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0000912057-00-013316.txt : 20000327
0000912057-00-013316.hdr.sgml : 20000327
ACCESSION NUMBER: 0000912057-00-013316
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 19991231
FILED AS OF DATE: 20000324

FILER:

COMPANY DATA:
COMPANY CONFORMED NAME: WMF GROUP LTD
CENTRAL INDEX KEY: 0001039206
STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE AGENTS & MANAGERS (FOR OTHERS) [6531]
IRS NUMBER: 541647759
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231

FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 000-22567
FILM NUMBER: 577489

BUSINESS ADDRESS:
STREET 1: 1593 SPRING HILL RD
STREET 2: STE 400
CITY: VIENNA
STATE: VA
ZIP: 22182
BUSINESS PHONE: 7036101400

MAIL ADDRESS:
STREET 1: 1593 SPRING HILL RD
STREET 2: STE 400
CITY: VIENNA
STATE: VA
ZIP: 22182


10-K
1
10-K



Prepared by MERRILL CORPORATION www.edgaradvantage.com<br />








UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K










 
/x/
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended: December 31, 1999







/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934


For the transition period from         to        

Commission File Number 000-22567





The WMF Group, Ltd.
(Exact name of registrant as specified in its charter)













Delaware

(State or other jurisdiction of

incorporation or organization)
  54-1647759

(I.R.S. Employer

identification no.)
 
1593 Spring Hill Road, Suite 400

Vienna, Virginia

(Address of principal executive offices)
 
 
 

 
22182

(Zip code)

Registrant’s telephone number, including area code (703) 610-1400

Securities registered pursuant to Section 12(b) of the Act:













Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, $.01 par value   The Nasdaq Stock Market

Securities Registered pursuant to Section 12(g) of the Act: NONE

    Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes /x/  No / /

    Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.       

    The
aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $76.7 million based on the closing price of such shares on
The Nasdaq National Market as of March 17, 2000.

    As
of March 17, 2000 there were 10,959,321 shares of common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

THE PROXY STATEMENT FOR THE 2000 ANNUAL MEETING OF STOCKHOLDERS

IS INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT.









The WMF GROUP, LTD.

FORM 10-K

TABLE OF CONTENTS





































































































































Item No.

  Page
PART I    
1.   Business   2
2.   Properties   19
3.   Legal Proceedings   20
4.   Submission of Matters to a Vote of Security Holders   20
 
PART II
 
 
 

 
5.   Market for Registrant’s Common Equity and Related Stockholder Matters   21
6.   Selected Financial Data   21
7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   23
7A.   Quantitative and Qualitative Disclosure about Market Risk   39
8.   Financial Statements and Supplementary Data   40
9.   Changes in and disagreements with Accountants on Accounting and Financial Disclosure   40
 
PART III
 
 
 

 
10.   Directors and Executive Officers of the Registrant   41
11.   Executive Compensation   41
12.   Security Ownership of Certain Beneficial Owners and Management   41
13.   Certain Relationships and Related Transactions   41
 
PART IV
 
 
 

 
14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K   42


1






A Warning About Forward Looking Statements

    This report may contain “forward-looking statements.” Any statement in this report, other than a statement of historical fact, may be a forward-looking
statement.

    You
can generally identify forward-looking statements by looking for words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue.” Variations on
those or similar words, or the negatives of such words, also may indicate forward-looking statements.

    Although
the Company believes that the expectations reflected in this report are reasonable, the Company cannot assure you that its expectations will be correct. The Company has
included a discussion entitled “Risk Factors” in this report, disclosing important factors that could cause its actual results to differ materially from its expectations. If in the future you hear or
read any forward-looking statements concerning the Company, you should refer to these Risk Factors.

    The
forward-looking statements in this report are accurate only as of its date. If the Company’s expectations change, or if new events, conditions or circumstances arise, the Company
is not required to, and may not, update or revise any forward-looking statement in this report.

PART I

Item 1. Business

Company Overview

    The WMF Group, Ltd. (the “Company”) is one of the largest commercial mortgage financial services companies in the United States, as measured by
servicing portfolio size, according to a 1999 survey published by the Mortgage Bankers Association of America (the “MBA”). The Company has been the nation’s largest originator of Federal National
Mortgage Association (“Fannie Mae”) and Federal Housing Administration (“FHA”) insured multifamily and healthcare loans and has originated more than $11 billion in conventional and
FHA-insured multifamily and commercial loans since 1996. The Company had a servicing portfolio of approximately $13.4 billion at December 31, 1999. The Company has 271
employees and operates 18 offices nationwide. The Company has three principal lines of business: (i) mortgage banking, which includes the origination and servicing of loans;
(ii) advisory services, which includes the investment and asset management of commercial mortgage funds; and (iii) capital markets.

    The
WMF Group, Ltd. is a Delaware corporation formed in October 1992 under the name “WMF Holdings, Inc.” Originally, the Company was created to hold the
operations of WMF/Huntoon, Paige Associates Limited (“WMF Huntoon Paige”) and WMF Washington Mortgage Corp. (“WMF Washington Mortgage”). WMF Washington Mortgage, WMF Carbon Mesa Advisors, Inc.
(“WMF Carbon Mesa”) and WMF CommQuote, Inc. (“WMF CommQuote”), formerly known as WMF Capital Corp., are wholly-owned subsidiaries of the Company. WMF Huntoon Paige is a wholly-owned subsidiary
of WMF Washington Mortgage.

    WMF
Huntoon Paige has originated and serviced multifamily and healthcare mortgages insured by FHA under various owners and under various names since 1979. WMF Washington Mortgage
acquired
WMF Huntoon Paige in 1991. WMF Washington Mortgage has originated and serviced multifamily and commercial mortgages under various owners and names since 1984.

    On
April 1, 1996, NHP Incorporated (“NHP”) purchased the Company and renamed it “NHP Financial Services, Inc.” In early 1997, NHP was acquired by Apartment Investment
and Management Co. (“AIMCO”). As a condition of that purchase, AIMCO required NHP to spin off the Company. On December 8, 1997, the Company became an independent, publicly traded company. The
Company’s primary shareholders are Demeter Holdings Corporation (“Demeter”), Phemus Corporation (“Phemus”) and Capricorn Investors II, L.P. (“Capricorn”). Demeter and Phemus are affiliates of Harvard
Private Capital Holdings, Inc. (“Harvard”).

2


Industry Overview

    The Company believes that the financing and servicing of commercial and multifamily real estate offers significant growth opportunities. Commercial and
multifamily real estate encompasses a wide spectrum of assets including multifamily, office, industrial, retail and hospitality. These assets are financed by an estimated $1.4 trillion of outstanding
commercial real estate debt. During the past ten years, total commercial mortgage originations have averaged approximately $150 billion annually, of which approximately 75 percent
consists of non-multifamily assets. The Company anticipates that on a stabilized basis, the commercial real estate market will require debt financing for existing properties of
approximately $100 to $120 billion annually, plus additional amounts for new construction.

    Mortgage
banking involves the origination and servicing of mortgage loans. Commercial mortgage banks have arranged a significant portion of the debt financing for commercial real
estate. Historically, commercial mortgage banks originated and serviced loans for life insurance companies in specified geographic regions. In addition to providing loans to life insurance companies,
some commercial mortgage banks acted as originators for Government Sponsored Enterprises (“GSEs”) such as Fannie Mae and Federal Home Loan Mortgage Corporation (“Freddie Mac”), and also acted as
brokers for other lenders. As a result, a fragmented industry has developed which is comprised of small local and regional firms.

    However,
since the early 1990s the commercial mortgage banking industry has experienced significant change, in part due to the growth in commercial mortgage securitization, the
expanded involvement of GSEs, increased borrower sophistication and advances in information technology. Many of the existing firms lack the capital, technology and financial sophistication to compete
effectively in today’s rapidly changing market. Accordingly, the Company believes the commercial mortgage banking industry is going through a period of consolidation similar to that experienced in the
residential mortgage industry. Although consolidation provides significant growth opportunities for the Company, certain risks are also involved. See “Risk Factors—The Company May Be
Unable to Complete Acquisitions or Enter into New Business Lines.”

Strategic Objectives

    Because it has broad geographic scope, multiple investor relationships, underwriting expertise, operating systems and product development capabilities, the
Company believes that it is well-positioned to compete effectively in the commercial real estate financing industry. Technological demands, large and sophisticated infrastructure for real
estate underwriting and risk evaluation, and rapid market changes increasingly characterize this industry. The Company believes that these developments will lead to the creation of large and
sophisticated mortgage enterprises offering a wide spectrum of commercial
finance products and services. The Company seeks to use its existing infrastructure and market position to increase market share of its established businesses and to expand into related businesses.

    The
Company seeks to increase reported earnings and cash flow through (i) acquisitions and internal growth, (ii) design and delivery of new mortgage products, including
structured loan products and participating loan products, (iii) expansion into related businesses, such as managing commercial mortgage investment funds, and (iv) diversification of fee
income sources.

    Acquisitions.  The Company has pursued a strategy of acquiring (1) multifamily and commercial mortgage businesses
that either serve key real estate markets in the United States or provide specialized services that enhance its product line, and (2) additional servicing portfolios. In the past, the Company
has sought to acquire companies with active and productive loan origination staffs, significant market share and servicing portfolios of $250 million or more and expects to continue to do so in
the future, to the extent adequate capital and attractive opportunities are available.

3


    Since
1996, the Company has made six acquisitions (the “Acquisitions”):



    During
    1996, the Company increased its portfolio of serviced mortgages by 40.9 percent from $4.4 billion to $6.2 billion, primarily as
    a result of two acquisitions. On May 13, 1996, WMF Huntoon Paige purchased a portion of the loan production pipeline and servicing, as well as certain other assets, of American Capital
    Resources Investment Corp. (“ACR”) for approximately $4.2 million, plus potential future payments based on realization of loans closed from the pipeline through August 1997.


    On
    December 31, 1996, WMF Washington Mortgage acquired all of the common stock of Detroit-based Proctor & Associates of Michigan (“Proctor”),
    the 37th largest commercial mortgage banking firm in the United States based on a survey by the MBA. WMF Washington Mortgage paid approximately $3.7 million in cash to acquire Proctor. The
    acquisition brought to the Company a $1.1 billion loan servicing portfolio of multifamily, retail and office building mortgages, as well as 17 active correspondent relationships with life
    insurance companies.


    On
    April 15, 1997, WMF Washington Mortgage purchased substantially all of the mortgage banking assets and liabilities of Askew Investment Company
    (“Askew”) in Dallas, Texas for $5.6 million, excluding transaction costs (82 percent of which was paid at closing and the remaining 18 percent of which was paid in the form of
    earnouts upon the attainment of certain performance objectives over a 36-month period). The acquisition increased the Company’s mortgage servicing portfolio and gave the Company access to
    the traditional insurance company whole-loan buyers in the markets served by Askew. The purchase also provided the Company with a new source of loans it intended for securitization through
    the Company’s capital market relationships.


    On
    November 5, 1997, WMF Washington Mortgage purchased 100 percent of the outstanding stock of The Robert C. Wilson Company and its Arizona
    subsidiary (collectively, “Robert C. Wilson”) for a purchase price of approximately $4.0 million in cash (80 percent of which was paid at closing and the remaining 20 percent of
    which was paid in the form of earnouts upon the attainment of certain performance objectives). Robert C. Wilson provides mortgage and equity origination and servicing.


    On
    December 23, 1997, WMF Washington Mortgage purchased substantially all of the mortgage banking assets of New York Urban West, Inc. (“New
    York Urban”) for a purchase price of approximately $4.9 million in cash (84 percent of which was paid at closing and the remaining 16 percent of which will be paid in the form of
    earnouts upon the attainment of certain performance objectives over a 42-month period).


    On
    March 27, 1998, the Company created WMF Carbon Mesa, which purchased certain assets of Carbon Mesa Advisors, Inc. and Strategic Real
    Estate Partners for a total purchase price of $4.9 million, including an additional $1.7 million paid in 1999 when the Company exercised its option to purchase certain additional assets.
    The purchase price was paid in combination of a cash, short-term notes and common stock. WMF Carbon Mesa manages commercial mortgage investment funds, provides special asset management
    services and originates commercial mortgages.



    The
Company also grows its servicing portfolio through the acquisition of servicing rights. Since 1992, the Company has acquired servicing rights on approximately $1.4 billion
of mortgages in over 47 transactions.

    Internal Growth.  The Company has grown through internal expansion. This growth has occurred though a combination of
opening of new offices, hiring new loan officers, implementing loan officer training programs, and creating a national sales force capable of originating loans for multiple of investor sources.
Prospectively, the Company seeks to grow via continued expansion of its national origination system, further streamlining of its servicing operations, and the realization of other operating
efficiencies.

4





    The
    Company hired 10 new loan officers in 1999. Through training and other management initiatives, the Company has developed a national sales force,
    capable of selling all loan products offered by the Company.


    The
    Company implemented a cost-reduction program, which resulted in savings of approximately $13 million during 1999 from previously
    projected amounts. See “Major Developments in 1999—Cost-Saving Measures.”



    As
a result of acquisitions and internal growth, the Company has increased loan originations, including conduit originations, by approximately 38 percent annually, from
approximately $240 million in 1992 to approximately $2.3 billion in 1999. The Company’s servicing portfolio has increased by approximately 24 percent annually, from approximately
$3.0 billion in 1992 to $13.4 billion as of December 31, 1999.

    Design and delivery of new mortgage products.  Since 1992, the Company has been involved in developing more than eight
new products, including one of the first whole-loan conduits (Common SenseSM), a revolving credit facility for real estate investment trusts, a bridge loan program for
mark-to-market properties and a forward commitment program for tax-credit new construction.

    The
Company intends to enhance its ability to develop new financing products in response to changing market conditions, including continued development of bridge loan products, as
well as the addition of high-yield, mezzanine and participating loan products and a small loan product. The Company cannot assure you that it will be successful in developing any
particular new product or, if a product is developed, that it will be profitable for the Company.

    Expansion into related businesses.  The Company seeks to build on its experience in evaluating real estate to expand its
services and develop related products. The Company has used its expertise to enter the advisory services/funds management business, to provide due diligence services for institutional clients, and to
expand its presence in the commercial mortgage-backed securities market. Other possible businesses may include asset management, commercial leasing and management and the purchase and retention of
commercial mortgage-backed securities. In 1999, the Company entered into a strategic alliance to create an Internet portal for the commercial real estate industry called Redbricks.com. The
Company intends to develop, with Redbricks.com and other on-line origination sources, expanded distribution of its financial products and continuous process improvements in the delivery of
services. Expansion may occur through a combination of acquisitions, strategic alliances and internal business development. There can be no assurance that the Company will seek to undertake any
specific line of business, or that, if it undertakes a particular line of business, that the business will be successful.

    Fee Diversification.  The Company intends to manage the risks of the commercial real estate financing industry by
(i) focusing its activities on earning service, origination and asset management fees rather than earning interest on retained mortgage assets, (ii) developing strategic relationships
with multiple investors, (iii) lending to a variety of commercial asset classes and (iv) operating on a national basis.



    Fee-based Earnings. In 1999, approximately 97.4 percent of the Company’s
    revenue was generated from origination, servicing and other related fees and funds management. Of this amount, fees and other recurring revenue related to servicing and funds management agreements
    accounted for approximately 42 percent of the Company’s fee revenue. In addition to providing a stable and recurring source of earnings, this approach requires significantly less capital and
    exposes the Company to lower levels of risk than the retention of mortgage assets. While it may make minority investments in funds it manages, the Company does not intend to take significant principal
    risk positions.


5







    Multiple Investors. In the past, changes in the financial markets and investor requirements
    have contributed to the volatility of the commercial mortgage financial markets. The Company seeks to manage this risk by developing strategic relationships with a variety of investor sources,
    including commercial banks, GSEs, investment banks and insurance companies.


    Multiple Asset Classes. The Company has lent to a wide variety of commercial asset classes,
    including multifamily, retail, office, industrial and hospitality. The Company believes that business and financing cycles vary among asset classes. By lending to multiple asset classes, the Company
    can reduce risk and improve operating efficiency by redeploying its origination activities and resources as market conditions change.


    National Presence. The Company has 18 loan origination offices located throughout the
    country and has originated loans in every state and the District of Columbia. This national presence provides another source of diversification, helping to mitigate the risk posed by changes in
    regional business conditions.



    See “Risk Factors” for a detailed discussion of the risks that may affect the Company.

Major Developments in 1999

    Cost-Saving Measures.  In response to its losses during 1998, the Company implemented a
cost-reduction program, reducing its workforce by 37 percent from peak levels in September 1998 and decreasing general and administrative expenses. The
cost-reduction program resulted in estimated annual savings of approximately $13 million during 1999 from previously projected amounts.

    Issuance and Repayment of Subordinated Note.  On September 4, 1998, the Company entered into a Credit Agreement
with Commercial Mortgage Investment Trust (“COMIT”), a real estate investment trust (“REIT”) owned primarily by Harvard, Capricorn and the Company. Under the Credit Agreement, Harvard and Capricorn
contributed a total of $20 million to COMIT, and the Company then sold a $20 million subordinated note to COMIT. The Company also issued warrants to COMIT entitling it to purchase
1,200,000 shares of common stock at $11.25 per share. COMIT later assigned 960,000 of the
warrants to Harvard and 240,000 of the warrants to Capricorn. As part of the Recapitalization Plan, described below, Harvard and Capricorn surrendered those warrants. The Company repaid
$16.6 million of the subordinated note on December 31, 1998. On March 12, 1999, the Company repaid the remaining principal and interest due under the subordinated note, and the
note was canceled. GSIC Real Estate, Inc., the real estate investment arm of the Government of Singapore Investment Corporation Pte. Ltd., became a significant investor in COMIT in 1999.

    Recapitalization Plan.  To provide for its working and other capital needs after its 1998 losses, the Company entered
into the Recapitalization Plan. The Recapitalization Plan had two parts and raised a total of approximately $27.5 million of new equity:

    (1)  Sale
of $16.6 Million of Capital Stock to Demeter, Phemus and Capricorn

    On
December 31, 1998, Demeter, Phemus and Capricorn acquired 3,635,972 shares of the Company’s Class A Non-Voting Convertible Preferred Stock (the
“Class A Stock”) for total cash proceeds of approximately $16.6 million. On January 14, 1999, each share of Class A Stock was converted into one share of common stock. As a
result of these transactions, Demeter acquired 2,757,633 shares of the Company’s common stock, Phemus acquired 151,145 shares of common stock, and Capricorn acquired 727,194 shares of common stock.

    As
part of the Class A Stock transaction, Harvard and Capricorn canceled the warrants to purchase 1,200,000 shares of common stock issued to COMIT in connection with the
subordinated note. In addition, Demeter, Phemus and Capricorn entered into a Standby Purchase Agreement to purchase up to 664,028 shares of common stock not otherwise purchased in the rights offering
described below, for a total

6


purchase
price of $3,320,140. The Company applied the proceeds of the sale of Class A Stock to repay part of the subordinated note held by COMIT.

    Because
of their participation in this transaction, Demeter, Phemus and Capricorn agreed not to exercise, transfer or acquire any rights during the rights offering.

    (2)  $10.9
Million Public Rights Offering/Private Placement

    The
Company issued all of its shareholders of record as of February 1, 1999, 1.072 transferable rights for each share of common stock held by them on that date. Each right
entitled its holder to purchase one share of common stock for $5.00. The rights expired on March 8, 1999.

    Through
the rights offering, the Company sold a total of 1,482,271 shares of common stock for total proceeds of approximately $7.4 million. On March 19, 1999, Demeter,
Phemus and Capricorn completed the purchase of a total of 664,028 shares of the Company’s common stock pursuant to the Standby Purchase Agreement, for total proceeds to the Company of approximately
$3.3 million. In addition, on March 31, 1999, Capricorn purchased an additional 34,250 shares at $5.375 per share, for proceeds to the Company of $0.2 million.

    The
Company applied the proceeds from the rights offering to repay the remaining subordinated note held by COMIT and other operating purposes. The Recapitalization Plan resulted in
the effective conversion of the Company’s $20 million subordinated note into common stock and raised approximately $7.5 million of additional common equity, which was used to repay
borrowings under the Company’s revolving line of credit and for working capital.

    Stock Repurchase Plan.  On May 4, 1999, the Company announced a stock repurchase plan. The Company’s Board of
Directors has authorized the acquisition of up to $3 million of the Company’s common stock from time to time in open market transactions, block purchases, or otherwise. As of March 17,
2000, the Company has acquired a total of 495,300 shares of common stock at an average price of $5.53 per share.

    Redbricks Online Service.  During 1999, the Company contributed to the development of Redbricks.com, a website designed
for commercial real estate developers and owners. On February 7, 2000, the Company announced the closing of a Fannie Mae targeted affordable housing loan that was used to successfully test and
design LoanConnection, the automated loan processing system of Redbricks.com.

    Hiring of Credit Suisse First Boston.  In October 1999, the Company announced that it had hired Credit Suisse
First Boston to advise it on the development of strategic relationships.

The Company’s Lines of Business

Mortgage Services

    Mortgage origination involves the making of loans to borrowers who use real estate property as collateral. The Company’s staff of 54 loan originators targets a
wide variety of borrowers, including developers, local entrepreneurial owners, large portfolio owners and public companies such as real estate investment trusts.

    Currently,
the Company originates mortgages through three channels—retail, correspondent and the Internet. For the retail operation, the Company has loan originators in 18
offices located throughout the country. Those individuals directly solicit owners of real estate, as well as real estate service providers in their markets. The Company believes that having a local
presence within a market significantly adds to its understanding of the local economic, demographic and real estate trends, thus allowing it to serve borrowers and investors better. A local presence
also helps develop borrower relationships and identify new customers.

7


    In
those markets where the Company does not have a retail presence, it acts through “correspondent relationships” with local commercial and multifamily mortgage brokers. In this
relationship, a local mortgage broker identifies potential borrowers and refers them to the Company for their loans. Currently, the Company originates loans through correspondents throughout the
United States. In 1999, the Company obtained approximately 31 percent of its $2.3 billion of loan originations through correspondents.

    The
Company’s relationship with correspondents differs between multifamily and commercial lending and FHA lending. For multifamily and commercial lending, the Company enters into an
agreement with each correspondent which generally provides that (1) the borrower will pay the correspondent, usually based on a percentage of the loan, (2) in some instances, the Company
will have a right of first refusal to finance properties meeting the criteria of its loan programs and investors and (3) the correspondent may be eligible for incentive fees based on the
servicing fees received by the Company from the originated loans. Generally either party to a multifamily and commercial correspondent agreement may terminate the relationship without cause upon prior
written notice. The multifamily and commercial correspondent agreements usually do not place geographic restrictions on either the Company or the correspondent.

    With
respect to FHA lending, correspondents generally enter into agreements with the Company for each individual transaction and the terms of the agreements vary from transaction to
transaction. These agreements define the compensation, roles, representations and warranties for the correspondent and the Company.

    After
it identifies a potential borrower, the Company determines which of its mortgage products best meets the borrower’s needs. Then the Company works with the borrower and a
mortgage investor to prepare a loan application. When the borrower completes the application, the Company’s underwriters conduct due diligence. In the case of FHA loans, the FHA conducts due
diligence. See “—Mortgage Underwriting” below. The loan is evaluated, and if appropriate, submitted to a loan committee consisting of senior officers of the Company.

    If
the Company or the FHA approves the loan, the Company issues a commitment to the borrower. Normally, the Company simultaneously commits to sell the loan to an appropriate investor.
This simultaneous commitment from both a borrower and a mortgage investor enables the Company to eliminate its exposure to interest rate changes for each transaction. Typical investors include
insurance companies, banks, credit companies, GSEs (such as Fannie Mae) and other institutional investors. Typically the Company funds a loan 15 to 30 days after the loan commitment. At that
time, the Company funds the loan using its warehouse lines of credit and the borrower pays the Company an origination fee, typically one percent of the principal amount of the loan.

    Within
10 to 45 days after funding the loan, the Company completes the sale of the loan to an investor. In connection with such sales, the Company sometimes retains certain
liabilities. See “Risk Factors—The Company is Liable for Certain Representation and Warranties Concerning Mortgage Loans” and “Risk Factors—The Company May Incur Losses on
Mortgage Loans Under the Fannie Mae DUS Program.” After selling a mortgage loan, the Company typically retains the right to service the loan. See “—Mortgage Servicing” below.

    As
of December 31, 1999, the Company’s subsidiary, WMF Carbon Mesa, had a $58 million floating rate forward commitment that was not matched with an investor sale
commitment. This commitment is subject to market risk until such time as a permanent investor is identified. See “Risk Factors—The Company May Incur Losses Related To Loan Commitments For
Which It Does Not Have A Purchaser And Has Not Entered Into Hedge Arrangements” below.

    The
Company provides a diverse range of products to borrowers through three business units: Conventional Multifamily, FHA Multifamily and Healthcare, and Commercial/Life Insurance
Company.

8


The
following table sets forth information regarding loan origination volume by business unit for each of the last three years.

LOAN ORIGINATION VOLUME BY BUSINESS UNIT

(Dollars in Millions)














































































 
  1999
  1998
  1997
Conventional Multifamily   $ 837.0   $ 1,263.5   $ 742.0
FHA Multifamily and Healthcare     375.9     451.3     489.7
Commercial/Life Insurance (1)     1,077.5     2,633.9     1,075.2
   
 
 
Total   $ 2,290.4   $ 4,348.7   $ 2,306.9
   
 
 





(1)
Includes
WMF CommQuote and other conduit originations.


    Conventional Multifamily (Fannie Mae).  This business unit finances multifamily properties that are not supported by
governmental insurance or guaranties. The Company sells such loans to a variety of mortgage investors, including Fannie Mae. Through WMF Washington Mortgage, the Company is a Fannie Mae Delegated
Underwriting and Servicing Program (“DUS Program”) lender. Currently, there are only 26 companies approved to participate in this program. The Company, through WMF Washington Mortgage, originated
approximately $700 million of DUS Program loans in 1999.

    Under
the DUS Program, Fannie Mae allows WMF Washington Mortgage to approve, close and service loans on multifamily mortgages that meet predetermined criteria. Fannie Mae commits to
purchase these loans after they close. As part of the program, Fannie Mae requires that participating companies share in the risk of loss on the loan. See “Risk Factors—The Company May
Incur Losses on Mortgage Loans Under the DUS Program.” In return for sharing the risk of loss, the Company receives a servicing fee that is significantly higher than its typical fee. The Company
underwrites each loan to manage its loss exposure and enhance its return on servicing. See “—Mortgage Underwriting” below.

    In
addition to its participation in the DUS Program, the Company, through WMF Washington Mortgage, is a Fannie Mae Prior Approval Lender and is one of the designated
post-closing review lenders for the Fannie Mae Aggregation Facility. These programs allow WMF Washington Mortgage to sell certain loans to Fannie Mae that would not otherwise qualify for
the DUS Program. Unlike the DUS Program, however, neither of these programs requires that the Company share in the risk of loss.

    FHA Multifamily and Healthcare.  The Company, through WMF Huntoon Paige, is the largest provider of
FHA-insured multifamily and healthcare financing in the country. The Company originates and services both construction and permanent loans. During twelve months ended September 30,
1999, WMF Huntoon Paige originated approximately 10.5 percent of all FHA multifamily and healthcare insured debt financing, more than any other FHA mortgagee, based on number of loans.

    The
Company operates FHA lending through a separate subsidiary. Typical property characteristics, borrower requirements, licensing and approval processes differ significantly between
FHA and conventional multifamily financing. The Company, through WMF Huntoon Paige, is an FHA-approved mortgagee and a Government National Mortgage Association (“Ginnie Mae”) issuer and,
as such, must comply with the applicable requirements of the National Housing Act (“Housing Act”) and the regulations and policies of the FHA that are promulgated pursuant to the Housing Act. See
“Risk Factors-The Company May Be Unable To Continue To Comply With Government Regulations and Programs,” below.

    Commercial/Life Insurance Company Loans.  With its acquisitions in 1996 and 1997, the Company substantially increased
its presence in the market for commercial, non-multifamily financing. The Company originates loans secured by a variety of properties, including office buildings, retail centers, hotels,

9


warehouses
and assisted living facilities. Through relationships with regional mortgage banks, insurance companies have been particularly active investors in this segment. The Company, through its
acquisitions, has established relationships with a number of insurance companies, including: John Hancock, UNUM, Canada Life, American General, Nationwide, Berkshire Life, State Farm, Government
Personnel Mutual and Century Life.

    In
addition to originating commercial and multifamily loans placed with insurance companies, the Company has established origination relationships with commercial mortgage conduits
operated by major financial institutions, including BankAmerica Securities, RFC Commercial and Archon Financial. In 1999, the Company originated loans totaling approximately $197 million
through commercial mortgage conduits.

    Mortgage Underwriting.  The Company’s originators work with underwriters who perform due diligence on all loans prior to
commitment and approval. The Company’s underwriters assess each proposed loan including a review of (1) borrower financial position and credit history, (2) past operating performance of
the underlying collateral, (3) potential changes in project economics and (4) appraisal, environmental and engineering studies completed by a pre-approved list of third-party
consultants. Additionally, underwriters inspect the property, review tenant and lease files, survey comparable markets, and analyze area economic and demographic trends. A loan committee consisting of
the Company’s senior officers reviews and approves each proposed loan.

    The
Company applies its own underwriting guidelines, as well as those provided by investors. Among other things, the Company considers debt service coverage and
loan-to-value ratios, property financial and operating performance, quality of property management, borrower credit history and tenant profile. The standards vary from investor
to investor and may include a subjective element based on an assessment of the total credit risk. The standards generally do not involve mechanical application of a set formula. The Company revises
its underwriting criteria based on its experience and as market conditions and investor requirements change.

    Due
in part to its underwriting and asset management procedures, in 1999 the Company achieved a loan delinquency rate (
i.e., loans
delinquent over 60 days) equal to only 0.63 percent of its entire conventional multifamily and commercial portfolios based on unpaid principal balance. The Company has originated over
430 DUS Program loans since 1990 with original principal balances in excess of $2.4 billion. The Company has experienced one loss of $0.3 million on a Fannie Mae DUS Program loan.
Another lender originated that loan, and the Company acquired the risk-sharing obligation as part of its Fannie Mae DUS Program approval in 1990. The Company has never experienced a loss
on a Fannie Mae DUS Program loan that it originated.

    The
Company uses the underwriting criteria established by the FHA to recommend loans for FHA insurance. The Company must provide the FHA with certain information. The FHA then
examines the loans and decides whether to provide insurance.

10





Mortgage Servicing

    As a mortgage servicer, the Company performs both primary and master servicing functions. Primary servicing involves the collection of mortgage payments,
maintenance of escrow accounts for the payment of taxes and insurance premiums, remittance of payments of principal and interest, reporting to investors on financial and property issues and general
loan administration. The primary servicer must inspect properties, determine the adequacy of insurance coverage, monitor delinquent accounts and, in cases of extreme delinquency, institute forbearance
arrangements or foreclosure proceedings on behalf of investors.

    Master
servicers administer and report on securitized pools of mortgage-backed securities. Normally, the mortgages in the pool are serviced by individual primary servicers. Master
servicing agreements typically require the primary servicer to retain responsibility for administering the mortgage loans, and the master servicer supervises the primary servicers by monitoring their
compliance with the servicing contract. The master servicer consolidates all accounting and reporting to the issuer of the securities.

    The
Company has contracts to service loans with mortgage owners and originators of mortgage-backed securities. The contracts are generally for a term equal to the term of the serviced
mortgage or the mortgage-backed security and are terminable for cause. Contracts with insurance companies who own mortgages are usually terminable on 30 days’ notice by the owner, in many
instances without cause. In some circumstances, the insurance company must pay a termination fee if it terminates a servicing contract without cause. Under these agreements, the Company receives an
annual fee for primary servicing. Primary servicing fees typically range from 5 basis points to 40 basis points of the unpaid principal balance of the loans underlying the securities. Fees for master
servicing typically range from one to ten basis points.

    As
of December 31, 1999, the Company acted as the primary servicer for approximately $11.4 billion of loans and as the master servicer for an additional
$1.9 billion of loans. These loans were obtained through the Company’s origination network and through the purchase of servicing rights. A breakdown of the servicing portfolio is shown below.

SERVICING PORTFOLIO BY PRODUCT TYPE

(Dollars in Millions)































































































 
  Year ended December 31,
 
  1999
  1998
  1997
Conventional Multifamily   $ 3,141   $ 2,583   $ 1,544
FHA and Ginnie Mae     4,367     3,905     4,201
Commercial     3,932     4,069     4,173
Master Servicing     1,916     1,585     952
   
 
 
Total   $ 13,356   $ 12,142   $ 10,870
   
 
 


    The
Company principally services loans in its offices in Edison, New Jersey; Houston, Texas and Vienna, Virginia. It employs approximately 70 people in these servicing facilities. As
of December 31, 1999, the Company serviced 3,248 loans. As part of its servicing functions on these loans, the Company managed escrow accounts totaling approximately $350 million. The
Company continuously reviews its servicing operations and seeks to implement improvements in its systems and business processes.

Advisory Services

    The Company’s advisory services segment, WMF Carbon Mesa, was formed in March 1998, when the Company acquired all of the assets of Carbon Mesa
Advisors, Inc. and Strategic Real Estate Partners. Based in Los Angeles, WMF Carbon Mesa manages commercial mortgage investment funds, provides special asset management servicing and originates
commercial mortgages. As of December 31, 1999, WMF Carbon Mesa managed two private commercial mortgage funds and provided a variety of advisory services

11


to
institutional investors. In March 2000, WMF Carbon Mesa entered into an agreement to begin managing a third private commercial mortgage fund. The Company is a minority investor in two of the
three funds managed by WMF Carbon Mesa. WMF Carbon Mesa has originated approximately $204 million in loans and investments since its inception and as of December 31, 1999 had
$259 million in assets under management. WMF Carbon Mesa employs 12 people.

    Financial
information for each of the Company’s operating segments is included in Note 18 of the Company’s Consolidated Financial Statements.

Capital Markets

    To capitalize on its national loan origination system and conduit loan processing system, as well as to reduce the capital requirements and principal risks
associated with operating a conduit, the Company created WMF Funding, a division of WMF Washington Mortgage, in December 1998. The Company then entered into a strategic relationship with
Greenwich Capital Markets (“Greenwich”) pursuant to which WMF Funding would originate loans for sale to Greenwich. Greenwich was expected to pool these loans with other loans and then sell interests
in, or “securitize,” the pool. The Company was to service the loans it originated and receive a portion of the profits, if any, from any securitization of those loans. Due to various market factors,
the anticipated arrangements did not materialize and WMF Funding was disbanded in July 1999.

    Prior
to September 1998, the Company had operated an independent commercial mortgage conduit through its subsidiary WMF Capital Corp. The operations of WMF Capital Corp. were
curtailed after it suffered substantial losses in the second and third quarters of 1998, and the Company then determined it would not make further significant investments in WMF Capital Corp. During
the second quarter of 1999, the operations of WMF Capital Corp. were scaled back to minimal levels. In December 1999, WMF Capital Corp. was renamed WMF CommQuote, Inc. Going forward, WMF
CommQuote will manage the Company’s Internet originations as well as oversee commercial conduit activity for all of the Company’s subsidiaries.

Employees

    At December 31, 1999, the Company employed 271 persons. Most of these people work in professional, administrative and technical positions, and no
employee is represented by a labor union or subject to a collective bargaining agreement. The Company believes that its employee relations are generally good.

