SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-27736
POINT WEST CAPITAL CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3165263
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1700 Montgomery Street, Suite 250
---------------------------------
San Francisco, California 94111
------------------------- ---------
(Address of principal executive offices) (Zip Code)
(415) 394-9467
--------------
(Registrant's telephone number, including area code)
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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At October 31, 1998, there were 3,253,324 shares of the registrant's Common
Stock outstanding.
<PAGE>
POINT WEST CAPITAL CORPORATION
------------------------------
INDEX
-----
Part I Page #
- ------ ------
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 1
Consolidated Statements of Operations
and Comprehensive Income (Loss) for the
Three and Nine Months Ended September 30, 1998 and 1997 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 3
Condensed Notes to Consolidated Financial Statements 4-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
Part II
- -------
Item 1. Legal Proceedings 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
- ----------
(i)
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------------------- ------------------
<S> <C> <C>
Cash and cash equivalents $ 4,955,470 $ 10,039,560
Restricted cash 3,433,699 3,756,714
Investment securities (note 2)
Held-to-maturity 1,235,010 2,220,000
Available-for-sale 8,593,662 3,597,343
Matured policies receivable 75,000 305,435
Loans receivable, net of unearned income of $(127,106) and
$59,884, respectively (note 3) 7,018,698 4,015,716
Assets held for sale (note 4) 66,470 129,334
Purchased life insurance policies (note 5) 33,993,697 36,586,788
Non-marketable securities (note 6) 3,658,478 1,658,478
Deferred financing and organizational costs, net of
accumulated amortization of $818,602 and
$621,884, respectively 516,216 525,433
Furniture and equipment, net of accumulated depreciation of
$2,784 and $341, respectively 27,049 6,862
Other assets 129,316 127,590
------------------- ------------------
Total assets $ 63,702,765 $ 62,969,253
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 174,815 $ 183,150
Accounts payable 208,643 216,851
Accrued compensation payable 163,000 193,000
Reserve for equity interest in wholly owned financing
subsidiary (note 5) -- 2,300,037
Long term notes payable (note 7) 38,528,914 38,804,107
Debentures payable to Small Business Administration (note 8) 3,000,000 --
Deferred income taxes 6,000 6,000
------------------- ------------------
Total liabilities 42,081,372 41,703,145
------------------- ------------------
Stockholders' equity:
Common stock, $0.01 par value; 15,000,000 authorized shares,
4,291,824 shares issued
3,253,324 shares outstanding 42,918 42,918
Additional paid-in-capital 29,496,720 29,496,720
Comprehensive income-- net unrealized
investment gains (note 2 and 9) 5,001,555 2,597,239
Retained deficit (10,045,768) (7,996,737)
Treasury stock, 1,038,500 shares (2,874,032) (2,874,032)
------------------- ------------------
Total stockholders' equity 21,621,393 21,266,108
------------------- ------------------
Total liabilities and stockholders' equity $ 63,702,765 $ 62,969,253
=================== ==================
<FN>
See accompanying condensed notes to consolidated financial statements
</FN>
</TABLE>
1
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three and Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Income:
Earned discounts on matured policies (note 10) $ 65,167 $ 91,473 $ 430,819 $ 377,450
Interest income 350,218 338,191 1,049,373 883,401
Gain (loss) on sale of convertible
preferred shares -- (20,000) -- 679,665
Gain on assets sold (note 4) 14,820 98,128 165,346 1,460,986
Other 173,990 18,168 342,878 88,043
-------------- -------------- -------------- -----------------
Total income 604,195 525,960 1,988,416 3,489,545
Expenses:
Interest expense 925,545 896,771 2,697,587 2,721,030
Compensation and benefits 414,984 289,244 1,110,322 843,352
Other general and administrative expenses 409,101 12,123 1,256,920 1,037,236
Amortization 71,406 60,392 196,718 177,538
Depreciation 1,240 -- 2,443 --
Provision for loss on assets held for sale (note 4 ) -- 328,236 -- 328,236
Loss on non-marketable securities (note 6) 1,073,494 -- 1,073,494 --
-------------- -------------- -------------- -----------------
Total expenses 2,895,770 1,586,766 6,337,484 5,107,392
-------------- -------------- -------------- -----------------
Loss before net loss in wholly owned
financing subsidiary charged
to reserve for equity interest (2,291,575) (1,060,806) (4,349,068) (1,617,847)
Net loss in wholly owned financing subsidiary charged
to reserve for equity interest (note 5) 407,324 942,943 2,300,037 2,827,594
-------------- -------------- -------------- -----------------
Net income (loss) $ (1,884,251) $ (117,863) $ (2,049,031) $ 1,209,747
============== ============== ============== =================
Comprehensive income (loss) -- net unrealized
investment gains (losses) (note 9) (3,274,708) 356,421 2,404,316 356,421
Total comprehensive income (loss) (note 9) (5,158,959) 238,558 355,285 1,566,168
Basic earnings (loss) per share (note 11) (0.58) (0.04) (0.63) 0.33
Diluted earnings (loss) per share (note 11) (0.58) (0.04) (0.63) 0.33
Weighted average number of shares of common stock
outstanding (note 11) 3,253,324 3,253,324 3,253,324 3,612,190
Weighted average number of shares of common stock
and common stock equivalents outstanding (note 11) 3,253,324 3,253,324 3,253,324 3,692,572
<FN>
See accompanying condensed notes to consolidated financial statements
</FN>
</TABLE>
2
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------------------- -------------------
<S> <C> <C>
Cash flows for operating activities:
Net income (loss) $ (2,049,031) $ 1,209,747
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 199,161 177,538
Gain on sale of assets (165,346) (1,460,986)
Gain on sale of convertible preferred shares -- (679,665)
Provisions for loss on sale of assets -- 328,236
Earned discounts on policies (430,819) (377,450)
Purchase of life insurance policies -- (966,275)
Collections on matured life insurance policies 3,082,440 5,317,170
Increase in other assets (1,729) (37,192)
(Decrease) increase in accrued expenses (8,335) 3,383
(Decrease) increase in accounts payable (8,208) 149,648
Decrease in accrued compensation payable (30,000) (52,390)
Decrease in reserve for equity interest in wholly
owned financing subsidiary (2,128,989) (2,827,594)
Loss on non-marketable securities 1,073,494 --
------------------- -------------------
Net cash (used in) provided by operating activities (467,362) 784,170
------------------- -------------------
Cash flows from investing activities:
Proceeds from sale of assets held for sale 229,067 12,686,192
Purchase of furniture and equipment (22,630) --
Return of restricted cash 323,015 504,816
Purchase of investment and non-marketable securities (6,708,504) (3,477,500)
Sale of investment and non-marketable securities 2,028,000 2,021,187
Additions to loans receivable (3,111,990) --
Principal payments on loans receivable 109,008 --
------------------- -------------------
Net cash (used in) provided by investing activities (7,154,034) 11,734,695
------------------- -------------------
Cash flows from financing activities:
Proceeds from debentures payable to the Small Business Administration 3,000,000 --
Principal payments on long term notes payable (275,193) (2,414,098)
Purchase of treasury stock -- (2,484,032)
Increase in financing costs (187,501) (80,592)
------------------- -------------------
Net cash provided by (used in) financing activities 2,537,306 (4,978,722)
------------------- -------------------
Net (decrease) increase in cash and cash equivalents (5,084,090) 7,540,143
Cash and cash equivalents, beginning of period 10,039,560 6,586,447
------------------- -------------------
Cash and cash equivalents, end of period $ 4,955,470 $ 14,126,590
=================== ===================
Supplemental disclosures:
Supplemental disclosure of non-cash activities:
Unrealized gain on securities available for sale $ 5,001,555 $ 356,421
=================== ===================
Supplemental disclosure of cash flow information:
State taxes paid $ 16,014 $ 35,823
=================== ===================
Cash paid for interest $ 2,701,359 $ 2,717,647
=================== ===================
<FN>
See accompanying condensed notes to consolidated financial statements
</FN>
</TABLE>
3
<PAGE>
POINT WEST CAPITAL CORPORATION
-------------------------------
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. General Description
- -- -------------------
The unaudited consolidated financial statements of Point West Capital
Corporation ("Point West") and its consolidated entities (the "Company") as of
September 30, 1998 and for the three and nine month periods ended September 30,
1998 have been prepared in accordance with generally accepted accounting
principles for interim financial information, in accordance with Rule 10-01 of
Regulation S-X. Accordingly, such statements do not include all of the
information and notes thereto that are included in the annual consolidated
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. The balance sheet as of December 31, 1997 has been derived from the
audited consolidated financial statements of the Company. The statements and
notes thereto included herein should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 (the "Form
10-K").
Point West is a specialty financial services company. The Company's
financial statements consolidate the assets, liabilities and operations of
Dignity Partners Funding Corp. I ("DPFC"), Fourteen Hill Management, LLC
("Fourteen Hill Management"), Fourteen Hill Capital, L.P. ("Fourteen Hill
Capital"), Allegiance Capital, LLC ("Allegiance Capital"), Allegiance Funding
Corp. I ("Allegiance Funding") and Allegiance Capital Trust I ("Allegiance Trust
I"). References herein to Allegiance include Allegiance Capital, Allegiance
Funding and Allegiance Trust I.
Until February 1997, the Company provided viatical settlements for
terminally ill persons. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview." Subsequently, the Company has
become a more broadly-based specialty financial services company by expanding
its financial services business through the formation of Fourteen Hill
Management and Fourteen Hill Capital, which invest in small businesses, and
Allegiance which lends funds to funeral home and cemetery owners. The Company
continues to service the life insurance policies held by its wholly owned
special purpose subsidiary, DPFC, and to evaluate other strategic business
opportunities. Fourteen Hill Capital and Allegiance may or may not be indicative
of the types of business opportunities the Company intends to continue to
pursue. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Fourteen Hill Management and Fourteen Hill Capital" and
"-- Allegiance."
During 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standard No. 131 ("SFAS 131"), Disclosure
About Segments of An Enterprise and Related Information. SFAS 131 is effective
with the year-end 1998 financial statements. During 1998, FASB issued Statement
of Financial Accounting Standard No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company will comply
with the disclosure requirements of SFAS 131 and SFAS 133 when required.
4
<PAGE>
2. Investment Securities
- -- ---------------------
Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
Accounting for Certain Instruments in Debt and Equity Securities, requires
marketable debt and equity securities to be classified into held-to-maturity,
available-for-sale and trading categories. Securities classified as
held-to-maturity are reported at amortized cost and available-for-sale
securities are reported at fair market value with unrealized gains and losses as
a separate component of stockholders' equity. Many of the equity securities
classified by the Company as available-for-sale are securities (or are
convertible into securities) traded in the over-the-counter ("OTC") market. Fair
market value is estimated by the Company based on the average closing bid of the
securities for the last three trading days of the reporting period and is
adjusted to reflect management's estimate of liquidity constraints. The Company
had no trading securities at September 30, 1998 or December 31, 1997. Any
unrealized gains and losses, declines in value of securities judged to be
other-than-temporary and accrued interest and dividends on all securities will
be reported on an appropriate line item above "Net Income (Loss)" on the
consolidated statements of operations and comprehensive income (loss) when
realized.
The amortized costs and estimated fair value of investment securities
(before any minority interest) as of September 30, 1998 and December 31, 1997
are as follows:
<TABLE>
<CAPTION>
December 31, 1997
- -------------------------------------------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Cost Gains Loss
Fair Value
<S> <C> <C> <C> <C>
Held-to-maturity
Corporate bonds $ 1,235,010 $ -- $ (150,010) $ 1,085,000
-------------- --------------- ----------------- --------------
Total held-to-maturity $ 1,235,010 $ -- $ (150,010) $ 1,085,000
Available-for-sale
Common stock $ 3,592,000 $ 5,001,662 $ -- $ 8,593,662
Warrants $ 0 $ -- $ -- $ --
------------------ ----------------- ------------------ ------------------
Total available-for-sale $ 3,592,000 $ 5,001,662 $ -- $ 8,593,662
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
- -------------------------------------------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Cost Gains Loss
Fair Value
<S> <C> <C> <C> <C>
Held-to-maturity
Corporate bonds $ 2,220,000 $ 75,000 $ (5,000) $ 2,290,000
-------------- ---------------- ----------------- --------------
Total held-to-maturity $ 2,220,000 $ 75,000 $ (5,000) $ 2,290,000
Available-for-sale
Common stock $ 903,181 $ 1,355,153 $ -- $ 2,258,334
Warrants $ 96,819 $ 1,242,190 $ -- $ 1,339,009
-------------- ----------------- --------------- --------------
Total available-for-sale $ 1,000,000 $ 2,597,343 $ -- $ 3,597,343
</TABLE>
5
The Company classifies debt securities for which it has the positive
intent and ability to hold to maturity as held-to-maturity. All investments in
debt securities classified as held-to-maturity at September 30, 1998 and
December 31, 1997 have maturity dates ranging from one to six years. Warrants
classified as available-for-sale have expiration dates ranging from one to five
years. Certain warrants outstanding at December 31, 1997 were exercised during
the first quarter of 1998 and the securities purchased upon such conversion are
reflected at September 30, 1998 as available-for-sale.
Unrealized gains on available-for-sale securities (representing
differences between estimated fair value and cost) of $5.0 million and $2.6
million at September 30, 1998 and December 31, 1997, respectively, were credited
to a separate component of stockholders' equity called "Comprehensive Income --
Net Unrealized Investment Gains."
3. Loans Receivable
- -- -----------------
Loans receivable includes loans made to unaffiliated third parties
through Allegiance and Fourteen Hill Capital. Such loans are reported at
amortized cost, and interest is accrued as earned. All loans at September 30,
1998 and December 31, 1997 were current, and no reserves were considered
necessary as of either date.
Allegiance had two loans outstanding at September 30, 1998 in the
aggregate principal amount of $5.8 million, one of which was originated in
December 1997 and bears interest at a fixed interest rate per annum of 9.4% and
the other of which was originated in January 1998 and bears interest at a fixed
interest rate per annum of 9.8%. Principal payments are due monthly on such
loans, and such loans mature, subject to permitted prepayments, in approximately
fifteen years from the initial loan date. Loan origination fees and direct loan
origination costs are capitalized and recognized over the life of the related
loan as an adjustment of yield (interest income) in accordance with Statement of
Financial Accounting Standards No. 91 ("SFAS 91"), Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases.
On August 19, 1998, Allegiance put in place a structured financing
which provides short term financing and may provide long term financing, subject
to certain limitations, with respect to loans Allegiance has made in the past
and may make in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Allegiance." It is anticipated
that this transaction will provide interim floating rate financing and
ultimately permanent fixed and floating rate financing for loans originated by
Allegiance, including the two loans held by Allegiance at September 30, 1998.
The interest rate at which it is anticipated that term certificates will be
issued will be set in the future when approximately $30 million of loans have
been originated. Allegiance utilizes futures contracts to hedge certain interest
rate exposure between the time of origination of the loans and the issuance of
term certificates. Any realized gain or loss related to these hedges are
deferred and recognized by the Company over the life of the related loan as an
adjustment of interest income. Pursuant to Statement of Financial Accounting
Standards No. 80 ("SFAS 80"), Accounting for Futures Contracts, all such
deferred amounts are reflected on the balance sheet as an increase (in the case
of a hedging loss) or decrease (in the case of a hedging gain), in the carrying
value of loans receivable. As of September 30, 1998, the Company had net
realized losses on its hedging activities of $211,000 which increased loans
receivable in a like amount. In addition, the Company had unrealized net losses
from open hedging positions of $123,000 as of September 30, 1998. The Company
had no hedging activities at December 31, 1997.
Fourteen Hill Capital had two loans outstanding at September 30, 1998
in the aggregate principal amount of $1,045,000, one of which was originated in
January 1998 and bears interest at a fixed interest rate per annum of 15% and
the other of which was originated in September 1998 and bears interest at a
6
<PAGE>
fixed interest rate per annum of 14%. Such loans mature, subject to permitted
prepayments, in approximately 5 years.
4. Assets Held for Sale
- -- --------------------
As a result of the Company's decision in 1996 to sell all or
substantially all of its assets, it reclassified all assets owned as of such
date, other than the assets of DPFC, to a "held-for-sale" category. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview." Accordingly, such assets are recorded on the balance
sheet as of September 30, 1998 and December 31, 1997 at the lower of carrying
value or fair value less estimated cost to sell. In connection with the decision
to sell assets, the Company established a reserve for loss on sale of assets in
1996 and reevaluates such reserve each quarter. Assets held for sale consisted
of:
<TABLE>
<CAPTION>
September 30 , 1998 December 31, 1997
------------------- -----------------
<S> <C> <C>
Capitalized costs $ 232,447 $ 525,697
Earned discounts on life insurance policies 731 2,482
Reserve for loss on sale (166,708) (398,845)
------------------ ----------------
Assets held for sale $ 66,470 $ 129,334
================= ==================
</TABLE>
The reserve for loss on sale was calculated based on the life
expectancy of the insured under each life insurance policy in relation to prices
obtained by the Company in connection with other sales, management's estimate of
the saleability of such policy, the type of policy (e.g., term or whole life),
the age of the insured and premiums on such policy. Any gain or loss due to the
difference between actual proceeds (less any back end sourcing fees) and the
carrying value after giving effect to the reserve for loss on sale of assets is
reported as a realized gain or loss on assets sold at the time any sale proceeds
are received.
"Assets held for sale" at September 30, 1998 consisted of 7 life
insurance policies which were the subject of prior sales agreements between the
Company and unaffiliated third parties. The Company experienced delays and
difficulties in transferring to the purchasers under such agreements the
ownership of these 7 policies and, thus, the sale of these 7 policies was not
consummated under such sales agreements. However, the Company continues to
pursue other alternatives for the sale of these policies.
5. Purchased Life Insurance Policies
- -- ---------------------------------
Effective July 1996, purchased life insurance policies consisted only
of those policies held by DPFC. The sale of policies held by DPFC, all of which
are pledged as security for the Securitized Notes (as defined in Note 7),
requires the consent of the Company and the Noteholders. The Company has
discussed potential sales of DPFC policies with the Noteholders; however, the
Company has not determined whether it will decide to sell such policies and
cannot determine whether the Noteholders will consent to such a sale or whether
such a sale is feasible. A reserve was recorded in 1996 in the amount of $6.9
million to reflect the estimated loss of Point West's equity interest in DPFC.
The reserve provided for the write-off of the unrealized residual value
associated with DPFC. The losses of DPFC were charged first against the reserve
which, during the third quarter of 1998, was fully depleted. Losses associated
with DPFC after depletion of the reserve during the third quarter of 1998 have
been, and all future losses associated with DPFC will be, reflected in the
Company's consolidated statement of operations and comprehensive income (loss)
in the appropriate period. See Note 7.
7
<PAGE>
6. Non-Marketable Securities
- -- -------------------------
Non-marketable securities include investments in non-marketable debt
and equity securities through Point West and Fourteen Hill Capital. The Company
accounts for such non-marketable securities using the cost method.
In 1996, Point West purchased convertible preferred shares in American
Information Company, Inc. ("American Information"). As of September 30, 1998,
the carrying value of such non-marketable preferred shares was $1.7 million. See
the Form 10-K for further information regarding the Company's investment in
American Information.
In 1998, Fourteen Hill Capital invested $2 million in the convertible
preferred shares (convertible into common shares) of one unaffiliated small
business entity and invested $1 million in the debt securities (which are
convertible into preferred shares, which in turn are convertible into common
shares) of another unaffiliated small business entity. The investment in the
convertible debt yields a fixed interest rate per annum of 6.4%.
The Company reviews on a quarterly basis all non-marketable securities
and attempts to ascertain whether the value is impaired. As a result of such
review, the Company determined that $1.1 million of non-marketable securities of
one company was impaired at September 30, 1998, and therefore wrote-off its
entire $1.1 million carrying value of such security.
7. Long Term Notes Payable
- -- -----------------------
The Senior Viatical Settlement Notes, Series 1995-A, Stated Maturity
March 10, 2005 (the "Securitized Notes") were issued by DPFC. Principal and
interest payments on the Securitized Notes are payable solely from collections
on pledged policies and deposited funds. The Securitized Notes, which are
reported on the balance sheet as long term notes payable, bear a fixed interest
rate of 9.17% per annum.
The Securitized Notes represent the obligations solely of DPFC. The
Company's consolidated financial statements include the assets, liabilities and
operations of DPFC; however, the assets of DPFC are not available to pay
creditors of Point West. The assets of DPFC are the beneficial ownership
interests in the life insurance policies and funds which secure the Securitized
Notes. Since 1996, losses associated with DPFC have been charged against the
reserve which was originally established in 1996 for the estimated loss of Point
West's equity interest in DPFC. See Note 5. Losses associated with DPFC after
depletion of the reserve during the third quarter of 1998 have been, and all
future losses associated with DPFC will be, reflected in the Company's
consolidated statement of operations and comprehensive income (loss) in the
appropriate period. Upon the retirement of the Securitized Notes, the Company
will recognize a gain in an amount approximately equal to any accumulated
deficit reflected. At September 30, 1998, DPFC's accumulated deficit was
$562,000. In the third quarter of 1998, the total loss realized by DPFC was
$969,000, $407,000 of which was charged against the reserve for equity interest
in wholly owned financing subsidiary, and $562,000 of which was otherwise
reflected in the Company's consolidated statements of operations and
comprehensive income (loss).
Point West is the servicer of the policies pledged under the indenture
pursuant to which the Securitized Notes were issued and incurs servicing
expenses (which are reimbursed, subject to certain priority payments) in
connection therewith.
8
<PAGE>
8. Debentures payable to Small Business Administration
- -- ---------------------------------------------------
As of September 30, 1998, Fourteen Hill Capital had issued one
debenture in the principal amount of $3 million payable to the Small Business
Administration ("SBA") with semi-annual interest only payments at a fixed rate
of 5.9% (plus a 1% annual fee) and a scheduled maturity date of September 1,
2008. In addition, Fourteen Hill Capital paid to the SBA a $105,000 fee (3.5% of
the total borrowings) to borrow such money. The debenture is subject to a
prepayment penalty if paid prior to September 1, 2003.
9. Stockholders' Equity
- -- --------------------
Changes in stockholders' equity during the first nine months of 1998
reflected the following:
Stockholders' equity, beginning of period $ 21,266,108
Comprehensive income -- net unrealized investment gains 2,404,316
Net loss (2,049,031)
-----------------
Stockholders' equity, end of period $ 21,621,393
During 1997, FASB issued Statement of Financial Accounting Standard
No.130 ("SFAS 130"), Reporting Comprehensive Income. SFAS 130 is effective for
interim and annual periods beginning after December 15, 1997. At September 30,
1998, the Company's total comprehensive income (loss) includes net unrealized
investment gains which represents the increase in the Company's investment
securities classified as available-for-sale.
10. Earned Discounts on Matured Policies
- -- ------------------------------------
With the decision to sell all or substantially all of the Company's
assets, any income on matured policies since the third quarter of 1996 has been
recorded as earned discounts on matured policies and recorded upon the
notification of death of the insured. Such income is equal to the difference
between the proceeds the Company received on the policies (less any back end
sourcing fees) and the carrying value of such policies after giving effect to
any reserve for loss on sale of such policies.
11. Earnings per Share
- -- ------------------
Statement of Financial Accounting Standards No.128 ("SFAS 128"),
Earnings per Share, was issued in February 1997 and is effective for years
ending after December 15, 1997. Under SFAS 128, earnings per share ("EPS") is
reported as two separate calculations: Basic EPS, similar to the previous
primary EPS excluding stock equivalents; and, Diluted EPS, similar to the
previous fully diluted EPS.
The weighted average number of common stock shares and additional
common stock equivalent shares used in computing EPS are set forth below for the
periods indicated.
<TABLE>
<CAPTION>
For the three months For the six months
ended September 30, ended September 30,
=================== ==================
1998 1997 1998 1997
<S> <C> <C>
Weighted average number of shares of common
Stock outstanding....................................... 3,253,324 3,253,324 3,253,324 3,612,190
Additional common stock equivalents .............. -- -- -- 80,382
--------- --------- --------- ---------
Weighted average number of shares of common stock
and common stock equivalents outstanding ........ 3,253,324 3,253,324 3,253,324 3,692,572
========= ========= ========= =========
</TABLE>
9
<PAGE>
Diluted EPS for the three and nine months ended September 30, 1998 and
the three months ended September 30, 1997 do not include any common stock
equivalents due to their anti-dilutive effect. Common Stock equivalents for the
nine months ended September 30, 1997 include, to the extent they do not have an
anti-dilutive effect, employee stock options, non-employee director stock
options and warrants issued to Jefferies & Company, Inc., the investment banking
firm which previously advised the Company in connection with strategic options.
12. Litigation
- -- ----------
On December 19, 1996, a complaint was filed in the United States
District Court, Northern District of California (the "Court") (Docket No.
C96-4558) against Dignity Partners, Inc. (now Point West Capital Corporation)
and each of its directors by three individuals purporting to act on behalf of
themselves and an alleged class consisting of all purchasers of the Company's
common stock during the period February 14, 1996 to July 16, 1996. The complaint
alleged that the defendants violated Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder and Section 11 of the Securities Act of
1933 and seeks, among other things, compensatory damages, interest, fees and
costs. The allegations were based on alleged misrepresentations in and omissions
from the Company's registration statement and prospectus related to its initial
public offering and certain documents filed by the Company under the Exchange
Act. On April 24, 1998, the Court granted the Company's and other defendants'
motion to dismiss as it related to the Section 11 claims with prejudice but
denied the motion to dismiss the claims under Section 10(b) and Rule 10b-5 as to
all defendants other than Mr. Bow, one of Point West's directors. Thereafter,
plaintiffs filed a motion for class certification which the remaining defendants
have opposed. The Company has not received a ruling on the motion for class
certification. The case is currently in discovery. The Company and each of the
remaining defendants intend to continue to defend the action vigorously.
On February 13, 1997, a complaint was filed in the Superior Court of
California, City and County of San Francisco (Docket No. 984643) against Dignity
Partners, Inc., and each of its executive officers and New Echelon LLC by an
individual purporting to act on behalf of himself and an alleged class
consisting of all purchasers of the Company's common stock during the period
February 14, 1996 to July 16, 1996. The complaint alleges that the defendants
violated section 25400 of the California Corporate Code and seeks to recover
damages. The allegations are based on alleged misstatements, concealment and/or
misrepresentations and omissions of allegedly material information in connection
with the Company's initial public offering and subsequent disclosures. Although
the case has been stayed since its inception, the plaintiff recently filed a
motion (which the defendants have opposed) to have the stay lifted. The Company
and each of the defendants intend to defend the action vigorously.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The following is a discussion and analysis of the consolidated
financial condition of the Company as of September 30, 1998, and of the results
of operations for the Company for the three and nine months ended September 30,
1998 and 1997, and of certain factors that may affect the Company's prospective
financial condition and results of operations. The following should be read in
conjunction with the unaudited consolidated financial statements and related
notes appearing elsewhere herein. For the reasons set forth below (including the
sale of a substantial portion of the Company's life insurance policies during
the first half of 1997 and the inception of two new businesses in the second
half of 1997) the Company's results of operations and cash flows for the three
and nine months ended September 30, 1998 are not comparable to those for the
three and nine months ended September 30, 1997.
Overview
- --------
The Company is a specialty financial services company. The Company's
financial statements consolidate the assets, liabilities and operations of DPFC,
Fourteen Hill Management, Fourteen Hill Capital and Allegiance. See the Form
10-K and Condensed Notes to Consolidated Financial Statements (contained herein)
for further information regarding these entities.
The principal business activity of the Company through February 1997
was to provide viatical settlements for terminally ill persons. A viatical
settlement is the payment of cash in return for an ownership interest in, and
right to receive the death benefit (face value) of, a life insurance policy. In
February 1997, Point West's Board of Directors (the "Board") decided to cease
the Company's viatical settlement business. The Board's decision resulted from
(i) accounts of research results reported at the International AIDS Conference
held in Vancouver, British Columbia in July 1996 (the "AIDS Conference"), (ii)
the Board's belief regarding increased risks of purchasing and holding policies
insuring the lives of individuals diagnosed with HIV or AIDS, (iii) accounts of
subsequent research results which appeared to confirm the reports from the AIDS
Conference, and (iv) a determination by the Board that it was not viable for the
Company to continue to operate a viatical settlement business solely for
non-AIDS policies. Also as a result of the accounts of research results reported
at the AIDS Conference, the Company decided in the third quarter of 1996 to sell
all or substantially all of its assets. Through December 31, 1997, the Company
had entered into agreements to sell 373 policies with an aggregate face value of
$29.2 million and had consummated the sale of (or otherwise collected) all but 7
of such policies (having an aggregate face value of $436,000) at September 30,
1998. See "Results of Operations -- Three and Nine Months Ended September 30,
1998 Compared to Three and Nine Months Ended September 30, 1997 -- Gain on
Assets Sold" and Note 4 of the Condensed Notes to Consolidated Financial
Statements (contained herein) for further information regarding assets held for
sale.
Subsequent to February 1997, the Company has become a more
broadly-based specialty financial services company by expanding its financial
services business through the formation of Fourteen Hill Management and Fourteen
Hill Capital, which invest in small businesses, and Allegiance which lends funds
to funeral home and cemetery owners. The Company continues to service the life
insurance policies held by its wholly owned special purpose subsidiary, DPFC,
and to evaluate other strategic business opportunities. Fourteen Hill Capital
and Allegiance, whose business activities are described below, may or may not be
indicative of the types of business opportunities the Company intends to
continue to pursue.
11
<PAGE>
Fourteen Hill Management and Fourteen Hill Capital
- --------------------------------------------------
On June 3, 1997, the Company formed Fourteen Hill Management and
Fourteen Hill Capital. Fourteen Hill Management is a wholly owned limited
liability company of Point West formed solely for the purpose of serving as the
general partner of one or more small business investment companies ("SBIC").
Fourteen Hill Capital is a limited partnership formed solely for the purpose of
operating as an SBIC. Fourteen Hill Capital received its SBIC license from the
SBA effective September 26, 1997. Fourteen Hill Management is the sole general
partner of Fourteen Hill Capital, and owns 99.978% of the partnership interests.
Point West is one of the two limited partners of Fourteen Hill Capital and owns
0.02% of the partnership interests. The remaining 0.002% of the partnership
interest is owned by one unaffiliated limited partner. Point West capitalized
Fourteen Hill Management with $5.0 million.
Fourteen Hill Capital provides loans, debt and equity capital to small
companies (i.e., generally companies with a net worth less than $l8 million and
average net income less than $6 million for the last two years). Fourteen Hill
Capital commenced operations in August 1997. At September 30, 1998, Fourteen
Hill Capital had two loans outstanding in the aggregate principal amount of
$1,045,000 and non-marketable securities consisting of one convertible debt
instrument and one convertible preferred equity instrument for which it
originally provided funds in the aggregate amount of $3 million. See Notes 3 and
6 of the Condensed Notes to Consolidated Financial Statements (contained herein)
and "Method of Accounting." In addition, Fourteen Hill Capital has investments
in marketable securities consisting of three equity investments outstanding for
which it had originally provided funds in the aggregate amount of $3.6 million.
At September 30, 1998, such investments in marketable securities were carried on
the balance sheet at $8.6 million. The difference between such carrying value
and the original funds provided is reflected as "Comprehensive Income -- Net
Unrealized Investment Gains" in stockholders' equity. Many of the marketable
equity securities, which are held by Fourteen Hill Capital and which are
classified as available-for-sale, are securities traded in the OTC Market. Fair
market value is estimated by the Company based on the average closing bid of the
securities for the last three trading days of the reporting period and is
adjusted to reflect management's estimate of liquidity constraints.
On July 16, 1998, Fourteen Hill Capital borrowed $3 million from the
SBA. At present, Fourteen Hill Capital is unable to borrow additional funds from
the SBA because two investments each represents an amount greater than 20% of
its regulatory capital plus its net unrealized investment gains. The Company
cannot determine when, if ever, it will be able to borrow additional funds from
the SBA. In addition, if Fourteen Hill Capital does not liquidate a portion of
its investment portfolio or obtain additional capital, the SBA may accelerate
the repayment of the debenture. See "Liquidity and Capital Resources." See the
Form 10-K and Notes 2, 3 and 6 of the Condensed Notes to Consolidated Financial
Statements (contained herein) for further information regarding Fourteen Hill
Management and Fourteen Hill Capital.
Allegiance
- ----------
Allegiance Capital is a limited liability company formed on September
5, 1997 as a specialty finance company to provide senior secured loans to
funeral home and cemetery owners. Through September 30, 1998, Allegiance Capital
had funded two loans in the aggregate principal amount of $5.9 million. Point
West provided the capital to Allegiance Capital for such loans. Point West has a
65% ownership interest and 95% voting control in Allegiance Capital and serves
as the managing member of Allegiance Capital. Allegiance Capital's president and
its vice president of marketing, each of whom was hired in September 1997, have
the balance of such interests and have an option to acquire from Point West 5%
of the equity interests (but not the voting power) if certain events occur.
Allegiance Capital owns 100% of Allegiance Funding, which is a special purpose
subsidiary formed to acquire and securitize loans originated by Allegiance
Capital. Net profits of Allegiance Capital for each calendar year will be
12
<PAGE>
allocated first to Point West in an amount equal to a return of 10% per annum,
compounded monthly, on the amount of its capital contribution, but not in excess
of such net profits. Any shortfall will be carried forward indefinitely to the
next calendar year or years in which net profits are sufficient to make such
allocation. An additional 5% return for each calendar year will be allocated
first to Point West to the extent that in each year sufficient profits are
available with no carry forward provided.
On August 19, 1998, Allegiance Funding formed a trust, Allegiance Trust
I, to consummate a structured financing which may provide approximately $56.4
million to support Allegiance's lending activities (the "Financing"). At
September 30, 1998, no funds had been borrowed under the Financing.
Pursuant to the Financing, a consortium of insurance companies (the
"Investors") will provide funding of approximately $26.4 million through August
31, 1999 on a non recourse revolving certificate basis to be used for the
purchase or funding of loans originated by Allegiance Capital and transferred to
Allegiance Funding. The interest rate on such revolving facility depends on the
amount outstanding and varies with prevailing interest rates, but if the entire
revolving facility were utilized, the weighted-average interest rate at
September 30, 1998 would have been approximately 7.5%. Such interest rate
represents a spread of 2.0% over the one-month LIBOR (London InterBank Offered
Rate) on such date for a portion of the certificates and the weighted-average
spread of 3.9% over the one-year U.S. Treasury rate for the remaining interest
bearing certificates. Upon the earlier of the incurrence of $26.4 million of
revolving certificates or August 31, 1999, such revolving certificates will be
repaid through the issuance of term certificates with an approximate 15-year
maturity. In addition, the Financing provides a commitment to provide up to an
additional $30 million of funding through August 31, 1999 through 15-year term
loans. In the event that term certificates are not issued by August 31, 1999,
Allegiance will be required to refinance any revolving certificates outstanding
under the Financing. See "Liquidity and Capital Resources."
The Financing contemplates the issuance of various classes of revolving
and term certificates through Allegiance Trust I. Certificates receiving ratings
are to be purchased by the Investors, while Allegiance Funding will retain
unrated certificates. The revolving certificates received ratings from Duff &
Phelps Credit Rating Co. ranging from A to BB and it is anticipated that the
term certificates, when and if issued, will also receive ratings from Duff &
Phelps. Allegiance initially retained an unrated revolving certificate
(currently with an aggregate principal amount of $0) with a maximum aggregate
principal amount of $3,650,000. This certificate represents the right to receive
all excess cash flow from Allegiance Trust I. Allegiance also anticipates
retaining unrated term certificates following retirement of revolving
certificates. Because of Allegiance's right to redeem the certificates if 15% or
less in principal amount of certificates is outstanding, the Financing does not
qualify for sale treatment under Statement of Financial Accounting Standards No.
125 ("SFAS 125"), Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Accordingly, the Financing will not receive gain
on sale treatment under SFAS 125 and any borrowings under the Financing will be
reflected on the consolidated balance sheet.
In connection with the Financing, Allegiance will pay a $175,000
commitment fee when funds are initially borrowed under the Financing. Such
commitment fee will be amortized over the expected life of the Financing (15
years). See Note 3 of the Condensed Notes to Consolidated Financial Statements
(contained herein) and "Liquidity and Capital Resources" for further information
regarding Allegiance and the Financing.
