AGREEMENT AND PLAN OF MERGER DATED AS OF SEPTEMBER 5, 2005 AMONG ARH MORTGAGE INC., AIRLIE OPPORTUNITY MASTER FUND, LTD. AND UNITED FINANCIAL MORTGAGE CORP.

 

Exhibit 2.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SCHEDULE I 

 

SCHEDULE II

 

COMPANY DISCLOSURE SCHEDULE

 

 

ANNEX  B

Company Preferred Stock Repurchase Agreement

ANNEX  C

Form of Consulting Agreement among the Purchaser, the Company and Joseph  Khoshabe

ANNEX E

Form of Opinion of the Purchasers’ Counsel

 

AGREEMENT AND PLAN OF MERGER, dated as of September 5, 2005 (this “Agreement”), among ARH Mortgage Inc., a Delaware corporation (the “Purchaser”), Airlie Opportunity Master Fund, Ltd., a Cayman Islands limited partnership and the sole shareholder of the Purchaser (the “Purchaser Parent,” and together with the Purchaser, the “Purchasers”), and United Financial Mortgage Corp. (the “Company”), an Illinois corporation.

 

 

 

WHEREAS, the respective boards of directors of the Purchaser and the Company, and the partners of the Purchaser Parent, have determined that it is in the best interests of their respective companies and their shareholders or partners, as the case may be, to consummate the transactions being considered herein pursuant to which the Purchasers shall acquire control of the Company through the merger of the Merging Subsidiary, as defined below, with and into the Company (the “Merger”) with the Company being the surviving corporation (the “Surviving Corporation”); and

 

WHEREAS, pursuant to the terms of this Agreement, each issued and outstanding share of Company Common Stock (excluding Dissenting Shares and Treasury Stock), each as defined below, shall be exchanged for cash in an amount equal to $5.64 per share, and each issued and outstanding share of common stock of the Merging Subsidiary, as defined below, shall be exchanged for one (1) share of common stock of the Surviving Corporation, no par value per share; and

 

WHEREAS, as a material inducement to the Purchasers to enter into this Agreement, simultaneously with the execution of this Agreement, each Director Shareholder, as defined below, is entering into an agreement, in the form of Annex A hereto (collectively, the “Voting Agreements”), pursuant to which the Director Shareholders have agreed, subject to the terms and limitations set forth in the Voting Agreements, among other things, to vote their shares of Company Common Stock in favor of this Agreement; and

 

WHEREAS, the parties desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe certain conditions to the consummation of the Merger;

 

NOW, THEREFORE, in consideration of the premises and of the mutual covenants, representations, warranties and agreements contained herein, and intending to be legally bound hereby, the parties agree as follows:

 

ARTICLE I  

 

 

Section 1.01  Certain Definitions. The following terms are used in this Agreement with the meanings set forth below:

 

“Acquisition Proposal” means any proposal or offer with respect to any of the following (other than the transactions contemplated hereunder) involving the Company: (i) any merger, consolidation, share exchange, business combination or other similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets and/or liabilities that constitutes a substantial portion of the net revenues, net income or assets of the Company in a single transaction or series of transactions; (iii) any tender offer or exchange offer for 10% or more of the outstanding shares of its capital stock or the filing of a registration statement under the Securities Act in connection therewith; or (iv) any public announcement by any Person (which shall include any regulatory application or notice, whether in draft or final form) of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing.

 

“Acquisition Transaction” means any of the following (other than the transactions contemplated hereunder) involving the Company: (i) any merger, consolidation, share exchange, business combination or other similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets and/or liabilities that constitutes a substantial portion of the net revenues, net income or assets of the Company in a single transaction or series of transactions; or (iii) any tender offer or exchange offer for 10% or more of the outstanding shares of its capital stock or the filing of a registration statement under the Securities Act in connection therewith.

 

“Agency” means the FHA, the FHLMC, the FMHA (now RHCDS), the FNMA, the GNMA, HUD, the VA, RHS or a State Agency, as applicable.

 

“Agreement” means this Agreement, as amended or modified from time to time in accordance with Section 9.02.

 

“AmPro” means AmPro Mortgage Corporation.

“AmPro Acquisition” means the acquisition by the Company pursuant to the AmPro Agreement.

“AmPro Agreement” means the definitive agreement between AmPro and the Company, dated May 4, 2005, pursuant to which the Company has agreed to acquire certain business divisions of AmPro, as such agreement may be amended, revised, supplemented or otherwise modified from time to time.

“Business Day” means Monday through Friday of each week, except a legal holiday recognized as such by the U.S. Government or any day on which banking institutions in the State of Illinois are authorized or obligated to close.

 

“Certificate” means a certificate evidencing shares of Company Common Stock.

 

“Closing” and “Closing Date” have the meanings set forth in Section 2.02.

 

“Code” means the Internal Revenue Code of 1986, as amended.

 

“Company” has the meaning set forth in the preamble to this Agreement.

 

“Company Articles” means the Articles of Incorporation of the Company, as amended.

 

 

“Company Benefit Plans” has the meaning set forth in Section 5.01(o)(i).

 

“Company Board” means the Board of Directors of the Company.

 

“Company Bylaws” means the Bylaws of the Company, as amended.

 

“Company Common Stock” means shares of the common stock of the Company, no par value per share.

 

“Company Disclosure Schedule” has the meaning set forth at the beginning of Section 5.01.

 

“Company Employees” has the meaning set forth in Section 5.01(o)(i).

 

“Company Financial Advisor” means Ryan Beck & Co., Inc.

 

“Company Financial Statements” has the meaning set forth in Section 5.01(g).

 

“Company Group” means any “affiliated group” (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) that includes the Company or any predecessor of or any successor to the Company (or to another such predecessor or successor).

 

“Company Loan Property” has the meaning set forth in Section 5.01(q).

 

“Company Meeting” has the meaning set forth in Section 6.02.

 

“Company Options” means the options to acquire Company Common Stock issued under any Company Stock Incentive Plan.

 

“Company Pension Plan” has the meaning set forth in Section 5.01(o)(ii).

 

“Company Preferred Stock” means shares of the preferred stock of the Company, no par value per share.

 

“Company Preferred Stock Repurchase Agreement” has the meaning set forth in Section 3.05.

“Company Restricted Stock” means the Company’s restricted stock under any Company Stock Incentive Plan.

 

“Company Restricted Stock Award” means a grant of restricted stock under any Company Stock Incentive Plan.

 

“Company SEC Reports” has the meaning set forth in Section 5.01(bb).

 

“Company Stock” means, collectively, the Company Common Stock and the Company Preferred Stock.

 

 

“Company Stock Incentive Plan” means, either or both, as appropriate, the Company’s 1993 Non-Qualified and Incentive Stock Option Plan or the Company’s 2004 Stock Incentive Plan.

 

“Company Termination Reimbursement Amount” has the meaning set forth in Section 8.02(c)(ii).

 

“Confidentiality Agreement” means the Confidentiality Agreement, dated as of August 9, 2005, between the Company and Airlie Enterprises LLC.

 

“Consideration” has the meaning set forth in Section 3.01(a).

 

“Custodial Account” means all funds held or directly controlled by the Company with respect to any Mortgage Loan, including, but not limited to, all principal and interest funds and any other funds due, buydown funds, suspense funds, funds for the payment of Taxes, assessments, insurance premiums, ground rents and similar charges, funds for the payment of bankruptcy and fraud coverage, funds from hazard insurance loss drafts and other mortgage escrow and impound amounts (including interest thereon for the benefit of mortgagors, if applicable).

 

“Delinquent Loan” means those Mortgage Loans which, as of the Closing Date, are more than sixty (60) days delinquent or past due more than two (2) payments.

 

“Derivative Transactions” has the meaning set forth in Section 5.01(t)(iii).

 

“Director Shareholder” means each director of the Company who is a Shareholder.

“Dissenting Shares” has the meaning set forth in Section 3.07.

“Environmental Laws” has the meaning set forth in Section 5.01(q)(ii).

 

“Equal Credit Opportunity Act” means the Equal Credit Opportunity Act, as amended.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.

 

“Exchange Agent” means Corporate Stock Transfer, Inc., or such other exchange agent as may be designated by the Purchasers and reasonably acceptable to the Company to act as agent for purposes of conducting the exchange procedures described in Section 3.03.

 

 

“Exchange Agent Agreement” means the agreement among the Purchasers and the Exchange Agent, to be entered into subsequent to execution of this Agreement, relating to the obligations, rights and procedures set forth in Section 3.03 hereto, the terms of which shall be reasonably acceptable to the Company.

“Fair Housing Act” means the Fair Housing Act, as amended.

 

“FHA” means the Federal Housing Administration.

 

“FMHA” means the Farmers Home Administration, now known as RHCDS, or Rural Housing and Community Development Services.

 

“FNMA” means the Federal National Mortgage Association.

 

“FHLMC” means the Federal Home Loan Mortgage Corporation.

 

“GAAP” means accounting principles generally accepted in the United States of America.

 

“GNMA” means the Government National Mortgage Association.

 

“Governmental Authority” means any federal, state or local court, administrative agency or commission or other governmental authority or instrumentality.

 

“Hazardous Substance” has the meaning set forth in Section 5.01(q)(ii).

 

“HUD” means the United States Department of Housing and Urban Development.

 

“Illinois Business Corporation Act” means the Illinois Business Corporation Act of 1983, as amended from time to time.

“Indebtedness” with respect to any Person means (a) any obligation of the Person for borrowed money, including, without limitation: (i) any obligation or liabilities incurred for all or any part of the purchase price of property, stock or other assets or for the cost of property or other assets constructed or of improvements thereto, other than accounts payable included in current liabilities and incurred in the ordinary course of business (whether accrued, absolute, contingent, unliquidated or otherwise, known or unknown, whether due or to become due); (ii) obligations incurred for all or any part of the purchase price of property or other assets or for the cost of property or other assets constructed or of improvements thereto, other than accounts payable included in current liabilities and incurred in respect of property purchased in the ordinary course of business (whether or not the Person has assumed or become liable for the payment of the obligation) secured by Liens; (iii) the face amount of all letters of credit issued for the account of the Person and all drafts drawn thereunder; (iv) capitalized lease obligations; (v) all guarantees of the Person; (vi) annual employee bonus obligations that are not accrued on the Company’s most recent balance sheet provided to the Purchasers; (vii) installment purchases; and (viii) unpaid retroactive insurance premium obligations.

 

 

“Indemnified Party” and “Indemnifying Parties” have the meanings set forth in Section 6.08(a).

 

“Insurance Policies” has the meaning set forth in Section 5.01(x).

 

“Insurer” means the FHA, VA, RHS or any private mortgage insurer that insures or guarantees all or any portion of the risk of loss upon default by a Mortgagor under any Mortgage Loan or any other insurer that provides policies of life, hazard, disability, title or other insurance with respect to any of the Mortgage Loans or the collateral securing a Mortgage Loan.

 

“Investment Commitment” means the optional or mandatory commitment of the Company to sell to any Person, and a Person to purchase from the Company, a Mortgage Loan or an interest in a Mortgage Loan owned or to be acquired by the Company.

 

“Investor” means FNMA, FHLMC, GNMA or any other Person having the beneficial interest in a Mortgage Loan, or any purchaser or prospective purchaser of a Mortgage Loan.

 

“Investor Commitment” means the commitment of an Investor to purchase a Mortgage Loan owned by the Company.

 

“Investor Requirements” means any requirement, guide or indication set forth by the Investor(s) with which the Company is obligated to comply in the delivery of Mortgage Loans under an Investor Commitment or the Servicing of the Mortgage Loans, including but not limited to applicable rules, regulations, directives, guidelines, and instructions and the Servicing Agreements.

 

“IRS” means the Internal Revenue Service.