Risk Factors

Losses Related To Loans Held For Sale For Which The Company Does Not Have Investor Commitments Could Affect The Company’s Results Of Operations

    Generally the Company sells loans to third-party mortgage investors at predetermined prices before the Company funds or purchases the loan. However,
occasionally the Company originates or purchases a mortgage loan before an investor has agreed to purchase it from the Company. During the period between the Company’s origination or purchase of a
loan and the sale of the loan to an investor (called the “holding period”), the Company must bear the interest rate risk and credit risk associated with that loan. If the holding period is long (which
it typically is not), the Company’s risks are higher. Adverse changes in interest rates, the market for these mortgage loans or the value of assets securing the mortgages could impair the Company’s
ability to sell loans, increasing the Company’s holding period and potential losses. If the Company is unable to sell its loans for a long period of time, the Company’s business and results of
operations could be materially adversely affected.

12


The Company May Incur Losses Related To Loan Commitments For Which It Does Not Have A Purchaser And Has Not Entered Into Hedge Arrangements

    As of December 31, 1999, WMF Carbon Mesa had a floating rate forward commitment outstanding to extend credit to a borrower of $58 million. No
investor has committed to purchase this loan, and WMF Carbon Mesa has not entered into arrangements to manage the market risk associated with this loan. If
interest rates increase or the demand for such loans declines before WMF Carbon Mesa is able to sell this loan, WMF Carbon Mesa may incur losses. WMF Carbon Mesa is not expected to have to perform
under this commitment, but the Company cannot assure you that WMF Carbon Mesa will not incur losses if it is required to honor this commitment and an investor is not found.

Company’s Loss Of Deferred Tax Assets Could Adversely Affect Shareholder Equity

    At December 31, 1999, the Company had a $20.0 million deferred tax asset recorded related to Federal and state net operating loss carryforwards
(“NOLS”). These NOLs relate to the Company’s losses during 1998. Substantially all of the state portion of the NOLs, which total $2.6 million, expire, if unused, in 2003. The remaining Federal
NOLs expire in 2018. The Company will have to generate sufficient taxable income, within the carryforward periods and in the appropriate tax jurisdiction, in order to realize the net deferred tax
asset recorded related to the net operating loss carryforwards. The Company believes its future levels of pretax earnings for financial reporting purposes will be sufficient to generate the minimum
amount of future taxable income needed to realize the net deferred tax asset. The Company has also identified the possible disposition of assets as a means of generating future taxable income if
enough taxable income is not derived from recurring operations in order to realize the deferred tax asset during the carryforward periods. Management believes that it is more likely than not the
Company will realize the benefits of these assets, net of the existing valuation allowance for state deferred taxes at December 31, 1999. However, in the event of a change of control of the
Company, or certain other material changes in the Company’s business, the Company would have to establish additional valuation allowances against the deferred tax asset. An increase in the valuation
allowance relating to the deferred tax asset could adversely affect operating results and stockholders’ equity.

The Company May Be Unable To Complete Acquisitions Or Enter Into New Business Lines

    The Company plans to expand its business both internally and through acquisitions of other commercial mortgage financial service companies. The Company cannot
assure you that it will be able to support its continued growth. The Company also cannot assure you that it will be able to identify, finance and purchase additional acquisition candidates, or that
future acquisitions, if completed, will be successful.

    When
the Company acquires new businesses with different markets, customers, financial products, systems and management, the Company may have difficulty integrating those business into
its existing operations. This integration process may cause unforeseen difficulties and may require a large portion of management’s attention and the Company’s resources.

    The
Company originally focused on originating and servicing mortgages on multifamily properties, such as apartment buildings and condominiums. Since 1996, the Company has expanded its
origination and servicing of mortgages on other classes of commercial properties, such as office, industrial, hospitality, and retail. The Company plans to continue to expand its business in both the
multifamily and commercial mortgage areas. See “Business—Strategic Objectives.”

    To
support, manage and control continued growth, the Company must be able to hire, train, retain, supervise and manage its workforce. The Company must also develop the skills
necessary to compete successfully in its new business lines. In particular, the success of certain acquisitions may depend on the Company’s ability to retain key employees of the acquired business.

13


The Company May Incur Losses On Mortgage Loans Under The DUS Program

    WMF Washington Mortgage is an approved lender under the Fannie Mae DUS Program. Under this program, WMF Washington Mortgage originates, places and services
multifamily loans for Fannie Mae without having to obtain Fannie Mae’s prior approval for each loan.

    The
DUS Program requires WMF Washington Mortgage to pay a portion of any losses on mortgages that it originates under the program. These losses may cost WMF Washington Mortgage up to
20 percent of the original principal balance of the loan. Additionally, if borrowers default under loans in the DUS Program, the value of WMF Washington Mortgage’s servicing rights for those
loans could materially decrease. See “The Company’s Operations May Decline As a Result of Impairment of Mortgage Servicing Rights.”

    To
remain in the DUS Program, WMF Washington Mortgage must maintain a letter of credit or cash sufficient to cover its estimated portion of any losses. As of December 31, 1999,
the unpaid principal balance of WMF Washington Mortgage loans in the DUS Program totaled $2.0 billion and WMF Washington Mortgage had a $7.0 million accrual for servicing losses under
the DUS Program. WMF Washington Mortgage also had a $7.8 million letter of credit to pay for losses under the program. While the Company believes that its accrual for servicing losses is
sufficient, actual losses under the DUS Program could exceed this accrual and hurt the Company’s performance. If the Company incurs and is required to fund additional losses, results of operations may
be adversely affected.

The Company Is Liable For Certain Representations And Warranties Concerning Mortgage Loans

    When the Company originates mortgage loans and then sells them to investors, the Company must make certain representations and warranties concerning those
mortgages. These representations and warranties cover such matters as title to mortgaged property, lien priority, environmental reviews and certain other matters. When making these representations and
warranties, the Company relies in part on similar representations and warranties made by the borrower or others.

    If
the representations made by a borrower or others are false, the Company will have a claim against the borrower or other party. The Company’s ability to recover its damages,
however, depends on the financial condition of the party that made the false representation. In addition, the Company makes some representations and warranties even though it does not receive similar
representations and warranties from borrowers or others. If those representations are later found to be false, the Company would have to pay for any losses and would not have a claim against another
party. The Company cannot assure you that it will not experience a material loss as a result of its representations and warranties.

The Company May Incur Losses As A Result Of Changes In General Economic Conditions

    The following general economic conditions could have an adverse effect on the Company’s business:



    periods
    of general, regional or industry-related economic slowdown or recession,


    declining
    demand for real estate or


    changes
    in interest rate levels.



    An
economic slowdown will generally reduce the Company’s origination and sales of mortgages, which generated approximately 54 percent of the Company’s revenue during 1999. In
addition, periods of
economic slowdown or recession may increase the risk that borrowers will default on multifamily and commercial mortgage loans, and those defaults may have an adverse effect on the Company’s financial
condition. When the owner of a mortgage forecloses on a property, the Company’s servicing fees may be reduced or eliminated and the Company may experiences additional losses.

14




    Periods
of economic slowdown or recession may be accompanied by decreased demand for multifamily or commercial properties. Decreased demand may result in declining values for the
properties securing outstanding loans, and decreased property values weaken the Company’s collateral coverage and increase the possibility of losses in the event of default. If more properties are for
sale during recessionary periods, the Company may receive lower prices when it sells foreclosed properties, or it may have to delay such sales. The Company cannot assure you that it will be able to
sell foreclosed properties in the multifamily or commercial markets. Any material deterioration of such markets could reduce the Company’s proceeds from foreclosure sales.

The Company Earnings May Be Affected By Changes In Interest Rates

    The Company believes that interest rate changes can affect its operating results in a variety of ways, including impacts on origination fees, servicing fees,
placement fee income and gains on loan sales, as well as its own cost of financing. Generally, interest rate increases reduce the level of economic and real estate activity, thereby decreasing the
demand for mortgage financing, which in turn may negatively affect the Company’s ability to earn origination fees and generate gains on loan sales. In addition to possibly depressing loan origination
levels, gains on loan sales may be further restricted because the value of fixed income securities, such as many real estate mortgages, tend to decline as interest rates increase. Finally, interest
rate increases raise the cost of debt financing, particularly if the Company finances its operations with variable rate debt.

    Interest
rate increases, however, positively affect Company earnings from loan servicing activities. A reduction in real estate activity may reduce the risk of borrower prepayments,
potentially increasing the level of servicing fees and the value of the Company’s servicing portfolio. Additionally, placement fee income earned by the Company may benefit from increased
short-term interest rate levels.

    Declines
in interest rates should generally have a corresponding favorable impact on Company earnings from originating, loan sales and financing activities and a negative impact on
servicing and placement fee income. Changes in the relationship between short-term and long-term interest rates may also affect the Company’s results of operations. The Company
earns net interest income, typically based upon long-term rates earned on loans held between loan closing and mortgage investor funding. Net interest income increases when
long-term rates increase relative to short-term rates and decreases when short-term rates increase relative to long-term rates.

    Although
the Company believes that the interest rate environment generally has the foregoing effects, there is no consistent correlation between interest rate levels and either the
Company’s revenues or its overall profitability. In part, this lack of correlation reflects the refinancing of existing permanent and construction mortgages at their maturities which may occur
regardless of the interest rate environment. Additionally, approximately 54 percent of the Company’s 1999 revenues were derived from originating and approximately 37 percent of the
Company’s 1999 revenues were derived from servicing activities, and interest rates have different impacts on each, as described above.

    See
Item 7A, Quantitative and Qualitative Disclosure about Market Risk, for additional information about the Company’s exposure to interest rate risk.

The Company’s Operations May Decline As A Result Of Impairment Of Mortgage Servicing Rights

    Under generally accepted accounting principles (“GAAP”), the Company must treat its servicing rights as an asset. Servicing rights are recorded as an asset on
the Company’s balance sheet at either the purchase price paid for the servicing rights or the relative fair value of the servicing rights at the time the Company sells a loan and retains the servicing
associated with that loan. The Company also must amortize the value of the servicing rights over their estimated lives.

15


    If
the value of the servicing rights, as shown on the Company’s balance sheet, exceeds their fair value, then the rights are impaired. The fair value of the servicing rights may be
affected by, and impairment may result from, factors such as:



    changes
    in mortgage prepayments, which tend to increase as long-term interest rates decline, and tend to decrease as such interest rates rise;


    prepayment
    penalty terms, including lockout and yield maintenance requirements;


    higher
    than expected rate of loan defaults;


    lower
    than expected short-term interest rates;


    factors
    which impact the net cash flow generated from the servicing rights, such as the cost of servicing such loans; and


    the
    underlying loans’ average custodial balances (the amount deposited by borrowers for taxes, deposits and replacement reserves).



    To
the extent that the Company’s servicing rights are impaired, the Company’s operating results may be adversely affected. Although the Company has not recorded any impairment in the
Consolidated Financial Statements presented herein, it may record impairment at any time in the future. The Company cannot assure you that it has accurately estimated the factors that could cause
impairment of the servicing, or that the Company’s mortgage servicing rights can be sold at their value, if at all.

The Company May Incur Losses Upon Termination Of Certain Servicing Contracts

    As of December 31, 1999, the Company had contracts to service mortgages with a total principal balance of $13.4 billion. Approximately
23 percent of those contracts are terminable upon 30 days’ notice by the owner of the serviced mortgage. Most of the contracts with these termination provisions are for the servicing of
mortgages held by insurance companies. As the Company increases its servicing of mortgages held by insurance companies, the percentage of servicing contracts with such termination provisions may also
increase.

    The
rest of the Company’s servicing contracts are for a term equal to the life of the mortgage. The holder of the mortgage may terminate the contract only for cause, after paying the
Company a termination fee, or after prepayment or other early termination of the mortgage.

    If
a significant number of the Company’s mortgage servicing contracts were terminated and the Company were unable to replace them with new servicing contracts, the Company’s
operations would be adversely affected.

The Company May Be Unable To Continue To Comply With Government Regulations And Programs

    The Company’s operations are regulated by:



    federal,
    state and local government authorities, including the FHA and Ginnie Mae;


    various
    federal, state and local laws and judicial and administrative decisions; and


    regulations
    of GSEs (such as Fannie Mae) that purchase mortgages originated and/or serviced by the Company.



    Among
other things, these laws, regulations and decisions:



    require
    the Company to maintain a minimum net worth, minimum lines of credit, minimum liquid reserves and minimum errors and omissions and fidelity
    insurance;


    require
    the employment of trained personnel competent to perform their assigned responsibilities;


16







    require
    periodic financial reports;


    require
    a quality control plan for the underwriting, origination and servicing of loans;


    regulate
    loan originations, credit activities, maximum interest rates, and finance and other charges;


    regulate
    disclosures to customers, the terms of secured transactions and personnel qualifications; and


    require
    certain collection, repossession and claims-handling procedures and other trade practices.



    Although
the Company believes that it complies in all material respects with applicable laws and regulations and with the requirements of mortgage purchasers, the Company cannot
assure you that it will be able to continue to comply if more restrictive laws, rules, regulations or requirements are adopted in the future. If the Company fails to comply with all applicable
requirements, the Company could lose the opportunity to originate, sell or service mortgages in certain jurisdictions, or to originate mortgages on behalf of, sell mortgages to or service mortgages
held by certain institutions. If that occurs, the Company’s financial results could be adversely affected.

    The
FHA insured approximately 3.5 percent of loans originated by the Company during the year ended December 31, 1999 and approximately 47.0 percent of loans
serviced by the Company as of December 31, 1999. If the laws or regulations governing FHA programs change, the availability of FHA-insured loans could decrease, and the Company’s
ability to originate or service those mortgages could be affected. Any such change could have a material adverse effect on the Company and its results of operations.

The Company May Not Be Able to Compete With Other Mortgage Banking Businesses

    The Company’s competition varies by geographic market. Generally, competition is fragmented with very few national competitors and many local and regional
competitors. In addition, the Company’s business is characterized by low barriers to entry, and new competitors have recently been successful in raising the capital necessary to enter the business.
Moreover, certain of the Company’s competitors are larger and have greater financial resources than the Company, including the commercial mortgage
financial services arms of General Motors, General Electric, Lend Lease, and First Union. The Company competes largely on the basis of its experience in origination and servicing and on its ability to
respond promptly to changing market conditions. Although management believes that the Company is well positioned to continue to compete effectively in the multifamily and commercial mortgage financial
services businesses, there can be no assurance that it will do so or that the Company will not encounter further increased competition in the future which could limit its ability to maintain or
increase its market share.

The Company May Incur Losses Related to Its COMIT Investment

    As of December 31, 1999, the Company had a $1.6 million investment in COMIT, which represents approximately 4% of COMIT’s equity. The Company has
a commitment, through June of 2000, to invest up to an additional $5.7 million under certain circumstances. COMIT is a leveraged commercial mortgage REIT managed by the Company’s subsidiary WMF Carbon
Mesa and invests in structured mortgage debt. If a significant number of the mortgages held by COMIT defaulted and/or otherwise failed to perform under their terms, the Company’s expected returns
could be significantly reduced and the Company could lose its investment. If this were to happen, the Company’s financial results could be adversely affected.

17


Item 2. Properties

    The following table summarizes information about the Company’s primary leased office space:

























































Office Location

  Approximate

Square Feet

Occupied

  Lease

Expiration

Date

  Business Segment

Occupying Space

Vienna, Virginia   52,000 sf   December 31, 2000   Mortgage Banking, Headquarters
Edison, New Jersey   15,200 sf   April 28, 2005   Mortgage Banking
Houston, Texas   11,800 sf   January, 28, 2001   Mortgage Banking
Los Angeles, California   17,700 sf   January, 30, 2007   Advisory Services, Mortgage Banking
Dallas, Texas   11,100 sf   February 28, 2003   Mortgage Banking


    The
Company’s headquarters are currently located in Vienna, Virginia. In addition to the offices listed above, the Company has thirteen corporate offices located around the country,
including Phoenix, Arizona; Detroit, Michigan; New York, New York; Denver, Colorado; Atlanta, Georgia; Seattle, Washington; and Charlotte, North Carolina.

    The
Company has subleased or otherwise mitigated its long-term costs on certain leased office space that is no longer utilized by the Company. The Company is currently
evaluating each of its remaining leased offices to determine if there is a potential for long-term cost savings by relocating its operations to less costly space in the same general area.
When offices are relocated, the Company may incur additional one-time costs associated with subleasing or otherwise disposing of leased space that the Company is leaving. These costs could
include, but are not limited to, brokerage fees, moving costs, subtenant concessions and/or the cost of buying out a lease. Therefore, the Company may have increased costs associated with its leased
space in the year 2000, with the goal of significantly reducing its long-term occupancy costs.

Item 3. Legal Proceedings

    Two lawsuits were filed against WMF Capital Corp. alleging, among other things, a breach by WMF Capital Corp. of its commitment to lend funds to the respective
plaintiffs. These lawsuits have been settled and dismissed at or below amounts previously accrued.

    The
Company is involved presently and from time to time in legal and administrative proceedings that arise in the ordinary course of its business. In connection with the Company’s
loan servicing activities, the parties on whose behalf the Company services loans indemnify the Company to varying degrees. The Company also maintains insurance that management believes to be adequate
for the Company’s operations and business. None of the legal or administrative proceedings pending against the Company, either individually or in the aggregate (and after consideration of available
indemnities and insurance), is expected to have a materially adverse effect on the Company’s business or financial condition. Any claims asserted against the Company in the future may result in legal
expenses or liabilities, which could have a materially adverse effect on the Company’s business or financial condition.

Item 4. Submissions of Matters to a Vote of Security Holdings

    No matters were submitted to a vote of the Company’s security holders during the fourth quarter of the year ended December 31, 1999.

18






PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

    The Company’s common stock began trading on December 8, 1997 and trades on The Nasdaq Stock Market under the symbol “WMFG.” The following table sets
forth the high and low per-share closing prices for the Company’s common stock for each quarterly period for the last two years:
















































































Calendar Year

  High
  Low
1998        
First Quarter   $321/2   $111/8
Second Quarter    281/4    195/8
Third Quarter    29     5
Fourth Quarter     81/4     33/8
1999        
First Quarter     61/2     43/4
Second Quarter     67/8     315/16
Third Quarter     61/4     37/16
Fourth Quarter     6     27/16


    On
March 17, 2000, the Company had approximately 263 stockholders of record.

    The
Company does not anticipate declaring and paying cash dividends on the Company’s common stock in the foreseeable future. The Board of Directors of the Company will make the
decision, from time to time in the exercise of its business judgment, whether to apply any legally available funds to the payment of dividends on the Company’s common stock. The decision will be made
taking into account the Company’s financial condition, results of operations, existing and proposed commitments for use of the Company’s funds and other relevant factors.

    The
Company’s ability to pay dividends may be restricted by financial covenants in its credit agreements or in arrangements with or regulations of government sponsored entities.

Item 6. Selected Financial Data

    The following table sets forth selected financial and operating data of the Company as of and for each of the years ended December 31, 1999, 1998, 1997,
1995. The table also sets forth selected financial data as of December 31, 1996, and unaudited pro forma income statement data for the year ended December 31, 1996, giving effect to the
acquisition of the Company, by NHP Incorporated on April 1, 1996 (the”NHP Acquisition”) as though it occurred on January 1, 1996. The selected financial data of the Company as of and for
each of the above mentioned periods were derived from the Company’s consolidated financial statements contained elsewhere herein. The unaudited pro forma income statement data for 1996 is derived from
the Company’s historical data for the three-month period ended March 31, 1996 and the nine-month period ended December 31, 1996. The three and nine-month periods
of 1996 were prepared on different bases due to the NHP Acquisition and the “push down” of certain acquisition related adjustments to the Company’s books. Prior to the NHP Acquisition, the Company was
known as WMF Holdings, Ltd. The pro forma operating results are not necessarily indicative of operating results that would have been achieved had the NHP Acquisition actually occurred on
January 1, 1996. The selected financial and operating data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the
financial statements and related notes included elsewhere herein.

19



Selected Consolidated Financial Data

(In thousands, except per share data)

(Unaudited)



















































































































































































































































































































































































































 
  Year Ended December 31,
 
 
  1999
  1998
  1997
  Pro Forma

1996(1)

  1995
 
Operating Results:                                
Total revenue   $ 67,856   $ 72,541   $ 44,645   $ 30,301   $ 21,999  
Total expenses     62,529     124,929     39,874     27,432     20,422  
Net income (loss)     1,155     (33,322 )   2,442     885     777  
Net income (loss) per common share—Basic(2)     0.11     (6.38 )   0.57     0.21     0.16  
Weighted average common shares outstanding—Basic(2)     10,346     5,244     4,272     4,217     4,717  
Net income (loss) per common share—Diluted(2)     0.11     (6.38 )   0.55     0.21     0.16  
Weighted average common shares outstanding—Diluted(2)     10,587     5,224     4,452     4,217     4,717  
Financial Position:                                
Mortgage loans held for sale   $ 15,381   $ 34,217   $ 49,431   $ 40,263   $ 32,462  
Servicing rights, net     33,476     26,243     26,796     22,460     8,466  
Total assets     111,261     144,527     119,331     88,097     57,176  
Total debt (3)     52,228     79,151     59,904     46,136     43,304  
Stockholders’ equity     37,938     27,378     38,825     22,528     4,018  
Other Information:                                
Cash flows provided by (used in):                                
Operating activities   $ 25,046   $ 15,569   $ (1,040 ) $ 1,275   $ (21,897 )
Investing activities     (12,771 )   (52,722 )   (21,522 )   (9,824 )   (2,343 )
Financing activities     (19,071 )   37,602     26,529     7,833     26,833  
EBITDA (4)     16,792     (41,168 )   11,439     8,256     4,743  





(1)
Adjusted
to reflect results of operations for the twelve months ended December 31, 1996, as if the NHP Acquisition had occurred January 1, 1996. Adjustments include
all income amounts for the three months ended March 31, 1996 and additional amortization of $575,648 related to the pro forma impact of the “push down” of certain acquisition adjustments to the
Company’s books.


(2)
Gives
retroactive effect to a 789.94 per share stock split effective October 3, 1997.


(3)
Includes
$5 million of notes to the Company’s former stockholder as of December 31, 1995, which were repaid in conjunction with the NHP Acquisition.


(4)
EBITDA
is a non-GAAP presentation of the Company’s performance and consists of income (loss) from operations before non-operating interest expense, income
taxes, depreciation and amortization. EBITDA is included because it is used in the industry as a measure of a company’s operating performance and provides information in addition to that supplied by
GAAP-based data regarding the ability of the Company’s business to generate cash, but should not be considered as an alternative either (i) to income (loss) from operations
(determined in accordance with GAAP) as measure of profitability or (ii) to cash flows from operating activities (determined in accordance with GAAP). EBITDA does not take into account the
Company’s debt service requirements and other commitments and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses. EBITDA as measured by the Company may
not be comparable to EBITDA as measured by other companies.

20




Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

    The following discussion and analysis presents the significant changes in financial condition and results of operations of the Company for the years ended
December 31, 1999, 1998 and 1997. The results of operations of acquired businesses are included in the Company’s consolidated financial statements from the date of acquisition. This discussion
should be read in conjunction with the Company’s consolidated financial statements and notes thereto included elsewhere herein.

    On
April 1, 1996, NHP Incorporated (“NHP”) acquired all the outstanding capital stock of the Company for consideration of approximately $21 million, in the form of
$16.8 million in cash and 210,000 shares of NHP Common Stock. As a result of the NHP Acquisition, all assets and liabilities acquired were recorded at their fair value, which resulted in an
increase of the recorded value of the Company’s servicing rights of $10.7 million and goodwill of $5.1 million.

    Since
1996, the Company has experienced significant growth in its revenues, annual production volume and servicing volume. The Company seeks to continue to expand its business through
(i) acquisitions, (ii) internal growth, (iii) design and delivery of new mortgage products, (iv) expansion into related businesses, and (v) diversification of fee
income sources. Through its acquisitions, the Company’s primary focus is to increase its funds under management and to increase its mortgage origination capabilities
and servicing portfolio. If the Company is successful in completing acquisitions, it may experience increased expenses associated with the amortization of goodwill and acquired mortgage servicing
rights and, if the acquisitions are financed by additional indebtedness, an increase in interest expense. Accordingly, such acquisitions may result in a short-term decrease in income from
operations during the period from acquisition through the period necessary to integrate the acquired companies.

    During
1999 and 1998, the Company analyzed its operations through three business segments: mortgage banking, advisory services and capital markets. The mortgage banking business
segment consists of the activities of WMF Washington Mortgage Corp. (“WMF Washington Mortgage”) and its subsidiaries: WMF/Huntoon, Paige Associates Limited (“WMF Huntoon Paige”), WMF
Proctor, Ltd., and The Robert C. Wilson Company (“WMF Robert C. Wilson”). The mortgage banking segment also includes corporate administrative expenses. Effective December 31, 1999, WMF
Proctor, Ltd. was merged into its parent, WMF Washington Mortgage. The advisory services segment consists of the activities of WMF Carbon Mesa Advisors, Inc. (“WMF Carbon Mesa”).

    The
capital markets segment consists of the activities of WMF Capital Corp. In December 1999, WMF Capital Corp. was renamed WMF CommQuote, Inc. (“WMF CommQuote”). Going
forward, WMF CommQuote will manage the Company’s Internet originations as well as oversee commercial conduit activity for the all of the Company’s subsidiaries. For the purposes of the following
discussion, WMF Capital Corp. will be used to refer to the operating unit within the capital markets segment. In 2000, the activities of WMF CommQuote will be included in the mortgage banking business
segment.

Results Of Operations—Summary

    The Company’s primary business activities are commercial and multifamily loan servicing, loan origination and sales of the loans to investors in the secondary
market and management of commercial mortgage investment funds. As stated above, the Company manages its operations through three business segments, mortgage banking, advisory services and capital
markets.

    Revenue
from mortgage banking activities is earned from the origination of commercial and multifamily real estate mortgage loans and the servicing of such loans. Revenue of the
mortgage banking business segment includes loan servicing fees, gains on sale of mortgage loans (including related gains on originated mortgage servicing rights), interest income on loans prior to
sale, placement fees (revenue earned relating to utilization of escrow funds), origination fee income and other income. Revenue of the

21


advisory
services segment includes management fees, gain on sale of mortgage loans and other income. In the capital markets segment, the principal sources of revenue include gain on the sale of
mortgage loans, gains on the sale of servicing and interest income on loans prior to sale or securitization. In 1998, WMF Capital Corp. operated a commercial mortgage conduit. WMF Capital Corp. held
and securitized loans in 1998 but did not hold or securitize loans in 1999. During the second quarter of 1999, the operations of WMF Capital Corp. were scaled back to minimal levels.

    The
Company’s revenue is significantly influenced by the timing of origination and sales of mortgage loans and is somewhat sensitive to economic factors such as the general level of
interest rates and demand for commercial and multifamily real estate. As a result, future revenues may fluctuate due to changes in these factors. Therefore, the Company’s historical results may not be
indicative of future periods.

    The
following table sets forth the summary segment financial information derived from the Company’s consolidated statements of operations and reconciles the summary segment financial
information to the consolidated statements of operations for each of the years ended December 31, 1999, 1998 and 1997:

Segment Financial Information

Results of Operations

(Dollars in Thousands)








































































































































































































































































































































































 
  1999

  1998
  1997
Revenue:                  
Mortgage Banking (1)   $ 64,435   $ 67,567   $ 44,645
Advisory Services     2,486     1,490    
Capital Markets     935     3,484    
   
 
 
Total     67,856     72,541     44,645
Expenses:                  
Mortgage Banking (1)   $ 56,455   $ 59,169   $ 39,116
Advisory Services     2,446     2,114    
Capital Markets     1,471     60,379    
   
 
 
Total     60,372     121,662     39,116
Earnings (loss) before non-operating interest expense and taxes:                  
Mortgage Banking (1)     7,980     8,398     5,529
Advisory Services     40     (624 )  
Capital Markets     (536 )   (56,895 )  
   
 
 
Total     7,484     (49,121 )   5,529
Non-operating interest expense     2,157     3,267     758
   
 
 
Income (loss) before income taxes     5,327     (52,388 )   4,771
Income tax provision (benefit)     4,172     (19,066 )   2,329
   
 
 
Net income (loss)   $ 1,155   $ (33,322 ) $ 2,442
   
 
 
Mortgage Banking EBITDA (1)   $ 16,951   $ 16,074   $ 11,439
Advisory Services EBITDA     368     (476 )  
Capital Markets EBITDA     (527 )   (56,766 )  
   
 
 
Total EBITDA   $ 16,792   $ (41,168 ) $ 11,439
   
 
 





(1)
The
Mortgage Banking segment includes corporate administrative expenses.

22




    The
following table sets forth information derived from the Company’s consolidated balance sheet for the date presented:


























































































 
  1999
  1998
  1997
Assets:                  
Mortgage Banking(1)   $ 97,980   $ 131,264   $ 119,331
Advisory Services     6,165     4,705    
Capital Markets     7,116     8,558    
   
 
 
Total   $ 111,261   $ 144,527   $ 119,331
   
 
 





(1)
The
Mortgage Banking segment includes corporate administrative assets.


Year End December 31, 1999 Compared With The Year Ended December 31, 1998

    Summary

    Net income for the year ended December 31, 1999, was $1.2 million compared with a net loss of $33.3 million for the same period of 1998.
The Company’s core loan origination and servicing businesses generated increases in revenue in 1999 versus 1998. These increases in revenue were offset, however, by a reduction in interest income
related to loans held for sale in 1998 by WMF Capital Corp. Total expenses decreased significantly in 1999 verses 1998. The 1998 results include significant losses on short sales of U.S. Treasury
securities. The decrease in expenses was due primarily to no such losses occurring in 1999 and the Company’s continued cost reduction program. As part of the reorganization and recapitalization that
took place in late 1998 and early 1999, the Company implemented a cost reduction program which positively impacted the 1999 results. For a more detailed explanation of changes in revenues and expenses
see the discussion by business segment below.

    The
Company’s earnings before non-operating interest expense, income taxes, depreciation and amortization (EBITDA) for the year ended December 31, 1999, was
$16.8 million, compared with a negative EBITDA of $41.2 million for same period of 1998. The increase in EBITDA in 1999 from 1998, is due primarily to the absence in 1999 of losses on
short sales of U.S. Treasury securities as well as the Company’s continued cost reduction program.

    EBITDA
is widely used in the industry as a measure of a company’s operating performance, but should not be considered as an alternative either (i) to income from continuing
operations (determined in accordance with generally accepted accounting principals (“GAAP”) as a measure of profitability or (ii) to cash flows from operating activities (determined in
accordance with GAAP). EBITDA does not take into account the Company’s debt service requirements and other commitments and, accordingly, is
not necessarily indicative of amounts that are available for discretionary uses. Also, EBITDA as measured by the Company may not be comparable to EBITDA as measured by other companies.

Mortgage Banking Segment

    Revenue

    Servicing fees earned by the mortgage banking segment were $16.1 million for the year ended December 31, 1999, compared with $14.7 million
for the year ended December 31, 1998, an increase of $1.4 million or 9.5%. Revenue related to mortgage servicing is based upon the unpaid principal balance of loans serviced. The
increase in servicing fees for the year ended December 31, 1999 is a result of the average principal balance of the servicing portfolio increasing to $12.6 billion in 1999, from
$11.7 billion in 1998, an increase of 7.7%. The mortgage banking segment’s servicing portfolio year-end principal balance was $13.4 billion and $12.1 billion for 1999
and 1998, respectively, an increase of 10.7%. The Company earns lower fees on life insurance servicing and master servicing than on primary servicing for Federal

23


National
Mortgage Association (“Fannie Mae”) and Federal Housing Administration (“FHA”) insured mortgages. Therefore, changes in the mix of the Company’s servicing portfolio could impact its servicing
fees. The weighted average servicing fee rate was approximately .134% in 1999, an increase .008 percentage points from .126% in 1998.

    The
mortgage banking segment’s gain on sale of mortgage loans, net, was $30.6 million for year ended December 31, 1999, compared with $31.3 million for the year
ended December 31, 1998, a decrease of $0.7 million or 2.2%. For the year ended December 31, 1999, the mortgage banking segment sold $2.2 billion in mortgage loans,
compared with $3.3 billion for the year ended December 31, 1998. The decrease in gain on sale of mortgage loans, due to the lower level of production in 1999, was largely offset by
increases related to the capitalization of servicing rights on mortgages originated under the Fannie Mae Delegated Underwriting and Servicing (“DUS”) Program discussed below. The total gain related to
the recognition of originated mortgage servicing rights was $11.1 million and $6.0 million for the years ended December 31, 1999 and 1998, respectively. In addition, 1998 results
include a $1.3 million loss related to an interest rate lock agreement, which was terminated in the third quarter.

    The
Company capitalizes retained servicing rights after the origination and sale of the related loan by allocating the total cost incurred between the loan and the servicing rights,
based on their relative fair value, if it is practicable to determine the mortgage servicing rights’ fair value. If it is not practicable to determine the servicing rights’ fair value, then no value
is allocated to the servicing rights. As a result of the first observed sale of DUS Program servicing rights in the first quarter of 1999, the Company concluded that market condition changes made it
practicable to estimate the fair value of DUS Program servicing rights. For the year ended December 31, 1999, the Company recognized gains totaling $6.6 million related to the
origination of DUS Program servicing rights. Prior to the first quarter of 1999, the Company did not recognize gains related to the origination of DUS Program servicing.

    Gain
on sale of servicing rights was $0.5 million for the year ended December 31, 1999, compared with $2.0 million for the year ended December 31, 1998.
The gain on sale of servicing rights in 1998 resulted primarily from the sale of approximately $500 million of servicing rights late in the fourth quarter. No such large sales of servicing
rights occurred in 1999.

    Interest
income was $5.6 million for the year ended December 31, 1999, compared with $5.9 million for the year ended December 31, 1998, a decrease of
$0.3 million or 5.1%. The decrease is due primarily to
a lower average balance of loans held until funding during 1999, partially offset by increased interest rates in 1999.

    Placement
fee income was $8.0 million for the year ended December 31, 1999, compared with $8.5 million for the year ended December 31, 1998, a decrease of
$0.5 million or 5.9%. The decrease was primarily the result of the Company’s increased use of investor escrow balances as compensating balances to reduce the interest rate on its debt
facilities. The escrow balances are on deposit in restricted escrow bank accounts and are not included in the Company’s balance sheet.

    Other
income includes prepayment penalties, termination fees, loan management fees, asset management fees, brokerage fees, extension fees and dividend income from the Company’s
investment in Commercial Mortgage Investment Trust, Inc. (“COMIT”). COMIT is a commercial mortgage real estate investment trust (“REIT”) of which the Company owns a non-controlling
minority interest (less than 20%). Other income was $3.5 million for the year ended December 31, 1999, compared with $5.2 million for the year ended December 31, 1998, a
decrease of $1.7 million or 32.7%. The decrease was the result of decreased prepayment penalties, termination fees, loan management fees, asset management fees, brokerage fees and extension
fees, offset partially by $1.0 million of dividend income from COMIT in 1999. The higher termination and prepayment fees in 1998 were associated with the prepayment of loans serviced by the
Company. The larger number of prepayments in 1998 was primarily the result of a lower interest rate environment in 1998, which resulted in a higher number of mortgage refinancings.

24



    Expenses

    The mortgage banking segment’s expenses consist of salaries and employee benefits (including commissions), general and administrative expenses, occupancy
expense, provision for loan servicing losses, interest expense, amortization of servicing rights, and depreciation and amortization. The mortgage banking segment’s expenses include corporate
administrative expenses.