Method of Accounting
- --------------------
As a result of the Company's decision in 1996 to sell all or
substantially all of its assets, the Company established a reserve for loss on
sale of assets during 1996 and reevaluates this reserve
13
<PAGE>
quarterly. The Company also established a reserve for loss of Point West's
equity interest in DPFC during 1996 because of the uncertainties created by the
data presented at the AIDS Conference and subsequent reports of the efficacy of
new treatments for AIDS/HIV. The reserve for loss on sale of assets was $167,000
and $399,000 as of September 30, 1998 and December 31, 1997, respectively. The
reserve for loss of Point West's equity interest in DPFC was fully depleted as
of September 30, 1998 and was $2.3 million as of December 31, 1997,
respectively. See "Certain Accounting Implications for DPFC." In addition,
beginning in 1996, the Company began recognizing income with respect to its
viatical settlement business upon receipt of proceeds on policies (either
pursuant to sale of the policy or the death of the insured). Such income is
equal to the difference between such proceeds (less any back-end sourcing fees)
and the carrying value of such policies after giving effect to any reserve for
loss on the sale of such policies. See the Form 10-K and Notes 4 and 5 of the
Condensed Notes to Consolidated Financial Statements (contained herein) for
further information regarding the reserve for loss on sale of assets and the
reserve for loss of Point West's equity interest in DPFC.
SFAS 115 requires marketable debt and equity securities (including
those held by Fourteen Hill Capital) to be classified into held-to-maturity,
available-for-sale and trading categories. Securities classified as
held-to-maturity are reported at amortized cost and available-for-sale
securities are reported at fair market value with unrealized gains and losses as
a separate component of stockholders' equity. The Company had no trading
securities at September 30, 1998 or December 31, 1997. Any unrealized gains and
losses, declines in value of securities judged to be other-than-temporary and
accrued interest and dividends on all securities will be reported on an
appropriate line item above "Net Income (Loss)" on the consolidated statements
of operations and comprehensive income (loss) when realized. See Note 2 of the
Condensed Notes to Consolidated Financial Statements (contained herein).
The Company accounts for loans advanced by Fourteen Hill Capital and
Allegiance by accruing interest on outstanding balances. At December 31, 1997
and September 30, 1998, the Company evaluated each of the outstanding loans and
determined that a reserve for the loans was not necessary. As the Company's loan
portfolio grows or upon subsequent evaluation, reserves for loans will be added
to the extent considered necessary. Loan origination fees and direct loan
origination costs are capitalized and recognized over the life of the related
loan as an adjustment of yield (interest income) in accordance with SFAS 91. See
Note 3 of the Condensed Notes to Consolidated Financial Statements (contained
herein).
The interest rate at which Allegiance anticipates issuing term
certificates will be set in the future when approximately $30 million of loans
have been originated. Allegiance utilizes futures contracts to hedge certain
interest rate exposure between the time of origination of the loans and the
issuance of term certificates. Any realized gain or loss related to these hedges
are deferred and recognized by the Company over the life of the related loan as
an adjustment of interest income. Pursuant to SFAS 80, all such deferred amounts
are reflected on the balance sheet as an increase (in the case of a hedging
loss) or decrease (in the case of a hedging gain), in the carrying value of
loans receivable. As of September 30, 1998, the Company had net realized losses
on its hedging activities of $211,000 which increased loans receivable in a like
amount. In addition, the Company had unrealized net losses from open hedging
positions of $123,000 as of September 30, 1998. The Company had no hedging
activities at December 31, 1997.
Point West is the counter party to a swap agreement pursuant to which
Point West has assumed certain variable rate interest exposure of Allegiance
between the time of origination of loans and the issuance of term certificates.
Point West plans to utilize futures contracts to hedge such exposure. Any
realized gain or loss related to these hedges will be deferred and recognized by
the Company over the life of the term certificates as an adjustment of interest
expense.
14
<PAGE>
The Company uses the cost method to account for non-marketable
securities. The Company reviews on a quarterly basis all non-marketable
securities and attempts to ascertain whether the value is impaired. As a result
of such review, the Company determined that $1.1 million of non-marketable
securities of one company was impaired at September 30, 1998, and therefore
wrote-off its entire $1.1 million carrying value of such security. See "Results
of Operations -- Three and Nine Months Ended September 30, 1998 Compared to
Three and Nine Months Ended September 30, 1997 -- Loss on Non-Marketable
Securities"
Certain Accounting Implications for DPFC
- ----------------------------------------
Although the Securitized Notes had an expected life of 2.1 years in
September 1995, the Securitized Notes were not retired through collections by
October 1997. At September 30, 1998, $38.5 million was outstanding under the
Securitized Notes. As a result of the substantially delayed collection of DPFC
policies, DPFC had a deficit at September 30, 1998.
If the collection experience for the DPFC policies continues to be
substantially delayed, the deficit of DPFC will increase for one or more of the
following reasons. First, a decision to discontinue paying premiums on some
policies may be made because the present value of the expected death benefit on
some policies may be less than expected future premiums to be paid on such
policies. Second, the face value of certain policies (especially group term) may
begin to decrease as the people whose lives are insured thereunder reach
specified age levels (often 65). Finally, policies for which the insurance was
continued under a disability provision may be uneconomical to convert given the
insured's age and life expectancy if such insured person is no longer considered
disabled. The Company cannot determine at present the extent to which policies
held by DPFC will be so affected.
Since 1996, losses associated with DPFC have been charged against the
reserve which was originally established in 1996 for the estimated loss of Point
West's equity interest in DPFC. Losses associated with DPFC after depletion of
the reserve during the third quarter of 1998 have been, and all future losses
associated with DPFC will be, reflected in the Company's consolidated statement
of operations and comprehensive income (loss) in the appropriate period. Upon
the retirement of the Securitized Notes, the Company will recognize a gain in an
amount approximately equal to any accumulated deficit reflected. At September
30, 1998, DPFC's accumulated deficit was $562,000. In the third quarter of 1998,
the total loss realized by DPFC was $969,000, $407,000 of which was charged
against the reserve for equity interest in wholly owned financing subsidiary,
and $562,000 of which was otherwise reflected in the Company's consolidated
statement of operations and comprehensive income (loss). The loss of $562,000
for the third quarter of 1998 decreased basic EPS by $0.17 for the three and
nine months ended September 30, 1998. The average historical quarterly losses in
DPFC have been approximately $938,000 per quarter over the past eight quarters.
The Securitized Notes represent the obligations solely of DPFC. The Company did
not guarantee repayment of the Securitized Notes and is not required to fund any
principal or interest deficiencies thereunder.
Results of Operation
- --------------------
Three and Nine Months Ended September 30, 1998 Compared to the Three and Nine
- -----------------------------------------------------------------------------
Months Ended September 30, 1997
- -------------------------------
Earned Discounts on Matured Policies. Earned discounts on matured
polices decreased 28.8% in the third quarter of 1998 compared to the third
quarter of 1997 due to the decrease in the number and face amount of matured
policies. During the third quarter of 1998, the Company had earned discounts on
6 policies with a face value of $542,000, compared to 9 policies with a face
value of $605,000 in the third quarter of 1997. Earned discounts on matured
polices increased 14.1% in the first nine months of 1998
15
<PAGE>
compared to the first nine months of 1997. During the first nine months of 1998,
the Company had earned discounts on 44 policies with a face value of $2.9
million, compared to 63 policies with a face value of $4.1 million during the
first nine months of 1997. Although the Company had earned discounts on fewer
policies during the first nine months of 1998 compared to the first nine months
of 1997, the earned discounts increased for the 1998 period due primarily to the
collection in the first quarter of 1998 of two policies with above-average face
values and relatively low carrying values. See "Method of Accounting."
Interest Income. Interest income increased 3.6% in the third quarter of
1998 compared to the third quarter of 1997 and 18.8% in the first nine months of
1998 over the first nine months of 1997. This increase is due primarily to the
interest earned on loans made by Fourteen Hill Capital (which was formed in June
1997) and Allegiance (which was formed in September 1997). See "Method of
Accounting." Partially offsetting this increase is the decrease in interest
earned on the proceeds from the sale of policies in the first half of 1997 which
were invested in short term securities and marketable securities.
Gain on Sale of Convertible Preferred Shares. In the first quarter of
1997 the Company recognized a $700,000 gain on the sale of a portion of Point
West's investment in American Information. In addition, the Company had an
option that expired on October 26, 1997 to purchase for approximately $1.1
million, 8.2 million additional shares of common stock of American Information.
Since the Company did not exercise this option, a $20,000 pre-tax loss was
recognized in the third quarter of 1997. See the Form 10-K. The Company accounts
for this investment using the cost method.
Gain on Assets Sold. The gain on assets sold decreased 84.9% in the
third quarter of 1998 compared to the third quarter of 1997 and 88.7% in the
first nine months of 1998 compared to the first nine months of 1997 because a
large portion of the sale proceeds from life insurance policies was collected
during the first half of 1997. The Company collected the sale proceeds on 1
policy resulting in a realized gain of $15,000 in the third quarter of 1998,
compared to 6 policies resulting in a realized gain of $98,000 in the third
quarter of 1997. The Company collected the sale proceeds on 7 policies resulting
in a realized gain of $165,000 in the first nine months of 1998, compared to 245
policies resulting in a realized gain of $1.5 million in the first nine months
of 1997. The realized gain was calculated based on the difference between the
sale proceeds and the carrying value of such policies after giving effect to the
reserve for loss on sale of assets. See Note 4 of the Condensed Notes to
Consolidated Financial Statements (contained herein).
Other Income. Components of other income include a placement fee,
collections on policies of dividends, interest and paid-up cash values,
increases in face value of matured policies, refunds of premiums on matured
policies and realized capital gains on investments securities. Other income
increased $156,000 during the third quarter of 1998 compared to the third
quarter of 1997 and $255,000 during the first nine months of 1998 compared to
the first nine months of 1997. This increase is primarily a result of $110,000
in capital gains from the sale of investment securities and a $65,000 increase
in face value on one policy, both realized during the third quarter of 1998. The
nine-month increase is also due to a $70,000 placement fee received in the
second quarter of 1998 by Point West in the form of convertible preferred shares
in connection with an investment made by co-investors of Fourteen Hill Capital
in an unaffiliated small business entity.
Interest Expense. Interest expense increased 3.2% in the third quarter
of 1998 compared to the third quarter of 1997. Such increase was due to the
interest paid on the $3 million borrowed from the SBA on July 16, 1998. The
interest rate (including the 1% annual fee) on the SBA Debentures was 6.9%.
Interest expense decreased 0.9% in the first nine months of 1998 compared to the
first nine months of 1997. Such decrease was due to the decrease in interest
expense for the Securitized Notes. Average borrowings under the Securitized
Notes were $38.7 million in the first nine months of 1998 compared to
16
<PAGE>
$39.3 million in the first nine months of 1997. The interest rate on the
Securitized Notes was 9.17% in both periods.
Compensation and Benefits. Compensation and benefits increased 43.5% in
the third quarter of 1998 compared to the third quarter of 1997 and 31.7% in the
first nine months of 1998 compared to the first nine months of 1997. This
increase was due to two new employees hired in September 1997 to support
Allegiance's lending activities, four new employees hired in the third quarter
of 1998 to support Point West's activities and an increase in compensation and
benefits for other employees (including executive officers) for 1998.
Other General and Administrative Expenses. Other general and
administrative expenses increased $397,000 in the third quarter of 1998 compared
to the third quarter of 1997. The third quarter of 1997 included a one-time
reduction of professional fees in the amount of $75,000 due to the expiration of
a consulting contract and a reduction of estimated general legal expenses in the
amount of $100,000. In addition, such increase is also due to an increase of
$115,000 in life insurance policy premium costs during 1998 and an increase in
legal expenses of $49,000 incurred in connection with federal and state alleged
class action lawsuits filed against the Company and its officers and directors.
Other general and administrative expenses increased $220,000 in the
first nine months of 1998 compared to the first nine months of 1997. The
increase was due to an increase in life insurance policy premium costs of
$389,000 in the first nine months of 1998. Prior to the third quarter of 1998
and the depletion of the reserve for equity interest in wholly owned financing
subsidiary, premium costs were reflected in the reduction of such reserve. As a
result, such increased premium costs did not impact net income in any period
prior to the third quarter of 1998. Partially offsetting this increase was a
decrease in legal expenses in the first nine months of 1998 in the amount of
$241,000 incurred in connection with federal and state alleged class action
lawsuits filed against the Company and its officers and directors. This decrease
was largely a result of the retention limit being satisfied, requiring the
insurance carrier to fund the majority of the continuing costs of such
litigation.
Provision for Loss on Assets Held for Sale. The Company recorded in
1996 a provision for loss on sale of assets totaling $3.3 million. For the
quarter ended September 30, 1997, the Company recorded an additional provision
in the amount of $328,000 in connection with the remaining policies not yet
sold, based on management's revised best estimate of proceeds from the sale of
such policies. No adjustment to the provision has been made during 1998.
Loss on Non-Marketable Securities. The Company reviews on a quarterly
basis all non-marketable securities and attempts to ascertain whether the value
is impaired. As a result of such review, the Company determined that $1.1
million of non-marketable securities of one company was impaired at September
30, 1998, and therefore wrote-off its entire $1.1 million carrying value of such
security.
Net Loss in Wholly Owned Financing Subsidiary Charged to Reserve for
Equity Interest. The DPFC net loss of $407,000 and $2.3 million recorded in the
three and nine months ended September 30, 1998, respectively, and $943,000 and
$2.8 million recorded in the three and nine months ended September 30, 1997,
respectively, were included in the Company's net loss before net loss in wholly
owned financing subsidiary charged to reserve for equity interest. Prior to the
depletion of the reserve during the third quarter of 1998, losses were charged
against the reserve for equity interest in wholly owned financing subsidiary.
After the reserve was fully depleted during the third quarter of 1998, DPFC's
losses have been reflected in the Company's consolidated statement of operations
and comprehensive income (loss). All additional losses of DPFC will be reflected
in the Company's consolidated statement of operations and comprehensive income
(loss) for the periods in which such losses occur.
17
<PAGE>
Liquidity and Capital Resources
- --------------------------------
On July 16, 1998, Fourteen Hill Capital borrowed $3 million from the
SBA. At present, Fourteen Hill Capital is unable to borrow additional funds from
the SBA because two investments each represents an amount greater than 20% of
its regulatory capital plus its net unrealized investment gains. The Company
cannot determine when, if ever, it will be able to borrow additional funds from
the SBA. In addition, if Fourteen Hill Capital does not liquidate a portion of
its investment portfolio or obtain additional capital, the SBA may accelerate
the repayment of the debenture. The Securitized Notes do not provide funds with
which to fund operations. On August 19, 1998, Allegiance put in place the
Financing which may provide up to $56.4 million solely to support any future
lending activities of Allegiance. It is anticipated that the Financing will
provide interim floating rate financing through August 31, 1999 and ultimately
15 year fixed and floating rate financing for loans originated by Allegiance.
However, if Allegiance does not originate $30 million in loans by August 31,
1999, the term certificates may not be issued and Allegiance would be
responsible for finding an alternative financing source. See "Allegiance." At
present, the Company does not have an external funding source from which to fund
its working capital and general corporate needs.
At September 30, 1998, cash and cash equivalents was $5.0 million. The
Company continues to analyze its current and future needs for financing, which
will be dependent on its ability to develop the businesses of Fourteen Hill
Capital and Allegiance and any other business opportunities the Company pursues.
There can be no assurance that the Company will be successful in obtaining
external financing on satisfactory terms assuming it determines it needs
additional funds. Point West at present anticipates having sufficient liquidity
to meet its working capital and operational needs through 1999, using current
cash and cash equivalents. However, the Company may not have sufficient
liquidity to grow the business of Fourteen Hill Capital.
As of September 30, 1998, the outstanding principal amount of the
Securitized Notes was $38.5 million. Principal and interest payments on the
Securitized Notes are payable solely from collections on policies pledged to
secure the payment thereof and do not require the Company to expend cash or
obtain financing to satisfy such principal and interest obligations. See Note 7
of the Condensed Notes to Consolidated Financial Statements (contained herein).
Considerations Under the Investment Company Act of 1940
- -------------------------------------------------------
The Investment Company Act of 1940 (the "1940 Act") creates a
comprehensive regulatory framework applicable generally to investment companies
(i.e., companies engaged primarily in the business of investing, reinvesting,
holding or trading in securities within the meaning of the 1940 Act, whether or
not those companies intend to be engaged primarily in such business). There are
various percentage of assets and income tests under the 1940 Act (the
"Percentage Tests") that are relevant in considering whether a company is deemed
to be an investment company. Companies that are subject to the 1940 Act must
register with the Securities and Exchange Commission (the "Commission") as
investment companies and upon registration become subject to extensive
regulation.
The Company does not believe it is engaged primarily in the business of
investing, reinvesting, holding or trading in securities within the meaning of
the 1940 Act and the rules of the Commission promulgated thereunder and does not
believe that it should be deemed to be an investment company under the
Percentage Tests. It is possible, however, that the Company could, in the
future, be deemed to be an investment company under the Percentage Tests or
otherwise and, thus, be required to register and be regulated under the 1940
Act, which could significantly and adversely affect the Company's business and
the market price of its Common Stock.
18
<PAGE>
In particular, through Fourteen Hill Capital, the Company holds
investments in securities. These investments have been made primarily since
January 1998. The value of these and certain of the Company's other investments
have increased substantially since originally being purchased, increasing the
likelihood that the Company will, in the future, exceed one or more of the
Percentage Tests, unless the Company's other businesses grow more rapidly than
currently anticipated.
Although the Company intends to conduct its business so as to not
become subject to regulation under the 1940 Act, the Company's ability to
continue not being subject to registration and regulation under the 1940 Act
will be subject to many factors, some of which may be outside the Company's
control. Such factors include, among others, the successful and timely
implementation of the Company's business plan, the relative values of the
various assets which are held by the Company and the sources of the Company's
income which, in turn, will be significantly affected by increases or decreases
in the market value of assets held by Fourteen Hill Capital. In view of the
foregoing, no assurance can be given that the Company may not, in the future, be
required to register as an investment company under the 1940 Act or take steps
to avoid being required to register. Such steps may include (i) disposing of
certain assets at a time or in a manner which would not maximize potential
returns, (ii) restricting additional investments by Fourteen Hill Capital (or
otherwise) even if the capital to make additional investments is available, and
(iii) initiating other businesses which may be different from the Company's
other business activities.
Other
- -----
The "Year 2000 issue" refers to a wide variety of potential computer
program processing and functionality issues that may arise from the inability of
computer programs to properly process date-sensitive information relating to the
Year 2000, years thereafter and to a lesser degree the Year 1999. Any of the
Company's computers, computer programs and administration equipment or products
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. If any of the Company's systems or equipment
that have date-sensitive software use only two digits, system failures or
miscalculations may result causing disruptions of operations, including, among
other things, a temporary inability to process transactions or send and receive
electronic data with third parties or engage in similar normal business
activities.
The Company expects to spend approximately $50,000 to $100,000 in the
aggregate during 1998 and 1999 to modify its computer information systems
enabling proper processing of transactions relating to the year 2000 and beyond
("Year 2000 Compliant"). During 1998, the Company made an assessment of Year
2000 Compliant issues and determined that it needed to modify or replace certain
third party computer hardware and software. As the Company has implemented
solutions to the Year 2000 Compliant issues, in some circumstances it has
determined that replacing existing systems, hardware, or equipment may be more
efficient and also provide additional functionality. The Company has completed
such modifications and replacements. Through September 30, 1998, the Company had
incurred Year 2000 Compliant costs of approximately $24,000, of which $19,000
has been capitalized. The Company does not believe the amounts expected to be
expensed over the next two years will have a material effect on its financial
position or results of operations. However, there can be no assurance that
actual costs (i) will not materially exceed expected costs and (ii) will not
have a material adverse effect on the Company's financial condition and results
of operation. The Company is currently assessing its electronic office equipment
such as the phone system, copiers, fax machines, printers, and the like to
determine if such equipment is date sensitive and will require upgrades. The
Company is also assessing the readiness of its business-critical spreadsheets
and customized databases and plans to make modifications of those systems as
necessary. The Company expects to have completed all of its remediation efforts
by the end of 1998, allowing time in 1999 for testing and system refinements
that may be needed.
19
<PAGE>
The Company has begun assessing the readiness of external entities,
such as vendors, suppliers, investments and financial institutions which
interface with the Company and plans to have this assessment complete by June
30, 1999. The Company plans to determine whether those parties have appropriate
plans to remediate Year 2000 issues where their systems interface with the
Company's systems or otherwise impact its operations. The Company plans to
assess the extent to which its operations are vulnerable should those
organizations fail to properly remediate their computer systems. The Company's
Year 2000 team is made up of only one internal staff member, and the loss of the
service of such individual may have a material adverse effect on the Company's
ability to be Year 2000 Compliant. While the Company believes its planning
efforts are adequate to address its Year 2000 concerns, there can be no
guarantee that the systems of other companies on which the Company's systems and
operations rely will be Year 2000 Compliant on a timely basis. Although the
Company believes it is unlikely, there can be no assurance that the failure of
the Company or a third party on which it is dependent to be Year 2000 Compliant
will not have a material adverse effect on the Company's operations, prospects,
financial condition or results of operations.
The Company's contingency plans, if year 2000 modifications do not work
or are not ready by year 2000, relies significantly on manual procedures and
record keeping. All files are expected to be adequately backed up as of December
31, 1999 and to be available to facilitate manual record keeping. Adequate hard
copy reports of balances and transactions as of December 31, 1999 will also be
available to provide a complete manual system of accounting and inventory
control, if required. Subsequent to year 2000, manual systems will continue to
be in place to mitigate the risk of lost information due to any unforeseen
interruptions that may occur as a result of year 2000 issues arising after
January 1, 2000. Nonetheless, there can be no assurance that the Company's
contingency plan will effectively mitigate any Year 2000 failures or that such
contingency plan would not themselves materially adversely effect the Company's
financial condition or results of operations.
Forward Looking Statements
- --------------------------
This report includes forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. All statements made herein
which are not based on historical facts are forward looking and, accordingly,
involve risks and uncertainties that could cause actual results to differ
materially from those discussed. Such forward looking statements include those
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" relating to (i) the ability of Allegiance to finance the loans at
the expected rating levels, (ii) sufficiency of the Company's liquidity and
capital resources (See "Liquidity and Capital Resources"), (iii) the Company's
ability to continue not being subject to registration and regulation under the
1940 Act (See "Considerations Under the Investment Company Act of 1940"), and
(iv) expected expenses to make the Company's computer operations Year 2000
Compliant and expectations regarding the Year 2000 Compliance of the Company,
third-parties on which the Company is dependent and the efficacy of contingency
plans related thereto. Such statements are based on management's belief,
judgment and analysis as well as assumptions made by and information available
to management at the date hereof. In addition to any assumptions and cautionary
factors referred to specifically in this report in connection with such forward
looking statements, factors that could cause actual results to differ materially
from those contemplated by the forward looking statements include (i)
Allegiance's ability to originate a sufficient number and amount of loans, the
market's acceptance of the asset class consisting of the loans held by
Allegiance and Allegiance's ability to finance the loans on terms acceptable to
the market and Allegiance, (ii) the results of the Company's consideration of
strategic options and any costs associated with a chosen option, (iii)
availability and cost of capital, (iv) the factors described under "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Considerations Under the Investment Company Act of 1940," and (v) the ability of
the Company's suppliers and vendors to become Year 2000 Compliant.
20
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
- ------ -----------------------------------------------------------
Not required.
21
<PAGE>
PART II. OTHER INFORMATION
- -------- ------------------
Item 1. Legal Proceedings
- ------- -----------------
On December 19, 1996, a complaint was filed in the United States
District Court, Northern District of California (the "Court") (Docket
No. C96-4558) against Dignity Partners, Inc. (now Point West Capital
Corporation) and each of its directors by three individuals purporting
to act on behalf of themselves and an alleged class consisting of all
purchasers of the Company's common stock during the period February 14,
1996 to July 16, 1996. The complaint alleged that the defendants
violated Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 thereunder and Section 11 of the Securities Act of 1933 and
seeks, among other things, compensatory damages, interest, fees and
costs. The allegations were based on alleged misrepresentations in and
omissions from the Company's registration statement and prospectus
related to its initial public offering and certain documents filed by
the Company under the Exchange Act. On April 24, 1998, the Court
granted the Company's and other defendants' motion to dismiss as it
related to the Section 11 claims with prejudice but denied the motion
to dismiss the claims under Section 10(b) and Rule 10b-5 as to all
defendants other than Mr. Bow, one of Point West's directors.
Thereafter, plaintiffs filed a motion for class certification which the
remaining defendants have opposed. The Company has not received a
ruling on the motion for class certification. The case is currently in
discovery. The Company and each of the remaining defendants intend to
continue to defend the action vigorously.
On February 13, 1997, a complaint was filed in the Superior Court of
California, City and County of San Francisco (Docket No. 984643)
against Dignity Partners, Inc., and each of its executive officers and
New Echelon LLC by an individual purporting to act on behalf of himself
and an alleged class consisting of all purchasers of the Company's
common stock during the period February 14, 1996 to July 16, 1996. The
complaint alleges that the defendants violated section 25400 of the
California Corporate Code and seeks to recover damages. The allegations
are based on alleged misstatements, concealment and/or
misrepresentations and omissions of allegedly material information in
connection with the Company's initial public offering and subsequent
disclosures. Although the case has been stayed since its inception, the
plaintiff recently filed a motion (which the defendants have opposed)
to have the stay lifted. The Company and each of the defendants intend
to defend the action vigorously.
22
<PAGE>
Item 5. Other Information
- ------ -----------------
(a) The NASDAQ Stock Market SM ("NASDAQ")
On October 19, 1998, the Company received a notice from NASDAQ
which indicated that, because of the recent decline in the
price of the Company's Common Stock, the Company failed to
meet one of the listing requirements of the NASDAQ National
Market(R) ("NMS") to maintain a public float having a market
value equal to at least $5 million. NASDAQ indicated that, if
the Company did not satisfy such requirement by November 13,
1998, NASDAQ would issue a formal notice. The Company does not
believe at November 13, 1998 that it satisfied such request.
In the event that the Company receives a formal notice from
NASDAQ, the Company believes that it will have 90 days to cure
such deficiency. At present, the Company's desire is to
maintain a listing for its Common Stock on the NMS, but it is
possible that, not withstanding such desire, the Company's
Common Stock will be delisted from the NMS. The Company
believes that its Common Stock satisfies the listing
requirements for the NASDAQ SmallCap Market(R) and may pursue
such listing if the Common Stock is delisted from the NMS.
Another alternative is for the Company's Common Stock to be
traded on the NASDAQ OTC Bulletin Board(R) or delisted
entirely.
(b) Annual Stockholders' Meeting
The Company has established May 10, 1999 as the date on which
the Company's 1999 annual stockholders meeting (the "1999
Meeting") will be held. As indicated in the Company's proxy
statement related to its 1998 annual stockholders' meeting,
the Company must receive by December 18, 1998 any proposal of
a stockholder intended to be presented at the 1999 Meeting and
to be included in the Company's proxy, notice of meeting and
proxy statement related to the Meeting pursuant to Rule 14a-8
under the Securities Act of 1934 (the "Exchange Act").
Proposals of stockholders submitted outside the processes of
Rule 14a-8 under the Exchange Act in connection with the 1999
Meeting ("Non-Rule 14a-8 Proposals") must be received by the
Company by March 11, 1999 or such proposals will be considered
untimely under the advance notice provisions of the Company's
Second Amended and Restated Certificate of Incorporation and
Amended and Restated By-Laws (the "Charter Documents"). The
Company's proxy related to the 1999 Meeting will give
discretionary authority to the proxy holders to vote with
respect to all Non-Rule 14a-8 Proposals received by the
Company after March 11, 1999. Any stockholder wishing to
submit a proposal at the 1999 Meeting must also comply with
certain other provisions of the Charter Documents. Notices of
stockholder proposals should be directed to, and any request
for a copy of the Charter Documents (which will be provided at
no charge to any holder of the Company's Common Stock), should
be directed to: Secretary, Point West Capital Corporation,
1700 Montgomery Street, Suite 250, San Francisco, California
94111.
23
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits.
Number Description
------ -----------
# 10.1 Trust Agreement, dated as of August 1, 1998,
among Allegiance Funding Corp. I, Manufacturers
and Traders Trust Company and Point West Capital
Corporation
# 10.2 Supplement to Trust Agreement for Revolving
Series 1998-1, dated as of August 1, 1998 among
Allegiance Funding Corp. I, Manufacturers and
Traders Trust Company and Point West Capital
Corporation
# 10.3 Loan Acquisition Agreement, dated as of August
1, 1998, between Allegiance Capital, LLC and
Allegiance Funding Corp. I
# 10.4 Servicing Agreement, dated as of August 1, 1998,
among Point West Capital Corporation, Allegiance
Capital, LLC, Allegiance Funding Corp. I,
Manufacturers and Traders Trust Company and
other party thereto
10.5 Amended and Restated Limited Liability Company
Agreement of Allegiance Capital, LLC
27 Financial Data Schedule
99.1 Subsidiaries
99.2 Press Release for Fourteen Hill Capital, L.P.
# Certain information omitted pursuant to a request for
confidential treatment filed separately with the Securities
and Exchange Commission.
(b) Reports on Form 8-K.
Date Item Reported Matter Reported
July 24, 1998 5 The Company issued a
press release regarding
its results of
operations for the
second quarter of 1998.
August 19, 1998 5 The Company issued a
press release announcing
the Allegiance
Financing.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
POINT WEST CAPITAL CORPORATION
DATED: November 13, 1998 /S/ ALAN B. PERPER
--------------------------------
ALAN B. PERPER
President
(Duly Authorized Officer)
DATED: November 13, 1998 /S/ JOHN WARD ROTTER
--------------------------------
JOHN WARD ROTTER
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
25
TRUST AGREEMENT
among
ALLEGIANCE FUNDING CORP. I
(the "Depositor")
MANUFACTURERS AND TRADERS TRUST COMPANY
(the "Trustee")
and
POINT WEST CAPITAL CORPORATION
(the "Servicer")
================================================================================
Dated as of August 1, 1998
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
<S> <C> <C>
Page
ARTICLE ONE
DEFINITIONS
Section 1.01 Definitions............................................................................2
Section 1.02 Certain Rules of Construction.........................................................17
Section 1.03 Certain Calculations..................................................................17
ARTICLE TWO
THE CERTIFICATES
Section 2.01 Form Generally........................................................................18
Section 2.02 Series; Denomination..................................................................18
Section 2.03 Formation, Execution, Authentication, Delivery and Dating.............................19
Section 2.04 Temporary Certificates................................................................19
Section 2.05 Registration, Registration of Transfer and Exchange...................................20
Section 2.06 Limitation on Transfer and Exchange...................................................21
Section 2.07 Mutilated, Destroyed, Lost or Stolen Certificate......................................22
Section 2.08 Payment of Principal and Interest.....................................................22
Section 2.09 Persons Deemed Owner..................................................................24
Section 2.10 Cancellation..........................................................................24
Section 2.11 Tax Treatment.........................................................................25
ARTICLE THREE
ISSUANCE OF CERTIFICATES; SUBSTITUTIONS OF COLLATERAL
Section 3.01 Conditions to Initial Issuance of Certificates........................................26
Section 3.02 Issuances of Additional Series of Certificates........................................27
Section 3.03 Perfection of Transfer................................................................28
Section 3.04 Substitution and Repurchase of Loan Assets............................................29
Section 3.05 Releases..............................................................................30
Section 3.06 Trust Estate..........................................................................30
Section 3.07 Notice of Release.....................................................................30
Section 3.08 Nature of Transfer....................................................................31
ARTICLE FOUR
FUNDINGS
Section 4.01 General...............................................................................32
Section 4.02 Funding Amounts.......................................................................32
Section 4.03 Procedures for Obtaining Fundings Under a Revolving Series............................32
Section 4.04 Procedures for Obtaining Fundings Under Term Certificates.............................33
Section 4.05 Obligation of Certificateholders to Make Fundings.....................................33
Section 4.06 Delivery of Loan Files................................................................35
i
<PAGE>
Page
ARTICLE FIVE
ACCOUNTS, ALLOCATIONS AND DISTRIBUTIONS
Section 5.01 Collections; Collection Account.......................................................36
Section 5.02 Distributions; Distribution Account...................................................38
Section 5.03 Reserve Account.......................................................................38
Section 5.04 Reports by Trustee to Certificateholders..............................................40
ARTICLE SIX
DEFAULTS AND REMEDIES
Section 6.01 Depositor Events of Default...........................................................41
Section 6.02 Remedies..............................................................................42
ARTICLE SEVEN
THE TRUSTEE
Section 7.01 Certain Duties and Responsibilities...................................................43
Section 7.02 Notice of Default and Other Events....................................................44
Section 7.03 Certain Rights of Trustee.............................................................44
Section 7.04 Not Responsible for Recitals or Issuance of Certificates..............................45
Section 7.05 May Hold Certificates.................................................................46
Section 7.06 Money Held in Trust...................................................................46
Section 7.07 Compensation and Reimbursement........................................................46
Section 7.08 Corporate Trustee Required; Eligibility...............................................46
Section 7.09 Resignation and Removal; Appointment of Successor.....................................47
Section 7.10 Acceptance of Appointment by Successor................................................47
Section 7.11 Merger, Conversion, Consolidation or Succession to Business of Trustee................48
Section 7.12 Co-Trustees and Separate Trustees.....................................................48
Section 7.13 Rights with Respect to the Servicer...................................................49
Section 7.14 Trustee to Hold Loans.................................................................49
Section 7.15 Unclaimed Monies Held for Certificate Payments........................................49
Section 7.16 Swap Agreements.......................................................................50
ARTICLE EIGHT
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 8.01 Representations and Warranties of the Depositor.......................................51
Section 8.02 Covenants of the Depositor............................................................52
Section 8.03 Other Matters as to the Depositor.....................................................56
Section 8.04 Representations and Warranties of the Trustee.........................................56
ii
<PAGE>
Page
ARTICLE NINE
AMENDMENTS
Section 9.01 Amendments without Consent of Certificateholders......................................58
Section 9.02 Amendments and Modifications to Agreement with Consent of
Certificateholder.................................................................... 58
Section 9.03 Execution of Amendments...............................................................60
Section 9.04 Effect of Amendments..................................................................60
Section 9.05 Reference in Certificates to Amendments...............................................60
ARTICLE TEN
TERMINATION AND DISCHARGE
Section 10.01 Termination of Trust; Satisfaction and Discharge of Agreement.........................61
Section 10.02 Optional Termination..................................................................61
ARTICLE ELEVEN
PROVISIONS OF GENERAL APPLICATION
Section 11.01 General Provisions....................................................................62
Section 11.02 Acts of Certificateholders............................................................62
Section 11.03 Notices, etc., to Trustee, Depositor, Servicer........................................62
Section 11.04 Notices to Certificateholders; Waiver.................................................63
Section 11.05 Effect of Headings and Table of Contents..............................................64
Section 11.06 Successors and Assigns................................................................64
Section 11.07 Separability..........................................................................64
Section 11.08 Benefits of Agreement.................................................................64
Section 11.09 Legal Holidays........................................................................64
Section 11.10 Governing Law.........................................................................64
Section 11.11 Counterparts..........................................................................64
Section 11.12 Corporate Obligation..................................................................64
Section 11.13 Compliance Certificates and Opinions..................................................65
EXHIBITS
<FN>
A Form of Escrow Instructions
B Form of Investment and Assumption Letter
C Form of AFI Certificate
D Form of Funding Report
</FN>
</TABLE>
iii
<PAGE>
This TRUST AGREEMENT (this "Agreement"), dated as of August 1, 1998, is
---------------
entered into among Allegiance Funding Corp. I, a Delaware corporation (the
"Depositor"), Manufacturers and Traders Trust Company, a New York banking
corporation, as trustee (the "Trustee"), and Point West Capital Corporation, a
Delaware corporation, as servicer (the "Servicer").
PRELIMINARY STATEMENT
---------------------
The Depositor is conveying assets to the Trustee and has duly
authorized the execution and delivery of this Agreement to provide for the
formation of a trust to be known as "Allegiance Capital Trust I" and the
issuance of the Certificates issuable as provided in this Agreement. All
covenants and agreements made by the Depositor, the Trustee, and the Servicer
herein are for the benefit and security of the Holders of the Certificates. The
Depositor, the Trustee and the Servicer are entering into this Agreement, and
the Trustee is accepting the trusts created hereby, for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged.
All things necessary to make this Agreement a valid agreement of the
Depositor, the Trustee and the Servicer in accordance with its terms have been
done.
