-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fqvb7JfDZ6V5oTfn7soC475bQVeOSn8gkM56UaQbOMBAeZ08qAQEndZMdqY5WA1Y VDhL1deRdIGoIJD7k0Cnhg== 0000912057-00-015587.txt : 20000403 0000912057-00-015587.hdr.sgml : 20000403 ACCESSION NUMBER: 0000912057-00-015587 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINET COM INC CENTRAL INDEX KEY: 0000852450 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 943115180 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18108 FILM NUMBER: 590917 BUSINESS ADDRESS: STREET 1: 2527 CAMINO RAMON STREET 2: SUITE 200 CITY: SAN RAMON STATE: CA ZIP: 94583 BUSINESS PHONE: 9252426550 MAIL ADDRESS: STREET 1: 2527 CAMINO RAMON STREET 2: SUITE 200 CITY: SAN RAMON STATE: CA ZIP: 94583 FORMER COMPANY: FORMER CONFORMED NAME: FINET HOLDINGS CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WILLIAM & CLARISSA INC DATE OF NAME CHANGE: 19920525 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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) DELAWARE 94-3115180 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.)
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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- $.01 PAR VALUE COMMON STOCK Nasdaq
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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS 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
2 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 3 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 4 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 5 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 6 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 7 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. 8 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 9 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. 10 LOAN ORIGINATION The following table summarizes our originations for the categories of mortgage loans by type in the periods indicated for our ongoing businesses.
EIGHT MONTHS ENDED DECEMBER 31 FISCAL YEAR ENDED APRIL 30 ---------------------- ------------------------------------ 1999 1998 1999 1998 1997 -------- -------- -------- -------- -------- 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......................... * -- * * *
- ------------------------ * Less than one percent 11 The following table summarizes originations for the categories of mortgage loans by type in the periods indicated for our discontinued businesses.
EIGHT MONTHS ENDED DECEMBER 31 FISCAL YEAR ENDED APRIL 30 ----------------------- ------------------------------------ 1999 1998 1999 1998 1997 --------- -------- -------- -------- -------- 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% -- --
The following table summarizes our originations of mortgage loans by purpose in the periods indicated for our ongoing businesses.
EIGHT MONTHS ENDED DECEMBER 31 FISCAL YEAR ENDED APRIL 30 ---------------------- ------------------------------------ 1999 1998 1999 1998 1997 -------- -------- -------- -------- -------- 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%
12 The following table summarizes our originations of mortgage loans by purpose in the periods indicated for our discontinued businesses.
EIGHT MONTHS ENDED DECEMBER 31 FISCAL YEAR ENDED APRIL 30 ---------------------- ------------------------------------ 1999 1998 1999 1998 1997 -------- -------- -------- -------- -------- 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% -- -- --
- ------------------------ * Less than one percent The following table summarizes our originations of mortgage loans by channel in the periods indicated for our ongoing businesses.
EIGHT MONTHS ENDED DECEMBER 31 FISCAL YEAR ENDED APRIL 30 ---------------------- ------------------------------------ 1999 1998 1999 1998 1997 -------- -------- -------- -------- -------- 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%
The following table summarizes our originations of mortgage loans by channel in the periods indicated for our discontinued businesses.
EIGHT MONTHS ENDED DECEMBER 31 FISCAL YEAR ENDED APRIL 30 ---------------------- ------------------------------------ 1999 1998 1999 1998 1997 -------- -------- -------- -------- -------- 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%
13 GEOGRAPHIC CONCENTRATION The following table summarizes our loan originations by state in the periods indicated for our ongoing businesses.
EIGHT MONTHS ENDED DECEMBER 31 FISCAL YEAR ENDED APRIL 30 ---------------------- ------------------------------------ 1999 1998 1999 1998 1997 -------- -------- -------- -------- -------- 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%
- ------------------------ * Less than one percent 14 The following table summarizes our originations of mortgage loans by state in the periods indicated for our discontinued businesses.
EIGHT MONTHS ENDED DECEMBER 31 FISCAL YEAR ENDED APRIL 30 ---------------------- ------------------------------------ 1999 1998 1999 1998 1997 -------- -------- -------- -------- -------- 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%
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 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 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 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 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 - 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 EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding FiNet.com's executive officers and directors as of March 1, 2000.
NAME AGE POSITION - ---- -------- ------------------------------------------------ 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
- ------------------------ (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 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 22 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. 23 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.
HIGH LOW -------- -------- 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
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. 24 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 25 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.
EIGHT MONTHS ENDED FISCAL YEAR ENDED APRIL 30 DECEMBER 31 ---------------------------------------------------- 1999 1999 1998 1997 1996(2) 1995(2) ------------ -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 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
- ------------------------ (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 26 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 27 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:
EIGHT MONTHS FISCAL YEARS ENDED APRIL 30 ENDED ------------------------------ DECEMBER 31, 1999 1999 1998 1997 ----------------- -------- -------- -------- (IN THOUSANDS) 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 ======= ======== ====== ======
28 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.