    Salaries
and benefits expense, the largest category of expenses for the Company, was $28.4 million for the year ended December 31, 1999, compared with
$32.3 million for the year ended December 31, 1998, a decrease of $3.9 million or 12.1%. The decrease is due primarily to lower commissions paid due to lower production in 1999
versus 1998. In addition, significant staff reductions were made in 1999 as part of the Company’s overall cost reduction program. The savings resulting from the staff reductions were partially offset
by severance costs related to terminations and by normal increases in salaries. The number of mortgage banking and corporate administrative employees decreased to 258 at December 31, 1999 from
292 at December 31, 1998.

    General
and administrative expenses consist of professional fees, travel, management information, telephone and equipment rental, and other expenses. General and administrative
expenses were $11.7 million for the year ended December 31, 1999, compared with $12.0 million for the year ended December 31, 1998, a decrease of $0.3 million or
2.5%. The 1999 general and administrative expenses include approximately $2.2 million of non-recurring charges related to lease terminations and legal settlements. General and
administrative expenses in 1999 include approximately $1.2 million of non-recurring charges related to the 1998 recapitalization and reorganization. Excluding the
non-recurring items in both periods, general and administrative expenses for 1999 were $9.5 million compared with $10.8 million in 1998, a decrease of $1.3 million or
12.0%. This decrease is due primarily to lower professional fees, as well as lower travel and other expenses resulting from the Company’s cost reduction program.

    Occupancy
expense was $5.2 million for the year ended December 31, 1999, compared with $3.8 million for the year ended December 31, 1998, an increase of
$1.4 million or 36.8%. The increase is due primarily to the full year impact of entering new leases for additional offices in the second half of 1998.

    The
provision for loan servicing losses was $0.8 million for the year ended December 31, 1999, compared with $1.1 million for the year ended December 31,
1998, a decrease of $0.3 million or 27.3%. The Company bears a portion of the credit loss risk associated with the loans it services as a result of its participation in the Fannie Mae DUS
multifamily loan program. The accrual for loan servicing losses represents management’s estimate of the losses inherent in the recourse loans underwritten to date. Management believes the current
accrual for loan servicing losses is adequate to provide for such probable losses. The principal balance of Fannie Mae DUS Program loans in the Company’s servicing portfolio was $2.0 billion
and $1.5 billion as of December 31, 1999 and 1998, respectively. Management regularly reviews the adequacy of this accrual, considering such items as: changes in the composition of the
DUS portfolio, loan-to-value and debt service coverage ratios of the underlying properties, the condition of the multifamily real estate market (by region, where applicable),
the current interest rate environment, and general economic conditions. Based on this assessment, the accrual is adjusted through the provision for loan servicing losses as considered necessary.
Although management considers the accrual adequate to cover inherent loan servicing losses, management’s judgment is based on a number of assumptions about future events which are believed to be
reasonable but which may or may not prove valid. There can be no assurance that losses will not exceed the accrual, and future increases may be required.

    Operating
interest expense includes interest on the Company’s warehouse lines of credit as well as the related commitment fees. Operating interest expense was $1.3 million for
the year ended December 31, 1999, compared with $2.3 million for the year ended December 31, 1998, a decrease of $1.0 million or 43.5%. The decrease is due primarily to the
absence in 1999 of additional commitment fees that were paid to the warehouse lender during the fourth quarter of 1998 to temporarily increase the warehouse line. Interest expense also decreased due
to a lower average balance outstanding on the warehouse line of

25


credit,
which resulted from lower levels of loan originations in 1999. An increase in 1999 in investor escrow balances used by the Company as compensating balances to reduce the interest rate on its
debt facilities also contributed to the decrease.

    Amortization
of servicing rights was $6.0 million for the year ended December 31, 1999, compared with $5.2 million for the year ended December 31, 1998, an
increase of $0.8 million or 15.4%. The increase was due primarily to the Company beginning to capitalize servicing rights on DUS Program loan originations in 1999.

    Depreciation
and amortization was $2.9 million for the year ended December 31, 1999, compared with $2.5 million for the year ended December 31, 1998, an
increase of $0.4 million or 16.0%. The increase was due primarily to depreciation on acquisitions of furniture and computer equipment in the last half on 1998 and first half of 1999. In
addition, amortization of goodwill increased in 1999 as a result of goodwill recorded in late 1998 and during 1999 related to earnouts on prior acquisitions.

Advisory Services Segment

    Revenue

    The advisory services segment of the Company, WMF Carbon Mesa, began operations during the second quarter of 1998. WMF Carbon Mesa originates loans for and
manages three commercial mortgage funds. One of the funds is COMIT. As previously stated, COMIT is a commercial mortgage REIT of which the Company owns a non-controlling minority interest
(less than 20 percent). Revenue of the advisory services segment consists of gain on sale of mortgage loans (including processing fees), management fees (including incentive management fees)
and other income. Loan processing fees are paid to WMF Carbon Mesa for processing mortgage loan applications. Other income includes structuring fees which are paid to WMF Carbon Mesa for structuring,
consulting, underwriting, or otherwise helping a potential borrower on a financing commitment.

    The
advisory services segment earned revenue of $2.5 million for the year ended December 31, 1999, compared with $1.5 million for the year ended
December 31, 1998, an increase of $1.0 million or 66.7%. The increase in 1999 is due primarily to an increase in management fee revenue, offset somewhat by a decrease in the amount of
structuring fees recognized. Structuring fees of $0.1 million were recognized in 1999 compared with $1.0 million in 1998. WMF Carbon Mesa earned $2.3 in management fees in 1999,
including $0.6 million in incentive management fees, compared with $0.3 million of management fees in 1998. Incentive management fees are earned when returns to investors in the funds
managed by WMF Carbon Mesa exceed predetermined levels. The increase in management fees is due to the increase in assets under management and due to managing the portfolios for a full year in 1999.
Total assets under management by WMF Carbon Mesa as of December 31, 1999, were $259 million compared with $139 million as of December 31, 1998, an increase of
$120 million or 86.3%.

    Expenses

    The advisory services segment expenses consist primarily of salaries and benefits, occupancy and depreciation and amortization. Total expenses for the year
ended December 31, 1999, were $2.4 million compared with $2.1 million for the year ended December 31, 1998, an increase of $0.3 million or 14.3%. The increase is due
to the fact that WMF Carbon Mesa had a full year of operations in 1999 versus only about 9 months in 1998.

Capital Markets Segment

    Revenue

    The capital markets segment of the Company, WMF Capital Corp., was formed in February of 1998 to conduct the securitization conduit activities of the Company.
For the year ended December 31, 1999, the

26


capital
markets segment had a loss (before taxes and non-operating interest) of $0.5 million compared with a loss of $56.9 million for the year ended December 31,
1998. The loss in 1999 relates to the cost of maintaining a small loan processing unit and a loan origination office, and certain administrative costs incurred to curtail conduit operations, largely
offset by income recognized on the settlement of WMF Capital Corp. payables for amounts less than were previously recorded. During the second quarter of 1999, the operations of WMF Capital Corp. were
scaled back to minimal levels. The 1998 losses related primarily to realized losses on short sales of U.S. Treasury securities. In 1998, WMF Capital Corp. also experienced a loss of
$10.5 million on the sale of loans with a principal balance approximately $971 million. The 1998 loss on sale of loans is net of gains from the sales of the related servicing rights of
$5.5 million.

    Interest
income earned on commercial mortgage loans held for sale was negligible for the year ended December 31, 1999, compared with $14.9 million for the year ended
December 31, 1998. The decrease resulted from the significant decrease in the loan origination activity at WMF Capital Corp.

    Expenses

    Salaries and benefits expense was $0.8 million for the year ended December 31, 1999, compared with $5.1 million for the year ended
December 31, 1998. The decrease was due primarily to staff reductions resulting from the curtailment of conduit operations and the Company’s continued cost reduction program.

    Occupancy
expense was $0.4 million for the year ended December 31, 1999, compared with $0.8 million for the year ended December 31, 1998. The decrease was
due primarily to the Company closing or subleasing several of WMF Capital Corp.’s locations in the second quarter of 1999. The savings resulting from the closings and subleases were partially offset
by one-time costs related to the office closings.

    The
capital markets segment incurred negligible interest expense for the year ended December 31, 1999, because it held no loans for securitization during the period. Interest
expense was $12.2 million for the year ended December 31, 1998. WMF Capital Corp. sold its remaining loan portfolio and closed out the related warehouse balances during the fourth
quarter of 1998.

    Realized
losses on short sales of U.S. Treasury securities for the year ended December 31, 1998 were $36.7 million. The losses resulted from volatility in commercial
mortgage-backed securities and interest rates on U.S. Treasury securities. No such losses were incurred in 1999.

    Other
general and administrative expenses were $0.3 million for the year ended December 31, 1999, compared with $5.5 million for the year ended
December 31, 1998. The decrease is due to the substantial reduction in activity at WMF Capital Corp. In addition, WMF Capital Corp. recognized $1.5 million in legal settlement expenses
incurred in connection with the curtailment of conduit operations during the fourth quarter of 1998.

Non-operating Interest Expense

    Non-operating interest expense reflects interest expense on the Company’s term loan, revolving credit facility and the subordinated note held by
COMIT. Non-operating interest expense was $2.2 million for the year ended December 31, 1999, compared with $3.3 million for the year ended December 31, 1998, a
decrease of $1.1 million or 33.3%. The decrease was due primarily to repayment of the subordinated note, as well as the increase in investor escrow balances used by the Company as compensating
balances to reduce the interest rate on its debt facilities. On September 4, 1998, the Company issued $20 million of subordinated debt to COMIT. The Company repaid $16.1 million
of the subordinated note on December 31, 1998, and repaid the remaining $3.9 million in March 1999.

27


Year End December 31, 1998 Compared With The Year Ended December 31, 1997

    Summary

    The Company reported a net loss for the year ended December 31, 1998 of $33.3 million compared with net income of $2.4 million for the
year ended December 31, 1997, a decrease of $35.7 million. The decline in net income was due primarily to U.S. Treasury short sale transaction losses of $36.7 million
and losses of $10.5 million on certain loan sales at WMF Capital Corp. The losses were partially offset by higher gains on other loan sales, servicing revenue and placement fee income in the
mortgage banking segment and structuring fee income in the advisory services segment. The net loss for the year ended December 31, 1998, includes a tax benefit of $19.1 million.

    The
Company’s EBITDA for the year ended December 31, 1998, was negative $41.2 million compared with $11.4 million for the year ended December 31, 1997, a
decrease of $52.6 million. The decrease in EBITDA for the year ended December 31, 1998 as compared to 1997 is due primarily to U.S. Treasury short sale transaction losses and losses on
loans sales at WMF Capital Corp., as discussed above. Higher servicing fee and placement fee income in the mortgage banking segment helped to offset the loss in EBITDA, as the Company’s servicing
portfolio balance at December 31, 1998 was $12.1 billion, up from $10.9 billion as of December 31, 1997.

Mortgage Banking Segment

    Revenue

    Servicing fees earned by the mortgage banking segment were $14.7 million for the year ended December 31, 1998, compared with $11.9 million
for the year ended December 31, 1997, an increase of $2.8 million or 23.5%. The increase in servicing fees for the year ended December 31, 1998, is a result of the average
principal balance of the Company’s servicing portfolio increasing to $11.7 billion in 1998, from $7.8 billion in 1997, an increase of 49%. The Company’s servicing portfolio principal
balance was $12.1 billion and $10.9 billion as of December 31, 1998 and 1997, respectively, an increase of 11%. The average service fee rate in 1998 was slightly lower due to an
increase in servicing fees from insurance companies and conduits which are lower than the Company’s historical average servicing rate. The average servicing fee rate was .126% in 1998, a decrease of
.026 percentage points from .152% in 1997.

    Gain
on sale of mortgage loans was $31.3 million for year ended December 31, 1998, compared with $19.7 for the year ended December 31, 1997, an increase of
$11.6 million or 58.9%. For the year ended December 31, 1998, the mortgage banking segment sold $3.3 billion in mortgage loans, as compared to $2.3 billion for the year
ended December 31, 1997. Gain on sale of mortgage loans includes the gain recognized on originated mortgage servicing rights in the amount of $6.0 million and $2.1 million for the
years ended December 31, 1998 and 1997, respectively. In addition, 1998 results include a $1.3 million loss related to an interest rate lock agreement, which was terminated in the third
quarter.

    Gain
on sale of servicing rights was $2.0 million for the year ended December 31, 1998, compared with $0.3 million for the year ended December 31, 1997, an
increase of $1.7 million. The increase in income is attributed to the sale of approximately $500 million of servicing rights near the end of 1998.

    Interest
income was $5.9 million for the year ended December 31, 1998, compared with $5.8 million for the year ended December 31, 1997, an increase of
$0.1 million or 1.7%. The increase in interest income is attributed to the higher average balance of loans held until funding during the fourth quarter of 1998.

    Placement
fee income was $8.5 million for the year ended December 31, 1998, compared with $5.3 million for the year ended December 31, 1997, an increase of
$3.2 million or 60.4%. The increase was the result of an increase in the average investor escrow balances held by the Company to $340 million in 1998 from $277 million in 1997.
The escrow balances are on deposit in restricted escrow bank accounts and are not included in the Company’s balance sheet.

28


    Other
income, which includes prepayment penalties, termination fees and loan management fees, was $5.2 million for the year ended December 31, 1998, compared with
$1.7 million for the year ended December 31, 1997, an increase of $3.5 million or 205.9%. The increase in other income is attributed primarily to higher termination and prepayment
fees associated with the prepayment of loans serviced by the Company. This increase in prepayments is mainly the result of a lower interest rate environment in 1998, which resulted in higher mortgage
refinancing.

    Expenses

    Salaries and employee benefits increased with loan production due to the payment of commissions on loan originations. Salaries and benefits expense was
$32.3 million for the year ended December 31, 1998, compared with $21.2 million for the year ended December 31, 1997, an increase of $11.1 million or 52.4%. The
increase is due primarily to increased originations and increased personnel resulting from acquisitions of businesses. Salaries and benefits related to corporate administrative costs also increased
due to the formation of WMF Carbon Mesa and WMF Capital Corp. These factors, combined with the mortgage banking segment’s expansion into non-multifamily commercial lending, contributed to
the increase in the number of mortgage banking and corporate administrative employees to 292 as of December 31, 1998, from 272 as of December 31, 1997. Additionally, salaries and
benefits in the fourth quarter of 1998 include approximately $0.4 million related to severance payments as a result of the Company’s cost-savings measures.

    General
and administrative expenses were $12.3 million for the year ended December 31, 1998, compared with $7.6 million for the year ended December 31,
1997, an increase of $4.7 million or 61.8%. The increase is a result of integration and start-up costs associated with the acquisitions of new businesses and formation of WMF
Capital Corp., as well as recapitalization and reorganization costs incurred during the fourth quarter of 1998. Recapitalization and reorganization costs reported in general and administrative
expenses in 1998 totaled $1.2 million.

    Occupancy
expense was $3.8 million for the year ended December 31, 1998, compared with $2.1 million for the year ended December 31, 1997, an increase of
$1.7 million or 81.0%. This increase was due to an increased number of offices in 1998.

    The
provision for loan servicing losses was $1.1 million for the year ended December 31, 1998, compared with $0.7 million for the year ended December 31,
1997, an increase of $0.4 million or 57.1%. The provision for loan servicing losses is the result of management’s ongoing assessment of the Company’s exposure related to its Fannie Mae DUS
portfolio. The Company’s principal balance of Fannie Mae DUS Program loans in the servicing portfolio was $1.5 billion and $944 million as of December 31, 1998 and 1997,
respectively.

    Operating
interest expense was $2.3 million for the year ended December 31, 1998, compared with $1.5 million for the year ended December 31, 1997, an
increase of $0.8 million or 53.3%. The increase is due to commitment fees paid to the warehouse lender during the fourth quarter of 1998 to temporarily increase the warehouse line.

    Depreciation
and amortization was $7.7 million for the year ended December 31, 1998, compared with $5.9 million for the year ended December 31, 1997, an
increase of $1.8 million or 30.5%. The increase was due primarily to the amortization related to the originated mortgage servicing rights recognized during 1998 and the full year effect of
amortization of goodwill related to acquisitions of businesses in 1997.

Advisory Services Segment

    The advisory services segment of the Company, WMF Carbon Mesa, began operations during the second quarter of 1998. Significant revenue and expense items for
1998 are included in the above discussion of 1999 results of operations compared with 1998.

29


Capital Markets Segment

    WMF Capital Corp., the capital markets segment of the Company, was formed in February of 1998 to conduct the securitization conduit activities of the Company.
Significant revenue and expense items for 1998 are included in the above discussion of 1999 results of operations compared with 1998.

Non-operating Interest Expense

    Non-operating interest expense was $3.3 million for the year ended December 31, 1998, compared with $0.8 million for the year
ended December 31, 1997, an increase of $2.5 million or 313%. The interest expense on the $20 million of subordinated debt issued to COMIT, combined with increased borrowings
under bank debt facilities, contributed to the increase in expense.

Liquidity and Capital Resources

Debt Facilities

    The Company’s principal financing needs are the funding of loan originations, the pursuit of new company acquisitions and the purchase of servicing rights. To
meet these needs, the Company currently utilizes warehouse lines of credit, a revolving line of credit and a term loan.

    The
Company incurred substantial operating losses during the second and third quarters of 1998. In response to the losses, the Company curtailed its operations at WMF Capital Corp.
WMF Capital Corp. also terminated its $50 million credit facility with Merrill Lynch Capital Markets, sold all remaining commercial mortgage loans and terminated the related U.S. Treasury short
sale transactions, which were financed by the facility. As part of its overall recapitalization, the Company also refinanced its prior debt facilities in February 1999. The old facilities were
replaced with the warehouse lines of credit, revolving credit facility and term loan described below. The Company’s servicing rights collateralize these facilities. In addition, the warehouse lines of
credit are secured by the mortgage loans held for sale.

    Warehouse Lines of Credit

    In February 1999, the Company replaced its two warehouse lines of credit with a $150 million warehouse line of credit (the “New Warehouse Line”).
The New Warehouse Line can be drawn upon for purposes of originating loans. The New Warehouse Line is required to be repaid with interest upon sale of the mortgage loans and matures in July of 2000.
The interest rate on the New Warehouse Line is one percent, to the extent borrowings are equal to or less than compensating balances maintained, and is equal to the one-month London
InterBank Offered Rate (“LIBOR”) plus one percent on amounts borrowed in excess of compensating balances. The outstanding balance of the New Warehouse Line at December 31, 1999 was
$15.4 million. Historically, the Company has temporarily increased this line of credit at times to allow borrowings beyond the credit limit.

    In
February 1999, the Company obtained two additional warehouse lines to be used only for servicing advances. The credit limit on these warehouse lines is $5.0 million
each. These warehouse lines replaced the $4.0 and $5.0 million advance portions of the $35 million warehouse line that expired in early 1999. The interest rate on the servicing advances
is 1.5 percent and 2.0 percent, respectively, to the extent borrowings are equal to or less than compensating balances maintained, and is equal to one-month LIBOR plus
1.5 percent or 2.0 percent, respectively, on amounts borrowed in excess of the compensating balances. Interest and principal is repayable monthly and the balances of these advance lines
are required to be zero for at least seven consecutive days during each month of the year. There was no outstanding balance on either of the servicing advance warehouse lines as of December 31,
1999.

    The
Company’s warehouse lines are renewable annually. The next renewal date is in July 2000. The Company believes that it will be able to renew its warehouse facilities at the
renewal date with substantially the same terms.

30



    Revolving Credit Facility

    In February 1999, the Company obtained a $25.0 million revolving credit agreement to be used for servicing acquisitions or working capital
purposes. This facility replaced the Company’s prior $10.0 million secured revolving credit agreement and the $35.0 million secured credit line. The facility matures in
February 2002. The interest rate on the revolving credit facility is 2.5 percent to the extent borrowings are equal to or less than compensating balances maintained and is equal to
one-month LIBOR plus 2.5 percent on borrowings in excess of compensating balances. Interest is payable monthly. At closing, the Company borrowed $10.7 million under this line
to repay a portion of its previous credit facilities. The outstanding balance on this revolving credit agreement was $14.3 million as of December 31, 1999.

    Term Loan and Subordinated Note

    In February 1999, the Company obtained a $25.0 million term loan to be repaid in twenty quarterly installments based on a 10-year
amortization schedule beginning on March 31, 1999. The interest rate on the term loan is 3.0 percent to the extent borrowings are equal to or less than compensating balances maintained
and is equal to one-month LIBOR plus 3.0 percent on borrowings in excess of compensating balances. Interest is payable monthly. The Company cannot borrow any additional amounts
under this line. The outstanding balance on the $25.0 million term loan was $22.5 million as of December 31, 1999. The remaining principal balance due on this loan will mature as
follows: $1.9 million in 2000, $2.5 million in each year from 2001 to 2003 and $13.1 million in February 2004.

    On
September 4, 1998, the Company issued $20.0 million of subordinated debt to COMIT. From this borrowing, the Company used $10.0 million to repay a portion of a
credit line with another lender. The balance of $10.0 million was used for working capital purposes. The subordinated debt was subordinate in right of payment to certain of the Company’s senior
indebtedness, was unsecured and bore interest at a rate of 11 percent through January 31, 1999, and 15 percent from February 1, 1999, through the maturity date of
May 31, 1999. Interest was payable on January 29, 1999, at maturity and upon repayment of principal. In connection with the COMIT subordinated debt agreement, the Company also issued
COMIT warrants to purchase 1.2 million shares of the Company’s common stock at an exercise price of $11.25 per share. The Company repaid $16.1 million of the subordinated note on
December 31, 1998, and as part of the sale of approximately $16.6 million of Class A Preferred Stock discussed below, the warrants were surrendered. The Company repaid the
remainder of the subordinated note in March 1999.

Recapitalization

    Sale of Preferred Stock

    On December 31, 1998, the Company’s three largest stockholders purchased a total of 3,635,972 shares of a new class of capital stock called
Class A Non-Voting Convertible Preferred Stock (“Preferred Stock”) for an aggregate purchase price of approximately $16.6 million. Proceeds from the sale of the Preferred
Stock were used to partially repay the subordinated note due to COMIT.

    On
January 14, 1999, each outstanding share of Preferred Stock was converted into one share of the Company’s common stock, after the Federal Trade Commission informed the
Company that it would not object to the conversion. As a result of the conversion, the Company’s three largest stockholders received a total of 3,635,972 shares of common stock.

    Also
as part of the transaction, the warrants to purchase 1,200,000 shares of common stock at a price of $11.25 per share, which were issued in connection with the purchase of a
$20.0 million subordinated note by COMIT, were surrendered. In addition, the Company’s three largest stockholders further agreed to a stand-by purchase commitment to purchase up to
664,028 shares of the Company’s common stock for up to $3.3 million following the rights offering, as described below.

31


    Because
of their participation in this transaction, the Company’s three largest stockholders agreed not to exercise, transfer or acquire any rights during the rights offering.

    Public Rights Offering

    The Company issued to each of its stockholders of record as of February 1, 1999, 1.072 transferable rights for each share of common stock held by them
on that date. Each right entitled its holder to purchase one share of common stock for $5.00. The rights expired on March 8, 1999.

    Through
the rights offering the Company sold a total of 1,482,271 shares of common stock for proceeds of approximately $7.4 million. On March 19, 1999, the Company’s
three largest stockholders completed the purchase of a total of 664,028 shares of the Company’s common stock, pursuant to the standby commitment, for proceeds to the Company of approximately
$3.3 million. The Company used the proceeds from the rights offering to repay the remaining subordinated note held by COMIT and for other operating purposes.

    On
March 31, 1999, one of the Company’s three largest stockholders purchased 34,520 additional shares of common stock for proceeds to the Company of $0.2 million.

Cash Flows

    Operating Activities—Net cash provided by operations was $25.0 million for the year ended
December 31, 1999, compared with $15.6 million for the for the year ended December 31, 1998. Cash from operating activities is driven largely by the timing of the origination and
sales of mortgage loans. Mortgage loans held for sale are viewed as short-term assets and are generally financed with short-term borrowings (the warehouse line of credit) as
discussed under “Financing Activities” below.

    Investing Activities—Net cash used in investing activities was $12.8 million for the year ended December 31,
1999, compared with $52.7 million for the year ended December 31, 1998. The primary investing activities for which cash was used during 1999 were the origination of mortgage servicing
rights, additional investments in COMIT, payments made related to earnouts and the exercise of the option to purchase certain assets related to WMF Carbon Mesa, and the purchase of mortgage servicing
rights. These uses of cash were offset partially by the proceeds from the sale of a portion of the Company’s investment in COMIT and the proceeds from the sale of mortgage servicing rights. In 1998,
the primary use of cash for investing activities related to the net loss on securities sold and purchased to settle the short sales of U.S. Treasury securities. Other uses of cash for investing
activities in 1998 were similar to those in 1999. The 1998 uses of cash for investing activities was partially offset by the proceeds from the sale of servicing in late 1998.

    Financing Activities—Net cash used in financing activities was $19.1 million for the year ended December 31,
1999, compared with net cash provided by financing activities of $37.6 million for the year ended December 31, 1998. Principal financing activities for 1999 and 1998 included a net
decrease in the warehouse line of credit due to decreases in mortgage loans held for sale, and the debt refinancing and equity transactions described above as part of the Company’s recapitalization
plan.

Net Operating Loss Carryforwards

    At December 31, 1999, the Company had a $20.0 million deferred tax asset recorded related to Federal and state net operating loss carryforwards
(“NOLs”). These NOLs relate to the Company’s losses during 1998. Substantially all of the state portion of the NOLs, which total $2.6 million, expire, if unused, in 2003. The remaining Federal
NOLs expire in 2018. The Company will have to generate sufficient taxable income, within the carryforward periods and in the appropriate tax jurisdiction, in order to realize the net deferred tax
asset recorded related to the net operating loss carryforwards. The Company believes its future levels of pretax earnings for financial reporting purposes will be sufficient to generate the minimum

32


amount
of future taxable income needed to realize the net deferred tax asset. The Company has also identified the possible disposition of assets as a means of generating future taxable income if
enough taxable income is not derived from recurring operations in order to realize the deferred tax asset during the carryforward periods. Management believes that it is more likely than not the
Company will realize the benefits of these assets, net of the existing valuation allowance for state deferred taxes at December 31, 1999. However, in the event of a change of control of the
Company, or certain other material changes in the Company’s business, the Company would have to establish additional valuation allowances against the deferred tax asset.

    In
the fourth quarter of 1999, the Company recorded an increase to its tax provision of $1.6 million, net of the change in valuation allowance. This adjustment represents
primarily an adjustment of the Company’s NOLs from the estimates recorded in 1998 to actual amounts as calculated on the 1998 tax returns filed in late 1999. Most of the increase in the tax provision
related to adjustments of state NOLs. The Company does business in many state tax jurisdictions, each of which has varying tax rates and varying calculations of taxable income. The amount of business
that the Company does in the various jurisdictions can change from period to period. Shifting of taxable income between state jurisdictions as a result of normal changes in business activity can have
a significant impact on the overall taxes paid by the Company.

Other

    In May 1999, the Company established a stock repurchase program. The Company’s Board of Directors has authorized the acquisition of up to
$3 million of the Company’s common stock. Through December 31, 1999, 424,800 shares had been repurchased at an aggregate cost of $2.3 million, or an average cost of $5.46 per
share. Through February 29, 2000, 70,500 additional shares have been repurchased at a cost of $0.4 million.

    In
the course of the Company’s mortgage banking operations, the Company sells to investors the mortgage loans it originates but generally retains the right to service the loans,
thereby increasing the Company’s investment in loan servicing rights. The Company views the sale of loans on a servicing-retained basis in part as an investing activity. Significant unanticipated
prepayments in the Company’s servicing portfolio could have a material adverse effect on the Company’s future operating results and liquidity.

    The
Company enters into commitments to extend credit to borrowers in the normal course of business. Normally, the Company simultaneously commits to sell the loan to an appropriate
investor. Because the commitment for the loan normally occurs simultaneously with the investor commitment, the Company limits its exposure to interest rate changes for these transactions. As of
December 31, 1999, the Company had floating rate and fixed rate commitments outstanding to originate multifamily and commercial mortgage loans in the approximate amounts of $91 million
and $108 million, respectively, with pre-existing investor sales commitments. In addition at December 31, 1999, WMF Carbon Mesa had a floating rate forward commitment to a
borrower in the amount of $58 million, without a pre-existing investor sale commitment. This commitment expires July 31, 2001. In the event there are significant fluctuations
in interest rates and spreads, the value of the commitment for which the Company does not have a pre-existing investor sale commitment could have a material adverse effect on the Company’s
future operating results and consequently the Company’s ability to honor the commitment.

    As
of December 31, 1999, the Company had invested $1.6 million in COMIT and had a commitment to invest up to an additional $5.7 million. This commitment expires
June 12, 2000.

    The
Company has established a letter of credit of $7.8 million, as of December 31, 1999, on behalf of Fannie Mae to meet the requirements of the DUS Program. The Fannie
Mae letter of credit is secured by cash equivalents and mortgage-backed securities with a market value of $8.4 million as of December 31, 1999. The Company also has outstanding an
$0.8 million letter of credit related to the lease of certain office space. This letter of credit is secured by cash on deposit with a bank of $0.8 million.

33


    The
Company’s credit agreement, as amended, requires the maintenance of certain financial ratios relating to liquidity, leverage, working capital, and net worth among other
restrictions, all of which were met at December 31, 1999 and 1998. During the third quarter of 1999, the Company’s debt agreement was amended. Among other things, the amendment allowed the
Company to invest additional funds, up to a pre-approved limit, in WMF Capital Corp. and changed certain financial debt covenant requirements. As of December 31, 1999, the Company
was in compliance with all financial ratio requirements.

    The
Company has subleased or otherwise mitigated its long-term costs on certain leased office space that is no longer utilized by the Company. The Company is currently
evaluating each of its remaining leased offices to determine if there is a potential for long-term cost savings by relocating its operations to less costly space in the same general area.
When offices are relocated, the Company may incur additional one-time costs associated with subleasing or otherwise disposing of leased space that the
Company is leaving. These costs could include, but are not limited to, brokerage fees, moving costs, subtenant concessions and/or the cost of buying out a lease. Therefore, the Company may have
increased costs associated with its leased space in the year 2000, with the goal of significantly reducing its long-term occupancy costs.

    The
Company believes its funds on hand at December 31, 1999, its current cash flow from operations and its unused borrowing capacity under its debt facilities will be
sufficient to meet its anticipated operating needs as well as planned investments for at least the next twelve months. In addition, in the event additional capital resources are required, the Company
believes it will have access to capital through other sources.

New Accounting Standard

    In June 1999, SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities—Deferral of the
Effective Date of FASB No 133, An Amendment of FASB Statement No. 133
, was issued. SFAS No. 137 delayed the effective date of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities
. SFAS No. 133, as amended, is now effective for the Company beginning
January 1, 2001. Based on the Company’s current operations, SFAS No. 133 is not expected to have a material impact on the Company’s financial position or results of operations but the
Company will reassess its impact as the implementation date draws nearer.

Subsequent Event

    In March of 2000, the Company entered into an agreement whereby the Company invested approximately $2.0 million to acquire a 10% interest in a newly
formed entity. The only assets of this newly formed entity are performing variable rate multifamily and commercial loans totaling approximately $130 million. WMF Carbon Mesa will be the manager
of the newly formed entity’s portfolio and WMF Huntoon Paige is expected to become the servicer on the loans.

Item 7A. Quantitative and Qualitative Disclosure about Market Risk

    Interest
rate risk is the most significant market risk affecting the Company. Interest rate risk is the possibility that changes in interest rates will cause unfavorable changes in
net income or in the value of interest rate-sensitive assets, liabilities and commitments. In particular, changes in interest rates affect the volume of mortgage loan originations, the
interest rate spread on the Company’s mortgage loans held for sale, the amount of gain on the sale of loans, the amount of placement fee income earned on invested escrow balances and the value of the
Company’s loan servicing portfolio. The Company has been managing this risk by striving to balance its revenue from loan origination and loan servicing segments, which generally are counter-cyclical
in nature. The Company does not maintain a trading portfolio. As a result, the Company is not exposed to market risk as it relates to trading activities.

34


    Generally,
interest rate increases reduce the level of economic and real estate activity, thereby decreasing the demand for mortgage financing. Such a decrease in demand may
negatively affect the Company’s ability to earn origination fees and generate gains from the sale of loans. In the ordinary course of business, the Company enters into commitments to extend credit to
borrowers. Normally, the Company simultaneously commits to sell the loan to an investor, limiting the Company’s exposure to interest rate fluctuations. To the extent that the Company has committed to
extend credit to borrowers without a pre-existing sale commitment, changes in interest rates and spreads affect the value of the commitments and could have a material adverse effect on the
Company’s future operating results. Between the time that the loan is originated and sold to the ultimate investor, the Company earns
interest income. The loans are funded through the use of a revolving warehouse line of credit, for which the Company is charged interest based upon short-term interest rates. Therefore,
the net interest income that is earned by the Company is generally dependent upon the spread between long-term mortgage rates and short-term interest rates. An increase in
short-term rates relative to long-term rates could have an adverse effect on net interest income.

    Interest
rate increases, however, positively affect Company earnings from loan servicing activities. A reduction in real estate activity may reduce the risk of borrower prepayments,
potentially increasing the level of servicing fees and the value of the Company’s servicing portfolio. Additionally, placement fee income earned by the Company may benefit from increased interest rate
levels.

    Although
loans within the servicing portfolio may have prepayment restrictions and yield maintenance provisions, declines in interest rates can adversely affect the Company’s revenues
by increasing the level of loan prepayments. To the extent that future mortgage servicing rights have been capitalized by the Company, higher than anticipated rates of loan prepayments or losses could
cause an increase of the amortization of these servicing assets or require the Company to write down the value of these assets, adversely affecting earnings. In addition, increased prepayment rates
can reduce the Company’s servicing income by decreasing the size of the Company’s servicing portfolio. Declines in interest rates could also have an adverse effect on the placement fee income earned
on invested escrow balances. At the same time, interest rate declines should generally have a correspondingly favorable impact on Company earnings from originating, loan sales and financing
activities.

    The
Company currently does not enter into hedging activities. In the future, the Company may use hedging techniques including futures, options, interest rate swap agreements or other
hedge instruments to help mitigate interest rate and market risk. However, there can be no assurance that any of the above hedging techniques will be successful. To the extent they are not successful,
the Company’s profitability may be adversely affected.

    Based
on the information available and the interest environment as of December 31, 1999, the Company believes that an instantaneous 100 basis point increase, all else being
constant, would result in an increase in the Company’s net income of $1.3 million over a twelve-month period. An instantaneous 100 basis point decrease in rates, all else being constant, would
result in a decrease in the Company’s net income of $1.1 million over a twelve-month period. The Company believes that larger or smaller interest rate changes would result in proportionately
larger or smaller gains and losses. The change in net income principally reflects the impact of interest expense on variable rate debt, offset by changes in placement fee income. The sensitivity
analyses relate solely to the Company’s rate-sensitive assets, liabilities and commitments at December 31, 1999 and do not capture changes in cash flows and earnings related to
certain production and servicing activities that would be expected to affect financial performance in the simulated rate environments. These estimates are limited by the fact that they are performed
at a particular point in time and do not incorporate other factors that would impact the Company’s financial performance in such a scenario. Consequently, the preceding estimates should not be viewed
as a forecast.

35


Item 8. Financial Statements and Supplementary Data

    The Consolidated Financial Statements and Supplementary Data of the Company are listed and included under Item 14 of this report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    None.

36






PART III

Item 10. Directors and Executive Officers of the Registrant

    Information concerning the directors and executive officers of the Company is incorporated by reference from the Company’s Proxy Statement for the 2000 Annual
Meeting of Stockholders (the “2000 Proxy Statement”) under the caption “Election of Directors.”