CONVEYANCE CLAUSE
------------------
The Depositor does hereby transfer, assign, set over, and otherwise
convey to the Trustee, for the ratable benefit of the Holders of the
Certificates, all of the Depositor's rights, title and interest in and to the
following and any and all benefits accruing to the Depositor from (but none of
the obligations under): (a) the Loans and all payments received on or with
respect to the Loans and due after their applicable Cut-Off Dates; (b) the
Depositor's rights and interests in the Loan Collateral; (c) any rights of the
Depositor under each Insurance Policy related to the Loans or the Loan
Collateral and Insurance Proceeds; (d) the Loan Acquisition Agreement, the
Servicing Agreement and any other Transaction Documents to which the Depositor
is a party; (e) all amounts from time to time on deposit in the Collection
Account and the Reserve Account (including any Eligible Investments and other
property in such accounts); (f) the Loan Files; and (g) proceeds of the
foregoing (including all cash proceeds, accounts, accounts receivable, notes,
drafts, acceptances, chattel paper, checks, deposit accounts, insurance
proceeds, condemnation awards, rights to payment of any and every kind, and
other forms of obligations and receivables which at any time constitute all or
part or are included in the proceeds of any of the foregoing), in each case
whether now owned or hereafter acquired, (all of the foregoing being hereinafter
referred to as the "Trust Estate"). The foregoing transfer, assignment, set over
and conveyance does not constitute and is not intended to result in a creation
or an assumption by the Trustee or any Certificateholder of any obligation of
the Depositor, the Company, the Servicer or any other Person in connection with
the Trust Estate or under any agreement or instrument relating thereto.
The Trustee acknowledges its acceptance on behalf of the
Certificateholders of all right, title and interest previously held by the
Depositor in and to the Trust Estate, and declares that it shall maintain such
right, title and interest in accordance with the provisions hereof and agrees to
perform the duties herein required to the best of its ability so that the
interests of the Certificateholders may be adequately and effectively protected.
1
<PAGE>
ARTICLE ONE
-----------
DEFINITIONS
-----------
Section 1.01 Definitions.
------------ ------------
Except as otherwise expressly provided herein or in the applicable
Supplement, or unless the context otherwise requires, each of the following
terms has the meaning set forth below for all purposes of this Agreement. Each
capitalized term used herein but not otherwise defined has the meaning assigned
to such term in the Servicing Agreement or the Loan Acquisition Agreement, as
applicable.
"Accrual Period": The period beginning on and including a Payment Date
(or, in the case of the Accrual Period that is applicable to an Initial Payment
Date, beginning on and including the Delivery Date for such Series) and ending
on and including the day before the next Payment Date.
"Acquisition Date": Any Delivery Date, other Funding Date or date of
substitution of a Substitute Loan, as applicable.
"Act": With respect to any Certificateholder, the meaning specified in
Section 11.02.
"Adjustment Amount": As of any date of determination and with respect
to any Defaulted Loan, an amount equal to the valuation of the business and
assets comprising the Loan Collateral for such Defaulted Loan, as prepared by an
Independent Person; provided that in no event shall the Adjustment Amount exceed
--------
the Loan Balance for such Loan and provided, further, the Adjustment Amount for
--------- -------
any Defaulted Loan shall be zero if either (a) no such valuation has been done,
(b) the Special Servicer has not received a letter of intent from a bona fide
purchaser with respect to such Loan Collateral within sixty (60) days from the
date such Loan became a Defaulted Loan, or (c) such Loan Collateral is not sold
within one hundred twenty (120) days from the date of the receipt of such letter
of intent. Such valuation shall (y) be net of Recovery Expenses and (z)
generally be performed using the same methods as were used in the most recent
valuation for such Loan.
"Affiliate": With respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified Person.
For purposes of this definition, "control," when used with respect to any
specified Person, means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"AFI Certificate": A Certificate delivered by the Depositor in
connection with a Funding, substantially in the form of Exhibit C hereto.
"Agreement": The meaning specified in the introductory paragraph
hereof, as supplemented by the Supplements.
"Available Collections": With respect to any Determination Date and the
related Payment Date, all Collections (including Reinvestment Income thereon but
excluding any Scheduled Payments due after such Determination Date) remaining in
the Collection Account after the disbursements provided for in Section
5.01(f)(i)-(v).
"Benefit Plan Investor": The meaning set forth in 29 C.F.R. ss
2510.3-101.
2
<PAGE>
"Board of Directors": The managing member, in the case of the Special
Servicer, and in the case of the Depositor or Servicer, the board of directors
of such entity or any duly authorized committee of such board.
"Board Resolution": A copy of a resolution certified by the secretary
or an assistant secretary of the Depositor or of the Servicer (or the managing
member, in the case of the Special Servicer) to have been duly adopted by its
Board of Directors and to be in full force and effect on the date of such
certification and delivered to the Trustee.
"Business Day": Any day other than a Saturday, a Sunday or a day on
which member banks in the federal reserve system, banking institutions in New
York City, London (solely for purposes of determining LIBOR Rate) or in the city
in which the principal place of business of the Depositor or the Servicer or the
Corporate Trust Office of the Trustee under this Agreement is located are
authorized or obligated by law or executive order to close.
"Certificate" or "Certificates": Any one or collectively, all of the
Certificates of any Series or Class, as is consistent with the context in which
such term is used.
"Certificateholder" or "Holder": The Person in whose name a Certificate
is registered in the Certificate Register.
"Certificateholder Agent": The agent for the Holders of the Rated
Certificates, which shall be with respect to any Revolving Series, each of ***
and *** provided that, to the extent that any party receives written
--------
instructions from both ***and *** which are contradictory or incompatible, the
instruction of *** shall control; and with respect to any Term Series, each
of *** and ***, provided that, to the extent that any party receives written
--------
instructions from both *** and *** which are contradictory or incompatible, the
instruction of *** shall control.
"Certificate Interest Rate": The per annum rate, whether fixed or
periodically reset, at which interest shall accrue on a Certificate, as
specified in such Certificate and in the applicable Supplement.
"Certificate Prepayment Fee Amount": As of any Determination Date, the
sum for each Loan prepaid in the related Due Period of the following amounts (a)
50% of the Loan Prepayment Fee collected with respect to such Loan until such
amount equals 1.5% of the Prepaid Principal Amount for such Loan, plus (b) 80%
of the amount of the Loan Prepayment Fee collected with respect to such Loan, if
any, in excess of 3% of the Prepaid Principal Amount for such Loan.
"Certificate Purchase Agreement": Each Certificate Purchase Agreement
between the Depositor and one or more purchasers of Certificates.
"Certificate Register" and "Certificate Registrar": The respective
meanings specified in Section 2.05.
"Class": With respect to each Series of Certificates, the various
classes of Certificates that are specified in the Supplement for such Series,
each such Class having the specific terms identified in this Agreement and in
the related Supplement.
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
3
<PAGE>
"Class D Percentage": The ratio of (a) the Outstanding Principal Amount
of the Class D Certificates of a Term Series less all Realized Losses and
Valuation Reductions to the extent not yet distributed to the Holders of such
Certificates or set aside in the Reserve Account with respect to such Term
Series to (b) the Outstanding Principal Amount of all Classes of Certificates in
such Series.
"Code": The Internal Revenue Code of 1986, as amended.
"Collection Account": The trust account or accounts designated as such
and created and maintained pursuant to Section 5.01.
"Collections": All amounts collected with respect to and all proceeds
of the Loans, including all Repurchase Prices, all Scheduled Payments, all
Prepayment Fee Collections, all Guaranty Amounts, all Insurance Proceeds, all
Servicing Charges and all Recoveries, but excluding collections attributable to
amounts due before the Cut-off Date for a Loan and that portion of a Scheduled
Payment due after the Cut-off Date for such Loan but attributable to interest
accrued before the Cut-off Date.
"Company": The meaning specified in the Loan Acquisition Agreement.
"Company Certificate": The meaning specified in the Loan Acquisition
Agreement.
"Controlling Holders": The Holders of not less than 51% of the
Outstanding Principal Amount (or with respect to any Class during the Funding
Period applicable to such Class, the Maximum Series Amount with respect to such
Class) of the most senior Class of Certificates then Outstanding (or Classes, if
more than one Series is Outstanding).
"Corporate Trust Office": The principal corporate trust office of the
Trustee at One M&T Plaza, 7th Floor, Buffalo, New York 14203-2399, or at such
other address as the Trustee may designate from time to time by notice to the
Certificateholders and the Depositor, or the principal corporate trust office of
any successor Trustee.
"Coverage Ratio": With respect to each Loan, the debt service coverage
ratio, fixed charge coverage ratio or other similar measure, as defined under
the terms of such Loan (as provided in the Standard Forms or as was otherwise
agreed to by the Certificateholder Agent on the Funding Report relating to such
Loan).
"Cut-Off Date": With respect to any Loan, the date specified for such
Loan in the related Loan Schedule.
"Default": Any occurrence or circumstance which with notice or the
lapse of time or both would become a Depositor Event of Default, a Servicer
Event of Default, a Special Servicer Event of Default or a Servicing Advisor
Event of Default.
"Defaulted Loan": A Loan shall become a Defaulted Loan upon the earlier
of (a) the date on which such Loan has been delinquent for ninety (90) days or
more, or (b) the date on which the Special Servicer determines in accordance
with its customary practices that such Loan is a Defaulted Loan.
"Delinquent Loan": As of any date of determination, any Loan (a) as to
which all Scheduled Payments due (including any applicable grace period as
provided in the Standard Forms or as was otherwise agreed to by the
Certificateholder Agent on the Funding Report relating to such Loan) prior to
such date have not been received in full.
4
<PAGE>
"Delivery Date": The date on which the Certificates of a Series are
first executed, authenticated and delivered, as specified in the applicable
Supplement.
"Depositor": The Person described in the introductory paragraph hereof
and all successors and permitted assigns of such Person under this Agreement.
"Depositor Event of Default": The meaning specified in Section 6.01.
"Depositor Order" and "Depositor Request": A written order or request,
as applicable, signed in the name of the Depositor by its President or a Vice
President and delivered to the Trustee.
"Determination Date": The twelfth day of each calendar month (or if
such day is not a Business Day, the next succeeding Business Day).
"Directing Holder": The meaning specified in the Servicing Agreement.
"Distribution Account": The trust account or accounts designated as
such and created and maintained pursuant to Section 5.02.
"Dollar(s)": Lawful money of the United States of America.
"Due Date": With respect to each Loan, each date on which payment is
due thereunder.
"Due Period": As to any Determination Date or Payment Date, the period
beginning on and including the tenth day of the prior month and ending on and
including the ninth day of the calendar month in which such Determination Date
or Payment Date occurs.
"Eligibility Criteria": The criteria set forth in Section 3.01(a) of
the Loan Acquisition Agreement.
"Eligible Investments": Any and all of the following:
(a) direct obligations of, and obligations fully guaranteed by,
the United States of America, or any agency or instrumentality
of the United States of America the obligations of which are
backed by the full faith and credit of the United States of
America;
(b) (i) demand and time deposits in, certificates of deposit of,
banker's acceptances issued by or federal funds sold by any
depository institution or trust company (including the Trustee
or its agent acting in their respective commercial capacities)
incorporated under the laws of the United States of America or
any State thereof and subject to supervision and examination
by federal and/or state authorities, so long as at the time of
such investment or contractual commitment providing for such
investment, such depository institution or trust company has a
short term unsecured debt rating in the highest available
ratings categories and provided that each such investment has
an original maturity of no more than 365 days; and provided
that any such certificates of deposit must be secured at all
times by collateral described in clause (a) above, such
collateral must be held by a third party and the Trustee must
have a perfected first priority security interest in such
collateral, and (ii) any other demand or time deposit or
deposit which is fully insured by the Federal Deposit
Insurance Corporation;
5
<PAGE>
(c) repurchase obligations with a term not to exceed thirty (30)
days with respect to any security described in clause (a)
above and entered into with a depository institution or trust
company (acting as a principal) rated in the highest available
rating category of the Rating Agency or, if not rated by the
Rating Agency, in the highest available rating category of at
least two other nationally recognized rating agencies;
provided that collateral transferred pursuant to such
repurchase obligation must be of the type described in clause
(a) above and must (i) be valued weekly at current market
price plus accrued interest, (ii) pursuant to such valuation,
equal, at all times, 104% of the cash transferred by the
Trustee in exchange for such collateral and (iii) be delivered
to the Trustee or, if the Trustee is supplying the collateral,
an agent for the Trustee, in such a manner as to accomplish
perfection of a security interest in the collateral by
possession of certificated securities;
(d) commercial paper having an original maturity of less than
three hundred sixty-five (365) days and issued by an
institution having a short term unsecured debt rating of the
Rating Agency in the highest available rating category at the
time of such investment or, if not rated by the Rating Agency,
in the highest available rating category of at least two other
nationally recognized rating agencies at the time of such
investment;
(e) a guaranteed investment contract approved in writing by the
Rating Agency and issued by an insurance company or other
corporation having a long term unsecured debt rating in the
highest available rating category of the Rating Agency or, if
not rated by the Rating Agency, in the highest available
rating category of at least two other nationally recognized
rating agencies;
(f) money market funds registered under the Investment Company Act
of 1940, as amended, whose shares are registered under the
Securities Act of 1933, and who have ratings in the highest
available rating categories of the Rating Agency, or, if not
rated by the Rating Agency, in the highest available rating
category of at least two other nationally recognized rating
agencies, and who, at the time of such investment invest only
in other Eligible Investments; any such money market funds
which provide for demand withdrawals shall conclusively be
deemed to satisfy any maturity requirement for Eligible
Investments set forth in this Agreement; and
(g) any other investment approved in writing by the Rating Agency
and the Certificateholder Agent.
The Trustee may purchase from or sell to itself or an Affiliate, as principal or
agent, the Eligible Investments listed above. All Eligible Investments shall be
made in the name of the Trustee for the benefit of the Certificateholders.
"Eligible Loan": The meaning specified in the Loan Acquisition
Agreement.
"ERISA": The Employee Retirement Income Security Act of 1974,
as amended or any successor statute thereto.
"Escrow Instructions": With respect to any Loan, the related escrow
instructions, if any, that are substantially in the form of Exhibit A, with such
changes as the Certificateholder Agent shall approve or shall reasonably
require, so long as such escrow instructions are not subsequently changed
without the prior written consent of the Certificateholder Agent.
6
<PAGE>
"Existing Indebtedness": The meaning specified in the Loan Acquisition
Agreement.
"Final Due Date": With respect to each Loan, the final Due Date
thereunder.
"Final Payment Date": With respect to any Certificate of a Series, the
date on which the final principal payment on such Certificate is made as therein
or herein provided, whether at the Series Termination Date or otherwise.
"First Period Interest": With respect to any Funding that occurs on a
day other than the first day of an Accrual Period, the amounts, if any, of
interest that will accrue on the related Funding Amount for each Class, at the
applicable Certificate Interest Rate, commencing on and including such Funding
Date and ending on and including the last day of the Accrual Period in which
such Funding occurs.
"Funded Loan": A Loan acquired by the Depositor on a Funding Date.
"Funding": Any extension of credit by any Class or Series of
Certificateholders in accordance with Article Four.
"Funding Amount": As of any Funding Date, an amount equal to the
aggregate Loan Balance of the related Funding Group.
"Funding Date": A day designated by the Depositor in accordance with
the terms of this Agreement on which it will obtain a Funding, which date is
either the fifteenth or last day of a month; provided that if such date is not a
Business Day, then the Funding Date shall be the next succeeding Business Day.
"Funding Group": A pool of Loans to be funded on a Delivery Date or
subsequent Funding Date.
"Funding Period": For each Series, the period of time commencing on the
Delivery Date for such Series and ending on the applicable Funding Termination
Date.
"Funding Report": A report substantially in the form of Exhibit D here
to.
"Funding Termination Date": With respect to each Series and each Class
within such Series, the earlier of (a) the Scheduled Funding Termination Date,
and (b) the day of the occurrence of a Funding Termination Event for such Class
or Series.
"Funding Termination Event": For each Series of Certificates, the
events specified in the related Supplement.
"Guaranty Amounts": Any and all amounts paid by any guarantor or
pledgor with respect to a Loan.
"Holder" or "Certificateholder": The person in whose name a Certificate
is registered in the Certificate Register.
"Independent": When used with respect to any specified Person and
except as otherwise defined in the Servicing Agreement with respect to a Loan,
means such a Person, who (a) is in fact independent of the Depositor, the
Servicer, the Special Servicer, the Servicing Advisor and their Affiliates, (b)
does not have any direct financial interest or any material indirect financial
interest in the Depositor, the Servicer, the Special Servicer, the Servicing
Advisor and their Affiliates and (c) is not connected with the Depositor, the
7
<PAGE>
Servicer, the Special Servicer, the Servicing Advisor and their Affiliates as an
officer, employee, promoter, advisor, consultant, underwriter, trustee, partner,
director, or person performing similar functions. Whenever it is herein provided
that any Independent Person's opinion or certificate shall be furnished to the
Trustee, such Person shall be appointed by a Depositor Order delivered to the
Trustee and the Certificateholder Agent, and such opinion or certificate shall
state that the signer has read this definition and that the signer is
Independent within the meaning hereof.
"Independent Accountants": Any firm of Independent certified public
accountants of recognized national standing.
"Initial Class D Percentage": The ratio of the Outstanding Principal
Amount of the Class D Certificates of a Term Series as of the Delivery Date for
such Series to the Maximum Series Amount for all Classes of Certificates in such
Series.
"Initial Delivery Date": The date on which the first Series of
Certificates are executed, authenticated and delivered.
"Initial Funding Amount": With respect to each Series of Certificates,
as defined in the related Supplement.
"Initial Payment Date": With respect to each Series, as defined in the
related Supplement.
"Insurance Policy": With respect to any Loan Collateral and the related
Loan, any insurance policy maintained by or on behalf of the Obligor pursuant to
the related Loan that covers physical damage to the Loan Collateral or general
liability (including policies procured by the Company or the Servicer on behalf
of the Obligor).
"Insurance Proceeds": With respect to an item of Loan Collateral and
the related Loan, any amount received during the related Due Period pursuant to
an Insurance Policy issued with respect to such Loan Collateral and the related
Loan and not required to be held in trust or released to the related Obligor or
guarantor or otherwise applied under the terms of the related Loan, net of any
costs of collecting such amounts not otherwise reimbursed.
"Insurer": Any insurance company or other insurer providing any
Insurance Policy.
"Interest Collections": As of any Determination Date, all Collections
attributable to interest on the Loans accrued before the end of the related Due
Period.
"Investment and Assumption Letter": The letter required to be delivered
by each transferee of a Certificate, as provided in Section 2.06, substantially
in the form of Exhibit B hereto.
"LIBOR Rate": For each Series, the meaning, if any, specified in the
applicable Supplement.
"Lien": The meaning specified in the Loan Acquisition Agreement.
"Liquidated Loan": The meaning specified in the Servicing Agreement.
"Loan": Any loan that is (a) originated or purchased by the Company and
(b) is identified on the Loan Schedule and, in accordance with the terms of this
Agreement, has become part of the Trust Estate;
8
<PAGE>
provided that, from and after the date on which a Loan is repurchased, removed
- --------
or substituted by the Company or the Depositor in accordance with Section 3.04,
such repurchased, removed or replaced Loan shall no longer constitute a "Loan"
for purposes of the Transaction Documents.
"Loan Acquisition Agreement": The Loan Acquisition Agreement, dated as
of August 1, 1998, entered into between the Depositor and the Company.
"Loan Assets": The meaning specified in the Loan Acquisition Agreement
"Loan Balance": As of any date of determination, the principal amount
of such Loan as of its Cut-Off Date, minus the sum of (a) the portion of
Scheduled Payments and any prepayments allocable to principal paid by or on
behalf of the related Obligor, (b) the amount of Recoveries, Insurance Proceeds
or other Collections allocable to principal, and (c) the portion of the
Repurchase Price allocable to principal and deposited in the Collection Account,
each as received from such Loan's Cut-Off Date to the close of business on the
last day of the Due Period (or, prior to the end of the first Due Period,
calculated as of the close of business on the day immediately prior to the
Cut-Off Date); provided that the Loan Balance of a Liquidated Loan shall be
--------
zero.
"Loan Collateral": The meaning specified in the Loan Acquisition
Agreement.
"Loan File": The meaning specified in the Loan Acquisition Agreement.
"Loan Pool": The Loans in the aggregate.
"Loan Prepayment Fee": For any Loan, the fee, if any, that is due from
the Obligor upon prepayment of the Loan.
"Loan Schedule": As the context requires: (a) the list of Loans
attached to an AFI Certificate delivered to the Trustee on an Acquisition Date,
each of which shall include with respect to the Loans thereon as of the
Acquisition Date thereof: (i) a number identifying the Loan, (ii) the initial
and remaining Loan Balance, (iii) the Obligor's name, (iv) the Obligor's billing
address, (v) origination date, maturity date, and initial payment date, (vi) the
original and remaining months to maturity of the Loan, (vii) the amount and
frequency of the Scheduled Payments, (viii) the amount of the final Scheduled
Payment (if different), (ix) the Cut-Off Date, (x) the coupon rate and if
applicable the reset index, frequency and margin, (xi) the prepayment terms,
(xii) the debt service or fixed charge coverage ratio, (xiii) the loan-to-value
ratio, and (xiv) the name and address of each collateral business, the type of
business and whether the related loan is secured by a fee interest or leasehold
interest in realty; and (b) the aggregate of all Loan Schedules.
"Lockbox Account": The meaning specified in the Servicing Agreement.
"London Banking Day": Any day on which dealings in deposits in Dollars
are transacted in the London interbank market.
"Maximum Series Amount": For each Series and Class of Certificates
within such Series, as defined in the related Supplement.
"Minimum Funding Amount": For each Series and Class of Certificates
within such Series, the meaning specified in the related Supplement.
9
<PAGE>
"Obligor": The borrower under each Loan, including any guarantor of
such borrower, and their respective successors and assigns.
"Officer's Certificate": A certificate signed by the Chairman of the
Board, the President, a Vice President, the Treasurer, the Controller, an
Assistant Controller or the Secretary of the company on whose behalf the
certificate is delivered, and delivered to the Trustee, which certificate shall
comply with the applicable requirements of Section 11.13. Unless otherwise
specified, any reference in this Agreement to an Officer's Certificate shall be
to an Officer's Certificate of the Depositor.
"Opinion of Counsel": A written opinion of outside counsel who shall be
reasonably satisfactory to the Trustee and which opinion shall comply with the
applicable requirements of Section 11.13 and shall be acceptable as to form and
substance to the Trustee.
"Outstanding": With respect to Certificates, as of any date of
determination, all Certificates theretofore authenticated and delivered under
this Agreement except:
(a) Certificates previously canceled by the Certificate Registrar
or delivered to the Certificate Registrar for cancellation;
and
(b) Certificates in exchange for or in lieu of which other
Certificates have been authenticated and delivered pursuant to
this Agreement, unless proof satisfactory to the Trustee is
presented that any such Certificates are held by a bona fide
purchaser;
provided that, in determining whether the Holders of the requisite Outstanding
- --------
Principal Amount of Certificates have given any request, demand, authorization,
direction, notice, consent or waiver hereunder, Certificates owned by the
Depositor or any other obligor upon the Certificates or any Affiliate of the
Depositor or the Servicer or such other obligor shall be disregarded and deemed
not to be outstanding, except that, in determining whether the Trustee shall be
protected in relying upon any such request, demand, authorization, direction,
notice, consent, or waiver, only Certificates which the Trustee knows to be so
owned shall be so disregarded.
"Outstanding Principal Amount": With respect to any Outstanding
Certificate or Class of Certificates as of any date of determination, the unpaid
principal amount of such Certificate or Class of Certificates.
"Overall Substitution/Repurchase Limitation": 10% of the Pool Balance
as of its highest level.
"Overdue Payment": With respect to a Due Period and a Loan that is a
Delinquent Loan, all payments due in a prior Due Period that the Servicer
receives from or on behalf of a Obligor during the related Due Period on such
Delinquent Loan, including any Servicing Charges.
"Paying Agent": The Trustee or any other Person approved by the
Certificateholder Agent.
"Payment Date": For each Series, the 15th day of each calendar month
(or if such day is not a Business Day, the next succeeding Business Day)
commencing on the Initial Payment Date for such Series.
"Pending Credit Schedule":The meaning specified in the Loan Acquisition
Agreement.
10
<PAGE>
"Person": Any individual, corporation, partnership, association,
joint-stock company, limited liability company, trust (including any beneficiary
thereof), unincorporated organization or government or any agency or political
subdivision thereof.
"Pool Balance": As of any date of determination, the sum of all Loan
Balances.
"Pool Criteria": The meaning specified in the Loan Acquisition
Agreement.
"Pool Performance Condition": Shall be deemed satisfied if, as of the
applicable Determination Date, each of the following tests is met: (a) the Loan
Balance of any Liquidated Loan has been either paid to Certificateholders or
allocated to reduce the Outstanding Principal Amount of Certificates other than
Rated Certificates; (b) no Loan is classified as a Delinquent Loan or a
Defaulted Loan unless an amount equal to all Valuation Reductions with respect
to each such Loan has been deposited into the Reserve Account or distributed to
Certificateholders; (c) not more than the lesser of three (3) loans and 8.0% of
the Pool Balance is attributable to Loans which are not Defaulted Loans or
Delinquent Loans but whose Coverage Ratio is below the minimum required under
their terms; (d) not more than the lesser of five (5) loans and 16.0% of the
Pool Balance is attributable to Loans classified as Underperforming Loans; (e)
with respect to Term Series Outstanding, if any, the sum of the Class D
Percentages for all Series is not less than the sum of the Initial Class D
Percentages for all Series, or the Rating Agency has confirmed all of the
initial ratings on all Rated Certificates; (f) with respect to all Revolving
Series Outstanding, the Class D-R Outstanding Principal Amount has not been
reduced by losses and is not less than the amount required by the Rating Agency
from time to time, pursuant to the applicable Supplement; and (g) the Reserve
Account balance is at least equal to the Reserve Account Required Balance.
"Prepaid Principal Amount": For each Due Period, all amounts allocable
to principal that are received in respect of any Loan for which either (i) a
Loan Prepayment Fee is due or (ii) the Repurchase Price is received and such
Repurchase Price includes an amount attributable to clause (c) of the definition
of Repurchase Price.
"Prepayment Fee Collections": For each Due Period, an amount equal to
the sum of (a) all Collections attributable to Loan Prepayment Fees plus (b) all
amounts received in respect of clause (c) of the definition of Repurchase Price.
"Principal Collections": As of any Determination Date, all Collections
attributable to principal on the Loans due prior to the end of the related Due
Period.
"Principal Distribution Amount": For any Payment Date, the sum, for all
Loans, of (a) the principal component of all Scheduled Payments, (b) to the
extent not included in the preceding clause, the portion of the Repurchase Price
allocable to principal for any Loan which was purchased or repurchased from the
Trust Estate during the related Due Period, (c) to the extent not included in
the preceding clauses, the amount of any Valuation Reduction determined or
Realized Losses incurred during the preceding Due Period, (d) to the extent not
included in the preceding clauses, the amount of any prepayments received during
the preceding Due Period and (e) to the extent not included in the preceding
clauses (a) through (d), any such amounts with respect to a prior Due Period
that have not previously been distributed.
"Proceeding": Any suit in equity, action at law or other judicial or
administrative proceeding.
"Qualified Institutional Buyer": Any "qualified institutional buyer"
as defined in 17 CFR 230.144A.
11
<PAGE>
"Rated Certificates": Any Class of Certificates bearing a credit rating
at issuance from the Rating Agency.
"Rating Agency": Duff & Phelps Credit Rating Co., and any legal
successor thereto.
"Realized Loss": As of any Determination Date, with respect to a Loan
designated as a Liquidated Loan during the preceding Due Period, an amount (not
less than zero) equal to (a) the Loan Balance of such Loan on the day
immediately prior to it becoming a Liquidated Loan, plus (b) accrued and unpaid
interest thereon to such Determination Dat, minus (c) all Recoveries in respect
of such Liquidated Loan that the Servicer has (in accordance with the definition
of "Liquidated Loan" contained in the Servicing Agreement) identified and
reasonably expects to receive within thirty (30) days from the date such Loan
became a Liquidated Loan.
"Record Date": The close of business on the last day of the month
preceding the applicable Payment Date, whether or not a Business Day, except
with respect to an Initial Payment Date, the Record Date shall be the related
Delivery Date.
"Recoveries": For any Due Period occurring after the date on which any
Loan becomes a Defaulted Loan and with respect to such Defaulted Loan, all
payments that the Servicer or Special Servicer received from or on behalf of a
Obligor during such Due Period in respect of such Defaulted Loan, from the sale
of such Defaulted Loan, or from liquidation or leasing of the related Loan
Collateral, including Scheduled Payments, Overdue Payments, Guaranty Amounts,
and Insurance Proceeds.
"Recovery Expenses": The meaning specified in the Servicing Agreement.
"Reference Banks": Unless otherwise specified in the applicable
Supplement, four leading banks selected by the Servicer that are engaged in
transactions in eurodollar deposits in the international eurocurrency market,
each of which shall have an established place of business in London.
"Registered Holder": The Person whose name appears on the Certificate
Register on the applicable Record Date.
"Reinvestment Income": Any interest or other earnings earned on all or
part of the Trust Estate.
"Report": The meaning specified in the Servicing Agreement.
"Repossessed Collateral": The meaning specified in the Servicing
Agreement.
"Repurchase Price": With respect to any Loan repurchased by the Company
pursuant to Sections 2.06 or 3.03 of the Loan Acquisition Agreement or removed
by the Depositor pursuant to Section 3.04(d) or Section 10.02, the sum of the
following: (a) the excess of the Loan Balance (computed without giving effect to
clause (c) and the provisos to the definition of "Loan Balance" contained
therein) of the related Loan on the Determination Date on or immediately
preceding the date when the Loan is removed or repurchased over the Loan Balance
of the Substitute Loan(s), if any, substituted therefore; (b) any accrued but
unpaid interest thereon at the interest rate specified in the Loan through the
date of repurchase and (without duplication) any unreimbursed advances; and (c)
other than in connection with a determination of the Repurchase Price under
Section 10.02, if the Loan Balance of the Loan (or portion thereof) being
repurchased or removed, together with the Loan Balance of all Loans previously
repurchased or removed, exceeds 5.0% of the initial Loan Balances of all loans
transferred by the Company to the Depositor under
12
<PAGE>
the Loan Acquisition Agreement, then an amount equal to the Loan Prepayment Fee
which would be due if the Loan were being prepaid rather than repurchased.
"Request for Release of Documents": The meaning specified in the
Servicing Agreement.
"Required Prepayment Fee Deposit": As of any Determination Date for
which Prepayment Fee Collections were received during the related Due Period, an
amount equal to the lesser of (a) before giving effect to any deposits to, and
withdrawals from, the Reserve Account on such Determination Date, an amount
sufficient to bring the Reserve Account balance up to the Reserve Account
Required Balance, and (b) the Residual Prepayment Fee Amount.
"Reserve Account": The trust account or accounts created and maintained
pursuant to Section 5.03.
"Reserve Account Floor Amount": $250,000.00.
"Reserve Account Required Balance": As of any date of determination, an
amount equal to the sum of: (a) the greater of (i) the product of 1.0% and the
Pool Balance and (ii) the Reserve Account Floor Amount; plus (b) the sum of (i)
the product of 5.0% and the sum of the Loan Balances of each Loan other than a
Delinquent Loan or Defaulted Loan whose Coverage Ratio is less than the Coverage
Ratio required under its terms, and (ii) the product of 5.0% and the excess of
(A) the sum of the Loan Balances of each Underperforming Loan over (B) the
product of 5.0% and the Pool Balance.
"Reserve Withdrawals": Amounts withdrawn from the Reserve Account
pursuant to Section 5.03(d)(i).
"Reset Date": For each Series, except otherwise specified in the
related Supplement, (a) with respect to First Period Interest, the second
Business Day preceding a Funding Date, (b) with respect to the LIBOR Rate (other
than the calculation of the LIBOR Rate with respect to First Period Interest),
the second Business Day immediately preceding the commencement of each Accrual
Period for interest paid on any Payment Date; provided that if such date is not
--------
both a Business Day and a London Banking Day, the Reset Date shall be the first
preceding day that is both a Business Day and a London Banking Day.
"Residual Prepayment Fee Amount": As of any Determination Date, the sum
for each Loan prepaid in the related Due Period of the following amounts (a) 50%
of the Loan Prepayment Fee collected with respect to such Loan until such amount
equals 1.5% of the Prepaid Principal Amount for such Loan, plus (b) 20% of the
amount of the Loan Prepayment Fee collected with respect to such Loan, if any,
in excess of 3% of the Prepaid Principal Amount for such Loan.
"Responsible Officer": When used with respect to the Trustee, any
officer assigned to the Corporate Trust Office (or any successor thereto),
including any Vice President, senior trust officer, trust officer, assistant
trust officer, any assistant secretary, any trust officer or any other Officer
of the Trustee customarily performing functions similar to those performed by
any of the above designated officers and having direct responsibility for the
administration of this Agreement, and also, with respect to a particular matter,
any other officer, to whom such matter is referred because of such officer's
knowledge of and familiarity with the particular subject.
"Revolving Certificates": Any Certificates of a Series that is
designated as a Revolving Series in the Supplement for such Series.
13
<PAGE>
"Revolving Series": Any Series denominated as such in the Supplement
for such Series.
"Scheduled Distributions": With respect to all Series and any Payment
Date, the sum of (a) interest accrued and payable on all outstanding Rated
Certificates on such date, including interest accrued in prior Due Periods but
unpaid, (b) the aggregate Principal Distribution Amount payable on such date on
all outstanding Rated Certificates, and (c) the sum of all prior Principal
Distribution Amounts, if any, from prior Payment Dates not yet paid.
"Scheduled Expenses": On any Determination Date, the Trustee Fee, the
Servicer Fee, the Special Servicer Fee and the Servicing Advisor Fee due on the
related Payment Date.
"Scheduled Funding Termination Date": For each Series of Certificates,
the date specified in the related Supplement.
"Scheduled Maturity": With respect to any Series, the meaning set forth
in the applicable Supplement.
"Scheduled Payment": With respect to a Payment Date and any Loan, the
periodic payment (inclusive of any amounts in respect of stated interest but
exclusive of any Servicing Charges or impound amounts) due with respect to such
Loan in the related Due Period.
"Series": Each series of Revolving or Term Certificates issued pursuant
to this Agreement and a common Supplement, bearing the same Series designation
and which may be comprised of multiple Classes of Certificates.
"Series Collections": With respect to any Series and any Payment Date,
an amount equal to the Available Collections allocated to such Series pursuant
to Section 5.01(e), as otherwise adjusted pursuant to Section 5.01(f)(vi).
"Series Percentage": With respect to any Series and any Determination
Date, a fraction the numerator of which is the Series Principal Amount and the
denominator of which is the aggregate Series Principal Amounts for all Series
then Outstanding.
"Series Principal Amount": With respect to any Series and any
Determination Date, the aggregate Outstanding Principal Amount of all
Certificates of such Series immediately following the preceding Payment Date or
Funding Date, whichever is later.
"Series Termination Date": With respect to any Series of Certificates,
the date specified in the applicable Supplement.
"Servicer": The meaning specified in the Servicing Agreement.
"Servicer Event of Default": The meaning specified in Section 6.01(a)
of the Servicing Agreement.
"Servicer Fee": With respect to each Loan and for any Payment Date, an
amount per Due Period equal to (a) the product of (i) one-twelfth of 0.20% and
(ii) (A) if the Loan became a Funded Loan prior to the Determination Date
occurring in the month preceding such Payment Date, the Loan Balance of such
loan as of the Determination Date occurring in the month preceding such Payment
Date, otherwise (B) (1) the Loan Balance of such Loan as of the date it became a
Funded Loan times (2) a fraction, the numerator of
14
<PAGE>
which is the number of days from the date the Loan became a Funded Loan through
the last day of the Due Period in which such Loan became a Funded Loan, and the
denominator of which is thirty (30), minus (b) the Trustee Fee.
"Servicer Report": The meaning specified in the Servicing Agreement.
"Servicer Termination Notice": The meaning specified in Section 6.01(b)
of the Servicing Agreement.
"Servicing Advisor": The meaning specified in the Servicing Agreement.
"Servicing Advisor Fee": The meaning specified in the Servicing
Agreement.
"Servicing Agreement": The Servicing Agreement, dated as of August 1,
1998, entered into among the Servicer, the Depositor, the Special Servicer, the
Servicing Advisor and the Trustee.
"Servicing Charges": The sum of (a) all late payment charges paid by
Obligors on Loans that are Delinquent Loans after payment in full of any
Scheduled Payments due in a prior Due Period and Scheduled Payments for the
related Due Period and (b) any other incidental charges or fees received from a
Obligor, including assumption fees, other late fees, collection fees and bounced
check charges.
"Servicing Officers": The meaning specified in the Servicing Agreement
"Special Servicer": The meaning specified in the Servicing Agreement.
"Special Servicer Fee": With respect to each Loan and for any Payment
Date, an amount per Due Period equal to (a) the product of (i) one-twelfth of
0.20% and (ii) (A) if the Loan became a Funded Loan prior to the Determination
Date occurring in the month preceding such Payment Date, the Loan Balance of
such Loan as of the Determination Date occurring in the month preceding such
Payment Date, otherwise (B) (1) the Loan Balance of such Loan as of the date it
became a Funded Loan times (2) a fraction, the numerator of which is the number
of days from the date the Loan became a Funded Loan through the last day of the
Due Period in which such Loan became a Funded Loan, and the denominator of which
is thirty (30), minus (b) the Servicing Advisor Fee.