 

“Knowledge” as used with respect to the Company (including references to the Company being aware of a particular matter) means those facts that are known by the directors of the Company or, upon reasonable inquiry, to any of Steve Y. Khoshabe, Jason K. Schiffman, Michael A. Kraft, Robert L. Hiatt or Christian P. Kloster, and includes any facts, matters or circumstances set forth in any written notice from any Governmental Authority or any other written notice received by the Company. “Knowledge” as used with respect to any other Person (including references to such Person being aware of a particular matter) means those facts that are known by the senior officers and directors of such Person, or in the case of the Purchaser Parent, the senior officers and general partners of the Purchaser Parent, and includes any facts, matters or circumstances set forth in any written notice from any Governmental Authority or any other written notice received by that Person.

“Leases” means all leases, subleases, licenses and other agreements under which the Company uses or occupies or has the right to use or occupy, now or in the future, real property.

 

 

“Lending Policies” means the written policies and procedures used by the Company in the origination and administration of the Mortgage Loans and any applicable rules or regulations of Governmental Authorities.

“Liens” means any charge, mortgage, pledge, security interest, restriction, claim, lien or encumbrance.

 

“Loan Documents” means each agreement, contract, instrument or other document evidencing or governing, or executed and delivered by an obligor in connection with, any Mortgage Loan, including documentation in respect of guarantees and security interests granted or delivered by an obligor in connection with such Mortgage Loan.

 

“Loan File” means all documents, whether on hard copy, computer record, microfilm, imaged copies, or any other format, evidencing and pertaining or relating to the processing and origination of Mortgage Loans, as the case may be, including without limitation, all documents in the Company’s possession that are necessary to comply with or close a Mortgage Loan in accordance with applicable Mortgage Loan Requirements.

 

“Loan Reserve Policies” means any and all loan loss or loan reserve policies of the Company.

 

“Material Adverse Effect” means (a) with respect to the Company, any effect that is material and adverse to the financial position, results of operations or business of the Company or which would materially impair the ability of the Company to perform its obligations under this Agreement or otherwise materially impairs the ability of the Company to consummate the Merger; provided, however, that Material Adverse Effect shall not be deemed to include the impact of (i) changes in laws relating to mortgage banking or mortgage lending and similar laws of general applicability or interpretations thereof by Governmental Authorities, (ii) changes in GAAP or regulatory accounting requirements applicable to mortgage bankers, mortgage lenders or mortgage brokers generally, (iii) changes in general economic conditions (including interest rates) affecting mortgage bankers, mortgage lenders or mortgage brokers generally, (iv) factors affecting the financial markets as a whole (which factors do not disproportionately affect the Company as compared to other companies in its industry in any material respect), (v) any modifications or changes to valuation policies and practices in connection with the Merger or restructuring charges taken in connection with the Merger, in each case in accordance with GAAP, (vi) reasonable expenses incurred in connection with the Merger and (vii) the effects of any action or omission taken with the prior consent of the Purchasers or as otherwise expressly permitted by this Agreement (including compliance with the covenants contained in this Agreement); and (b) with respect to the Purchasers, any effect that materially impairs the ability of the Purchasers to make payment on the Closing Date of the aggregate Consideration or otherwise materially impairs the ability of the Purchasers to consummate the Merger.

 

“Material Contracts” has the meaning set forth in Section 5.01(m)(i).

 

 

“Merger” has the meaning set forth in the Recitals.

 

“Merging Subsidiary” means a wholly-owned subsidiary corporation of the Purchaser to be organized in the State of Illinois in connection with the execution of this Agreement and for the sole purpose of effecting the Merger.

 

“Mortgage” means a mortgage, deed of trust or other instrument pledging property as security for payment of a Mortgage Note.

 

“Mortgage Loan” means an individual mortgage loan that has been originated, serviced, owned or financed by the Company in the course of its business and for which under any legal theory, law or regulation the Company continues to hold an interest or continues to have any liability or obligation, which may include Servicing Rights and the obligations that would accompany such Servicing Rights.

 

“Mortgage Loan Requirements” means the (i) federal, state, local or foreign laws, rules, standards, requirements, administrative rulings, orders, or processes applicable to the processing, origination and servicing of Mortgage Loans, (ii) applicable responsibilities and obligations set forth in any agreement between the Company and an Agency, Investor or Insurer, and (iii) applicable requirements of an Investor, Agency or Insurer with respect to the processing or origination of Mortgage Loans.

 

“Mortgage Note” means a promissory note evidencing a Mortgage Loan secured by a Mortgage.

 

“Mortgagor” means the obligor on a Mortgage Note.

 

“National Labor Relations Act” means the National Labor Relations Act, as amended.

 

“Pool” means a group of Mortgage Loans that collateralize a mortgage-backed or asset-backed security issue.

 

“Purchaser” has the meaning set forth in the preamble to this Agreement.

 

“Purchasers” has the meaning set forth in the preamble to this Agreement.

“Purchaser Benefit Plans” has the meaning set forth in Section 6.09(a).

 

“Purchaser Board” means the board of directors of the Purchaser.

 

“Purchaser Parent” has the meaning set forth in the preamble to this Agreement.

“Purchaser Termination Reimbursement Amount” has the meaning set forth in Section 8.02(c)(i).

 

“Person” means any individual, bank, corporation, general, limited or limited liability partnership, association, joint-stock company, business trust, limited liability company, unincorporated organization or other organization or firm of any kind or nature.

 

 

 

“Proxy Statement” means the proxy statement, together with any amendments and supplements thereto, to be delivered to holders of Company Common Stock in connection with the solicitation of their approval of this Agreement.

 

“Rights” means, with respect to any Person, warrants, options, rights, convertible securities and other arrangements or commitments which obligate the Person to issue or dispose of any of its capital stock or other ownership interests.

 

“RHS” means the Rural Housing Service of the U.S. Department of Agriculture, or any successor thereto.

 

“Sales Commitments” means commitments of the Company to sell Mortgage Loans.

 

“SEC” means the Securities and Exchange Commission.

 

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations thereunder.

 

“Servicing Agreement” means each agreement between the Company and another Person (including an Investor) under which a Mortgage Loan is serviced or otherwise affecting the Servicing Rights.

 

“Servicing Rights” or “Servicing” means all of the Company’s obligations to service the Mortgage Loans in accordance with the Mortgage Loan Requirements, and all of the Company’s rights to receive the servicing fee income and any and all ancillary or other income including, without limitation, prepayment fees, premiums, late charge income, and all of the Company’s rights to hold and administer the related escrows and the records arising from or connected to any of the servicing of the Mortgage Loans that are owned by the Company as of the Closing Date.

 

“Shareholders” means shareholders of Company Common Stock immediately prior to consummation of the Merger.

 

“State Agency” means any state agency with authority to (i) regulate the businesses of the Company, including without limitation any state agency with authority to determine the investment, origination, lending or servicing requirements with regard to mortgage loans originated, purchased or serviced by the Company, or (ii) regulate the Company’s ability to originate, purchase or service mortgage loans, or otherwise promote mortgage lending, including without limitation state and local housing finance authorities.

 

“Subsidiary” means, with respect to any party, any corporation or other entity of which a majority of the capital stock or other ownership interest having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such party.

 

 

“Superior Proposal” means any bona fide written proposal made by a third party to acquire, directly or indirectly, including pursuant to a tender offer, exchange offer, merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction, for consideration consisting of cash and/or securities, more than 50% of the combined voting power of the shares of Company Common Stock then outstanding or all or substantially all of the assets of the Company and otherwise (i) on terms which the Company Board determines in good faith, after consultation with the Company Financial Advisor, to be more favorable from a financial point of view to the Shareholders than the Consideration, (ii) that constitutes a transaction that, in the Company Board’s good faith judgment, is reasonably likely to be consummated on the terms set forth, taking into account all legal, financial, regulatory and other aspects of such proposal, and (iii) for which financing, to the extent required, is then committed or which, in the good faith judgment of the Company Board based on the advice from the Company Financial Advisor, is highly likely to be obtained by such third party.

 

“Surviving Corporation” has the meaning set forth in the Recitals.

 

“Tax” and “Taxes” mean all federal, state, local or foreign income, gross income, gains, gross receipts, sales, use, ad valorem, goods and services, capital, production, transfer, franchise, windfall profits, license, withholding, payroll, employment, disability, employer health, excise, estimated, severance, stamp, occupation, property, environmental, custom duties, unemployment or other taxes of any kind whatsoever, together with any interest, additions or penalties thereto and any interest in respect of such interest and penalties.

 

“Tax Authority” and “Tax Authorities” means any Governmental Authority responsible for the assessment or collection of any Tax.

 

“Tax Returns” means any return, declaration or other report (including elections, declarations, schedules, estimates and information returns) with respect to any Taxes.

 

“Termination Fee” has the meaning set forth in Section 8.02(b).

“Treasury Stock” means shares of Company Stock held by the Company, or by the Purchasers, in each case other than in a fiduciary (including custodial or agency) capacity.

 

“VA” means the United States Department of Veterans Affairs, or any successor thereto.

 

“Voting Agreements” has the meaning set forth in the Recitals.

 

“Warrant” has the meaning set forth in Section 3.06.

 

 

ARTICLE II  

 

 

Section 2.01  The Merger.

 

(a)  The Merger. Subject to the terms and conditions of this Agreement, the Merging Subsidiary shall merge with and into the Company in accordance with the provisions of Article 11 of the Illinois Business Corporation Act. Upon consummation of the Merger, the separate corporate existence of the Merging Subsidiary shall terminate and the Company shall be the Surviving Corporation operating under the laws of the State of Illinois.

 

(b)  Articles and Bylaws. The Company Articles and Company Bylaws as in effect immediately prior to consummation of the Merger shall be the Articles of Incorporation and Bylaws of the Surviving Corporation.

 

(c)  Directors and Officers of the Surviving Corporation. The directors of the Surviving Corporation shall be the directors of the Merging Subsidiary immediately prior to the Merger. The executive officers of the Surviving Corporation shall be the executive officers of the Company immediately prior to the Merger.

 

(d)  Authorized Capital Stock. The authorized capital stock of the Surviving Corporation upon consummation of the Merger shall be as set forth in the Company Articles immediately prior to the Merger.

 

(e)  Effect of the Merger. On the Closing Date, all the property, rights, privileges, powers and franchises of the Company shall vest in the Surviving Corporation, and all debts, liabilities, obligations, restrictions, disabilities and duties of the Company shall become the debts, liabilities, obligations, restrictions, disabilities and duties of the Surviving Corporation.

 

Section 2.02  Closing. A closing (the “Closing”) shall take place at the principal offices of Thacher Proffitt & Wood llp (“Thacher Proffitt”) at 10:00 a.m., Eastern Time, on October 31, 2005 or such other place, at such other time, or on such other date as the parties may mutually agree upon (such date, the “Closing Date”). At the Closing, there shall be delivered to the Purchasers and the Company the certificates and other documents required to be delivered under Article VII hereof.

 

ARTICLE III  

 

 

 

Section 3.01  Consideration. Subject to the provisions of this Agreement, on the Closing Date, automatically by virtue of the Merger and without any action on the part of any Person:

 

(a)  Company Common Stock. Subject to the provisions of this Agreement, automatically by virtue of the Merger and without any action on the part of any Person, (i) each share of Company Common Stock issued and outstanding immediately prior to the Merger (excluding Dissenting Shares and Treasury Stock) shall be converted into the right to receive cash in an amount equal to $5.64 (the “Consideration”), and (ii) each Certificate representing issued and outstanding Company Common Stock shall, after the Closing Date, represent only the right to receive the Consideration specified in clause (i) above. Shareholders of the Company shall not be required or permitted to exchange Certificates evidencing Company Common Stock for certificates evidencing common stock of the Surviving Corporation upon consummation of the Merger.