Item 11. Executive Compensation

    Information regarding executive compensation is incorporated by reference from the 2000 Proxy Statement under the caption “Executive Compensation.”

Item 12. Security Ownership of Certain Beneficial Owners and Management

    Information regarding the stock ownership of each person known to the Company to be the beneficial owner of more than 5% of the Common Stock, of each director
and executive officer of The WMF Group, Ltd., and all directors and executive officers as a group, is incorporated by reference from the 2000 Proxy Statement under the caption “Beneficial
Ownership of Common Stock.”

Item 13. Certain Relationships and Related Transactions

    Information regarding certain relationships and related transactions is incorporated by reference from the 2000 Proxy Statement under the caption “Certain
Relationships and Related Transactions.”

37






PART IV

Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K

    A. The following documents are filed as part of this report.




      1.
      The
      Consolidated Financial Statements of The WMF Group, Ltd.



        See
        Index to Financial Statements on Page F-1 included herein



    B.
No current reports on Form 8-K were filed by the Company during the last quarter of 1999.

    C.
Exhibits









































































Exhibit

No.

  Description
3.1   Restated Certificate of Incorporation of The WMF Group, Ltd. (the “Company”).(2)
3.2   Amendment to the Company’s Restated Certificate of Incorporation.(3)
3.3   Certificate of Designations, Preferences and Rights of Class A Non-Voting Convertible Preferred Stock.(1)
3.4   Amended and Restated Bylaws of The WMF Group, Ltd.(4)
4.1   Form of certificate representing shares of Common Stock of The WMF Group, Ltd.(3)
10.1   Mortgage Selling and Servicing Contract between Fannie Mae and the Company, dated December 21, 1990.(2)
10.2   Delegated Underwriting and Servicing Addendum to Mortgage Selling and Servicing Contract between Fannie Mae and the Company, dated as of March 1, 1994.(2)
10.3   Delegated Underwriting and Servicing Master Loss Sharing Agreement between Fannie Mae and the Company, dated as of March 1, 1994.(2)
10.4   Delegated Underwriting and Servicing Reserve Agreement among Fannie Mae, State Street Bank and Trust Company and the Company, dated as of June 4, 1996.(2)
10.5   Credit and Security Agreement (Syndicate Agreement) dated as of February 10, 1999, between the Company, WMF Washington Mortgage Corp., WMF/Huntoon, Paige Associates Limited, WMF Proctor, Ltd., The Robert C. Wilson Company,
The Robert C. Wilson Company—Arizona, WMF Carbon Mesa Advisors, Inc. and Residential Funding Corporation and certain other lenders party thereto.(7)
10.6   Warehousing Promissory Note between The WMF Group, Ltd., WMF Washington Mortgage Corp., WMF/Huntoon, Paige Associates Limited, WMF Proctor, Ltd., The Robert C. Wilson Company, The Robert C. Wilson Company—Arizona,
WMF Carbon Mesa Advisors, Inc., and         , dated as of February 10, 1999.(7)
10.7   Term Loan Facility Promissory Note between The WMF Group, Ltd., WMF Washington Mortgage Corp., WMF/Huntoon, Paige Associates Limited, WMF Proctor, Ltd., The Robert C. Wilson Company, The Robert C. Wilson Company
—Arizona, WMF Carbon Mesa Advisors, Inc., and         , dated as of February 10, 1999.(7)
10.8   Servicing Promissory Note between The WMF Group, Ltd., WMF Washington Mortgage Corp., WMF/Huntoon, Paige Associates Limited, WMF Proctor, Ltd., The Robert C. Wilson Company, The Robert C. Wilson Company—Arizona, WMF
Carbon Mesa Advisors, Inc., and         , dated as of February 10, 1999.(7)


38




































































































10.9   Swingline Promissory Note between The WMF Group, Ltd., WMF Washington Mortgage Corp., WMF/Huntoon, Paige Associates Limited, WMF Proctor, Ltd., The Robert C. Wilson Company, The Robert C. Wilson Company—Arizona, WMF
Carbon Mesa Advisors, Inc., and Residential Funding Corporation, dated as of February 10, 1999.(7)
10.10   Sublimit Promissory Note between The WMF Group, Ltd., WMF Washington Mortgage Corp., WMF/Huntoon, Paige Associates Limited, WMF Proctor, Ltd., The Robert C. Wilson Company, The Robert C. Wilson Company—Arizona, WMF
Carbon Mesa Advisors, Inc., and         , dated as of February 10, 1999.(7)
10.11   Key Employee Incentive Plan of The WMF Group, Ltd., as amended and restated.(10)
10.12   Key Employee Incentive Award Agreement.(3)
10.13   Key Employee Deferred Compensation Plan.(3)
10.14   Employee Stock Purchase Plan.(3)
10.15   Stock Purchase Agreement dated as of October 31, 1997, between Washington Mortgage Financial Group, Ltd. and The Robert C. Wilson Company.(5)
10.16   Asset Purchase Agreement dated as of December 16, 1997, between Washington Mortgage Financial Group, Ltd. and NY Urban West, Inc.(6)
10.17   Registration Rights Agreement dated December 7, 1997, between the Company and Capricorn Investors II, L.P.(7)
10.18   Registration Rights Agreement dated June 12, 1998, between the Company, Harvard Private Capital Holdings, Inc. and Capricorn Investors II, L.P., as amended by the First Amendment to the Registration Rights Agreement,
dated as of October 16, 1998, among the Company, Harvard Private Capital Holdings, Inc., Capricorn Investors II, L.P., Demeter Holdings Corporation and Phemus Corporation.(1)
10.19   Series 2 Warrant Agreement, dated December 31, 1998, between the Company and HN Acquisitions, Inc.
10.20   Series 3 Warrant Agreement, dated December 31, 1998, between the Company and HN Acquisitions, Inc.
10.21   Registration Rights Agreement, dated December 30, 1998, between the Company and HN Acquisitions, Inc.
10.22   Employment Agreement, dated Apri11, 1998, between the Company and Mitchell E. Clarfield.(8)
10.23   Employment Agreement, dated Apri11, 1998, between the Company and Glenn A. Sonnenberg.(8)
10.24   Warrant Agreement, dated as of June 23, 1999, between the Company and CKRS Investments, LLC.(9)
10.25   Registrations Rights Agreement, dated as of June 23, 1999, between the Company and CKRS Investments, LLC.(9)
10.26   Letter Agreement dated May 20, 1999, between the Company and Elizabeth Whitbred-Snyder.(10)
10.27   Letter Agreement dated June 7, 1999, between the Company and Charles H. Cremens.(10)


39






























10.28   First Amendment to Credit and Security Agreement, dated as of September 23, 1999, between The WMF Group, Ltd., WMF Washington Mortgage Corp., WMF/Huntoon, Paige Associates Limited, WMF Proctor, Ltd., The Robert C. Wilson
Company, The Robert C. Wilson Company—Arizona, WMF Carbon Mesa Advisors, Inc., Residential Funding Corporation, Bank United and Lasalle Bank National Association.(11)
11   Statement re Computation of Per Share Earnings
21   Subsidiaries of the Registrant
23   Consent of KPMG LLP
27   Financial Data Schedule





(1)
Incorporated
by reference to the current report on Form 8-K previously filed by the Company on January 13, 1999.


(2)
Incorporated
by reference to the registration statement on Form 10 filed by the Company on August 14, 1997, as amended.


(3)
Incorporated
by reference to the registration statement on Form S-1 (File No. 333-37447) filed by the Company on October 30, 1997.


(4)
Incorporated
by reference to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 1998, filed on May 15, 1998.


(5)
Incorporated
by reference to the current report on Form 8-K previously filed by the Company on November 20, 1997.


(6)
Incorporated
by reference to the Company’s annual report on Form 10-K for the year ended December 31, 1997, filed on March 31, 1998.


(7)
Incorporated
by reference to the Company’s annual report on Form 10-K for the year ended December 31, 1998, filed on March 31, 1999.


(8)
Incorporated
by reference to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 1999, filed on May 14, 1999.


(9)
Incorporated
by reference to the registration statement on Form S-3 (File No. 333-83109) filed by the Company on July 16, 1999.


(10)
Incorporated
by reference to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 1999, filed on August 13, 1999.


(11)
Incorporated
by reference to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 1999, filed on November 12, 1999.

40








SIGNATURES














    THE WMF GROUP, LTD.
 

 
 
 
 
By:
 

/s/ 
SHEKAR NARASIMHAN   
Shekar Narasimhan

Chairman and Chief Executive Officer


    Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
















































































Signature
  Title
  Date
 
 
 
 
 

 
 
 
 

 
 

/s/ 
SHEKAR NARASIMHAN   
Shekar Narasimhan
 
 
 

Chairman of the Board and Chief Executive Officer
 
 
 

March 24, 2000
 

/s/ 
ELIZABETH WHITBRED-SNYDER   
Elizabeth Whitbred-Snyder
 
 
 

Executive Vice President, Chief Financial Officer and Treasurer
 
 
 

March 24, 2000
 

/s/ 
CHARLES H. CREMENS   
Charles H. Cremens
 
 
 

Director, President and Chief Operating Officer
 
 
 

March 24, 2000
 

/s/ 
MOHAMMED A. AL-TUWAIJRI   
Mohammed A. Al-tuwaijri
 
 
 

Director
 
 
 

March 24, 2000
 

/s/ 
MICHAEL R. EISENSON   
Michael R. Eisenson
 
 
 

Director
 
 
 

March 24, 2000
 

/s/ 
J. RODERICK HELLER   
J. Roderick Heller
 
 
 

Director
 
 
 

March 24, 2000
 

/s/ 
TIM R. PALMER   
Tim R. Palmer
 
 
 

Director
 
 
 

March 24, 2000
 

/s/ 
JOHN D. REILLY   
John D. Reilly
 
 
 

Director
 
 
 

March 24, 2000
 


Herbert S. Winokur
 
 
 

Director
 
 
 

March 24, 2000


41






INDEX TO CONSOLIDATED FINANCIAL STATEMENTS






































 
  Page
Independent Auditors’ Report   F-2
 

Consolidated Balance Sheets

As of December 31, 1999 and 1998
 
 
 

F-3
 

Consolidated Statements of Operations

For the Years Ended December 31, 1999, 1998 and 1997
 
 
 

F-4
 

Consolidated Statements of Cash Flows

For the Years Ended December 31, 1999, 1998 and 1997
 
 
 

F-5
 

Consolidated Statements of Changes in Stockholders’ Equity

For the Years Ended December 31, 1999, 1998 and 1997
 
 
 

F-7
 

Notes to Consolidated Financial Statements
 
 
 

F-8


F-1






Independent Auditors’ Report

The
Board of Directors

The WMF Group, Ltd. and subsidiaries:

    We
have audited the accompanying consolidated balance sheets of The WMF Group Ltd. and subsidiaries (“the Company”) as of December 31, 1999 and 1998, and the related
consolidated statements of operations, cash flows, and changes in stockholders’ equity for each of the years in the three-year period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

    We
conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

    In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1999
and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.











                        /s/
                        KPMG LLP











McLean,
Virginia

February 17, 2000, except for

Note 19 which is as of March 17, 2000

F-2




THE WMF GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)











































































































































































































































































































































































































 
  As of December 31,
 
 
  1999
  1998
 
ASSETS              
Cash and cash equivalents   $ 2,101   $ 8,897  
Restricted cash     7,714     13,398  
Mortgage-backed securities     6,163     6,195  
Mortgage loans held for sale, pledged     15,381     34,217  
Principal, interest and other servicing advances     1,492     2,588  
Investment in COMIT     1,594     3,780  
Furniture, equipment and leasehold improvements, net     4,308     5,011  
Servicing rights, net     33,476     26,243  
Goodwill, net     23,085     22,360  
Deferred tax asset, net     12,596     17,290  
Other assets     3,351     4,548  
   
 
 
Total assets   $ 111,261   $ 144,527  
   
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 

 
 
 
 
 
 

 
 
 
Liabilities:              
Accounts payable and accrued expenses   $ 9,123   $ 15,455  
Warehouse lines of credit     15,408     39,519  
Revolving credit facility     14,320     31,519  
Term loan     22,500      
Subordinated note         3,901  
Servicing acquisition loan         4,212  
Escrow payable     2,223     10,853  
Deferred fees     2,701     5,437  
Accrued loan servicing losses     7,048     6,253  
   
 
 
Total liabilities     73,323     117,149  
Stockholders’ equity:              
Preferred stock, no par value, 12,500,000 shares authorized; 0 and 3,635,972 shares issued and outstanding in 1999 and 1998, respectively         16,541  
Common stock, $.01 par value, 25,000,000 shares authorized; 11,187,117 and 5,349,403 issued in 1999 and 1998, respectively     112     53  
Treasury stock at cost: 396,321 and 0 shares in 1999 and 1998, respectively     (2,134 )    
Additional paid-in capital     68,530     40,509  
Retained deficit     (28,570 )   (29,725 )
   
 
 
Total stockholders’ equity     37,938     27,378  
   
 
 
Total liabilities and stockholders’ equity   $ 111,261   $ 144,527  
   
 
 


The
accompanying notes are an integral part of these consolidated financial statements.

F-3




THE WMF GROUP, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)
















































































































































































































































































































































































 
  For the Year Ended December 31,
 
  1999
  1998
  1997
Revenue:                  
Servicing fees   $ 16,131   $ 14,715   $ 11,871
Gain on sale of mortgage loans, net     30,844     20,064     19,652
Gain on sale of servicing rights     518     2,026     297
Interest income     5,598     20,844     5,771
Placement fee income     8,013     8,470     5,330
Management fee income     2,285     295    
Other income     4,467     6,127     1,724
   
 
 
Total revenue     67,856     72,541     44,645
Expenses:                  
Salaries and employee benefits     31,041     38,816     21,163
General and administrative     11,923     17,878     7,649
Occupancy     5,953     4,736     2,140
Provision for loan servicing losses     795     1,128     729
Interest     3,509     17,764     2,283
Amortization of servicing rights     6,046     5,153     4,250
Depreciation and amortization     3,262     2,801     1,660
Loss on treasury security short sales         36,653    
   
 
 
Total expenses     62,529     124,929     39,874
   
 
 
Income (loss) before income taxes     5,327     (52,388 )   4,771
Income tax provision (benefit)     4,172     (19,066 )   2,329
   
 
 
Net income (loss)   $ 1,155   $ (33,322 ) $ 2,442
   
 
 
Net income (loss) per common share—Basic   $ 0.11   $ (6.38 ) $ 0.57
   
 
 
Net income (loss) per common share—Diluted   $ 0.11   $ (6.38 ) $ 0.55
   
 
 


The
accompanying notes are an integral part of these consolidated financial statements.

F-4




THE WMF GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)














































































































































































































































































































































































































































































































 
  For the Year Ended December 31,
 
 
  1999
  1998
  1997
 
Cash flows from operating activities:                    
Net income (loss)   $ 1,155   $ (33,322 ) $ 2,442  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                    
Depreciation and amortization of furniture, equipment and leasehold improvements     1,379     1,136     596  
Amortization of mortgage servicing rights     6,046     5,153     4,250  
Amortization of goodwill     1,883     1,665     1,064  
Compensation related to stock and option awards     342     796     1,093  
Gain on sale of mortgage servicing rights     (518 )   (2,026 )   (297 )
Non-cash charges for issuance of stock and warrants     1,068     631      
Provision for loan servicing losses     795     1,128     729  
Losses on treasury security short sales         36,653      
Deferred taxes     4,694     (20,564 )   90  
Changes in operating assets and liabilities:                    
Mortgage loans originated     (1,124,564 )   (4,333,507 )   (1,283,552 )
Mortgage loans sold     1,143,400     4,348,721     1,274,384  
Decrease (increase) in principal, interest and other servicing advances     1,096     43     (619 )
Increase (decrease) in escrows payable     (8,630 )   8,515     (86 )
Decrease in due to affiliates             (872 )
Decrease (increase) in restricted cash     5,684     (9,484 )   (600 )
Decrease (increase) in other assets     1,233     (996 )   (971 )
Increase (decrease) in accounts payable and accrued expenses     (7,281 )   9,190     495  
Increase (decrease) in deferred fees     (2,736 )   1,837     814  
   
 
 
 
Net cash provided by (used in) operating activities     25,046     15,569     (1,040 )
Cash flows from investing activities:                    
Purchase of furniture and equipment     (638 )   (3,848 )   (1,410 )
Purchase of mortgage servicing rights     (1,637 )   (1,594 )   (5,524 )
Origination of mortgage servicing rights     (11,096 )   (5,980 )   (3,251 )
Proceeds from sale of mortgage servicing rights     518     5,000     486  
Proceeds from securities sold but not yet purchased         850,000      
Purchases to cover securities sold but not yet purchased         (886,653 )    
Assets acquired and liabilities assumed, net of cash     (2,104 )   (3,467 )   (11,823 )
Purchase of subordinated interest in credit tenant leases         (2,400 )    
Proceeds from sale of COMIT stock     5,411          
Investment in COMIT     (3,225 )   (3,780 )    
   
 
 
 
Net cash used in investing activities     (12,771 )   (52,722 )   (21,522 )


F-5



THE WMF GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)



















































































































































































































































































































































































 
  For the Year Ended December 31,
 
 
  1999
  1998
  1997
 
 

Cash flows from financing activities:
 
 
 
 
 

 
 
 
 
 
 

 
 
 
 
 
 

 
 
 
Repayment of servicing acquisition loan     (4,212 )   (1,250 )   (750 )
Increase (decrease) in warehouse lines of credit, net     (19,349 )   (13,986 )   8,818  
Increase (repayment) of revolving credit facility, net     (21,961 )   30,582     5,699  
Borrowings under term loan     25,000          
Repayments of term loan     (2,500 )        
Proceeds from issuance of subordinated note         20,000      
Repayment of subordinated note     (3,901 )   (16,099 )    
Proceeds from issuance of common stock and exercise of options     10,169     1,814     6,262  
Equity contribution by NHP             6,500  
Purchase of treasury stock     (2,317 )        
Proceeds from issuance of preferred stock         16,541      
   
 
 
 
Net cash provided by (used in) financing activities     (19,071 )   37,602     26,529  
   
 
 
 
Net increase (decrease) in cash     (6,796 )   449     3,967  
Cash at beginning of period     8,897     8,448     4,481  
   
 
 
 
Cash at end of period   $ 2,101   $ 8,897   $ 8,448  
   
 
 
 
Supplemental disclosures of cash flow information:                    
Cash paid during the period for interest   $ 4,103   $ 17,117   $ 2,290  
Cash paid during the period for income taxes     546     1,156     2,610  
Non-cash investing and financing activities:                    
Conversion of preferred stock to common stock   $ 16,541   $   $  
Issuance of stock and warrants     1,068     631      
Short-term notes payable issued in acquisition of assets     1,014          
Stock issued in acquisition of assets     183     2,093      


The
accompanying notes are an integral part of these consolidated financial statements.

F-6




THE WMF GROUP, LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)







































































































































































































































































































































































































































































































































































































































































































































































































 
  Preferred Stock
  Common Stock
   
   
   
   
 
 
  Additional

Paid-in

Capital

  Retained

Earnings

(Deficit)

  Treasury

Stock

   
 
 
  Shares
  Value
  Shares
  Par Value
  Total
 
Balance, December 31, 1996     $   4,217   $ 42   $ 21,331   $ 1,155   $   $ 22,528  
Net income                     2,442         2,442  
Issuance of common stock—Capricorn Investors         547     6     4,994             5,000  
Employee compensation for stock options                 1,093             1,093  
Equity contribution—NHP                 6,500             6,500  
Adjustment for NHP’s conversion         129     1     (1 )            
Exercise of stock options and other         150     1     1,261             1,262  
   
 
 
 
 
 
 
 
 
Balance, December 31, 1997         5,043     50     35,178     3,597         38,825  
Net loss                     (33,322 )       (33,322 )
Issuance of preferred stock   3,636     16,541                       16,541  
Issuance of warrants                 409             409  
Employee compensation for stock options and restricted stock         37         796             796  
Issuance of stock         50     1     221             222  
Exercise of stock options         128     1     1,813             1,814  
Stock issued in conjunction with Acquisition of WMF Carbon Mesa         91     1     2,092             2,093  
   
 
 
 
 
 
 
 
 
Balance, December 31, 1998   3,636     16,541   5,349     53     40,509     (29,725 )       27,378  
Net income                     1,155         1,155  
Conversion of preferred stock to common stock   (3,636 )   (16,541 ) 3,636     37     16,504              
Recapitalization         2,181     22     10,117             10,139  
Issuance of warrants                 1,068             1,068  
Purchase of treasury stock                         (2,317 )   (2,317 )
Employee compensation for stock options and restricted stock         15         342             342  
Issuance of treasury stock in acquisition                 (40 )       183     143  
ESPP purchases         6         30             30  
   
 
 
 
 
 
 
 
 
Balance, December 31, 1999     $   11,187   $ 112   $ 68,530   $ (28,570 ) $ (2,134 ) $ 37,938  
   
 
 
 
 
 
 
 
 


The accompanying notes are an integral part of these consolidated financial statements.

F-7




THE WMF GROUP, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(1) Organization

    The WMF Group, Ltd. (the “Company”) originates, underwrites, structures, places, sells and services multifamily and commercial real estate loans.
Through its relationships with Government Sponsored Enterprises (“GSEs”), investment banks, life insurance companies, commercial banks and other investors, the Company provides and arranges financing
to owners of multifamily and commercial real estate on a nationwide basis using both a retail and wholesale network. The Company generates revenues through servicing fees, origination fees, net
interest income on loans held for sale, placement fees, management fees and other. Other income includes structuring fees, termination fees, assumption fees and dividend income.

    The
Company is a Delaware corporation formed in October 1992. The Company has three direct wholly owned subsidiaries: WMF Washington Mortgage Corp. (“WMF Washington Mortgage”)
(previously known as Washington Mortgage Financial Group, Ltd.), WMF CommQuote, Inc. (previously known as WMF Capital Corp.), and WMF Carbon Mesa Advisors, Inc. (“WMF Carbon
Mesa”). Each of these subsidiaries are incorporated under the laws of Delaware. WMF Washington Mortgage’s wholly owned subsidiaries are WMF/Huntoon, Paige Associates Limited (“WMF Huntoon Paige”), WMF
Proctor, Ltd. (“WMF Proctor”), and The Robert C. Wilson Company (“WMF Robert C. Wilson”), which are incorporated under the laws of the states of Delaware, Michigan and Texas, respectively.
Effective December 31, 1999, WMF Proctor was merged into its parent, WMF Washington Mortgage.

    WMF
Carbon Mesa was formed in the first quarter of 1998, and began managing commercial mortgage investment funds and providing special asset management services. The Company also
formed WMF Capital Corp. in early 1998 and during 1998 WMF Capital Corp. operated a commercial mortgage conduit. In late 1998, the operations of WMF Capital Corp. were substantially reduced.
Subsequent to 1998, WMF Capital Corp. held no loans for securitization. In the December 1999, WMF Capital Corp. was renamed WMF CommQuote, Inc. (“WMF CommQuote”). Beginning in 2000, WMF
CommQuote will manage the Company’s Internet originations as well as oversee commercial conduit activity for the all of the Company’s subsidiaries.

    On
April 1, 1996, NHP Incorporated (“NHP”), purchased the Company and renamed it NHP Financial Services, Inc. In early 1997, NHP was acquired by Apartment Investment and
Management Co. (“AIMCO”). As a condition of that purchase, AIMCO required NHP to spin-off the Company. The Company was renamed The WMF Group, Ltd. and on December 8, 1997,
the Company became an independent, publicly traded company. As a result of the Company’s acquisition by NHP, NHP’s acquisition cost was pushed down to the Company and all assets acquired were recorded
at their estimated fair value. This resulted in an increase of the recorded value of the Company’s servicing rights of $10,700, as well as recording approximately $5,100 of goodwill related to the
transaction and a deferred tax liability of approximately $3,200.

(2) Summary of Significant Accounting Policies

    (A) Basis of Presentation

    The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with the current year presentation.

F-8


    The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant estimates included in the financial statements relate to the valuation of mortgage-backed securities, mortgage loans
held for sale, servicing rights, net deferred tax assets, goodwill and accrued loan servicing portfolio losses.

    (B) Cash and Cash Equivalents

    The Company considers all highly liquid investments with an initial maturity of 90 days or less to be cash equivalents. These include cash, demand
deposits and overnight repurchase agreements.

    (C) Restricted Cash

    Restricted cash includes cash deposited at banks to cover escrow payables and money market funds that are used as collateral on a Federal National Mortgage
Association (“Fannie Mae”) Delegated Underwriting and Servicing (“DUS”) letter of credit. Restricted cash also includes cash deposited as collateral on a letter of credit related to the lease of one
of the Company’s offices.

    (D) Mortgage-Backed Securities

    The Company classifies its mortgage-backed securities as either held-to-maturity or as available-for-sale.
Securities that the Company has the ability and the intent to hold until maturity are classified as held-to-maturity and are recorded at amortized cost. Premiums and discounts
are amortized on a method which approximates the effective interest rate method. Mortgage-backed securities classified as available-for-sale, are carried at fair market value.
Unrealized holding gains and losses, if any, on available-for-sale securities, net of the related tax effect, are excluded from earnings and are reported as a separate
component of other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification
basis. See Note 4 for further discussion.

    (E) Mortgage Loans Held for Sale

    Mortgage loans held for sale are carried at the lower of aggregate cost or market as determined by outstanding commitments from investors or current investor
yield requirements. Gains and losses on the sale of loans are recognized upon settlement with investor. The Company does not anticipate prepayment of loans held for sale due to the Company’s short
holding period, which is typically less than three months. As of December 31, 1999 and 1998, there were no loans in the warehouse for a period greater than three months. Mortgage loans held for
sale are pledged as collateral against the Company’s warehouse lines of credit.

    (F) Investment in COMIT

    Commercial Mortgage Investment Trust, Inc. (“COMIT”) is a commercial mortgage Real Estate Investment Trust (“REIT”) of which the Company owns a
non-controlling minority interest (less than

F-9


20 percent).
The Company records its investment in COMIT at cost. See Note 15 for further discussion of COMIT.

    (G) Furniture, Equipment, and Leasehold Improvements

    Furniture, equipment and leasehold improvements are stated at cost, net of accumulated depreciation and amortization. Depreciation of furniture and equipment
is recognized using the straight-line method over the estimated useful life of the assets, which is approximately five years. Leasehold improvements are amortized over the shorter of the
estimated useful life of the asset or the lease term. Cost of maintenance and repairs are charged to expense as incurred.

    (H) Servicing Rights

    Servicing rights retained by the Company after the origination and sale of the related loans are capitalized by allocating the carrying amount between the loan
and the servicing rights based on their relative fair value. If it is not practicable to determine the servicing rights’ fair value then no value is allocated
to the servicing rights. The Company has determined that it is practicable to estimate the fair value of servicing rights related to permanent Federal Housing Administration (“FHA”) originated loans,
conduit servicing rights and, beginning in 1999, DUS servicing rights. The Company does not capitalize retained servicing rights for other loan types due to the limited secondary market for the
products and/or contractual terms which allow cancellation of the servicing contracts at any time with short notice.

    The
capitalization of these originated mortgage servicing rights increases net income for the period by the amount capitalized less related amortization and impairment, if any. The
income from originated mortgage servicing rights is included in the gain on sale of mortgage loans discussed below. Purchased servicing rights are initially recorded at their cost. Servicing rights
are amortized over their estimated life, which is generally seven years.

    All
capitalized mortgage servicing rights are evaluated for impairment and a valuation allowance is recognized if the carrying amount of the mortgage servicing rights exceed their
fair value. In measuring impairment, the servicing rights are stratified based on the interest rate and loan type of the underlying loan. The assumptions used in estimating the net cash flows are
based on market conditions and actual experience. Impairment, if any, is recognized through a valuation allowance for each stratum.

    (I) Goodwill

    Goodwill arising from acquisitions is determined based on the excess of the purchase price over the fair value of the assets acquired. The Company evaluates
the impairment of goodwill periodically or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is amortized on a straight-line
basis over periods which range from seven to twenty years.

    (J) Accrued Loan Servicing Losses

    The Company bears a portion of the credit risk associated with the loans it services as a result of its participation in the Fannie Mae DUS multifamily loan
program. The accrual for loan servicing losses represents management’s estimate of the losses, inherent on recourse loans underwritten to date. Management believes the current accrual reserve is
adequate to provide for such probable losses. Management

F-10


regularly
reviews the adequacy of this accrual, considering such items as changes in the composition of the Fannie Mae DUS portfolio, loan-to-value and debt service coverage
ratios of the underlying properties, the condition of the multifamily real estate market (by region, where applicable), the current interest rate environment, and general economic conditions. Based on
this assessment, the accrual is adjusted through the provision for loan servicing losses as considered necessary.

    (K) Servicing Fees

    Servicing fee income represents fees earned for servicing multifamily and commercial real estate mortgage loans owned by institutional investors, including
subservicing fees, net of guarantee fees, pool insurance fees and trustee fees. The fees are generally calculated on the outstanding principal balances of the loans serviced and are recorded as income
when collected. Late charge income is recognized as income when collected and is included in servicing fee income.

    (L) Gain on Sale of Mortgage Loans

    Gain on sale of mortgage loans consists of origination fees, commitment fees and income recognized on originated mortgage servicing rights. The gain on sale of
mortgage loans also includes the gain or loss recognized based upon the difference between the selling price and the carrying amount of the related mortgage loans sold, net of the allocation to
servicing rights for permanent FHA, Fannie Mae DUS and conduit originated loans. Origination fees and expenses, net of commitment fees paid in connection with the sale of the loans, are deferred and
are recognized at the time of sale as part of the gain or loss determination.

    (M) Gain on Sale of Servicing Rights

    Gain on sale of servicing rights is recognized based upon the difference between the selling price and the carrying amount of the related servicing rights
sold.

    (N) Placement Fee Income

    Placement fee income represents revenue earned from the placement and utilization of escrow funds. Income is recognized during the period in which it is
earned.

    (O) Management Fee Income

    Management fee income represents management revenue and incentive management revenue recorded by WMF Carbon Mesa for management of two commercial mortgage
funds (one of which is COMIT). Management revenue is generally earned based on the size of the portfolios under management. Incentive management revenue is earned when the returns to the investors in
the portfolios under management exceed predetermined levels for a specified period of time. Management fee income is recorded when earned.

    (P) Comprehensive Income

    Statement of Financial Accounting Standards (“SFAS”) No. 130, Reporting Comprehensive Income,
establishes standards for reporting and display of comprehensive income and its components and in total in

F-11


the
financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from
non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company adopted the requirements of
SFAS No. 130 on January 1, 1998. The Company has no items of other comprehensive income in 1999 or 1998.

    (Q) New Accounting Statements

    In June 1999, SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities—Deferral of the
Effective Date of FASB No 133, An Amendment of FASB Statement No. 133
, was issued. SFAS No. 137 delayed the effective date of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities
. SFAS No. 133 establishes accounting and reporting requirements for derivative
instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. If certain conditions are met, a derivative may be specifically designated as: (a) a hedge of certain exposures to changes in
the fair value of a recognized asset or liability or an unrecognized firm commitment; (b) a hedge of the exposure to variable cash flows of a recognized asset or liability or of a forecasted
transaction; or (c) a hedge of foreign currency exposure. SFAS No. 133, as amended, is now effective for the Company beginning January 1, 2001. Based on the Company’s current
operations, SFAS No. 133 is not expected to have a material impact on the Company’s financial position or results of operations.

(3) Acquisitions

    (A) Askew

    On April 15, 1997, WMF Washington Mortgage acquired the assets and liabilities of Askew Investment (“Askew”) in Dallas, Texas for approximately $5,600.
In accordance with the purchase agreement, $4,600 of the purchase price was paid upon closing with the remaining $1,000, plus interest, to be paid in the form of earnouts upon attainment of certain
performance objectives. The acquisition was accounted for as a purchase and resulted in initial goodwill, including transaction costs, of $4,875. During 1998 and 1997, respectively, $727 and $333 of
goodwill was recorded, as additional payments, including interest, were made in connection with the earnout agreement related to the acquisition. No further earnout payments are required related to
this transaction. The goodwill is being amortized on a straight-line basis over twenty years, which is the estimated life of the mortgage loan production operations acquired.

    (B) WMF Robert C. Wilson

    On November 5, 1997, WMF Washington Mortgage acquired 100 percent of the outstanding stock of The Robert C. Wilson Company and its Arizona
subsidiary (collectively “WMF Robert C. Wilson”), a Houston based commercial mortgage banking company. The purchase price of WMF Robert C. Wilson was approximately $4,000. In accordance with the
purchase agreement $3,200 was paid at closing and the remaining $800, plus interest, would be paid in the form of earnouts upon the attainment of certain performance objectives over a 42 month
period. The acquisition has been accounted for as a purchase and resulted in initial goodwill, including transaction costs, of $3,737. During 1999 and 1998, an additional $646

F-12


and
$267 of goodwill was recorded as payments, including interest, were made in connection with the earnout agreement related to the acquisition. No further earnout payments are required related to
this transaction. The goodwill is being amortized on a straight-line basis over twenty years, which is the estimated life of the mortgage loan production operations acquired.

    (C) WMF New York Urban

    On December 23, 1997, WMF Washington Mortgage acquired the assets and liabilities of New York Urban West, Inc. (“WMF New York Urban”), a New York
based commercial mortgage banking company for $4,900. In accordance with the purchase agreement, approximately $4,100 was paid in cash and the remaining $800, plus interest, would be paid in the form
of earnouts upon the attainment of certain performance objectives over a 42 month period. The acquisition has been accounted for as a purchase and resulted in initial goodwill, including
transaction costs, of $2,977. During 1999, $258 of goodwill was recorded as an additional payment was made in connection with the earnout agreement related to the acquisition. The goodwill is being
amortized on a straight-line basis over twenty years, which is the estimated life of the mortgage loan production operations acquired.

    (D) WMF Carbon Mesa

    On March 27, 1998, the Company created WMF Carbon Mesa, which purchased most of the assets of Carbon Mesa Advisors, Inc. and Strategic Real
Estate Partners for a purchase price of approximately $3,200. As part of this transaction, the Company also obtained the option to purchase the right to certain other intangible assets at a later
date. The initial purchase price was paid as $1,107 of cash and 91,000 shares of the Company’s common stock valued at $2,093.

    In
April 1999, the Company exercised its option and purchased the right to certain cash flow streams of Carbon Mesa Advisors, Inc., for a total cost of $1,705. This
purchase price was paid as $1,095 of cash, $427 in short-term notes and 28,479 shares of common stock valued at $183.

    The
WMF Carbon Mesa acquisition was accounted for as a purchase and resulted in initial goodwill, including transaction costs, of $3,391 in 1998. An additional $1,752 of goodwill,
including transaction
costs, was recorded in 1999 related to the exercise of the purchase option. The goodwill is being amortized on a straight-line basis over 20 years.

(4) Mortgage-Backed Securities

    Mortgage-backed securities include Government National Mortgage Association (“Ginnie Mae”) securities. These securities are classified as held to maturity. The
securities held will mature in the years 2028 and 2029 but may be prepaid prior to that time. The securities carry an AAA credit rating and are pledged as collateral for a letter of credit established
on behalf of Fannie Mae for loans originated under

F-13


the
DUS program. The following table contains certain information related to the Company’s investment in Ginnie Mae securities:
























































 
   
  Gross Unrealized
   
 
  Amortized

Cost

  Market

Value

 
  Gains
  Losses
Ginnie Mae securities held as of December 31, 1999   $ 3,763   $ 118   $ 105   $ 3,776
Ginnie Mae securities held as of December 31, 1998     3,795     18         3,813


    Mortgage-backed
securities also include a subordinated interest in certain commercial tenant leases (“CTLs”) retained by the Company after their origination and sale. This security is
classified as available-for-sale but the Company has not recognized increases in its fair value in excess of the amount at which the security may be called by the holder of the
related senior security. The CTLs are scheduled to mature in 2012. The CTLs are callable by the holder of the related senior security through January 1, 2002, at the Company’s original cost of
$2,400.

