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FINET HOLDINGS CORPORATION,
MONUMENT MORTGAGE, INC.
AND
PREFERENCEAMERICA MORTGAGE NETWORK
TERM SHEET AGREEMENT
THIS TERM SHEET AGREEMENT, which is effective as of the 22nd day of
May, 1996 is intended to set forth the understanding of the parties as to
their respective commitments.
RECITALS
X. XXXXX HOLDINGS CORPORATION, a Delaware corporation ("Finet"),
MONUMENT MORTGAGE, INC., a California corporation ("MMI") and PREFERENCE
AMERICA MORTGAGE NETWORK, a California corporation ("PAMN"), wish to
combine their respective businesses by means of MMI and PAMN becoming
subsidiaries of Finet through an appropriate method of acquisition to be
determined, with the objectives of minimizing MMI tax consequences and
retaining existing MMI Lender approvals.
B. Two individuals, Xx. Xxxxx Xxxxx and Xx. Xxxxx Xxxxxxxx, are the
sole shareholders of MMI, and together with a third individual, Xx. X. X.
Xxxxxxxx, are the sole shareholders of PAMN.
C. The parties agree that upon consummation of the acquisitions of
MMI and PAMN, they intend to continue to operate under their respective
names; however, for purposes of relationships with the market, each will
become a wholly owned subsidiary of Finet and shall indicate that it is a
Finet company by use of the Finet name and logo in an appropriate manner.
D. The purpose of this Term Sheet Agreement is to set forth the
understanding of the parties relative to the matters above. After
execution of this Term Sheet Agreement, more Definitive Acquisition
Agreements (DAA) will be prepared which will contain the representations,
warranties, covenants and indemnities that are usual and customary in
transactions of this nature, and will be consistent in all material
respects with the terms of this Agreement. It is intended that this
Agreement will be a binding contract, subject to its terms and conditions.
AGREEMENT AND TERMS
In consideration of the mutual covenants contained herein, the parties
hereto hereby agree as follows:
I. Recitals
The above recitals are incorporated herein by reference.
II. MMI Shareholder Distribution
It is hereby acknowledged that, on or before May 31, 1996, the Board
of Directors of MMI intends to declare a distribution payable to the
shareholders of record in the amount of Two Million Dollars ($2,000,000).
Further, it is MMI's intent to distribute one half this amount
($1,000,000) in cash, and to issue a convertible subordinated debenture in
the amount of the remaining half ($1,000,000) which bears interest at the
Applicable Federal Rate (AFR) as established by the Internal Revenue
Service, and is convertible into MMI's common shares. These distributions
will be made prior to the acquisition of MMI by Finet.
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III. Acquisition of MMI
In consideration for the acquisition of all (100%) of the issued and
outstanding stock of MMI, Finet will (a.) retire the Monument convertible
subordinated debenture described in section II above by (i) issuing its own
subordinated convertible debenture with a face amount of one million
dollars ($1,000,000) or, at Finet's option, by (ii) issuing two million
(2,000,000) shares of Finet common stock to the debenture holders, (b.)
issue the number of shares of Finet's common stock equal to the sum of (i)
the 4/30/96 audited GAAP book value of MMI, adjusted for the results of
operations through the date of acquisition of MMI by Finet, plus (ii) the
value of MMI's loan servicing rights, net of recorded intangible servicing
rights, as established by independent appraisal as of said acquisition
date, divided by the price per share of the shares offered by Finet in its
current private placement, said price expected to be fifty cents ($0.50)
per share, and (c.) by issuing an additional Two Million (2,000,000) shares
of Finet common stock. The parties agree that subsequent changes in the
market price of Finet stock will not cause a change in the number of shares
issued.
Should Finet chose to retire the MMI convertible subordinated
debenture in accordance with section III(a)(i) above, the convertible
subordinated debenture issued by Finet in exchange for MMI's convertible
subordinated debenture shall have a term of five (5) years, bear interest
at the Applicable Federal Rate (AFR) as established by the IRS, payable
monthly, and at the option of Finet, may at any time, be retired for cash,
in part or entirely, upon thirty (30) days written notice, however, upon
such notice, the holders(s) shall have the right to chose shares in lieu of
cash at the rate of two (2) shares per retirement dollar.
