the
Lender: $________
TANGIBLE NET WORTH $________________
B. Requirements of Section 8.1(t) of the Agreement:
THE TANGIBLE NET WORTH OF THE GUARANTOR IS AT ANY TIME LESS THAN
$13,000,000 PLUS 75% OF THE NET PROCEEDS OF ANY SHARES OF STOCK OF
THE GUARANTOR SOLD ON OR AFTER THE CLOSING DATE.
C. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
X. DEBT OF THE GUARANTOR
Total liabilities $________
Minus: Debt arising under Hedging Arrangements
(to the extent of offsetting assets) $________
Minus: Subordinated Debt not due within one year
of the Statement Date (or any portion
thereof): $________
Minus: Deferred taxes arising from capitalized
excess servicing fees and
capitalized servicing rights: $________
DEBT $________________
6
<PAGE>
XI. RATIO OF DEBT TO TANGIBLE NET WORTH OF GUARANTOR
A. The ratio of Debt to Tangible Net Worth (X. to IX.A) is:
________ to 1
B. Requirements of Section 8.1(s) of the Agreement:
THE RATIO OF DEBT TO TANGIBLE NET WORTH OF GUARANTOR SHALL NOT
EXCEED 10 TO 1.
C. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
XII. LIABILITY GROWTH OF GUARANTOR
A. Liabilities of Guarantor at end of most recent Fiscal
Quarter was: $________
B. Liabilities of Guarantor at the end of prior Fiscal
Quarter was: $________
C. Requirements of Section 8.1(u) of the Agreement:
Liabilities of Guarantor at the end of the most recent Fiscal
Quarter shall not exceed 150% of liabilities at the end of the
prior Fiscal Quarter.
D. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
7
<PAGE>
EXHIBIT J
SCHEDULE OF EXISTING LINES OF CREDIT
<TABLE>
<CAPTION>
LENDER NAME COMMITMENT AMOUNT EXPIRATION DATE
- ----------- ----------------- ---------------
<S> <C> <C>
(to be completed by Company)
FNMA ASAP UNCOMMITTED NONE
</TABLE>
<PAGE>
EXHIBIT K
FORM FOR FUNDING BANK
LETTER AGREEMENT
(Letterhead of the Company)
June 30, 1999
The First National Bank of Chicago
One North State Street
Chicago, IL 60602
Gentlemen:
The undersigned, MONUMENT MORTGAGE, INC. (the "Company"), hereby
authorizes The First National Bank of Chicago (the "Funding Bank") to permit
Residential Funding Corporation (the "Lender") to debit and access information
on the Company's accounts held by the Funding Bank as outlined below. The
Company hereby directs and authorizes the Funding Bank to follow the directions
of the Lender in debiting such accounts.
The Company authorizes the Lender to access account information from time
to time for the Company's operating account no. ___________________________ (the
"Operating Account") for the purpose of verifying balance information. In
addition, the Company requests that the Lender, and the Company hereby
authorizes the Lender, to debit the Operating Account to the extent necessary to
cover (a) wires to be initiated by the Lender in accordance with the Company's
instructions as set forth in the Request for Advance for the purposes permitted
in the First Amended and Restated Warehousing Credit and Security Agreement (the
"Agreement") by and between the Company and the Lender; and (b) amounts due and
owing to the Lender, including but not limited to principal, interest and fees.
Upon the termination or expiration of the Agreement, the Company requests
that the Lender, and the Company hereby authorizes the Lender to (a) close the
Operating Account and any other accounts which have been established by the
Company and the Lender to facilitate transactions under the Agreement, and (b)
withdraw any funds remaining in the Operating Account and remit such funds to
the Company after all amounts due and owing the Lender have been paid.
The Company hereby directs and authorizes the Funding Bank to follow all
of the foregoing instructions of the Lender.
Very truly yours,
MONUMENT MORTGAGE, INC.,
a California corporation
By:
---------------------------------
Its:
--------------------------------
ACKNOWLEDGED AND AGREED THIS
_____ DAY OF ____________, 19___.
THE FIRST NATIONAL BANK OF CHICAGO
By:
-------------------------------
Its:
------------------------------
<PAGE>
FORM OF COMMITMENT SUMMARY REPORT
<TABLE>
<CAPTION>
Loan or Unfilled
Issue or Security Security Rate/ Mandatory/ Commitment Commitment Delivery/Settlement
Investor Comm. No. Trade Date Type Loan Term Net Yield Optional Amount Remaining Expiration Date Price
- -------- --------- ---------- -------- --------- ---------- -------- ------- --------- ---------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL ------ ---------
Wtd. Avg. Price of Unfilled Commitments: ------
</TABLE>
CERTIFICATION
The undersigned hereby certifies to Residential Funding Corporation that as of
the date set forth below:
1 The Company has the foregoing Purchase Commitments (as defined in the
Agreement); and
2. The Weighted Average Purchase Commitment Price for all unfilled Purchase
Commitments as set forth above.
MONUMENT MORTGAGE, INC.,
a California corporation
By:
------------------------------------
Its:
-----------------------------------
Date: , 19
------------------ ----
<PAGE>
EXHIBIT L
Page 2
<TABLE>
<CAPTION>
MORTGAGE POSITION REPORT Report Date: _______________
Total Locked and Unfilled
Loan Type Applications Locked Pipeline Closed Warehouse Closed Loans Commitments Net Position
- ---------- ------------- --------------- ---------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
EXHIBIT M
ELIGIBLE LOANS
For the purposes hereof, the following terms shall have the following meanings:
"APPRAISED VALUE" means, with respect to an interest in real
property, the then current fair market value of the real property and any
improvements thereon as of a recent date determined in accordance with
accepted methods of appraising by qualified appraiser who is a member of
the American Institute of Real Estate Appraisers or other group of
professional appraisers.
"CREDIT SCORE" means a mortgagor's overall consumer credit rating,
represented by a single numeric credit score using the Fair, Isaac
consumer credit scoring system, provided by a credit repository
acceptable to the Lender and the Investor that issued the Purchase
Commitment covering the related Mortgage Loan.
"GMAC LOAN" means a Mortgage Loan covered by a Purchase Commitment
issued by GMAC Mortgage Corporation.
"GMAC-RFC CLIENT GUIDE" means the applicable loan purchase guide
issued by RFC, as the same may be amended or replaced.