(5) Furniture, Equipment, and Leasehold Improvements

    As of December 31, 1999 and 1998, furniture, equipment and leasehold improvements consist of the following:





















































































 
  1999
  1998
Furniture and equipment   $ 6,636   $ 5,911
Capital lease         125
Leasehold improvements     969     933
   
 
      7,605     6,969
Less—accumulated depreciation and amortization     3,297     1,958
   
 
    $ 4,308   $ 5,011
   
 


(6) Servicing Rights

    During 1999 and 1998, the activity for servicing rights consisted of the following:

































































































 
  1999
  1998
 
Beginning balance, net   $ 26,243   $ 26,796  
Purchases     2,225     1,594  
Capitalization of servicing rights     11,096     5,980  
Book value of servicing rights sold, net         (2,974 )
Valuation allowance     (42 )    
Amortization     (6,046 )   (5,153 )
   
 
 
Ending balance, net   $ 33,476   $ 26,243  
   
 
 


    Impairment
of servicing rights is measured based on the excess of the carrying amount of the servicing rights over their current fair value. At December 31, 1999 the Company
had a $42 allowance for impairment. At December 31, 1998, no allowance for impairment in the Company’s mortgage servicing rights was necessary. The estimated fair value of the capitalized
mortgage servicing rights, computed on an

F-14


aggregate
basis, was approximately $77,736 and $51,200 at December 31, 1999 and 1998, respectively. The estimated fair value was determined using a discounted cash flow valuation model
incorporating prepayment, default, cost to service and interest rate assumptions to the underlying loans. This estimated fair value is not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions, valuation methodologies or both may have a material effect on the estimates of fair value.

(7) Loan Administration

    The Company services mortgage loans for institutional investors with aggregate principal balances of $13,356,041 and $12,141,933 at December 31, 1999
and 1998, respectively. Included in this portfolio are
approximately $12,734,104 and $11,553,866 of permanent multifamily and commercial loans, and $621,937 and $588,067 of construction loans at December 31, 1999 and 1998, respectively.

    At
December 31, 1999 and 1998, the Company serviced and subserviced loans for the following investors:












































































































 
  1999
  1998
 
  Loan

Count

  Principal

Outstanding

  Loan

Count

  Principal

Outstanding

Investor:                    
Federal National Mortgage Association   418   $ 3,140,541   353   $ 2,583,180
Government National Mortgage Association   353     1,961,947   283     1,411,756
Other Investors   2,477     8,253,553   2,518     8,146,997
   
 
 
 
Total Loans Serviced   3,248   $ 13,356,041   3,154   $ 12,141,933
   
 
 
 


    The
Company’s Fannie Mae DUS portfolio has the following geographic and interest rate concentrations as of December 31, 1999 and 1998, respectively:



































































































































 
  1999
  1998
 
State:          
Texas   18 % 18 %
California   11   8  
Nevada   6   7  
Other   65   67  
   
 
 
    100 % 100 %
   
 
 
Interest Rate:          
Less than 7.5%   58 % 35 %
7.5% to 9.49%   41   60  
Greater than 9.49%   1   5  
   
 
 
    100 % 100 %
   
 
 


F-15





    In
addition, the Company makes advances in accordance with certain of its servicing agreements pending receipt from the mortgagors. Such advances amounted to $1,492 and $2,588 at
December 31, 1999 and 1998, respectively.

    Related
escrow funds of approximately $343,493 and $305,368 at December 31, 1999 and 1998, respectively, are on deposit in escrow bank accounts and are not included in the
accompanying consolidated balance sheet. As of December 31, 1999, the Company carried blanket bond insurance coverage of $14,100 and errors and omissions insurance coverage in the amount of
$19,100.

    The
Company bears the Level I risk of loss associated with the loans it services under the Fannie Mae DUS program. The Level I risk of loss imposes a lender deductible of
5 percent of the unpaid principal balance and limits the maximum risk of loss to 20 percent of the original mortgage. The unpaid principal balance of the Fannie Mae DUS loan servicing
portfolio was approximately $2,007,123 and $1,500,510 at December 31, 1999 and 1998, respectively. The DUS loans are secured by first liens on the underlying multifamily properties. The
Company’s portfolio includes two states (Texas and California) that comprise over 10 percent of the total portfolio. No other state comprises over 10 percent of the Fannie Mae DUS
portfolio. No Fannie Mae DUS loans were delinquent as of December 31, 1999 and 1998. The Company has provided a reserve for losses which represents management’s estimate of inherent losses on
loans that are currently being serviced of which the Company bears some risk of loss.

    Activity
in the accrued loan servicing losses is summarized as follows:


































































 
  1999
  1998
  1997
Balance, beginning of period   $ 6,253   $ 5,125   $ 4,396
Provision for loan servicing losses     795     1,128     729
   
 
 
Balance, end of period   $ 7,048   $ 6,253   $ 5,125
   
 
 


(8) Debt Facilities

    As part of the Company’s overall recapitalization, the Company’s debt facilities were refinanced in February 1999. The following is a description of the
Company’s current debt facilities as well as those that existed prior to the refinancing, by type of facility. The Company’s servicing rights collateralize these facilities. In addition, the warehouse
lines of credit are secured by the mortgage loans held for sale.

    (A) Warehouse Lines of Credit

    In February 1999, the Company replaced its two warehouse lines of credit with a $150,000 warehouse line of credit (the “New Warehouse Line”). The New
Warehouse Line can be drawn upon for purposes of originating loans. The New Warehouse Line is required to be repaid with interest upon sale of the mortgage loans and matures in July 2000. The
interest rate on the New Warehouse Line is one percent, to the extent borrowings are equal to or less than compensating balances maintained, and is equal to the one-month London InterBank
Offered Rate (“LIBOR”) plus one percent on amounts borrowed in excess of compensating balances. The outstanding balance of the New Warehouse Line at December 31, 1999 was $15,408.

F-16


    In
February 1999, the Company obtained two additional warehouse lines to be used only for servicing advances. The credit limit on the these warehouse lines is $5,000 each.
These warehouse lines replaced the $4,000 and $5,000 advance portions of the $35,000 warehouse line described below. The interest rates on the servicing advances are 1.5 percent and
2.0 percent, respectively, to the extent borrowings are equal to or less than compensating balances maintained, and are equal to one-month LIBOR plus 1.5 percent or
2.0 percent, respectively, on amounts borrowed in excess of the compensating balances. Interest and principal is payable monthly and the balance of these advance lines are required to be zero
for at least seven consecutive days during each month. There was no outstanding balance on either of the servicing advance warehouse lines as of December 31, 1999.

    Prior
to February 1999, the Company had two warehouse lines of credit which totaled $185,000 (one for $150,000 and another for $35,000) which were used for the same purpose and
were collateralized by the same assets as the New Warehouse Line. The interest rate on the $150,000 warehouse line of credit was .75 to 1.0 percent for 1997 and 1998, to the extent borrowings
were equal to or less than compensating balances maintained, and was equal to one-month LIBOR plus .75 to 1.0 percent for 1997 and 1998 for amounts borrowed in excess of
compensating balances. The interest rate on the $35,000 warehouse line of credit was .75 percent to the extent borrowings were equal to or less than compensating balances maintained and was
equal to the one-month Euro-Rate plus .75 percent for amounts borrowed in excess of compensating balances. The outstanding balance on these lines of credit (excluding
advance lines described below) was $34,756 as of December 31, 1998.

    The
$35,000 warehouse line of credit could also be used for principal and interest advances and working capital purposes with credit limits of $4,000 to $5,000, respectively. The
terms on these advance lines were substantially the same as the terms on the two new servicing advance warehouse lines described above. The outstanding balance on this portion of the $35,000 warehouse
line of credit was $4,763 as of December 31, 1998.

    (B) Revolving Credit Facilities

    In February 1999, the Company obtained a $25,000 revolving credit agreement to be used for servicing acquisitions and working capital purposes. This
facility replaced the $10,000 secured revolving credit agreement and the $35,000 secured credit line described below. The facility matures in February 2002. The interest rate on the revolving
credit facility is 2.5 percent to the extent borrowings are equal to or less than compensating balances maintained and is equal to one-month LIBOR plus 2.5 percent on
borrowings in excess of compensating balances. Interest is payable monthly. The outstanding balance on this revolving credit agreement was $14,320 as of December 31, 1999.

    Prior
to February 1999, the Company had a $10,000 secured revolving credit agreement to be used for servicing acquisitions and working capital purposes. This revolving credit
agreement was renewable
annually through November 2002 and required monthly interest payments. The interest rate on the $10,000 secured revolving credit agreement was 2.5 percent to the extent borrowings were
equal to or less than compensating balances maintained and was equal to one-month LIBOR plus 2.5 percent on borrowings in excess of compensating balances. The outstanding balance on
this revolving credit agreement was $10,000 as of December 31, 1998. This secured revolving credit agreement was repaid in February 1999.

F-17




    Prior
to February 1999, the Company also had a $35,000 secured revolving line of credit, which was utilized to finance the acquisition of commercial mortgage banking companies
and related activities. The interest rate on this facility was 3.0 percent to the extent borrowings were equal to or less than compensating balances maintained and was equal to
one-month LIBOR plus 3.0 percent on amounts borrowed in excess of the compensating balances. Interest was payable monthly. The outstanding balance on this secured revolving line of
credit was $21,519 as of December 31, 1998. This secured revolving line of credit was repaid in February 1999.

    (C) Term Loans

    In February 1999, the Company obtained a $25,000 term loan to be repaid in twenty quarterly installments based on a 10-year amortization
schedule beginning on March 31, 1999. The interest rate on the term loan is 3.0 percent to the extent borrowings are equal to or less than compensating balances maintained and is equal
to one-month LIBOR plus 3.0 percent on borrowings in excess of compensating balances. Interest is payable monthly. The outstanding balance on the $25,000 term loan was $22,500 as of
December 31, 1999. The remaining principal balance due on this loan will mature as follows: $1,875 in 2000, $2,500 in each year from 2001 to 2003 and $13,125 in February 2004.

    Prior
to February 1999, the Company had a servicing acquisition loan which was to be repaid in twenty equal quarterly installments based on a 10-year amortization
schedule beginning in October 1996, with the remaining balance due in June 2001. Interest was payable monthly. The interest rate on the servicing loan was 3.0 percent to the
extent borrowings were equal to or less than compensating balances maintained and was equal to one-month LIBOR plus 3.0 percent on borrowings in excess of compensating balances. The
outstanding balance on the servicing loan was $4,212 as of December 31, 1998. This loan was repaid in February 1999.

    (D) Subordinated Note

    On September 4, 1998, the Company issued $20,000 of subordinated debt to COMIT. From this borrowing, the Company used $10,000 to repay a portion of the
credit line with another lender and the balance of $10,000 was used for working capital purposes. The subordinated note was subordinate in right of payment to certain of the Company’s senior
indebtedness, was unsecured and bore interest at a rate of 11 percent through January 31, 1999, and 15 percent from February 1, 1999, through the maturity date of
May 31, 1999. Interest was payable on January 29, 1999, at maturity and upon repayment of principal. In connection with the COMIT subordinated debt agreement, the Company also issued to
COMIT warrants to purchase 1,200,000 shares of the Company’s common stock at an exercise price of $11.25 per share. The Company repaid $16,099 of the subordinated note on December 31, 1998, and
as part of the sale of approximately $16,600 of Class A Preferred Stock discussed in Note 10, the warrants were surrendered. The Company repaid the remainder of the subordinated note in
March 1999.

    (E) Other

    The Company’s debt agreements require maintenance of certain financial ratios relating to liquidity, leverage, working capital, and net worth among other
restrictions. The Company was in compliance with these ratio requirements at December 31, 1999 and 1998.

F-18


    Following
is certain information relating to the Company’s various credit agreements for the years ended December 31, 1999 and 1998, respectively.
















































































































































 
  Outstanding

Balance at

December 31,

1999

  Average

Balance

Outstanding

  Maximum

Balance

Outstanding

  Interest Rate at

December 31,

1999

  Average

Interest

Rate

$150,000 warehouse line   $ 15,408   $ 55,124   $ 180,597   1.03 % 1.58%
$10,000 warehouse line         3,946     8,832   1.84 % 1.80%
$25,000 revolving credit facility     14,320     15,701     19,731   2.58 % 4.10%
$25,000 term note     22,500     23,162     25,000   3.10 % 3.46%
$35,000 warehouse line         4,801     20,876     0.76%
$45,000 revolving credit facilities         21,388     31,519     4.31%
Servicing acquisition loan         2,858     4,212     2.95%
Subordinated note         3,104     3,901     15.22%


















































































 
  Outstanding

Balance at

December 31,

1998

  Average

Balance

Outstanding

  Maximum

Balance

Outstanding

  Interest Rate at

December 31,

1998

  Average

Interest

Rate

$185,000 warehouse lines   $ 39,519   $ 71,159   $ 170,815   2.58 % 1.28%
$45,000 revolving credit facilities     31,519     24,684     41,519   10.18 % 3.92%
Servicing acquisition loan     4,212     4,844     5,462   3.10 % 3.04%
Subordinated note     3,901     19,037     20,000   11.00 % 11.00%


(9) Income Taxes

    As a result of the acquisition of the Company by NHP, the Company filed consolidated Federal tax returns with NHP from April 1, 1996 through
May 8, 1997. Since then, the Company has filed consolidated tax returns on its own behalf. The Company has recorded income tax expense or benefit as if it filed a return on a stand-alone basis
for all periods presented. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.

F-19




    Income
tax expense (benefit) attributable to income (loss) before income taxes for the years ended December 31, 1999, 1998 and 1997 consisted of the following:




















































































































































































 
  1999
  1998
  1997
 
Federal:                    
Current   $ (1,202 ) $   $ 2,092  
Deferred     3,297     (17,729 )   (90 )
   
 
 
 
      2,095     (17,729 )   2,002  
   
 
 
 
State:                    
Current     680     1,498     327  
Deferred     1,397     (2,835 )    
   
 
 
 
      2,077     (1,337 )   327  
   
 
 
 
Total   $ 4,172   $ (19,066 ) $ 2,329  
   
 
 
 


    The
following is a summary of the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities.





































































































































































































































 
  1999
  1998
  1997
 
Deferred tax assets:                    
Reserve for loan servicing losses   $ 2,819   $ 2,501   $ 2,050  
Mark to market valuation allowance         374      
Net operating loss carryforwards     20,030     21,563      
   
 
 
 
Gross deferred tax assets     22,849     24,438     2,050  
Less valuation allowance     (150 )   (560 )    
   
 
 
 
Deferred tax assets, net of valuation allowance     22,699     23,878     2,050  
   
 
 
 
Deferred tax liabilities:                    
Originated mortgage servicing rights     (9,810 )   (6,472 )   (5,238 )
Other     (293 )   (116 )   (86 )
   
 
 
 
Gross deferred tax liabilities     (10,103 )   (6,588 )   (5,324 )
   
 
 
 
Net deferred tax asset (liability)   $ 12,596   $ 17,290   $ (3,274 )
   
 
 
 


F-20


    A
reconciliation of the statutory Federal and state income tax rates to the Company’s effective income tax rates follows:





























































































 
  1999
  1998
  1997
 
Federal statutory tax rate (benefit)   34 % (35 )% 35 %
State income tax rate   6   (3 ) 5  
Change in valuation allowance   (8 ) (1 )  
Adjustment to net deferred tax asset   37      
Goodwill amortization   9   3   9  
   
 
 
 
Effective tax rate   78 % (36 )% 49 %
   
 
 
 


    At
December 31, 1999, the Company had a $20,030 deferred tax asset recorded related to Federal and state net operating loss carryforwards (“NOLs”). These NOLs relate to the
Company’s losses during 1998. Substantially all of the state portion of the NOLs, which total $2,600, expire, if unused, in 2003. The remaining Federal NOLs expire in 2018. The Company will have to
generate sufficient taxable income, within the carryforward periods and in the appropriate tax jurisdiction, in order to realize this net deferred tax asset. The Company believes its future levels of
pretax earnings for financial reporting purposes will be sufficient to generate the minimum amount of future taxable income needed to realize the net deferred tax asset. The Company has also
identified the possible disposition of assets as a means of generating future taxable income if enough taxable income is not derived from recurring operations in order to realize the deferred tax
asset during the carryforward periods. Management believes that it is more likely than not the Company will realize the benefits of these assets, net of the existing valuation allowance for state
deferred taxes at December 31, 1999. However, in the event of a change of control of the Company, or certain other material changes in the Company’s business, the Company would have to
establish additional valuation allowances against the deferred tax asset.

(10) Stockholders’ Equity

    (A) Recapitalization

Sale
of Preferred Stock

    On
December 31, 1998, the Company’s three largest stockholders purchased a total of 3,635,972 shares of a new class of capital stock called Class A
Non-Voting Convertible Preferred Stock (“Preferred Stock”) for an aggregate purchase price of approximately $16,600. Proceeds from the sale of the Preferred Stock were used to partially
repay the subordinated note due to COMIT.

    On
January 14, 1999, each outstanding share of Preferred Stock was converted into one share of the Company’s common stock, after the Federal Trade Commission informed the
Company that it would not object to the conversion. As a result of the conversion, the Company’s three largest stockholders received a total of 3,635,972 shares of common stock.

    Also
as part of the transaction, the warrants to purchase 1,200,000 shares of common stock at a price of $11.25 per share that were issued in connection with the purchase of $20,000
of the Company’s subordinated note by COMIT were surrendered. In addition, the Company’s three largest stockholders

F-21


further
agreed to a stand-by purchase commitment to purchase up to 664,028 shares of the Company’s common stock for up to $3,300 following the rights offering, as described below.

    Because
of their participation in this transaction, the Company’s three largest stockholders agreed not to exercise, transfer or acquire any rights during the rights offering.

    Public
Rights Offering

    The
Company issued to each of its stockholders of record as of February 1, 1999, 1.072 transferable rights for each share of common stock held by them on that date. Each right
entitled its holder to purchase one share of common stock for $5.00. The rights expired on March 8, 1999.

    Through
the rights offering the Company sold a total of 1,482,271 shares of common stock for proceeds of approximately $7,400. On March 19, 1999, the Company’s three largest
stockholders completed the purchase of a total of 664,028 shares of the Company’s common stock, pursuant to the standby commitment, for proceeds to the Company of approximately $3,300.

    The
Company used the proceeds from the rights offering to repay the remaining subordinated note held by COMIT and for other operating purposes.

    (B) Other

    On December 30, 1998, the Company issued 250,000 warrants as part of a settlement agreement between the Company and a WMF Capital Corp. customer. The
Company recorded the issuance of the warrants at their estimated fair market value, which resulted in recording expense of $221. The warrants permit the holder to purchase 150,000 shares of the
Company’s common stock at $9.70 per share and 100,000 shares of the Company’s stock at $5.90 per share. The $9.70 and $5.90 warrants expire in December 2002 and 2003, respectively. The exercise
price of the warrants may be adjusted upon the occurrence of certain dilutive events.

    On
March 31, 1999, one of the Company’s three largest stockholders purchased 34,520 additional shares of common stock for proceeds to the Company of $186.

    On
June 23, 1999, the Company issued 250,000 additional warrants as part of a settlement agreement between the Company and another WMF Capital Corp. customer. The Company
recorded the issuance of the warrants at their estimated fair market value, which resulted in recording expense of $960. The warrants permit the holder to purchase 250,000 shares of the Company’s
common stock at $6.25 per
share and expire in June 2009. The exercise price of the warrants may be adjusted upon the occurrence of certain dilutive events.

    During
1999, the Company also accrued the cost of 70,000 warrants issuable to a vendor in payment for services. The Company recorded the warrants at their estimated fair market value,
which resulted in recording expense of $108. The warrants permit the holder to purchase 70,000 shares of the Company’s common stock at $7.00 per share and expire on December 31, 2001. Under the
vendor agreement, 10,000 additional warrants accrue each month up to a total of 150,000. The awarding of the remaining warrants may be accelerated if certain events occur.

    In
May 1999, the Company established a stock repurchase program. The Company’s Board of Directors has authorized the acquisition of up to $3,000 of the Company’s common stock.
Through

F-22


December 31,
1999, 424,800 shares had been repurchased at an aggregate cost of $2,317, or an average cost of $5.46 per share.

(11) Earnings per share

    Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings
per share is calculated by adjusting the outstanding shares by assuming conversion of all potentially dilutive stock options, warrants and assuming the issuance of unvested restricted stock.

    The
following is a reconciliation of basic earnings per common share and diluted earnings per common share for the years ended December 31, 1999, 1998 and 1997.




































































































































 
  1999
  1998
  1997
Net income (loss)   $ 1,155   $ (33,322 ) $ 2,442
Determination of Shares (in thousands):                  
Weighted average common shares outstanding     10,346     5,224     4,272
Assumed conversion of stock options, warrants and unvested restricted stock     240         180
   
 
 
Diluted weighted average common shares outstanding     10,586     5,224     4,452
   
 
 
Basic earnings per common share   $ 0.11   $ (6.38 ) $ 0.57
   
 
 
Diluted earnings per common share   $ 0.11   $ (6.38 ) $ 0.55
   
 
 


(12) Stock and Stock Option Plans

    The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(“APB
25”) and related interpretations in accounting for its stock-based employee compensation arrangements, including employee stock options and restricted stock awards. Certain options granted by
the Company have exercise prices less than the market price of the underlying stock on the date of grant. In accordance with APB 25, compensation expense is being recognized on these stock options
over their vesting periods. Compensation expense related to restricted stock awards is also being recognized over their vesting periods.

    As
part of the spin-off of the Company from NHP, the Company granted options to certain key employees to purchase common shares under its Key Employee Incentive Plan
(“KEIP”). On December 8, 1997, the Company granted 271,250 non-qualified stock options at an exercise price of $9.15 per share. The options vest ratably over five years and are
contingent upon continued employment of the individual and other factors as set forth in the agreement. These options were deemed to have been issued with an exercise price below market and,
therefore, compensation expense of $119, $288 and $343 was recognized in the years ended December 31, 1999, 1998 and 1997, respectively, related to these options.

    Also
as part of the spin-off, the Company agreed to honor the options held by NHP employees for NHP shares by converting the outstanding options to options for shares of
the Company based on the

F-23




underlying
terms of the spin-off. No compensation expense was recorded related to these options. The Company granted 265,415 options in 1997 related to the conversion of the NHP options.

    The
Company also issued options under its prior employee stock purchase plan during December 1997. Employees exercised the right to purchase 131,677 shares at a purchase price
of $9.15 per share and 6,675 shares at a purchase price of $0.25 per share. The Company incurred compensation expense of $750 related to the issuance of these options. Subsequent to
December 1997, no options under this plan were outstanding.

    In
June 1999, the Company granted 522,500 non-qualified stock options to certain of its employees under its KEIP. These options were granted at an exercise price of
$7.00 per share. The options vest over 31 months, have a ten-year life and are contingent upon continued employment of the individual and other factors as set forth in the
agreement. No compensation expense was recorded related to these options.

    In
December 1999, 1998 and 1997, the Company issued 5,000 non-qualified stock options to each of its non-employee members of the Board of Directors (a
total of 30,000 options each year). The exercise price of these options was the market price of the Company’s common stock on the date of each grant. Therefore, no expense was recognized upon issuance
of these options. The options awarded to the Board of Directors vest 100 percent six months after the grant date and have a ten-year life.

    No
options were granted prior to the fiscal year ended December 31, 1996. The following tables summarize the Company’s stock option activity for the years ended
December 31, 1999, 1998 and 1997:































































































































































































 
  Options
  Range of

Exercise

Prices

  Weighted

Average

Exercise

Price

Balance, December 31, 1996          
Granted   707,017   $ .25-9.15   $ 7.79
Exercised   (150,273 )   4.88-9.15     8.81
Forfeited          
   
 
 
Balance, December 31, 1997   556,744     3.96-9.15     7.51
Granted   606,104     3.96-26.12     12.12
Exercised   (126,073 )   9.15-26.12     13.99
Forfeited   (15,429 )   11.63     11.63
   
 
 
Balance, December 31, 1998   1,021,346     3.96-15.00     10.07
Granted   552,500     5.75—7.00     6.83
Exercised          
Forfeited   (516,850 )   6.73-15.00     12.24
   
 
 
Balance, December 31, 1999   1,056,996   $ 3.96-9.15   $ 7.25
   
 
 


F-24


    The
following table provides certain information with respect to stock options outstanding and exercisable as of December 31, 1999:













































































































 
  Options Outstanding
  Options Exercisable
Range of Prices

  Number of

Options

  Weighted

Average

Remaining

Life

  Weighted

Average

Exercise

Price

  Number of

Options

  Weighted

Average

Exercise

Price

$3.96-4.88   101,829   2.21 yrs   $ 4.41   101,829   $ 4.41
$5.75-7.00   656,667   9.10 yrs     6.83   276,042     6.73
$9.15   298,500   8.19 yrs     9.15   160,900     9.15
   
 
 
 
 
$3.96-9.15   1,056,996   8.18 yrs   $ 7.25   538,771   $ 7.02
   
 
 
 
 


    At
December 31, 1999, there were 468,882 additional shares available for grant under the KEIP.

    The
Company also granted 125,625, 118,000 and 20,000 restricted shares under its Key Employee Deferred Compensation Plan in 1999, 1998 and 1997, respectively. Compensation expense for
the restricted shares is being recognized over the vesting period. The vesting period ranges from 13 months to five years. Vesting of the shares is contingent upon continued employment of the
individual and other factors as set forth in the agreement. For 70,000 of the shares granted in 1998 (the “Performance
Shares”), vesting is also contingent upon the achievement of certain performance objectives. Compensation expense related to Performance Shares will not be recognized until the performance objectives
have been satisfied. The Company recognized compensation expense related to restricted shares of $223, $34 and $0 in 1999, 1998 and 1997, respectively.

    The
weighted average fair value of restricted stock granted during the years ended December 31, 1999, 1998 and 1997 was $5.75, $6.26 and $9.15 per share, respectively, based on
the market value at the date of grant.

    The
weighted average fair value of options granted during the years ended December 31, 1999, 1998 and 1997 was $4.60, $3.78 and $9.19 per share, respectively, and were
estimated using the Black—Scholes options valuation model with the following weighted average assumptions:





















































 
  1999
  1998
  1997
 
Expected life in years   10.0   10.0   8.6  
Risk free interest rate   5.96 % 4.75 % 4.75 %
Volatility   58.5%   20.0%   20.0%  
Dividend yield   0.0%   0.0%   0.0%  


    The
Company applies APB 25 in accounting for its stock based compensation plans and has adopted the disclosure only provisions of SFAS 123,
Accounting
for Stock-Based Compensation.
Under APB 25, no compensation cost has been recognized for certain of the Company’s stock options awards because the option exercise price was
equal to the fair market price of the common stock on the date of the grant. Under SFAS 123, stock options are valued at grant date using the Black-Scholes valuation model and compensation
costs are recognized ratably over the vesting period of the options (generally five years). If

F-25


the
Company had determined compensation cost as prescribed by SFAS 123, the Company’s net income and net income per common share would have been reduced to the pro forma amounts indicated
below:
























































































































 
  1999
  1998
  1997
Net income (loss):                  
As Reported   $ 1,155   $ (33,322 ) $ 2,442
Pro forma     681     (34,154 )   2,244
Net income (loss) per common share—Basic:                  
As Reported   $ 0.11   $ (6.38 ) $ 0.57
Pro forma     0.07     (6.54 )   0.53
Net income (loss) per common—Diluted:                  
As Reported   $ 0.11   $ (6.38 ) $ 0.55
Pro forma     0.06     (6.54 )   0.50


(13) Employee Benefit Plans

    The Company has a defined contribution plan under Section 401(k) of the Internal Revenue Code covering substantially all employees. Employees may
contribute to the plan up to 15 percent of their salary, up to the maximum allowable by the Internal Revenue Code. Beginning in 1999, the Company will match each participating employee’s
contributions at 100 percent up to 3 percent of their salary and will match each participating employee’s contributions at 50 percent of the next 2 percent of their salary.
Prior to 1999, the Company matched each participating employee’s contributions at 50 percent for an amount up to 5 percent of their salary. Company contributions vest 20 percent
after the first year of employment and an additional 20 percent in each subsequent year until fully vested in the fifth year. The Company, at its discretion, may also make profit sharing
contributions to the plan. Contributions by the Company were $572, $285 and $168 for the years ended December 31, 1999, 1998 and 1997, respectively.

    In
July 1998, the Company established a qualified Employee Stock Purchase Plan (“ESPP”). Beginning in October 1998, the ESPP allows substantially all employees to
participate in the purchase of designated shares of the Company’s common stock through payroll deductions at a price equal to 95% of
the closing price at the beginning of each quarterly stock purchase period. The Company issued 5,922 shares of common stock during 1999 under the ESPP plan at an average price of $5.09 per share. No
shares were issued under the ESPP in 1998.

F-26







(14) Commitments and Contingencies

    (A) Leases

    The Company is obligated under noncancelable leases for office space, furniture and equipment. Minimum future lease payments are as follows as of
December 31, 1999:




























































Year

  Amount
2000   $ 4,750
2001     3,098
2002     2,752
2003     2,206
2004     1,867
Thereafter     4,675
   
Total   $ 19,348
   


    Rent
expense was $4,590, $3,438 and $1,594, in the years ended December 31, 1999, 1998 and 1997, respectively.

    (B) Commitments

    The Company enters into commitments to extend credit to borrowers in the normal course of business. Normally, the Company simultaneously commits to sell the
loan to an appropriate investor. Because the commitment for the loan normally occurs simultaneously with the investor commitment, the Company limits its exposure to interest rate changes for these
transactions. As of December 31, 1999, the Company had floating rate and fixed rate commitments outstanding to originate multifamily and commercial mortgage loans in the approximate amounts of
$91,000 and $108,000, respectively, with pre-existing investor sales commitments. In addition at December 31, 1999, WMF Carbon Mesa had a floating rate forward commitment to a
borrower in the amount of $58,000, without a pre-existing investor sale commitment.

    The
Company has established a letter of credit of $7,800 on behalf of Fannie Mae for the DUS program as of December 31, 1999. The Fannie Mae DUS letter of credit is secured by
cash equivalents and mortgage-backed securities with a market value of $8,431 as of December 31, 1999. The Company
also has outstanding an $800 letter of credit related to the lease of certain office space. This letter of credit is secured by cash on deposit with a bank of $837.

    As
of December 31, 1999, the Company has a commitment to invest up to an additional $5,710 in COMIT. This commitment expires June 12, 2000.

    (C) Litigation

    Two lawsuits were filed against WMF Capital Corp. alleging, among other things, a breach by WMF Capital Corp. of its commitment to lend funds to the respective
plaintiffs. These lawsuits have been settled and dismissed at or below amounts previously accrued.

F-27


    The
Company is involved in other litigation related to the normal course of its business. Management is of the opinion that the litigation will not have a material adverse impact on
the Company’s financial position or results of operations.

(15) Related Party Transactions with COMIT

    In June 1998, the Company began investing in COMIT, a commercial mortgage REIT of which the Company owns a non-controlling minority interest
(less than 20 percent). COMIT invests in multifamily and commercial mortgages, primarily those originated by the Company that are not sold in securitizations (during 1998) or to other
institutional investors. These types of multifamily and commercial loans include bridge, mezzanine and structured transactions. Two of the Company’s major stockholders are also major stockholders of
COMIT.

    As
of December 31, 1999 and 1998, the Company’s investment in COMIT was $1,594 and $3,780, respectively. At December 31, 1998, the Company owed a subordinated note to
COMIT in the amount of $3,901. This note was repaid in March 1999. In addition, WMF Carbon Mesa is the fund manager for COMIT and received $2,046 and $137 in management fees for services
rendered to COMIT during 1999 and 1998, respectively. WMF Huntoon Paige services loans for COMIT and received fees of $80 and $3 in 1999 and 1998, respectively. The Company also has a commitment to
invest up to an additional $5,710 in COMIT.

(16) Disclosures of Fair Value of Financial Instruments

    The Company is required to disclose the estimated fair values for its financial instruments. The basic assumptions used and the estimates disclosed represent
management’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to management. In certain cases, fair values are not subject to precise
quantification or verification and may change as economic and market factors, and management’s evaluation of those factors change.

    Although
management uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique. Therefore, these
fair value estimates are not
necessarily indicative of the amounts that the Company would realize in a market transaction.

F-28




    The
following fair values do not represent an estimate of the overall market value of the Company as a going concern, which would take into account future business opportunities.


















































































































































































































































 
  1999
  1998
 
  Carrying

Value

  Fair

Value

  Carrying

Value

  Fair

Value

Assets:                        
Cash, cash equivalents and restricted cash   $ 9,815   $ 9,815   $ 22,295   $ 22,295
Mortgage-backed securities     6,163     6,176     6,195     6,213
Mortgage loans held for sale, pledged     15,381     15,381     34,217     34,217
Investment in COMIT     1,594     1,594     3,780     3,780
Servicing rights, net     33,476     77,736     26,243     51,200
Liabilities:                        
Warehouse lines of credit     15,408     15,408     39,519     39,519
Revolving credit facility     14,320     14,320     31,519     31,519
Term loan     22,500     22,500        
Subordinated note             3,901     3,901
Servicing acquisition loan             4,212     4,212
   
 
 
 
Off-balance sheet instruments:                        
Non-capitalized servicing rights   $   $ 45,636   $   $ 35,570


    The
following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value.

    (A) Cash, Cash Equivalents, and Restricted Cash

    For cash, cash equivalents, and restricted cash, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the
origination of the instruments and their expected realization.

    (B) Mortgage-Backed Securities

    The fair value of the Ginnie Mae portion of the mortgage-backed securities was estimated based on bid quotations received from securities dealers. The CTL
portion of the mortgage-backed securities are carried at fair value which was determined as the lower of its call value or the present value of the related cash flows discounted at an appropriate risk
adjusted rate.

    (C) Mortgage Loans Held for Sale, Pledged

    For mortgage loans held for sale, fair value was estimated based on outstanding commitments from investors or current inventory yield requirements calculated
on an aggregate basis. The fair market value of loans held for sale also includes the fair value of commitments to extend credit to borrowers for which a pre-existing investor sale
commitment does not exist. The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counter parties. For fixed-rate loan commitments, fair

F-29


value
also considers the difference between current levels of interest rates and the committed rates. The fair value of such commitments is considered in the calculation of the lower of cost or market
calculations for mortgage loans held for sale.

    (D) Servicing Rights (Capitalized and Non-capitalized)

    The estimated fair value was determined using a discounted cash flow valuation model incorporating prepayment, default, cost to service and interest rate
assumptions to the underlying loans.

    (E) Warehouse Lines of Credit, Servicing Acquisition Loan and Revolving Credit Facility

    The estimated fair value of the warehouse lines of credit, servicing acquisition loan and revolving credit facility, each of which are short-term
liabilities with variable interest rates, approximates their carrying values.

    (F) Term Loan

    The carrying value of the term loan approximates its estimated fair value, which is based on interest rates that are currently available to the Company for
issuance of debt with similar terms and remaining maturities.

    (G) Off-balance Sheet

    The Company may use a variety of off-balance sheet investment products as part of its risk management strategy and in its loan origination
activities. The most frequently used off-balances sheet investment products are various types of interest rate swaps and forward rate agreements. Off-balance sheet investment
products are typically classified as hedges. The Company does not enter into financial instruments for trading purposes. As of December 31, 1999 and 1998, the Company had no
off-balance sheet investments outstanding. During 1999, the Company did not enter into any off-balance sheet investments.