"Special Servicer Report": The meaning specified in the Servicing
Agreement.
***
"State": Any state of the United States of America and, in addition,
the District of Columbia.
"Substitute Loan": The meaning specified in the Loan Acquisition
Agreement.
"Supplement": With respect to each Series of Certificates, a supplement
to this Agreement setting forth the terms of the various Classes of Certificates
comprising such Series, as provided in Section 2.02.
"Swap Agreement": With respect to any Series of Certificates, the
meaning set forth in the applicable Supplement.
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
15
<PAGE>
"Swap Payments": With respect to each Due Period, the payments that are
required to be made to or from the Trust under any Swap Agreement then in
effect.
"Term Certificates": Any Certificates of a Series that is designated
as a Term Series in the Supplement for such Series.
"Term Series": Any Series designated as such in the Supplement for
such Series.
"Transaction Documents": This Agreement, the Servicing Agreement, the
Loan Acquisition Agreement, the Certificates and the Certificate Purchase
Agreements.
"Transaction Documents Date": With respect to each Series of
Certificates, the meaning specified in the applicable Supplement.
"Transition Costs": Any documented expenses reasonably incurred by a
Successor Servicer or the Trustee in connection with a transfer of servicing
from the Servicer, Special Servicer or Servicing Advisor, pursuant to the
Servicing Agreement, but not to exceed $25,000 in the aggregate for any
particular transfer.
"Trust": Allegiance Capital Trust I, being the trust created hereunder
"Trust Estate": The meaning specified in the Conveyance Clause of this
Agreement.
"Trustee": Manufacturers and Traders Trust Company, a New York banking
corporation, until a successor Person shall have become the Trustee pursuant to
the applicable provisions of this Agreement, and thereafter "Trustee" shall mean
such successor Person.
"Trustee Fee": The fee payable to the Trustee in consideration for the
Trustee's performance of its duties as trustee pursuant to this Agreement, which
fee shall be nonrefundable as to the current year and shall be payable in
advance as follows: (a) $7,500, payable by the Depositor to the Trustee on the
initial Funding Date; and (b) $615, deposited on each Payment Date thereafter.
"UCC": The Uniform Commercial Code in effect in the applicable
jurisdiction.
"Underperforming Loan": As of any Determination Date, a Loan that is
not a Defaulted Loan or a Delinquent Loan and that has a Coverage Ratio of less
than ***.
"Valuation Reduction": With respect to any Defaulted Loan that is not a
Liquidated Loan and with respect to which an updated Valuation has been prepared
in accordance with Section 3.12(f) of the Servicing Agreement, an amount equal
to the excess of (a) the sum, as of the beginning of the Due Period in which an
updated Valuation is received with respect to such Loan in accordance with
Section 3.12(f) of the Servicing Agreement, (i) the Loan Balance of such Loan as
of the beginning of the related Due Period, plus, (ii) to the extent not
previously advanced by the Servicer or the Special Servicer, all unpaid interest
on such Loan at a per annum rate equal to the applicable interest rate, (iii)
any unreimbursed advances and (iv) all currently due but unpaid real estate
taxes and assessments, insurance premiums and, if applicable, ground rents in
respect of the related Loan Collateral or Repossessed Collateral over (b) 80% of
the Valuation of the Loan Collateral or Repossessed Collateral securing such
Loan as per such updated Valuation.
"Vice President": With respect to the Depositor or the Trustee, any
vice president, whether or not designated by a number or a word or words added
before or after the title "vice president."
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
16
<PAGE>
"Workout Fee": The meaning specified in the Servicing Agreement.
Section 1.02 Certain Rules of Construction.
------------ -----------------------------
Unless the context of this Agreement or any Supplement clearly requires
otherwise: (a) references to the plural include the singular and to the singular
include the plural; (b) references to any gender include any other gender; (c)
the words "include" and "including" are not limiting; (d) the word "or" has the
inclusive meaning represented by the phrase "and/or"; (e) the words "hereof,"
"herein," "hereby," and "hereunder," and any other similar words, refer to this
Agreement or such Supplement (as applicable) as a whole and not to any
particular provision hereof; and (f) article, section, subsection, clause,
exhibit, and schedule references are to this Agreement or such Supplement (as
applicable). Article, section, and subsection headings are for convenience of
reference only, shall not constitute a part of this Agreement for any other
purpose, and shall not affect the construction of this Agreement or any
Supplement. All exhibits and schedules attached hereto are incorporated herein
by this reference. Any reference herein to this Agreement or in any Supplement
or any other agreement, document, or instrument includes all permitted
alterations, amendments, changes, extensions, modifications, renewals, or
supplements thereto or thereof, as applicable.
Section 1.03 Certain Calculations.
------------ ---------------------
For purposes of this Agreement and unless the context of this Agreement
clearly requires otherwise:
(a) All calculations of interest on the Certificates and of Scheduled
Expenses shall be made on the basis of a year of three hundred sixty (360) days
consisting of twelve (12), thirty (30) day months. All calculations of interest
with respect to any Loan shall be made in accordance with the terms of the
related Note and Mortgage or, if such documents do not specify the basis upon
which interest accrues thereon, on the basis of a year of three hundred sixty
(360) days consisting of twelve (12), thirty (30) day months.
(b) Subject to Section 1.03(c), all Recoveries in respect of a Loan
shall be applied as follows: (i) first, to the reimbursement of any Recovery
Expenses with respect to such Loan; (ii) second, to past due Scheduled Payments;
(iii) third, to the Scheduled Payment due in the Due Period in which such
Recoveries are received; (iv) fourth, as a principal prepayment on the related
Loan; (v) fifth, to the applicable Loan Prepayment Fee, if any, and (vi) sixth,
to the Obligor, as required by law or the terms of the related Loan.
(c) Notwithstanding acceleration or foreclosure of any Loan and the
repossession of the related Loan Collateral and the cancellation of the related
Loan, such Loan shall (for purposes of all calculations hereunder) be considered
to be a Loan held in the Trust Estate until such time as such Loan or the
related Repossessed Collateral is sold by the Trust Estate. Consistent with the
foregoing, for purposes of all calculations hereunder, so long as such Loan is
considered to be a Loan held in the Trust Estate, it shall be assumed that,
notwithstanding that the indebtedness evidenced by the related Note shall have
been discharged, such Note shall remain outstanding and, for purposes of
determining the Loan Balance thereof and in connection with the calculation of
any servicing compensation, the interest rate and related amortization schedule
in effect at the time of any such acquisition of title shall remain in effect
(except that such schedule shall be adjusted to reflect the application of
Recoveries in the manner set forth in Section 1.03(b) or 1.03(c), as
applicable).
17
<PAGE>
ARTICLE TWO
-----------
THE CERTIFICATES
----------------
Section 2.01 Form Generally.
------------ --------------
Each Class of Certificates and the certificates of authentication shall
be in substantially the form set forth in the applicable Supplement, in each
case with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Agreement, and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon, as may, consistently herewith, be determined by the
officers executing such Certificates, as evidenced by their execution of the
Certificates.
The definitive Certificates shall be typewritten, printed,
lithographed, or engraved or produced by any combination of these methods on
steel engraved borders or may be produced in any manner acceptable to the
Trustee and the initial purchasers of the Certificates, all as determined by the
officers executing such Certificates, as evidenced by their execution of such
Certificates.
Section 2.02 Series; Denomination.
------------ ---------------------
(a) This Agreement provides for the issuance from time to time of one
or more Series of Certificates, designated as either a Revolving Series or a
Term Series, each subject to and in accordance with the terms of this Agreement
and the applicable Supplement. Each Series of Certificates shall have multiple
Classes and, to the extent provided in the applicable Supplement, sub-Classes.
Certificates in a Revolving Series may be designated in the applicable
Supplement as Class A-R, Class B-R, Class C-R or Class D-R, and Certificates in
a Term Series may be designated as Class A, Class B, Class C, Class D or Class
R. Each Certificate in a Series shall bear upon the face thereof the designation
selected for the Series and Class (and sub-Class, if applicable) to which it
belongs.
(b) Each Class of Certificates issued under this Agreement shall in all
respects represent a fractional undivided interest in the Trust Estate, and
shall be entitled to the benefits hereof without preference, priority or
distinction on account of the actual time or times of authentication and
delivery, except as otherwise provided in this Agreement or the applicable
Supplement. As and to the extent set forth in the priority of payments in
Section 5.02(b) and the Supplements, the rights of the Holders of certain
Classes of Certificates to receive payments of interest and principal shall be
subordinated to the rights of the Holders of certain other Classes of
Certificates to receive such payments.
(c) The Supplement with regard to a Series of Certificates shall
establish, without limitation, the following terms and provisions of each Class
of Certificates of such Series, each of which the Depositor shall determine in
authorizing the issuance of any Series:
(i) designation of the Series and the Classes of
Certificates within such Series;
(ii) the applicable Delivery Date, Initial Funding
Amount, Initial Payment Date, Minimum Funding Amount, and Transaction
Documents Date;
(iii) the maximum aggregate principal amount of Certificates of
each Class of such Series that may be issued, including the Maximum
Series Amount;
18
<PAGE>
(iv) the Certificate Interest Rate for each Class of
Certificates in such Series;
(v) the Series Termination Date for each Class of
Certificates in such Series; and
(vi) the priority of payments for the Distribution Account for
such Series.
(d) The aggregate principal amount of Certificates of each Class of
each Series which may be authenticated and delivered under this Agreement shall
be the Maximum Series Amount, except for Certificates authenticated and
delivered upon registration of transfer or in exchange for or in lieu of other
Certificates pursuant to Sections 2.04, 2.05, 2.07 or 9.05. Except as specified
in the related Supplement, the Certificates shall be issuable only as registered
Certificates without coupons in denominations of at least $250,000 and any
amount in excess thereof; provided that the foregoing shall not restrict or
prevent the transfer in accordance with Sections 2.05 and 2.06 of any
Certificate with a remaining Outstanding Principal Amount of less than $250,000.
Section 2.03 Formation, Execution, Authentication, Delivery and
------------ ---------------------------------------------------
Dating
- ------
(a) By its conveyance of the Trust Estate to the Trustee as set forth
in the Conveyance Clause hereof, the Depositor hereby establishes the Trust in
exchange for the Depositor's rights to receive payments hereunder. On the
Initial Delivery Date and from time to time thereafter, Certificates shall be
issued in accordance with the terms hereof by the Trust and authenticated by the
Trustee upon the written order of the Depositor.
(b) The Certificates shall be executed on behalf of the Depositor by
its President or one of its Vice Presidents under its corporate seal imprinted
or otherwise reproduced thereon. The signature of these officers on the
Certificates must be manual.
(c) Certificates bearing the manual signatures of individuals who were
at any time the proper officers of the Depositor shall bind the Depositor,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication or delivery of such Certificates or did not
hold offices at the date of authentication or delivery of such Certificates.
(d) Each Certificate shall bear on its face the applicable Delivery
Date and be dated as of the date of its authentication.
(e) No Certificate shall be entitled to any benefit under this
Agreement or be valid or obligatory for any purpose, unless there appears on
such Certificate a certificate of authentication substantially in the form
provided for herein executed by the Trustee by the manual signature of one of
its authorized officers, and such certificate upon any Certificate shall be
conclusive evidence, and the only evidence, that such Certificate has been duly
authenticated and delivered hereunder.
Section 2.04 Temporary Certificates.
------------ -----------------------
Pending the preparation of definitive Certificates, the Depositor may
execute, and upon Depositor Order, the Trustee shall authenticate and deliver,
temporary Certificates which are printed, lithographed, typewritten,
mimeographed or otherwise produced, in any denomination, containing the same
terms and representing the same rights as the definitive Certificates in lieu of
which they are issued.
19
<PAGE>
If temporary Certificates are issued, the Depositor will cause
definitive Certificates to be prepared without unreasonable delay. After the
preparation of definitive Certificates, the temporary Certificates shall be
exchangeable for definitive Certificates upon surrender of the temporary
Certificates at the office or agency of the Depositor to be maintained as
provided in Section 8.02(l), without charge to the Holder. Upon surrender for
cancellation of any one or more temporary Certificates, the Depositor shall
execute and the Trustee shall authenticate and deliver in exchange therefor one
or more definitive Certificates of any authorized denominations and of a like
initial aggregate principal amount and Series Termination Date. Until so
exchanged, the temporary Certificates shall in all respects be entitled to the
same benefits under this Agreement as definitive Certificates.
Section 2.05 Registration, Registration of Transfer and Exchange.
------------ ----------------------------------------------------
(a) The Depositor shall cause to be kept at an office or agency to be
maintained by the Depositor in accordance with Section 8.02(l) a register (the
"Certificate Register"), in which, subject to such reasonable regulations as it
may prescribe, the Depositor shall provide for the registration of Certificates
and the registration of transfers of Certificates. The Trustee is hereby
appointed "Certificate Registrar" for the purpose of registering Certificates
and transfers of Certificates as herein provided. The Trustee shall have the
right to examine the Certificate Register at all reasonable times and to rely
conclusively upon a Certificate of the Certificate Registrar as to the names and
addresses of the Holders of the Certificates and the principal amounts and
numbers of such Certificates as held.
(b) Upon surrender for registration of transfer of any Certificate at
the office or agency of the Depositor to be maintained as provided in Section
8.02(l) and subject to the conditions set forth in Section 2.06, the Depositor
shall execute, and the Trustee or its agent shall authenticate and deliver, in
the name of the designated transferee or transferees, one or more new
Certificates of any authorized denominations and of a like aggregate principal
amount, Class, Series and Series Termination Date.
(c) At the option of the Holder, Certificates of a Series may be
exchanged for other Certificates of such Series of any authorized denominations
and of a like aggregate principal amount, Class and Series Termination Date upon
surrender of the Certificates to be exchanged at such office or agency. Whenever
any Certificates are so surrendered for exchange, the Depositor shall execute,
and the Trustee or its agent shall authenticate and deliver, the Certificates
which the Certificateholder making the exchange is entitled to receive.
(d) All Certificates issued upon any registration of transfer or
exchange of Certificates shall be entitled to the same benefits under this
Agreement, as the Certificates surrendered upon such registration of such
transfer or exchange.
(e) Every Certificate presented or surrendered for registration of
transfer or exchange shall (if so required by the Depositor or the Certificate
Registrar) be duly endorsed or be accompanied by a written instrument of
transfer in form reasonably satisfactory to the Depositor and the Certificate
Registrar duly executed by the Holder thereof or his attorney duly authorized in
writing.
(f) No service charge shall be made to a Holder for any registration of
transfer or exchange of Certificates, but the Depositor may require payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration of transfer or exchange of Certificates,
other than exchanges pursuant to Section 2.04 or Section 9.05 not involving any
registration of transfer.
20
<PAGE>
Section 2.06 Limitation on Transfer and Exchange.
------------ ------------------------------------
(a) The Certificates have not been registered or qualified under the
Securities Act of 1933, as amended (the "1933 Act") or the securities laws of
any state. No transfer of any Certificate shall be made unless that transfer is
made in a transaction which does not require registration or qualification under
the 1933 Act or under applicable state securities or "Blue Sky" laws. In the
event that a transfer is to be made without registration or qualification, such
Certificateholder's prospective transferee shall (i) deliver to the Trustee an
Investment and Assumption Letter and (ii) if the Trustee deems necessary (in
other than a transfer under Rule 144A), deliver to the Trustee an opinion of
counsel that the transfer is exempt from such registration or qualification
(which opinion shall not be at the expense of the Depositor, the Trustee, the
Servicer or the Trust Estate). Neither the Depositor nor the Trustee is
obligated to register or qualify the Certificates under the 1933 Act or any
other securities law. Any such Holder desiring to effect such transfer shall,
and does hereby agree to, indemnify the Trustee and the Depositor against any
liability, cost or expense (including attorneys' fees) that may result if the
transfer is not so exempt or is not made in accordance with such federal and
state laws. The Trustee shall promptly, after receipt of such information as is
set forth in the next succeeding sentence, furnish to any Holder, or any
prospective owner designated by a Holder, the information required to be
delivered to Holders and prospective owners of Certificates in connection with
resales of the Certificates to permit compliance with Rule 144A of the 1933 Act
in connection with such resales. Such information shall be provided to the
Trustee by the Servicer.
(b) No acquisition or transfer of a Certificate or any interest therein
may be made to any Benefit Plan Investor or to any Person who is directly or
indirectly purchasing such Certificates or an interest therein on behalf of, as
named fiduciary of, as trustee of, or with assets of, such a Benefit Plan
Investor unless the Trustee is provided with evidence that establishes to the
satisfaction of the Trustee that either no "prohibited transaction" under ERISA
or the Code will occur in connection with such prospective acquiror's or
transferee's acquisition and holding of the Certificates or that the acquisition
and holding of the Certificates by such prospective acquiror or transferee is
subject to a statutory or administrative exemption.
(c) Except as otherwise provided in the applicable Certificate Purchase
Agreement, no acquisition or transfer of a Certificate or any interest therein
may be made during such Certificate's Funding Period without the prior written
consent of the Depositor.
(d) In addition, no transfer of a Certificate shall be permitted, and
no such transfer shall be registered by the Trustee or the Certificate Registrar
on the Certificate Register, or shall be effective hereunder, if such transfer
or the registration of such transfer would cause the Trust to have, directly or
indirectly, more than 98 Certificateholders at any time. The Servicer hereby
agrees to determine at least annually the number of Certificateholders and
promptly notify the Trustee of the restriction in this subsection (c) if the
number of beneficial owners exceeds seventy-five. The Trustee further agrees
that it shall not participate in the establishment of an "established securities
market" (within the meaning of section 1.7704-1(b) of the Treasury Regulations)
or a "secondary market or the substantial equivalent thereof" (within the
meaning of section 1.7704-1(c) of the Treasury Regulations), or the inclusion of
any of the Certificates in such a market, nor shall it permit the registration
or listing of any Certificate on any such market.
(e) The Trustee shall have no liability to the Trust Estate or any
Certificateholder arising from a transfer of any such Certificate in reliance
upon a certification described in this Section 2.06.
21
<PAGE>
Section 2.07 Mutilated, Destroyed, Lost or Stolen Certificat.
------------ ------------------------------------------------
If (a) any mutilated Certificate is surrendered to the Certificate
Registrar, or the Trustee receives evidence to its satisfaction of the
destruction, loss or theft of any Certificate (which evidence shall be, in the
case of a Qualified Institutional Buyer, notice from such Qualified
Institutional Buyer of such ownership and such loss, theft, destruction or
mutilation), and (b) in the case of any such destruction, loss or theft, there
is delivered to the Trustee such security or indemnity as may be required by the
Trustee to save the Depositor, the Trustee or any agent of any of them harmless
(provided that, if the Holder of the Certificate is, or is a nominee for, a
--------
Qualified Institutional Buyer, then such Qualified Institutional Buyer's own
unsecured agreement of indemnity shall be deemed to be satisfactory for such
purpose), then, in the absence of notice to the Depositor or the Certificate
Registrar that such Certificate has been acquired by a bona fide purchaser, the
Depositor shall execute and, upon its request, the Trustee shall authenticate
and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost
or stolen Certificate, a new Certificate of the same tenor, Series, Class,
initial principal amount and Series Termination Date, bearing a number not
contemporaneously outstanding. If after the delivery of such new Certificate, a
bona fide purchaser of the original Certificate in lieu of which such new
Certificate was issued presents for payment such original Certificate, the
Depositor and the Trustee shall be entitled to recover such new Certificate from
the person to whom it was delivered or any person taking therefrom, except a
bona fide purchaser, and shall be entitled to recover upon the security or
indemnity provided therefor to the extent of any loss, damage, cost or expenses
incurred by the Depositor or the Trustee or any agent of any of them in
connection therewith. If any such mutilated, destroyed, lost or stolen
Certificate shall have become or shall be about to become due and payable, or
shall have become subject to redemption in full, instead of issuing a new
Certificate, the Depositor may pay such Certificate without surrender thereof,
except that any mutilated Certificate shall be surrendered.
No service charge shall be made to a Holder for any registration of
transfer, exchange or issuance of Certificates, but the Depositor may require
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection with any registration of transfer or exchange of
Certificates, other than exchanges pursuant to Section 2.04 or Section 9.05 not
involving any registration of transfer.
Every new Certificate issued pursuant to this Section 2.07, in lieu of
any destroyed, lost or stolen Certificate, shall constitute an original
additional contractual obligation of the Depositor, whether or not the
destroyed, lost or stolen Certificate shall be at any time enforceable by
anyone, and shall be entitled to all the benefits of this Agreement equally and
proportionately with any and all other Certificates duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
maximum extent permitted by law) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Certificates.
Section 2.08 Payment of Principal and Interest.
------------ ----------------------------------
(a) Each Certificate shall bear interest during each Accrual Period at
the Certificate Interest Rate applicable to such Class and Series on the
Outstanding Principal Amount of such Certificate (as of the first day of the
Accrual Period) until and including the last day preceding the Payment Date on
which its Outstanding Principal Amount has been reduced to zero, and, if and to
the extent specifically provided for in the related Supplement and to the extent
that the payment of such interest shall be legally enforceable, on any overdue
installment of interest from the date such interest became due until fully paid.
Unless otherwise specified in the related Supplement, such interest shall be
calculated on the basis of a three hundred sixty
22
<PAGE>
(360) day year consisting of twelve (12) months of thirty (30) days each.
Interest shall be payable in arrears on each Payment Date. On any Reset Date
preceding any Accrual Period or Delivery Date, the Servicer shall determine the
changes, if any, applicable to the Certificate Interest Rates and will promptly
provide notice by 11:00 a.m. local time (of the Servicer) of such determination
to the Holders of Certificates and the Trustee.
In addition to the foregoing, with respect to any Funding occurring in
any Accrual Period since the preceding Payment Date, the related Funding Amounts
shall accrue interest from the related Funding Date through the end of the
Accrual Period in which such Funding occurs in the amount of the applicable
First Period Interest, which interest shall be paid on the next Payment Date to
the Series and Class of Certificates having made such Funding. The Servicer
shall determine the First Period Interest due on a Funding Amount based on the
rate established on the applicable Reset Date.
Accrued but unpaid interest on a Certificate shall be paid on a Payment
Date to the extent of funds available to be distributed as interest on such
Class in accordance with the priorities set forth in Article Five and the
related Supplement.
In making any interest payments hereunder, if the interest calculation
with respect to a Certificate shall result in a portion of such payment being
less than $0.01, then such payment shall be decreased to the nearest whole cent
and no subsequent adjustment shall be made in respect thereof.
(b) The principal of each Certificate shall be payable in installments
beginning on the Initial Payment Date for such Series and ending no later than
the applicable Series Termination Date for such Series unless such Certificate
becomes due and payable at an earlier date by call for redemption or otherwise
under the terms of the applicable Supplement. All reductions in the principal
amount of a Certificate effected by payments of installments of principal made
on any Payment Date shall be binding upon all future Holders of such Certificate
and of any Certificate issued upon the registration of transfer thereof or in
exchange therefor or in lieu thereof, whether or not such payment is noted on
such Certificate. Each installment of principal payable on a Certificate shall
be in an amount equal to that Certificate's pro rata share of the Principal
Distribution Amount for such Class and Series that is available to be paid in
accordance with the priorities of Article Five and the related Supplement. All
payments of principal with respect to the Certificates of a particular Class and
Series shall be made on a pro rata basis based upon the ratio that the
Outstanding Principal Amount of a Certificate bears to the Outstanding Principal
Amount of all Certificates of such Class and Series; provided that if, as a
--------
result of such proration, a portion of such principal would be less than $0.01,
then such payment shall be reduced to the nearest whole cent and no subsequent
adjustment shall be made in respect thereof..
In addition to the foregoing, on each Payment Date the Certificate
Prepayment Fee Amount shall be distributed to the Holders of any Series and
Class of Certificates then receiving a distribution of Prepaid Principal Amount,
in the same proportion as such Prepaid Principal Amount is then being
distributed. For purposes of this computation, the first dollars of the
Principal Distribution Amount for a Payment Date shall be deemed attributable to
the Prepaid Principal Amount for such Due Period and such computation shall be
made after the reallocations provided for in Section 5.02(c) hereof. All
payments of Certificate Prepayment Fee Amounts with respect to the Certificates
of a particular Class and Series shall be made on a pro rata basis based upon
the ratio that the Outstanding Principal Amount of a Certificate bears to the
Outstanding Principal Amount of all Certificates of such Class and Series;
provided that if, as a result of such proration, a portion of such principal
- --------
would be less than $0.01, then such payment shall be reduced to the nearest
whole cent and no subsequent adjustment shall be made in respect thereof..
23
<PAGE>
(c) Notwithstanding the foregoing, the Class R Certificates of any Term
Series shall be entitled solely to the payment of the amounts specified in the
related Supplement or otherwise released from the Reserve Account as provided in
Section 5.03(d).
(d) The principal, interest and any other amounts paid on the
Certificates are payable either (i) by check mailed by first-class mail to the
Person whose name appears as the Registered Holder of such Certificate on the
Certificate Register at the address of such Person as it appears on the
Certificate Register or (ii) by wire transfer in immediately available funds to
the account specified in writing to the Trustee by such Registered Holder at
least five Business Days prior to the Record Date for the Payment Date on which
wire transfers will commence, in such coin or currency of the United States of
America as at the time of payment is legal tender for the payment of public and
private debts. All payments on the Certificates shall be paid without any
requirement of presentment. The Depositor shall notify the Person in whose name
a Certificate is registered at the close of business on the Record Date next
preceding the Payment Date on which the Depositor expects that the final
installment of principal of such Certificate will be paid that the Depositor
expects that such final installment will be paid on such Payment Date. Such
notice shall be mailed no later than the tenth day prior to such Payment Date
and shall specify the place where such Certificate may be surrendered. Funds
representing any such checks returned undeliverable shall be held in accordance
with Section 7.16. Each Certificateholder shall surrender its Certificate to the
Trustee within thirty (30) days after the Final Payment Date therefor; provided
that if the Holder of any Certificate is, or is a nominee for, a Qualified
Institutional Buyer, then such Qualified Institutional Buyer need not surrender
its Certificate but shall indemnify the Trustee and the Depositor for any losses
attributable to the failure to surrender such Certificate.
(e) The Certificates are payable only out of the Trust Estate and do
not represent recourse obligations of the Depositor, the Servicer or any
Affiliate thereof or any successor thereto.
Section 2.09 Persons Deemed Owner.
------------ ---------------------
Prior to due presentment for registration of transfer of any
Certificate, the Depositor, the Trustee and any agent of the Depositor or the
Trustee shall treat the Person in whose name any Certificate is registered as
the owner of such Certificate for the purpose of receiving payments of principal
of and interest on such Certificate and for all other purposes whatsoever,
whether or not such Certificate be overdue, and neither the Depositor, the
Trustee nor any agent of the Depositor or the Trustee shall be affected by
notice to the contrary.
Section 2.10 Cancellation.
------------ -------------
All Certificates surrendered to the Trustee for payment, registration
of transfer or exchange (including Certificates surrendered to any Person other
than the Trustee which shall be delivered to the Trustee) shall be promptly
canceled by the Trustee. No Certificates shall be authenticated in lieu of or in
exchange for any Certificates canceled as provided in this Section 2.10, except
as expressly permitted by this Agreement. All canceled Certificates held by the
Trustee shall be disposed of by the Trustee as is customary with its standard
practice.
24
<PAGE>
Section 2.11 Tax Treatment.
------------ --------------
The Depositor has structured this Agreement and the Certificates with
the intention that the Trust formed hereby be treated as a partnership, with the
assets of the partnership including all of the assets comprising the Trust
Estate and the partners of the partnership being all Certificateholders and the
Depositor. The Depositor, the Trustee, the Servicer and each Certificateholder,
by acceptance of such Person's Certificate (and any Person that is a beneficial
owner of any interest in a Certificate, by virtue of such Person's acquisition
of a beneficial interest therein) agree to report the transactions contemplated
hereby in accordance with such stated intentions unless and until determined to
the contrary by an applicable taxing authority. In connection therewith, the
Depositor shall be designated as the "tax matters partner" of the Trust and
shall be authorized to maintain capital accounts and make partnership
allocations in accordance with Section 704 of the Code, which allocations shall
track as nearly as possible the cash distributions made to the various parties
hereunder.
In no event shall the Trust, or any party with the authority to act on
behalf of the Trust, make the election described in Treasury Regulation
301.7701-3(a) to treat the Trust as an association taxable as a corporation for
United States federal income tax purposes, or in any comparable state tax law.
Section 2.12 No Petition By Certificateholders.
------------ ----------------------------------
Each Holder of a Certificate, by acceptance of such Person's
Certificate, agrees that during the term of this Agreement and for one year and
one day after the termination hereof, such Holder or any Affiliate thereof will
not (without the consent of Holders holding at least 51% of all Rated
Certificates, by Outstanding Principal Amount) file any involuntary petition or
otherwise institute or cooperate in the institution of any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceeding or other
proceeding under any federal or state bankruptcy or similar law against the
Depositor or the Trust.
25
<PAGE>
ARTICLE THREE
--------------
ISSUANCE OF CERTIFICATES; SUBSTITUTIONS OF COLLATERAL
------------------------------------------------------
Section 3.01 Conditions to Initial Issuance of Certificats.
------------ ----------------------------------------------
Each Certificate to be issued on the Initial Delivery Date shall be
executed by the Depositor and delivered to the Trustee for authentication, and
thereupon, the same shall be authenticated and delivered by the Trustee upon
Depositor Order and upon receipt by the Trustee of the following:
(a) a Company Certificate and an AFI Certificate with the related
Loan Schedule attached thereto;
(b) the original manually executed counterpart of each Loan to be
acquired on such date and all other items included in the related Loan Files,
subject to such exceptions as shall be noted in an exception report delivered in
accordance with Section 4.06, by the Trustee to the Depositor, the Servicer, the
Certificateholders of the Series being issued on such date and the Rating
Agency;
(c) a Board Resolution of each of the Depositor, the Servicer, the
Special Servicer, the Servicing Advisor and the Company authorizing, as
applicable, the execution, delivery and performance of the Transaction Documents
and the transactions contemplated hereby and by the other Transaction Documents,
certified by the Secretary or an Assistant Secretary of the Depositor, the
Servicer, the Special Servicer, the Servicing Advisor or the Company, as
applicable;
(d) a copy of an officially certified document, dated not more than 30
days prior to the Initial Delivery Date, evidencing the due organization and
good standing of each of the Depositor, the Servicer, the Special Servicer, the
Servicing Advisor and the Company in their respective states of formation;
(e) copies of the organizational documents of each of the Depositor,
the Servicer, the Special Servicer, the Servicing Advisor and the Company,
certified by the Secretary or Managing Member, as applicable, of the Depositor,
the Servicer, the Special Servicer, the Servicing Advisor and the Company;
(f) (i) evidence of filing with the Secretary of State of the State
(and with the relevant county, if required by the applicable state law) of the
Company's chief executive office of UCC-1 financing statements executed by the
Company, as debtor, and naming the Depositor as secured party, the Trustee for
the benefit of the Certificateholders, as assignee, and the Loan Assets as
collateral; (ii) evidence of filing with the Secretary of State of the State
(and with the relevant county, if required by the applicable state law) of the
Depositor's chief executive office of UCC-1 financing statements executed by the
Depositor, as debtor, and naming the Trustee for the benefit of the
Certificateholders, as secured party, and the Trust Estate as collateral; and
(iii) evidence of all other filings, recordations or other actions required to
be made, filed, recorded or taken under Section 2.06 of the Loan Acquisition
Agreement;
(g) certificates listing the Servicing Officers of the Servicer, the
Special Servicer, and the Servicing Advisor as of the Initial Delivery Date;
(h) executed copies of each of the Supplement for the Series of
Certificates being issued on the Initial Delivery Date, the Servicing Agreement,
the Loan Acquisition Agreement and the Swap Agreement;
26
<PAGE>
(i) evidence of the deposit by the Depositor into the Collection
Account of any amounts due and paid on the Loans since the applicable Cut-Off
Date;
(j) confirmation from the Rating Agency that each Class of Certificates
in the Series being issued on such date has been assigned the credit rating
required under the Certificate Purchase Agreements for such Series; and
(k) such other documents as the Trustee or the prospective
Certificateholders of such Series may reasonably require, including such
documents and opinions as are described in the applicable Certificate Purchase
Agreement.
Section 3.02 Issuances of Additional Series of Certificates.
------------ -----------------------------------------------
(a) Additional Series of Revolving or Term Certificates may be issued
in accordance with the terms of this Agreement, provided that no new Series of
--------
Certificates shall be issued without the consent of the Certificateholder Agent.
(b) On or before the Delivery Date relating to any new Series of
Certificates, the parties hereto shall execute and deliver a Supplement
specifying the terms applicable to such new Series of Certificates. The terms
set forth in such Supplement may modify or amend, subject to Article Nine, the
terms of this Agreement solely as applied to such new Series of Certificates.
(c) Each new Series of Certificates shall be executed by the Depositor
and delivered to the Trustee for authentication, and thereupon, the same shall
be authenticated and delivered by the Trustee upon Depositor Order and upon
receipt by the Trustee of the following:
(i) a Supplement for such Series of Certificates executed
by each party hereto other than the Trustee;
(ii) if the Depositor is acquiring Loans from the Company on
the applicable Delivery Date, compliance with the requirements for a
Funding set forth in Article IV;
(iii) on or before the tenth Business Day immediately preceding
the Delivery Date for the Series to be issued (unless the parties to be
notified agree to a shorter time period), the Depositor shall have
given the Trustee, the Servicer and the Rating Agency notice of such
issuance and the applicable Delivery Date;
(iv) the Depositor shall have delivered to the Trustee an
Officer's Certificate of the Depositor to the effect that such issuance
will not result in a Default and all conditions precedent provided in
this Agreement relating to the authentication and delivery of the
additional Series of Certificates proposed to be issued have been
complied with;
(v) to the extent not previously filed, (A) evidence of
filing with the Secretary of State of the State (and with the relevant
county, if required by the applicable state law) of the Company's chief
executive office of UCC-1 financing statements executed by the Company,
as debtor, and naming the Depositor as secured party, the Trustee for
the benefit of the Certificateholders as assignee, and the applicable
Loan Assets as collateral; (B) evidence of filing with the Secretary of
State of the State (and with the relevant county, if required by the
applicable state law) of the Depositor's chief executive office of
UCC-1 financing statements executed by the Depositor, as
27
<PAGE>
debtor, and naming the Trustee for the benefit of the
Certificateholders, as secured party, and the Trust Estate as
collateral; and (C) evidence of all other filings, recordations or
other actions required to be made, filed, recorded or taken under
Section 2.06 of the Loan Acquisition Agreement;
(vi) confirmation from the Rating Agency of the initial rating
on each Class of Certificates in any Series then Outstanding along with
evidence that each Class of Certificates in the Series being issued has
been assigned the credit rating required under the Certificate Purchase
Agreements for such Series;
(vii) an opinion of counsel to the effect that the Trust will
not be taxable as an association or as a publicly traded partnership as
a result of the issuance of such Series of Certificate;
(viii) evidence of the deposit by the Depositor into the
Collection Account of any amounts due and paid under the Loans of such
Series since the related Cut-Off Date; and
(ix) such other documents, certificates, instruments,
opinions, or other items as may be required by the terms of the
Supplement creating such Series of Certificates or the Certificate
Purchase Agreements executed in connection therewith.
Upon satisfaction of the above conditions, the Trustee shall execute
the Supplement and issue and deliver to or upon the order of the Depositor the
applicable Certificates.
Section 3.03 Perfection of Transfer.
------------ -----------------------
(a) The Depositor and the Company shall file such Uniform Commercial
Code financing statements and assignments as are described in Sections 3.01and
3.02 in accordance with such Sections and take such other actions as are
required (i) to perfect the sale by the Company to the Depositor of the Loans
and the related Loan Assets, (ii) to assign to the Trustee all Uniform
Commercial Code financing statements perfecting the security interest of the
Depositor (as assignee of the Company) in the related Loan Collateral, (iii) to
perfect the first priority security interest of the Trustee in the Loans and the
related Loan Assets and (iv) to cause any related Loan Collateral (including any
Mortgages) to name the Trustee as lienholder. From time to time thereafter, the
Servicer shall take or cause to be taken such actions and execute such documents
as are necessary to perfect and protect the Trustee's interest in the Loans and
the Loan Collateral against all other Persons, including the filing of financing
statements, amendments thereto and continuation statements, the execution of
transfer instruments and the making of notations on or taking possession of all
records.
(b) File-stamped copies of such Uniform Commercial Code financing
statements and assignments with respect to the Loans shall be given to the
Trustee within ten (10) days of the Initial Delivery Date.