"GOVERNMENT LOAN" means a closed-end First Mortgage Loan that is
either HUD/FHA insured (other than a HUD 203(k) Loan or a Title I Loan)
or VA guaranteed.
"LOAN-TO-VALUE RATIO" means, for any Mortgage Loan, the ratio of
(a) 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, to (b) the Appraised Value of the related improved real
property.
"RFC LOAN" means a Mortgage Loan covered by a Purchase Commitment
issued by RFC.
"THIRD PARTY ORIGINATED" means a Mortgage Loan that was purchased
by the Company from a third party originator.
"WEIGHTED AVERAGE PURCHASE COMMITMENT PRICE" shall mean the
weighted average of the Committed Purchase Prices of the unfilled
Purchase Commitments (expressed as a percentage) for Mortgage Loans or
Mortgage-backed Securities of the same type, interest rate and term.
SUBLIMITS:
The following aggregate limitations shall apply to Advances against Eligible
Loans:
1. Wet Settlement Advances: 30% of the Commitment Amount.
2. Advances against Second Mortgage
Loans (either closed-end or
open-end): 5% of the Commitment Amount
(Purchase
Commitment from RFC required).
3. Third Party Originated: Not Permitted.
<PAGE>
ELIGIBLE MORTGAGE LOANS:
The following specified types of Single Family Mortgage Loans are Eligible Loans
provided they conform in all respects with the terms of the Warehousing
Agreement:
1. PRIME MORTGAGE LOAN
a. DEFINITION: A First Mortgage Loan with the following
characteristics:
(i) For a First Mortgage Loan:
A. Underwritten substantially in accordance with Fannie
Mae or Freddie Mac underwriting standards (except as
to maximum amount); and
B. Loan-to-Value Ratio not to exceed 80% or, if the
Loan-to-Value Ratio exceeds 80%, the amount by which
such Prime Mortgage Loan exceeds 80% is insured by
or subject to a commitment for mortgage insurance.
C. Is a Government Mortgage Loan.
(ii) For a Second Mortgage Loan:
A. The credit of the obligor has been underwritten
substantially in accordance with Fannie Mae or
Freddie Mac underwriting standards;
B. Loan-to-Value Ratio not more than 100%; and
C. Committed for purchase by RFC.
b. INTEREST RATE: 1.75% over LIBOR (Advances outstanding up to
60 days)
2.125% over LIBOR (Advances outstanding 61
days or more)
c. PRIME SUBLIMIT: No limit.
d. COMMITTED/UNCOMMITTED: Purchase Commitment required.
e. COMMITTED FIRST MORTGAGE 95% of the lesser of (i) the Mortgage
LOAN ADVANCE RATE: Note Amount or (ii) the Weighted
Average Purchase Commitment Price.
f. RFC LOAN FIRST MORTGAGE 98% of the lesser of (i) the Mortgage
LOAN ADVANCE RATE: Note Amount or (ii) the Committed
Purchase Price.
g. GMAC FIRST MORTGAGE 98% of the lesser of (i) the Mortgage
LOAN ADVANCE RATE: Note Amount or (ii) the Committed
Purchase Price.
h. RFC LOAN SECOND MORTGAGE 98% of the lesser of (i) the Mortgage
LOAN ADVANCE RATE: Note Amount or (ii) the Committed
Purchase Price.
i. WAREHOUSING PERIOD
FIRST MORTGAGE LOAN: 120 days.*
j. WAREHOUSING PERIOD
SECOND MORTGAGE LOAN: 90 days.*
*For Advances outstanding against Mortgage Loans, other than RFC Mortgage Loans
or GMAC Mortgage Loans, for more than 60 days, the amount of the Advance shall
be reduced on the 61st day to 80% of the lesser of (i) the Mortgage Note Amount
or (ii) the Committed Purchase Price.
-2-
<PAGE>
2. SUBPRIME MORTGAGE LOAN
a. DEFINITION: A First Mortgage Loan or a Second Mortgage Loan that
meets either the Credit Gap program eligibility criteria or the
AlterNet Loan Program eligibility criteria as set forth in
Sections 528 or 530, respectively, of the GMAC-RFC Client Guide.
b. INTEREST RATE: 1.75% over LIBOR.
c. SUBPRIME SUBLIMIT: 10% of Commitment Amount.
d. COMMITTED/UNCOMMITTED: Purchase Commitment required.
e. COMMITTED FIRST MORTGAGE 95% of the lesser of (i) the
LOAN ADVANCE RATE: Mortgage Note Amount or (ii)
the Committed Purchase Price.
f. RFC LOAN FIRST MORTGAGE 98% of the lesser of (i) the
LOAN ADVANCE RATE: Mortgage Note Amount or (ii)
the Committed Purchase Price.
g. RFC LOAN SECOND MORTGAGE 98% of the lesser of (i) the
LOAN ADVANCE RATE: Mortgage Note Amount or (ii)
the Committed Purchase Price.
h. WAREHOUSING PERIOD
FIRST/SECOND MORTGAGE LOANS: 60 days.
-3-
<PAGE>
EXHIBIT N
FISCAL YEAR 2000 LOSSES
<TABLE>
<CAPTION>
Permitted
Fiscal Quarter Anticipated Loss Cumulative Loss
- --------------- ---------------- ---------------
<S> <C> <C>
1 $ 4,999,000 $ 7,498,500
2 $ 4,289,000 $13,932,000
3 $ 3,380,000 $19,002,000
4 $ 2,583,000 $22,876,500
-----------
TOTAL $15,251,000
</TABLE>
<PAGE>
EXHIBIT O
RFCONNECTS PLEDGE AGREEMENT
FOR VALUABLE CONSIDERATION, MONUMENT MORTGAGE, INC., a California
corporation (the "Company") grants to RESIDENTIAL FUNDING CORPORATION (the
"Lender") a security interest in the Mortgage Loans described on the list
attached to this Pledge Agreement and all notes and documents evidencing,
creating or securing the same (the "Pledged Loans") to secure the payment of all
of the Obligations of the Company, including, without limitation, all
Obligations of the Company under that First Amended and Restated Warehousing
Credit and Security Agreement dated August 9, 1999, between the Company and the
Lender (as amended or supplemented, the "Agreement").