 

 

(b)  Outstanding Merging Subsidiary Common Stock. Each share of common stock of the Merging Subsidiary issued and outstanding immediately prior to the Closing Date shall automatically by virtue of the Merger and without any action on the part of any Person be converted into one (1) share of validly issued, fully paid and nonassessable common stock of the Surviving Corporation, no par value per share.

 

(c)  Treasury Stock. Each share of Company Common Stock held as Treasury Stock immediately prior to the Closing Date shall be canceled and retired on the Closing Date and no consideration shall be issued in exchange therefor.

 

Section 3.02  Rights as Shareholder. As of the Closing Date, Shareholders of Company Common Stock shall cease to be, and shall have no rights as, shareholders of the Surviving Corporation other than the right to receive the Consideration provided under this Article III.

 

Section 3.03  Exchange Procedures. The parties hereto shall enter into the Exchange Agent Agreement prior to the Closing Date, which shall provide the following:

 

(a)  No later than three (3) Business Days following the Closing Date, the Purchasers shall cause the Exchange Agent to mail or make available to each holder of record of a Certificate a notice and letter of transmittal disclosing the effectiveness of the Merger and the procedure for exchanging Certificates for the Consideration. Such letter of transmittal shall specify that delivery shall be effected and risk of loss and title shall pass only upon proper delivery of Certificates to the Exchange Agent.

 

(b)  At or prior to the Closing Date, the Purchasers, without duplication, shall deliver to the Exchange Agent for the benefit of the holders of Certificates (other than the holders of Dissenting Shares and Treasury Stock) an amount of cash equal to the aggregate Consideration for payment of the aggregate Consideration to such holders of Certificates.

 

(c)  Each holder of any outstanding Certificate (other than holders of Dissenting Shares and Treasury Stock) who surrenders such Certificate (or other appropriate documentation under Section 3.03(d) below) to the Exchange Agent will, upon acceptance thereof by the Exchange Agent, be entitled to the Consideration. The Exchange Agent shall accept Certificates upon compliance with such reasonable terms and conditions as the Exchange Agent may impose to effect an orderly exchange in accordance with normal exchange practices. Each outstanding Certificate which is not surrendered to the Exchange Agent shall evidence ownership of only the right to receive the Consideration without interest.

 

 

(d)  The Exchange Agent shall not be obligated to deliver the Consideration until the Shareholder surrenders a Certificate as provided in this Section 3.03, or, in default thereof, presents appropriate documentation as may be required in each case by the Exchange Agent. If any check is to be issued in a name other than that in which the Certificate is registered, it shall be a condition of the issuance thereof that the Certificate so surrendered shall be properly endorsed or accompanied by an executed form of assignment separate from the Certificate and otherwise in proper form for transfer and that the person requesting such exchange pay to the Exchange Agent any transfer or other Tax required by reason of the issuance of a check in any name other than that of the registered holder of the Certificate surrendered or otherwise establish to the satisfaction of the Exchange Agent that such Tax has been paid or is not payable.

 

(e)  Any portion of the cash delivered to the Exchange Agent by the Purchasers pursuant to Section 3.03(b) that remains unclaimed by the Shareholders for six months after the Closing Date shall be delivered by the Exchange Agent to the Purchasers, as directed by the Purchasers. Any Shareholders who have not theretofore complied with Section 3.03(c) shall thereafter look only to the Purchasers for the Consideration. If outstanding Certificates are not surrendered or the payment for them is not claimed prior to the date on which such payment would otherwise escheat to or become the property of any Governmental Authority, the unclaimed items shall, to the extent permitted by abandoned property and any other applicable law, become the property of the Purchasers (and to the extent not in the Purchasers’ possession shall be delivered to the Purchasers), free and clear of all Liens of any Person previously entitled to such property. Neither the Exchange Agent nor any of the parties hereto shall be liable to any Shareholder for any consideration paid to a public official pursuant to applicable abandoned property, escheat or similar laws in accordance with this Section 3.03(e). The Purchasers and the Exchange Agent shall be entitled to rely upon the stock transfer books of the Company to establish the identity of those persons entitled to receive the Consideration, which books shall be conclusive with respect thereto.

 

(f)  The Exchange Agent or the Purchasers shall be entitled to deduct and withhold from the Consideration otherwise payable pursuant to this Agreement to any holder of Certificates an amount of Taxes that is attributable to the making of such payment under the Code, or any provision of state, local or foreign Tax law, including without limitation, all sales, use, transfer, income and other applicable Taxes. To the extent that amounts are so withheld by the Exchange Agent or the Purchasers, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the Certificates in respect of which such deduction and withholding was made.

 

Section 3.04  Company Options and Restricted Stock. Prior to and effective as of the Closing Date, the Company shall take all such action as is necessary to terminate the Company Stock Incentive Plan and shall provide written notice to each holder of a then-outstanding Company Option (whether or not such Company Option is then vested or exercisable) that such Company Option shall be, as at the date of such notice, fully vested and exercisable in full and that such Company Option shall terminate on the Closing Date and that, if such Company Option is not exercised or otherwise terminated on or before the Closing Date, such holder shall be entitled to receive in cancellation of such Company Option a cash payment from the Company at the Closing in an amount equal to the excess of the Consideration over the per share exercise price of such Company Option, multiplied by the number of shares of Company Common Stock covered by such Company Option, subject to any required withholding of Taxes. Similarly, prior to and effective as of the Closing Date, the Company shall provide written notice to each holder of a then-outstanding unvested Company Restricted Stock Award that such Company Restricted Stock Award shall be cancelled as of the Closing Date and such holder shall be entitled to receive in cancellation of such Company Restricted Stock a cash payment from the Company at the Closing in an amount equal to the Consideration multiplied by the number of shares of Company Common Stock covered by such Company Restricted Stock Award which has been cancelled, subject to any required withholding of Taxes. The Company shall obtain the written acknowledgement of each holder of a then-outstanding Company Option and then-outstanding unvested Company Restricted Stock Award with regard to the cancellation of such Company Option or Company Restricted Stock Award and the payment therefor in accordance with the terms of this Agreement.

 

 

Section 3.05  Company Preferred Stock. The Company has entered into an agreement with the sole owner of the Company Preferred Stock, a copy of which is attached hereto as Annex B (the “Company Preferred Stock Repurchase Agreement”), in which the owner of the Company Preferred Stock has agreed to sell and the Company has agreed to purchase all of the outstanding Company Preferred Stock, effective immediately prior to the Closing Date, at which time such owner shall be entitled to receive a purchase price in consideration for such Company Preferred Stock in an amount equal to $5,000 per share of Company Preferred Stock, plus a pro-rated cash dividend per share of Company Preferred Stock for the period beginning May 1, 2005 through, but not including, the Closing Date (based on an annual cash dividend per share of $611.11). The Company shall take all such action as is necessary to repurchase and retire the Company Preferred Stock effective immediately prior to the Closing Date. The Company shall obtain the written acknowledgement of the sole owner of the Company Preferred Stock with regard to the repurchase and retirement of such Company Preferred Stock and the payment therefor in accordance with the terms of this Section 3.05 and the Company Preferred Stock Repurchase Agreement.

 

Section 3.07  Dissenting Shares. A Shareholder who has perfected his or her right to dissent from the Merger under Section 11.70 of the Illinois Business Corporation Act and who has not effectively withdrawn or lost such rights as of the Closing Date with respect to his or her shares of Company Common Stock (the “Dissenting Shares”) shall not have a right to receive the Consideration specified in Section 3.01(a) hereof, and such Shareholder of Dissenting Shares shall be entitled only to such rights as are granted by such provisions of the Illinois Business Corporation Act. If any Shareholder of Dissenting Shares shall fail to perfect or shall have effectively withdrawn or lost the right to dissent, such Shareholder shall thereupon be treated as though it had the right to receive the aggregate Consideration to which such Shareholder would be entitled pursuant to Section 3.01(a) hereof. The Company shall give the Purchasers prompt notice upon receipt by the Company of any such written demands for payment of the fair value of shares of Company Common Stock and of withdrawals of such demands and any other instruments provided pursuant to the Illinois Business Corporation Act.

 

 

ARTICLE IV  

 

 

Section 4.01  Covenants of the Company. During the period from the date of this Agreement and continuing until the Closing Date, except as expressly contemplated or permitted by this Agreement or with the prior written consent of the Purchasers, the Company shall carry on its business in the ordinary course consistent with past practice and consistent with prudent mortgage banking and mortgage lending practices and in compliance in all material respects with all applicable laws and regulations. The Company will use its commercially reasonable efforts to (i) preserve its business organization intact, except as set forth in (iii) below, (ii) keep available to itself and the Purchasers the present services of the current officers and employees of the Company, (iii) dissolve the Company’s wholly-owned Subsidiaries, PlusFunding-Com, Inc. and PlusFunding Mortgage, Inc., and (iv) preserve the goodwill of the customers of the Company and others with whom business relationships exist. Without limiting the generality of the foregoing, and except as set forth in Section 4.01 of the Company Disclosure Schedule or as otherwise expressly contemplated or permitted by this Agreement or consented to in writing by the Purchasers, the Company shall not:

 

(a)  Capital Stock. Other than pursuant to the exercise of Company Options set forth in Section 5.01(b) of the Company Disclosure Schedule: (i) issue, sell or otherwise permit to become outstanding, or authorize the creation of, any additional shares of capital stock or any Rights or (ii) permit any additional shares of capital stock to become subject to grants of employee or director stock options or other Rights.

 

(b)  Dividends; Etc. (i) Make, declare, pay or set aside for payment any dividend on or in respect of, or declare or make any distribution on any shares of Company Stock or (ii) directly or indirectly adjust, split, combine, redeem, reclassify, purchase or otherwise acquire any shares of its capital stock.

 

(c)  Compensation; Employment Agreements, Etc. Enter into or amend or renew any employment, consulting, severance or similar agreements or arrangements with any director, officer or employee of the Company or grant any salary or wage increase or increase any employee benefit or grant or pay any incentive or bonus other than commissions to loan officers paid in the ordinary course of business consistent with past practices pursuant to compensation arrangements existing as of the date hereof and consistent with Section 5.01(h)(iii)(A) of the Company Schedule.

 

(d)  Hiring. Hire any person as an employee of the Company or promote any employee, except (i) to satisfy contractual obligations existing as of the date hereof and set forth in Section 4.01(d) of the Company Disclosure Schedule and (ii) persons hired to fill any vacancies arising after the date hereof and whose employment is terminable at the will of the Company.

 

 

(e)  Benefit Plans. Enter into, establish, adopt, amend, modify or terminate (except (i) as may be required by or to make consistent with applicable law, subject to the provision of prior written notice and consultation with respect thereto to the Purchasers, or (ii) to satisfy contractual obligations existing as of the date hereof and set forth in Section 4.01(e) of the Company Disclosure Schedule), any pension, retirement, stock option, stock purchase, savings, profit sharing, deferred compensation, consulting, bonus, group insurance or other employee benefit, incentive or welfare contract, plan or arrangement, or any trust agreement (or similar arrangement) related thereto, in respect of any current or former director, officer or employee of the Company or take any action to accelerate the vesting or exercisability of stock options, restricted stock or other compensation or benefits payable thereunder, other than as specifically provided in any Company Stock Incentive Plan or as contemplated by this Agreement.

 

(f)  Transactions with Affiliates. Except pursuant to agreements or arrangements in effect on the date hereof, pay, loan or advance any amount to, or sell, transfer or lease any properties or assets (real, personal or mixed, tangible or intangible) to, or enter into any agreement or arrangement with, any of its officers or directors or any of their immediate family members or any affiliates or associates (as such terms are defined under the Exchange Act) of any of its officers or directors other than compensation in the ordinary course of business consistent with past practice;

 

(g)  Dispositions. Sell, transfer, mortgage, pledge, encumber or otherwise dispose of or discontinue any of its assets, business or properties except in the ordinary course of business consistent with past practice and in a transaction that, together with all other such transactions, is not material to the Company.