(c) If any change in either the Company's or the Depositor's name,
identity, structure or the location of its principal place of business or chief
executive office occurs, then the Depositor shall, or the Depositor shall cause
the Company to, deliver thirty (30) days prior written notice of such change or
relocation to the Servicer, the Certificateholder Agent and the Trustee and no
later than the effective date of such change or relocation, the Servicer shall
file such amendments or statements as may be required to preserve and protect
the Trustee's interest in the Trust Estate.
(d) During the term of this Agreement, the Depositor shall maintain its
chief executive office and principal place of business in one of the States of
the United States.
28
<PAGE>
(e) The Servicer agrees to pay all reasonable costs and disbursements
in connection with the perfection and the maintenance of perfection, as against
all third parties, of the Trustee's right, title and interest in and to the
Trust Estate.
(f) The Trustee shall hold the original manually executed counterparts
of each Loan at its office in the State of New York, or at any such new address
in the State of New York, as the Trustee shall inform the Servicer, the
Depositor, and the Certificateholders in writing from time to time. The Trustee
shall hold each Loan for the benefit of Certificateholders, and shall maintain
accurate records pertaining to each Loan including a current inventory thereof.
The Trustee may, pursuant to a Request for Release of Documents, temporarily
release such Loan to the Special Servicer, provided that such request shall be
--------
in writing with an explanation of the intended use specified and the
Certificateholder Agent shall receive a copy of such Request for Release of
Documents. Any Loan temporarily released from the custody of the Trustee to the
Special Servicer or its agents shall have stamped on it prior to delivery a
legend to the effect that the Loan is the property of Manufacturers and Traders
Trust Company, as Trustee. The Special Servicer shall hold any such Loan in
trust for the benefit of the Trustee and shall promptly return the Loan to the
Trustee when the need therefor no longer exists.
Section 3.04 Substitution and Repurchase of Loan Assets.
------------ -------------------------------------------
(a) If any party hereto obtains knowledge (within the meaning of
Section 7.01(e)), or discovers or is notified by the Servicer that any of the
representations and warranties of the Company in the Loan Acquisition Agreement
were incorrect at the time as of which such representations and warranties were
made, then the Person discovering such defect, omission, or circumstance shall
promptly notify the other parties to this Agreement.
(b) Within the time period and in the manner set forth in Section 3.03
of the Loan Acquisition Agreement, the Depositor shall require the Company to
substitute for, or repurchase, Loan Assets as required by Section 3.03 of the
Loan Acquisition Agreement. The proceeds of a repurchase shall be remitted by or
on behalf of the Depositor to the Collection Account in accordance with Sections
3.03 and 3.04 of the Loan Acquisition Agreement.
(c) If the Depositor fails to enforce the purchase or substitution
obligation of the Company under the Loan Acquisition Agreement, the Trustee
shall, at the direction of the Controlling Holders (provided, in each case, that
--------
the requirements of Section 7.03(e) have been satisfied), enforce such
repurchase or substitution obligation for the benefit of the Certificateholders,
and the Trustee is hereby appointed attorney-in-fact to act on behalf of and in
the name of the Depositor to require such repurchase or substitution.
(d) With respect to any Loan that becomes a Defaulted Loan or a
Delinquent Loan, the Depositor (and if not the Depositor, the Directing Holder)
may, upon five (5) Business Days notice to the Trustee, purchase such Loan at
the Repurchase Price or remove such Loan from the Trust Estate and deposit the
Repurchase Price and/or deliver a Substitute Loan meeting the same requirements
as those specified in Section 3.04 of the Loan Acquisition Agreement for
substitutions and purchases by the Company upon breaches of a representation or
warranty by the Company thereunder; provided that the aggregate Loan Balance
--------
(computed without regard to clause (c) and the proviso to such definition) of
such Defaulted Loans and Delinquent Loans that are substituted or removed by the
Depositor shall be subject to the Overall Substitution/Repurchase Limitation;
provided further that no substitution or repurchase shall be made if (i) such
- -----------------
substitution or repurchase is made with any intent to hinder, delay, or defraud
any entity to which the Company is or will become indebted; (ii) there shall be
any reason to believe that the Company is
29
<PAGE>
insolvent or that such substitution or repurchase will render the Company
insolvent on the date thereof or as a result of such substitution or repurchase;
(iii) at the time of such substitution or repurchase, the Company is engaged in
business, or about to engage in business, for which the assets remaining with it
after the substitution or repurchase will be an unreasonably small amount of
capital; or (iv) the Company intends or believes that it will incur debts beyond
its ability to pay as such debts mature.
(e) Any Substitute Loans conveyed to the Trustee shall be accompanied
by the following items:
(i) on or before the applicable Acquisition Date, a Company
Certificate and an AFI Certificate, each such certificate having
attached thereto a Loan Schedule and subjecting such Substitute Loan to
the provisions thereof and hereof , along with a Pending Credit
Schedule for such Substitute Loan; and
(ii) by the time required in Section 4.06, the original
executed counterpart of the Substitute Loan and all other items
included in the related Loan File.
Section 3.05 Releases.
------------ --------
(a) The Depositor shall be entitled to obtain a release from the lien
of this Agreement for any Loan and the related Loan Collateral at any time (i)
after a payment by the Company or the Depositor of the Repurchase Price of the
Loan or (ii) after a Substitute Loan is substituted for such Loan, if the
Depositor delivers to the Trustee an Officer's Certificate (A) identifying the
Loan and the related Loan Collateral to be released and requesting the release
thereof, (B) setting forth the amount deposited in the Collection Account with
respect thereto or identifying the Substitute Loan, as the case may be, and (C)
certifying that either the amount deposited in the Collection Account or the
Loan Balance of the Substitute Loan, as the case may be, equals the Repurchase
Price of the Loan.
(b) Upon satisfaction of the conditions specified in subsection (a),
the Trustee shall release from the lien of this Agreement and deliver to or upon
the order of the Depositor (or to or upon the order of the Company if it has
satisfied its obligations under Section 3.04 of the Loan Acquisition Agreement
with respect to a Loan) the Loan and any related Loan Collateral described in
the Depositor's request for release.
Section 3.06 Trust Estate.
------------ ------------
The Trustee may, and when required by the provisions of this Agreement
shall, execute instruments to release property from the lien of this Agreement,
or convey the Trustee's interest in the same, in a manner and under
circumstances which are not inconsistent with the provisions of this Agreement.
No party relying upon an instrument executed by the Trustee as provided in this
Article Three shall be bound to ascertain the Trustee's authority, inquire into
the satisfaction of any conditions precedent or see to the application of any
monies.
Section 3.07 Notice of Release.
------------ -----------------
The Trustee shall be entitled to receive at least ten (10) days notice
of any action to be taken pursuant to Section 3.05(a), accompanied by copies of
any instruments involved.
30
<PAGE>
Section 3.08 Nature of Transfer.
------------ ------------------
To the extent that the transfer of the Trust Estate from the Depositor
to the Trustee is deemed to be a secured financing, the Depositor shall be
deemed hereunder to have granted to the Trustee, and the Depositor does hereby
grant to the Trustee, a security interest in all of the Depositor's right, title
and interest in, to and under the Trust Estate, whether now owned or hereafter
acquired. For purposes of such grant, this Agreement shall constitute a security
agreement under applicable law.
31
<PAGE>
ARTICLE FOUR
------------
FUNDINGS
--------
Section 4.01 General.
------------ --------
Subject to satisfaction of the conditions precedent set forth in
Section 4.03 or 4.04, as applicable, the Depositor shall be eligible to obtain
Fundings under the Certificates on the Delivery Date for such Series of
Certificates and thereafter on any applicable Funding Date.
Section 4.02 Funding Amounts.
------------ ----------------
The Funding Amount for a Funding Group acquired on a Funding Date shall
be determined by the Depositor and confirmed by the Trustee (based solely on the
information contained in the Funding Report) and shall be reflected in a Funding
Report with respect to such Funding Group. Each Funding Group shall be conveyed
to the Trust pursuant to an AFI Certificate and the Loans in such Funding Group
shall be identified on a Loan Schedule attached to the AFI Certificate and the
Company Certificate for such Funding. The related Loan Files shall be held by
the Trustee for the benefit of the Certificateholders as provided herein.
Section 4.03 Procedures for Obtaining Fundings Under a Revolving
------------ ---------------------------------------------------
Series.
- -------
(a) Conditions Precedent. Each Funding under a Revolving Series is
----------------------
subject to the satisfaction of the following conditions precedent on the
relevant date specified below:
(i) fifteen (15) days prior to the Funding Date (or such
shorter period of time as may be agreed to by the Certificateholder
Agent in its sole discretion), the Depositor shall deliver, for each
Loan to be funded, (A) the related Pending Credit Schedule to the
Rating Agency and the Certificateholder Agent, and (B) the related
credit application, preliminary credit memorandum, preliminary
Valuation, draft Loan Funding Checklist and draft credit agreement
(blacklined against the Standard Form thereof) to the Certificateholder
Agent;
(ii) the Depositor shall deliver to the Certificateholder
Agent, as soon as possible, with respect to each Loan to be funded,
written notice of any exceptions intended to be included on the Funding
Report relating to such Loan, which notice shall specify with
reasonable detail the nature of such exceptions;
(iii) five (5) Business Days prior to the Funding Date (or
such shorter period of time as may be agreed to by the
Certificateholder Agent in its sole discretion), the Depositor shall
deliver, for each Loan to be funded, (A) an updated Pending Credit
Schedule to the Trustee, the Rating Agency and the Certificateholder
Agent, (B) a *** to the Rating Agency and the Certificateholder Agent,
and (C) the Valuation, a draft Funding Report, indicating the amount of
the Funding, the related credit memorandum, and drafts of all of the
items on the Loan Funding Checklist for such Loan (blacklined against
the Standard Forms thereof, to the extent applicable) to the
Certificateholder Agent;
(iv) two (2) Business Days prior to the requested Funding
Date, the Depositor shall deliver, (A) with respect to each Loan to be
funded, the final Funding Report to the Rating Agency and the
Certificateholder Agent and (B) to the Trustee and the
Certificateholder Agent, with respect
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
32
<PAGE>
to all Loans to be funded, an AFI Certificate and Company Certificate,
each accompanied by a copy of the applicable Loan Schedule, executed by
the Depositor, or the Company, respectively;
(v) on the Funding Date, the Depositor shall deliver to the
Trustee either (A) the original manually executed counterpart of the
Loans relating to such Funding and the other items comprising the
related Loan Files or (B) the Escrow Instructions or evidence
acceptable to the Certificateholder Agent that such items have been
obtained from the Obligor and are being held in escrow with delivery of
the Loan Files to be made in accordance with Section 4.06;
(vi) (A) the Loans in the proposed Funding Group shall be
Eligible Loans and shall not cause the Loan Pool to violate the Pool
Criteria, (B) after giving effect to such Funding, the applicable
Maximum Series Amount shall not be exceeded, and (C) if any Funded Loan
is subject to Existing Indebtedness the Depositor shall use the
proceeds of such Funding to repay such Existing Indebtedness and shall
obtain a release and extinguishment of rights from the obligee of such
Existing Indebtedness, which shall include an acknowledgment that upon
such repayment all obligations owing to such obligee and relating to
such Funded Loan have been satisfied;
(vii) such Funding shall occur on a date prior to the
applicable Funding Termination Date and shall be at least equal to the
Minimum Funding Amount for Series or Class, as applicable;
(viii) no Default (other than a Servicing Advisor Default),
Depositor Event of Default, Servicer Event of Default, Special Servicer
Event of Default or Servicing Advisor Event of Default shall exist or
shall result from the Funding;
(ix) both before and after giving effect to such Funding, the
Pool Performance Condition shall be met; and
(x) such other conditions as may be specified in the
applicable Supplement or related Certificate Purchase Agreement(s).
(b) Preparation of Funding Report. In connection with each Funding, the
-----------------------------
Depositor shall prepare the Funding Report and the Loan Schedule and shall
calculate the First Period Interest with respect to each Funding Amount. Each
Funding Report shall be countersigned by the Certificateholder Agent to evidence
its approval of the contents thereof.
Section 4.04 Procedures for Obtaining Fundings Under Term
------------ --------------------------------------------
Certificates.
- ------------
Each Funding under a Term Series shall also be based upon a Funding
Report and shall be subject to the satisfaction of the conditions precedent that
are specified in the applicable Supplement or related Certificate Purchase
Agreement(s) for such Series.
Section 4.05 Obligation of Certificateholders to Make Fundings.
------------ --------------------------------------------------
(a) Unless otherwise specified in the related Supplement, upon the
issuance of each Series of Certificates and execution of a Certificate Purchase
Agreement on the related Delivery Date, the initial Certificateholders shall
have agreed, and by their acquisition of any Certificates and execution of an
Investment and Assumption Letter after the applicable Delivery Date, any
subsequent Certificateholders shall have agreed, on the terms and conditions set
forth herein, in the applicable Supplement and the related
33
<PAGE>
Certificate Purchase Agreement(s) to make Fundings to the Depositor on the
Delivery Date and from time to time thereafter during the Funding Period.
(b) On the Delivery Date for a Series, a Funding shall take place under
such Series in an aggregate amount equal to the Initial Funding Amount specified
for each Class in such Series. All subsequent Fundings under that Series shall
be made by each Class in the proportions and priorities set forth in the
Supplement for such Series.
(c) Each Class of each Series of Certificates shall be issued in an
aggregate principal amount equal to the Maximum Series Amount for such Class,
although at any one time the Outstanding Principal Amount may be less than the
Maximum Series Amount for such Class of such Series. The Certificateholders
shall endorse on a schedule, which shall be attached to each Certificate, the
date and amount of each Funding made by such Certificateholder with respect to
the related Series and the amount of each payment of principal made by the
Depositor with respect thereto; provided that the Certificateholders may, at
--------
their option, record the amount of their respective Fundings in other internal
records rather than on such a schedule. The Certificateholders are authorized
and directed by the Depositor to make such endorsements or records but each
Certificateholder's records shall be effective only if such records are in
agreement with the applicable Certificate Register maintained by the Trustee,
absent manifest error in such Certificate Register. Failure by any
Certificateholders to make, or an error by any Certificateholder in making, such
endorsement or record with respect to any Funding shall not limit or otherwise
affect the obligations of the Depositor hereunder or under any Certificate.
(d) Subject to the terms hereof, each Certificateholder will wire
directly to the account specified in the applicable Funding Report on the
applicable Funding Date in immediately available funds such Certificateholder's
allocable share of the Funding Amount for its Class that is specified in the
Funding Report for such Class and Series. Each such Certificateholder's
allocable share of a Funding shall be based on a fraction, the numerator of
which shall be equal to the maximum principal amount of such Holder's
Certificate (as indicated on the face of such Certificate), and the denominator
of which shall be equal to the Maximum Series Amount for such Class.
(e) The failure of any Certificateholder to remit its allocable share
of any Funding Amount for its Series and Class on the Delivery Date or any
subsequent Funding Date shall not relieve any other Certificateholder in such
Series of any obligation hereunder to make its allocable share of a Funding
Amount for its Class and Series on such date. Any nondefaulting
Certificateholder may, but is not required to, fund the portion of the Funding
Amount of its respective Class and Series, not funded by the defaulting
Certificateholder. If a nondefaulting Certificateholder does not fund the
portion of the Funding Amount due from the defaulting Certificateholder, the
Funding Amount and the Minimum Funding Amount with respect thereto shall be
reduced by the defaulting Certificateholder's allocable portion of the Funding
Amount and the Depositor shall have all remedies available to it under
applicable law in respect of the defaulting Certificateholder.
(f) Immediately following each Funding or payment of principal on any
Series of Certificates, the Trustee shall make an appropriate notation in the
applicable Certificate Register indicating the amount and date of the Funding or
payment and the unused Maximum Series Amount after giving effect to any Funding.
34
<PAGE>
Section 4.06 Delivery of Loan Files.
------------ -----------------------
(a) The Depositor shall or shall cause the Company to comply with the
requirements relating to Funded Loans and Substitute Loans as set forth in the
Loan Acquisition Agreement (including compliance with the Eligibility Criteria
and the Pool Criteria) within the time periods set forth therein. On or prior to
any Acquisition Date, the Depositor shall deliver to the Trustee either (i) the
final, executed Loan File or (ii) evidence acceptable to the Certificateholder
Agent that such documents are being held in escrow pursuant to the related
Escrow Instructions, in which case the Loan File shall be delivered to the
Trustee in accordance with the provisions of the Loan Acquisition Agreement.
Upon receipt of a Loan File, the Trustee will review such files and shall
confirm, by execution and delivery of a certificate of the Trustee to the
Depositor and the Certificateholder Agent, that: (A) the Trustee has received a
Loan File for each Loan that it is listed on the Loan Schedule; (B) such Loan
File contains all of the items listed on the Loan Funding Checklist for such
Loan, including original executed copies of those items required to be originals
pursuant to the Loan Funding Checklist for such Loan.
(b) If, upon examination of the Loan Files in accordance with this
Section, the Trustee determines that any such Loan File is incomplete, the
Trustee shall, within two (2) Business Days, deliver an exception report to the
Depositor, the Servicer and the Certificateholder Agent by telephone or
telecopy.
(c) Within thirty (30) days after each Acquisition Date, the Trustee
shall review any exception report delivered pursuant to Section 7.14 in
connection with the related Loan Files and shall verify that it has possession
of any missing items noted thereon. The Trustee shall send such verification
report and notice of any defects to the Depositor, the Company and Servicer
within thirty (30) days thereafter and shall take any appropriate action under
the Loan Acquisition Agreement.
(d) Notwithstanding anything to the contrary contained in this Section
4.06, any review by the Trustee of the documents contained in a Loan File shall
be limited to ascertaining that such documents appear on their face to be
executed original counterparts of the documents listed on the applicable Loan
Funding Checklist. The Trustee shall have no obligation to verify the
authenticity, completeness or legal sufficiency of any such documents or the
genuineness of any signatures thereon.
35
<PAGE>
ARTICLE FIVE
------------
ACCOUNTS, ALLOCATIONS AND DISTRIBUTIONS
---------------------------------------
Section 5.01 Collections; Collection Account.
------------ --------------------------------
(a) Except as otherwise expressly provided herein or in the Servicing
Agreement, the Trustee may demand payment or delivery of, and shall receive and
collect, all money and other property payable to or receivable by the Trustee in
respect of the Trust Estate. The Trustee shall, upon the request of the
Servicer, provide the Servicer with the information requested by the Servicer
regarding the amount of Collections received by the Trustee in the accounts held
in the name of the Trustee (including the Lockbox Account) so as to permit the
Servicer to perform its duties under the Servicing Agreement. The Trustee shall
hold all such money and property so received by it as part of the Trust Estate
and shall apply it as provided in this Agreement. Absent manifest error, the
Trustee shall be entitled to rely, without any independent verification, on all
information contained in any Report. If any Loan becomes a Defaulted Loan, the
Trustee, upon Depositor or Servicer request may, and upon the request of the
Controlling Holders shall take such action as may be appropriate to enforce such
payment or performance, including the institution and prosecution of appropriate
Proceedings. If the Depositor receives any amounts payable to or receivable by
the Trustee pursuant to this Agreement, then the Depositor shall immediately,
but not later than two (2) Business Days after receipt, remit such amounts in
the form received to the Trustee for deposit in the Collection Account.
(b) On or before the Initial Delivery Date, the Trustee shall open and
maintain a trust account at its Corporate Trust Office (the "Collection
Account") in the name of the Trustee for the benefit of the Certificateholders,
wherein it shall deposit or where there shall be received, among other amounts,
Collections and all of the following: (i) payments remitted to the Trustee by
the Servicer or Special Servicer pursuant to Article Three of the Servicing
Agreement, (ii) any amounts received by the Trustee from the Lockbox Account or
otherwise pursuant to Section 5.01(a), (iii) amounts transferred from the
Reserve Account in accordance with Section 5.03(d)(i), (ii) and (iii), (iv)
amounts received by the Trustee as Swap Payments, and (v) any Reinvestment
Income. Funds in the Collection Account shall not be commingled with any other
monies. All monies deposited from time to time in the Collection Account
pursuant to this Agreement shall be held by the Trustee as part of the Trust
Estate (other than monies attributable to that portion of a Scheduled Payment
that relates to interest accrued on a Loan prior to its Cut-off Date which shall
be held in Trust for the benefit of the Company). The Business Day prior to each
Payment Date, the Trustee shall (i) remove any amounts improperly deposited into
the Collection Account and remit them to the correct party; (ii) remove funds
from the Collection Account and pay the Swap Payments, if any, required to be
paid by the Trust; and (iii) pay to the Company any amounts collected
representing interest accrued on any Loan prior to its Cut-off Date.
(c) Upon Depositor Order, the Trustee shall invest the funds in the
Collection Account in Eligible Investments. The Depositor Order shall specify
the Eligible Investments in which the Trustee shall invest, shall state that the
same are Eligible Investments and shall further specify the percentage of funds
to be invested in each Eligible Investment. No such Eligible Investment shall
mature later than one (1) Business Day preceding the next following
Determination Date and shall not be sold or disposed of prior to its maturity;
provided that Eligible Investments of the type described in clause (a) of the
- --------
definition of "Eligible Investments" contained herein may mature on such
Determination Date. In the absence of a Depositor Order, the Trustee shall
invest funds in the Collection Account in Eligible Investments described in
clause (f) of the definition thereof. Eligible Investments shall be made in the
name of the Trustee for the benefit of the Certificateholders. The Trustee shall
provide to the Depositor and the Servicer monthly written
36
<PAGE>
confirmation of such investments, describing the Eligible Investments in which
such amounts have been invested.
(d) Any income or other gain from investments in Eligible Investments
as outlined in Section 5.01(c) shall be credited to the Collection Account and
any loss resulting from such investments shall be charged to such account.
Except as otherwise specifically set forth herein, the Trustee shall not be
liable for any loss incurred on any funds invested in Eligible Investments
pursuant to the provisions of this Section 5.01 (other than in its capacity as
obligor under any Eligible Investment).
(e) On each Determination Date, after computing all transfers and
deposits to the Collection Account referred to in Section 5.01(b), the Servicer
shall (i) determine the amount of any Certificate Prepayment Fee Amounts, (ii)
determine the Available Collections and then shall allocate them among the
outstanding Series pro rata according to the Series Percentage for each such
Series, and (iii) determine the amount of any Reserve Withdrawals.
(f) Thereafter, on each Payment Date, the Trustee shall withdraw all
amounts in the Collection Account (including the Reinvestment Income therein but
excluding any Scheduled Payments due after the Determination Date for such
Payment Date) and shall disburse them in the following priority in accordance
with the provisions of and instructions in the monthly Servicer Report; provided
--------
that, to the extent that the Available Collections are insufficient to pay
Scheduled Distributions on Rated Certificates, any Servicing Fee, Special
Servicing Fee and Servicing Advisor Fee otherwise payable to the initial
Servicer or the initial Special Servicer or the initial Servicing Advisor (or,
with respect to any such Person prior to the delivery of a Termination Notice to
such Person, such Person's successors or Affiliates) under clauses (ii), (iii)
and (iv) respectively shall not be paid to them and shall instead be made
available for disbursement under clause (vi) below and the applicable
Supplement:
(i) to pay to the Trustee: (A) a deposit of $615 to be
applied to the payment of the Trustee Fee becoming due on the next
anniversary of the initial Funding Date; (B) to reimburse it for any
expenses incurred by it and reimbursable from the Trust Estate under
the terms of any of the Transaction Documents; and (C) after delivery
of a Termination Notice, to pay any Transition Costs to the applicable
party;
(ii) to pay to the Servicer: (A) the Servicer Fee then due;
(B) all Servicing Charges received and due to the Servicer; (C) in
respect of each Liquidated Loan, from Recoveries on such Loan or any
related Repossessed Collateral, any Recovery Expenses not previously
reimbursed and all other reimbursement amounts due to it, as provided
in Section 3.09(a) of the Servicing Agreement; and (D) any amounts
received from Obligors to pay the taxes or other impound amount
required under the related Loan, to the extent deposited in the
Collection Account;
(iii) to pay to the Special Servicer: (A) the Special Servicer
Fee then due; (B) all Servicing Charges received and due to the Special
Servicer; and (C) in respect of each Liquidated Loan, from Recoveries
on such Loan or any related Repossessed Collateral, any Recovery
Expenses not previously reimbursed and all other reimbursement amounts
due to it, as provided in Section 3.09(b) of the Servicing Agreement;
(iv) to pay to the Servicing Advisor: (A) the Servicing
Advisor Fee then due; and (B) in respect of each Liquidated Loan, from
Recoveries on such Loan or any related Repossessed Collateral, any
Recovery Expenses not previously reimbursed and all other reimbursement
amounts due to it, as provided in Section 3.09(c) of the Servicing
Agreement;
37
<PAGE>
(v) to the extent of Prepayment Fee Collections, (A) to pay
the Certificate Prepayment Fee Amount to the Certificateholders as
provided in Section 2.08(b), (B) to make any Required Prepayment Fee
Deposit into the Reserve Account, and (C) to pay the remainder to the
Class R Certificateholders, or if there are none, to the Depositor;
(vi) to deposit into the Distribution Account for each Series,
the Available Collections allocable to such Series pursuant to Section
5.01(e) plus the applicable Series Percentage of any Servicer Fee,
----
Special Servicer Fee and Servicing Advisor Fee deferred pursuant to the
introductory paragraph of this Section 5.01(f) and any Reserve
Withdrawal made with respect to such Series; and
(vii) to deposit into (or remove from) the Distribution
Account for each Series any amounts reallocated to (or from) such
Series in accordance with Section 5.02(c)
Section 5.02 Distributions; Distribution Account.
------------ ------------------------------------
(a) On or before the Delivery Date for a Series of Certificates, the
Trustee shall open and maintain a trust account at its Corporate Trust Office
(each such account, a "Distribution Account") in the name of the Trustee for the
benefit of the Certificateholders of that Series, for the receipt of amounts
allocated to such Series in accordance with Section 5.01(e). Funds in each
Distribution Account shall not be commingled with any other monies and shall not
be invested. All monies deposited from time to time in each Distribution Account
pursuant to this Agreement shall be held by the Trustee as part of the Trust
Estate as herein provided. All payments to be made from time to time to the
Certificateholders out of funds in the Distribution Account pursuant to the
Agreement shall be made by the Trustee or the Paying Agent.
(b) On each Payment Date, the Trustee shall withdraw amounts on deposit
in each Distribution Account and shall distribute them to the Certificateholders
of the related Series in accordance with the priorities set forth in the
applicable Supplement (as directed in the Servicer Report).
(c) Each Supplement shall provide for reallocations as described in
this subsection. On each Payment Date, Series Collections otherwise
distributable to Certificates other than Rated Certificates of such Series shall
be made available for Scheduled Distributions on any other Series and payment of
any Outstanding Principal Amount on the Rated Certificates of a Revolving Series
at their Scheduled Maturity, to the extent that any shortfalls with respect
thereto exist. Such reallocation shall be divided between each Series having a
shortfall pro rata by the amount of its shortfall and shall be distributed
within each Series according to the Supplement for such Series. In addition, if
after such reallocation of amounts otherwise distributable to unrated
Certificates, Series Collections are insufficient to pay accrued interest,
whether current or past due, on all Rated Certificates for all Series, then such
shortfall shall be allocated among all Series with Rated Certificates
outstanding with a like initial rating, pro rata, in reverse order of rating
seniority, in a manner such that, after giving effect to the distribution of
such Available Collections, all Rated Certificates with a like initial rating
shall have received identical percentages of interest distributable to such
Rated Certificates on the Payment Date.
Section 5.03 Reserve Account.
------------ ----------------
(a) Prior to the initial Delivery Date, the Depositor shall cause the
Trustee to open and maintain a trust account (the "Reserve Account") at the
Corporate Trust Office in the name of the Trustee for the benefit of the
Certificateholders, for the receipt of deposits pursuant to Section 5.01(f) and
the Supplements. Monies received in the Reserve Account will be invested at the
written direction of a majority of the Holders of the Class R Certificates or,
if there are no Class R Certificates then Outstanding, the Depositor, in
Eligible
38
<PAGE>
Investments during the term of this Agreement, and any income or other gain
realized from such investment, shall be held by the Trustee in the Reserve
Account as part of the Trust Estate subject to disbursement and withdrawal as
herein provided. Eligible Investments shall be made in the name of the Trustee
for the benefit of the Certificateholders. No such Eligible Investment shall
mature later than one (1) Business Day preceding the next following
Determination Date and shall not be sold or disposed of prior to its maturity;
provided that Eligible Investments of the type described in clause (a) of the
- --------
definition of "Eligible Investments" may mature on such Determination Date. In
the absence of direction, the Trustee shall invest funds in the Reserve Account
in Eligible Investments described in clause (f) of the definition thereof.
Monies in the Reserve Account shall be subject to withdrawal in accordance with
Section 5.03(d).
(b) The Trustee shall provide to the Servicer monthly written
confirmation of investments of funds held in the Reserve Account, describing the
Eligible Investments in which such amounts have been invested. Any funds not so
invested must be insured by the Federal Deposit Insurance Corporation.
(c) The Trustee shall not be liable for any investment loss resulting
from investment of money in the Reserve Account in any Eligible Investment in
accordance with the terms hereof (other than in its capacity as obligor under
any Eligible Investment).
(d) Disbursements from the Reserve Account shall be made, to the extent
funds therefor are available, only as follows (in accordance with the provisions
of and instructions in the monthly Servicer Report):
(i) if the Available Collections allocable to a Series
(computed after giving effect to any deferral of Servicing Fees,
Special Servicing Fees and Servicing Advisors Fees pursuant to Section
5.01(f) on the Determination Date immediately preceding such Payment
Date) are less than the amounts required to be distributed as interest
on all Classes of Rated Certificates in such Series plus, at the Series
Termination Date for such Series, the Outstanding Principal Amount
thereof, the Trustee shall withdraw funds from the Reserve Account on
such Determination Date to the extent necessary to make such payments
on such Payment Date and deposit such funds into the Collection
Account;
(ii) at the close of any Payment Date on which (A) the balance
in the Reserve Account exceeds the Reserve Account Required Balance,(B)
the Pool Performance Condition is met, and (C) no Default, Depositor
Event of Default, Servicer Event of Default, Special Servicer Event of
Default or Servicing Advisor Event of Default exists, the Trustee shall
withdraw such excess funds from the Reserve Account and pay them as
follows:
(1) first to the Depositor, to the extent of any
unreimbursed deposits made by it pursuant to
any Series Supplement, and
(2) second, to the Holders of the Class R
Certificates of any Term Series then
Outstanding and if no such Certificates are
then Outstanding, to the Depositor; and
(iii) upon termination of the Trust and payment in full of all
Rated Certificates, any funds remaining in the Reserve Account shall be
paid in the same manner as provided in Section 5.03(d) (ii) above.
39
<PAGE>
Section 5.04 Reports by Trustee to Certificateholders.
------------ ------------------------------------------
(a) On each Payment Date, the Trustee shall account to each Holder of
Certificates on which payments are then being made the amount that represents
principal, the amount that represents interest and the amount that represents
any Certificate Prepayment Fee Amount and shall contemporaneously advise the
Depositor of all such payments. The Trustee may satisfy its obligations under
this Section 5.04 by delivering the monthly Servicer Report to each such Holder
of the Certificates, the Depositor and the Rating Agency. On or before the 15th
day prior to any Final Payment Date (or the 5th day prior to the Final Payment
Date occurring as a result of the Depositor taking action under Section 10.02),
the Trustee shall provide notice to the Rating Agency and the Holders of the
applicable Series of Certificates of the Final Payment Date for such
Certificates. Such notice shall include (i) a statement that interest shall
cease to accrue as of the last day preceding the date on which the Final Payment
Date occurs, and (ii) shall specify the place or places at which presentation
and surrender of Certificates may be made; provided that, if the Holder of any
--------
Certificate is, or is a nominee for, a Qualified Institutional Buyer, then such
Person need not surrender such Certificate, provided further that, in such
event, such Qualified Institutional Buyer shall automatically be deemed to have
provided its own unsecured agreement of indemnity saving the Depositor and the
Trustee, or either of them, harmless in respect of such failure to surrender.
(b) At least annually, or as otherwise required by law, the Trustee
shall distribute to the Certificateholders any information returns or other tax
information or statements as are required by applicable tax law to be
distributed to the Certificateholders. The Servicer shall prepare or cause to be
prepared all such information for distribution by the Trustee to the
Certificateholders.
Section 5.05 Trustee Permitted to Rely on Reports.
------------ -------------------------------------
Absent manifest error, the Trustee shall be permitted to rely on the
Servicer Report and, to the extent relevant, any other Reports, in making the
allocations, distributions and funds transfers required pursuant to this Article
Five and the Supplements.
40
<PAGE>
ARTICLE SIX
-----------
DEFAULTS AND REMEDIES
----------------------
Section 6.01 Depositor Events of Default.
------------ ---------------------------
"Depositor Event of Default" wherever used herein means any one of the
following events:
(a) (i) the breach in any material respect of any representation or
warranty of the Depositor in any Transaction Document or (ii) default in the
performance of any covenant of the Depositor in any Transaction Document, and,
except in the case of a default in the performance of Section 8.2(a),
continuance of such default or breach for a period of thirty (30) days after the
earlier of the Depositor has received notice thereof or has actual knowledge
thereof;
(b) the entry of a decree or order for relief by a court having
jurisdiction in the premises in respect of the Depositor under the United States
Bankruptcy Code or any other applicable federal or state bankruptcy, insolvency,
reorganization, liquidation or other similar law now or hereafter in effect or
any arrangement with creditors or appointing a receiver, liquidator, assignee,
trustee, or sequestrator (or other similar official) for the Depositor or for
any substantial part of its property, or ordering the winding up or liquidation
of the Depositor's affairs, and the continuance of any such decree or order
unstayed and in effect for a period of sixty (60) consecutive days;
(c) the institution by the Depositor of bankruptcy or insolvency
proceedings against itself, or the consent by the Depositor to the institution
of bankruptcy or insolvency proceedings against the Depositor, or the filing by
the Depositor of a petition or answer or consent seeking reorganization or
relief under the United States Bankruptcy Code or any other applicable federal
or state bankruptcy insolvency, reorganization, liquidation or other similar law
now or hereafter in effect, or the consent by the Depositor to the filing of any
such petition or to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee or sequestrator (or other similar
official) of the Depositor or of any substantial part of the Depositor's
property, or the making by the Depositor of any assignment for the benefit of
creditors, or the admission by it in writing of its inability, or the failure by
it generally, to pay its debts as they become due, or the taking of corporate
action by the Depositor in furtherance of any such action;
(d) the cumulative amount (without double counting) of all Realized
Losses and all Valuation Reduction Amounts, to the extent that amounts in
respect thereof have not previously been distributed to Certificateholders,
exceeds 62.5% of the initial Outstanding Principal Amount of all Class D
Certificates and the Maximum Series Amount of any Class D-R Certificates then
Outstanding, unless the initial rating on all Rated Certificates is confirmed in
writing by the Rating Agency upon (i) the initial triggering of such condition
and (ii) at any time thereafter that a Loan is delinquent thirty (30) days or
more;
(e) any portion of the interest accrued on any Rated Certificate
(computed without regard to any Maximum Interest Rate provided for in the
applicable Supplement) remains unpaid 5 days after the Payment Date such
interest was first scheduled to be paid;
(f) the failure of any Rated Certificates of any Revolving Series to be
paid in full by their Scheduled Maturity, or the failure of any Rated
Certificates of any Term Series to be paid in full by the Series Termination
Date, in either case for any reason other than a breach by the Holders of such
Certificates of their obligations under the applica.ble Certificate Purchase
Agreement, and continuance of such failure for a period of sixty (60) days
thereafter;
41
<PAGE>
(g) at any time the amount equal to the Loan Balances of all Defaulted
Loans minus all Adjustment Amounts with respect to all Defaulted Loans exceeds
the amount equal to 7.50% of the sum of the initial Loan Balances of all Loans
transferred by the Company to the Depositor under the Loan Acquisition Agreement
and not repurchased or replaced by substitution;
(h) the cumulative amount of Realized Losses exceeds (i) prior to the
first anniversary of the initial Funding Date, 2.0% of the sum of the initial
Loan Balances of all loans transferred by the Company to the Depositor under the
Loan Acquisition Agreement prior to such date and not replaced by substitution,
or (ii) at any time following the first anniversary of the initial Funding Date,
3.0% of the sum of the initial Loan Balances of all loans transferred by the
Company to the Depositor under the Loan Acquisition Agreement prior to such date
and not replaced by substitution;
(i) the Coverage Ratio applicable to Loans comprising 10% or more of
the Pool Balance is less than 1.10:1.00 and such Loans are not current with
respect to their Scheduled Payments; or
(j) following the delivery of a Servicing Advisor Termination Notice
with respect to the initial Servicing Advisor or the resignation of the initial
Servicing Advisor, (i) the Depositor shall have failed to appoint a successor
Servicing Advisor within the time period provided, and otherwise in accordance
with the provisions of, the Servicing Agreement or (ii) the Special Servicer
shall have not provided to the Certificateholder Agent in writing two (2)
qualified successor Servicing Advisor candidates.