(17) Balance Sheet Classification

    The Company prepares its consolidated balance sheet using an unclassified balance sheet presentation as is customary in the mortgage banking industry. A
classified presentation would have aggregated current assets, current liabilities, and net working capital as follows:

























































 
  1999
  1998
 
Current assets   $ 26,688   $ 49,980  
Current liabilities     29,455     55,649  
   
 
 
Net working capital (deficit)   $ (2,767 ) $ (5,669 )
   
 
 


(18) Segment Reporting

    Beginning in 1998, the Company has divided its operations into three reportable business segments; Mortgage Banking, Advisory Services and Capital Markets
based primarily on similarities in economic

F-30


characteristics,
products and services and type of customer. Only one reportable business segment existed prior to 1998.

    The
reporting segments follow the same accounting policies used for the Company’s consolidated financial statements which are described in the summary of significant accounting
policies. Management
evaluates a segment’s performance based on earnings before non-operating interest expense and taxes. The Mortgage Banking segment includes corporate administrative expenses.

    The
following table sets forth both information derived from the Company’s consolidated statements of operations and reconciles the summary segment information to the consolidated
statement of operations for each of the years ended December 31, 1999, 1998 and 1997:






































































































































































































































































































 
  1999
  1998
  1997
Revenue:                  
Mortgage Banking (1)   $ 64,435   $ 67,567   $ 44,645
Advisory Services     2,486     1,490    
Capital Markets     935     3,484    
   
 
 
Total     67,856     72,541     44,645
Expenses:                  
Mortgage Banking (1)   $ 56,455   $ 59,169   $ 39,116
Advisory Services     2,446     2,114    
Capital Markets     1,471     60,379    
   
 
 
Total     60,372     121,662     39,116
Earnings (loss) before non-operating interest expense and taxes:                  
Mortgage Banking (1)     7,980     8,398     5,529
Advisory Services     40     (624 )  
Capital Markets     (536 )   (56,895 )  
   
 
 
Total     7,484     (49,121 )   5,529
Non-operating interest expense     2,157     3,267     758
   
 
 
Pretax income (loss)     5,327     (52,388 )   4,771
Provision (benefit) for income taxes     4,172     (19,066 )   2,329
   
 
 
Net income (loss)   $ 1,155   $ (33,322 ) $ 2,442
   
 
 





(1)
The
Mortgage Banking segment includes corporate administrative expenses.

F-31




    The
following table sets forth information derived from the Company’s consolidated balance sheet for the date presented:


























































































 
  1999
  1998
  1997
Assets:                  
Mortgage Banking   $ 97,980   $ 131,264   $ 119,331
Advisory Services     6,165     4,705    
Capital Markets     7,116     8,558    
   
 
 
Total   $ 111,261   $ 144,527   $ 119,331
   
 
 


    The
Mortgage Banking segment includes corporate and administration assets.

(19) Subsequent Events

    In March of 2000, the Company entered into an agreement whereby the Company invested $1,980 to acquire a 10% interest in a newly formed entity. The only assets
of this newly formed entity are
performing variable rate multifamily and commercial loans totaling approximately $133,500. The Company will account for its investment at cost. WMF Carbon Mesa will be the manager of the newly formed
entity’s portfolio and WMF Huntoon Paige is expected to become the servicer on the loans.

F-32














EX-10.19
2
EXHIBIT 10.19

Exhibit 10.19

SERIES 2 WARRANT AGREEMENT dated as of December 30, 1998
between The WMF Group, Ltd., a Delaware corporation (the “Company”), and HN
Acquisitions, Inc., a Florida corporation (hereinafter referred to as “HN”).

W I T N E S S E T H:

WHEREAS, WMF Capital Corp., a subsidiary of the Company
(“Capital Corp.”), issued a certain Credit Lease Loan Commitment dated August 6,
1998, to HN; and

WHEREAS, HN, Norton Herrick (“Herrick”), the Company and
Capital Corp. have entered into a Settlement Agreement whereby HN and Herrick
have agreed to release the Company and Capital Corp. from liability under the
Credit Lease Loan Commitment; and

WHEREAS, as partial consideration to HN and Herrick under the
Settlement Agreement, the Company has agreed to issue to HN Series 2 warrants
(the “Warrants”) to purchase up to 100,000 shares (the “Shares”) of common stock
of the Company, $.01 par value (the “Common Stock”);

NOW, THEREFORE, in further consideration for the release by HN
and Herrick of the Company and Capital Corp., from their obligations to HN under
the Credit Lease Loan Commitment, and in consideration of the premises and
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

1. GRANT.

HN (or its designees, as permitted pursuant to the Settlement
Agreement) is hereby granted the right to purchase, at any time from the date
hereof until 5:00 P.M., New York City time, on December 30, 2002 (the “Warrant
Exercise Term”), up to 100,000 Shares at an initial

-1-

exercise price per Share (subject to adjustment as provided in SECTION 8 hereof)
equal to the average closing sale price of the Common Stock for the ten (10)
consecutive trading days ending on the trading day immediately prior to the date
of this Agreement (the “Initial Exercise Price”).

2. WARRANT CERTIFICATES.

The warrant certificates (the “Warrant Certificates”) delivered and to
be delivered pursuant to this Agreement shall be in the form set forth as
EXHIBIT A, attached hereto and made a part hereof, with such appropriate
insertions, omissions, substitutions and other variations as required or
permitted by this Agreement.

3. CASH EXERCISE OF WARRANTS.

The Warrants initially are exercisable at the Initial Exercise Price,
payable in cash or by check to the order of the Company, or any combination of
cash or check, subject to adjustment as provided in SECTION 8 hereof. Upon
surrender of the Warrant Certificate with the annexed Form of Election to
Purchase duly executed, together with payment of the Exercise Price (as
hereinafter defined) for the Shares purchased, at the Company’s principal
offices (presently located at 1593 Spring Hill Road, Suite 400, Vienna, Virginia
22182) the registered holder of a Warrant Certificate (“Holder” or “Holders”)
shall be entitled to receive a certificate or certificates for the Shares so
purchased. The purchase rights represented by each Warrant Certificate are
exercisable at the option of the Holder thereof, in whole or in part (but not as
to fractional shares of the Common Stock). In the case of the purchase of less
than all the Shares purchasable under any Warrant Certificate, the Company shall
cancel said Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate of like tenor for the balance of the

-2-

Shares purchasable thereunder.

4. CASHLESS EXERCISE OF WARRANTS.

At any time during the Warrant Exercise Term, the Holder may, at its
option, exchange the Warrant, in whole or in part, into the number of Shares
determined in accordance with this SECTION 4 (a “Warrant Exchange”), by
surrendering this Warrant at the principal office of the Company or at the
office of its transfer agent, accompanied by a notice stating such Holder’s
intent to effect such exchange, the number of Shares to be exchanged and the
date on which the Holder requests that such Warrant Exchange occur (the “Notice
of Exchange”). The Warrant Exchange shall take place on the date specified in
the Notice of Exchange or, if later, the date the Notice of Exchange is received
by the Company (the “Exchange Date”). Certificates for the Shares issuable upon
such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing
the balance of the Shares remaining subject to this Warrant, shall be issued as
of the Exchange Date and delivered to the Holder within five (5) business days
following the Exchange Date. In connection with any Warrant Exchange, this
Warrant shall represent the right to subscribe for and acquire the number of
Shares (rounded to the next highest integer) equal to (i) the number of Shares
specified by the Holder in its Notice of Exchange (the “Total Number”) less (ii)
the number of Shares equal to the quotient obtained by dividing (A) the product
of the Total Number and the existing Exercise Price (as hereinafter defined) by
(B) the current Market Price of one share of Common Stock.

5. ISSUANCE OF CERTIFICATES.

Upon the exercise of the Warrants, the issuance of certificates for the
Shares shall be made

-3-

forthwith (and in any event within five (5) business days thereafter) without
charge to the Holder thereof including, without limitation, any tax which may be
payable in respect of the issuance thereof, and such certificates shall be
issued in the name of, or, if the requirements of SECTION 7 hereof have been
satisfied, in such names as may be directed by, the Holder thereof; PROVIDED,
HOWEVER, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
such certificates in a name other than that of the Holder, and the Company shall
not be required to issue or deliver such certificates unless and until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.

The Warrant Certificates and the certificates representing the Shares
shall be executed on behalf of the Company by the manual or facsimile signature
of the present or any future Chairman or Vice Chairman of the Board of Directors
or President or a Vice President of the Company, attested to by the manual or
facsimile signature of the present or any future Treasurer or an Assistant
Treasurer or Secretary or an Assistant Secretary of the Company. Warrant
Certificates shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer.

The Warrant Certificates and, upon exercise of the Warrants, in part or
in whole, certificates representing the Shares shall bear a legend substantially
similar to the following:

“The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the “Act”) or
applicable state securities laws, and may not be offered or sold except
(i) pursuant to an effective registration statement under the Act or
such laws, (ii) to the extent applicable, pursuant to

-4-

Rule 144 under the Act (or any similar rule under the Act relating to
the disposition of securities), or (iii) upon the delivery by the
holder to the Company of an opinion of counsel, reasonably satisfactory
to counsel to the Company, stating that an exemption from registration
under the Act is available.”

6. PRICE.

6.1 INITIAL AND ADJUSTED EXERCISE PRICE.

The initial exercise price of each Warrant shall be the Initial
Exercise Price set forth in SECTION 1. The adjusted exercise price shall be the
price which shall result from time to time from any and all adjustments of the
Initial Exercise Price in accordance with the provisions of SECTION 8 hereof.

6.2 EXERCISE PRICE.

The term “Exercise Price” herein shall mean the Initial Exercise Price
or the adjusted exercise price, depending upon the context.

7. REGISTRATION RIGHTS; LIMITATIONS ON TRANSFER.

The Warrants and the Shares have not been registered for purposes of
public distribution under the Securities Act of 1933, as amended (“the Act”) or
applicable state securities laws and may not be offered, sold or otherwise
transferred except (i) pursuant to an effective registration statement under the
Act or such laws, (ii) to the extent applicable, pursuant to Rule 144 under the
Act (or any similar rule under the Act relating to the disposition of
securities), or (iii) upon the delivery by the holder to the Company of an
opinion of counsel, reasonably satisfactory to counsel to the Company, stating
that exemptions from registration under the Act and such laws are available. The
Shares shall be registered under the Act pursuant to the terms and conditions of
the Registration Rights Agreement, of even date herewith, by and between HN and
the Company.

-5-

8. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF SHARES.

8.1 ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE.

Upon any adjustment of the Exercise Price as provided in SECTION 8.2,
the holder hereof shall thereafter be entitled to purchase, at the Exercise
Price resulting from such adjustment, the number of shares of Common Stock
(calculated to the nearest full share) obtained by multiplying the Exercise
Price in effect immediately prior to such adjustment by the number of shares of
Common Stock purchasable hereunder immediately prior to such adjustment and
dividing the product thereof by the Exercise Price resulting from such
adjustment.

8.2 ADJUSTMENT OF EXERCISE PRICE.

The Exercise Price shall be subject to adjustment from time to time as
hereinafter set forth.

(a) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS.
In the event that the Company after the date hereof shall:

(1) declare a dividend upon, or make any
distribution in respect of, any of its stock, payable
in Common Stock, securities convertible or
exchangeable into Common Stock (“Convertible
Securities”) or options, rights or warrants to
purchase Common Stock (“Stock Purchase Rights”), or

(2) subdivide its outstanding shares of
Common Stock into a larger number of shares of Common
Stock, or

(3) combine its outstanding shares of
Common Stock into a smaller number of shares of
Common Stock,

-6-

then the Exercise Price shall be adjusted to that price determined by
multiplying the Exercise Price immediately prior to such event by a fraction (A)
the numerator of which shall be the total number of outstanding shares of Common
Stock of the Company immediately prior to such event, and (B) the denominator of
which shall be the total number of outstanding shares of Common Stock of the
Company immediately after such event, treating as outstanding all shares of
Common Stock issuable upon conversions or exchanges of the Convertible
Securities and exercises of the Stock Purchase Rights referred to in SECTION
8.2(a)(1).

(b) ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In
case the Company shall issue or sell any shares of Common
Stock after the Closing Date for a consideration less than the
Market Price (as defined below) per share on the date
immediately prior to such issuance, the Exercise Price upon
each such issuance or sale shall be adjusted (to the nearest
full cent) to the price calculated by MULTIPLYING the then
existing Exercise Price by a fraction the numerator of which
is (A) the sum of (1) the number of shares of Common Stock
outstanding immediately prior to such issue or sale multiplied
by the Market Price per share of Common Stock on the date
immediately prior to such issue or sale PLUS (2) the
consideration received by the Company upon such issue or sale,
divided by (B) the total number of shares of Common Stock
outstanding immediately after such issue or sale, and the
denominator of which shall be the Market Price per share of
Common Stock on the date immediately prior to such issue or
sale.

For purposes of this SECTION 8.2(b) the adjustment shall be made
successively whenever any issuance is made, and shall become effective
immediately after such issuance.

-7-

The provisions of this SECTION 8.2(b) shall not apply to any additional
shares of Common Stock which are distributed to holders of Common Stock pursuant
to a stock dividend or subdivision for which an adjustment is provided for under
SECTION 8.2(a). No adjustment of the Exercise Price shall be made under this
SECTION 8.2(b) upon the issuance of any additional shares of Common Stock which
are issued pursuant to the exercise of any Stock Purchase Rights or pursuant to
the conversion or exchange of any Convertible Securities to the extent that such
adjustment shall previously have been made upon the issuance of such Stock
Purchase Rights or Convertible Securities pursuant to subsection (a), (c) or (d)
of this SECTION 8.2.

Further, the provisions of this SECTION 8.2(b) shall not apply if:

(i) the Company issues stock to third parties in an
arms-length transaction for cash or other consideration having a value
equal to at least (A) 85 percent (85%) of the Market Price on the date
of the issuance of such stock or, if the offering is priced prior to
the closing of the applicable market for the Common Stock on such date,
the trading day immediately preceding such date, or (B) 90 percent
(90%) of the average of the Market Prices of the Common Stock for the
ten (10) consecutive trading days ending on the date of the issuance of
such stock, including but not limited to, stock issuances pursuant to a
merger, consolidation, corporate reorganization (both taxable and
nontaxable), corporate restructuring, or private placement or;

(ii) the Company issues shares of Common Stock to individuals
or entities upon the exercise or conversion of Convertible Securities
or Stock Purchase Rights outstanding on the date hereof, or pursuant to
Stock Purchase Rights issued pursuant to

-8-

the rights offering first announced publicly on or about October 21,
1998 (the “Company Rights Offering”) or pursuant to any stand-by
purchase commitment relating to the Company Rights Offering; or

(iii) the Company issues warrants, rights, options or
restricted stock to employees of the Company or its affiliates pursuant
to a deferred compensation plan, key employee incentive plan or another
applicable employment compensation plan so long as the exercise price
for any such warrants, rights or options is equal to or greater than
either (A) the Market Price on the date of the issuance of such
warrants, rights or options, or (B) the average Market Prices for the
ten (10) consecutive trading days ending on the date of the issuance of
such warrants, rights or options.

As used in this Agreement, the phrase “Market Price” at any date shall
be deemed to be the last reported sale price, or, in case no such reported sale
takes place on such day, the average of the last reported sale prices for the
last three trading days, in either case as officially reported by the principal
securities exchange on which the Common Stock is listed or admitted to trading
or as reported in the Nasdaq National Market System, or, if the Common Stock is
not listed or admitted to trading on any national securities exchange or quoted
on the Nasdaq National Market System, the closing bid price as furnished by the
National Association of Securities Dealers, Inc. through Nasdaq or similar
organization if Nasdaq is no longer reporting such information, or if the Common
Stock is not quoted on Nasdaq, as determined in good faith by resolution of the
Board of Directors of the Company based on the best information available to it.

(c) ISSUANCE OF STOCK PURCHASE RIGHTS. In case the
Company shall issue or sell any Stock Purchase Rights and the
consideration per share for which

-9-

additional shares of Common Stock may at any time thereafter
be issuable upon exercise thereof (or, in the case of Stock
Purchase Rights exercisable for the purchase of Convertible
Securities, upon the subsequent conversion or exchange of such
Convertible Securities) shall be less than the then Market
Price per share, the Exercise Price shall be adjusted as
provided in SECTION 8.2(b) on the basis that (I) the maximum
number of additional shares of Common Stock issuable upon
exercise of such Stock Purchase Rights (or upon conversion or
exchange of such Convertible Securities following such
exercise) shall be deemed to have been issued as of the date
of the determination of the Market Price, as hereinafter
provided, and (II) the aggregate consideration received for
such additional shares of Common Stock shall be deemed to be
the minimum consideration received and receivable by the
Company in connection with the issuance and exercise of such
Stock Purchase Rights (or upon conversion or exchange of such
Convertible Securities). For the purposes of this SECTION
8.2(c), the date as of which the Market Price shall be
determined shall be the earlier of (A) the date on which the
Company shall enter into a firm contract for the issuance of
such Stock Purchase Rights, or (B) the date of actual issuance
of such Stock Purchase Rights. The provisions of this SECTION
8.2(c) shall not apply to Stock Purchase Rights issued in
connection with the Company Rights Offering.

(d) ISSUANCE OF CONVERTIBLE SECURITIES. In case the
Company shall issue or sell any Convertible Securities and the
consideration per share for which additional shares of Common
Stock may at any time thereafter be issuable

-10-

pursuant to the terms of such Convertible Securities shall be
less than the then Market Price per share, the Exercise Price
shall be adjusted as provided in SECTION 8.2(b) on the basis
that (I) the maximum number of additional shares of Common
Stock necessary to effect the conversion or exchange of all
such Convertible Securities shall be deemed to have been
issued as of the date for the determination of the Market
Price, as hereinafter provided, and (II) the aggregate
consideration received for such additional shares of Common
Stock shall be deemed to be equal to the minimum consideration
received and receivable by the Company in connection with the
issuance and exercise of such Convertible Securities. For the
purposes of this SECTION 8.2(d), the date as of which the
Market Price per share shall be determined shall be the
earlier of (A) the date on which the Company shall enter into
a firm contract for the issuance of such Convertible
Securities, or (B) the date of actual issuance of such
Convertible Securities. No adjustment of the Exercise Price
shall be made under this SECTION 8.2(d) upon the issuance of
any Convertible Securities which are issued pursuant to the
exercise of any Stock Purchase Rights, if an adjustment shall
previously have been made upon the issuance of such Stock
Purchase Rights pursuant to SECTION 8.2(c).

(e) MINIMUM ADJUSTMENT. In the event any adjustment
of the Exercise Price pursuant to this SECTION 8.2 shall
result in an adjustment of less than $.02 per share of Common
Stock, no such adjustment shall be made, but any such lesser
adjustment shall be carried forward and shall be made at the
time and together with the next subsequent adjustment, if any,
which, together with any adjustments so

-11-

carried forward, shall amount to $.02 more per share of Common
Stock; PROVIDED, HOWEVER, that upon any adjustment of the
Exercise Price resulting from (i) the declaration of a
dividend upon, or the making of any distribution in respect
of, any stock of the Company payable in Common Stock or
Convertible Securities or (ii) the reclassification by
subdivision, combination or otherwise, of the Common Stock
into a greater or smaller number of shares, the foregoing
figure of $.02 per share (or such figure as last adjusted)
shall be proportionately adjusted.

(f) READJUSTMENT OF EXERCISE PRICE. In the event (i)
the purchase price payable for any Stock Purchase Rights or
Convertible Securities referred to in subsection (c) or (d)
above, (ii) the additional consideration, if any, payable upon
exercise of such Stock Purchase Rights or upon the conversion
or exchange of such Convertible Securities or (iii) the rate
at which any Convertible Securities referred to above are
convertible into or exchangeable for additional shares of
Common Stock shall change, the Exercise Price in effect at the
time of such event shall forthwith be readjusted to the
Exercise Price which would have been in effect at such time
had such Stock Purchase Rights or Convertible Securities
provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold. On the expiration of
any such Stock Purchase Rights or of any such right to convert
or exchange under any such Convertible Securities, if none of
such Stock Purchase Rights or such Convertible Securities, as
the case may be, shall have been exercised, the Exercise Price
then in effect hereunder shall forthwith be increased to the
Exercise Price

-12-

which would have been in effect at the time of such expiration
or termination had such Stock Purchase Rights or Convertible
Securities never been issued. No readjustment of the Exercise
Price pursuant to this SECTION 8.2(f) shall have the effect of
increasing the Exercise Price by an amount in excess of the
adjustment originally made to the Exercise Price in respect of
the issue, sale or grant of the applicable Stock Purchase
Rights or Convertible Securities.

(g) REORGANIZATION, RECLASSIFICATION OR
RECAPITALIZATION OF COMPANY. In case of any capital
reorganization or reclassification or recapitalization of the
capital stock of the Company (other than in the cases referred
to in SECTION 8.2(a)), or in case of the consolidation or
merger of the Company with or into another corporation, or in
case of the sale or transfer of the property of the Company as
an entirety or substantially as an entirety, there shall
thereafter be deliverable upon the exercise of any Warrant or
any portion thereof (in lieu of or in addition to the number
of shares of Common Stock theretofore deliverable, as
appropriate) the number of shares of stock or other securities
or property to which the holder of the number of shares of
Common Stock which would otherwise have been deliverable upon
the exercise of any Warrant or any portion thereof at the time
would have been entitled upon such capital reorganization or
reclassification of capital stock, consolidation, merger or
sale, and at the same aggregate Exercise Price.

Prior to and as a condition of the consummation of any transaction
described in the preceding sentence, the Company shall make equitable, written
adjustments in the application of the provisions herein set forth satisfactory
to the holder or holders of a majority of the Warrants,

-13-

so that the provisions set forth herein shall thereafter be applicable, as
nearly as possible, in relation to any shares of stock or other securities or
other property thereafter deliverable upon exercise of any Warrant. Any such
adjustment shall be made by and set forth in a supplemental agreement between
the Company and/or the successor entity, as applicable, which agreement shall
bind each such entity, shall be accompanied by an opinion of counsel as to the
enforceability of such agreement and shall be approved by the holder or the
holders of a majority of the Warrants.

(h) OTHER DILUTIVE EVENTS. In case any Distribution
shall occur as to which the other provisions of this SECTION 8
are not strictly applicable but the failure to make any
adjustment would not fairly protect the purchase rights
represented by this Warrant in accordance with the essential
intent and principles hereof, then, in each such case, the
Board of Directors of the Company shall determine the amount
of the adjustment in good faith and on a basis consistent with
the essential intent and principles established in this
SECTION 8, necessary to preserve, without dilution, the
purchase rights represented by this Warrant. Upon
determination of such adjustment, the Company will promptly
mail a copy thereof to the holder of this Warrant and shall
make the adjustment described therein.

(i) DETERMINATION OF CONSIDERATION. For purposes of
this SECTION 8, the consideration received or receivable by
the Company for the issuance, sale, grant or assumption of
additional shares of Common Stock, Stock Purchase Rights or
Convertible Securities, irrespective of the accounting
treatment of such consideration, shall be valued as follows:

(1) CASH PAYMENT. In the case of cash, the
net amount received

-14-

by the Company without deduction of any expenses paid
or incurred or any underwriting commissions or
concessions paid or allowed by the Company.

(2) SECURITIES OR OTHER PROPERTY. In the
case of securities or other property, at the Market
Price of the security or the fair value of such other
property as determined in good faith by the Board of
Directors of the Company (in both cases as of the
date immediately preceding the issuance, sale or
grant in question).

(3) ALLOCATION RELATED TO COMMON STOCK. In
the event additional shares of Common Stock are
issued or sold together with other securities or
other assets of the Company for a consideration which
covers both, the consideration received (computed as
provided in (1) and (2) above) shall be allocable to
such additional shares of Common Stock as determined
in good faith by the Board of Directors of the
Company.

(4) DIVIDENDS IN SECURITIES. In case the
Company shall declare a dividend or make any other
distribution upon any stock of the Company (other
than Common Stock) payable in either case in Common
Stock, Convertible Securities or Stock Purchase
Rights, such Common Stock, Convertible Securities or
Stock Purchase Rights, as the case may be, issuable
in payment of such dividend or distribution shall be
deemed to have been issued or sold without
consideration.

(5) STOCK PURCHASE RIGHTS AND CONVERTIBLE
SECURITIES. The

-15-

consideration for which shares of Common Stock shall
be deemed to be issued upon the issuance of any Stock
Purchase Rights or Convertible Securities shall be
determined by dividing (i) the total consideration,
if any, received or receivable by the Company as
consideration for the granting of such Stock Purchase
Rights or the issuance of such Convertible
Securities, plus the minimum aggregate amount of
additional consideration payable to the Company upon
the exercise of such Stock Purchase Rights, or, in
the case of such Convertible Securities, the minimum
aggregate amount of additional consideration, if any,
payable upon the conversion or exchange thereof, in
each case after deducting any accrued interest,
dividends, or any expenses paid or incurred or any
underwriting commissions or concessions paid or
allowed by the Company, by (ii) the maximum number of
shares of Common Stock issuable upon the exercise of
such Stock Purchase Rights or upon the conversion or
exchange of all such Convertible Securities.

(6) MERGER, CONSOLIDATION OR SALE OF
ASSETS. In case any shares of Common Stock or
Convertible Securities or any Stock Purchase Rights
shall be issued in connection with any merger or
consolidation in which the Company is the surviving
corporation, the amount of consideration therefor
shall be deemed to be the fair value of such portion
of the assets and business of the nonsurviving
corporation as shall be attributable to such Common
Stock, Convertible Securities or Stock Purchase
Rights, as the case may be. In the event of any
merger or consolidation of the Company

-16-

in which the Company is not the surviving corporation
or in the event of any sale of all or substantially
all of the assets of the Company for stock or other
securities of any corporation, the Company shall be
deemed to have issued a number of shares of its
Common Stock for stock or securities of the other
corporation computed on the basis of the actual
exchange ratio on which the transaction was
predicated and for a consideration equal to the
Market Price on the date of such transaction of such
stock or securities of the other corporation, and if
any such calculation results in adjustment of the
Exercise Price, the determination of the number of
shares of Common Stock issuable upon exercise of this
Warrant immediately prior to such merger,
consolidation or sale, for the purposes of SECTION
8.2(g) above, shall be made after giving effect to
such adjustment of the Exercise Price.

(j) RECORD DATE. In case the Company shall take a
record of the holders of the Common Stock for the purpose of
entitling them (i) to receive a distribution payable in Common
Stock, Stock Purchase Rights or in Convertible Securities or
(ii) to subscribe for or purchase Common Stock or Convertible
Securities, then all references in this SECTION 8 to the date
of the issue or sale of the shares of Common Stock deemed to
have been issued or sold upon the making of such distribution
or the date of the granting of such right of subscription or
purchase, as the case may be, shall be deemed to be references
to such record date.

(k) SHARES OUTSTANDING. The number of shares of
Common Stock deemed to be outstanding at any given time shall
exclude shares of Common Stock

-17-

in the treasury of the Company and those held by any
subsidiary of the Company.

(l) MAXIMUM EXERCISE PRICE. At no time shall the
Exercise Price per share of Common Stock exceed the amount set
forth in SECTION 1 of this Agreement except as provided in
subsection (a) or (g) of this SECTION 8.2.

(m) APPLICATION. Except as otherwise provided herein,
all subsections of this SECTION 8.2 are intended to operate
independently of one another. If an event occurs that requires
the application of more than one subsection, all applicable
subsections shall be given independent effect.

8.3 CERTIFICATES AND NOTICES.

(a) ADJUSTMENTS TO EXERCISE PRICE. Upon any
adjustment under this SECTION 8 of the number of shares of
Common Stock purchasable upon exercise of a Warrant or of the
Exercise Price, a certificate, signed (i) by the President or
a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the
Company, or (ii) by any independent firm of certified public
accountants of recognized national standing selected by, and
at the expense of, the Company, setting forth in reasonable
detail the events requiring the adjustment and the method by
which such adjustment was calculated, shall be mailed to the
holders of the Warrant specifying the adjusted Exercise Price
and the number of shares of Common Stock purchasable upon
exercise of such holder’s Warrant after giving effect to such
adjustment.

The certificate of any independent firm of certified public accountants
of recognized national standing selected by the Board of Directors of the
Company shall be conclusive evidence

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of the correctness of any computation made under this SECTION 8.

(b) EFFECT OF FAILURE.

Failure to file any certificate or notice or
to mail any notice or any defect in any certificate or notice
pursuant to this SECTION 8.3 shall not affect the legality or
validity of the adjustment of the Exercise Price or the number
of shares purchasable upon exercise of any Warrant, or any
transaction giving rise thereto.

9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES.

Each Warrant Certificate is exchangeable without expense, upon
the surrender hereof by the registered Holder at the principal executive office
of the Company, for a new Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of Shares in
such denominations as shall be designated by the Holder thereof at the time of
such surrender.

Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrant Certificate, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.

10. ELIMINATION OF FRACTIONAL INTERESTS.

The Company shall not be required to issue certificates
representing fractions of shares of Common Stock and shall not be required to
issue scrip or pay cash in lieu of fractional

-19-

interests, it being the intent of the parties that all fractional interests
shall be eliminated by rounding any fraction up to the nearest whole number of
shares of Common Stock.

11. RESERVATION AND LISTING OF SECURITIES.

The Company shall at all times reserve and keep available out
of its authorized shares of Common Stock, solely for the purpose of issuance
upon the exercise of the Warrants, such number of shares of Common Stock as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all shares of Common Stock issuable upon such exercise shall be duly and validly
issued, fully paid, non-assessable and not subject to the preemptive rights of
any shareholder. As long as the Warrants shall be outstanding, the Company shall
cause all shares of Common Stock issuable upon the exercise of the Warrants to
be listed on or quoted by Nasdaq or listed on such national securities exchanges
as the Company’s Common Stock is then listed or quoted, if any.

12. NOTICES TO WARRANT HOLDERS.

Nothing contained in this Agreement shall be construed as
conferring upon the Holder or Holders the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:

(a) the Company shall take a record of the holders of
its shares of Common Stock for the purpose of entitling them
to receive a dividend or distribution payable otherwise than
in cash, or a cash dividend or distribution payable otherwise
than out of current or retained earnings, as indicated by the

-20-

accounting treatment of such dividend or distribution on the
books of the Company; or

(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the
Company or securities convertible into or exchangeable for
shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or

(c) a merger or consolidation involving the Company
or subsidiary of the Company and any other entity and the
Company is not the surviving entity; or

(d) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or
merger) or a sale of all or substantially all of its property,
assets and business as an entirety shall be proposed; then, in
any one or more of said events, the Company shall give written
notice of such event at least fifteen (15) days prior to the
date fixed as a record date or the date of closing the
transfer books for the determination of the shareholders
entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, options or
warrants, or entitled to vote on such proposed merger,
consolidation, dissolution, liquidation, winding up or sale.
Such notice shall specify such record date or the date of
closing the transfer books, as the case may be. Failure to
give such notice or any defect therein shall not affect the
validity of any action taken in connection with the
declaration or payment of any such dividend or distribution,
or the issuance of any convertible or exchangeable securities
or subscription rights, options or warrants, or any proposed
merger, consolidation, dissolution,

-21-

liquidation, winding up or sale.

13. NOTICES.

All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made when delivered,
or mailed by registered or certified mail, return receipt requested:

(a) If to a registered Holder of the Warrants, to the
address of such Holder as shown on the books of the Company;
or

(b) If to the Company, to the address set forth in
SECTION 3 of this Agreement or to such other address as the
Company may designate by notice to the Holders.

14. SUPPLEMENTS AND AMENDMENTS.

The Company and HN may from time to time supplement or amend this
Agreement without the approval of any Holders of Warrant Certificates in order
to cure any ambiguity, to correct or supplement any provision contained herein
which may be defective or inconsistent with any provisions herein, or to make
any other provisions in regard to matters or questions arising hereunder which
the Company and HN may deem necessary or desirable and which the Company and HN
deem not to adversely affect the interests of the Holders of Warrant
Certificates.

15. SUCCESSORS.

All the covenants and provisions of this Agreement by or for the
benefit of the Company and the Holders inure to the benefit of their respective
successors and assigns hereunder.

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16. TERMINATION.

This Agreement shall terminate at the close of business on December 30,
2002. Notwithstanding the foregoing, this Agreement will terminate on any
earlier date when all Warrants have been exercised and all the Shares issuable
upon exercise of the Warrants have been resold to the public.

17. GOVERNING LAW.

This Agreement and each Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of New York and for all
purposes shall be construed in accordance with the laws of said State.

18. BENEFITS OF THIS AGREEMENT.

Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and HN and any other registered Holder or
Holders of the Warrant Certificates, Warrants or the Shares any legal or
equitable right, remedy or claim under this Agreement; and this Agreement shall
be for the sole and exclusive benefit of the Company and HN and any other Holder
or Holders of the Warrant Certificates, Warrants or the Shares.

19. COUNTERPARTS.

This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and
such counterparts shall together constitute but one and the same instrument.

-23-

IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.

[SEAL] THE WMF GROUP, LTD.

By: /S/ SHEKAR NARASIMHAN
———————————
Name: Shekar Narasimhan
Title: President and Chief
Executive Officer

Attest:

/S/ BARBARA EKSTROM
– —————————-

HN ACQUISITIONS, INC.

By: /S/ NORTON HERRICK
———————————
Name: Norton Herrick
Title: President

-24-

EXHIBIT A

THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE “ACT”) OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE
OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR SUCH LAWS, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER
SUCH ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF
SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING
THAT EXEMPTIONS FROM REGISTRATION UNDER THE ACT AND SUCH LAWS ARE AVAILABLE.

THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.

EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, DECEMBER 30, 2002

No. W2- _______ Series 2 Warrants

SERIES 2 WARRANT CERTIFICATE

This Warrant Certificate certifies that _______________
____________ or registered assigns, is the registered holder of _______ Series 2
Warrants to purchase, at any time from December 30, 1998 until 5:00 P.M. New
York City time on December 30, 2002 (“Expiration Date”), up to _____ shares
(“Shares”) of fully-paid and non-assessable common stock, $.01 par value
(“Common Stock”), of The WMF Group, Ltd., a Delaware corporation (the
“Company”), at an initial exercise price per share of $________, subject to
adjustment in certain events (the “Exercise Price”), upon surrender of this
Warrant Certificate and payment of the Exercise Price at an office or agency of
the Company, but subject to the conditions set forth herein and in the Warrant
Agreement, dated as of December 30, 1998, between the Company and HN
Acquisitions, Inc. (the “Series 2 Warrant Agreement”). Payment of the Exercise
Price may be made in cash, or by certified or official bank check in New York
Clearing House funds payable to the order of the Company, or any combination of
cash or check, or by cashless exercise as provided in the Warrant Agreement.

No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.

The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to in a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words “holders” or “holder” meaning the registered
holders or registered holder) of the Warrants.

The Warrant Agreement provides that upon the occurrence of
certain events, the Exercise Price and/or number of the Company’s securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.

Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection therewith.

Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.

The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.

All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.

IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.

Dated: ___________, THE WMF GROUP, LTD.

[SEAL] By:________________________
Name:
Title:

Attest:

_________________________

[FORM OF ELECTION TO PURCHASE]

The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _________ Shares and
herewith tenders in payment for such Shares cash or a certified or official bank
check payable in New York Clearing House Funds to the order of The WMF Group,
Ltd. in the amount of $ , all in accordance with the terms hereof. The
undersigned requests that a certificate for such Shares be registered in the
name of , whose address is __________________, and that such Certificate be
delivered to __________________, whose address is _____________.