The Company will deliver the Pledged Loans to the Lender as required by
the Agreement.
The Company agrees that this Agreement is binding upon and will inure to
the benefit of the legal representatives, successors and assigns of the Lender.
All rights, interests, duties and liabilities of the Company and the
Lender under this Pledge Agreement will be determined according to the laws of
the State of Minnesota.
All capitalize terms used in this Pledge Agreement that are not otherwise
defined above are defined in the Agreement.
IN WITNESS WHEREOF, the Company has caused this Pledge Agreement to be
executed by its duly authorized officers or agents as of this _______________day
of ___________________, 1999,
MONUMENT MORTGAGE, INC.,
a California corporation
By:
---------------------------------
Its:
--------------------------------
<PAGE>
FIRST AMENDMENT TO
FIRST AMENDED AND RESTATED WAREHOUSING CREDIT
AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO FIRST AMENDED AND RESTATED WAREHOUSING CREDIT AND
SECURITY AGREEMENT (this "Amendment") is entered into as of this 31st day of
December 1999, by and between MONUMENT MORTGAGE, INC., a California 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 $75,000,000, to
finance the origination and acquisition of Mortgage Loans as evidenced by a
Promissory Note in the principal sum of $75,000,000, dated August 9, 1999 (the
"Note"), and by a First Amended and Restated Warehousing Credit and Security
Agreement dated August 9, 1999, as the same may have been amended or
supplemented (the "Agreement");
WHEREAS, the Company and the Lender have agreed to change the Maturity
Date, and the Company has also requested that the Lender waive certain Defaults
and amend certain other terms of the Agreement and the Lender has agreed to such
waivers 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 is October
31, 1999.
"MATURITY DATE" shall mean the earlier of: (a) the close of
business on May 31, 2000, 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.
3. Section 5 of the Agreement is amended to add the following section
immediately after Section 5.17:
-1-
<PAGE>
5.18 ASSUMED NAMES. The Company does not originate Mortgage
Loans or otherwise conduct business under any names other than its legal
name and the assumed name(s) set forth on EXHIBIT O attached hereto and
made a part hereof. The Company has made all filings and taken all other
action as may be required under the laws of any jurisdiction in which it
originates Mortgage Loans or otherwise conducts business under any
assumed name. The Company's use of assumed name(s) set forth herein does
not conflict with any other Person's legal rights to any such name(s),
nor otherwise give rise to any liability by the Company to any other
Person.
4. Section 8.1(n) of the Agreement is deleted in its entirety and the
following is substituted in lieu thereof:
8.1(n) [INTENTIONALLY OMITTED]
5. The Company is in default under Section 7.9 of the Agreement for
the Fiscal Quarter ending October 31, 1999. The liabilities of the Company for
the Fiscal Quarter ending July 31, 1999 were $4,280,000 as compared to the
liabilities for the next Fiscal Quarter ending October 31, 1999 of $39,810,000,
exceeding the 150% growth permitted in Section 7.9 of the Agreement. The
Company has requested, and the Lender hereby agrees, to waive its default rights
with respect to the failure of the Company to comply with the Liability Growth
requirement set forth in Section 7.9 of the Agreement as of October 31, 1999.
The foregoing waiver applies only to the specific instances described herein.
It is not a waiver of any subsequent breach of the same provision of the
Agreement, or of any breach of any other provisions of the Agreement.
6. The Company informed the Lender that effective January 15, 2000,
Mark L. Korell will no longer be the chairman and chief executive officer of the
Guarantor. This is a Default under Section 8.1(n) of the Agreement. The
Company has requested, and the Lender hereby agrees, to waive its default rights
with respect to the requirement that Mark L. Korell remain as the chairman and
chief executive officer of the Guarantor as set forth in Section 8.1(n) of the
Agreement. The foregoing waiver applies only to the specific instance described
herein. It is not a waiver of any breach of any other provisions of the
Agreement.
7. The Company is in default under Section 8.1(r) of the Agreement
for the Fiscal Quarter ending October 31, 1999. The Company's aggregate net
loss for the Fiscal Quarter ending October 31, 1999 was $14,571,627, exceeding
the Permitted Cumulative Loss of $13,932,000 by $639,627. The Company has
requested, and the Lender hereby agrees, to waive its default rights with
respect to the failure of the Company to comply with the Guarantor's Maximum
Permitted Cumulative Loss requirement set forth in Section 8.1(r)
-2-
<PAGE>
of the Agreement as of October 31, 1999. The foregoing waiver applies only to
the specific instances described herein. It is not a waiver of any subsequent
breach of the same provision of the Agreement, or of any breach of any other
provisions of the Agreement.
8. Notwithstanding the three preceding paragraphs, the Lender
reserves all of the rights, powers and remedies presently available to the
Lender under the Agreement, the Note and the Guaranty, including the right to
cease making Advances to the Company and the right to accelerate any of the
indebtedness owing under the Agreement, if any other Default or Event of Default
occurs under the Agreement.
9. 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.
10. EXHIBIT N to the Agreement is deleted in its entirety and replaced
with the new EXHIBIT N attached to this Amendment. All references in this
Amendment and the Agreement to EXHIBIT N shall be deemed to refer to the new
EXHIBIT I-N.
11. The Agreement is hereby amended to add EXHIBIT O attached hereto
and made a part hereof.
12. The Company must deliver to the Lender (a) an executed original of
this Amendment; (b) an executed Certificate of Secretary with corporate
resolutions; and (c) a $350 document production fee.
13. The Company represents, warrants and agrees that (a) except as
stated above, 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.
14. Except as hereby expressly modified, the Agreement is otherwise
unchanged and remains in full force and effect, and the Company ratifies and
reaffirms all of its obligations thereunder.
15. 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
-3-
<PAGE>
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.