 

(h)  Acquisitions. Acquire (other than by way of foreclosures or acquisitions of control in a bona fide fiduciary capacity or in satisfaction of debts previously contracted in good faith, in each case in the ordinary and usual course of business consistent with past practice) all or any portion of the assets, business or properties of any other entity.

 

(i)  Capital Expenditures. Make any capital expenditures other than capital expenditures in the ordinary course of business consistent with past practice in amounts not exceeding $25,000 individually or $100,000 in the aggregate.

 

(j)  Governing Documents. Amend the Company Articles or Company Bylaws.

 

(k)  Accounting Methods. Implement or adopt any change in its accounting principles, practices or methods, other than as may be required by applicable laws or regulations or GAAP.

 

(l)  Contracts. Except in the ordinary course of business consistent with past practice or as otherwise expressly permitted by this Agreement, enter into, amend, modify or terminate any Material Contract, Lease or Insurance Policy.

 

 

(m)  Claims. Enter into any settlement or similar agreement with respect to any action, suit, proceeding, order or investigation to which the Company is or becomes a party after the date of this Agreement, which settlement, agreement or action involves payment by the Company of an amount which exceeds $50,000 and/or would impose any material restriction on the business of the Company.

 

(n)  Operations. Enter into any new material line of business; change its material lending, investment, underwriting, risk and asset liability management and other material operating policies, except as required by applicable law, regulation or policies imposed by any Governmental Authority; or file any application or make any contract with respect to branching or site location or branching or site relocation.

 

(o)  Derivatives Transactions. Enter into any Derivatives Transaction, except in the ordinary course of business consistent with past practice.

 

(p)  Indebtedness. Incur any Indebtedness other than in the ordinary course of business consistent with past practice.

 

(q)  [Reserved].

 

(r)  [Reserved].

 

(s)  Investments in Real Estate. Make any investment or commitment to invest in real estate or in any real estate development project (other than by way of foreclosure or acquisitions in a bona fide fiduciary capacity or in satisfaction of a debt previously contracted in good faith, in each case in the ordinary course of business consistent with past practice).

 

(t)  Taxes. Make or change any material Tax election, file any material amended Tax Return, enter into any material closing agreement, settle or compromise any material liability with respect to Taxes, agree to any material adjustment of any Tax attribute, file any claim for a material refund of Taxes, or consent to any extension or waiver of the limitation period applicable to any material Tax claim or assessment, provided, that, for purposes of this subparagraph (t), “material” shall mean affecting or relating to $100,000 of taxable income.

 

(u)  Compliance with Agreements. Commit any act or omission which constitutes a material breach or default by the Company under any agreement with any Governmental Authority or under any Material Contract, Lease or other material agreement or material license to which the Company is a party or by which the Company or any of its properties is bound.

 

(v)  Environmental Assessments. Foreclose on or take a deed or title to any commercial real estate without first conducting a Phase I environmental assessment of the property or foreclose on any commercial real estate if such environmental assessment indicates the presence of a Hazardous Substance in amounts which, if such foreclosure were to occur, would be material.

 

(w)  Adverse Actions. Take any action or fail to take any action that is intended or is reasonably likely to result in (i) any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time at or prior to the Closing Date, (ii) any of the conditions to the Merger set forth in Article VII not being satisfied or (iii) a material violation of any provision of this Agreement, except, in each case, as may be required by applicable law or regulation.

 

 

(x)  Commitments. Enter into any contract with respect to, or otherwise agree or commit to do, any of the foregoing.

 

Section 4.02  Covenants of the Purchasers. From the date hereof until the Closing Date, except as expressly contemplated or permitted by this Agreement, without the prior written consent of the Company, the Purchasers will not:

 

(a)  Adverse Actions. Take any action or fail to take any action that is intended or is reasonably likely to result in (i) any of their respective representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time at or prior to the Closing Date, (ii) any of the conditions to the Merger set forth in Article VII not being satisfied or (iii) a material violation of any provision of this Agreement, except, in each case, as may be required by applicable law or regulation.

 

(b)  Commitments. Enter into any contract with respect to, or otherwise agree or commit to do, any of the foregoing.

 

ARTICLE V  

 

 

Section 5.01  Representations and Warranties of the Company. Except as set forth in a schedule delivered by the Company to the Purchasers (the “Company Disclosure Schedule”) on or prior to the date hereof setting forth, among other things, items the disclosure of which is necessary or appropriate either in response to an express provision of this Agreement or as an exception to one or more of its representations and warranties set forth below or its covenants in Article IV, the Company hereby represents and warrants to the Purchasers as follows:

 

(a)  Organization, Standing and Authority. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois. The Company is duly qualified to do business and is in good standing in each foreign jurisdiction where its ownership or leasing of property or assets or the conduct of its business requires it to be so qualified, except where the failure to be so qualified has not had and is not reasonably likely to have a Material Adverse Effect on the Company.

 

(b)  Company Capital Stock. The authorized capital stock of the Company consists solely of 20,000,000 shares of Company Common Stock, of which 6,042,943 shares are outstanding as of the date hereof, and 5,000,000 shares of Company Preferred Stock, of which 63 shares are outstanding as of the date hereof. As of the date hereof, 176,700 shares of the Company Common Stock were held in treasury by the Company or otherwise directly or indirectly owned by the Company and no shares of Company Stock were reserved for issuance, other than 495,450 shares of Company Common Stock reserved for issuance upon the exercise of Company Options in accordance with their terms and 48,000 shares of Company Common Stock subject to Company Restricted Stock Awards (of which 38,400 shares of Company Restricted Stock are unvested). The outstanding shares of Company Common Stock and Company Preferred Stock have been duly authorized and validly issued and are fully paid and non-assessable, and none of the outstanding shares of Company Common Stock and the Company Preferred Stock have been issued in violation of the preemptive rights of any Person. Section 5.01(b) of the Company Disclosure Schedule sets forth a true and correct list of the beneficial and record holder(s) of the Company Preferred Stock. Section 5.01(b) of the Company Disclosure Schedule also sets forth for each Company Option, the name of the grantee, the date of the grant, the type of grant, the status of the option grant as qualified or non-qualified under Section 422 of the Code, the number of shares of Company Common Stock subject to each option, the number of shares of Company Common Stock subject to options that are currently exercisable and the exercise price per share as well as each unvested Company Restricted Stock Award, the name of the grantee, the date of the grant, the number of shares of Company Common Stock subject to each Company Restricted Stock Award and the number of shares of Company Restricted Stock that are currently unvested. Except as set forth in this Section 5.01(b), the Company does not have any Rights issued or outstanding with respect to Company Stock and the Company does not have any commitment to authorize, issue or sell any Company Stock or Rights.

 

 

(c)  Subsidiaries. Except as set forth in Section 5.01(c) of the Company Disclosure Schedule, the Company has no Subsidiaries. Except for securities and other interests held in a fiduciary capacity and beneficially owned by third parties or taken in consideration of debts previously contracted, the Company does not own beneficially, directly or indirectly, any equity securities or similar interests of any Person or any interest in a partnership or joint venture of any kind, except as set forth in Section 5.01(c) of the Company Disclosure Schedule.

 

(d)  Corporate Power; Minute Books. The Company has the corporate power and authority to carry on its business as it is now being conducted and to own all its properties and assets; and the Company has the corporate power and authority to execute, deliver and perform its obligations under this Agreement and to consummate the transactions contemplated hereby, subject to receipt of all necessary approvals of Governmental Authorities and the approval of this Agreement by the Company’s Shareholders. The minute books of the Company contain true, complete and accurate records of all meetings and other corporate actions held or taken since July 1, 2002 by the Company’s Shareholders and the Company Board (including committees of the Company Board).

 

(e)  Corporate Authority. Subject to the approval of this Agreement by the Shareholders of the Company, this Agreement and the Merger have been authorized by all necessary corporate action of the Company and the Company Board on or prior to the date hereof. The Company Board has directed that this Agreement be submitted to the Company’s Shareholders for approval at a meeting of such Shareholders and, except for the approval and adoption of this Agreement by the affirmative vote of the holders of two-thirds of the outstanding shares of Company Common Stock, no other vote of the shareholders of the Company is required by law, the Company Articles, the Company Bylaws or otherwise to approve this Agreement and the Merger. The Company has duly executed and delivered this Agreement and, assuming due authorization, execution and delivery by the Purchasers, this Agreement is a valid and legally binding obligation of the Company, enforceable in accordance with its terms (except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and similar laws of general applicability relating to or affecting creditors’ rights or by general equity principles).

 

 

(f)  Regulatory Approvals; No Defaults.

 

(i)  No licenses, consents, approvals of, or waivers by, or filings or registrations with, any Governmental Authority or with any third party are required to be made or obtained by the Company in connection with the execution, delivery or performance by the Company of this Agreement, or to consummate the Merger, except for (A) the approval of this Agreement by the holders of the outstanding shares of Company Common Stock, (B) as set forth in Section 5.01(f)(i) of the Company Disclosure Schedule, and (C) licenses, consents, approvals, waivers, filings or registrations, the failure to obtain or make (as applicable) which will not have or is not reasonably likely to have a Material Adverse Effect on the Company. As of the date hereof, the Company is not aware of any reason why the licenses, consents, approvals or waivers set forth above and referred to in Section 7.03(i) will not be received in a timely manner.

 

(ii)  Subject to receipt, or the making, of the licenses, consents, approvals, waivers and filings referred to in the preceding paragraph, and the expiration of related waiting periods, the execution, delivery and performance of this Agreement by the Company and the consummation of the Merger do not and will not (A) constitute a breach or violation of, or a default under, the Company Articles or the Company Bylaws, (B) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to the Company or any of its properties or assets or (C) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the properties or assets of the Company under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, contract, agreement or other instrument or obligation to which the Company is a party or by which the Company or any of its properties or assets may be bound or affected, other than violations, conflicts, breaches or defaults under clause (C) that will not have a Material Adverse Effect on the Company or that will be cured or waived prior to the Closing Date.

 

(g)  Financial Statements. The Company has previously made available to the Purchasers copies of (i) the balance sheets of the Company as of April 30 for the fiscal years 2003 through 2005, inclusive, and the related statements of income, shareholders’ equity and cash flows for each of the fiscal years 2003 through 2005, inclusive, as included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended April 30, 2005 filed with the SEC under the Exchange Act, in each case accompanied by the audit report of Crowe Chizek and Company LLC, registered independent public accountants with respect to the Company, and (ii) the unaudited balance sheets of the Company and the related unaudited statements of income for the months ended May 31, 2005 and June 30, 2005 ((i) and (ii), collectively, the “Company Financial Statements”). The April 30, 2005 financial statements of the Company (including the related notes, where applicable) fairly present the financial position of the Company as of the date thereof, and the other financial statements referred to in this Section 5.01(g) (including the related notes, where applicable) fairly present, and the financial statements to be filed by the Company with the SEC after the date of this Agreement will fairly present (subject, in the case of the unaudited statements, to recurring audit adjustments normal in nature and amount and the absence of footnotes), the results of operations and financial position of the Company for the respective fiscal periods or as of the respective dates therein set forth; each of such statements (including the related notes, where applicable) complies, and the financial statements to be filed by the Company with the SEC after the date of this Agreement will comply, with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto; and each of such statements (including the related notes, where applicable) has been, and the financial statements to be filed by the Company with the SEC after the date of this Agreement will be, prepared in accordance with GAAP consistently applied during the periods involved, except as indicated in the notes thereto or, in the case of unaudited statements, subject to recurring audit adjustments normal in nature and amount and the absence of footnotes. The books and records of the Company have been, and are being, maintained in accordance with GAAP and any other applicable legal and accounting requirements and reflect only actual transactions. Crowe Chizek and Company LLC has not resigned or been dismissed as independent registered public accountants of the Company as a result of or in connection with any disagreements with the Company on a matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.