Section 6.02 Remedies.
------------ ---------
(a) If a Depositor Event of Default shall have occurred and be
continuing, the Trustee may, at the direction of the Controlling Holders, do one
or more of the following:
(i) to the extent that such Depositor Event of Default has
interfered with the collection of any payments or the making of distributions
hereunder, institute Proceedings for the collection of all amounts then due and
payable on the Certificates or under this Agreement and enforce any judgment
obtained;
(ii) exercise any remedies available at law, in equity, or by
statute, including under the UCC, and take any other appropriate action to
protect and enforce the rights and remedies of the Trustee and the Holders of
the Certificates under the Transaction Documents; and
(iii) direct the Trustee, the Servicer or the Special Servicer
to sell or otherwise liquidate the Trust Estate, in whole or in any number of
parts, in one or more transactions from time to time, in any commercially
reasonable manner approved by the Controlling Holders; provided that, in
connection with any such sale or other liquidation, the Person conducting such
sale or other liquidation shall provide the Directing Holders and the Rating
Agencies with ten (10) days prior written notice thereof.
(b) Upon the occurrence and during the continuation of any Depositor
Event of Default, the Controlling Holders may deliver a Termination Notice to
any or all of the Servicer, the Special Servicer or the Servicing Advisor.
(c) Any amounts realized by the Trustee, the Servicer or the Special
Servicer in accordance with this Section 6.02 shall be deposited into the
Collection Account within two (2) Business Days following the receipt thereof
and treated as Collections for distribution on the next Payment Date.
42
<PAGE>
ARTICLE SEVEN
-------------
THE TRUSTEE
-----------
Section 7.01 Certain Duties and Responsibilities.
------------ -----------------------------------
(a) Except during the continuance of a Default known to the Trustee as
provided in subsection (e) below:
(i) the Trustee undertakes to perform such duties and only
such duties as are specifically set forth in any of the Transaction
Documents to which it is a party and no implied covenants or
obligations shall be read into this Agreement against the Trustee; and
(ii) in the absence of bad faith or negligence on its part,
the Trustee may conclusively rely as to the truth of the statements and
the correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Agreement; but in the case of any such certificates or opinions,
which by any provision hereof are specifically required to be furnished
to the Trustee, the Trustee shall be under a duty to examine the same
and to determine whether or not they conform to the requirements of
this Agreement.
(b) If a Default known to the Trustee as provided in subsection (e)
below has occurred and is continuing, the Trustee shall exercise such of the
rights and powers vested in it by this Agreement, and shall use the same degree
of care and skill in its exercise, as a reasonable person would exercise or use
under the circumstances in the conduct of his or her own affairs.
(c) No provision of this Agreement shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct or bad faith, except that:
(i) this subsection (c) shall not be construed to limit the
effect of subsection (a) of this Section;
(ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer of the Trustee, unless it
shall be proved that the Trustee was negligent in ascertaining the
pertinent facts;
(iii) the Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in good faith in accordance
with the direction of the Controlling Holders (or other such percentage
as may be required by the terms hereof) in accordance with Section 6.02
relating to the time, method and place of conducting any Proceeding for
any remedy available to the Trustee, or exercising any trust or power
conferred upon the Trustee, under this Agreement, the Loan Acquisition
Agreement or the Servicing Agreement; and
(iv) no provision of this Agreement shall require the Trustee
to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder, or in the
exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to
it, provided that nothing contained in this Agreement shall excuse the
--------
Trustee for failure to perform its duties as Trustee under this
Agreement.
43
<PAGE>
(d) Whether or not therein expressly so provided, every provision of
this Agreement relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section 7.01.
(e) For all purposes under this Agreement, the Trustee shall not be
deemed to have notice of any Default, Servicer Event of Default, Depositor Event
of Default or of the failure of any Pool Performance Condition unless a
Responsible Officer assigned to and working in the Trustee's corporate trust
department has actual knowledge thereof or unless written notice of any event
which is in fact such a Default or failure of a Pool Performance Condition is
received by the Trustee at the Corporate Trust Office, and such notice
references any of the Certificates generally, the Depositor, the Trust Estate or
this Agreement.
(f) The Trustee shall be under no obligation to institute any suit, or
to take any remedial proceeding under this Agreement, or to enter any appearance
or in any way defend in any suit in which it may be made defendant, or to take
any steps in the execution of the trusts hereby created or in the enforcement of
any rights and powers hereunder until it shall be indemnified to its
satisfaction against any and all costs and expenses, outlays and counsel fees
and other reasonable disbursements and against all liability, except liability
that is adjudicated, in connection with any action so taken.
(g) Notwithstanding anything to the contrary contained herein, the
provisions of subsections (e) and(f) of this Section 7.01 shall be subject to
the provisions of subsections (a) through (c), inclusive, of this Section 7.01.
(h) The Trustee shall provide the reports and accountings as required
pursuant to Section 5.04.
Section 7.02 Notice of Default and Other Events.
------------ -----------------------------------
Within one (1) Business Day after the Trustee has notice (within the
meaning of Section 7.01(e)) of any Default or Funding Termination Event, the
Trustee shall transmit by telephonic or telegraphic communication confirmed by
mail to all Holders, as their names and addresses appear on the Certificate
Register, notice of such Default or Funding Termination Event, unless such event
shall have been promptly cured or waived in accordance with this Agreement.
Section 7.03 Certain Rights of Trustee.
------------ --------------------------
Except as otherwise provided in Section 7.01:
(a) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond, note or other
obligation, paper or document believed by it to be genuine and to have been
signed or presented by the proper party or parties;
(b) any request or direction of the Depositor mentioned herein shall be
sufficiently evidenced by a Depositor Request or Depositor Order and any
resolution of the Board of Directors may be sufficiently evidenced by a Board
Resolution;
(c) whenever in the administration of this Agreement the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its part,
rely upon an Officer's Certificate;
44
<PAGE>
(d) the Trustee may consult with counsel and the written advice of such
counsel selected by the Trustee with due care or any Opinion of Counsel shall be
full and complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Agreement at the request or direction of
any of the Certificateholders pursuant to this Agreement, unless such
Certificateholders shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which might be incurred by
it in compliance with such request or direction;
(f) unless so directed by the Controlling Holders and if the
requirements of clause (e) above have been satisfied, the Trustee shall not be
bound to make any investigation into the facts or matters stated in any
resolution, certificate, statement, instrument, opinion, report, notice,
request, direction, consent, order, bond, note or other paper or document, but
the Trustee, in its discretion, may make such further inquiry or investigation
into such facts or matters as it may see fit, and, if the Trustee shall
determine to make such further inquiry or investigation, it shall be entitled to
examine the books, records and premises of the Depositor, upon reasonable notice
and at reasonable times personally or by agent or attorney; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys.
Section 7.04 Not Responsible for Recitals or Issuance of
------------ -------------------------------------------
Certificates.
- -------------
(a) The recitals contained in this Agreement and in the Certificates,
except the certificates of authentication on the Certificates, shall be taken as
the statements of the Depositor, and the Trustee assumes no responsibility for
their correctness. The Trustee makes no representations as to the validity or
condition of the Trust Estate or any part thereof, or as to the title of the
Depositor thereto, or as to the security afforded thereby or hereby, or as to
the validity or genuineness of any securities at any time pledged and deposited
with the Trustee hereunder or as to the validity or sufficiency of this
Agreement as against any other party or any of the Certificates. The Trustee
shall not be accountable for the use or application by the Depositor of any of
the Certificates or the proceeds thereof or of any money paid to the Depositor
or upon Depositor Order under any provisions hereof.
(b) Except as otherwise expressly provided herein and in Section 7.15
and without limiting the generality of the foregoing, the Trustee shall have no
responsibility or liability for or with respect to the validity of any Loan
Collateral or Loan, the perfection of any security interest (whether as of the
date hereof or at any future time), the maintenance of or the taking of any
action to maintain such perfection, the validity of the assignment of any
portion of the Trust Estate to the Trustee or of any intervening assignment, the
review of any Loan (it being understood that the Trustee has not reviewed and
does not intend to review the substance or form of any such Loan), the
performance or enforcement of any Loan, the compliance by the Depositor or the
Servicer with any covenant or the breach by the Depositor or the Servicer of any
warranty or representation made hereunder or in any related document or the
accuracy of any such warranty or representation, any investment of monies in the
Collection Account or any loss resulting therefrom, the acts or omissions of the
Depositor, the Servicer, or any Obligor, any action of the Servicer taken in the
name of the Trustee, or the validity as against any other party of the Servicing
Agreement or the Loan Acquisition Agreement.
(c) Except as otherwise expressly provided herein, the Trustee shall
not have any obligation or liability under any Loan by reason of or arising out
of this Agreement or the assignment of such Loan hereunder or the receipt by the
Trustee of any payment relating to any Loan pursuant hereto, nor shall the
45
<PAGE>
Trustee be required or obligated in any manner to perform or fulfill any of the
obligations of the Depositor under or pursuant to any Loan, or to make any
payment, or to make any inquiry as to the nature or the sufficiency of any
payment received by it, or the sufficiency of any performance by any party,
under any Loan.
Section 7.05 May Hold Certificates.
------------ ----------------------
The Trustee, the Servicer, any Paying Agent, the Certificate Registrar
or any other agent of the Depositor, in its individual or any other capacity,
may become the owner or pledgee of Certificates, and if operative, may otherwise
deal with the Depositor with the same rights it would have if it were not
Trustee, Servicer, Paying Agent, Certificate Registrar or such other agent.
Section 7.06 Money Held in Trust.
------------ --------------------
Money and investments held in trust by the Trustee or any Paying Agent
hereunder shall be held in one or more trust accounts hereunder but need not be
segregated from other funds except to the extent required in this Agreement or
required by law. The Trustee or any Paying Agent shall be under no liability for
interest on any money received by it hereunder except as otherwise agreed with
the Depositor or otherwise specifically provided in this Agreement.
Section 7.07 Compensation and Reimbursement.
------------ -------------------------------
The Trustee shall be paid, from the Trust Estate, a fee for all
services rendered by it hereunder as Trustee, in the amount of the Trustee Fee
(which compensation shall not otherwise be limited by any provision of law in
regard to the compensation of a trustee of an express trust) payable in
accordance with Section 5.01(f) and the definition of "Trustee Fee" contained
herein; provided that upon the termination of the Trust or the resignation or
--------
removal of the Trustee, the Trustee shall return to the Servicer a sum equal to
$615 times the number of months that have elapsed since the last anniversary of
the initial Funding Date. In addition, the Trustee shall be reimbursed, from the
Trust Estate, for all expenses (including attorneys fees) reasonably incurred by
it in connection with its administration of the Trust. The Trustee shall not be
entitled to any other or additional compensation or reimbursement, except as
expressly provided in Section 8.02(q) hereof.
Section 7.08 Corporate Trustee Required; Eligibility.
------------ ----------------------------------------
There shall at all times be a trustee hereunder which shall be a
corporation or association organized and doing business under the laws of the
United States of America or of any state, authorized under such laws to exercise
corporate trust powers, having a combined capital and surplus of at least
$100,000,000 (or a lesser amount with the approval of the Rating Agency and the
Controlling Holders), subject to supervision or examination by Federal or state
authority and having an office within the United States of America, and which
shall have a commercial paper or other short-term rating of the highest short
term rating categories by the Rating Agency, or otherwise acceptable to the
Rating Agency and the Controlling Holders. If such corporation publishes reports
of condition at least annually, pursuant to law or to the requirements of the
aforesaid supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such corporation shall be deemed to
be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section, it shall resign immediately in
the manner and with the effect hereinafter specified in this Article.
46
<PAGE>
Section 7.09 Resignation and Removal; Appointment of Successor.
------------ --------------------------------------------------
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 7.10.
(b) The Trustee may resign at any time by giving thirty (30) days
written notice thereof to the Depositor and each Certificateholder. If an
instrument of acceptance by a successor Trustee shall not have been delivered to
the Trustee within thirty (30) days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee. Such court may
thereupon, after such notice, if any, as it may deem proper and may prescribe,
appoint a successor Trustee.
(c) The Trustee may be removed by (i) the Depositor with (A) with the
consent of the Controlling Holders, or (ii) upon written notice from the Rating
Agency that failure to remove the Trustee will result in a downgrade of any
Rated Certificates or by the Controlling Holders so long as removal of the
Trustee will not result in a downgrade of any Rated Certificates, at any time if
one of the following events have occurred:
(i) the Trustee shall cease to be eligible under Section 7.08
and shall fail to resign after written request therefor by the
Depositor or by any Certificateholder, or
(ii) the Trustee shall become incapable of acting or shall be
the subject of a bankruptcy or insolvency proceeding or a receiver of
the Trustee or of its property shall be appointed or any public officer
shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation,
or
(iii) the Trustee has failed to perform its duties in this
Agreement or has breached any representation of warranty made in this
Agreement, in either case, in any material respect.
(d) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of the Trustee for any cause
with respect to any of the Certificates, the Depositor by a Board Resolution,
shall promptly appoint a successor Trustee satisfactory to the Controlling
Holders and subject to confirmation by the Rating Agency of no downgrade of the
Rated Certificates. If no successor Trustee shall have been so appointed by the
Depositor within thirty (30) days, then the Controlling Holders may petition any
court of competent jurisdiction for the appointment of a successor Trustee with
respect to the Certificates.
(e) The Depositor shall give notice in the manner provided in Section
11.03 and 11.04 of each resignation and each removal of the Trustee and each
appointment of a successor Trustee with respect to the Certificates to the
Certificateholders, the Certificateholder Agent and the Rating Agency. Each
notice shall include the name of the successor Trustee and the address of its
Corporate Trust Office.
Section 7.10 Acceptance of Appointment by Successor.
------------ ----------------------------------------
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Depositor, the Certificateholders and the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or removal
of the retiring Trustee shall become effective and such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts
47
<PAGE>
and duties of the retiring Trustee but, on request of the Depositor or the
successor Trustee, such retiring Trustee shall, upon payment of its reasonable
out-of-pocket costs and expenses, execute and deliver an instrument transferring
to such successor Trustee all the rights, powers and trusts of the retiring
Trustee, and shall duly assign, transfer and deliver to such successor Trustee
all property and money held by such retiring Trustee hereunder. Upon request of
any such successor Trustee, the Depositor shall execute any and all instruments
for more fully and certainly vesting in and confirming to such successor Trustee
all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be eligible under this Article.
Section 7.11 Merger, Conversion, Consolidation or Succession to
------------ ---------------------------------------------------
Business of Trustee.
- -------------------
Any Person into which the Trustee may be merged or converted or with
which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided that such Person shall be otherwise qualified and eligible under this
- --------
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto, and notice thereof shall be provided by the
Trustee to the Certificateholders and the Rating Agency. In case any
Certificates have been authenticated, but not delivered, by the Trustee then in
office, any successor by merger, conversion or consolidation to such
authenticating Trustee may adopt such authentication and deliver the
Certificates so authenticated with the same effect as if such successor Trustee
had itself authenticated such Certificates.
Section 7.12 Co-Trustees and Separate Trustees.
------------ ----------------------------------
At any time or times, for the purpose of meeting the legal requirements
of any jurisdiction in which any of the Trust Estate may at the time be located,
the Depositor and the Trustee shall have power to appoint, and, upon the written
request of the Trustee and the Holders representing at least 25% in Outstanding
Principal Amount of all Certificates, the Depositor shall for such purpose join
with the Trustee in the execution, delivery and performance of all instruments
and agreements necessary or proper to appoint one or more Persons approved by
the Trustee and meeting the requirements of Section 7.08, either to act as
co-Trustee, jointly with the Trustee of all or any part of such Trust Estate, or
to act as separate Trustee of any such property, in either case with such powers
as may be provided in the instrument of appointment, and to vest in such Person
or persons in the capacity aforesaid, any property, title, right or power deemed
necessary or desirable, subject to the other provisions of this Section. If the
Depositor does not join in such appointment within fifteen (15) days after the
receipt by it of a request so to do, or in case a Depositor Event of Default has
occurred and is continuing, the Trustee alone shall have power to make such
appointment.
Every co-Trustee or separate Trustee shall, to the extent permitted by
law, but to such extent only, be appointed subject to the following terms:
(a) the Certificates shall be authenticated and delivered by, and all
rights, powers, duties and obligations under this Agreement in respect of the
custody of securities, cash and other personal property held by, or required to
be deposited or pledged with, the Trustee under this Agreement, shall be
exercised solely by the Trustee;
(b) the rights, powers, duties and obligations conferred or imposed
upon the Trustee by this Agreement in respect of any property covered by such
appointment shall be conferred or imposed upon and
48
<PAGE>
exercised or performed by the Trustee or by the Trustee and such co-Trustee or
separate Trustee jointly, as shall be provided in the instrument appointing such
co-Trustee or separate Trustee, except to the extent that under any law of any
jurisdiction in which any particular act is to be performed, the Trustee shall
be incompetent or unqualified to perform such act, in which event such rights,
powers, duties and obligations shall be exercised and performed by such
co-Trustee or separate Trustee;
(c) the Trustee at any time, by an instrument in writing executed by
it, with the concurrence of the Depositor evidenced by a Board Resolution, may
accept the resignation of or remove any co-Trustee or separate Trustee,
appointed under this Section, and, in case a Depositor Event of Default has
occurred and is continuing, the Trustee shall have power to accept the
resignation of, or remove, any such co-Trustee or separate Trustee without the
concurrence of the Depositor. Upon the written request of the Trustee, the
Depositor shall join with the Trustee in the execution, delivery and performance
of all instruments and agreements necessary or proper to effectuate such
resignation or removal. A successor to any co-Trustee or separate Trustee that
has so resigned or been removed may be appointed in the manner provided in this
Section;
(d) no co-Trustee or separate Trustee hereunder shall be personally
liable by reason of any act or omission of the Trustee or any other such Trustee
hereunder nor shall the Trustee be liable by reason of any act or omission of
any co-Trustee or separate Trustee selected by the Trustee with due care or
appointed in accordance with directions to the Trustee pursuant to Section 6.02;
and
(e) any Act of Certificateholders delivered to the Trustee shall be
deemed to have been delivered to each such co-Trustee and separate Trustee.
Section 7.13 Rights with Respect to the Servicer.
------------ ------------------------------------
The Trustee's rights and obligations with respect to the Servicer and
the Special Servicer shall be governed by the Servicing Agreement.
Section 7.14 Trustee to Hold Loans.
------------ ---------------------
The Trustee hereby acknowledges receipt of the Loans and related Loan
Files (subject to any exceptions as may be noted by the Trustee to the
Depositor, the Servicer and the Certificateholder Agent within two (2) Business
Days of receipt thereof) and shall hold each Loan together with any documents
relating thereto that may from time to time be delivered to the Trustee, until
such time as such Loan is released from the Trust Estate pursuant to the terms
of this Agreement.
Except as provided in Section 4.06, the Trustee shall be under no duty
or obligation to inspect, review or examine the Loans, related Loan Files, and
other documents to determine that the same are genuine, enforceable or
appropriate for the represented purpose or that they have actually been recorded
or that they are other than what they purport to be on their face.
Section 7.15 Unclaimed Monies Held for Certificate Payments.
------------ -----------------------------------------------
If there is any Paying Agent other than the Trustee, the Depositor will
cause each Paying Agent other than the Trustee to execute and deliver to the
Trustee and the Certificateholder Agent an instrument in which such Paying Agent
shall agree with the Trustee and the Certificateholder Agent that, subject to
the provisions of this Section, such Paying Agent will:
49
<PAGE>
(a) hold all sums held by it for the payment of principal or interest
on Certificates in trust for the benefit of the Certificateholders entitled
thereto until such sums shall be paid to such Persons or otherwise disposed of
as herein provided;
(b) give the Trustee, the Certificateholder Agent and the
Certificateholders notice of any Default by the Depositor (or any other obligor
upon the Certificates) in the making of any payment of principal or interest;
and
(c) at any time during the continuance of any such Default, upon the
written request of the Trustee and the Certificateholder Agent forthwith pay to
the Trustee all sums so held in trust by such Paying Agent.
The Depositor may at any time, for the purpose of obtaining the
satisfaction and discharge of this Agreement or for any other purpose, pay, or
by Depositor Order direct any Paying Agent to pay, to the Trustee all sums held
in trust by such Paying Agent, such sums to be held by the Trustee upon the same
trusts as those upon which such sums were held by such Paying Agent; and, upon
such payment by any Paying Agent to the Trustee, such Paying Agent shall be
released from all further liability with respect to such money.
Section 7.16 Swap Agreements.
------------ ----------------
The Trustee is hereby directed to executed, on behalf of the Trust, the
Swap Agreement entered into connection with the Initial Delivery Date. Such Swap
Agreement shall not be amended or modified without the consent of the Depositor
and the Controlling Holders, with notice to the Rating Agency. The Trustee shall
be authorized to enter into any subsequent Swap Agreement upon receipt of a
Depositor Order to such effect, which Depositor Order has been approved by the
Controlling Holders, as evidenced by the countersignature of the
Certificateholder Agent.
50
<PAGE>
ARTICLE EIGHT
-------------
REPRESENTATIONS, WARRANTIES AND COVENANTS
------------------------------------------
Section 8.01 Representations and Warranties of the Depositor.
------------ ------------------------------------------------
The Depositor hereby makes the following representations and warranties
for the benefit of the Trustee and the Certificateholders on which the Trustee
relies in accepting the Trust Estate in trust and in authenticating the
Certificates and on which the Certificateholders rely in acquiring their
Certificates. Such representations and warranties are made as of the Initial
Delivery Date and, except as specifically provided herein, each additional
Delivery Date, and shall survive the transfer, conveyance and assignment of the
Trust Estate to the Trustee.
(a) The Depositor is a corporation duly organized, validly existing and
in good standing under the law of the State of Delaware and each other State
where the nature of its business requires it to qualify, except to the extent
that the failure to so qualify would not in the aggregate materially adversely
affect the ability of the Depositor to perform its obligations under the
Transaction Documents or otherwise materially adversely affect the interests of
the Certificateholders, as Certificateholders, under the Transaction Documents.
(b) The Depositor has the power, authority and legal right to execute,
deliver and perform under the terms of the Transaction Documents and the
execution, delivery and performance of the Transaction Documents have been duly
authorized by the Depositor by all necessary corporate action.
(c) Each of (i) this Agreement, assuming due authorization, execution
and delivery by the Trustee and the Servicer, (ii) the Servicing Agreement,
assuming due authorization, execution and delivery by the Servicer, the Special
Servicer, the Servicing Advisor and the Trustee, (iii) the applicable
Certificate Purchase Agreement, assuming due authorization, execution and
delivery by the purchaser(s) named therein, (iv) the Loan Acquisition Agreement,
assuming due authorization, execution and delivery by the Company, constitutes a
legal, valid and binding obligation of the Depositor, enforceable against the
Depositor in accordance with its terms except that (A) such enforcement may be
subject to bankruptcy, insolvency, reorganization, moratorium or other similar
laws (whether statutory, regulatory or decisional) now or hereafter in effect
relating to creditors' rights generally and (B) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
certain equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought, whether a proceeding at law or in equity.
(d) The consummation of the transactions contemplated by the
fulfillment of the terms of the Transaction Documents to which the Depositor is
a party will not conflict with, result in any breach of any of the terms and
provisions of or constitute (with or without notice, lapse of time or both) a
default under the organizational documents or bylaws of the Depositor, or any
indenture, agreement, mortgage, deed of trust or other instrument to which the
Depositor is a party or by which it is bound, or in the creation or imposition
of any Lien upon any of its properties pursuant to the terms of such indenture,
agreement, mortgage, deed of trust or other such instrument, other than any Lien
created or imposed pursuant to the terms of such Transaction Documents, or
violate any law, or any order, rule or regulation applicable to the Depositor of
any court or of any federal or state regulatory body, administrative agency or
other governmental instrumentality having jurisdiction over the Depositor or any
of its properties.
51
<PAGE>
(e) There are no Proceedings or investigations to which the Depositor,
or any of the Depositor's Affiliates, is a party pending, or, to the knowledge
of Depositor, threatened, before any court, regulatory body, administrative
agency or other tribunal or governmental instrumentality (A) asserting the
invalidity of the Transaction Documents, (B) seeking to prevent the issuance of
any of the Certificates or the consummation of any of the transactions
contemplated by the Transaction Documents or (C) seeking any determination or
ruling that would materially and adversely affect the performance by the
Depositor of its obligations under, or the validity or enforceability of, the
Transaction Documents or materially adversely affect the interests of the
Certificateholders, as Certificateholders, under the Transaction Documents.
(f) All approvals, authorizations, consents, orders or other actions of
any Person, or of any court, governmental agency or body or official, required
in connection with the execution and delivery of the Transaction Documents and
with the valid and proper authorization, issuance and sale of the Certificates
pursuant to this Agreement (except approvals of state securities officials under
the Blue Sky Laws), have been or will be taken or obtained on or prior to the
applicable Delivery Date.
(g) As of the Initial Delivery Date, the Depositor's principal place of
business and chief executive office is located at 1700 Montgomery Street, Suite
250B, San Francisco, California 94111 and the Depositor has done business only
under the name Allegiance Funding Corp. I.
(h) The Depositor hereby restates and makes each of the representations
and warranties with respect to the Loans and the related Loan Collateral that
are made by the Company in Section 3.01(a) and (b) of the Loan Acquisition
Agreement as of the date on which such representations and warranties were made
with references to the Company therein deemed to refer to the Depositor, as the
context requires.
(i) The Depositor is not an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(j) There has been no material adverse change in the financial
condition of the Depositor since April 28, 1998 and all information concerning
the Depositor furnished by the Depositor to the Certificateholder Agent, any
Certificateholder, the Trustee or the Rating Agency in connection with the
Transaction Documents or any transaction contemplated thereby is true and
accurate in all material respects or based on reasonable estimates (but, if
based on estimates, shall be identified as so based) on the date as of which
such information is stated or certified, as applicable, and no such information
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein or therein, in
light of the circumstances under which such statements were made and taken as a
whole, not misleading; provided that, to the extent that the representations and
--------
warranties of the Depositor contained in this subsection (j) relate to any such
information that was not prepared by the Depositor or any of its Affiliates,
then such representations and warranties are made by the Depositor solely to the
best of its knowledge. As used in this clause, "information" does not include
casual oral conversations or informal oral statements of opinions on which it
would be unreasonable to rely.
Section 8.02 Covenants of the Depositor.
------------ ---------------------------
The Depositor hereby makes the following covenants for the benefit of
the Trustee and the Certificateholders, on which the Trustee relies in accepting
the Trust Estate in trust and in authenticating the Certificates and the
Certificateholders rely in acquiring their Certificates. Such covenants shall
survive the transfer, conveyance and assignment of the Trust Estate to the
Trustee.
52
<PAGE>
(a) Except for the conveyances and assignment hereunder, the Depositor
will not sell, pledge, assign or transfer to any other Person, or grant, create,
incur, assume or suffer to exist any Lien on the Trust Estate now existing or
hereafter created, or any interest therein prior to the termination of this
Agreement pursuant to Section 10.01; the Depositor will notify the Trustee of
the existence of any Lien on the Trust Estate immediately upon discovery
thereof; and the Depositor shall defend the right, title and interest of the
Trustee in, to and under the Trust Estate now existing or hereafter created,
against all claims of third parties claiming through or under the Depositor;
provided that nothing in this Section 8.02(a) shall prevent or be deemed to
- --------
prohibit the Depositor from suffering to exist upon any of the Loan Collateral
any Liens permitted under the terms of the related Loan.
(b) The Depositor agrees to hold in trust and promptly pay to the
Servicer any amounts received by the Depositor in respect of the Trust Estate
(other than amounts distributed to or for the benefit of the Depositor pursuant
to Article Five).
(c) The Depositor will duly fulfill all obligations on its part to be
fulfilled under or in connection with each Loan and will do nothing to impair
the rights of the Trustee (for the benefit of the Certificateholders) in the
Loans and the related Loan Collateral.
(d) The Depositor will comply, in all material respects, with all acts,
rules, regulations, orders, decrees and directions of any governmental authority
applicable to the Loans or the Loan Collateral or the Depositor.
(e) The Depositor shall execute and file such continuation statements
and any other documents and take such other actions that may be required by law
to fully preserve and protect the interest of the Trustee (for the benefit of
the Certificateholders) in the Trust Estate.
(f) The Depositor will not, without providing thirty (30) days notice
to the Trustee and the Certificateholder Agent and without filing such
amendments to any previously filed financing statements as the Trustee may
require or as may be required in order to maintain the Trustee's perfected
security interest in the Trust Estate, (a) change the location of its principal
executive office, or (b) change its name, identity or corporate structure in any
manner which would make any financing statement or continuation statement filed
by the Depositor in accordance with the Servicing Agreement or this Agreement
seriously misleading within the meaning of Article 9-402(7) of any applicable
enactment of the UCC.
(g) The Depositor will make, execute or endorse, acknowledge, and file
or deliver to the Trustee from time to time such schedules, confirmatory
assignments, conveyances, transfer endorsements, powers of attorney,
certificates, reports and other assurances or instruments and take such further
steps relating to the Trust Estate, as the Trustee may request and reasonably
require.
(h) The Depositor shall notify the Trustee promptly after becoming
aware of any Lien on any Trust Estate, except for any Liens on Loan Collateral
for municipal or other local taxes if such taxes shall not at the time be due or
payable without penalty or if the Depositor or the related Obligor shall
currently be contesting the validity thereof in good faith by appropriate
proceedings and the Depositor shall have set aside on its books adequate
reserves with respect thereto.
(i) The Depositor (a) shall engage in only (1) the acquisition,
ownership, leasing, selling and pledging of the property acquired by the
Depositor pursuant to the Loan Acquisition Agreement, and causing the issuance
of, receiving and selling the Certificates issued pursuant to this Agreement and
(2) the exercise of any powers permitted to corporations under the corporate law
of the State of Delaware which are
53
<PAGE>
incidental to the foregoing or necessary to accomplish the foregoing and the
Depositor shall incur no debt other than trade payables and expense accruals in
connection with its operations in the normal course of business, and other than
as contemplated by the Transaction Documents; (b) will (1) maintain its books,
records and cash management accounts separate from the books and records of any
other entity and in accordance with generally accepted accounting principles,
(2) maintain separate bank accounts and shall not commingle its funds with those
of any other entity, (3) keep in full effect its existence, rights and
franchises as a corporation under the laws of its State of incorporation, and
will obtain and preserve its qualification to do business as a foreign
corporation in each jurisdiction in which such qualification is or shall be
necessary to protect the validity and enforceability of this Agreement, (4)
observe all corporate procedures required by its Certificate of Incorporation,
its bylaws and the laws of the State of Delaware, (5) maintain its good standing
under the laws of the State of Delaware, (6) keep correct and complete books and
records of account and minutes of meeting and other proceedings of its Board of
Directors and shareholder meetings, (7) obtain proper authorization from its
directors or shareholders, as appropriate, and act solely in its corporate name
and through its duly authorized officers and agents in the conduct of its
business, (8) disclose in its financial statements that the Loan Assets have
been sold and assigned to the Depositor and from the Depositor to the Trust and
that the assets of the Depositor are not available to pay the creditors of the
Company, (9) maintain a separate telephone number and stationery reflecting a
separate address and identity from that of the Company; and (c) will not (1)
dissolve or liquidate in whole or in part, (2) own any subsidiary or lend or
advance any moneys to, or make an investment in, any Person, (3) make any
capital expenditures, (4)(A) commence any case, proceeding or other action under
any existing or future bankruptcy, insolvency or similar law seeking to have an
order for relief entered with respect to it, or seeking reorganization,
arrangement, adjustment, wind-up, liquidation, dissolution, composition or other
relief with respect to it or its debts, (B) seek appointment of a receiver,
trustee, custodian or other similar official for it or any part of its assets,
(C) make a general assignment for the benefit of creditors, or (D) take any
action in furtherance of, or consenting or acquiescing in, any of the foregoing,
(5) guarantee (directly or indirectly), endorse or otherwise become contingently
liable (directly or indirectly) for the obligations of, or own or purchase any
stock, obligations or securities of or any other interest in, or make any
capital contribution to, any other Person, (6) merge or consolidate with any
other Person, (7) engage in any other action that bears on whether the separate
legal identity of the Depositor will be respected, including (A) holding itself
out as being liable for the debts of any other party or (B) acting other than in
its corporate name and through its duly authorized officers or agents, or (8)
create, incur, assume, or in any manner become liable in respect of any
indebtedness other than as contemplated by the Transaction Documents and other
than trade payables and expense accruals incurred in the ordinary course of
business and which are incidental to its business purpose; provided that the
--------
Depositor may take any action prohibited by this clause (8) if (y) the Depositor
shall cause, prior to the taking of such action, an Opinion of Counsel
experienced in federal bankruptcy matters, in substance satisfactory to the
Trustee, the Certificateholders and the Rating Agency confirming the
non-consolidation of the Depositor and the Company, to be delivered to the
Trustee, the Certificateholders and the Rating Agency, (z) the Rating Agency
shall indicate in writing that the taking of such action will not affect the
then current rating of any Series of Certificates. The Depositor shall not amend
any article in its Certificate of Incorporation that deals with any matter
discussed above without the prior written consent of the Controlling Holders. On
or before April 15 of each year, so long as any of the Certificates are
Outstanding, the Depositor shall furnish to each Certificateholder and the
Trustee, an Officer's Certificate confirming that the Depositor has complied
with its obligations under this Section 8.02(i).
(j) The Depositor agrees that at all times, at least one (1) of the
directors and one (1) of the executive officers of the Depositor (or two (2)
persons, one of whom is serving as both a director and an executive officer)
will not be a director, officer or employee of any direct or ultimate parent, or
Affiliate of the parent or of the Depositor; provided that such independent
--------
directors and officers may serve in similar
54
<PAGE>
capacities for other "special purpose corporations" formed by the Company and
its Affiliates. The Depositor's Certificate of Incorporation shall at all times
provide that such independent directors shall have a fiduciary duty to the
Holders of the Certificates and will always require unanimous consent of the
Board of Directors to file any bankruptcy petition.
(k) The Depositor shall comply with Section 2.11 of this Agreement at
all times and its financial and tax records shall reflect such tax treatment.
(l) The Depositor will maintain an office or agency within the United
States of America where notices and demand to or upon the Depositor in respect
of the Certificates and this Agreement may be served. The Depositor hereby
initially appoints the Trustee as the Paying Agent and its Corporate Trust
Office as the office for each of said purposes. The Depositor will give thirty
(30) days prior written notice to the Trustee and the Certificateholders of any
change in the identity of the Paying Agent or the location of any such office or
agency. If at any time the Depositor shall fail to maintain any such office or
agency or shall fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served to the
Trustee, and the Depositor hereby appoints the Trustee its agent to receive all
such presentations, surrenders, notices and demands.
(m) The Depositor will take all actions, and diligently pursue all
remedies available to it, in any case, to the extent necessary or reasonably
prudent and to the extent commercially reasonable, to enforce the obligations of
the Servicer under the Servicing Agreement and the Company under the Loan
Acquisition Agreement and to secure the Depositor's rights under such
agreements.
(n) The proceeds from the sale of the Certificates will be used by the
Depositor (i) to pay the Existing Indebtedness, if any, and to otherwise make
the payments required under the terms of the Loan Acquisition Agreement; (ii) to
pay the expenses associated with this transaction and (iii) for general
corporate purposes, including the cost of funding additional Loans. None of the
transactions contemplated in the Transaction Documents (including the use of the
proceeds from the sale of the Certificates) will result in a violation of
Section 7 of the Securities and Exchange Act of 1934, as amended, or any
regulations issued pursuant thereto, including Regulations T, U and X of the
Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. The
Depositor does not own or intend to carry or purchase any "margin security"
within the meaning of said Regulation G, including margin securities originally
issued by it or any "margin stock" within the meaning of said Regulation U.
(o) The Depositor shall not consolidate with or merge into any other
Person or convey or transfer its properties and assets substantially as an
entirety to any Person, without the consent of the Controlling Holders.
(p) Upon any consolidation or merger, or any conveyance or transfer of
the properties and assets of the Depositor in accordance with Section 8.02(o)
hereof, the Person formed by or surviving such consolidation or merger (if other
than the Depositor) or the Person to which such conveyance or transfer is made
shall succeed to, and be substituted for, and may exercise every right and power
of, the Depositor under this Agreement with the same effect as if such Person
had been named as the Depositor herein upon the execution of an assignment and
assumption agreement by such Person. In the event of any such conveyance or
transfer, the Person named as the "Depositor" in the first paragraph of this
Agreement or any successor which shall theretofore have become such in the
manner prescribed in this Article shall be released from its liabilities and its
obligations under this Agreement and may be dissolved, wound-up and liquidated
at any time thereafter.