MONUMENT MORTGAGE, INC.,
a California corporation
By:
----------------------------------
Its:
---------------------------------
RESIDENTIAL FUNDING CORPORATION,
a Delaware corporation
By:
----------------------------------
Its:
---------------------------------
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On ___________________, 1999, before me, a Notary Public, personally
appeared _____________________________________________, the _______________ of
MONUMENT MORTGAGE, INC., a California 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>
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On _______________________, 1999, 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:
---------------
-5-
<PAGE>
CONSENT OF GUARANTOR
The undersigned, being the Guarantor under the Guaranty dated as of
August 9, 1999, hereby consents to the foregoing Amendment and the transactions
contemplated thereby and hereby modifies and reaffirms his obligations under his
Guaranty so as to include within the term "Guaranteed Debt" the indebtedness,
obligations and liabilities of the Company under this Amendment. The Guarantor
hereby reaffirms that his obligations under his Guaranty are separate and
distinct from the Company's obligations to Lender, and that his obligations
under the Guaranty are in full force and effect, and hereby waives and agrees
not to assert any anti-deficiency protections or other rights as a defense to
his obligations under the Guaranty, all as more fully set forth in the Guaranty,
the terms of which are incorporated herein as if fully set forth herein.
The Guarantor further agrees, upon Lender's request, to execute for the
benefit of Lender an additional guaranty in form and content acceptable to
Lender and conforming to the Guaranty in connection with the foregoing
Amendment.
GUARANTOR:
FiNET.COM, INC.,
a Delaware corporation
By:
----------------------------------
Its:
---------------------------------
STATE OF _______________ )
) ss
COUNTY OF ______________ )
On ______________________, 1999, before me, a Notary Public, personally
appeared ____________________________________, the _________________________ of
FiNET.COM.INC., 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:
---------------
-6-
<PAGE>
EXHIBIT I-SF
OFFICER'S CERTIFICATE
Reference is made to that certain First Amended and Restated Warehousing
Credit and Security Agreement (Single Family Mortgage Loans) between MONUMENT
MORTGAGE, INC., a California corporation (the "Company") and RESIDENTIAL FUNDING
CORPORATION, a Delaware corporation (the "Lender"), dated as of August 9, 1999
(as the same may be amended, modified, supplemented, renewed or restated from
time to time, the "Agreement"). All capitalized terms used herein and all
Section numbers given herein refer to those terms and Sections set forth in the
Agreement. This Officer's Certificate is submitted to the Lender pursuant to
Section 6.2(d) of the Agreement.
The undersigned hereby certifies to the Lender that as of the close of
business on , 19 ("Statement Date",) and with respect
to the Company and its Subsidiaries on a consolidated basis:
1. As illustrated in the attached calculations supporting this Officer's
Certificate, the Company met the covenants set forth in Sections 7.6,
7.7, 7.8, 7.9, 7.10 and 7.11 and the Guarantor satisfied the requirements
of Sections 8.1(r), 8.1(s), 8.1(t) and 8.1(u), or if the Company did not
meet any of such covenants, a detailed explanation is attached setting
forth the nature and period of the existence of the Default and the
action the Company has taken, is taking, and proposes to take with
respect thereto.
2. No Servicing Contracts have been sold or pledged by the Company except as
permitted under the terms of the Agreement.
3. No recourse Servicing Contracts have been acquired by the Company.
4. No payments in advance of the scheduled maturity date have been made with
respect to any Subordinated Debt. The Company has incurred no Debt
required to be subordinated pursuant to Section 6.10.
5. The Company was in compliance with the applicable HUD, Ginnie Mae or
Investor net worth requirements, and in good standing with VA, HUD,
Ginnie Mae and each Investor.
6. The representation set forth in Section 5.17 of the Agreement is true and
correct as of the date of this Officer's Certificate or, if such
representation is not true and correct as of such date, the nature of the
problem and the action the
-1-
<PAGE>
Company has taken, is taking and proposes to take with respect thereto
are described in the statement attached hereto.
7. I have reviewed the terms of the Agreement and have made, or caused to be
made under my supervision, a review in reasonable detail of the
transactions and conditions of the Company (and, if applicable, its
Subsidiaries) and such review has not disclosed the existence, and I have
no knowledge of the existence, of any Default or Event of Default, or if
any Default or Event of Default existed or exists, a detailed explanation
is attached specifying the nature and period of the existence of the
Default and the action the Company has taken, is taking and proposes to
take with respect thereto.
8. Pursuant to Section 6.2 of the Agreement, enclosed are the financial
statements of the Company as of the Statement Date. The financial
statements for the period ending on the Statement Date fairly present the
financial condition and results of operations of the Company (and, if
applicable, its Subsidiaries) as of the Statement Date.
Dated:
-----------------------------
MONUMENT MORTGAGE, INC.,
a California corporation
By:
----------------------------------
Its:
---------------------------------
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<PAGE>
CALCULATIONS SUPPORTING OFFICER'S CERTIFICATE
Company Name: MONUMENT MORTGAGE, INC. and its Subsidiaries
Statement Date:____________________________________
All financial calculations set forth herein are as of the Statement Date.
I. TANGIBLE NET WORTH
A. Tangible Net Worth of the Company is:
Excess of total assets over total liabilities: $________
Plus: Subordinated Debt not due within one year
of the Statement Date (or any portion thereof): $________
Minus: Advances to owners, officers,
employees or Affiliates: $________
Minus: Investments in Affiliates: $________
Minus: Assets pledged to secure liabilities
not included in Debt: $________
Minus: Intangible assets: $________
Minus: Any other HUD nonacceptable assets: $________
Minus: Other assets unacceptable to the
Lender: $________
TANGIBLE NET WORTH $________________
B. Requirements of Section 7.8 of the Agreement:
MINIMUM TANGIBLE NET WORTH OF $10,000,000.
C. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
II. DEBT OF THE COMPANY
Total liabilities $________
Minus: Debt arising under Hedging Arrangements
(to the extent of offsetting assets) $________
Minus: Subordinated Debt not due within one year
of the Statement Date (or any portion
thereof): $________
Minus: Deferred taxes arising from capitalized
excess servicing fees and
capitalized servicing rights: $________
DEBT $________________
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<PAGE>
III. RATIO OF DEBT TO TANGIBLE NET WORTH
A. The ratio of Debt to Tangible Net Worth (II to I.A.) is:
________ to 1
B. Requirements of Section 7.7 of the Agreement:
The ratio of Debt to Tangible Net Worth shall not
exceed 10 to 1.
C. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
IV. DIVIDENDS
A. The dividends declared or paid by the Company with respect to the
current fiscal year was: $________
B. Net Income of the Company with respect to the current fiscal year
was: $________
C. Requirements of Section 7.10 of the Agreement:
No dividends shall be declared or paid in excess of 25% of the
Company's net income.
D. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
V. CURRENT RATIO
A. Current assets of the Company was: $________
B. Current liabilities of the Company was: $________
C. Ratio of current assets to current liabilities
was: _____ to 1.0
D. Requirements of Section 7.6 of the Agreement:
The current ratio shall not be less than 1.01 to 1.00.
E. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
VI. LIABILITY GROWTH
A. Liabilities at end of most recent Fiscal
Quarter was: $________
B. Liabilities at the end of prior Fiscal
Quarter was: $________
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<PAGE>
C. Requirements of Section 7.9 of the Agreement:
Liabilities at the end of the most recent Fiscal Quarter shall not
exceed 150% of liabilities at the end of the prior Fiscal Quarter.
D. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
VII. TRANSACTIONS WITH AFFILIATES
A. Loans, advances, and extensions of credit made by the Company to
its Affiliates total: $________
B. Capital contributions made by the Company to its Affiliates total:
$________
C. Management fees paid to Affiliates during the current fiscal year
total: $________
D. Transfers, sales, pledges, assignments or other dispositions of
assets made by the Company to its Affiliates total: $________
E. Requirements of Section 7.11 of the Agreement:
1. Loans, advances, extensions of credit or capital
contributions shall not exceed $1,000,000.
COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
2. No transfers, sales, pledges assignments or other
dispositions of assets by the Company to Affiliates.
COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
3. No merger, consolidation, purchase or acquisition of assets
by the Company to Affiliates.
COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
4. Management fees paid by the Company to Affiliates shall not
exceed $1,000,000 per month.
COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
VIII. GUARANTOR'S NET LOSS
A. Guarantor's net loss through the end of the most recently
completed Fiscal Quarter was: $________
B. Guarantor's Permitted Cumulative Loss was: $________
-5-
<PAGE>
C. Requirements of Section 8.1(r) of the Agreement:
Guarantor's Net Loss shall not exceed the Permitted Cumulative
Loss.
D. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
IX. GUARANTOR'S TANGIBLE NET WORTH
A. Tangible Net Worth of the Guarantor is:
Excess of total assets over total liabilities: $________
Plus: Subordinated Debt not due within one year
of the Statement Date (or any portion
thereof): $________
Minus: Advances to owners, officers,
employees or Affiliates: $________
Minus: Investments in Affiliates: $________
Minus: Assets pledged to secure liabilities
not included in Debt: $________
Minus: Intangible assets: $________
Minus: Any other HUD nonacceptable assets: $________
Minus: Other assets unacceptable to the
Lender: $________
TANGIBLE NET WORTH $________________
B. Requirements of Section 8.1(t) of the Agreement:
THE TANGIBLE NET WORTH OF THE GUARANTOR IS AT ANY TIME LESS THAN
$13,000,000 PLUS 75% OF THE NET PROCEEDS OF ANY SHARES OF STOCK OF
THE GUARANTOR SOLD ON OR AFTER THE CLOSING DATE.
C. COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
X. DEBT OF THE GUARANTOR
Total liabilities $________
Minus: Debt arising under Hedging Arrangements
(to the extent of offsetting assets) $________
Minus: Subordinated Debt not due within one year
of the Statement Date (or any portion
thereof): $________
Minus: Deferred taxes arising from capitalized
excess servicing fees and
capitalized servicing rights: $________
DEBT $________________
XI. RATIO OF DEBT TO TANGIBLE NET WORTH OF GUARANTOR
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<PAGE>
A. The ratio of Debt to Tangible Net Worth (X. to IX.A) is:
________ to 1
B. Requirements of Section 8.1(s) of the Agreement:
THE RATIO OF DEBT TO TANGIBLE NET WORTH OF GUARANTOR SHALL NOT
EXCEED 10 TO 1.
C0 COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
XII LIABILITY GROWTH OF GUARANTOR
A0 Liabilities of Guarantor at end of most recent Fiscal
Quarter was: $________
B0 Liabilities of Guarantor at the end of prior Fiscal
Quarter was: $________
C0 Requirements of Section 8.1(u) of the Agreement:
Liabilities of Guarantor at the end of the most recent Fiscal
Quarter shall not exceed 150% of liabilities at the end of the
prior Fiscal Quarter.
D0 COVENANT SATISFIED:____ COVENANT NOT SATISFIED:____
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<PAGE>
EXHIBIT N
FISCAL YEAR 2000 LOSSES
<TABLE>
<CAPTION>
Permitted
Fiscal Quarter Ending Anticipated Loss Cumulative Loss
- --------------------- ---------------- ----------------
<S> <C> <C>
December 31, 1999 $22,342,000 $27,927,500
March 31, 2000 $ 6,338,000 $ 8,873,200
June 30, 2000 $11,574,000 $16,203,000
</TABLE>
-8-
<PAGE>
EXHIBIT O
ASSUMED NAMES
(if none, state "none")
Monument Mortgage, Inc. dba FiNet.com
Monument Mortgage, Inc. dba Interloan.com
Monument Mortgage, Inc. dba Finet Direct
<PAGE>
EMPLOYMENT AND COMPENSATION AGREEMENT
This Employment and Compensation Agreement (the "Agreement") is entered
into in Contra Costa County, California, as of the 28th day of December, 1999,
by and between, FiNet.com, Inc., a Delaware corporation (herein "FiNet" or
"Employer") and Rick Cossano ("Employee"), who agree as follows:
This Agreement is made with reference to the following facts:
FiNet, is a provider of both traditional and e-commerce home financing
services.
Employee desires to perform services for Employer and Employer desires to
engage Employee to perform services in accordance with the terms and conditions
set forth in this Agreement.
NOW THEREFORE, in consideration of the foregoing and of the covenants,
representations and promises set forth in this Agreement, the parties hereto,
agree as follows:
1. EMPLOYMENT.
a. Employer hereby offers Employee employment with Employer, and
Employee hereby accepts employment, commencing on February 1, 2000 on the terms
and conditions contained in this Agreement.
b. Employee shall serve as President and Chief Executive Officer of
FiNet, reporting directly to FiNet's Board of Directors or its designee. In
that capacity, Employee shall faithfully and diligently carry out such duties
and have such responsibilities as are customary among persons employed in
substantially similar capacities for similar companies, provided that Employee
shall at all times be subject to the direction of the Board of Directors of
FiNet. Employee agrees to the best of his ability and experience to perform
loyally and conscientiously all of the duties and responsibilities required of
him, either expressly or implicitly, by the terms of this Agreement.
c. Location of Employee's employment shall be San Ramon, California.