FOR THE EIGHT MONTHS ENDED DECEMBER 31 ------------------------- 1999 1998 --------- --------- (IN THOUSANDS)(UNAUDITED) Business-to-Business................................. $428,400 $144,100 Consumer-direct...................................... 90,600 529,700 -------- -------- Total Loan Volume................................ $519,000 $673,800 ======== ========
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. 29 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. 30 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 31 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. 32 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. 33 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. 34 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. 35 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. 36 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, 37 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 38 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 39 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 40 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 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 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 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 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 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
45 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 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 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 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 FINET.COM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
APRIL 30 DECEMBER 31 ------------------- 1999 1999 1998 ----------- -------- -------- 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 ======== ======= ========
See accompanying notes to the consolidated financial statements. 50 FINET.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
EIGHT MONTHS ENDED DECEMBER 31 YEARS ENDED APRIL 30 ---------------------- ------------------------------ 1999 1998 1999 1998 1997 -------- ----------- ---- -------- -------- (UNAUDITED) 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 ======== ======== ======== ======= =======
See accompanying notes to the consolidated financial statements. 51 FINET.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
ADDITIONAL COMMON STOCK PAID COMMON ACCUMULATED -------------------------------- IN STOCK COMPREHENSIVE SHARES AMOUNT SUBSCRIBED CAPITAL SUBSCRIPTION INCOME -------- -------- ---------- ---------- ------------ -------------- 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 ====== ==== ==== ======== ======= ====== ACCUMULATED (DEFICIT) TOTAL ------------ -------- 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 ======== ========
See accompanying notes to the consolidated financial statements. 52 FINET.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
EIGHT MONTHS ENDED DECEMBER 31 YEARS ENDED APRIL 30 ---------------------- ------------------------------ 1999 1998 1999 1998 1997 -------- ---- -------- -------- -------- (UNAUDITED) 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
See accompanying notes to the consolidated financial statements. 53 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 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 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):
EIGHT MONTHS ENDED DECEMBER 31 1999 YEARS ENDED APRIL 30 ---------------------- ------------------------------ 1999 1998 1999 1998 1997 -------- ----------- -------- -------- -------- (UNAUDITED) 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 ====== ======= ======= ======= =======
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 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 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 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 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:
EIGHT MONTHS FISCAL YEARS ENDED ENDED APRIL 30 DECEMBER 31 ------------------------------ 1999 1999 1998 1997 ----------- -------- -------- -------- (IN THOUSANDS) 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 ====== ====== ====== ====
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:
APRIL 30 DECEMBER 31 ------------------- 1999 1999 1998 ----------- -------- -------- (IN THOUSANDS) 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 ====== ====== =======
60 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:
APRIL 30 DECEMBER 31 ------------------- 1999 1999 1998 ----------- -------- -------- (IN THOUSANDS) 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 ======= ======= =======
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 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 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:
FISCAL YEAR OPERATING CAPITAL - ----------- --------- -------- (IN THOUSANDS) 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 ======
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 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 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 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:
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) 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
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 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:
NUMBER OF EXERCISE PRICE YEAR OF WARRANTS ISSUED PER SHARE EXPIRATION - --------------------- -------------- ---------- (IN THOUSANDS) 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 ======
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 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 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.
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) 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)
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 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:
WEIGHTED- WEIGHTED- AVERAGE AVERAGE SHARES FAIR VALUE EXERCISE PRICE --------- ---------- -------------- 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
70 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:
WEIGHTED AVERAGE EMPLOYEE STOCK OPTION SUMMARY OPTIONS EXERCISE PRICE EXERCISE PRICE - ----------------------------- ---------- -------------- -------------- 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 ==========
71 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:
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 - ------------------------ ------------- ---------------- ---------------- -------------- ---------------- 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 ========== =========
72 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 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:
FISCAL YEARS ENDED APRIL 30 EIGHT MONTHS ------------------------------ ENDED DECEMBER 31, 1999 1999 1998 1997 ----------------- -------- -------- -------- (IN THOUSANDS) 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 === === ==== ====
The reconciliation of the provision for income taxes computed at U.S. statutory income tax rates to pretax income is as follows:
EIGHT MONTHS ENDED FISCAL YEARS ENDED APRIL 30 DECEMBER 31 -------------------------------------- 1999 1999 1998 1997 ----------- -------- -------- -------- (IN THOUSANDS) 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% ===== ===== ===== =====
73 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:
APRIL 30 DECEMBER 31 ------------------- 1999 1999 1998 ----------- -------- -------- (IN THOUSANDS) 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............... $ -- $ -- $ -- ======== ======== ========
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 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:
EIGHT MONTHS FISCAL YEAR ENDED ENDED APRIL 30 DECEMBER 31 ------------------- 1999 1999 1998 ------------ -------- -------- (IN THOUSANDS) 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 --
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 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):
EIGHT MONTHS ENDED DECEMBER 31 FISCAL YEARS ENDED APRIL 30 ---------------------- ------------------------------ 1999 1998 1999 1998 1997 -------- ----------- -------- -------- -------- (UNAUDITED) 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 ======== ======== ======== =======
76 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 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:
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND ACQUIRED END OF DESCRIPTION OF PERIOD EXPENSES BUSINESS DEDUCTIONS PERIOD - ----------- --------- ---------- -------- ---------- ---------- (IN THOUSANDS) 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
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 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 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 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 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
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- 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
81
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- 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)
82
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- 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
- ------------------------ (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 (B) REPORTS ON FORM 8-K During the two months ended December 31, 1999, we filed two Current Reports on Form 8-K:
DATE ITEM DESCRIPTION - ---- -------- ----------- 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
84 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.