55
<PAGE>
(q) The Depositor shall indemnify and hold harmless the Trustee, the
Certificateholders and the Certificateholder Agent from and against any loss,
liability, expense, damage or injury (other than any loss attributable to a
Certificateholder's investment in any of the Certificates) sustained or suffered
by them by reason of any acts, omissions or alleged acts or omissions (i) by the
Depositor in the performance of its obligations under the Transaction Documents
(including any violation of any applicable laws by the Depositor as a result of
the transactions contemplated by this Agreement), (ii) arising out of the
activities of the Trust, or (iii) arising out of the activities of any of them
with respect to the Trust, including enforcement of rights and remedies against
the Depositor under the Transaction Documents and any judgment, award,
settlement, reasonable attorneys' fees and other expenses reasonably incurred in
connection with the defense of any actual or threatened action, proceeding or
claim; provided that the Depositor shall not indemnify the Trustee, the
--------
Certificateholders or the Certificateholder Agent if such loss, liability,
expense, damage or injury is due to the such Person's gross negligence, willful
misconduct, willful misfeasance or bad faith in the performance of its rights or
duties hereunder. Any indemnification pursuant to this Section shall only be
payable from the assets of the Depositor and shall not be payable from the
assets of the Trust Estate except as otherwise provided in the Transaction
Documents. The provisions of this indemnity shall survive the termination of
this Agreement.
Section 8.03 Other Matters as to the Depositor.
------------ ----------------------------------
(a) Except as provided in subsection (b) of this Section and elsewhere
in this Agreement, the directors, officers, or employees of the Depositor shall
not be under any personal liability to the Trust, the Trustee, the
Certificateholders, the Servicer, or any other Person hereunder or pursuant to
any documents delivered hereunder, it being expressly understood that all such
liability is expressly waived and released as a condition of, and as
consideration for, the execution of this Agreement and the issuance of the
Certificates, except with respect to liability resulting from such person's
fraudulent or willful misconduct. The Depositor and any director or officer or
employee or agent of the Depositor may rely in good faith on the advice of
counsel or on any documents of any kind, prima facie properly executed and
submitted by any Person respecting any matters arising hereunder.
(b) During the term of this Agreement and for one (1) year and one (1)
day after the termination hereof, none of the parties hereto or any Affiliate
thereof will file any involuntary petition or otherwise institute or cooperate
in the institution of any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceeding or other proceeding under any federal or state bankruptcy
or similar law against the Depositor or the Trust.
Section 8.04 Representations and Warranties of the Trustee.
------------ ----------------------------------------------
The Trustee hereby makes the following representations and warranties
for the benefit of the Depositor and the Certificateholders on which the
Certificateholders rely in acquiring their Certificates. Such representations
and warranties are made as of the Initial Delivery Date and, except as
specifically provided herein, each additional Delivery Date, and shall survive
the transfer, conveyance and assignment of the Trust Estate to the Trustee.
(a) The Trustee is a banking corporation duly organized, validly
existing and in good standing under the law of the State of New York and each
other State where the nature of its business requires it to qualify, except to
the extent that the failure to so qualify would not in the aggregate materially
adversely affect the ability of the Trustee to perform its obligations under the
Transaction Documents or otherwise
56
<PAGE>
materially adversely affect the interests of the Certificateholders, as
Certificateholders, under the Transaction Documents.
(b) The Trustee has the power, authority and legal right to execute,
deliver and perform under the terms of the Transaction Documents and the
execution, delivery and performance of the Transaction Documents have been duly
authorized by the Trustee by all necessary corporate action.
(c) Each of (i) this Agreement, assuming due authorization, execution
and delivery by the Servicer and (ii) the Servicing Agreement, assuming due
authorization, execution and delivery by the Depositor, the Servicer, the
Special Servicer and the Servicing Advisor, constitutes a legal, valid and
binding obligation of the Trustee, enforceable against the Trustee in accordance
with its terms except that (A) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws (whether statutory,
regulatory or decisional) now or hereafter in effect relating to creditors'
rights generally and (B) the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to certain equitable defenses and
to the discretion of the court before which any proceeding therefor may be
brought, whether a proceeding at law or in equity.
(d) The consummation of the transactions contemplated by the
fulfillment of the terms of the Transaction Documents to which the Trustee is a
party will not conflict with, result in any breach of any of the terms and
provisions of or constitute (with or without notice, lapse of time or both) a
default under the organizational documents or bylaws of the Trustee, or any
indenture, agreement, mortgage, deed of trust or other instrument to which the
Trustee is a party or by which it is bound, or in the creation or imposition of
any Lien upon any of its properties pursuant to the terms of such indenture,
agreement, mortgage, deed of trust or other such instrument, other than any Lien
created or imposed pursuant to the terms of such Transaction Documents, or
violate any law, or any order, rule or regulation applicable to the Trustee of
any court or of any federal or state regulatory body, administrative agency or
other governmental instrumentality having jurisdiction over the Trustee or any
of its properties.
(e) There are no Proceedings or investigations to which the Trustee, or
any of the Trustee's Affiliates, is a party pending, or, to the knowledge of
Trustee, threatened, before any court, regulatory body, administrative agency or
other tribunal or governmental instrumentality (A) asserting the invalidity of
the Transaction Documents, (B) seeking to prevent the issuance of any of the
Certificates or the consummation of any of the transactions contemplated by the
Transaction Documents or (C) seeking any determination or ruling that would
materially and adversely affect the performance by the Trustee of its
obligations under, or the validity or enforceability of, the Transaction
Documents or otherwise adversely affect the interests of the Certificateholders,
as Certificateholders, under the Transaction Documents.
(f) All approvals, authorizations, consents, orders or other actions of
any Person, or of any court, governmental agency or body or official, required
as a condition to the execution and delivery by the Trustee of the Transaction
Documents have been or will be taken or obtained on or prior to the applicable
Delivery Date.
57
<PAGE>
ARTICLE NINE
------------
AMENDMENTS
----------
Section 9.01 Amendments without Consent of Certificateholders.
------------ -------------------------------------------------
The Depositor, the Servicer and the Trustee, without the consent of the
Holders of any Certificates, at any time and from time to time, may enter into
one or more amendments hereto, in form satisfactory to the Trustee, for any of
the following purposes, provided that any such amendment, as evidenced by an
--------
Opinion of Counsel, will not have a material adverse affect on the
Certificateholders:
(a) to correct or amplify the description of any property at any time
included in the Trust Estate (other than any such correction or amplification
that would have the effect of curing a Default or a breach of any
representation, warranty or covenant that would otherwise require the Company or
the Depositor to repurchase or substitute for any Loan), or to better assure,
convey and confirm unto the Trustee any property included or required to be
included in the Trust Estate, or to include in the Trust Estate any additional
property;
(b) to evidence the succession of another Person to the Depositor, and
the assumption by such successor of the covenants of the Depositor herein and in
the Certificates, in accordance with Section 8.02(o);
(c) to add to the covenants of any party hereto, for the benefit of the
Holders of all Certificates or to surrender any right or power herein conferred
upon the Depositor;
(d) to convey, transfer, assign, mortgage or pledge any property to or
with the Trustee;
(e) to cure any ambiguity, to correct or supplement any provision
herein which may be defective or inconsistent with any other provisions with
respect to matters or questions arising under this Agreement, which shall not be
inconsistent with the provisions of this Agreement; or
(f) to evidence the succession of the Trustee pursuant to Article
Seven; provided that any such amendment does not modify this Agreement in a
--------
manner described in paragraphs (i) through (vii) of Section 9.02(a).
The Trustee is hereby authorized to join in the execution of any such
amendment and to make any further appropriate agreements and stipulations that
may be therein contained, but the Trustee shall not be obligated to enter into
any such amendment that affects the Trustee's own rights, duties, liabilities or
immunities under this Agreement or otherwise.
Promptly after the execution by the Depositor, the Servicer and the
Trustee of any amendment pursuant to this Section, the Depositor shall mail to
the Rating Agency, the Certificateholder Agent and each Certificateholder a copy
of such amendment.
Section 9.02 Amendments and Modifications to Agreement with Consent
------------- ------------------------------------------------------
of Certificateholders.
- ---------------------
(a) With the prior written consent of not less than 51% of the
Outstanding Principal Amount of the Holders of each affected Class (or, with
respect to any affected Class during the Funding Period applicable to such
Class, of not less than 51% of the Maximum Series Amount of such Class) of Rated
58
<PAGE>
Certificates, by Act of such Holders delivered to the Depositor and the Trustee,
the Depositor, the Servicer and the Trustee may enter into an amendment or
modification of this Agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement or
modifying in any manner the rights of the Holders of the Certificates under this
Agreement (other than as described in Section 9.01); provided that no such
--------
amendment shall, without the consent of the Holders of each Outstanding
Certificate affected thereby:
(i) change the Series Termination Date of any Certificate or
the Due Date of any installment of principal of, or any installment of
interest on, any Certificate, or change the principal amount thereof or
the Certificate Interest Rate or change any place of payment where, or
the coin or currency in which, any Certificate or the interest thereon
is payable, or impair the right to institute suit for the enforcement
of any such payment;
(ii) reduce the percentage in Outstanding Principal Amount of
Certificates, the consent of the Holders of which is required for any
such amendment, or the consent of the Holders of which is required for
any waiver of compliance with certain provisions of this Agreement or
Events of Default or their consequences;
(iii) impair or adversely affect the Trust Estate;
(iv) modify or alter the definition of the term "Outstanding"
or "Outstanding Principal Amount" or "Controlling Holders";
(v) modify or alter the provisions of Sections 5.01 or 5.02;
(vi) modify any of the provisions of this Section 9.02,except
to increase the percentage of Holders required for any modification or
waiver or to provide that certain other provisions of this Agreement
cannot be modified or waived without the consent of each Holder of each
Outstanding Certificate affected thereby; or
(vii) permit the creation of any lien ranking prior to, on a
parity with, or subordinate to the lien of this Agreement with respect
to any part of the Trust Estate or terminate or release the lien of
this Agreement or any lien created under the Loan Acquisition Agreement
on any property at any time subject hereto or deprive the Holder of any
Certificate of the security afforded by the lien of this Agreement or
any lien created under the Loan Acquisition Agreement.
(b) With the prior written consent of the Holders of not less than
66-2/3% in Outstanding Principal Amount of each Class of each Series of
Certificates then in its Funding Period, by Act of said Holders delivered to the
Depositor and the Trustee, the Depositor, the Servicer and the Trustee may enter
into amendments hereto for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of Article Three or the
definitions used therein, provided that any such amendment does not modify the
--------
Agreement in a manner described in clauses (i) through (vii) of paragraph (a) of
this Section 9.02.
(c) The Trustee is hereby authorized to join in the execution of any
amendments to this Agreement pursuant to clause (a) or (b) above and to make any
further appropriate agreements and stipulations that may be therein contained,
but the Trustee shall not be obligated to enter into any such amendment that
affects the Trustee's own rights, duties, liabilities or immunities under this
Agreement. It shall not be necessary for any Act of Certificateholders under
this Section to approve the particular form of
59
<PAGE>
any proposed supplemental agreement, but it shall be sufficient if such Act
shall approve the substance thereof. Promptly after the execution by the
Depositor, the Servicer and the Trustee of any amendment pursuant to this
Section, the Depositor shall mail to the Holders of the Certificates and the
Rating Agency a copy of such amendment, together with any consents obtained in
connection therewith.
Section 9.03 Execution of Amendments.
------------ ------------------------
In executing any amendment permitted by this Article or the
modifications thereby of the trusts created by this Agreement, the Trustee shall
be entitled to receive upon request, and (subject to Section 7.01) shall be
fully protected in relying in good faith upon, an Opinion of Counsel reasonably
acceptable to the Trustee stating that the execution of such amendment is
authorized or permitted by this Agreement. The Trustee may, but shall not be
obligated to, enter into any such amendment which affects the Trustee's own
duties or immunities under this Agreement or otherwise.
Section 9.04 Effect of Amendments.
------------ ---------------------
Upon the execution of any amendment under this Article, this Agreement
shall be modified in accordance therewith, and such amendment shall form a part
of this Agreement for all purposes; and every Holder of Certificates theretofore
or thereafter authenticated and delivered hereunder shall be bound thereby.
Section 9.05 Reference in Certificates to Amendments.
------------ ----------------------------------------
Certificates authenticated and delivered after the execution of any
amendment pursuant to this Article may, and if required by the Trustee shall,
bear a notation in form approved by the Trustee as to any matter provided for in
such amendment. If the Depositor shall so determine, new Certificates so
modified as to conform, in the opinion of the Trustee and the Depositor, to any
such amendment may be prepared and executed by the Depositor and authenticated
and delivered by the Trustee in exchange for Outstanding Certificates.
60
<PAGE>
ARTICLE TEN
------------
TERMINATION AND DISCHARGE
-------------------------
Section 10.01 Termination of Trust; Satisfaction and Discharge of
------------- ---------------------------------------------------
Agreement.
- ----------
(a) The Trust shall terminate upon the earlier of (i) December 31, 2020
and (ii) the day following the date when the Pool Balance has been reduced to
zero and all proceeds of the Trust Estate have been applied in accordance with
Article Five and each applicable Supplement. Upon termination of the Trust, all
rights, obligations and Liens created by this Agreement shall be discharged.
(b) If, nine (9) months prior to the date specified in Section
10.01(a)(i), there remains an Outstanding Principal Amount on any Certificate,
the Special Servicer shall use its best efforts to sell, dispose or otherwise
liquidate the Loans and related Loan Collateral in a commercially reasonable
manner in the succeeding one hundred eighty (180) days and shall deposit the
proceeds thereof in the Collection Account for application in accordance with
Article Five.
(c) Thirty (30) days advance written notice of termination of the Trust
shall be given by the Trustee to the Certificateholders, the Certificateholder
Agent and the Rating Agency, specifying the Final Payment Date and the amount of
any such final payment on the Certificates.
(d) Upon termination of the Trust and application of all proceeds of
the Trust Estate in accordance with Article Five and each applicable Supplement,
the Depositor may submit to the Trustee an Officer's Certificate requesting the
release of the funds on deposit in the Reserve Account, if any, and any other
assets then comprising the Trust Estate. Upon receipt of such request, the
Trustee shall release from the lien of this Agreement and deliver to or upon the
order of the Depositor all property remaining in the Trust Estate and shall
execute and file, at the expense of the Depositor, UCC financing statements
evidencing such discharge and release.
Section 10.02 Optional Termination.
------------- ---------------------
(a) At any time when the Pool Balance is equal to or less than 15% of
the Pool Balance at its highest level, the Depositor shall have the right to
purchase the Loan Assets at a price equal to the Repurchase Price for such
Loans. The Depositor shall deposit such amount in the Collection Account for
application in accordance with Article Five.
(b) The Depositor shall give written notice to the Trustee, the Rating
Agency and the Certificateholders of its intention to exercise such option five
(5) Business Days in advance thereof. Such notice shall include (i) a statement
that interest shall cease to accrue as of the last day preceding the date on
which such repurchase is to occur (such date being the Final Payment Date for
all of such Certificates) and (ii) shall specify the place or places at which
presentation and surrender of Certificates may be made; provided that, if the
---------
Holder of any Certificate is, or is a nominee for, a Qualified Institutional
Buyer, then such Person need not surrender such Certificate, provided further
----------------
that, in such event, such Qualified Institutional Buyer shall automatically be
deemed to have provided its own unsecured agreement of indemnity saving the
Depositor and the Trustee, or either of them, harmless in respect of such
failure to surrender.
(c) Upon exercise of such option and deposit of the amounts required
under Section 10.01 into the Collection Account, the Depositor shall be entitled
to obtain an assignment of the Loan Assets and the Trustee shall promptly
execute all instruments provided to it as may be necessary to effectuate such
assignment and the release of any lien created hereunder.
61
<PAGE>
ARTICLE ELEVEN
--------------
PROVISIONS OF GENERAL APPLICATION
---------------------------------
Section 11.01 General Provisions.
------------- -------------------
All of the provisions of this Article shall apply to this Agreement, as
supplemented by each Supplement.
Section 11.02 Acts of Certificateholders.
------------- ---------------------------
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Agreement to be given or taken by
Certificateholders may be embodied in and evidenced by one or more instruments
of substantially similar tenor signed by such Certificateholders in person or by
an agent duly appointed in writing; and, except as herein otherwise expressly
provided, such action shall become effective when such instrument or instruments
are delivered to the Trustee, and, where it is hereby expressly required, to the
Depositor. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the
Certificateholders signing such instrument or instruments. Proof of execution of
any such instrument or of a writing appointing any such agent shall be
sufficient for any purpose of this Agreement and (subject to Section 7.01)
conclusive in favor of the Trustee and the Depositor, if made in the manner
provided in this Section 11.02.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved in any manner which the Trustee deems
sufficient.
(c) The ownership of Certificates shall be proved by the Certificate
Register.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Certificate shall bind the Holder of
every Certificate issued upon the registration of transfer thereof or in
exchange therefor or in lieu thereof, in respect of anything done, omitted or
suffered to be done by the Trustee or the Depositor in reliance thereon, whether
or not notation of such action is made upon such Certificate.
Section 11.03 Notices,etc.,to Trustee, Depositor, Servicer and Rating
------------- -------------------------------------------------------
Agency.
- -------
(a) All notices, requests, demands, authorizations, directions,
consents, waivers or Acts of Certificateholders and other communications to any
party under this Agreement shall be in writing (including telefacsimile
communication) and mailed, sent by telefacsimile or delivered to such party at
its address or telefacsimile number set forth in Section 11.03(b) or such other
address or telefacsimile number as such party may hereafter specify for such
purpose by notice given in accordance with this Section 11.03. Each such notice,
request or other communication shall be deemed to have been received: (i) if
mailed as provided above by any method other than overnight delivery service,
when actually received; (ii) if mailed by overnight delivery service, when
delivered by the overnight delivery service; (iii) if sent by telefacsimile when
transmitted by telefacsimile (with electronic confirmation of receipt by the
sending party), so long as such notice is promptly confirmed in writing by any
of the other means specified in clauses (i), (ii) or (iv) of this Section
11.03(a); or (iv) if delivered by hand, upon delivery.
62
<PAGE>
(b) For purposes hereof, the address and telefacsimile number of:
(i) the Trustee shall be One M & T Plaza, 7th Floor, Buffalo,
New York 14203-2399, Fax 716-842-4474, or otherwise as furnished in
writing to the Depositor, the Certificateholder Agent, the
Certificateholders, the Servicer and the Special Servicer by the
Trustee;
(ii) the Depositor shall be 1700 Montgomery Street, Suite
250-B, San Francisco, California 94111, Fax 415-394-6703, or otherwise
as furnished in writing to the Trustee, the Certificateholder Agent,
the Certificateholders, the Servicer and the Special Servicer by the
Depositor;
(iii) the Servicer shall be 1700 Montgomery Street, Suite 250,
San Francisco, California 94111, Fax 415-394-9471, or otherwise as
furnished in writing to the Trustee, the Depositor, the
Certificateholder Agent, the Certificateholders and the Special
Servicer by the Servicer;
(iv) the Special Servicer shall be 1700 Montgomery Street,
Suite 250, San Francisco, California 94111, Fax 415-394-9471, or
otherwise furnished in writing to the Trustee, the Depositor, the
Certificateholder Agent, the Certificateholders and the Servicer by the
Special Servicer; and
(v) the Certificateholder Agent shall be ***, Attn. Asset
Manager, Fax *** or otherwise furnished in writing to the Trustee, the
Depositor, the Certificateholders, the Servicer and the Special
Servicer by the Certificateholder Agent;
(vi) the Rating Agency shall be 17 State Street, 12th Floor,
New York, New York 10004 Fax 212-908-0222, or otherwise furnished in
writing to the Trustee, the Depositor, the Certificateholder Agent, the
Certificateholders, the Servicer and the Special Servicer by the Rating
Agency.
Section 11.04 Notices to Certificateholders; Waiver.
------------- --------------------------------------
Where this Agreement provides for notice to Certificateholders of any
event, such notice shall be sufficiently given (unless otherwise herein
expressly provided) if in writing and made in accordance with Section 11.03 to
each Certificateholder affected by such event, at such Person's address as it
appears on the Certificate Register, not later than the latest date, and not
earlier than the earliest date, prescribed for the giving of such notice. In any
case in which notice to Certificateholders is given by mail, neither the failure
to mail such notice, nor any defect in any notice so mailed, to any particular
Certificateholder shall affect the sufficiency of such notice with respect to
other Certificateholders, and any notice which is mailed in the manner herein
provided shall conclusively be presumed to have been duly given.
Where this Agreement provides for notice in any manner, such notice may
be waived in writing by any Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Certificateholders shall be filed with the Trustee,
but such filing shall not be a condition precedent to the validity of any action
taken in reliance upon such waiver.
In case, by reason of the suspension of regular mail service as a
result of a strike, work stoppage or similar activity, it shall be impractical
to mail notice of any event to Certificateholders when such notice is required
to be given pursuant to any provision of this Agreement, then any manner of
giving such notice as shall be satisfactory to the Trustee shall be deemed to be
a sufficient giving of such notice.
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
63
<PAGE>
Section 11.05 Effect of Headings and Table of Contents.
------------- -----------------------------------------
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
Section 11.06 Successors and Assigns.
------------- -----------------------
All covenants and agreements in this Agreement by the Depositor shall
bind its successors and assigns, whether so expressed or not. Notwithstanding
the foregoing, no party shall assign any of its rights under this Agreement, or
delegate any of its duties, except in accordance with the provisions of Sections
2.06, 7.10 and 8.02(o).
Section 11.07 Separability.
------------- -------------
In case any provision in this Agreement or in the Certificates shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 11.08 Benefits of Agreement.
------------- ----------------------
Nothing in this Agreement or in the Certificates, express or implied,
shall give to any Person, other than the parties hereto, the Certificateholders,
and any Paying Agent which may be appointed pursuant to the provisions hereof,
and any of their successors hereunder, any benefit or any legal or equitable
right, remedy or claim under this Agreement or under the Certificates.
Section 11.09 Legal Holidays.
------------- ---------------
In any case in which the date of any Payment Date or the Series
Termination Date of any Certificate shall not be a Business Day, then
(notwithstanding any other provision of a Certificate or this Agreement) payment
of principal or interest need not be made on such date, but may be made on the
next succeeding Business Day with the same force and effect as if made on the
nominal date of any such Series Termination Date or Payment Date and, assuming
such payment is actually made on such subsequent Business Day, no additional
interest shall accrue on the amount so paid for the period from and after any
such nominal date.
Section 11.10 Governing Law.
------------- --------------
THIS AGREEMENT AND EACH CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE
-----------------------------------------------------------------------
WITH AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO
- --------------------------------------------------------------------------------
AGREEMENTS MADE AND TO BE PERFORMED THEREIN, WITHOUT REGARD TO THE CONFLICT OF
- --------------------------------------------------------------------------------
LAWS PROVISIONS OF ANY STATE.
- -----------------------------
Section 11.11 Counterparts.
------------- -------------
This Agreement may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
Section 11.12 Corporate Obligation.
------------- ---------------------
No recourse may be taken, directly or indirectly, against any
incorporator, subscriber to the capital stock, stockholder, employee, officer or
director of the Depositor or of any predecessor or successor of the
64
<PAGE>
Depositor with respect to the Trust or under this Agreement or any certificate
or other writing delivered in connection herewith.
Section 11.13 Compliance Certificates and Opinions.
------------- -------------------------------------
Upon any application, order or request by the Depositor or the Servicer
to the Trustee to take any action under any provision of this Agreement for
which a specific request is required under this Agreement, the Depositor or the
Servicer, as applicable, shall furnish to the Trustee an Officer's Certificate
of the Depositor or the Servicer, as applicable, stating that all conditions
precedent, if any, provided for in this Agreement relating to the proposed
action have been complied with, except that in the case of any such application
or request as to which the furnishing of a different certificate is specifically
required by any provision of this Agreement relating to such particular
application or request, no additional certificate need be furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Agreement shall include:
(a) a statement that each individual signing such certificate or
opinion has read or has caused to be read such covenant or condition and the
definitions herein relating thereto;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of each such individual, such
individual has made such examination or investigation as is necessary to enable
such individual to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(d) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
65
<PAGE>
IN WITNESS WHEREOF, the Depositor, the Trustee and the Servicer have
caused this Agreement to be executed by their respective duly authorized
officers as of the date and year first written above.
ALLEGIANCE FUNDING CORP. I, as Depositor
By: /s/ Alan B. Perper
--------------------------------
Name: Alan B. Perper
Title: President
MANUFACTURERS AND TRADERS TRUST
COMPANY, as Trustee
By: /s/ Russell T. Whitley
--------------------------------
Name: Russell T. Whitley
Title: Assistant Vice President
POINT WEST CAPITAL CORPORATION, as Servicer
By: /s/ Alan B. Perper
--------------------------------
Name: Alan B. Perper
Title: President
<PAGE>
EXHIBIT A
---------
to Trust Agreement
------------------
FORM OF
-------
STANDARD ESCROW INSTRUCTIONS
----------------------------
--------------- --, 199_
[Title Company]
Re: Loan (the "Loan") from Allegiance Capital, LLC (the
"Lender") to [] (the "Borrower")
Ladies and Gentlemen:
This letter is being forwarded to you by the Borrower[, [other
Credit Parties]] and the Lender in connection with the Loan. Pursuant to the
written authorization from the Borrower to the Lender (the "Disbursement
Letter"), the Lender is sending to you, or will cause to be sent to you, by wire
transfer of immediately available federal funds (in accordance with wire
transfer instructions previously supplied by you) an amount equal to ($ )
-------
(the "Wired Funds"). A copy of the Disbursement Letter is attached hereto as
Exhibit A. The Wired Funds are being delivered to you to be held in trust for
payment as provided in the Disbursement Letter.
You are not authorized to disburse any or all of the Wired
Funds unless and until all of the following conditions (the "Threshold
Conditions") have been satisfied:
(a) You hold in your possession each of the documents set
forth on Exhibit B attached hereto (collectively, the "Credit Documents"), duly
executed by each of the respective parties thereto.
(b) You hold in your possession originals of all documents
required by Section [] of each Title Commitment (except to the extent otherwise
permitted by the Lender);
(c) You have received written authorization from the Lender
that you may disburse the Wired Funds.
If all of the foregoing conditions are satisfied on or before
the close of business on 199 (the "Threshold Date"), then, on the
----- -- --
earliest date on which (A) all such conditions have been fulfilled and (B) you
are able to satisfy the Title Company Conditions (as hereinafter defined), you
are hereby authorized and directed to disburse the Wired Funds according to the
Disbursement Letter. Notwithstanding anything to the contrary contained herein,
you may not disburse any or all of the Wired Funds, unless, contemporaneously
with your disbursement of the Wired Funds, you do both of the following (the
"Title Company Conditions"): (1) record, or cause to be recorded, each Mortgage
(as that term is defined on Exhibit B attached hereto, a "Mortgage") in the
appropriate recording office identified on Exhibit B attached hereto, with
respect to the related real property identified in such Mortgage(s) that is the
subject
<PAGE>
(Title Company)
199
- ------------ --, -
Page 2
of your Title Commitment(s), dated , 199 (the "Title Commitment(s)");
-- -
and (2) issue, in favor of the Lender, the following title insurance policies
(collectively, the "Title Insurance Policies"):
(i) [identify title insurance policy for each
separate piece of real property that is the subject of a Mortgage],
such policy to reflect the lien of the Lender as the only lien or
encumbrance of any kind on such real property, other than those set
forth in Items [] of the [related] Title Commitment; and
(ii) [identify title insurance policy for each
separate piece of real property that is the subject of a Mortgage],
such policy to reflect the lien of the Lender as the only lien or
encumbrance of any kind on such real property, other than those set
forth in Items [] of the [related] Title Commitment.
Should all of the Threshold Conditions not be satisfied on or
before the close of business on the Threshold Date and/or should you not be able
to comply with the Title Company Conditions on or before the close of business
on the Threshold Date, you are to return (i) the Wired Funds to the Trustee
according to wire transfer instructions provided to you by the Lender or its
counsel, and (ii) the Credit Documents to the Lender.
Following the distribution of the Wired Funds, you are to
deliver the Credit Documents to Manufacturers and Traders Trust Company (the
"Trustee"), One M & T Plaza, 7th Floor, Buffalo, NY 14203-2399, Attention:
. Within five (5) business days of receipt of a recorded Mortgage,
- -----------
you are to forward such recorded Mortgage to the Trustee at the above address.
In addition, within three (3) business days of the disbursement of Wired Funds,
you are to send originals of each of the Title Policies to the Trustee at the
above address.
The instructions contained herein may not be altered, changed,
or modified in any way except by a writing signed by the Lender. The Lender
reserves the right to amend or cancel these instructions and authorizations at
any time prior to the recording of the Mortgages, the issuance of the Title
Policies, the delivery to the Trustee of the Credit Documents or the
disbursement of the Wired Funds.
Please indicate your acceptance of the foregoing provisions by
signing this letter in the space provided below and returning a copy by fax to
the undersigned at 415-394-9471. Please note that, by signing this letter below,
you are indicating that you will hold and disburse the Wired Funds solely as
provided herein. In addition, please note that, notwithstanding the failure of
the Lender to receive a copy of this letter signed by you, your act of recording
any or all of the Mortgages or disbursing any or all of the Wired Funds shall
constitute evidence of your agreement to comply with the foregoing instructions.
<PAGE>
(Title Company)
199
- ------------ --, -
Page 3
Should you have any questions regarding the above or receive
any contrary instructions from any other person, please do not hesitate to
contact the undersigned at 415-394-5180.
Very truly yours,
ALLEGIANCE CAPITAL, LLC
By:
Name:
Title:
Acknowledged and Agreed:
[TITLE COMPANY]
By:
Name:
Title:
[BORROWER]
By:
Name:
Title:
[ADDITIONAL CREDIT PARTIES]
<PAGE>
EXHIBIT B
---------
to Trust Agreement
------------------
FORM OF INVESTMENT AND ASSUMPTION LETTER
----------------------------------------
ALLEGIANCE FUNDING CORP. I
REVOLVING CERTIFICATES, SERIES -1
------
Allegiance Funding Corp. I (the "Company")
1700 Montgomery Street, Suite 250B
San Francisco, CA 94111
Manufacturers and Traders Trust Company
One M & T Plaza, 7th Floor
Buffalo, NY 14203-2399
Ladies and Gentlemen:
Terms used herein and not otherwise defined shall have the meanings
given to them in the Trust Agreement, dated as of August 1, 1998, by and among
the Depositor, Point West Capital Corporation, as servicer, and Manufacturers
and Traders Trust Company, as trustee. The undersigned hereby certifies on
behalf of the Purchaser named below (the "Purchaser") as follows:
1. I, , am the chief financial officer, a person
--------------
fulfilling an equivalent function or other executive officer of the Purchaser.
[2. I am familiar with the provisions of Rule 144A ("Rule 144A")
under the Securities Act of 1933 (the "1933 Act").
(a) The Purchaser is a "qualified institutional buyer,"
as defined in Rule 144A.
(b) The Purchaser is aware that the Depositor may rely on the
exemption from the registration requirements of the 1933 Act provided
by Rule 144A.
(c) The Purchaser acknowledges that the Purchaser has (i)
received such information regarding the Allegiance Capital Trust I
Revolving Certificates, Series -1 Class Certificates,
---- ----------
Class Certificates, Class Certificates and Class
---------- ----------
Certificates (the "Certificates") as the Purchaser may
----------
require pursuant to Rule 144A or (ii) the Purchaser has determined not
to request such information.]
(2. I am familiar with the provisions of Regulation D under the
Securities Act of 1933 (the "1933 Act").
<PAGE>
(a) The Purchaser is an "accredited investor" within the
meaning of Rule 501(a)(1), (2), (3), or (7) of Regulation D under the
1933 Act.
(b) In the normal course of the Purchaser's business the
Purchaser invests in or purchases securities similar to the
Certificates, has such knowledge and experience in financial and
business matters that the Purchaser is capable of evaluating the merits
and risks of its investment in the Certificates.
(c) The Purchaser is capable of bearing the economic
risks of an investment in the Certificates.)
3. The Purchaser is acquiring the Certificates for its own account or
the account of its affiliated entities for the purpose of investment or resale
under Rule 144A or any other exemption from registration available under the
1933 Act and not with a view to the distribution thereof.
4. The Purchaser understands that it is the expressed intent of the
Depositor that the Certificates are being issued only in transactions not
involving any public offering within the meaning of the 1933 Act and that the
Certificates will bear a legend substantially as set forth in the applicable
form of the Certificate attached to the Supplement to Trust Agreement.
5. The Purchaser has no present intention of selling, negotiating or
otherwise disposing of the Certificates (except pursuant to Rule 144A);
provided, that it is understood that the disposition of the Purchaser's property
shall at all times be and remain within its control and without prejudice,
subject however, to its right at all times to sell or otherwise dispose of all
or any part of the Certificates in accordance with the Trust Agreement under a
registration statement under the 1933 Act, or under the exemption from such
registration available under the 1933 Act.
6. The Purchaser represents to the Depositor that it is either (a) not
a "Benefit Plan Investor" (as defined in 29 C.F.R. '2510.3-101) or any person
who is directly or indirectly purchasing such Certificates or an interest
therein on behalf of, as named fiduciary of, as trustee of, or with assets of,
such a Benefit Plan Investor or (b) the Trustee has been provided with evidence
that should establish to the satisfaction of the Trustee that either no
"prohibited transaction" under ERISA or the Code will occur in connection with
the Purchaser's acquisition and holding of the Certificates or that the
acquisition and holding of the Certificates by the Purchaser is subject to a
statutory or administrative exemption.
7. The Purchaser represents to the Depositor that it is and will be the
beneficial owner of the Certificates for federal income tax purposes and (a)
that it is not classified as a partnership, grantor trust or S Corporation for
federal income tax purposes or (b) the value of the Certificates represents no
more than 50 percent (50%) of the value of its assets.1 The Purchaser further
covenants that it will not cause the Certificates to be marketed on or through
an established securities market within the meaning of Section 7704(b)(1) of the
Code and acknowledges that transfers of a Certificate (including the granting of
any participation therein) can only be effected in accordance with the Trust
Agreement, that any attempted
- --------------------------
1 (Or describe other facts that, in conjunction with existing facts re:
current Holders, Maintains publicly traded partnership exemption.)
<PAGE>
transfers in violation of such provisions shall be void and any such purported
transferee not recognized as by the Trust as a Holder for any purpose.
8. [The Purchaser acknowledges that no transfer can be made during the
Funding Period without the consent of the Depositor and hereby confirms it's
obligation to make Fundings in accordance with Article Four of the Trust
Agreement, and of the Certificate Purchase Agreement, dated ,
-------- ----------
among the Depositor and the initial purchaser named therein, as if such
Purchaser were an original party to such agreement.)2
The representations and warranties contained herein shall be binding
upon the heirs, executors, administrators and other successors of the
undersigned. If there is more than one signatory hereto, the obligations,
representations, warranties and agreements of the undersigned are made jointly
and severally.
- ---------------------
2 Required for transfers during the related Funding Period.
<PAGE>
Executed at , this
----------------------- ------------------- -----
day of , 199
------------ -
- -------------------------------- ------------------------------
Purchaser's Name and Title (Print) Signature of Purchaser
- ---------------------------------
Address of Purchaser
- ---------------------------------
Purchaser's Taxpayer Identification or
Social Security number
(Acknowledged and consented to:
- --------------------------
Depositor]3
- --------------------------
3 Required for transfers during the related Funding Period.
<PAGE>
EXHIBIT C
---------
to Trust Agreement
------------------
FORM OF AFI CERTIFICATE
, 19
--------------- --
Pursuant to the Trust Agreement, dated as of August 1, 1998 (as amended
or modified from time to time, the "Trust Agreement"), among Allegiance Funding
Corp. I, Manufacturers and Traders Trust Company and Point West Capital
Corporation, attached hereto as Schedule I is a Loan Schedule, which includes
information regarding the Loan Assets that are hereby assigned, set over,
transferred, delivered and otherwise conveyed by the Depositor to the Trustee in
accordance with the Trust Agreement. Each capitalized term used herein and not
otherwise defined has the meaning assigned thereto in the Trust Agreement.