2. TERM OF EMPLOYMENT. Employee's Term of Employment in accordance with the
terms of this Agreement, shall commence as of February 1st, 2000 and shall
terminate upon the earlier of thirty-six months, or as is otherwise specified in
this Agreement (the "Term of Employment").
3. COMMITMENT. Except as is otherwise provided herein, during the Term of
Employment Employee shall devote one hundred (100%) percent of his entire
productive time, ability, and attention to the business of the Employer. Except
as is otherwise provided herein, Employee shall not render any services of a
commercial or professional nature to any other person or organization, whether
for compensation or otherwise, without the prior written consent of the Board of
FiNet. However, the expenditure of reasonable amounts of time for educational,
charitable, or professional activities shall not be deemed a breach of this
Agreement if those activities do not materially interfere with the services
required under this Agreement and shall
<PAGE>
not require the prior written consent of the Board of FiNet. Notwithstanding
the foregoing, this Agreement shall not be interpreted to prohibit Employee from
making passive personal investments or conducting private business affairs if
those activities do not materially interfere with the services required under
this Agreement.
4. COMPETITIVE ACTIVITIES.
a. During the Term of Employment, Employee shall not, directly or
indirectly, own an interest in, operate, join, control, or participate in, or be
connected as an officer, employee, agent, independent contractor, partner,
shareholder or principal of any corporation, partnership, proprietorship, firm,
association, person, or other entity producing, designing, providing, soliciting
orders for, selling, distributing, or marketing products, goods, equipment, or
services that compete directly or indirectly with Employer's products and
services or Employer's business, without first obtaining the written approval of
Employer. Such approval may be rescinded by Employer if and when, in the
opinion of Employer, such activities materially inhibit Employee's performance
under this Agreement or place Employer at risk.
b. For one year following his termination as an Employee of, or
consultant to, Employer, whichever occurs later ("Post-termination Period"),
Employee shall not be prohibited from employment in the mortgage industry
involving activities similar to those engaged in prior to becoming an Employee
of or consultant to Employer, except, however, Employee shall not undertake any
employment or activity competitive with Employer's business in which the loyal
and complete fulfillment of the duties of the competitive employment or activity
would call on Employee to reveal or otherwise to use any confidential business
information or trade secrets of Employer's business to which Employee had access
by reason of his prior engagement by Employer.
c. During the Term of Employment and the Post-termination Period,
Employee shall not, directly or indirectly, either for himself or for any other
person, firm, or corporation, divert or take away or attempt to divert or take
away (and during the Post-termination Period, call on or solicit or attempt to
call on or solicit) any of Employer's customers or patrons, including but not
limited to those on whom Employee called or whom he solicited or to whom he
catered or with whom Employee became acquainted during his engagement by
Employer. Nothing herein shall limit Employee's right during the
Post-termination Period, to call on or solicit or attempt to call on or solicit
any of Employee's customers or patrons on whom Employee called or whom he
solicited or to whom he catered or with whom he became acquainted during the
period prior to Employee's engagement by Employer.
d. During the Term of Employment, Employee shall not undertake
planning for or organization of any business activity competitive with
Employer's business or combine or join with other employees or representatives
of Employer's business for the purpose of organizing any such competitive
business activity.
e. During the Term of Employment and the Post-termination Period,
Employee shall not, directly or indirectly or by action in concert with others,
induce or influence (or seek to induce or influence) any person who is engaged
(as an employee, agent, independent contractor, or otherwise) by Employer to
terminate his or her employment or engagement.
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<PAGE>
5. COMPENSATION. As compensation for the services to be rendered by
Employee hereunder during the Term of Employment, Employer shall pay Employee a
Base Salary and additional compensation based upon the performance of Employee,
as is more specifically set forth in Addendum A to this Agreement ("Adjusted
Base Salary"). In addition, Employee shall be granted those equity incentives
as are more specifically set forth in Addendum A to this Agreement.
6. BENEFITS. In addition to the compensation described herein above, during
the Term of Employment, Employee shall be eligible to receive the following
benefits:
a. Such health insurance and other benefits that Employer may, from
time to time, make available to Employer's employees.
b. Vacation time, sick leave, holidays and personal time in
accordance with Employer's vacation and absence policies, which Employer may,
from time to time, maintain for employees at Employee's level of employment.
c. Reimbursement of allowed business expenses, upon submission of
documentation in accordance with Employer's regular expense reimbursement
policies, for reasonable business expenses incurred on behalf of Employer by
Employee.
d. Participation in any savings plan, 401(k) plan, profit sharing
plan or pension plan, which Employer may, from time to time, maintain for
employees at Employee's level of employment, subject to plan eligibility.
7. CONFIDENTIAL INFORMATION.
a. Employee recognizes that, during the course of his employment with
Employer, he will be exposed to certain nonpublic, confidential information, the
disclosure of which to third parties would cause competitive injury to Employer.
Such confidential information includes but is not limited to Employer's
investment plans or strategies, trade secrets, sources of supply, customer
lists, lists of potential customers, customer or consultant contracts and the
details thereof, pricing policies, operational methods, marketing and
merchandising plans or strategies, business acquisition plans, personnel
acquisition plans, unannounced products and services, research and development
activities, processes, formulas, methods, techniques, technical data, know-how,
inventions, designs, financial or accounting data, inventory reports, production
schedules, cost and sales data, strategies, forecasts, and all other information
that is not publicly available pertaining to the business of Employer or any of
its affiliates. Such confidential information is hereinafter referred to as
"Confidential Information".
b. Confidential Information shall not include (i) any information
which is or becomes publicly available other than through breach of this
Agreement, or (ii) any information which is or becomes known or available to
Employee on a non-confidential basis and not in contravention of applicable law
from a source which is entitled to disclose such information to Employee.
c. Employee agrees that he will not, while employed by Employer,
divulge Confidential Information to any person, directly or indirectly, except
to Employer or its officers
-3-
<PAGE>
and agents, or as reasonably required in connection with Employee's duties on
behalf of the Employer, except as is required by law or court order. Employee
further agrees not to use, except on behalf of the Employer, any Confidential
Information acquired by Employee during the Term of Employment. Employee agrees
that he will not at any time after his employment with Employer has ended,
divulge to any person, directly or indirectly, any Confidential Information,
except as is required by law or court order. Employee further agrees that, if
his relationship with the Employer is terminated for any reason, Employee shall
not take with him but will leave with Employer all records, papers, and computer
software and data, and any copies thereof relating to the Confidential
Information (or if such papers, records, computer software and data, or copies
are not on the premises of Employer, Employee agrees to return such papers,
records, and computer software and data immediately upon his termination).