Dated: Signature:

(Signature must conform in
all respects to name of
holder as specified on the
face of the Warrant
Certificate.)

________________________________

________________________________
(Insert Social Security or Other
Identifying Number of Holder)

Signature Guaranteed:

________________________________

By:_____________________________
Title:

The signature to this document must be guaranteed by a member of the Securities
Transfer Agents Medallion program. Notarized or witnessed signatures are not
acceptable.

[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)

FOR VALUE RECEIVED ____________________________________________________

hereby sells, assigns and transfers unto

________________________________________________________________________________
(Please print name and address of transferee)

this Warrant Certificate, together with all right, title and interest therein,

and does hereby irrevocably constitute and appoint _______________, Attorney, to

transfer the within Warrant Certificate on the books of the within-named

Company, with full power of substitution.

Dated: Signature:__________________________

Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate)

________________________________

________________________________

(Insert Social Security or Other
Identifying Number of Assignee)

Signature Guaranteed:

________________________________

By:_____________________________
Title:

The signature to this document must be guaranteed by a member of the Securities
Transfer Agents Medallion program. Notarized or witnessed signatures are not
acceptable.




EX-10.20
3
EXHIBIT 10.20

Exhibit 10.20

SERIES 3 WARRANT AGREEMENT dated as of December 30, 1998
between The WMF Group, Ltd., a Delaware corporation (the “Company”), and HN
Acquisitions, Inc., a Florida corporation (hereinafter referred to as “HN”).

W I T N E S S E T H:

WHEREAS, WMF Capital Corp., a subsidiary of the Company
(“Capital Corp.”), issued a certain Credit Lease Loan Commitment dated August 6,
1998, to HN; and

WHEREAS, HN, Norton Herrick (“Herrick”), the Company and
Capital Corp. have entered into a Settlement Agreement whereby HN and Herrick
have agreed to release the Company and Capital Corp. from liability under the
Credit Lease Loan Commitment; and

WHEREAS, as partial consideration to HN and Herrick under the
Settlement Agreement, the Company has agreed to issue to HN Series 3 warrants
(the “Warrants”) to purchase up to 150,000 shares (the “Shares”) of common stock
of the Company, $.01 par value (the “Common Stock”);

NOW, THEREFORE, in further consideration for the release by HN
and Herrick of the Company and Capital Corp., from their obligations to HN under
the Credit Lease Loan Commitment, and in consideration of the premises and
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

1. GRANT.

HN (or its designees, as permitted pursuant to the Settlement
Agreement) is hereby granted the right to purchase, at any time from the date
hereof until 5:00 P.M., New York City time, on December 30, 2003 (the “Warrant
Exercise Term”), up to 150,000 Shares at an initial

-1-

exercise price of $10.00 per Share (the “Initial Exercise Price”) (subject to
adjustment as provided in SECTION 8 hereof).

2. WARRANT CERTIFICATES.

The warrant certificates (the “Warrant Certificates”) delivered and to
be delivered pursuant to this Agreement shall be in the form set forth as
EXHIBIT A, attached hereto and made a part hereof, with such appropriate
insertions, omissions, substitutions and other variations as required or
permitted by this Agreement.

3. CASH EXERCISE OF WARRANTS.

The Warrants initially are exercisable at the Initial Exercise Price,
payable in cash or by check to the order of the Company, or any combination of
cash or check, subject to adjustment as provided in SECTION 8 hereof. Upon
surrender of the Warrant Certificate with the annexed Form of Election to
Purchase duly executed, together with payment of the Exercise Price (as
hereinafter defined) for the Shares purchased, at the Company’s principal
offices (presently located at 1593 Spring Hill Road, Suite 400, Vienna, Virginia
22182) the registered holder of a Warrant Certificate (“Holder” or “Holders”)
shall be entitled to receive a certificate or certificates for the Shares so
purchased. The purchase rights represented by each Warrant Certificate are
exercisable at the option of the Holder thereof, in whole or in part (but not as
to fractional shares of the Common Stock). In the case of the purchase of less
than all the Shares purchasable under any Warrant Certificate, the Company shall
cancel said Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate of like tenor for the balance of the Shares
purchasable thereunder.

-2-

4. CASHLESS EXERCISE OF WARRANTS.

At any time during the Warrant Exercise Term, the Holder may, at its
option, exchange the Warrant, in whole or in part, into the number of Shares
determined in accordance with this SECTION 4 (a “Warrant Exchange”), by
surrendering this Warrant at the principal office of the Company or at the
office of its transfer agent, accompanied by a notice stating such Holder’s
intent to effect such exchange, the number of Shares to be exchanged and the
date on which the Holder requests that such Warrant Exchange occur (the “Notice
of Exchange”). The Warrant Exchange shall take place on the date specified in
the Notice of Exchange or, if later, the date the Notice of Exchange is received
by the Company (the “Exchange Date”). Certificates for the Shares issuable upon
such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing
the balance of the Shares remaining subject to this Warrant, shall be issued as
of the Exchange Date and delivered to the Holder within five (5) business days
following the Exchange Date. In connection with any Warrant Exchange, this
Warrant shall represent the right to subscribe for and acquire the number of
Shares (rounded to the next highest integer) equal to (i) the number of Shares
specified by the Holder in its Notice of Exchange (the “Total Number”) less (ii)
the number of Shares equal to the quotient obtained by dividing (A) the product
of the Total Number and the existing Exercise Price (as hereinafter defined) by
(B) the current Market Price of one share of Common Stock.

5. ISSUANCE OF CERTIFICATES.

Upon the exercise of the Warrants, the issuance of certificates for the
Shares shall be made forthwith (and in any event within five (5) business days
thereafter) without charge to the Holder

-3-

thereof including, without limitation, any tax which may be payable in respect
of the issuance thereof, and such certificates shall be issued in the name of,
or, if the requirements of SECTION 7 hereof have been satisfied, in such names
as may be directed by, the Holder thereof; PROVIDED, HOWEVER, that the Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder, and the Company shall not be required to
issue or deliver such certificates unless and until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.

The Warrant Certificates and the certificates representing the Shares
shall be executed on behalf of the Company by the manual or facsimile signature
of the present or any future Chairman or Vice Chairman of the Board of Directors
or President or a Vice President of the Company, attested to by the manual or
facsimile signature of the present or any future Treasurer or an Assistant
Treasurer or Secretary or an Assistant Secretary of the Company. Warrant
Certificates shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer.

The Warrant Certificates and, upon exercise of the Warrants, in part or
in whole, certificates representing the Shares shall bear a legend substantially
similar to the following:

“The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the “Act”) or
applicable state securities laws, and may not be offered or sold except
(i) pursuant to an effective registration statement under the Act or
such laws, (ii) to the extent applicable, pursuant to Rule 144 under
the Act (or any similar rule under the Act relating to the disposition
of securities), or (iii) upon the delivery by the holder to the Company

-4-

of an opinion of counsel, reasonably satisfactory to counsel to the
Company, stating that an exemption from registration under the Act is
available.”

6. PRICE.

6.1 INITIAL AND ADJUSTED EXERCISE PRICE.

The initial exercise price of each Warrant shall be the Initial
Exercise Price set forth in SECTION 1. The adjusted exercise price shall be the
price which shall result from time to time from any and all adjustments of the
Initial Exercise Price in accordance with the provisions of SECTION 8 hereof.

6.2 EXERCISE PRICE.

The term “Exercise Price” herein shall mean the Initial Exercise Price
or the adjusted exercise price, depending upon the context.

7. REGISTRATION RIGHTS; LIMITATIONS ON TRANSFER.

The Warrants and the Shares have not been registered for purposes of
public distribution under the Securities Act of 1933, as amended (“the Act”) or
applicable state securities laws and may not be offered, sold or otherwise
transferred except (i) pursuant to an effective registration statement under the
Act or such laws, (ii) to the extent applicable, pursuant to Rule 144 under the
Act (or any similar rule under the Act relating to the disposition of
securities), or (iii) upon the delivery by the holder to the Company of an
opinion of counsel, reasonably satisfactory to counsel to the Company, stating
that exemptions from registration under the Act and such laws are available. The
Shares shall be registered under the Act pursuant to the terms and conditions of
the Registration Rights Agreement, of even date herewith, by and between HN and
the Company.

-5-

8. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF SHARES.

8.1 ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE.

Upon any adjustment of the Exercise Price as provided in SECTION 8.2,
the holder hereof shall thereafter be entitled to purchase, at the Exercise
Price resulting from such adjustment, the number of shares of Common Stock
(calculated to the nearest full share) obtained by multiplying the Exercise
Price in effect immediately prior to such adjustment by the number of shares of
Common Stock purchasable hereunder immediately prior to such adjustment and
dividing the product thereof by the Exercise Price resulting from such
adjustment.

8.2 ADJUSTMENT OF EXERCISE PRICE.

The Exercise Price shall be subject to adjustment from time to time as
hereinafter set forth.

(a) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS.
In the event that the Company after the date hereof shall:

(1) declare a dividend upon, or make any
distribution in respect of, any of its stock, payable
in Common Stock, securities convertible or
exchangeable into Common Stock (“Convertible
Securities”) or options, rights or warrants to
purchase Common Stock (“Stock Purchase Rights”), or

(2) subdivide its outstanding shares of
Common Stock into a larger number of shares of Common
Stock, or

(3) combine its outstanding shares of
Common Stock into a smaller number of shares of
Common Stock,

-6-

then the Exercise Price shall be adjusted to that price determined by
multiplying the Exercise Price immediately prior to such event by a fraction (A)
the numerator of which shall be the total number of outstanding shares of Common
Stock of the Company immediately prior to such event, and (B) the denominator of
which shall be the total number of outstanding shares of Common Stock of the
Company immediately after such event, treating as outstanding all shares of
Common Stock issuable upon conversions or exchanges of the Convertible
Securities and exercises of the Stock Purchase Rights referred to in SECTION
8.2(a)(1).

(b) ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In
case the Company shall issue or sell any shares of Common
Stock after the Closing Date for a consideration less than the
Market Price (as defined below) per share on the date
immediately prior to such issuance, the Exercise Price upon
each such issuance or sale shall be adjusted (to the nearest
full cent) to the price calculated by MULTIPLYING the then
existing Exercise Price by a fraction the numerator of which
is (A) the sum of (1) the number of shares of Common Stock
outstanding immediately prior to such issue or sale multiplied
by the Market Price per share of Common Stock on the date
immediately prior to such issue or sale PLUS (2) the
consideration received by the Company upon such issue or sale,
divided by (B) the total number of shares of Common Stock
outstanding immediately after such issue or sale, and the
denominator of which shall be the Market Price per share of
Common Stock on the date immediately prior to such issue or
sale.

For purposes of this SECTION 8.2(b) the adjustment shall be made
successively whenever any issuance is made, and shall become effective
immediately after such issuance.

-7-

The provisions of this SECTION 8.2(b) shall not apply to any additional
shares of Common Stock which are distributed to holders of Common Stock pursuant
to a stock dividend or subdivision for which an adjustment is provided for under
SECTION 8.2(a). No adjustment of the Exercise Price shall be made under this
SECTION 8.2(b) upon the issuance of any additional shares of Common Stock which
are issued pursuant to the exercise of any Stock Purchase Rights or pursuant to
the conversion or exchange of any Convertible Securities to the extent that such
adjustment shall previously have been made upon the issuance of such Stock
Purchase Rights or Convertible Securities pursuant to subsection (a), (c) or (d)
of this SECTION 8.2.

Further, the provisions of this SECTION 8.2(b) shall not apply if:

(i) the Company issues stock to third parties in an
arms-length transaction for cash or other consideration having a value
equal to at least (A) 85 percent (85%) of the Market Price on the date
of the issuance of such stock or, if the offering is priced prior to
the closing of the applicable market for the Common Stock on such date,
the trading day immediately preceding such date, or (B) 90 percent
(90%) of the average of the Market Prices of the Common Stock for the
ten (10) consecutive trading days ending on the date of the issuance of
such stock, including but not limited to, stock issuances pursuant to a
merger, consolidation, corporate reorganization (both taxable and
nontaxable), corporate restructuring, or private placement or;

(ii) the Company issues shares of Common Stock to individuals
or entities upon the exercise or conversion of Convertible Securities
or Stock Purchase Rights outstanding on the date hereof, or pursuant to
Stock Purchase Rights issued pursuant to

-8-

the rights offering first announced publicly on or about October 21,
1998 (the “Company Rights Offering”) or pursuant to any stand-by
purchase commitment relating to the Company Rights Offering; or

(iii) the Company issues warrants, rights, options or
restricted stock to employees of the Company or its affiliates pursuant
to a deferred compensation plan, key employee incentive plan or another
applicable employment compensation plan so long as the exercise price
for any such warrants, rights or options is equal to or greater than
either (A) the Market Price on the date of the issuance of such
warrants, rights or options, or (B) the average Market Prices for the
ten (10) consecutive trading days ending on the date of the issuance of
such warrants, rights or options.

As used in this Agreement, the phrase “Market Price” at any date shall
be deemed to be the last reported sale price, or, in case no such reported sale
takes place on such day, the average of the last reported sale prices for the
last three trading days, in either case as officially reported by the principal
securities exchange on which the Common Stock is listed or admitted to trading
or as reported in the Nasdaq National Market System, or, if the Common Stock is
not listed or admitted to trading on any national securities exchange or quoted
on the Nasdaq National Market System, the closing bid price as furnished by the
National Association of Securities Dealers, Inc. through Nasdaq or similar
organization if Nasdaq is no longer reporting such information, or if the Common
Stock is not quoted on Nasdaq, as determined in good faith by resolution of the
Board of Directors of the Company based on the best information available to it.

(c) ISSUANCE OF STOCK PURCHASE RIGHTS. In case the
Company shall issue or sell any Stock Purchase Rights and the
consideration per share for which

-9-

additional shares of Common Stock may at any time thereafter
be issuable upon exercise thereof (or, in the case of Stock
Purchase Rights exercisable for the purchase of Convertible
Securities, upon the subsequent conversion or exchange of such
Convertible Securities) shall be less than the then Market
Price per share, the Exercise Price shall be adjusted as
provided in SECTION 8.2(b) on the basis that (I) the maximum
number of additional shares of Common Stock issuable upon
exercise of such Stock Purchase Rights (or upon conversion or
exchange of such Convertible Securities following such
exercise) shall be deemed to have been issued as of the date
of the determination of the Market Price, as hereinafter
provided, and (II) the aggregate consideration received for
such additional shares of Common Stock shall be deemed to be
the minimum consideration received and receivable by the
Company in connection with the issuance and exercise of such
Stock Purchase Rights (or upon conversion or exchange of such
Convertible Securities). For the purposes of this SECTION
8.2(c), the date as of which the Market Price shall be
determined shall be the earlier of (A) the date on which the
Company shall enter into a firm contract for the issuance of
such Stock Purchase Rights, or (B) the date of actual issuance
of such Stock Purchase Rights. The provisions of this SECTION
8.2(c) shall not apply to Stock Purchase Rights issued in
connection with the Company Rights Offering.

(d) ISSUANCE OF CONVERTIBLE SECURITIES. In case the
Company shall issue or sell any Convertible Securities and the
consideration per share for which additional shares of Common
Stock may at any time thereafter be issuable

-10-

pursuant to the terms of such Convertible Securities shall be
less than the then Market Price per share, the Exercise Price
shall be adjusted as provided in SECTION 8.2(b) on the basis
that (I) the maximum number of additional shares of Common
Stock necessary to effect the conversion or exchange of all
such Convertible Securities shall be deemed to have been
issued as of the date for the determination of the Market
Price, as hereinafter provided, and (II) the aggregate
consideration received for such additional shares of Common
Stock shall be deemed to be equal to the minimum consideration
received and receivable by the Company in connection with the
issuance and exercise of such Convertible Securities. For the
purposes of this SECTION 8.2(d), the date as of which the
Market Price per share shall be determined shall be the
earlier of (A) the date on which the Company shall enter into
a firm contract for the issuance of such Convertible
Securities, or (B) the date of actual issuance of such
Convertible Securities. No adjustment of the Exercise Price
shall be made under this SECTION 8.2(d) upon the issuance of
any Convertible Securities which are issued pursuant to the
exercise of any Stock Purchase Rights, if an adjustment shall
previously have been made upon the issuance of such Stock
Purchase Rights pursuant to SECTION 8.2(c).

(e) MINIMUM ADJUSTMENT. In the event any adjustment
of the Exercise Price pursuant to this SECTION 8.2 shall
result in an adjustment of less than $.02 per share of Common
Stock, no such adjustment shall be made, but any such lesser
adjustment shall be carried forward and shall be made at the
time and together with the next subsequent adjustment, if any,
which, together with any adjustments so

-11-

carried forward, shall amount to $.02 more per share of Common
Stock; PROVIDED, HOWEVER, that upon any adjustment of the
Exercise Price resulting from (i) the declaration of a
dividend upon, or the making of any distribution in respect
of, any stock of the Company payable in Common Stock or
Convertible Securities or (ii) the reclassification by
subdivision, combination or otherwise, of the Common Stock
into a greater or smaller number of shares, the foregoing
figure of $.02 per share (or such figure as last adjusted)
shall be proportionately adjusted.

(f) READJUSTMENT OF EXERCISE PRICE. In the event (i)
the purchase price payable for any Stock Purchase Rights or
Convertible Securities referred to in subsection (c) or (d)
above, (ii) the additional consideration, if any, payable upon
exercise of such Stock Purchase Rights or upon the conversion
or exchange of such Convertible Securities or (iii) the rate
at which any Convertible Securities referred to above are
convertible into or exchangeable for additional shares of
Common Stock shall change, the Exercise Price in effect at the
time of such event shall forthwith be readjusted to the
Exercise Price which would have been in effect at such time
had such Stock Purchase Rights or Convertible Securities
provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold. On the expiration of
any such Stock Purchase Rights or of any such right to convert
or exchange under any such Convertible Securities, if none of
such Stock Purchase Rights or such Convertible Securities, as
the case may be, shall have been exercised, the Exercise Price
then in effect hereunder shall forthwith be increased to the
Exercise Price

-12-

which would have been in effect at the time of such expiration
or termination had such Stock Purchase Rights or Convertible
Securities never been issued. No readjustment of the Exercise
Price pursuant to this SECTION 8.2(f) shall have the effect of
increasing the Exercise Price by an amount in excess of the
adjustment originally made to the Exercise Price in respect of
the issue, sale or grant of the applicable Stock Purchase
Rights or Convertible Securities.

(g) REORGANIZATION, RECLASSIFICATION OR
RECAPITALIZATION OF COMPANY. In case of any capital
reorganization or reclassification or recapitalization of the
capital stock of the Company (other than in the cases referred
to in SECTION 8.2(a)), or in case of the consolidation or
merger of the Company with or into another corporation, or in
case of the sale or transfer of the property of the Company as
an entirety or substantially as an entirety, there shall
thereafter be deliverable upon the exercise of any Warrant or
any portion thereof (in lieu of or in addition to the number
of shares of Common Stock theretofore deliverable, as
appropriate) the number of shares of stock or other securities
or property to which the holder of the number of shares of
Common Stock which would otherwise have been deliverable upon
the exercise of any Warrant or any portion thereof at the time
would have been entitled upon such capital reorganization or
reclassification of capital stock, consolidation, merger or
sale, and at the same aggregate Exercise Price.

Prior to and as a condition of the consummation of any transaction
described in the preceding sentence, the Company shall make equitable, written
adjustments in the application of the provisions herein set forth satisfactory
to the holder or holders of a majority of the Warrants,

-13-

so that the provisions set forth herein shall thereafter be applicable, as
nearly as possible, in relation to any shares of stock or other securities or
other property thereafter deliverable upon exercise of any Warrant. Any such
adjustment shall be made by and set forth in a supplemental agreement between
the Company and/or the successor entity, as applicable, which agreement shall
bind each such entity, shall be accompanied by an opinion of counsel as to the
enforceability of such agreement and shall be approved by the holder or the
holders of a majority of the Warrants.

(h) OTHER DILUTIVE EVENTS. In case any Distribution
shall occur as to which the other provisions of this SECTION 8
are not strictly applicable but the failure to make any
adjustment would not fairly protect the purchase rights
represented by this Warrant in accordance with the essential
intent and principles hereof, then, in each such case, the
Board of Directors of the Company shall determine the amount
of the adjustment in good faith and on a basis consistent with
the essential intent and principles established in this
SECTION 8, necessary to preserve, without dilution, the
purchase rights represented by this Warrant. Upon
determination of such adjustment, the Company will promptly
mail a copy thereof to the holder of this Warrant and shall
make the adjustment described therein.

(i) DETERMINATION OF CONSIDERATION. For purposes of
this SECTION 8, the consideration received or receivable by
the Company for the issuance, sale, grant or assumption of
additional shares of Common Stock, Stock Purchase Rights or
Convertible Securities, irrespective of the accounting
treatment of such consideration, shall be valued as follows:

(1) CASH PAYMENT. In the case of cash, the
net amount received

-14-

by the Company without deduction of any expenses paid
or incurred or any underwriting commissions or
concessions paid or allowed by the Company.

(2) SECURITIES OR OTHER PROPERTY. In the
case of securities or other property, at the Market
Price of the security or the fair value of such other
property as determined in good faith by the Board of
Directors of the Company (in both cases as of the
date immediately preceding the issuance, sale or
grant in question).

(3) ALLOCATION RELATED TO COMMON STOCK. In
the event additional shares of Common Stock are
issued or sold together with other securities or
other assets of the Company for a consideration which
covers both, the consideration received (computed as
provided in (1) and (2) above) shall be allocable to
such additional shares of Common Stock as determined
in good faith by the Board of Directors of the
Company.

(4) DIVIDENDS IN SECURITIES. In case the
Company shall declare a dividend or make any other
distribution upon any stock of the Company (other
than Common Stock) payable in either case in Common
Stock, Convertible Securities or Stock Purchase
Rights, such Common Stock, Convertible Securities or
Stock Purchase Rights, as the case may be, issuable
in payment of such dividend or distribution shall be
deemed to have been issued or sold without
consideration.

(5) STOCK PURCHASE RIGHTS AND CONVERTIBLE
SECURITIES. The

-15-

consideration for which shares of Common Stock shall
be deemed to be issued upon the issuance of any Stock
Purchase Rights or Convertible Securities shall be
determined by dividing (i) the total consideration,
if any, received or receivable by the Company as
consideration for the granting of such Stock Purchase
Rights or the issuance of such Convertible
Securities, plus the minimum aggregate amount of
additional consideration payable to the Company upon
the exercise of such Stock Purchase Rights, or, in
the case of such Convertible Securities, the minimum
aggregate amount of additional consideration, if any,
payable upon the conversion or exchange thereof, in
each case after deducting any accrued interest,
dividends, or any expenses paid or incurred or any
underwriting commissions or concessions paid or
allowed by the Company, by (ii) the maximum number of
shares of Common Stock issuable upon the exercise of
such Stock Purchase Rights or upon the conversion or
exchange of all such Convertible Securities.

(6) MERGER, CONSOLIDATION OR SALE OF
ASSETS. In case any shares of Common Stock or
Convertible Securities or any Stock Purchase Rights
shall be issued in connection with any merger or
consolidation in which the Company is the surviving
corporation, the amount of consideration therefor
shall be deemed to be the fair value of such portion
of the assets and business of the nonsurviving
corporation as shall be attributable to such Common
Stock, Convertible Securities or Stock Purchase
Rights, as the case may be. In the event of any
merger or consolidation of the Company

-16-

in which the Company is not the surviving corporation
or in the event of any sale of all or substantially
all of the assets of the Company for stock or other
securities of any corporation, the Company shall be
deemed to have issued a number of shares of its
Common Stock for stock or securities of the other
corporation computed on the basis of the actual
exchange ratio on which the transaction was
predicated and for a consideration equal to the
Market Price on the date of such transaction of such
stock or securities of the other corporation, and if
any such calculation results in adjustment of the
Exercise Price, the determination of the number of
shares of Common Stock issuable upon exercise of this
Warrant immediately prior to such merger,
consolidation or sale, for the purposes of SECTION
8.2(g) above, shall be made after giving effect to
such adjustment of the Exercise Price.

(j) RECORD DATE. In case the Company shall take a
record of the holders of the Common Stock for the purpose of
entitling them (i) to receive a distribution payable in Common
Stock, Stock Purchase Rights or in Convertible Securities or
(ii) to subscribe for or purchase Common Stock or Convertible
Securities, then all references in this SECTION 8 to the date
of the issue or sale of the shares of Common Stock deemed to
have been issued or sold upon the making of such distribution
or the date of the granting of such right of subscription or
purchase, as the case may be, shall be deemed to be references
to such record date.

(k) SHARES OUTSTANDING. The number of shares of
Common Stock deemed to be outstanding at any given time shall
exclude shares of Common Stock

-17-

in the treasury of the Company and those held by any
subsidiary of the Company.

(l) MAXIMUM EXERCISE PRICE. At no time shall the
Exercise Price per share of Common Stock exceed the amount set
forth in SECTION 1 of this Agreement except as provided in
subsection (a) or (g) of this SECTION 8.2.

(m) APPLICATION. Except as otherwise provided herein,
all subsections of this SECTION 8.2 are intended to operate
independently of one another. If an event occurs that requires
the application of more than one subsection, all applicable
subsections shall be given independent effect.

8.3 CERTIFICATES AND NOTICES.

(a) ADJUSTMENTS TO EXERCISE PRICE. Upon any
adjustment under this SECTION 8 of the number of shares of
Common Stock purchasable upon exercise of a Warrant or of the
Exercise Price, a certificate, signed (i) by the President or
a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the
Company, or (ii) by any independent firm of certified public
accountants of recognized national standing selected by, and
at the expense of, the Company, setting forth in reasonable
detail the events requiring the adjustment and the method by
which such adjustment was calculated, shall be mailed to the
holders of the Warrant specifying the adjusted Exercise Price
and the number of shares of Common Stock purchasable upon
exercise of such holder’s Warrant after giving effect to such
adjustment.

The certificate of any independent firm of certified public accountants
of recognized national standing selected by the Board of Directors of the
Company shall be conclusive evidence

-18-

of the correctness of any computation made under this SECTION 8.

(b) EFFECT OF FAILURE.

Failure to file any certificate or notice or
to mail any notice or any defect in any certificate or notice
pursuant to this SECTION 8.3 shall not affect the legality or
validity of the adjustment of the Exercise Price or the number
of shares purchasable upon exercise of any Warrant, or any
transaction giving rise thereto.

9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES.

Each Warrant Certificate is exchangeable without expense, upon
the surrender hereof by the registered Holder at the principal executive office
of the Company, for a new Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of Shares in
such denominations as shall be designated by the Holder thereof at the time of
such surrender.

Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrant Certificate, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.

10. ELIMINATION OF FRACTIONAL INTERESTS.

The Company shall not be required to issue certificates
representing fractions of shares of Common Stock and shall not be required to
issue scrip or pay cash in lieu of fractional

-19-

interests, it being the intent of the parties that all fractional interests
shall be eliminated by rounding any fraction up to the nearest whole number of
shares of Common Stock.

11. RESERVATION AND LISTING OF SECURITIES.

The Company shall at all times reserve and keep available out
of its authorized shares of Common Stock, solely for the purpose of issuance
upon the exercise of the Warrants, such number of shares of Common Stock as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all shares of Common Stock issuable upon such exercise shall be duly and validly
issued, fully paid, non-assessable and not subject to the preemptive rights of
any shareholder. As long as the Warrants shall be outstanding, the Company shall
cause all shares of Common Stock issuable upon the exercise of the Warrants to
be listed on or quoted by Nasdaq or listed on such national securities exchanges
as the Company’s Common Stock is then listed or quoted, if any.

12. NOTICES TO WARRANT HOLDERS.

Nothing contained in this Agreement shall be construed as
conferring upon the Holder or Holders the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:

(a) the Company shall take a record of the holders of
its shares of Common Stock for the purpose of entitling them
to receive a dividend or distribution payable otherwise than
in cash, or a cash dividend or distribution payable otherwise
than out of current or retained earnings, as indicated by the

-20-

accounting treatment of such dividend or distribution on the
books of the Company; or

(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the
Company or securities convertible into or exchangeable for
shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or

(c) a merger or consolidation involving the Company
or subsidiary of the Company and any other entity and the
Company is not the surviving entity; or

(d) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or
merger) or a sale of all or substantially all of its property,
assets and business as an entirety shall be proposed; then, in
any one or more of said events, the Company shall give written
notice of such event at least fifteen (15) days prior to the
date fixed as a record date or the date of closing the
transfer books for the determination of the shareholders
entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, options or
warrants, or entitled to vote on such proposed merger,
consolidation, dissolution, liquidation, winding up or sale.
Such notice shall specify such record date or the date of
closing the transfer books, as the case may be. Failure to
give such notice or any defect therein shall not affect the
validity of any action taken in connection with the
declaration or payment of any such dividend or distribution,
or the issuance of any convertible or exchangeable securities
or subscription rights, options or warrants, or any proposed
merger, consolidation, dissolution,

-21-

liquidation, winding up or sale.

13. NOTICES.

All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made when delivered,
or mailed by registered or certified mail, return receipt requested:

(a) If to a registered Holder of the Warrants, to the
address of such Holder as shown on the books of the Company;
or

(b) If to the Company, to the address set forth in
SECTION 3 of this Agreement or to such other address as the
Company may designate by notice to the Holders.

14. SUPPLEMENTS AND AMENDMENTS.

The Company and HN may from time to time supplement or amend this
Agreement without the approval of any Holders of Warrant Certificates in order
to cure any ambiguity, to correct or supplement any provision contained herein
which may be defective or inconsistent with any provisions herein, or to make
any other provisions in regard to matters or questions arising hereunder which
the Company and HN may deem necessary or desirable and which the Company and HN
deem not to adversely affect the interests of the Holders of Warrant
Certificates.

15. SUCCESSORS.

All the covenants and provisions of this Agreement by or for the
benefit of the Company and the Holders inure to the benefit of their respective
successors and assigns hereunder.

-22-

16. TERMINATION.

This Agreement shall terminate at the close of business on December 30,
2003. Notwithstanding the foregoing, this Agreement will terminate on any
earlier date when all Warrants have been exercised and all the Shares issuable
upon exercise of the Warrants have been resold to the public.

17. GOVERNING LAW.

This Agreement and each Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of New York and for all
purposes shall be construed in accordance with the laws of said State.

18. BENEFITS OF THIS AGREEMENT.

Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and HN and any other registered Holder or
Holders of the Warrant Certificates, Warrants or the Shares any legal or
equitable right, remedy or claim under this Agreement; and this Agreement shall
be for the sole and exclusive benefit of the Company and HN and any other Holder
or Holders of the Warrant Certificates, Warrants or the Shares.

19. COUNTERPARTS.

This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and
such counterparts shall together constitute but one and the same instrument.

-23-

IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.

[SEAL] THE WMF GROUP, LTD.

By: /S/ SHEKAR NARASIMHAN
——————————
Name: Shekar Narasimhan
Title: President and Chief
Executive Officer

Attest:

/S/ BARBARA EKSTROM
– ———————–

HN ACQUISITIONS, INC.

By: /S/ NORTON HERRICK
——————————
Name: Norton Herrick
Title: President

-24-

EXHIBIT A

THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE “ACT”) OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE
OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR SUCH LAWS, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER
SUCH ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF
SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING
THAT EXEMPTIONS FROM REGISTRATION UNDER THE ACT AND SUCH LAWS ARE AVAILABLE.

THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.

EXERCISABLE ON OR BEFORE

5:00 P.M., NEW YORK TIME, DECEMBER 30, 2003

No. W3- _______ Series 3 Warrants

SERIES 3 WARRANT CERTIFICATE

This Warrant Certificate certifies that _______________
____________ or registered assigns, is the registered holder of _______ Series 3
Warrants to purchase, at any time from December 30, 1998 until 5:00 P.M. New
York City time on December 30, 2003 (“Expiration Date”), up to _____ shares
(“Shares”) of fully-paid and non-assessable common stock, $.01 par value
(“Common Stock”), of The WMF Group, Ltd., a Delaware corporation (the
“Company”), at an initial exercise price per share of $10.00, subject to
adjustment in certain events (the “Exercise Price”), upon surrender of this
Warrant Certificate and payment of the Exercise Price at an office or agency of
the Company, but subject to the conditions set forth herein and in the Warrant
Agreement, dated as of December 30, 1998, between the Company and HN
Acquisitions, Inc. (the “Series 3 Warrant Agreement”). Payment of the Exercise
Price may be made in cash, or by certified or official bank check in New York
Clearing House funds payable to the order of the Company, or any combination of
cash or check, or by cashless exercise as provided in the Warrant Agreement.

No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.

The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to in a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words “holders” or “holder” meaning the registered
holders or registered holder) of the Warrants.

The Warrant Agreement provides that upon the occurrence of
certain events, the Exercise Price and/or number of the Company’s securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.

Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection therewith.

Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.

The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.

All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.

IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.

Dated: ___________, THE WMF GROUP, LTD.

[SEAL] By:________________________
Name:
Title:

Attest:

_______________________

[FORM OF ELECTION TO PURCHASE]

The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _________ Shares and
herewith tenders in payment for such Shares cash or a certified or official bank
check payable in New York Clearing House Funds to the order of The WMF Group,
Ltd. in the amount of $ , all in accordance with the terms hereof. The
undersigned requests that a certificate for such Shares be registered in the
name of , whose address is __________________, and that such Certificate be
delivered to __________________, whose address is _____________.

Dated: Signature:_________________________

(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)

________________________________

________________________________
(Insert Social Security or Other
Identifying Number of Holder)

Signature Guaranteed:

_______________________________

By:____________________________
Title:

The signature to this document must be guaranteed by a member of the Securities
Transfer Agents Medallion program. Notarized or witnessed signatures are not
acceptable.

[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)

FOR VALUE RECEIVED ____________________________________________________

hereby sells, assigns and transfers unto

________________________________________________________________________________
(Please print name and address of transferee)

this Warrant Certificate, together with all right, title and interest therein,

and does hereby irrevocably constitute and appoint _______________, Attorney, to

transfer the within Warrant Certificate on the books of the within-named

Company, with full power of substitution.

Dated: Signature:__________________________

Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate)

_________________________________

_________________________________

(Insert Social Security or Other
Identifying Number of Assignee)

Signature Guaranteed:

______________________________________

By:___________________________________
Title:

The signature to this document must be guaranteed by a member of the Securities
Transfer Agents Medallion program. Notarized or witnessed signatures are not
acceptable.




EX-10.21
4
EXHIBIT 10.21

Exhibit 10.21

REGISTRATION RIGHTS AGREEMENT

Dated as of December 30, 1998

by and between

THE WMF GROUP, LTD.
as the Company,

and

HN ACQUISITIONS, INC.
as the Initial Holder

This Registration Rights Agreement is made and entered into as of
December 30, 1998, by and between The WMF Group, Ltd., a Delaware corporation
(the “Company”), and HN Acquisitions, Inc., a Florida corporation (the “Initial
Holder”).

This Agreement is entered into pursuant to the Settlement Agreement
(the “Settlement Agreement”), dated December 30, 1998, between the Company, WMF
Capital Corp., a Delaware corporation, Norton Herrick, in his individual
capacity and the Initial Holder. In order to induce the Initial Holder to enter
into the Settlement Agreement, and pursuant to Sections 1 and 2 of the
Settlement Agreement, the Company has agreed to provide the registration rights
provided for in this Agreement to the Initial Holder and its direct and indirect
transferees.