IV. Acquisition of PAMN
Subject to completion of an acceptable employment contract revision
for Xx. Xxxxx Xxxxxxxxx, Executive Vice President and Regional Manager of
PAMN, and in consideration for the acquisition of all (100%) of the issued
and outstanding stock of PAMN, Finet will pay Two Hundred Fifty Thousand
Dollars ($250,000) in cash to the shareholders of PAMN. In the event that
Xx. Xxxxxxxxx refuses to enter into an employment agreement with PAMN, the
purchase price for PAMN will be renegotiated. The close of the PAMN
acquisition will be concurrent with the MMI close, and if the acquisition
of either MMI or PAMN fails to occur, the acquisition of the other is
hereby canceled.
V. Audit
Prior to July 15, 1996, MMI and PAMN will each provide complete
financial statement audits, at their respective expenses, to comply with
the requirements of the Securities and Exchange Commission for a registered
Section 12(g) company. Normally this would require three years of income
statements and two years of balance sheets.
VI. Retention
Twenty percent (20%) of the shares issued to MMI shareholders by Finet
for the acquisition of MMI will be escrowed in a Retention Account. During
the twenty-four month period after the closing of the acquisition, the
Retention account ledger balance, with an initial value of zero, shall be
adjusted upward for the dollar value of any liabilities that are not
reflected on the balance sheets of Finet (or are not otherwise disclosed)
and to cover any and all damages that may arise out of the violations, if
any, of Finet's representations and warranties in the DAA, and adjusted
downward for (i) any liabilities that are not reflected on the balance
sheets of MMI and/or PAMN (or are not otherwise disclosed) and to cover any
and all damages that may arise out of the violations, if any, of their
representations and warranties in the DAA and (ii) any expenses incurred
for tax payments pursuant to VIII(m) below. At the expiration of the twenty-
four month period, the final balance of the Retention Account ledger shall
be calculated and, if said balance is negative, the equivalent number of
shares calculated, at CMV as herein defined, shall be retained by Finet and
the remaining shares in the Retention Account, if any, shall be distributed
to the MMI shareholders. If the final Retention Account balance is
positive, the equivalent number of shares, calculated at CMV as herein
defined, shall be issued by Finet and, together with all the shares in the
Retention Account, be distributed to the MMI shareholders. The maximum
number of additional shares issued by Finet, if any, shall be equal to the
initial number of shares escrowed in the Retention Account. All shares held
in the Retention Account shall continue to grant full voting rights to the
shareholders while in escrow.
It is understood that the calculation of the above items shall be based on
continuation of the same accounting methods currently used by Finet, MMI
and PAMN.
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VII. Board of Directors
Finet will nominate Xx. Xxxxx and Xx. Xxxxxxxx to be Members of the
Board of Directors of Finet, and will use its best efforts to cause their
election to the Board at its first regular meeting after the acquisition
date. Each officer of Finet who is a Director will vote in favor of these
nominations at said meeting.
VIII. Employment & Consulting Contracts
Key management employees of MMI and PAMN have been identified as
Xxxx Xxxxxxxxx, Senior VP and CFO of MMI
Xxx Xxxxxx, Senior VP/Secondary Marketing of MMI
Xxxx Xxxxxxxxx, Senior VP/National Wholesale Loan Production
Manager of MMI
Xxxxx Xxxxxxxxx, Executive VP and Regional Manager of PAMN.
Existing employment contracts for these individuals will be revised
prior to the acquisition date to address their respective terms of
employment with the post-acquisition organization, including retention
commitments, stock options, non-compete & non-disclosure clauses, and
other critical terms. These agreements will be subject to review and
approval by Finet.
The parties hereto state their intent to require that the payment of
a fixed base salary in excess of $150,000 per year to any employee have the
recommendation of the compensation committee of the board and the approval
by not less than 75% of the members of the board of Directors not
abstaining.
Xx. Xxxxx and Xx. Xxxxxxxx will be employed by Finet on the following
basis: It is understood that the following terms shall be in effect until
replaced by individual employment contracts that are consistent in form and
content with the standards to be established by the compensation committee
for executive officers.
a) Title: Xx. Xxxxx: President of MMI
Xx. Xxxxxxxx: Executive VP of MMI and PAMN
b) Base Salary: $150,000 per annum, payable twice per month, net
of the cost of insurance
benefits and personal use of leased vehicles
c) Term: Three years from the closing of the acquisitions.
d) Participation in management stock option plan and/or incentive
plan as determined by the Board
of Directors for Xxxxx only.
e) Deleted
f) Benefits to include four weeks paid vacation and two weeks sick
leave annually and, subject to
applicable employer anti-discrimination requirements, if any,
full payment of all premiums for
company offered medical, dental, vision, life and disability
coverage.
g) Full time employment and no other competitive employment for
Xxxxx and Umphryes.
h) Termination only for cause as determined by the Board of
Directors with the definition of cause to be mutually agreed upon
in the DAA.