 

 

(h)  Absence of Certain Changes or Events.

 

(i)  Since April 30, 2005, there has been no change or development or combination of changes or developments which, individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect on the Company.

 

(ii)  Since April 30, 2005, the Company has carried on its business only in the ordinary and usual course of business consistent with past practice (except for actions taken with respect to the AmPro Acquisition and the incurrence of expenses and other actions taken in connection with this Agreement and the transactions contemplated hereby).

 

(iii)  Except as set forth in Section 5.01(h)(iii) of the Company Disclosure Schedule, since April 30, 2005, the Company has not (A) increased the wages, salaries, compensation, pension, or other fringe benefits or perquisites payable to any officer, employee or director from the amount thereof in effect as of April 30, 2005 (which amounts are included in Section 5.01(h)(iii) of the Company Disclosure Schedule), granted any severance or termination pay, entered into any contract to make or grant any severance or termination pay, or paid any bonus, (B) declared, set aside or paid any dividend or other distribution (whether in cash, stock or property) with respect to any of the Company Stock, (C) effected or authorized any split, combination or reclassification of any of the Company Stock or any issuance or issued any other securities in respect of, in lieu of or in substitution for shares of the Company Stock, except for issuances of Company Common Stock upon the exercise of Company Options, in each case awarded prior to the date hereof in accordance with their present terms, (D) changed any accounting methods (or underlying assumptions), principles or practices of the Company affecting its assets, liabilities or businesses, including without limitation, any reserving, renewal or residual method, practice or policy, (E) made any Tax election or any settlement or compromise of any income Tax liability by the Company, (F) made any material change in the Company’s policies and procedures in connection with underwriting standards, origination, purchase and sale procedures or hedging activities with respect to any Mortgage Loans, (G) suffered any strike, work stoppage, slow-down, or other labor disturbance, (H) been a party to a collective bargaining agreement, contract or other agreement or understanding with a labor union or organization, (I) had any union organizing activities or (J) made any agreement or commitment (contingent or otherwise) to do any of the foregoing.

 

 

(i)  Controls and Procedures.

 

(i)  Financial.  During the periods covered by the Company Financial Statements, the Company has had in place internal controls over financial reporting which are designed and maintained to ensure reasonable reliability of financial reporting and the preparation of the Company Financial Statements for external purposes in accordance with GAAP, and such internal controls include policies and procedures that (A) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company, (B) provide reasonable assurance that such transactions are and were recorded as necessary to permit preparation of the Company Financial Statements in accordance with GAAP, and that receipts and expenditures of the Company are and were being made only in accordance with authorization of the Company’s management and the Company Board, and (C) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company Financial Statements. Except as set forth on Schedule 5.01(i)(i), none of the Company’s records, systems, controls, data or information are recorded, stored, maintained, operated or otherwise wholly or partly dependent on or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) which (including all means of access thereto and therefrom) are not under the exclusive ownership and direct control of the Company or its accountants.

 

(ii)  Disclosure. The Company has established and maintains disclosure controls and procedures as required by Rule 13a-15 under the Exchange Act. As of the end of the period covered by each applicable Company SEC Report, the Company has conducted an evaluation under the supervision and with the participation of its management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures, and the Company’s Chief Executive Officer and Chief Financial Officer have concluded that its disclosure controls and procedures are effective to ensure that information required to be disclosed in the Company SEC Reports is recorded, processed, summarized and reported, within the periods specified in, and in accordance with the requirements of, the SEC’s rules, regulations and forms. Based on such evaluations, (A) there were no significant deficiencies or material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information and (B) there was no fraud, whether or not material, that involved management or other employees of the Company who have a significant role in the Company’s internal control over financial reporting.

 

 

(j)  Regulatory Matters.

 

(i)  The Company has timely filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that were required to be filed since April 30, 2002 with any Governmental Authority, and has paid all fees and assessments due and payable in connection therewith, except to the extent such failure will not have or is not reasonably likely to have a Material Adverse Effect on the Company. Except for normal examinations conducted by any Governmental Authority in the regular course of the business of the Company, and except as set forth in Section 5.01(j) of the Company Disclosure Schedule, no Governmental Authority has initiated any proceeding, or to the Knowledge of the Company, investigation into the business or operations of the Company, since April 30, 2002. To the Company’s Knowledge, there is no unresolved violation, criticism, or exception by any Governmental Authority with respect to any report or statement relating to any examinations of the Company.

 

(ii)  Neither the Company nor any of its properties is a party to or subject to any order, decree, agreement, memorandum of understanding or similar arrangement with, or a commitment letter or similar submission to, or extraordinary supervisory letter from, any Governmental Authority charged with the supervision or regulation of mortgage lenders, mortgage bankers or mortgage brokers, or issuers of securities. The Company has not been advised by, and the Company has no Knowledge of facts which could give rise to an advisory notice by, any Governmental Authority that such Governmental Authority is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, decree, agreement, memorandum of understanding, commitment letter, supervisory letter or similar submission.

 

(k)  Legal Proceedings.

 

(i)  Section 5.01(k)(i) of the Company Disclosure Schedule contains a true and correct summary description as of the date hereof of any pending or, to the Company’s Knowledge, threatened legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against the Company, including the venue, the parties thereto, the subject matter thereof and the amount of damages claimed or other remedies sought.

 

(ii)  Except as set forth in Section 5.01(k)(ii) of the Company Disclosure Schedule, the Company is not a party to any, and there are no pending or, to the Company’s Knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against the Company in which, to the Knowledge of the Company, there is a reasonable probability of any material recovery against or other Material Adverse Effect on the Company or which challenges the validity or propriety of the Merger.

 

 

(iii)  There is no injunction, order, judgment or decree imposed upon the Company or the assets of the Company. The Company has no Knowledge of the threat of any such action.

 

(l)  Compliance With Laws.

 

(i)  The Company is in compliance with all applicable federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders or decrees applicable thereto or to the employees conducting such businesses, including, without limitation, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, and all other applicable fair lending and fair housing laws or other laws relating to discrimination, except for violations which individually or in the aggregate do not and are not reasonably likely to have a Material Adverse Effect on the Company;

 

(ii)  Section 5.01(l)(ii) of the Company Disclosure Schedule sets forth each jurisdiction in which the Company is conducting a mortgage banking, mortgage lending or other mortgage business and the specific licenses obtained from such jurisdictions or whether licenses are not required in such jurisdictions to conduct a mortgage business. The Company has all permits, licenses, authorizations, orders and approvals of, and has made all filings, applications and registrations with, all Governmental Authorities that are required in order to permit the Company to own or lease its properties and to conduct its business as presently conducted other than permits, licenses, authorizations, orders, approvals, filings, applications and registrations which, if not obtained or made (as applicable), will not and are not reasonably likely to, individually or in the aggregate, have a Material Adverse Effect on the Company; all such permits, licenses, certificates of authority, orders and approvals are in full force and effect and, to the Company’s Knowledge, no suspension or cancellation of any of them is threatened; and

 

(iii)  Except as set forth on Schedule 5.01(l)(iii), the Company has received, since April 30, 2002, no written (or to the Company’s Knowledge, oral) notification or written (or to the Company’s Knowledge, oral) communication from any Governmental Authority (A) asserting that the Company is not in compliance with any of the statutes, regulations or ordinances which such Governmental Authority enforces or (B) threatening to revoke any license, franchise, permit or governmental authorization (nor, to the Company’s Knowledge, do any grounds for any of the foregoing exist).

 

(m)  Material Contracts; Defaults.

 

(i)  Except as set forth in Section 5.01(m)(i) of the Company Disclosure Schedule, the Company is not a party to, bound by or subject to any agreement, contract, arrangement, commitment or understanding (whether written, or to the Company’s Knowledge, oral) (A) with respect to the employment of any directors, officers, employees or consultants, (B) which would entitle any present or former director, officer, employee or agent of the Company to indemnification from the Company, (C) which is a material contract (as defined in Item 601(b)(10) of Regulation S-K of the SEC) to be performed after the date of this Agreement, (D) which is a consulting agreement (including data processing, software programming and licensing contracts) not terminable on sixty (60) days or less notice and involving the payment of more than $50,000 per annum, (E) which materially restricts the conduct of the business in which the Company is currently engaged or in which the Company currently expects to be engaged other than leases for real property and other than contracts for intellectual property entered into by the Company in the ordinary course of business to the extent such contracts include customary restrictions on the use and licensing of such intellectual property, or (F) with respect to any Indebtedness (collectively, “Material Contracts”). The Company has previously delivered or made available to the Purchasers true, complete and correct copies of each Material Contract.

 

 

(ii)  To the Company’s Knowledge, the Company is not in default under any contract, agreement, commitment, arrangement, lease, insurance policy or other instrument to which it is a party, by which its assets, business, or operations may be bound or affected, or under which it or its respective assets, business, or operations receives benefits, and there has not occurred any event that, with the lapse of time or the giving of notice or both, would constitute such a default by the Company. No power of attorney or similar authorization given directly or indirectly by the Company is currently outstanding.

 

(n)  Brokers. Neither the Company nor any of its officers or directors has employed any broker or finder or incurred any liability for any broker’s fees, commissions or finder’s fees in connection with any of the transactions contemplated by this Agreement, except that the Company has engaged, and will pay a fee or commission to, the Company Financial Advisor in accordance with the terms of a letter agreement between the Company Financial Advisor and the Company, a true, complete and correct copy of which has been previously delivered or made available by the Company to the Purchasers.

 

(o)  Employee Benefit Plans.

 

(i)  All benefit and compensation plans, contracts, policies or arrangements covering current or former employees of the Company (the “Company Employees”) and current or former directors of the Company including, but not limited to, “employee benefit plans” within the meaning of Section 3(3) of ERISA, and deferred compensation, stock option, stock purchase, stock appreciation rights, stock based, incentive and bonus plans (the “Company Benefit Plans”), are identified in Section 5.01(o)(i) of the Company Disclosure Schedule. True and complete copies of all Company Benefit Plans including, but not limited to, any trust instruments and insurance contracts forming a part of any Company Benefit Plans and all amendments thereto, have been provided to the Purchasers.

 

 

(ii)  All Company Benefit Plans other than “multiemployer plans” within the meaning of Section 3(37) of ERISA, covering Company Employees, to the extent subject to ERISA, are in substantial compliance with ERISA. Each Company Benefit Plan which is an “employee pension benefit plan” within the meaning of Section 3(2) of ERISA (a “Company Pension Plan”) and which is intended to be qualified under Section 401(a) of the Code, has received a favorable determination letter from the IRS, and the Company has no Knowledge of any circumstances likely to result in revocation of any such favorable determination letter or the loss of the qualification of such Company Pension Plan under Section 401(a) of the Code. There is no pending or, to the Company’s Knowledge, threatened litigation relating to the Company Benefit Plans. The Company has not engaged in a transaction with respect to any Company Benefit Plan or Company Pension Plan that, assuming the taxable period of such transaction expired as of the date hereof, could subject the Company to a material Tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA.

 

(iii)  The Company has not at any time maintained or contributed to a Company Benefit Plan under Title IV of ERISA or any Company Benefit Plan subject to Section 412 of the Code or Section 302 of ERISA.

 

(iv)  All contributions required to be made under the terms of any Company Benefit Plan have been timely made or have been reflected on the financial statements of the Company.

 

(v)  The Company has no obligations for retiree health and life benefits under any Company Benefit Plan, other than coverage as may be required under Section 4980B of the Code or Part 6 of Title I of ERISA, or under the continuation of coverage provisions of the laws of any state or locality. Except as set forth in Section 5.01(o)(v) of the Company Disclosure Schedule, the Company may amend or terminate any such Company Benefit Plan at any time without incurring any liability thereunder.