The parties hereby agree as follows:

1. DEFINITIONS

As used in this Agreement, the following terms shall have the following
meanings:

AFFILIATE: As to any specified Person, (i) any Person that directly or
indirectly controls or is controlled by or is under common control with the
specified Person, (ii) any Person that is an officer of, partner in or trustee
of, or serves in a similar capacity with respect to, the specified Person or of
which the specified Person is an officer, partner or trustee, or with respect to
which the specified Person serves in a similar capacity, and (iii) any Person
that, directly or indirectly, is the beneficial owner of 10% or more of any
class of equity securities of the specified Person or of which the specified
Person is directly or indirectly the owner of 10% or more of any class of equity
securities.

AGREEMENT: This Registration Rights Agreement, as the same may be
amended, supplemented or modified from time to time in accordance with the terms
hereof.

BUSINESS DAY: With respect to any act to be performed hereunder, each
Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which
banking institutions in New York, New York or such other place where such act is
to occur are authorized or obligated by applicable law, regulation or executive
order to close.

CLOSING DATE: December 30, 1998.

COMMISSION: The United States Securities and Exchange Commission.

COMMON STOCK: Common stock, $0.01 par value per share, of the Company.

COMPANY: The WMF Group, Ltd., a Delaware corporation, and any successor
corporation thereto.

COMPANY WARRANTS: The Series 2 Warrants and Series 3 Warrants issued by
the Company to the Initial Holder pursuant to Section 1 of the Settlement
Agreement.

CONTROLLING PERSON: As defined in SECTION 6(a) hereof.

EXCHANGE ACT: The Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated by the Commission thereunder.

EXPIRATION DATE: The earlier of (i) such time as all outstanding
Registrable Shares have been sold pursuant to a Registration Statement or have
been transferred pursuant to Rule 144 or otherwise transferred in a manner that
results in the transferred security being delivered not being subject to
transfer restrictions under the Securities Act or (ii) such time as the Company
delivers to the Holders an opinion of counsel reasonably satisfactory to the
Holders that the Registrable Shares may be sold without registration under the
Securities Act

HOLDER: Each registered holder of any Registrable Shares from time to
time, including, without limitation, the Initial Holder and its Affiliates.

INITIAL HOLDER: HN Acquisitions, Inc.

PERSON: An individual, partnership, corporation, trust, or
unincorporated organization, or government and any agency or political
subdivision thereof.

PLEDGED SHARES: Those shares of Common Stock pledged by the Company to
guarantee the obligation of WMF Capital Corp. pursuant to Section 2(ii) of the
Settlement Agreement.

PROCEEDING: An action, claim, suit or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or, to the knowledge of the person subject thereto,
threatened.

PROSPECTUS: The prospectus included in any Registration Statement,
including any preliminary Prospectus, and all other amendments and supplements
to any such prospectus, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference, if any, in
such prospectus.

REGISTER, REGISTERED and REGISTRATION: Such terms shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable

2

rules and regulations thereunder, and the declaration or ordering of the
effectiveness of such registration statement.

REGISTRABLE SHARES: The Warrant Shares, the Pledged Shares and any
shares of Common Stock replacing or issued as a dividend on the Warrant Shares
or the Pledged Shares, upon original issuance thereof and at all times
subsequent thereto, until, in the case of any such share, the earliest to occur
of (i) the date on which it has been registered effectively pursuant to the
Securities Act and disposed of in accordance with the Registration Statement
relating to it, (ii) the date on which either it is transferred in compliance
with Rule 144 (or any similar provisions then in effect) or (iii) the date on
which it is sold to the Company.

REGISTRATION EXPENSES: Any and all expenses incident to performance of
or compliance with this Agreement, including without limitation: (i) all
Commission, stock exchange, or other market registration, listing and filing
fees, (ii) all fees and expenses incurred in connection with compliance with
federal or state securities or blue sky laws (including any registration,
listing and filing fees and reasonable fees and disbursements of counsel in
connection with blue sky qualification of any of the Registrable Shares and the
preparation of a Blue Sky Memorandum and compliance with applicable rules and
regulations), (iii) all expenses of any Persons in preparing or assisting in
preparing, word processing, duplicating, printing, delivering and distributing
any Registration Statement, any Prospectus, any amendments or supplements
thereto, any underwriting agreements, securities sales agreements, certificates
and other documents relating to the performance of and compliance with this
Agreement, (iv) all fees and expenses incurred in connection with the listing of
any of the Registrable Shares on any securities exchange or market pursuant to
SECTION 4(i) hereof, (v) the fees and disbursements of counsel for the Company
and of the independent public accountants (including without limitation, the
expenses of any special audit and “cold comfort” letters required by or incident
to such performance) of the Company (provided that Registration Expenses shall
not include the fees and expenses of any counsel or accountants for the Holders)
and (vi) any fees and disbursements customarily paid by issuers or sellers of
securities (including the fees and expenses of any experts retained by the
Company in connection with any Registration Statement), but excluding
underwriters’ and brokers’ discounts and commissions and transfer taxes, if any,
relating to the sale or disposition of Registrable Shares by a Holder.

REGISTRATION STATEMENT: Any registration statement of the Company that
covers the issuance or resale of any of the Registrable Shares on an appropriate
form, including the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be
incorporated by reference, if any, in such registration statement.

RIGHTS OFFERING: The rights offering by the Company announced publicly
on or about October 14, 1998.

RULE 144: Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.

3

RULE 158: Rule 158 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.

RULE 424: Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.

SECURITIES ACT: The Securities Act of 1933, as amended, and the rules
and regulations promulgated by the Commission thereunder.

SETTLEMENT AGREEMENT: As defined in the preamble.

UNDERWRITTEN OFFERING: A sale of securities of the Company to an
underwriter or underwriters for reoffering to the public.

WARRANT AGREEMENTS: The Series 2 Warrant Agreement or the Series 3
Warrant Agreement between the Company and the Initial Holder, as the context
requires.

WARRANT SHARES: Those shares of Common Stock that the holder of the
Company Warrants is entitled to purchase upon exercise of the Company Warrants.

2. SHELF REGISTRATION

Pursuant to the registration procedures set forth in SECTION 4 hereof,
the Company agrees to file with the Commission no later than April 15, 1999, one
or more shelf Registration Statements with respect to the sale from time to time
in open-market transactions by the Holders of any and all Registrable Shares.

3. PIGGYBACK REGISTRATION

(a) PIGGYBACK REGISTRATION RIGHTS AND NOTICE OF REGISTRATION. From the
Closing Date until the Expiration Date, the Company shall notify all Holders in
writing at least twenty-one (21) days prior to filing any registration statement
under the Securities Act for the purpose of effecting a public offering of
securities of the Company (including, but not limited to, registration
statements relating to offerings of the Company’s securities by any shareholders
of the Company, but EXCLUDING registration statements relating to the Rights
Offering or relating exclusively to any employee benefit plan or corporate
reorganization) and will afford each such Holder an opportunity to include in
such registration statement all or any part of the Registrable Shares then held
by such Holder. Each Holder desiring to include in any such registration
statement all or any part of the Registrable Shares held by such Holder shall,
within seven (7) days after receipt of the above-described notice from the
Company, so notify the Company in writing, and in such notice shall inform the
Company of the number of Registrable Shares such Holder wishes to include in
such registration statement. If a Holder decides not to include all of its
Registrable Shares in any registration statement thereafter filed by the
Company, such Holder shall nevertheless continue to have the right to include
any Registrable Shares in any subsequent registration statement or

4

registration statements as may be filed by the Company with respect to offerings
of Company securities, all upon the terms and conditions set forth herein.

(b) RIGHT TO TERMINATE REGISTRATION. The Company shall have the right,
in its sole discretion, to terminate or withdraw any registration initiated by
it under this SECTION 3 prior to the effectiveness of such registration, whether
or not any Holder has elected to include Registrable Shares in such
registration.

(c) UNDERWRITING. If a registration statement under which the Company
gives notice under this SECTION 3 is for an Underwritten Offering, then the
Company shall so advise the Holders of Registrable Shares and the Holder shall
have the opportunity to include its Registrable Shares in such registration
statement. In such event, the right of any Holder to include its Registrable
Shares in a registration pursuant to this SECTION 3(c) shall be conditioned upon
such Holder’s participation in such underwriting and the inclusion of such
Holder’s Registrable Shares in the underwriting to the extent provided herein.
All Holders proposing to distribute their Registrable Shares through such
underwriting shall enter into an underwriting agreement in customary form with
the underwriter(s) selected for such underwriting. Notwithstanding any other
provision of this Agreement, if the managing underwriter(s) determine(s) in good
faith that marketing factors require a limitation of the number of shares to be
underwritten, then the managing underwriter(s) may exclude shares (including
Registrable Shares) from the registration and the underwriting, and the number
of shares that may be included in the registration and the underwriting shall be
allocated, FIRST, to the Company, and SECOND, to each of the shareholders
(including the Holders) requesting inclusion of their shares in such
registration statement on a PRO RATA basis based on the total number of shares
such shareholder has requested be included in such registration statement. If
any Holder disapproves of the proposed terms of any such Underwritten Offering,
such Holder may elect to withdraw therefrom by written notice to the Company and
the managing underwriter(s), delivered at least ten (10) Business Days prior to
the date on which the Underwritten Offering is expected to commence. Any
Registrable Shares excluded or withdrawn from such underwriting shall be
excluded and withdrawn from the registration. For any Holder that is a
partnership or corporation, the partners, retired partners and shareholders of
such Holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single “Holder,” and any PRO RATA reduction with respect to such
“Holder” shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
“Holder,” as defined in this sentence.

(d) HOLDBACK AGREEMENT. By electing to include Registrable Shares in
any registration pursuant to SECTION 3 hereof, the Holder of the Registrable
Shares shall be deemed to have agreed not to effect any public sale or
distribution of securities of the Company of the same or similar class or
classes of the securities included in the Registration Statement or any
securities convertible into or exchangeable or exercisable for such securities,
including a sale pursuant to Rule 144 under the Securities Act, during such
periods as are reasonably requested by the managing underwriter(s), if an
Underwritten Offering, or the Company, in any other registration. Any period up
to 180 days shall be deemed reasonable.

5

(e) The Company shall not be obligated to effect, or to take any action
to effect, any such registration of Registrable Shares pursuant to this
SECTION 3 in any particular jurisdiction in which the Company would be required
to execute a general consent to service of process or to qualify to do business
as a foreign corporation in affecting such registration, qualification or
compliance, unless the Company is already subject to service or required to be
so qualified in such jurisdiction and except as may be required by the
Securities Act.

4. REGISTRATION PROCEDURES.

Subject to SECTIONS 2 and 3 hereof, in connection with the obligations
of the Company with respect to any registration pursuant to this Agreement, the
Company shall use its commercially reasonable best efforts to effect or cause to
be effected the registration of the Registrable Shares under the Securities Act
to permit the sale of such Registrable Shares by the Holder or Holders in
accordance with customary methods of sale or distribution, including through
brokers’ transactions and block trades. The Company shall:

(a) prepare and file with the Commission, as specified in this
Agreement, a Registration Statement, which Registration Statement shall comply
as to form in all material respects with the requirements of the applicable form
and include all financial statements required by the Commission to be filed
therewith, and use its commercially reasonable best efforts to cause such
Registration Statement to become effective as soon as possible after filing and
to remain effective until the Expiration Date;

(b) subject to SECTION 4(h) hereof, prepare and file with the
Commission such amendments and post-effective amendments to each such
Registration Statement as may be necessary to keep such Registration Statement
effective for the period described in SECTION 4(a); cause each such Prospectus
contained therein to be supplemented by any required prospectus supplement, and
as so supplemented, to be filed pursuant to Rule 424 or any similar rule that
may be adopted under the Securities Act; and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by each
Registration Statement during the applicable period in accordance with the
intended method or methods of distribution by the selling Holder thereof;

(c) upon request of any Holder named in any Prospectus, prepare and
file with the Commission a post-effective amendment to the Registration
Statement of which such Prospectus is a part to reflect any transfer of one or
more Company Warrants to an individual or entity not already named as a Holder
in such Prospectus;

(d) furnish without charge to any Holder named in any Prospectus as
many copies of such Prospectus, and any amendment or supplement thereto and such
other documents as such Holder may reasonably request, in order to facilitate
the public sale or other disposition of the Registrable Shares; the Company
consents to the use of any such Prospectus by such Holder in connection with the
offering and sale of the Registrable Shares covered by any such Prospectus;

(e) use its commercially reasonable best efforts to register or
qualify, or obtain exemption from registration or qualification for, all
Registrable Shares by the time the applicable

6

Registration Statement is declared effective by the Commission under all
applicable state securities or “blue sky” laws of such jurisdictions as any
Holder shall reasonably request in writing, keep each such registration or
qualification or exemption effective during the period such Registration
Statement is required to be kept effective pursuant to SECTION 4(a) and do any
and all other acts and things which may be reasonably necessary or advisable to
enable each Holder to consummate the disposition in each such jurisdiction of
such Registrable Shares owned by such Holder;

(f) notify each Holder promptly and, if requested by any Holder,
confirm such advice in writing (i) when a Registration Statement has become
effective and when any post-effective amendments and supplements thereto become
effective, (ii) of the issuance by the Commission or any state securities
authority of any stop order suspending the effectiveness of a Registration
Statement or the initiation of any Proceedings for that purpose, and (iii) of
the happening of any event during the period a Registration Statement is
effective as a result of which such Registration Statement or the related
Prospectus contains any untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading (which advice shall be accompanied by an
instruction to suspend the use of the Prospectus until the requisite changes
have been made);

(g) during the period of time referred to in SECTION 4(a), use its
commercially reasonable best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of any enjoining order suspending the use or effectiveness
of a Registration Statement or the lifting of any suspension of the
qualification (or exemption from qualification) of any of the Registrable Shares
for sale in any jurisdiction, at the earliest possible moment;

(h) upon request, furnish to each requesting Holder, without charge, at
least one conformed copy of each Registration Statement and any post-effective
amendment thereto (without documents incorporated therein by reference or
exhibits thereto, unless requested);

(i) except as provided in SECTION 5 hereof, upon the occurrence of any
event contemplated by SECTION 4(e)(iii) hereof, use its commercially reasonable
best efforts to promptly prepare a supplement or post-effective amendment to a
Registration Statement or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Shares, such Prospectus will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;

(j) if the Company has listed its Common Stock on an exchange or
automated quotation system, use its commercially reasonable best efforts
(including, without limitation, seeking to cure any deficiencies (within the
Company’s control) cited by the exchange or automated quotation system in the
Company’s listing application) to list all Registrable Shares on such exchange
or automated quotation system;

(k) prepare and file in a timely manner all documents and reports
pursuant to the Exchange Act which are incorporated by reference into any
Registration Statement;

7

(l) use its commercially reasonable best efforts to comply with all
applicable rules and regulations of the Commission and make generally available
to its securityholders, as soon as reasonably practicable, earnings statements
covering at least 12 months which satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 (or any similar rule promulgated under the
Securities Act) thereunder;

(m) provide and cause to be maintained a transfer agent for all
Registrable Shares covered by any Registration Statement from and after a date
not later than the effective date of such Registration Statement; and

(n) in connection with any sale or transfer of the Registrable Shares
that will result in such securities no longer being restricted from resale
without registration under the Securities Act, cooperate with the Holders to
facilitate the timely preparation and delivery of certificates representing the
Registrable Shares to be sold, which certificates shall not bear any restrictive
legends, and to enable such Registrable Shares to be in such denominations and
registered in such names as the Holders may request at least two (2) Business
Days prior to any sale of the Registrable Shares.

The Company may require each Holder to furnish to the Company such
information regarding the proposed distribution by such Holder of Registrable
Shares as the Company may from time to time reasonably request in writing and no
Holder shall be entitled to be named as a selling securityholder in any
Registration Statement, and no Holder shall be entitled to use the Prospectus
forming a part thereof, if such Holder does not provide such information to the
Company.

Upon receipt of written notice from the Company of the happening of any
event of the kind described in SECTION 4(e)(iii) hereof, the Holders will
immediately discontinue disposition of Registrable Shares pursuant to a
Registration Statement until the Holders’ receipt of the copies of a
supplemented or amended Prospectus. If so requested by the Company, the Holders
will deliver to the Company (at the expense of the Company) all copies in their
possession, other than permanent file copies then in the Holders’ possession, of
the Prospectus covering such Registrable Shares current at the time of receipt
of such notice.

5. BLACK-OUT PERIOD. Subject to the provision of this SECTION 5, the
Company may defer filing or requesting the effectiveness of a Registration
Statement, or following the effectiveness of a Registration Statement (and the
filings with any state securities commissions), the Company, by written notice
to the Holders, may direct the Holders to suspend sales of the Registrable
Shares pursuant to the Registration Statement, if either of the following events
shall occur: (i) the suspension of sales is necessary to correct a material
misstatement or omission in the applicable Registration Statement or any
document incorporated by reference therein, (ii) the Company is engaged in a
primary Underwritten Offering of its securities and the managing underwriter(s)
informs the Company that the sale of shares under the Registration Statement
would impair the pricing or commercial practicability of the offering, or (iii)
if (A) the Company is engaged in negotiations relating to, or the consummation
of, a material transaction or (B) an event has occurred that would require
additional disclosure of material information by the Company in the Registration
Statement or the documents incorporated by reference therein, in either case as
to

8

which the Board of Directors of the Company determines in good faith that the
Company has a bona fide business purpose for preserving confidentiality or which
renders the Company unable to comply with the Commission’s disclosure
requirements, but such suspension shall continue only for so long as such event
or its effect is continuing. Upon the occurrence of such event, the Company
shall use its commercially reasonable best efforts to cause the Registration
Statement to become effective or to promptly amend or supplement the
Registration Statement on a post-effective basis, as applicable, so as to permit
the Holders to resume sales of the Registrable Shares.

In the case of an event which causes the Company to suspend the
effectiveness of a Registration Statement (a “Suspension Event”), the Company
may give written notice (a “Suspension Notice”) to the Holders at the addresses
set forth in the stock transfer records of the Company to suspend sales of the
Registrable Shares so that the Company may amend or update the Registration
Statement; PROVIDED, HOWEVER, that such suspension shall continue only for so
long as the Suspension Event or its effect is continuing and the Company is
taking all reasonable steps to terminate suspension of the effectiveness of the
Registration Statement as promptly as possible. In no case shall a suspension of
sales pursuant to this SECTION 5 continue for a total of more than 120 days out
of any one-year period and no more than 180 days in any two-year period. The
Warrant Exercise Term (as defined in the applicable Warrant Agreement) of any
Company Warrants outstanding at the time of any Suspension Event shall be
extended for a period of time equal to the duration of the resulting suspension.

The Holders shall not effect any sales of the Registrable Shares
pursuant to such Registration Statement at any time after receipt of a
Suspension Notice from the Company (and prior to receipt of an End of Suspension
Notice (defined below)). If so requested by the Company, the Holders will
deliver to the Company (at the expense of the Company) all copies in their
possession, other than permanent file copies then in the Holders’ possession, of
the Prospectus covering such Registrable Shares at the time of receipt of the
Suspension Notice. The Holders may recommence effecting sales of the Registrable
Shares pursuant to the Registration Statement (or such filings) following
further notice to such effect (an “End of Suspension Notice”) from the Company,
which End of Suspension Notice shall be given by the Company to the Holders in
the manner described above promptly following the conclusion of any Suspension
Event.

6. INDEMNIFICATION AND CONTRIBUTION.

(a) INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and
hold harmless (i) the Initial Holder, (ii) each Holder, (iii) each Person, if
any, who controls (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) any of the foregoing (any of the persons
referred to in this clause (iii) being hereinafter referred to as a “Controlling
Person”), (iv) the respective officers, directors, partners, employees,
representatives and agents of each Initial Holder and each Holder or any
Controlling Person, and (v) any person deemed to be an “underwriter” under the
Securities Act or other applicable law as follows:

(i) from and against any and all loss, claim, liability and
damage whatsoever, as incurred, arising out of (A) violation by the Company of
the Securities Act or applicable state

9

securities laws in connection with an offering of Registrable Shares hereunder
and (B) any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement (or any amendment thereto) pursuant to
which Registrable Shares were registered under the Securities Act, including all
documents incorporated therein by reference, or the omission or alleged omission
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or arising out of any untrue statement or
alleged untrue statement of a material fact contained in any Prospectus (or any
amendment or supplement thereto), including all documents incorporated therein
by reference, or the omission or alleged omission to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; PROVIDED, HOWEVER, that such indemnity with respect to any
Prospectus shall not inure to the benefit of any Holder or Initial Holder (or
any Controlling Person thereof) to the extent that any such loss, claim,
liability, damage or expense arises out of such indemnified person’s failure to
send or give a copy of the revised final Prospectus, as the same may be then
supplemented or amended, to the Person asserting an untrue statement or alleged
untrue statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Shares to such Person if such statement
or omission was corrected in such final Prospectus;

(ii) from and against any and all loss, liability, claim and,
damage whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or investigation or Proceeding by any governmental
agency or body, commenced or threatened, or of any claim whatsoever based upon
any such untrue statement or omission, if such settlement is effected with the
written consent of the Company, which consent shall not be unreasonably
withheld; and

(iii) from and against any and all expense reasonably incurred
(including reasonable fees and disbursements of one firm of attorneys), in
investigating, preparing or defending against any litigation, or investigation
or Proceeding by any governmental agency or body, commenced or threatened, in
each case whether or not a party, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or omission,
to the extent that any such expense is not paid under subparagraph (i) or (ii)
above;

PROVIDED, HOWEVER, that this indemnity agreement does not apply to any
Holder with respect to any loss, liability, claim, damage or expense to the
extent arising out of any untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with information
furnished to the Company in writing by such Holder expressly for use in a
Registration Statement (or any amendment thereto) or any Prospectus (or any
amendment or supplement thereto).

(b) INDEMNIFICATION BY HOLDERS. Each Holder severally and not jointly
agrees to indemnify and hold harmless the Company, its directors, officers,
partners, employees, representatives and agents (including each officer of the
Company who signed the Registration Statement), and each Person, if any, who
controls the Company, within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, against

10

(i) any and all loss, liability, claim, damage and expenses
whatsoever, as incurred, arising out of (A) any violation by the Holders of the
Securities Act or applicable state securities laws in connection with the
offering and (B) any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement (or any amendment thereto) pursuant
to which Registrable Shares were registered under the Securities Act, including
all documents incorporated therein by reference, or the omission or alleged
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
Prospectus (or any amendment or supplement thereto), including all documents
incorporated therein by reference, or the omission or alleged omission to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;

(ii) from and against any and all loss, liability, claim and,
damage whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or investigation or Proceeding by any governmental
agency or body, commenced or threatened, or of any claim whatsoever based upon
any such untrue statement or omission, if such settlement is effected with the
written consent of such Holder, which consent shall not be unreasonably
withheld; and

(iii) from and against any and all expense reasonably incurred
(including reasonable fees and disbursements of one firm of attorneys), in
investigating, preparing or defending against any litigation, or investigation
or Proceeding by any governmental agency or body, commenced or threatened, in
each case whether or not a party, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or omission,
to the extent that any such expense is not paid under subparagraph (i) or (ii)
above;

but only with respect to such untrue statements or omissions, or
alleged untrue statements or omissions, made in a Registration Statement (or any
amendment thereto) or any Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with information furnished to the Company in
writing by such Holder expressly for use in such Registration Statement (or any
amendment thereto) or such Prospectus (or any amendment or supplement thereto),
and PROVIDED FURTHER, that no Holder shall be liable under this Section 6(b) for
any amount in excess of the net proceeds received by such Holder from the sale
of such Holder’s Registrable Shares pursuant to a Registration Statement or a
Prospectus, as the case may be.

(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Each indemnified party
shall give reasonably prompt notice to each indemnifying party of any action or
Proceeding commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve it
from any liability which it may have under this SECTION 6 except to the extent
that the indemnifying party is actually prejudiced by such failure to give
notice. If the indemnifying party so elects within a reasonable time after
receipt of such notice, the indemnifying party may assume the defense of such
action or Proceeding at such indemnifying party’s own expense with counsel
chosen by the indemnifying party and approved by the indemnified parties in such
action or Proceeding, which approval shall not be unreasonably withheld;
PROVIDED, HOWEVER, that, if such indemnified party or parties reasonably
determine that a

11

conflict of interest exists where it is advisable for such indemnified party or
parties to be represented by separate counsel or that, upon advice of counsel,
there may be legal defenses available to them which are different from or in
addition to those available to the indemnifying party, then the indemnifying
party shall not be entitled to assume such defense and the indemnified party or
parties shall be entitled to one separate counsel at the indemnifying party’s
expense. If an indemnifying party is not entitled to assume the defense of such
action or Proceeding as a result of the proviso to the preceding sentence, such
indemnifying party’s counsel shall be entitled to conduct such indemnifying
party’s defense, and counsel for the indemnified party or parties shall be
entitled to conduct the defense of such indemnified party or parties, it being
understood that both such counsel will cooperate with each other to conduct the
defense of such action or Proceeding as efficiently as possible. If an
indemnifying party is not so entitled to assume the defense of such action or
does not assume such defense, after having received the notice referred to in
the first sentence of this paragraph, the indemnifying party or parties will pay
the reasonable fees and expenses of not more than one counsel (and any necessary
local counsel) for the indemnified party or parties. In such event, however, no
indemnifying party will be liable for any settlement effected without the
written consent of such indemnifying party. No indemnifying party shall, without
the consent of the indemnified party, consent to entry of any judgment or enter
into a settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such indemnified party of a release from
all liability in respect to such claim or litigation. If an indemnifying party
is entitled to assume, and assumes, the defense of such action or Proceeding in
accordance with this paragraph, such indemnifying party shall not be liable for
any fees and expenses for counsel for the indemnified parties incurred
thereafter in connection with such action or Proceeding.

(d) CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
this SECTION 6 is for any reason held to be unenforceable, unavailable or
insufficient although applicable in accordance with it terms, the Company and a
Holder shall contribute to the aggregate losses, liabilities, claims, damages
and expenses of the nature contemplated by such indemnity agreement incurred by
the Company and the Holder in such proportion as is appropriate to reflect the
relative fault of the Company on the one hand and the Holder on the other.
Relative fault shall be determined by reference to, among other things, whether
an untrue or alleged untrue statement of a material fact or an omission or
alleged omission of a material fact relates to information supplied by or
available to the Company on the one hand, or the Holder, on the other hand, and
by the parties’ relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. Notwithstanding
the foregoing, no Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. No Holder shall be liable under this Section 6(d) for any
amount in excess of the net proceeds received from such Holder from the sale of
such Holder’s Registrable Shares pursuant to a Registration Statement or a
Prospectus, as the case may be. For purposes of this SECTION 6, each Person, if
any, who controls (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) the Holder or the Company (as applicable) and
its respective officers, directors, partners, employees, representatives and
agents shall have the same rights to contribution as the Holder or the Company
(as applicable). Each party entitled to contribution

12

agrees that upon the service of a summons or other initial legal process upon it
in any action instituted against it in respect of which contribution may be
sought, it shall promptly give written notice of such service to the party or
parties from whom contribution may be sought, but the omission so to notify such
party or parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise, except to the extent that such party was actually prejudiced by the
failure to receive notice.

(e) SURVIVAL. The obligations of the Company and the Holders under this
SECTION 6 shall survive the completion of any offering of Registrable Shares
pursuant to a Registration Statement or otherwise.

7. COVENANTS OF THE HOLDERS. Each of the Holders hereby agrees (a) to
cooperate with the Company and to furnish to the Company all such information
concerning its plan of distribution and ownership interests with respect to its
Registrable Shares in connection with the preparation of a Registration
Statement with respect to such Holder’s Registrable Shares and filings with any
state securities commissions as the Company may reasonably request, and (b) to
deliver or cause delivery of the Prospectus contained in such Registration
Statement to any purchaser of the shares covered by such Registration Statement
from the Holder, as required by the Securities Act and any applicable state
securities laws.

8. ADDITIONAL SHARES. The Company, at its option, may register under any
Registration Statement and any filings with any state securities commissions
filed pursuant to this Agreement, any number of unissued shares of Common Stock
or any shares of Common Stock owned by any other shareholder or shareholders of
the Company.

9. TERMINATION OF THE COMPANY’S OBLIGATIONS. The Company shall have no
obligations pursuant to this Agreement with respect to any request or requests
for registration made by any Holder on a date after the Expiration Date.

10. NO OTHER OBLIGATION TO REGISTER. Except as otherwise expressly provided
in this Agreement, the Company shall have no obligation to the Holders to
register the Registrable Shares under the Securities Act or applicable state
securities laws.

11. MISCELLANEOUS.

(a) REMEDIES.

(i) In the event of a breach by the Company or by a Holder of
any of its obligations under this Agreement, each Holder or the Company, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Agreement. The parties agree that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach of any of the
provisions of this Agreement and the parties hereby further agree that, in the
event of any action for specific performance in respect of such breach, the
parties shall waive the defense that a remedy at law would be adequate. No
Holder shall have any right to obtain or seek an injunction restraining or

13

otherwise delaying any registration as a result of any controversy that might
arise with respect to the interpretation or implementation of this Agreement.

(ii) If the Company fails to register the Warrant Shares
pursuant to SECTION 2 hereof on or before April 15, 1999, the Company shall be
obligated to issue to the Initial Holder or its permitted designee, additional
Series 2 Warrants and Series 3 Warrants entitling the Initial Holder to purchase
an additional five (5) shares of Common Stock under each of the Series 2
Warrants and Series 3 Warrants, for each date after April 15, 1999 which elapses
until such registration shall become effective, up to a maximum of 100,000
additional Series 2 Warrants and an additional 150,000 Series 3 Warrants.

(b) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, without the written consent of the Company and of Holders owning not less
than 50% of the then outstanding Registrable Shares; PROVIDED, HOWEVER, that,
for the purposes of this Agreement, Registrable Shares that are owned, directly
or indirectly, by either the Company or an Affiliate of the Company shall not be
deemed to be outstanding. Notwithstanding the foregoing, a waiver or consent to
depart from the provisions hereof with respect to a matter that relates
exclusively to the rights of a Holder whose securities are being sold pursuant
to a Registration Statement and that does not directly or indirectly affect the
rights of any other Holder may be given by such Holder; PROVIDED, HOWEVER, that
the provisions of this sentence may not be amended, modified, or supplemented
except in accordance with the provisions of the immediately preceding sentence.

(c) NOTICES. All notices and other communications provided for herein
shall be made in writing by hand-delivery, next-day air courier, certified
first-class mail, return receipt requested, or telecopy;

(i) if to the Company, as provided in the Settlement
Agreement,

(ii) if to the Initial Holder, as provided in the Settlement
Agreement, or

(iii) if to any other person who is then the registered Holder
of any Registrable Shares, to the address of such Holder as it appears in the
Common Stock register of the Company.

Except as otherwise provided in this Agreement, all such communications
shall be deemed to have been duly given when (A) delivered by hand, if
personally delivered, (B) one (1) Business Day after being timely delivered to a
next-day air courier, (C) five (5) Business Days after being deposited in the
mail, postage prepaid, if mailed, or (E) when receipt is acknowledged by the
recipient’s telecopier machine, if telecopied.

(d) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of each of the
parties and shall inure to the benefit of each Holder. Each Holder shall be
deemed a third party beneficiary of this Agreement. Notwithstanding the
foregoing, no successor of the Company shall have any of the rights granted

14

under this Agreement until such successor shall acknowledge its rights and
obligations hereunder by a signed written agreement pursuant to which such
successor accepts such rights and obligations.

(e) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and, all of which taken
together shall constitute one and the same Agreement.

(f) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia, as applied to
contracts made and performed within the Commonwealth of Virginia without regard
to principles of conflicts of law.

(g) SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.

(h) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the provisions hereof.
All references made in this Agreement to “Section” refer to such Section of this
Agreement, unless expressly stated otherwise.

15

IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of the date first written above.

THE WMF GROUP, LTD.

By: /S/ SHEKAR NARASIMHAN
——————————————
Name: Shekar Narasimhan
Title: President and Chief Executive Officer

The foregoing Registration Rights Agreement
is hereby confirmed and accepted as of the date
first above written.

HN ACQUISITIONS, INC.

By: /S/ NORTON HERRICK
—————————————
Name: Norton Herrick
Title: President

16




EX-11
5
EXHIBIT 11

Exhibit 11
Annual Report Form 10-K
Commission File Number 000-22567

The WMF Group, Ltd.
Statement re Computation of Per Share Earnings (Unaudited)
(Dollars in thousands, except per share amounts)



FOR THE YEAR ENDED DECEMBER 31,
———————————————-
1999 1998 1997
———– ———– ———–

Net income (loss) $ 1,155 $ (33,322) $ 2,442
=========== =========== ===========
Weighted average shares of common
stock used for Basic computation 10,346,291 5,223,756 4,272,329
========== ========= =========
Weighted average shares of common
stock 10,346,291 5,223,756 4,272,329
Diluted adjustment:
Assumed exercise of options and
warrants (treasury stock method) 240,251 — 179,936
——- ——- ——-
Total weighted average shares and
equivalents used for Diluted
computation 10,586,542 5,223,756 4,452,265
========== ========= =========
INCOME (LOSS) PER COMMON SHARE:

Net income (loss) per common
share – Basic $ .11 $ (6.38) $ .57
=========== =========== ===========
Net income (loss) per common
share – Diluted $ .11 $ (6.38) $ .55
=========== =========== ===========





EX-21
6
EXHIBIT 21

Exhibit 21
Annual Report Form 10-K
Commission File Number 000-22567

THE WMF GROUP, LTD
SUBSIDIARIES



SUBSIDIARIES OF STATE OF PERCENT OF
THE WMF GROUP, LTD. (PARENT AND REGISTRANT) INCORPORATION VOTING POWER
– ——————————————- ————- ————

WMF Washington Mortgage Corp. Delaware 100
WMF/Huntoon, Paige Associates Limited Delaware 100
The Robert C. Wilson Company Texas 100
The Robert C. Wilson Company – Arizona Arizona 100
WMF Proctor, Ltd.(1) Michigan 100
Proctor & Associates of Western Michigan(1) Michigan 100
WMF Carbon Mesa Advisors, Inc. Delaware 100
WMF CommQuote, Inc (f/k/a WMF Capital Corp.) Delaware 100

– ————–
(1) WMF Proctor, Ltd. and its subsidiary were merged into WMF Washington
Mortgage Corp. effective December 31, 1999.




EX-23
7
EXHIBIT 23

Exhibit 23

The Board of Directors
The WMF Group. Ltd.:

We consent to incorporation by reference in the registration statements
(No. 333-41613 and No. 333-61653) on Form S-8 and (No. 333-83109 and 333-76391)
on Form S-3 of The WMF Group, Ltd. of our report dated February 17, 2000, except
for note 19 which is as of March 17, 2000, relating to the consolidated balance
sheets of The WMF Group, Ltd. and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, cash flows and changes in
stockholders’ equity for each of the years in the three-year period ended
December 31, 1999, which report appears in the December 31, 1999 annual report
on Form 10-K of The WMF Group, Ltd.

/s/ KDMG LLP

McLean, Virginia
March 24, 2000




EX-27
8
EXHIBIT 27


5

THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1999 CONSOLIDATED FINANCIAL STATEMENTS OF THE WMF GROUP, LTD. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.

0001039206
THE WMF GROUP, LTD.
1,000


YEAR
DEC-31-1999
JAN-01-1999
DEC-31-1999
9,815
6,163
1,492
0
0
0
7,605
3,297
111,261
0
52,228
0
0
112
37,826
111,261
67,856
67,856
0
0
58,225
795
3,509
5,327
4,172
1,155
0
0
0
1,155
0.11
0.11





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