SIGNATURE OFFICE DATE --------- ------ ---- 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
84
SIGNATURE OFFICE DATE --------- ------ ---- /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
85 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- 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
86
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- 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
- ------------------------ (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 EX-10.22 2 EXHIBIT 10.22 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE 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 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 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 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
iv 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 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 "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 2 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 3 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. 4 "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. 5 "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 6 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 7 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 8 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, 9 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 10 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 11 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 12 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. 13 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 14 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 15 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 16 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 17 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 18 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. 19 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 20 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 21 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 22 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. 23 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. 24 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 25 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. 26 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 27 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 28 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 29 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. 30 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. 31 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 32 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. 33 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 34 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 35 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 36 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 37 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. 38 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. 39 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 40 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 41 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 42 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. 43 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. 44 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: 45 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 46 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 47 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 48 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 49 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 50 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 51 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 52 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, 53 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 54 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. 55 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 56 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 57 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, 58 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, 59 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 60 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. 61 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: ---------------------------------- 62 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: --------------- 63 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. 1 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: -------------- 2 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 1 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 2 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 3 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 4 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 5 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: 6 (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 7 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 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. 9 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. 10 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: -------------- 11 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. 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: --------------------------------- 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). 1 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; 2 (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 3 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." 4 (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 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: ---------------------------------------------------------------- EXHIBIT E SCHEDULE OF SERVICING PORTFOLIO
UNPAID PRINCIPAL BALANCE OF LOANS SERVICED AS OF INVESTOR NAME DATE OF THIS AGREEMENT - ------------- ----------------------- (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
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 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 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 (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 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 [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 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 EXHIBIT G SUBSIDIARIES
States Qualified to do Name Incorporated Business Owned (%) - ---- ------------ ---------- --------- (to be completed by Company) None
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 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 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 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 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 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 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 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 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 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 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 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 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 EXHIBIT J SCHEDULE OF EXISTING LINES OF CREDIT
LENDER NAME COMMITMENT AMOUNT EXPIRATION DATE - ----------- ----------------- --------------- (to be completed by Company) FNMA ASAP UNCOMMITTED NONE
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: ------------------------------ FORM OF COMMITMENT SUMMARY REPORT
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 - -------- --------- ---------- -------- --------- ---------- -------- ------- --------- ---------------- ------ TOTAL ------ --------- Wtd. Avg. Price of Unfilled Commitments: ------
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 ------------------ ---- EXHIBIT L Page 2
MORTGAGE POSITION REPORT Report Date: _______________ Total Locked and Unfilled Loan Type Applications Locked Pipeline Closed Warehouse Closed Loans Commitments Net Position - ---------- ------------- --------------- ---------------- -------------- ------------ -------------
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. 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- 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- EXHIBIT N FISCAL YEAR 2000 LOSSES
Permitted Fiscal Quarter Anticipated Loss Cumulative Loss - --------------- ---------------- --------------- 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
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: -------------------------------- EX-10.23 3 EXHIBIT 10.23 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- 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- 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- 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- 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- 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- 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- 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: --------------------------------- -2- 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 $________________ -3- 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: $________ -4- 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- 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 -6- 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:____ -7- EXHIBIT N FISCAL YEAR 2000 LOSSES
Permitted Fiscal Quarter Ending Anticipated Loss Cumulative Loss - --------------------- ---------------- ---------------- 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
-8- 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 EX-10.24 4 EXHIBIT 10.24 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 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. -2- 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- 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- 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- 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- 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- 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 -1- 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- EX-23.1 5 EXHIBIT 23.1 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 EX-23.2 6 EXHIBIT 23.2 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 EX-23.3 7 EXHIBIT 23.3 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 EX-27.1 8 EXHIBIT 27.1
5 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. 8-MOS DEC-31-1999 DEC-31-1999 18,626,000 2,674,000 1,863,000 0 0 0 4,877,000 406,000 119,808,000 0 0 0 0 934,000 1,704,000 119,808,000 0 6,070,000 0 22,975,000 0 0 1,002,000 (25,328,000) 0 (25,328,000) 0 0 0 (25,328,000) (.28) (.28)
-----END PRIVACY-ENHANCED MESSAGE-----