Employee acknowledges that all such papers, records, computer software and data,
or copies thereof are and remain the property of Employer.
8. VOICE MAIL AND ELECTRONIC MAIL. All voice mail and electronic mail on
Employer's telephone or computer systems are the property of Employer and shall
be non-personal, non-private and non-privileged to Employee, and Employee shall
disclose to Employer all codes or passwords necessary for Employer to access
such voice mail or electronic mail.
9. COOPERATION. As a condition of his employment with Employer, Employee
agrees that he will not disrupt, damage, impair, or interfere with the business
of the Employer, such as by interfering with the duties of the Employer's
employees, disrupting relationships with Employer's customers, agents,
representatives, or vendors, or otherwise.
10. TERMINATION.
a. Employee may terminate this Agreement for any reason or for no
reason upon providing Employer with sixty (60) days prior written notice of his
intention to terminate.
b. Employer may terminate this Agreement upon written notice to
Employee prior to its expiration date for just cause or due to the Employee's
death or substantial physical impairment which prevents Employee from performing
his duties and responsibilities as set forth herein. For purposes of this
Section, "just cause" is defined as the failure of Employee to perform his
duties and responsibilities as set forth herein to the satisfaction of Employer;
a violation of Section(s) 3, 4, 7, 8, or 9 of this Agreement; fraud;
misappropriation of funds; breach of fiduciary duty; embezzlement; theft;
physical assault or threatened assault on another person; drunkenness on the
job; possession or use of narcotics on Employer's property; willful and material
damage to Employer's property; conviction of a felony; violation of any state or
federal law applicable to Employer's business or premises; or repeated or
material violations of Employer's policies, including but not limited to those
policies prohibiting unlawful employment discrimination and harassment. If
FiNet's Board of Directors determines that Executive has performed his duties
with gross negligence, is guilty of material misconduct in connection with the
performance of his duties or if the Executive is convicted of any serious crime
or offense, or fails or refuses to comply with the oral or written policies or
directives of the Company's Board of Directors (unless such instructions
represent an illegal act), the Company may at any time thereafter (i) by written
notice to the Executive terminate the Executive's right to enter the Company's
premises, and such termination shall be effective as of the date notice is given
hereof;
-4-
<PAGE>
and (ii) by 30 days written notice to the Executive terminate the Term of the
Executive's employment hereunder, and the Executive shall have no right to
receive any monetary compensation hereunder in respect of any period after the
term of such notice. Notwithstanding the foregoing, if Employee is terminated
by reason of the failure of Employee to perform his duties and responsibilities
as set forth herein to the satisfaction of the Board of Directors, Employee
shall receive six months of base salary as severance pay.
c. In the event Employee's employment is terminated, whether by
Employer for "just cause", as is defined herein or due to the Employee's death
or substantial physical or mental impairment preventing Employee from performing
the essential functions of his job, or by Employee as provided herein, Employer
shall have no further obligation to pay any compensation to or benefits on
behalf of Employee, however all compensation accrued as of the date of
termination shall be paid to Employee upon termination.
d. Upon termination of his employment, Employee agrees to deliver
promptly to Employer all records, files, drawings, documents, specifications,
blueprints, letters, notes, reports and computer software, and all copies
thereof, and any and all materials relating to Employer's Confidential
Information that is in Employee's possession or control. At the time of
termination, Employee will have an exit interview with Employer wherein Employee
will certify that Employee has returned to Employer all tangible Confidential
Information disclosed to him, and disclose Inventions conceived or developed by
him during the Term of Employment.
e. Sections 4, 7, 10, 11, 12, 13, 14, 15, and 16, hereof, shall
survive termination of this Agreement.
11. ASSIGNMENT. The rights and liabilities of the parties hereto shall bind
and inure to the benefit of their respective successors, executors and
administrators, as the case may be; provided that, as Employer has specifically
contracted for Employee's services, Employee may not assign or delegate his
duties and responsibilities under this Agreement either in whole or part without
the prior written consent of Employer. Employer may assign its rights and
obligations to a successor in interest to Employer, provided such successor
assumes all obligations and liabilities thereunder.
12. SEVERABILITY OF PROVISIONS. In the event any provision of this Agreement
is held to be illegal, invalid, or unenforceable under any present or future
law, (a) such provision will be fully severable, (b) this Agreement will be
construed and enforced as if such illegal, invalid, or unenforceable provision
had never comprised a part hereof, (c) the remaining provisions of this
Agreement will remain in full force and effect and will not be affected by the
illegal, invalid, or unenforceable provision or by its severance herefrom, and
(d) in lieu of such illegal, invalid, or unenforceable provision, there will be
added automatically as a part of this Agreement a legal, valid, and enforceable
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible.
13. MEDIATION AND ARBITRATION. Initially all claims and controversies of any
kind relating to this Agreement shall be submitted to mediation pursuant to the
services of JAMS/Endispute Mediation Service ("JAMS") with the venue of the
mediation being San Francisco, CA. In the event the matter cannot be disposed
of by mediation, all claims and controversies of any kind
-5-
<PAGE>
relating to this Agreement shall be finally settled by binding arbitration
before a single JAMS arbitrator in San Francisco, CA, in accordance with the
JAMS/Endispute Rules and Procedures for Mediation/Arbitration of Employment
Disputes. The parties to this Agreement shall be bound by the decisions in any
such arbitration, and judgment upon such arbitration may be entered by any court
of proper jurisdiction. Notwithstanding the applicable rules of JAMS, in
accordance with California Code of Civil Procedure Section 1283.1 (b), the
parties agree that depositions may be taken and discovery obtained in any
arbitration proceeding relating to this Agreement in accordance with California
Code of Civil Procedure Section 1283.05. Attorney's fees and costs shall be
allocated by agreement in mediation or by the arbitrator in arbitration.