 

(vi)  None of the execution of this Agreement, Shareholder approval of this Agreement or consummation of the Merger will (A) entitle any employees of the Company to severance pay or any increase in severance pay upon any termination of employment after the date hereof, (B) accelerate the time of payment or vesting or trigger any payment or funding (through a grantor trust or otherwise) of compensation or benefits under, increase the amount payable or trigger any other material obligation pursuant to, any of the Company Benefit Plans, (C) result in any breach or violation of, or a default under, any of the Company Benefit Plans or (D) result in any payment that would be a “parachute payment” to a “disqualified individual” as those terms are defined in Section 280G of the Code, without regard to whether such payment is reasonable compensation for personal services performed or to be performed in the future.

 

(p)  Labor Matters. The Company is not a party to and is not bound by any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor is the Company the subject of a proceeding asserting that it has committed an unfair labor practice (within the meaning of the National Labor Relations Act) or seeking to compel the Company to bargain with any labor organization as to wages or conditions of employment, nor is there any strike or other labor dispute involving the Company pending or, to the Company’s Knowledge, threatened, nor is the Company aware of any activity involving its employees seeking to certify a collective bargaining unit or engaging in other organizational activity.

 

 

(q)  Environmental Matters.

 

(i)  The Company is in compliance with applicable Environmental Laws; (ii) to the Company’s Knowledge, no real property (including buildings or other structures) currently or formerly owned or operated by the Company or any property in which the Company has held a security interest, Lien or a fiduciary or management role (“Company Loan Property”), has been contaminated with, or has had any release of, any Hazardous Substance except in compliance with Environmental Laws; (iii) to the Company’s Knowledge, the Company can not be deemed to be the owner or operator of, and has not participated in the management regarding Hazardous Substances of, any Company Loan Property which has been contaminated with, or has had any release of, any Hazardous Substance except in compliance with Environmental Laws; (iv) to the Company’s Knowledge, the Company has had no liability for any Hazardous Substance disposal or contamination on any third party property; (v) the Company has not received any written (or to the Company’s Knowledge, oral) notice, demand letter, claim or request for information alleging any violation of, or liability under, any Environmental Law; (vi) the Company is not subject to any order, decree, injunction or other agreement with any Governmental Authority or any third party relating to any Environmental Law; (vii) to the Company’s Knowledge, there are no circumstances or conditions (including the presence of asbestos, underground storage tanks, lead products, polychlorinated biphenyls, prior manufacturing operations, dry-cleaning, or automotive services) involving the Company, any currently or formerly owned or operated property, or any Company Loan Property, that could reasonably be expected to result in any claims, liability or investigations against the Company, result in any restrictions on the ownership, use, or transfer of any property pursuant to any Environmental Law, or materially adversely affect the value of any Company Loan Property; and (viii) the Company has delivered to the Purchasers copies of all environmental reports, studies, sampling data, correspondence, filings and other environmental information in its possession or reasonably available to it relating to the Company and any currently or formerly owned or operated property or any Company Loan Property.

 

(ii)  As used herein, the term “Environmental Laws” means any federal, state or local law, regulation, order, decree, permit, authorization, opinion or agency requirement relating to: (A) the protection or restoration of the environment, health, safety, or natural resources, (B) the handling, use, presence, disposal, release or threatened release of any Hazardous Substance or (C) wetlands, indoor air, pollution, contamination or any injury or threat of injury to persons or property in connection with any Hazardous Substance; and the term “Hazardous Substance” means any substance that is: (A) listed, classified or regulated pursuant to any Environmental Law, (B) any petroleum product or by-product, asbestos-containing material, lead-containing paint or plumbing, polychlorinated biphenyls, radioactive materials or radon or (C) any other substance which is the subject of regulatory action by any Governmental Authority in connection with any Environmental Law.

 

 

(r)  Tax Matters.

 

(i)  (A) All income Tax Returns and all other material Tax Returns that are required to be filed on or before the Closing Date (taking into account any extensions of time within which to file which have not expired) by or with respect to the Company have been or will be timely filed on or before the Closing Date, (B) all such Tax Returns are or will be true and complete in all material respects, and all such Tax Returns correctly reflected or will reflect in all material respects the facts regarding the income, business, assets, operations, activities, status and other matters of the Company and any other information required to be shown thereon, (C) all Taxes shown to be due on the Tax Returns referred to in clause (A) above have been or will be timely paid in full, (D) all deficiencies asserted or assessments made as a result of examinations of the Tax Returns referred to in clause (A) above conducted by any Tax Authority have been paid in full, (E) no material issues that have been raised by the relevant Tax Authority in connection with the examination of any of the Tax Returns referred to in clause (A) above are currently pending, (F) to the Knowledge of the Company, no material issues are threatened to be raised by the relevant Tax Authority in connection with the examination of any of the Tax Returns referred to in clause (A) above, (G) the Company has not waived any statutes of limitation with respect to any Taxes of the Company and (H) the Company is not currently the beneficiary of any extension of time within which to file any Tax Return.

 

(ii)  The Company has provided to the Purchasers true and correct copies of the United States federal income Tax Returns filed by the Company for each of their three most recent taxable years ended on or before April 30, 2004.

 

(iii)  The Company has no liability with respect to Taxes that accrued on or before the end of the most recent period covered by the Company Financial Statements in excess of the amounts accrued or subject to a reserve with respect thereto that are reflected in the Company Financial Statements, and will not exceed such accrual or reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Company in filing Tax Returns. The Company will not incur any liability for Taxes from the date of this Agreement through the Closing Date other than in the ordinary course of business and consistent with reasonable past practice.

 

(iv)  The Company is not a party to any Tax allocation or sharing agreement, is not and has not been a member of an affiliated group filing consolidated or combined Tax Returns (other than a group the common parent of which is or was the Company), and otherwise has no liability for the Taxes of any Person (other than the Company).

 

 

(v)  No closing agreements, private letter rulings or technical advice memoranda have been entered into with or issued by any Taxing Authority with respect to the Company.

 

(vi)  The Company does not maintain any compensation plans, programs or arrangements the payments under which would not reasonably be expected to be deductible as a result of the limitations under Section 162(m) of the Code and the regulations issued thereunder.

 

(vii)  (A) No Tax is required to be withheld pursuant to Section 1445 of the Code as a result of the Merger and (B) all Taxes that the Company is or was required by law to withhold or collect have been duly withheld or collected and, to the extent required by applicable law, have been paid to the proper Tax Authority or other Person.

 

(viii)  None of the Tax Returns filed by the Company contains a disclosure statement under former Section 6661 of the Code or Section 6662 of the Code (or any similar provision of state, local or foreign Tax law).

 

(ix)  There are no Liens for Taxes upon any assets of the Company, other than Liens for Taxes not yet due and payable.

 

(x)  All material elections with respect to Taxes affecting the Company, as of the date of this Agreement, are set forth in the Company Financial Statements.

 

(xi)  Section 5.01(r)(xi) of the Company Disclosure Schedule contains a list of all jurisdictions (whether foreign or domestic) to which any Tax is properly payable by the Company. No written (or to the Company’s Knowledge, oral) claim has ever been made by a Tax Authority in a jurisdiction where the Company does not file Tax Returns that it may be subject to Tax in that jurisdiction. The Company does not have nor has the Company ever had a permanent establishment in any foreign country, as defined in any applicable Tax treaty or convention between the United States and such foreign country.

 

(xii)  The Company is not a party to or member of any joint venture, partnership, limited liability Company or other arrangement or contract which could be treated as a partnership for federal income tax purposes.

 

(xiii)  To the Knowledge of the Company after reasonable diligence, the Company has never filed a consent pursuant to former Section 341(f) of the Code, relating to collapsible corporations, and former Section 341(f)(2) has not applied to any of the assets of the Company.

 

(xiv)  The Company does not own an interest in real property in any jurisdiction in which a Tax is imposed, or the value of the interest reassessed, on the transfer of an interest in real property and which treats the transfer of an interest in an entity that owns an interest in real property as a transfer of the interest in real property.

 

 

(xv)  The Company has not been either a “controlled corporation” or a “distributing corporation” (within the meaning of Section 355(a)(1)(A) of the Code) with respect to a transaction that was described in, or intended to qualify as a tax-free transaction pursuant to Section 355 of the Code.

 

(xvi)  The Company has no net operating losses or other Tax attributes presently subject to limitation under Sections 382, 383 or 384 of the Code, or the federal consolidated return regulations (other than limitations imposed as a result of the transactions contemplated by this Agreement).

 

(xvii)  The Company has not agreed to make any adjustment under Section 481(a) of the Code (or any corresponding provision of state, local or foreign Tax law) by reason of a change in accounting method or otherwise.

 

(s)  Representations Regarding the Mortgage Banking Business.

 

(i)  The Company (A) has, and at all other relevant times had, all material federal, state and local licenses, permits, franchises and other authorizations, rights and privileges of Governmental Authorities, Investors and Insurers required to permit it to own its properties and to conduct its business, including but not limited to any required state mortgage banking and real estate licenses, and is in good standing under all material applicable federal, state and local laws and regulations thereunder as a mortgage broker, lender and servicer, (B) has not received any written (or to the Company’s Knowledge, oral) notice that revocation is being considered with respect to any of such required material licenses, permits, or authorizations, (C) is in compliance with all and has not violated in any material respect such material licenses, permits and authorizations, and (D) has timely filed all applications for renewal (on substantially the same terms and conditions) of any required material licenses, permits and authorizations for which renewal applications must have been filed prior to the date hereof and the Closing Date; as of the date hereof and the Closing Date, there are no proceedings pending, or, to the Company’s Knowledge, threatened, that could reasonably be expected to result in the revocation, cancellation, modification or suspension of any such required material licenses, permits or authorizations, and there is no pending or, to the Company’s Knowledge, threatened cancellation or reduction of any mortgage loan sale agreement to which the Company is a party and the obligations of the Company under each such mortgage loan sale agreement and Investor Requirement are being performed by the Company in accordance with their respective terms. Without limiting the generality of the foregoing, the Company is an FHA approved mortgagee, a VA automatic lender, a GNMA issuer, a FNMA seller/servicer and a FHLMC seller/servicer, all in good standing and, to the Company’s Knowledge, no event has occurred that would cause the Company to have such approval revoked.

 

(ii)  Except as set forth in Section 5.01(s)(ii) of the Company Disclosure Schedule, no Mortgage Loans that are owned by the Company are (A) Delinquent Loans, in foreclosure, in bankruptcy or in litigation, (B) classified as “loss,”“doubtful,”“substandard,” or “special mention” by any Agency, or the Company’s internal credit review system, or (C) on a non-accrual status as a result of the Company’s loan review procedures.

 

 

(iii)  The Company has complied in all material respects with all applicable Mortgage Loan Requirements with respect to the Company’s operations and activities, including without limitation the origination, processing, underwriting and credit approval of the Mortgage Loans, such as, among others, (A) those laws relating to real estate settlement procedures, consumer credit protection, truth in lending laws, usury limitations, fair housing, transfers of servicing, collection practices, equal credit opportunity and adjustable rate mortgages, and (B) the handbooks and guides (including without limitation, selling and servicing guides) of and contracts with any Investor. The Company has not done or failed to do, or caused to be done or omitted to be done, any act, the effect of which would operate to invalidate, materially impair or be a material breach of (AA) any approvals of any Agency or state or local Governmental Authority, (BB) any insurance or insurance policy of any Insurer or commitment of any Insurer to insure, (CC) any fidelity bond, direct surety bond, or errors and omissions insurance policy required by any Insurer, (DD) any surety or guaranty agreement, or (EE) any agreement pursuant to which the Company sold Mortgage Loans to an Investor. No Agency, Investor, Governmental Authority, or Insurer has (AAA) provided written notice to the Company that the Company has violated or has not complied on a recurring basis with the applicable compliance or underwriting standards with respect to Mortgage Loans sold by the Company to an Investor, (BBB) has provided written notice to the Company that the Company has violated or not complied with any Mortgage Loan Requirements, (CCC) to the Company’s Knowledge imposed restrictions on the activities (including commitment authority) of the Company or (DDD) has provided written notice to the Company claiming a breach of any contract or agreement pursuant to which the Company sold Mortgage Loans to an Investor. Each Mortgage Loan sold by the Company complied with all of the representations and warranties contained in the contracts or agreements pursuant to which the Company sold such Mortgage Loan to an Investor.