I) Location: as determined by the Board of Directors, and it is
hereby acknowledged that Umphryes
primary office may be in his home.
j) A reasonable non-compete, non-disclosure agreement.
k) Legal Fees: Finet acknowledges that Messrs. Xxxxx and Xxxxxxxx
and MMI are defendants in a current legal action
brought by prior shareholders which seeks the restoration of
shares previously sold. Finet agrees to continue to bear the
costs of defending this action up to a maximum of $250,000. Legal
costs in excess of that amount, if any, and all settlement costs
are the responsibility of Messrs. Xxxxx and Xxxxxxxx as
individuals.
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l) Currently Leased Vehicles: Finet will assume the current leased
vehicle obligations of MMI on behalf of Messrs.
Umphryes and Xxxxx, and will continue payment of all lease and,
up to a maximum personal use amount of $3,000 per year, all
related operating costs (insurance, fuel, oil, repairs and
maintenance) for the lesser of the existing lease period or one
year from the acquisition of MMI. Thereafter, Finet's obligation
will be limited to a maximum lease cost of $750 per month and
payment of related operating costs as above.
m) As sole shareholders of MMI, an S corporation, Messrs. Xxxxx and
Xxxxxxxx will have personal Federal and
California State income tax liabilities for the tax year 1996
based on the taxable income generated by MMI during the period of
time from January 1, 1996 through the acquisition date. Finet
agrees to pay said tax liability on behalf of Messrs. Xxxxx and
Umphryes with said tax payments(s) to be a Section VI Retention
Account adjustment item.
IX. Stand Still
Finet, MMI, PAMN and their shareholders will not, so long as this
Agreement is in effect, take any action out of the ordinary course of
business, such as a sale of assets, termination of employment, modification
of employment contracts, or distribution of dividends or bonuses (except
as described in section II. above). The parties agree that Finet intends
to enter employment agreements with certain of its managers which will be
consistent in form and content with those referred to herein for MMI and
PAMN employees and be subject to review and approval by MMI and Finet. The
balance sheet attached to the DAA will reflect any activities to the date
of the balance sheet, which will be dated as near to the closing date as is
practical.
X. Due Diligence
The parties shall use their best efforts in promptly undertaking
respective due diligence reviews. The parties hereby agree to complete
said reviews within 30 days of the date of this Agreement, unless extended
by mutual consent, which consent not to be unreasonably withheld. All
parties will cooperate in providing materials and access reasonably
necessary for an adequate due diligence effort. In the event any party is
of the opinion that a material fact has been revealed by their due
diligence, and that party wished to terminate this Agreement, the matter
will be submitted to mediation and arbitration as per the provisions of
Paragraph XIV below. The failure to discover a material fact during the
course of the respective due diligence reviews shall not be deemed a waiver
of a representation or warranty, nor a defense against potential damage
from the undiscovered matter.
XI. Closing
The parties to this Agreement will use their best efforts to be in a
position to sign DAA as soon as practicable, but, unless extended by mutual
consent, said consent not to be unreasonably withheld, not more than the
later of 60 days after the date of this Term Sheet Agreement or 30 days
after the first closing of Finet's private placement now in process.
XII. Success of Private Placement
It is hereby acknowledged that this agreement has been entered into on
the basis that the Finet private placement, now in preparation, will be
successful in raising equity capital of not less than Two Million Dollars
($2,000,000). The success of this private placement is critical to the
desire and ability for MMI and PAMN to be acquired as described herein and
therefore, the failure to raise said equity capital shall be considered
cause for termination of this Agreement by, and at the option of, the
shareholders of MMI.
XIII. Non Refundable Advance Payment
In consideration for the promise to stand still by MMI and PAMN,
within five (5) business days following receipt by Finet of the proceeds of
the first closing of its private placement now in preparation, Finet will
issue to the MMI shareholders Two Hundred Thousand (200,000) shares of
Finet's common stock. Said shares shall be considered as part of the share
consideration to be issued pursuant to Section III.