14. NOTICES. Any notice provided for in this Agreement must be in writing
and must be either personally delivered, or mailed by certified mail (postage
prepaid and return receipt requested), or sent by reputable overnight courier
service, to the recipient at the address below indicated:
To Employee: Rick Cossano
5463 Castle Rock Drive
La Canada, CA 96140
To Employer: FiNet.com, Inc.
2527 Camino Ramon
San Ramon, California 94583
Attn: Chief Financial Officer
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or if mailed, five (5) days after deposit in a U.S. Postal facility.
15. ENTIRE AGREEMENT: AMENDMENTS AND WAIVERS. This Agreement contains the
sole, complete, final, exclusive and entire agreement between the parties
pertaining to the employment of Employee by Employer and supersedes all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties. No amendment, supplement, modification, rescission or
waiver of this Agreement shall be binding unless executed in writing by the
parties. No waiver of any of the provisions of this Agreement shall be deemed
or shall constitute a continuing waiver unless otherwise expressly provided.
The parties expressly acknowledge that they have not relied upon any prior
agreements, understandings, negotiations or discussions, whether oral or
written.
16. CHOICE OF LAW. The rights and duties of the parties will be governed by
the law of the State of California, excluding any choice-of-law rules that would
require the application of laws of any other jurisdiction.
17. INSURANCE. Employee shall cooperate with Employer, at no cost to
Employee, should Employer wish to purchase key-man insurance on Employee's life.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
EMPLOYER EMPLOYEE
By: By:
--------------------------- -------------------------
S. Lewis Meyer,
Chairman of Compensation
Committee Board of Directors
Date: December 28, 1999 Date: December 28, 1999
-7-
<PAGE>
ADDENDUM A
EMPLOYMENT CONTRACT
RICK COSSANO
This Addendum between Rick Cossano (Cossano), and FiNet.com, Inc.
(FiNet), shall define the terms of Compensation.
SALARY - Cossano shall receive a base salary of $375,000.
BONUS - Cossano shall be eligible to receive an annual bonus of up to
$400,000. Said bonus shall be paid quarterly subject to achievement of mutually
agreed upon benchmarks, but shall be no less than $100,000 during the first six
months of the term of this Agreement nor more than $200,000 during any six month
period thereafter.
EQUITY INCENTIVES - Cossano shall be entitled to a total of three
million qualified stock options or warrants. Said options shall be based on
market price of FiNet stock upon execution of this Agreement. Options shall
vest as follows:
500,000 upon execution of agreement.
250,000 on the sixth month anniversary of employment
250,000 on the twelve-month anniversary of employment
1,000,000 on the twenty-fourth month anniversary of employment
1,000,000 on the thirty-sixth month anniversary of employment
CHANGE OF CONTROL. In the event a person or entity gains ownership of
over 35% of the outstanding shares of FiNet ("Change of Control"), all of the
Employee's Options shall fully vest. In conjunction with the Change of Control
or thereafter during the Term of Employment, should Employee's employment by
FiNet be terminated by Employer without "just cause", Employer will continue to
pay Base Salary compensation through the remaining Term of Employment. All of
Employee's vested Options must be exercised within 90 days of the date of
termination.
RELOCATION EXPENSES. Employee shall be reimbursed for actual expenses
incurred in the relocation of his family to Northern California in an amount not
to exceed $40,000 ("Relocation Expenses"). Relocation Expenses shall be limited
to those expenses reasonably incurred by Employee in the moving of his family
and furnishings from his current residence in La Canada, California to a
residence in Northern California. For purposes of this Addendum Relocation
Expenses shall be limited to:
a. Packing and unpacking of furnishings;
b. Transportation costs charged by a household goods carrier for
shipment of household goods from La Canada, California to Northern
California;
Addendum A
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<PAGE>
c. Coach airfare and lodging for Employee and his spouse to visit
Northern California to look for a residence; and
d. Payment of industry standard real estate commission on the sale of
Employee's residence in La Canada, California.
If Employee terminates his employment prior to January 31, 2001, Employee
shall be required to repay Employer upon termination the Relocation Expenses
paid in accordance with this provision.
BOARD MEMBERSHIP - Cossano shall serve as a member of the FiNet Board of
Directors
-----------------------------------
S. Lewis Meyer,
Chairman of Compensation Committee
Board of Directors
-----------------------------------
Rick Cossano
Addendum A
-2-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-50833, Form S-3 No. 333-93809, Form S-8 No. 333-84245) of
FiNet.com, Inc. and subsidiaries and in the related Prospectus of our report
dated February 22, 2000 (except Note 6, as to which the date is March 30, 2000),
with respect to the consolidated financial statements and schedules of
FiNet.com, Inc. and subsidiaries included in this Form 10-K for December 31,
1999.
/s/ Ernst & Young LLP
San Francisco, California
March 30, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF REUBEN E. PRICE & CO., INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-3 (No. 333-50833 and No. 333-93809) and on Form S-8 (No. 333-57287 and
No. 333-84245) of FiNet.com, Inc. and subsidiaries and in the related Prospectus
of our report dated August 12, 1998 with respect to our audit of the
consolidated financial statements and schedules of FiNet.com, Inc. and
subsidiaries included in this Form 10-K for the eight month period ended
December 31, 1999 as of and for each of the years in the two-year period ended
April 30, 1998.
/s/ Reuben E. Price & Co.
San Francisco, CA
March 29, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-3 (No. 333-50833 and No. 333-93809) and on Form S-8 (No. 333-57287 and
No. 333-84245) of FiNet.com, Inc. and subsidiaries and in the related Prospectus
of our report dated July 9, 1998 (with respect to Note C July 31, 1998) with
respect to our audit of the financial statements (not included in the Form 10K
of FINET.com for the eight months ended December 31, 1999) of Coastal Federal
Mortgage Company, a wholly owned subsidiary of FiNET.com as of and for each of
the years in the two-year period ended April 30, 1998.
/s/ Richard A. Eisner & Company, LLP
Florham Park, New Jersey
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED FINANCIALS REPORTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1999
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