 

(iv)  Except as set forth in Section 5.01(s)(iv) of the Company Disclosure Schedule, all of the Mortgage Loans were secured by one-to-four-family residential real property or, to the extent that a Mortgage Loan was secured by property other than a one-to-four-family residential property, such Mortgage Loan has not been sold to any Person where the Company could have any recourse obligation in the event of a borrower default.

 

(v)  Except as set forth in Section 5.01(s)(v) of the Company Disclosure Schedule, none of the Mortgage Loans are or have been included by the Company in any Pool or securitization. The Company has not sponsored or established any special purpose vehicle or entity that would be required to be consolidated with the Company pursuant to Interpretation No. 46 or Interpretation No. 46R of the Financial Accounting Standards Board.

 

(vi)  Each Mortgage Loan that is required to be covered by FHA insurance is insured under the National Housing Act or qualifies for insurance thereunder and timely and proper application has been made for such insurance. Each Mortgage Loan that is required to be guaranteed by the VA is guaranteed under the provisions of Chapter 37 of Title 38 of the Code or qualifies for such guarantee and timely and proper application has been made for such guarantee. As to each FHA insurance certificate, each VA guarantee certificate and each Mortgage Loan that is required to be insured by private mortgage insurance, the Company has complied with applicable provisions of the insurance or guarantee contract and all applicable laws.

 

 

(vii)  Section 5.01(s)(vii) of the Company Disclosure Schedule contains a true and correct list of all of the audits, investigations and complaints of the Company by an Agency, a Governmental Authority, an Investor, or an Insurer commenced since April 30, 2002. Except for customary ongoing quality control reviews, no audit or investigation is pending or, to the Company’s Knowledge, threatened that is reasonably likely to result in:

 

(A)	a claim of a material failure to comply with applicable regulations;

 

 

(C)	indemnification by the Company in connection with Mortgage Loans;

 

(D)	rescission of any insurance or guaranty contract or agreement,

 

(E)	payment of a penalty to any Agency, an Investor or under a contract of private mortgage insurance; or

 

(F)	revocation of any license or authority, including authority to do business.

 

The Company has made available to the Purchasers true, complete and correct copies of all written reports and materials received in connection with such audits, investigations, complaints and inquiries.

 

(viii)  Except as set forth in Section 5.01(s)(viii) of the Company Disclosure Schedule, the Company does not issue and has not issued mortgage or asset backed securities and has not and is not conducting Servicing with respect to any Pools. Except as set forth in Section 5.01(s)(viii) of the Company Disclosure Schedule, all Mortgage Loans originated by the Company, purchased by the Company from mortgage brokers or correspondents, or acquired by the Company by way of merger or acquisition have been sold on a “servicing released” basis.

 

(ix)  Section 5.01(s)(ix) of the Company Disclosure Schedule sets forth as of the date hereof, a list of all Sales Commitments, together with the name of the other party thereto, the type of commitment (i.e., mandatory, best efforts, etc.), the total amount of such commitment, the expiration date, and the types of Mortgage Loans covered thereby. Neither the Company nor, to the Company’s Knowledge, the other party to any mortgage loan delivery commitment and Sales Commitment) is in breach or default, and no event has occurred which, with notice or lapse of time, would constitute a breach or default on the part of the Company (or, to the Company’s Knowledge, on the part of the other party to the mortgage loan delivery commitment or Sales Commitment) or permit termination, modification or acceleration thereunder against the Company (or to the Company’s Knowledge, against the other party to the mortgage loan delivery commitment or Sales Commitment). There are no oral agreements in effect as to any such mortgage loan delivery commitment or Sales Commitment.

 

 

(x)  The information contained in each Loan File and other documentation upon which underwriters generally rely (such as verification of employment) are, in all material respects, complete and accurate and are in compliance with all applicable Mortgage Loan Requirements.

 

(t)  Derivative Transactions.

 

(i)  All Derivative Transactions (as defined below) entered into by the Company or for the account of any of its customers were entered into in accordance with applicable laws, rules, regulations and regulatory policies of any Governmental Authority, and in accordance with the investment, securities, commodities, risk management and other policies, practices and procedures employed by the Company, and were entered into with counterparties believed at the time to be financially responsible and able to understand (either alone or in consultation with their advisers) and to bear the risks of such Derivative Transactions. The Company has duly performed all of its obligations under the Derivative Transactions to the extent that such obligations to perform have accrued, and, to the Knowledge of the Company, there are no material breaches, violations or defaults or allegations or assertions of such by any party thereunder.

 

(ii)  Except as set forth in Section 5.01(t)(ii) of the Company Disclosure Schedule, no Derivative Transaction held by the Company would be classified by the Company as “Special Mention,”“Substandard,”“Doubtful,”“Loss,”“Classified,”“Criticized,”“Credit Risk Assets,”“Concerned Loans,”“Watch List” or words of similar import. The financial position of the Company under or with respect to each such Derivative Transaction has been reflected in the books and records of the Company in accordance with GAAP consistently applied, and except as set forth in Section 5.01(t)(ii) of the Company Disclosure Schedule, no open exposure of the Company with respect to any such instrument (or with respect to multiple instruments with respect to any single counterparty) exceeds $50,000.

 

(iii)  For purposes of this Agreement, the term “Derivative Transaction” means any swap transaction, option, warrant, forward purchase or sale transaction, futures transaction, cap transaction, floor transaction or collar transaction relating to one or more currencies, commodities, bonds, equity securities, loans, interest rates, catastrophe events, weather-related events, credit-related events or conditions or any indexes, or any other similar transaction (including any option with respect to any of these transactions) or combination of any of these transactions, including collateralized mortgage obligations or other similar instruments or any debt or equity instruments evidencing or embedding any such types of transactions, and any related credit support, collateral or other similar arrangements related to such transactions.

 

 

(u)  Loan Repurchases. Section 5.01(u) of the Company Disclosure Schedule sets forth a list of all loans sold by the Company which have been repurchased by the Company in the past three (3) years. The details relating to such repurchases are set forth on Section 5.01(u) of the Company Disclosure Schedule.

 

(v)  Intellectual Property.

 

(i)  Section 5.01(v) of the Company Disclosure Schedule sets forth a true, complete and correct list of all Company Intellectual Property (as defined below). The Company owns or has a valid license to use all the Company Intellectual Property, free and clear of all Liens, royalty or other payment obligations (except for royalties or payments with respect to off-the-shelf Software at standard commercial rates). The Company Intellectual Property constitutes all of the Intellectual Property necessary to carry on the business of the Company as currently conducted. The Company Intellectual Property owned by the Company, and to the Knowledge of the Company, all other Company Intellectual Property, is valid and enforceable and has not been cancelled, forfeited, expired or abandoned, and the Company has received no written (or to the Company’s Knowledge, oral) notice challenging the validity or enforceability of the Company Intellectual Property. To the Knowledge of the Company, the conduct of the business of the Company does not violate, misappropriate or infringe upon the Intellectual Property rights of any third party. The consummation of the Merger will not result in the material loss or material impairment of the right of the Company to own or use any of the Company Intellectual Property.

 

(ii)  For purposes of this Agreement, the term “Intellectual Property” means (A) trademarks, service marks, trade names, Internet domain names, designs, logos, slogans, and general intangibles of like nature, together with all goodwill, registrations and applications related to the foregoing; (B) patents and industrial designs (including any continuations, divisionals, continuations-in-part, renewals, reissues, and applications for any of the foregoing); (C) copyrights (including any registrations and applications for any of the foregoing); (D) computer programs, whether in source code or object code form (including any and all software implementation of algorithms, models and methodologies), databases and compilations (including any and all data and collections of data), and all documentation (including user manuals and training materials) related to the foregoing (collectively, “Software”); and (E) technology, trade secrets and other confidential information, know-how, proprietary processes, formulae, algorithms, models, and methodologies. For purposes of this Agreement, the term “Company Intellectual Property” means the Intellectual Property used in or held for use in the conduct of the business of the Company.

 

(w)  Customers. Section 5.01(w) of the Company Disclosure Schedule sets forth the names of the five (5) largest purchasers (based upon dollar values of purchases) of Mortgage Loans from the Company in each of the Company’s fiscal year 2004 and 2005.

 

(x)  Insurance. Section 5.01(x) of the Company Disclosure Schedule identifies all of the material insurance policies, binders, or bonds currently maintained by the Company, other than credit-life policies (the “Insurance Policies”), including the insurer, policy numbers, amount of coverage, effective and termination dates and any pending claims thereunder involving more than $50,000. The Company is insured with reputable insurers against such risks and in such amounts as the management of the Company reasonably has determined to be prudent in accordance with industry practices. All the Insurance Policies are in full force and effect, the Company is not in material default thereunder and all claims thereunder have been filed in due and timely fashion.

 

 

(y)  Anti-takeover Provisions. Assuming the accuracy of the representation and warranty of the Purchasers contained in Section 5.02(g), no “control share acquisition,”“business combination moratorium,”“fair price” or other form of anti-takeover statute or regulation is applicable to this Agreement or the Merger, including without limitation Section 11.75 of the Illinois Business Corporation Act, and the provisions of the Company Articles relating to special voting requirements for certain business combinations do not apply to this Agreement or the Merger.

 

(z)  Fairness Opinion. The Company Board has received the written opinion of the Company Financial Advisor to the effect that as of the date hereof the Consideration is fair to the holders of Company Common Stock from a financial point of view.

 

(aa)  Proxy Statement. As of the date of the Proxy Statement and the date of the meeting of the Shareholders to which such Proxy Statement relates, the Proxy Statement will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided that information as of a later date shall be deemed to modify information as of an earlier date, and further provided that no representation and warranty is made with respect to information relating to the Purchasers or provided by the Purchasers included in the Proxy Statement pursuant to Section 5.02(f) hereof.

 

(bb)  SEC Reports. The Company has previously made available to the Purchasers a true, correct and complete copy of each (i) final registration statement, prospectus, report, schedule and definitive proxy statement (after giving effect to any and all amendments thereto) filed since April 30, 2002 by the Company with the SEC pursuant to the Securities Act or the Exchange Act (collectively, the “Company SEC Reports”) and (ii) communication mailed by the Company to its shareholders since April 30, 2002, and no such registration statement, prospectus, report, schedule, proxy statement or communication contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. The Company has timely filed all Company SEC Reports and other documents required to be filed by it under the Securities Act and the Exchange Act, and, as of their respective dates, all Company SEC Reports complied with the published rules and regulations of the SEC with respect thereto in all material respects. No executive officer of the Company has failed in any respect to make the certifications required of him or her under Section 302, 404 or 906 of the Sarbanes-Oxley Act of 2002 and no enforcement action has been initiated against the Company by the SEC relating to disclosures contained in any Company SEC Reports.

 

(cc)  Disclosure. The representations and warranties contained in this Section 5.01, as qualified by the Company Disclosure Schedule, do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained in this Section 5.01 not misleading.

 

 

(dd)  Lending Practices. (i) the Company has, and in the case of a Mortgage Loan originated with the assistance of a mortgage broker, the mortgage broker also has, complied in all material respects with all laws applicable to all outstanding Mortgage Loans, (ii) to the Company’s Knowledge, all mortgage brokers who originate Mortgage Loans have all consents, authorizations or waivers from Governmental Authorities from all jurisdictions requiring such consents, authorizations or waivers for such origination activities, and (iii) each outstanding Mortgage Loan and commitment to extend credit has been solicited, originated and administered in accordance with the Company’s underwriting standards in all material respects. The Loan Documents and Loan Files to which the Company is a party conform to all applicable laws in all material respects, and each of the related Mortgage Loans arose out of bona fide transactions in the ordinary course of business, and the Loan Files relating to the Mortgage Loans accurately and completely reflect in all material respects the terms of the Mortgage Loans.