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XIV. Mediation and Arbitration
Initially all claims and controversies of any kind relating to this
Term Sheet Agreement shall within 30 days of notice of claim to the other
party be submitted to mediation pursuant to the services of an established
mediation service with the venue of the mediation being San Francisco,
California.
In the event the matter cannot be disposed of by mediation, all claims
and controversies of any kind relating to this Agreement shall be finally
settled by arbitration before a single arbitration in San Francisco in
accordance with the rules then obtaining of the American Arbitration
Association. All parties to this Agreement shall be bound by the decision
in any such arbitration, and judgment upon such arbitration may be entered
by any court of proper jurisdiction. In any such arbitration, the
arbitrators: (i) shall apply the provisions of this Term Sheet Agreement
without varying therefrom in any respect, and they shall not have the power
to add to, modify or change the provisions of this Agreement; (ii) shall
make specific written findings of fact and law; and (iii) shall apply the
law of California to all substantive issues of law. The foregoing shall
not preclude the parties from seeking injunctive or other inequitable
relief from any court of proper jurisdiction pending the outcome of any
arbitration.
Attorney fees and costs shall be allocated by agreement in mediation
and by the arbitrators in arbitration.
XV. Miscellaneous
a) The Current Market Value (CMV) of Finet Common Shares shall be
defined for this Agreement as the average
bid price over the 20 business day period ending 10 days prior to
the date of valuation.
b) Any press releases or formal filings concerning this Agreement
and the acquisitions shall be subject to the mutual
consent of the parties, which consents may not be unreasonably
withheld.
c) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of California.
d) If any portion of this Agreement is found to be illegal and/or
unenforceable, the remainder will continue in full
force and effect.
e) It is acknowledged that an existing Finet shareholder has agreed
to sell privately certain of its shares to certain key
employees of Finet and that, by separate agreement as
consideration for the bridge loan described below, 15% of said
shares shall be made available for purchase by certain MMI and
PAMN employees. This private sale of shares is considered by MMI
and PAMN to be a critical element to the acquisition herein
described.
f) It is acknowledged that PAMN has made a bridge loan in the amount
of Forty Thousand Dollars ($40,000) to
National Mortgage Network (NMN) and that Finet has an option to,
and intends to, acquire NMN. Upon successful completion of the
first close of its private placement, Finet agrees to repay that
loan and accrued interest within five (5) business days.
g) All parties to this agreement acknowledge that the acquisition
described herein will require approvals of certain
third parties (FHLMC, FNMA, DRE, DOC, etc.) and that the parties
agree that they will use their best efforts to obtain said
approvals as quickly as possible. It is agreed that, to the
extent that an approval is not obtained and such denial does not
create a legal prohibition to the acquisition or a material
diminution in value, it will not be cause for termination of this
Agreement.
h) The shareholders of MMI and PAMN have been required, in the
normal course of business, to make personal
guarantees for certain financing transactions and general
business relationships. Finet hereby agrees to negotiate with
holders of said guarantees to release the shareholders of MMI and
PAMN from these obligations. If releases are not possible, then
Finet will offer to assume these obligations, or in the event
that assumption is not possible, to indemnify the MMI and PAMN
shareholders for any losses suffered as a result of these
personal guarantees.
i) The shareholders of MMI are aware that the public sale of shares
of Finet common stock issued as consideration for
the acquisition of MMI stock may be restricted by means of a
"lock up" agreement. However, said agreement shall include,
unless prohibited by Finet's investment banker, the right to sell
to sell up to 100,000 shares per year for each MMI shareholder
and shall not apply to private transfers of Finet shares between
MMI shareholders or transfers for estate planning purposes to
closely held trusts or family members,
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The undersigned, having been duly authorized by their respective
Boards of Directors, have signed this Term Sheet Agreement as a binding
contract effective as of the date indicated above.
FINET HOLDINGS CORPORATION MONUMENT MORTGAGE, INC.
By: /s/ L. Xxxxxx Xxxxxxx By:
/s/ Xxxxx X. Xxxxx
L. Xxxxxx Xxxxxxx, CEO Xxxxx X. Xxxxx, President
PREFERENCE AMERICA MORTGAGE NETWORK
By: /s/ Xxxxx X. Xxxxxxxx
Xxxxx X. Xxxxxxxx, Director