 

(ee)  Lending Policies; Loan Reserve Policies. (i) the Lending Policies and Loan Reserve Policies set forth a true and complete description of the written policies and practices of the Company relating to: (A) documentation procedures; (B) collateralization practices (including loan-to-value ratios and valuation and appraisal of collateral); (C) procedures for (including frequency of) billing and on-going monitoring and auditing of Mortgage Loans; (D) collections and review of past-due accounts; (E) making of charge-offs, write downs, specific accruals and specific valuation reserves for Mortgage Loans and (F) the placing of Mortgage Loans on a non-accrual status, (ii) each Mortgage Loan originated or acquired by the Company has been originated, authorized, collateralized, guaranteed and administered and serviced in accordance with the Lending Policies and (iii) the Lending Policies comply with applicable Law in all material respects.

 

(ff)  Investment Commitments. (i) the mandatory forward Investment Commitments are owned by the Company free and clear of any Liens, other than Liens for the benefit of the Company’s warehouse lenders and (ii) the Company has not received written notice of any pending cancellation of any mandatory forward Investment Commitment.

 

(gg)  Custodial Accounts. All Custodial Accounts required to be maintained by the Company are maintained in accordance with applicable law and insurer requirements in all material respects.

 

Section 5.02  Representations and Warranties of the Purchasers. The Purchaser and the Purchaser Parent, jointly and severally, hereby represent and warrant to the Company as follows:

 

(a)  Organization, Standing and Authority. The Purchaser is duly organized, validly existing and in good standing under the laws of the State of Delaware. The Purchaser Parent is duly organized, validly existing and in good standing under the laws of the Cayman Islands. Each of the Purchasers is duly licensed or qualified to do business in each jurisdiction where its respective ownership or leasing of property or assets or the conduct of its respective business requires it to be so licensed or qualified. Each of the Purchasers has in effect all federal, state, local, and foreign governmental authorizations necessary for it to own or lease its respective properties and assets and to carry on its respective business as it is now conducted.

 

 

(b)  Power. Each of the Purchasers has the power, corporate or otherwise, and authority to carry on its respective business as it is now being conducted and to own all its respective properties and assets; Each of the Purchasers has the power, corporate or otherwise, and authority to execute, deliver and perform its respective obligations under this Agreement and to consummate the Merger.

 

(c)  Authority. This Agreement and the Merger have been authorized by all necessary action, whether corporate or otherwise, of each of the Purchasers and the Purchaser Board, and following its organization this Agreement and the Merger will be authorized by all necessary corporate action of the Merging Subsidiary. This Agreement has been duly executed and delivered by each of the Purchasers and, assuming due authorization, execution and delivery by the Company, this Agreement is a valid and legally binding agreement of each of the Purchasers enforceable in accordance with its terms (except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and similar laws of general applicability relating to or affecting creditors’ rights or by general equity principles).

 

(d)  Regulatory Approvals; No Defaults.

 

(i)  No licenses, consents or approvals of, or waivers by, or filings or registrations with, any Governmental Authority or with any third party are required to be made or obtained by the Purchasers in connection with the execution, delivery or performance by the Purchasers of this Agreement, or to consummate the Merger.

 

(ii)  Subject to receipt, or the making, of the licenses, consents, approvals, waivers and filings referred to in the preceding paragraph, the execution, delivery and performance of this Agreement by the Purchasers and the consummation of the Merger do not and will not (A) constitute a breach or violation of, or a default under, the articles of incorporation or bylaws (or similar governing documents) of the Purchaser or the Purchaser Parent, (B) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to the Purchaser or the Purchaser Parent or any of their respective properties or assets or (C) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the properties or assets of the Purchaser or the Purchaser Parent under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, contract, agreement or other instrument or obligation to which the Purchaser or the Purchaser Parent is a party or by which Purchaser or the Purchaser Parent or any of their respective properties or assets may be bound or affected.

 

(e)  Financial Ability. On the Closing Date, the Purchasers, either individually or in combination, will have all funds necessary to consummate the Merger and pay the aggregate Consideration to holders of Company Common Stock pursuant to Section 3.01(a) hereof.

 

 

(f)  Proxy Statement Information. None of the information relating to the Purchasers, which is expressly provided by the Purchasers to the Company for inclusion in the Proxy Statement, as of the date of the Proxy Statement and the date of the meeting of the Shareholders to which such Proxy Statement relates, will contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided that information as of a later date shall be deemed to modify information as of an earlier date.

 

(g)  Ownership of Company Common Stock. As of the date hereof, none of the Purchaser, the Purchaser Parent or, to the Purchasers’ Knowledge, any of their other respective affiliates (as such term are defined under the Exchange Act) owns, beneficially or of record, directly or indirectly, or is a party to any agreement (not including the Confidentiality Agreement), arrangement or understanding for the purpose of acquiring, holding, voting or disposing of, shares of Company Stock (other than shares held in a fiduciary capacity that are beneficially owned by third parties or as a result of debts previously contracted).

 

(h)  No Brokers. The Purchasers have not incurred any liability for any broker’s fees, commissions or finder’s fees in connection with the Merger for which the Company or any of its directors or officers would be liable, other than liability for such fees of The Sapphire Group LLC, or any of its affiliates, in connection with the Merger, for which the Purchasers shall be solely responsible.

 

(i)  Litigation. As of the date hereof, neither the Purchaser nor the Purchaser Parent (i) is a party to any and there are no pending or, to the Purchasers’ Knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against the Purchaser or the Purchaser Parent which challenge the validity or propriety of the Merger such that there is a reasonable probability that the conditions set forth in Section 7.03(i) of this Agreement would not be satisfied, and (ii) is aware of any fact or circumstance that is reasonably likely to cause the conditions set forth in Section 7.03(i) of this Agreement to not be satisfied.

 

(j)  Disclosure. The representations and warranties contained in this Section 5.02, when considered as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained in this Section 5.02 not misleading.

 

ARTICLE VI  

 

 

Section 6.01  Commercially Reasonable Efforts.  Subject to the terms and conditions of this Agreement, each of the parties to the Agreement agrees to use commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws, so as to permit consummation of the Merger as promptly as practicable, and otherwise to enable consummation of the Merger, including the satisfaction of the conditions set forth in Article VII hereof, and shall cooperate fully with the other parties hereto to that end.

 

 

 

Section 6.02  Shareholder Approval. The Company agrees to take, in accordance with applicable law and the Company Articles and Company Bylaws, all action necessary to convene a meeting of the Shareholders to consider and vote upon the approval of this Agreement, in accordance with Section 5.01(e), and any other matters required to be approved by the Company’s shareholders in order to permit consummation of the Merger (including any adjournment or postponement, the “Company Meeting”) and, subject to Section 6.06(a), shall use best efforts to take all lawful action to solicit such approval by the Shareholders. The Company shall use best efforts to convene the Company Meeting within forty-five (45) days after the initial mailing of the Proxy Statement to Shareholders of the Company pursuant to Section 6.03(a). Except with the prior approval of the Purchasers, no other matters shall be submitted for the approval of the Shareholders at the Company Meeting. The Company Board shall at all times prior to and during the Company Meeting recommend adoption of this Agreement by the Shareholders and shall not withhold, withdraw, amend or modify such recommendation in any manner adverse to the Purchasers or take any other action or make any other public statement inconsistent with such recommendation, except as and to the extent expressly permitted by Section 6.06(a) (a “Change in Recommendation”). Notwithstanding any Change in Recommendation, this Agreement shall be submitted to the Shareholders for their approval at the Company Meeting and nothing contained herein shall be deemed to relieve the Company of such obligation.

	UNITED FINANCIAL MORTGAGE CORP.
	By:	/s/ Steve Y. Khoshabe
		Steve Y. Khoshabe
		President and Chief Executive Officer

If to Buyer:		ARH Mortgage Inc.
		c/o The Airlie Group
		115 East Putnam Avenue
		Greenwich, Connecticut 06830
		Attention: Andrew Dwyer

  

		_______________________________________
		Name:
		Title:
		Address for Notice:
		_______________________________________
		_______________________________________
		Shares beneficially owned:
		____________ shares of common stock of Lark
		ARH MORTGAGE INC.
		By:_____________________________________
		Dort A. Cameron III
		President

 

                A.       Shareholder currently holds 63 shares of Series A Preferred Stock of the Company (the “Preferred Stock”).

                B.       The Company is currently in negotiations with ARH Mortgage, Inc., a Delaware corporation, and Airlie Opportunity Master Fund, Ltd., a Cayman Islands limited partnership, to enter into an Agreement and Plan of Merger (the “Agreement”) whereby, among other things, shareholders of the Company will receive cash consideration in exchange for shares of their common stock in the Company.

                C.       Shareholder will receive substantial economic benefit from the consummation of the transactions contemplated under the Agreement. 

                D.      In contemplation of, and in consideration for, the transactions contemplated under the Agreement, the Shareholder grants the Company the option to repurchase the Preferred Stock in accordance with the terms of this Agreement.

 

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement either individually or through its duly authorized officer, on the day and year first written above.

UNITED FINANCIAL MORTGAGE CORP.
By: __________________________________	__________________________________
	JOSEPH KHOSHABE

This CONSULTING AGREEMENT (the "Agreement") is executed on ___________, 2005 and is made and entered into effective as of the Closing Date (also referred to as the “Employment Date”) by and among ARH MORTGAGE INC., a corporation organized and operating under the laws of the State of Delaware (the "Corporation"), UNITED FINANCIAL MORTGAGE CORP., a mortgage corporation organized and operating under the laws of the State of Illinois ("Mortgage Corp."), and JOSEPH KHOSHABE (the "Executive"). For purposes of this Agreement, the Closing Date shall have the meaning assigned to it by the Agreement and Plan of Merger dated as of September 1, 2005 among the Corporation, Airlie Opportunity Master Fund, Ltd. and the Mortgage Corp.

 

This EMPLOYMENT AGREEMENT (the "Agreement") is executed on _____________, 2005 and is made and entered into effective as of the Closing Date (also referred to as the “Employment Date”) by and among ARH MORTGAGE INC., a corporation organized and operating under the laws of the State of Delaware (the "Corporation"), UNITED FINANCIAL MORTGAGE CORP., a mortgage corporation organized and operating under the laws of the State of Illinois ("Mortgage Corp."), and STEVE Y. KHOSHABE (the "Executive"). For purposes of this Agreement, the Closing Date shall have the meaning assigned to it by the Agreement and Plan of Merger dated as of September 1, 2005 among the Corporation, Airlie Opportunity Master Fund, Ltd. and the Mortgage Corp. (the “Merger Agreement”).

26.  Dispute Resolution.

 

Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association then in effect. The expenses of the parties, including reasonable out-of-pocket costs and expenses of the prevailing party’s legal counsel and the costs and expenses of the arbitrator, shall be borne by the non-prevailing party if the arbitrator determines that any of the claims brought or any of the defenses asserted by such non-prevailing party were not brought, or were not asserted, in good faith. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding the foregoing, the Corporation and Mortgage Corp. each shall have the right apply to any court of competent jurisdiction for a temporary restraining order, preliminary injunction or other interim equitable relief to which they may be entitled in connection with any alleged violations of section 15 of this Agreement.

		STEVE Y. KHOSHABE

 

 

	ARH MORTGAGE INC.
	By:
		Name: Dort A. Cameron III
		Title:   President

 

	UNITED FINANCIAL MORTGAGE CORP.
:	By:
		Name: Michael A. Kraft
		Title:   Executive Vice President and Corporate Counsel