Further, Allegiance Funding Corp. I hereby certifies:
1. no Default (other than a Servicing Advisor Default), Depositor
Event of Default, Servicer Event of Default, Special Servicer
Event of Default, Servicing Advisor Event of Default or
Funding Termination Event exists or shall result from the
Funding;
2. the Loans to be funded are Eligible Loans and do not cause the
Loan Pool to violate the Pool Criteria;
3. after giving effect to such Funding, the applicable Maximum
Series Amount shall not be exceeded;
4. if any Funded Loan is subject to Existing Indebtedness, the
Depositor will use the proceeds of the Funding to repay the
Existing Indebtedness and will obtain a release and
extinguishment of rights from the obligee of such Existing
Indebtedness;
5. the Funding is at least equal to the Minimum Funding Amount
for Series or Class, as applicable;
6. both before and after giving effect to such Funding, the Pool
Performance Condition is met; and
7. it is not aware of any proposed or threatened downgrade in the
credit rating of any Rated Certificate.
C-1
<PAGE>
ALLEGIANCE FUNDING CORP. I
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
MANUFACTURERS AND TRADERS
TRUST COMPANY, as Trustee
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
C-2
<PAGE>
SCHEDULE I
LOAN SCHEDULE
C-3
<PAGE>
EXHIBIT D
---------
to Trust Agreement
------------------
FORM OF FUNDING REPORT
SERIES 19 -
-- -
Depositor: Allegiance Funding Corp. I
Funding Date:
----------------
Determination Date:
----------------
Class ___ Maximum Series Amount:
----------------
[Class ___ Maximum Series Amount: ]
----------------
Class ___ Minimum Funding Amount:
----------------
[Class ___ Minimum Funding Amount: ]
----------------
Class ___ Funding Amount:
----------------
[Class ___ Funding Amount: ]
----------------
Please see Schedule I attached hereto.
[With final Funding Report:
A. Please see AFI Certificate attached hereto as Schedule II.
B. Please see Company Certificate attached hereto as Schedule III.]
ALLEGIANCE FUNDING CORP.
Name:
------------------------
Title:
------------------------
Date:
------------------------
Acknowledged and Approved:
[CERTIFICATEHOLDER AGENT]
Name:
------------------------
Title:
------------------------
Date:
------------------------
D-1
<PAGE>
SCHEDULE I to EXHIBIT D to
TRUST AGREEMENT
Exceptions to and deviations from the Standard Forms:
Loan No. :
---
Loan No. :
---
Loan No. :
---
Exceptions to and deviations from the Program Guidelines:
Loan No. :
---
Loan No. :
---
Loan No. :
---
Updated Pool concentrations reflecting compliance with (or exceptions to) the
Pool Criteria:
D-2
SUPPLEMENT TO
-------------
TRUST AGREEMENT
---------------
FOR
---
REVOLVING SERIES 1998-1
------------------------
This Supplement to Trust Agreement for Revolving Series 1998-1 (as
amended or modified from time to time, this "Supplement"), dated as of August 1,
1998, is entered into among Allegiance Funding Corp. I, a Delaware corporation
(the "Depositor"), Manufacturers and Traders Trust Company, a New York banking
corporation (the "Trustee"), and Point West Capital Corporation, as servicer, a
Delaware corporation (the "Servicer").
This Supplement incorporates by reference all of the provisions of the
Trust Agreement (the "Trust Agreement"), dated as of August 1, 1998, among the
Depositor, the Servicer and the Trustee entered into in connection with the
transactions described below.
The Depositor has duly authorized the execution and delivery of this
Supplement to provide for the issuance of the Allegiance Capital Trust I
Revolving Certificates, Series 1998-1 (the "98-1 Revolving Certificates"), which
shall consist of the Class A-R Revolving Certificates, Series 1998-1 (the "98-1
Class A-R Certificates") in an aggregate principal amount not to exceed
$20,950,000, Class B-R Revolving Certificates, Series 1998-1 (the "98-1 Class
B-R Certificates") in an aggregate principal amount not to exceed $3,300,045,
Class C-R Revolving Certificates, Series 1998-1 (the "98-1 Class C-R
Certificates") in an aggregate principal amount not to exceed $2,100,000, and
Class D-R Revolving Certificates, Series 1998-1 (the "98-1 Class D-R
Certificates") in an aggregate principal amount not to exceed $3,650,000, each
issuable as provided in the Trust Agreement. This Series of Certificates is
hereby designated as a "Revolving Series" under the Trust Agreement. The Class
A-R Certificates, Class B-R Certificates and Class C-R Certificates have initial
credit ratings from the Rating Agency of A, BBB and BB, respectively, and the
Class D-R Certificates are not rated. The Loan Schedule listing the Loans
conveyed to the Trustee on the Delivery Date for this Series is attached hereto
as Schedule A. Pursuant to Section 2.02 of the Trust Agreement, this Supplement
sets forth the following additional terms applicable to this Series of
Certificates.
Section 1.01 Definitions.
- ---------- ------------
"Applicable Rate Spread": For each of the Class A-R, Class B-R and
Class C-R Certificates within this Series, the amount specified below (or as
otherwise adjusted pursuant to Section 5 hereof):
Class A-R = 2.00% per annum
Class B-R = 2.80% per annum Class
C-R = 5.50% per annum
"Certificate Interest Rate": (a) For the Class A-R Certificates in this
Series, a per annum rate equal to the LIBOR Rate plus the Applicable Rate Spread
for such Class, provided that such Certificate Interest Rate shall not exceed
the Maximum Interest Rate; (b) for the Class B-R and C-R Certificates in this
Series, respectively, the rate that provides a bond equivalent yield equal to
the sum of the Applicable Rate Spread for such Class plus the Treasury Rate for
such Class (as reset for each Funding Date for such Class), which computation
shall have been approved in writing by the Certificateholder Agent; and (c) for
the Class D-R Certificates in this Series, 0.0%.
"Class A-R Certificate": Any Certificate of this Series designated as a
Class A-R Certificate, substantially in the form attached hereto as Exhibit A,
and which is Outstanding as of any date.
1
<PAGE>
"Class B-R Certificate": Any Certificate of this Series designated as a
Class B-R Certificate, substantially in the form attached hereto as Exhibit B,
and which is Outstanding as of any date.
"Class C-R Certificate": Any Certificate of this Series designated as a
Class C-R Certificate, substantially in the form attached hereto as Exhibit C,
and which is Outstanding as of any date.
"Class D-R Certificate": Any Certificate of this Series designated as a
Class D-R Certificate, substantially in the form attached hereto as Exhibit D,
and which is Outstanding as of any date.
"Delivery Date": August 19, 1998.
"Draw Fee": With respect to any Funding, an amount equal to the product
of (i) 0.0010 and (ii) the Funding Amount for such Funding that is attributable
to any Rated Certificates of this Series.
"Excess Funding Amount": With respect to any Funding Date, if the
requested Funding Amount (a) would, under Section 2 hereof, cause the
Outstanding Principal Amount of a Class of Certificates in this Series (other
than the Class A-R Certificates) to equal the Maximum Series Amount for such
Class but (b) would not be in an amount sufficient to also permit a Funding in
the amount of the Minimum Funding Amount for the next Class of Certificates to
be funded pursuant to Section 2 hereof, the amount by which the requested
Funding Amount exceeds the Maximum Series Amount for the Class of Certificates
referenced in clause (a) of this definition.
"Funding Termination Event": The earlier to occur of (a) the cumulative
Funding of Loans having an aggregate Loan Balance of $60,000,045 and (b) the
occurrence of a Depositor Event of Default, Servicer Event of Default or Special
Servicer Event of Default that has not been cured or waived within thirty (30)
days after written notice thereof.
"Initial Funding Amount": For each of the Class A-R, Class B-R, Class
C-R and Class D-R Certificates within this Series, the amount specified below:
Class A-R = $0.0
Class B-R = $0.0
Class C-R = $0.0
Class D-R = $3,650,000
"Initial Payment Date": October 15, 1998.
"LIBOR Rate": With respect to each Accrual Period, a per annum interest
rate equal to the rate for London interbank offered quotations for one-month
Eurodollar deposits determined by the Servicer for such Accrual Period as
follows:
(a) On each Reset Date, the Servicer will determine the LIBOR Rate on
the basis of the rate for deposits in U.S. Dollars for a period of one
month that appears on Bloomberg MMR2 or, if unavailable, Telerate Page
3750, as of 11:00 a.m. (London time) on such Reset Date.
(b) If such rate does not appear on Telerate Page 3750 or Bloomberg
MMR2, the rate for such Reset Date will be determined on the basis of
the rates at which deposits in U.S. Dollars are offered by the
Reference Banks at approximately 11:00 a.m. (London time) on such date
to prime banks in the London interbank market for a period of one month
commencing on that Reset Date. The
2
<PAGE>
Servicer will request the principal London office of each of the
Reference Banks to provide such a quotation. If, on any Reset Date: (i)
at least two Reference Banks provide quotations when requested, the
LIBOR Rate for such Reset Date will be the arithmetic mean of the
quotations so received; or (ii) only one or none of the Reference Banks
provides such a quotation, the LIBOR Rate will be the arithmetic mean
of the offered rates quoted by major banks in New York City selected by
the Servicer at approximately 11:00 a.m. (New York City time) on such
Reset Date for loans to leading European banks in U.S. Dollars for a
period of one month commencing on that Reset Date.
(c) If, on any Reset Date, the LIBOR Rate cannot be calculated pursuant
to one of the above methods, the LIBOR Rate for such Reset Date shall
be the rate as most recently determinable under such methods.
"Maximum Interest Rate": A per annum rate for the Class A-R
Certificates that is derived from its pro rata share of the Series Percentage of
interest due on the Loans less the Series Percentage of Scheduled Expenses, with
such pro ration based upon the relative rate at which interest otherwise accrues
among Classes of this Series.
"Maximum Series Amount": $30,000,045, allocated to each Class of
Certificates in this Series as follows (or as otherwise adjusted pursuant to
Section 4 hereof):
Class A-R = $20,950,000
Class B-R = $ 3,300,045
Class C-R = $ 2,100,000
Class D-R = $ 3,650,000
"Minimum Funding Amount": The amount specified below for each Class of
Certificates in this Series:
Class A-R = $ 1,000,000
Class B-R = $ 3,300,045
Class C-R = $ 2,100,000
Class D-R = $ 1,000
provided that: (a) with respect to the final funding prior to issuance of any
- --------
Term Certificates, the Minimum Funding Amount for the Class A-R Certificates
shall be $100,000; and (b) the Minimum Funding Amount for each Class of
Certificates in this Series shall be as otherwise adjusted pursuant to Section 4
hereof.
"Non-Usage Fee": With respect to each Accrual Period through the
Funding Termination Date, an amount, payable to *** to the account specified in
Annex 2 to the Certificate Purchase Agreement, equal to the product of (a)
0.0015 per annum and (b) the positive difference between $26,350,045 and the
average Outstanding Principal Amount of all Certificates of Classes A-R, B-R and
C-R in this Series during such Accrual Period.
"Scheduled Funding Termination Date": August 31, 1999.
"Scheduled Maturity": With respect to any Class A-R, Class B-R or Class
C-R Certificate, September 15, 1999.
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
3
<PAGE>
"Series Termination Date": For each of the Class A-R, Class B-R, Class
C-R and Class D-R Certificates in this Series, the date specified below:
Class A-R = July 15, 2019
Class B-R = July 15, 2019
Class C-R = July 15, 2019
Class D-R = July 15, 2019
"Swap Agreement": Means the ISDA Master Agreement, dated as of August
1,1998, along with the related Schedule, dated as of August 1, 1998 and the
Confirmation dated as of August 1,1998, between Point West Capital Corporation
and the Trust.
"Transaction Documents Date": As of August 1,1998.
"Treasury Rate": With respect to either the Class B-R and Class C-R
Certificates, on the date three (3) Business Days prior to any Funding Date for
such Class, a per annum rate equal to the bond equivalent yield on actively
traded U.S. government securities with a one year maturity as set forth on page
"USD" of the Bloomberg Financial Markets Screen (or if not available, any other
nationally recognized trading screen reporting on-line intra-day trading in
United States government securities) at 11:00 a.m. (New York time) on such date
of determination, or in the event no such nationally recognized trading screen
is available, the arithmetic mean of the yields for the two columns under the
heading "Week Ending" published in the Federal Reserve H.15 Statistical Release
under the caption "Treasury Constant Maturities" for one (1) year maturities.
Section 2. Sequence for Fundings.
- ---------- ----------------------
Holders of Certificates in this Series shall provide Fundings under
this Series in sequence, by Class, in reverse order of alphabetical designation
such that no Class in this Series shall be obligated to make a Funding under
Section 4.05 of the Trust Agreement unless all subordinated Classes in this
Series have an Outstanding Principal Amount (taking into account any Fundings by
such subordinated Class on such Funding Date) equal to the Maximum Series Amount
for such Class; provided that, on any Funding Date, the Excess Funding Amount,
--------
if any, shall be funded by and allocated to the Class D-R Certificates, though
such Excess Funding Amount shall not change the Maximum Series Amount for such
Class; provided further that, on the next Funding Date, the Holders of
--------
Certificates in the applicable Class of this Series then obligated to make a
Funding shall first fund an amount equal to the Excess Funding Amount then held
by the Holders of the Class D-R Certificates.
On each Funding Date, all Draw Fees shall be paid as provided in the
applicable Certificate Purchase Agreement(s).
Section 3. Distributions.
- ---------- --------------
Subject to the adjustments provided for in Section 5.02(c) of the Trust
Agreement, on each Payment Date, the Trustee shall withdraw all funds then in
the Distribution Account for such Series and shall make the following
disbursements in the following order of priority (in accordance with the
provisions of and instructions on the monthly Servicer Report):
(a) to pay the interest accrued as of that Payment Date on all
outstanding Class A-R Certificates of this Series and any overdue interest;
4
<PAGE>
(b) to pay the interest accrued as of that Payment Date on all
outstanding Class B-R Certificates of this Series and any overdue interest;
(c) to pay the interest accrued as of that Payment Date on all
outstanding Class C-R Certificates of this Series and any overdue interest;
(d) to pay any Non-Usage Fees then due;
(e) to the extent of the Series Percentage of any Interest Collections
in excess of Scheduled Expenses and amounts distributed pursuant to clauses (a)
- - (d) above, to deposit into the Reserve Account an amount equal to the Series
Percentage of the amount necessary to bring the balance therein to an amount
equal to the Reserve Account Required Balance;
(f) to the extent of any remaining Series Collections, to pay to the
Class A-R Certificateholders of this Series an amount equal to the Principal
Distribution Amount allocable this Series, to be applied to the payment of the
Outstanding Principal Amount of such Certificates until such Outstanding
Principal Amount is repaid in full;
(g) to the extent of any remaining Series Collections, to pay to the
Class B-R Certificateholders of this Series an amount equal to the Principal
Distribution Amount allocable this Series (and not already distributed pursuant
to clause (f) above), to be applied to the payment of the Outstanding Principal
Amount of such Certificates until such Outstanding Principal Amount is repaid in
full;
(h) to the extent of any remaining Series Collections, to pay to the
Class C-R Certificateholders of this Series an amount equal to the Principal
Distribution Amount allocable this Series (and not already distributed pursuant
to clauses (f) and (g) above), to be applied to the payment of the Outstanding
Principal Amount of such Certificates until such Outstanding Principal Amount is
repaid in full;
(i) to pay to the Class A-R Certificateholders an amount equal to that
portion of the Certificate Interest Rate that would have otherwise accrued with
respect to such Class in respect of a prior Payment Date but for the application
of the Maximum Interest Rate, to the extent not already paid on a prior Payment
Date;
(j) to pay to the Trustee, the Servicer, the Special Servicer and the
Servicing Advisor any other amounts due to them as expressly provided in the
Trust Agreement or in the Servicing Agreement, including Recovery Expenses not
previously reimbursed and deferred Servicer Fees, Special Servicer Fees, and
Servicing Advisor Fees not otherwise paid pursuant to any Supplement or other
Transaction Document;
(k) upon the occurrence of a Depositor Event of Default, an amount
sufficient to reimburse the Trustee and the Certificateholders for any expenses
incurred by them in enforcing remedies available under Section 6.02 of the Trust
Agreement; and
(l) to pay any and all remaining funds to the Holders of the Class D-R
Certificates and, if no such Certificates are then Outstanding, to the
Depositor.
5
<PAGE>
Section 4. Right to Cause Prepayments; Adjustment of Maximum Series
- -------- --------------------------------------------------------
Amounts and Minimum Funding Amounts.
------------------------------------
Notwithstanding any other provision of the Trust Agreement or the
Certificates to the contrary, the Depositor shall have the option to cause the
Trust to prepay, without premium or penalty, principal on any Outstanding Class
of 98-1 Revolving Certificates on a dollar for dollar basis with the net
proceeds of the issuance of a Series of Term Certificates, with such net
proceeds being used to prepay all 98-1 Revolving Certificates by Class in
reverse order of issuance; provided that no such prepayment of 98-1 Revolving
--------
Certificates shall be permitted unless all Rated Certificates are prepaid in
full. Notwithstanding such prepayment, such 98-1 Revolving Certificates shall
remain Outstanding and additional Fundings may be made under such Certificates
in accordance with Article Three of the Trust Agreement. Following any such
prepayment in connection with the issuance of a Series of Term Certificates: (a)
the Maximum Series Amount for each Class of Certificates in this Series shall be
adjusted from time to time to the level required by the Rating Agency to
maintain the respective rating on each such Class of Certificates; provided that
--------
in no event shall the aggregate Maximum Series Amount of $30,000,045 for all
Classes be exceeded; and (b) following such adjustment, the Minimum Funding
Amount for the Class B-R and Class C-R Certificates shall be adjusted upward or
downward, as appropriate. Notwithstanding the foregoing, the Maximum Series
Amounts and Minimum Funding Amounts shall not be increased without the consent
of the Holders of Certificates in the relevant Class, and the Certificateholder
Agent shall use its best efforts to obtain any required approvals.
In addition, on any Funding Date: (i) the Class D-R Certificates may be
prepaid, without premium or penalty, in the amount of any Excess Funding Amount
being funded on such date by the Holders of Rated Certificates; and (ii) the
Maximum Series Amount for the Class D-R Certificates shall be increased if
required by the Rating Agency to maintain the rating of any Certificates of this
Series in connection with a specific Funding that involves Loans that are
permitted to deviate from the Program Guidelines or the Pool Criteria.
The parties agree that the aggregate amount of each Funding under a
Term Series shall be at least $15,000,000.
Section 5. Increase in Interest Rate.
- ---------- --------------------------
Notwithstanding the definition of Certificate Interest Rate set forth
above, if any Class A-R, Class B-R or Class C-R Certificate in this Series is
not repaid by its Scheduled Maturity, then, for any Accrual Period commencing on
or after such Scheduled Maturity, the Certificate Interest Rate on such
Certificate shall be increased by 1.00%.
Section 6. Limitation of Transfer and Exchange of Class D-R Certificates.
- --------- --------------------------------------------------------------
So long as any Rated Certificates are Outstanding, the Depositor shall
maintain legal and beneficial ownership of at least 51% of the Outstanding
Principal Amount of the Class D-R Certificates, unless otherwise agreed to by
the Controlling Holders.
Section 7. Reserve Account Deposit.
- ---------- ------------------------
On or prior to the initial Funding Date for this Series, the Depositor
shall deposit $ 250,000 into the Reserve Account for investment and disbursement
in accordance with Section 5.03 of the Trust Agreement.
6
<PAGE>
Section 8. Minimum Denominations
- --------- ----------------------
The Certificates of this Series shall be issuable in minimum
denominations greater than $100,000 which denominations shall be, in the case of
the Class A-R Certificates, integral multiples of $500, in the case of the Class
B-R and Class C-R Certificates, integral multiples of $105, and in the case of
the Class D-R Certificates, integral multiples of $100.
Section 9. General Provisions.
- --------- -------------------
As supplemented by this Supplement, the Trust Agreement is in all
respects ratified and confirmed and the Trust Agreement as so supplemented shall
be read, taken and construed as one and the same instrument. In the event that
any term or provision contained herein shall conflict with or be inconsistent
with any term or provision contained in the Trust Agreement, the terms and
conditions of the Supplement shall be controlling.
This Supplement shall be construed in accordance with and governed by
the internal laws of the State of New York applicable to agreements made and to
be performed therein, without regard to the conflict of laws provisions of any
State.
This Supplement may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
7
<PAGE>
IN WITNESS WHEREOF, the Depositor, the Trustee and the Servicer have
caused this Agreement to be executed by their respective duly authorized
officers as of the date and year first written above.
ALLEGIANCE FUNDING CORP. I, as Depositor
By: /s/ Alan B. Perper
--------------------------------
Name: Alan B. Perper
Title: President
MANUFACTURERS AND TRADERS TRUST
COMPANY, as Trustee
By: /s/ Russell T. Whitley
--------------------------------
Name: Russell T. Whitley
Title: Assistant Vice President
POINT WEST CAPITAL CORPORATION, as Servicer
By: /s/ Alan B. Perper
--------------------------------
Name: Alan B. Perper
Title: President
<PAGE>
Schedule A
-----------
LOAN SCHEDULE
--------------
<PAGE>
EXHIBIT A
---------
FORM OF CLASS A-R REVOLVING CERTIFICATE
---------------------------------------
THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS IN
RELIANCE ON EXEMPTIONS PROVIDED BY THE SECURITIES ACT AND SUCH STATE SECURITIES
LAWS. THIS CERTIFICATE MAY NOT BE SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS SUCH RESALE, TRANSFER, PLEDGE OR HYPOTHECATION (A) IS MADE
IN ACCORDANCE WITH SECTION 2.06 OF THE TRUST AGREEMENT REFERRED TO HEREIN AND
(B) IS MADE (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, (ii) IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR (iii) TO A PERSON
WHO THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN
THE MEANING OF RULE 144A UNDER THE SECURITIES ACT WHO IS AWARE THAT THE RESALE
OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A. NEITHER ALLEGIANCE
FUNDING CORP. I (THE "DEPOSITOR") NOR MANUFACTURERS AND TRADERS TRUST COMPANY,
AS TRUSTEE (THE "TRUSTEE"), IS OBLIGATED TO REGISTER THE CERTIFICATES UNDER THE
SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAWS. IN THE EVENT THAT A
TRANSFER OF A CLASS A-R CERTIFICATE IS TO BE MADE, THE PROSPECTIVE TRANSFEREE
SHALL DELIVER AN INVESTMENT AND ASSUMPTION LETTER IN THE FORM REQUIRED UNDER THE
TRUST AGREEMENT AND, IF THE TRUSTEE SO REQUESTS, AN OPINION OF COUNSEL TO THE
EFFECT THAT SUCH TRANSFER MAY BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES
ACT OR ANY APPLICABLE STATE SECURITIES LAWS.
DUE TO THE PROVISIONS FOR FUNDINGS AND FOR THE PAYMENT OF PRINCIPAL CONTAINED
HEREIN, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS CERTIFICATE ON ANY PARTICULAR
DATE MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. ANYONE PURCHASING
THIS CERTIFICATE MAY ASCERTAIN THE OUTSTANDING PRINCIPAL AMOUNT HEREOF BY
INQUIRY OF THE TRUSTEE.
No. A-R $
------- ------------
ALLEGIANCE CAPITAL TRUST I
CLASS A-R REVOLVING CERTIFICATE, SERIES 1998-1
Evidencing an undivided fractional interest in the Trust Estate, the property of
which includes, among other things, certain Loan Assets and monies on deposit in
the Collection Account.
(This Certificate does not represent an obligation of, or an
interest in, the Depositor, Allegiance Capital, LLC, the Trustee or
any of their respective affiliates or successors.)
Registered Owner:
-------------------------
A-1
<PAGE>
DELIVERY DATE:
----- --,----
SERIES TERMINATION DATE: July 15, 2019
THIS CERTIFIES THAT the registered owner specified above is the owner
of a(n) DOLLAR AND NO CENTS ($ ) nonassessable, fully paid,
----------- ----------
undivided fractional interest in the Allegiance Capital Trust I (the "Trust")
formed by Allegiance Funding Corp. I (the "Depositor"). The Trust was created
pursuant to the Trust Agreement, dated as of August 1, 1998, among the
Depositor, Manufacturers and Traders Trust Company, as Trustee (the "Trustee"),
and Point West Capital Corporation, as Servicer, and the Supplement to Trust
Agreement for Revolving Series 1998-1, dated as of August 1, 1998, among the
Depositor, the Trustee and Point West Capital Corporation, as Servicer
(collectively, the "Trust Agreement"). Reference is made to the Trust Agreement
for a statement of the respective rights thereunder of the Depositor, the
Trustee and the Holders of the Certificates, and the terms upon which the
Certificates are, and are to be, authenticated and delivered. To the extent not
otherwise defined herein, each capitalized term used herein has the meaning
assigned to it in the Trust Agreement.
This Certificate is one of a duly authorized issue of Certificates
designated as the Class A-R Revolving Certificates, Series 1998-1 having a
scheduled maturity of August 16, 1999 and a Series Termination Date of July 15,
2019 (herein called the "Class A-R Certificates") issued and to be issued under
the Trust Agreement. This Class A-R Certificate is issued under and is subject
to the terms, provisions and conditions of the Trust Agreement, to which Trust
Agreement the holder of this Class A-R Certificate by virtue of such Holder's
acceptance hereof assents and by which such Holder is bound.
The Holder of this Certificate is obligated to provide funds to the
Depositor on each Funding Date during the Funding Period subject to the
applicable terms and conditions set forth in the Transaction Documents. The
Fundings made by the Holder of this Certificate to the Depositor shall be
evidenced by this Certificate and the Certificateholder shall endorse on the
schedule annexed hereto and made a part hereof, or elsewhere in its internal
records, the date and amount of each Funding made by it to the Depositor and the
amount of each payment of principal made by the Depositor with respect thereto.
The Certificateholder is authorized and directed by the Depositor to endorse the
schedule attached hereto or maintain such records; provided that each
--------
Certificateholder's endorsements or records shall be effective only if they are
in agreement with the register maintained by the Trustee, absent manifest error
in such register. The failure of the Certificateholder to make, or an error in
making, a notation with respect to any Funding shall not limit or otherwise
affect the obligations of the Depositor hereunder or under the Trust Agreement.
The aggregate amount of all Fundings made by the Holder of this Certificate (as
reduced by any amounts distributed as principal during the Funding Period),
pursuant to this Certificate, shall not exceed ($ ).
--------
This Class A-R Certificate bears interest during each Accrual Period on
the Outstanding Principal Amount hereof (as of the first day of the Accrual
Period) at the Certificate Interest Rate, until and including the last day
preceding the Payment Date on which the Outstanding Principal Amount hereof has
been reduced to zero. Interest on the Outstanding Principal Amount hereof shall
be calculated on the basis of a 360-day year consisting of 12 months of 30 days
each. Interest shall be due and payable in arrears on each Payment Date. In
addition, with respect to any Funding by the Class A-R Certificates of this
Series occurring in any Accrual Period following the preceding Payment Date, the
related Funding Amounts shall accrue interest from the related Funding Date
through the end of the Accrual Period in which such Funding occurs in the amount
of the applicable First Period Interest, which interest shall be paid on the
next Payment Date. The First Period Interest on the Funding Amount shall be
determined on the Funding Date at the rate established on the applicable Reset
Date. Notwithstanding the foregoing, if the Outstanding Principal Amount of this
Certificate is not paid in full by its Scheduled Maturity, then, for any Accrual
Period
A-2
<PAGE>
commencing on or after such Scheduled Maturity, the Floating Rate Spread on this
Certificate shall be increased by 1.00%. In making any interest payment, if the
interest calculation with respect to a Certificate shall result in a portion of
such payment being less than $0.01, then such payment shall be decreased to the
nearest whole cent, and no subsequent adjustment shall be made in respect
thereof.
The principal of this Class A-R Certificate shall be payable in
installments ending no later than the Series Termination Date unless this Class
A-R Certificate becomes due and payable at an earlier date by call for
redemption or otherwise. All reductions in the principal amount of a Class A-R
Certificate effected by payments of installments of principal made on any
Payment Date shall be binding upon all future Holders of this Class A-R
Certificate and of any Class A-R Certificate issued upon the registration of
transfer hereof or in exchange herefor or in lieu hereof, whether or not such
payment is noted on this Class A-R Certificate. Each installment of principal
payable on this Class A-R Certificate shall be in an amount equal to this
Certificateholder's pro rata share of the Class A-R Principal Distribution
Amount available to be paid in accordance with the priorities of Section 3 of
the Supplement for this Series and Section 5.02 of the Trust Agreement. Subject
to the terms of the Trust Agreement, the principal payable on this Class A-R
Certificate shall be paid on each Payment Date during the term of the Trust
Agreement, beginning on the Initial Payment Date. All payments of principal with
respect to all of the Class A-R Certificates of a Series shall be made on a pro
rata basis based upon the ratio that the Outstanding Principal Amount of a Class
A-R Certificate bears to the Outstanding Principal Amount of all Class A-R
Certificates of such Series; provided that, if as a result of such proration a
portion of such principal would be less than $0.01, then such payment shall be
reduced to the nearest whole cent.
In addition, the Certificate Prepayment Fee Amount, if any, shall be
distributed on each Payment Date to the Holders of the Class A-R Certificates to
the extent such Class is receiving a distribution of Prepaid Principal Amount on
such date. All payments of Certificate Prepayment Fee Amounts with respect to
the Class A-R Certificates shall be made prorata based upon the ratio of the
Outstanding Principal Amount of this Certificate to the Outstanding Principal
Amount of Class A-R Certificates of this Series, provided that if as a result of
such proration, a portion of such payment would be less than $0.01, then such
payment shall be reduce to the nearest whole cent.
The interest and principal so payable on any Payment Date will, as
provided in the Trust Agreement, be paid to the Person in whose name this
Certificate is registered on the Record Date for such Payment Date, which shall
be the close of business on the last day of the month prior to such Payment Date
(whether or not a Business Day). The principal and interest on this Certificate
are payable by wire transfer in immediately available funds to the account
specified in writing to the Trustee by the Person whose name appears as the
Registered Holder of this Certificate on the Certificate Register received at
least five (5) Business Days prior to the Record Date for the Payment Date (or
if no such account is specified or if such wire fails, by check mailed by
first-class mail to the Person whose name appears as the Registered Holder of
this Certificate on the Certificate Register at the address of such Person as it
appears on the Certificate Register), in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts. Funds represented by checks returned undelivered will
be held for payment to the Person entitled thereto, subject to the terms of the
Trust Agreement, at the office or agency in the United States of America
designated as such by the Depositor for such purpose pursuant to the Trust
Agreement.
The Depositor has structured the Trust Agreement and the Certificates
with the intention that the Trust be treated as a partnership, with the assets
of the partnership including all of the assets of the Trust Estate and the
partners of the partnership being all of the Certificateholders and the
Depositor. The Depositor, the Trustee, the Servicer and each Certificateholder,
by acceptance of its Certificate (and any
A-3
<PAGE>
Person that is a beneficial owner of any interest in a Certificate, by virtue of
such Person's acquisition of a beneficial interest therein), agree to report the
transactions contemplated thereby in accordance with such stated intentions
unless and until determined to the contrary by an applicable taxing authority.
The property of the Trust Estate includes certain Loan Assets and
certain other assets described in the Trust Agreement. The Class A-R
Certificates of the 1998-1 Series and all other Series of Class A-R Certificates
issued under the Trust Agreement are payable out of the Trust Estate pari passu
among such Class A-R Certificateholders equally and ratably without prejudice,
priority or distinction between any Class A-R Certificate by reason of time of
issue or otherwise. The Class A-R Certificates are payable only out of the Trust
Estate and do not represent recourse obligations of the Depositor, Allegiance
Capital, LLC or any of their respective affiliates or successors. The Trust
Agreement pursuant to which this Class A-R Certificate is issued also provides
for the issuance of other Classes and Series of Certificates from time to time.
Payments of interest on the Class A-R Certificates are senior to such payments
on other Classes having a lower credit rating from the Rating Agency and are
subordinate to payments of interest on any Classes having a higher credit rating
form the Rating Agency. Payments of principal in the Class A-R Certificates are
senior to payments of principal on other classes having a lower credit rating
from the Rating Agency and are subordinate to such payments on any Class having
a higher credit rating from the Rating Agency.
Unless the Depositor exercises its Optional Termination rights, the
Certificates are payable only at the time and in the manner provided in the
Trust Agreement and are not redeemable or prepayable at the option of the
Depositor before such time, except that the Depositor may cause the Trust to
prepay on a dollar for dollar basis the principal, without penalty or premium,
of any Outstanding Series of Revolving Certificates with the proceeds of the
issuance of a Series of Term Certificates.
As provided in the Trust Agreement and subject to certain limitations
therein set forth, the transfer of this Certificate may be registered on the
Certificate Register of the Depositor upon surrender of this Certificate for
registration of transfer at the office or agency of the Depositor in the United
States of America maintained for such purpose, duly endorsed by, or accompanied
by a written instrument of transfer in form reasonably satisfactory to the
Depositor and the Trustee and duly executed by the holder hereof or his attorney
duly authorized in writing, and thereupon one or more new Class A-R Certificates
of the same Scheduled Maturity of authorized denominations and for the same
initial aggregate principal amount will be issued to the designated transferees.
Prior to due presentment for registration of transfer of this
Certificate, the Depositor, the Trustee and any agent of the Depositor or the
Trustee shall treat the Person in whose name this Certificate is registered as
the owner hereof for the purpose of receiving payment as herein provided and for
all other purposes whether or not this Certificate be overdue, and neither the
Depositor, the Trustee, nor any such agent shall be affected by notice to the
contrary.
The Holder of this Certificate, by acceptance of this Certificate,
agrees that for one year and one day after it has been paid hereunder, it or any
Affiliate thereof will not file any involuntary petition or otherwise institute
any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceeding or other proceeding under any federal or state bankruptcy or similar
law against the Depositor.
The Trust Agreement permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Depositor and the rights of the Holders of the
A-4
<PAGE>
Certificates under the Trust Agreement at any time by the Depositor, the Trustee
and the Servicer without the consent of the Holders of the Certificates.
The Certificates are issuable only in registered form without coupons
in such authorized denominations as provided in the Trust Agreement and subject
to certain limitations therein set forth.
This Class A-R Certificate and the Trust Agreement shall be governed by
and construed in accordance with the internal laws of the State of New York,
without regard to conflicts of laws principles.
No reference herein to the Trust Agreement and no provision of this
Class A-R Certificate or of the Trust Agreement shall alter or impair the
obligation of the Trust Estate to pay the principal of and interest on this
Class A-R Certificate, but solely from the assets of the Trust Estate and the
Class A-R Certificate Insurance Policy at the times, place and rate, and in the
coin or currency, herein prescribed.
A-5
<PAGE>
IN WITNESS WHEREOF, Allegiance Funding Corp. I has caused this
instrument to be signed, manually, by its President or a Vice President.
ALLEGIANCE FUNDING CORP. I
By:
-----------------------
Title:
----------------------
<PAGE>
CERTIFICATE OF AUTHENTICATION
This is one of the Class A-R Certificates described in the
within-mentioned Trust Agreement.
Dated:
-------------------------------------
MANUFACTURERS AND TRADERS TRUST
COMPANY, as Trustee
By:
----------------------------------------
Authorized Signatory
<PAGE>
Schedule to Class A-R Revolving Certificates, Series 1998-1
Disbursement Principal
Date of Amount of Payment &
Funding Funding Date Paid
- -------------------------------------------------------------------------------
<PAGE>
EXHIBIT B
---------
FORM OF CLASS B-R REVOLVING CERTIFICATE
---------------------------------------
THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS IN
RELIANCE ON EXEMPTIONS PROVIDED BY THE SECURITIES ACT AND SUCH STATE SECURITIES
LAWS. THIS CERTIFICATE MAY NOT BE SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS SUCH RESALE, TRANSFER, PLEDGE OR HYPOTHECATION (A) IS MADE
IN ACCORDANCE WITH SECTION 2.06 OF THE TRUST AGREEMENT REFERRED TO HEREIN AND
(B) IS MADE (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, (ii) IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR (iii) TO A PERSON
WHO THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN
THE MEANING OF RULE 144A UNDER THE SECURITIES ACT WHO IS AWARE THAT THE RESALE
OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A. NEITHER ALLEGIANCE
FUNDING CORP. I (THE "DEPOSITOR") NOR MANUFACTURERS AND TRADERS TRUST COMPANY,
AS TRUSTEE (THE "TRUSTEE"), IS OBLIGATED TO REGISTER THE CERTIFICATES UNDER THE
SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAWS. IN THE EVENT THAT A
TRANSFER OF A CLASS B-R CERTIFICATE IS TO BE MADE, THE PROSPECTIVE TRANSFEREE
SHALL DELIVER AN INVESTMENT AND ASSUMPTION LETTER IN THE FORM REQUIRED UNDER THE
TRUST AGREEMENT AND, IF THE TRUSTEE SO REQUESTS (IN A TRANSFER OTHER THAN UNDER
RULE 144A), AN OPINION OF COUNSEL TO THE EFFECT THAT SUCH TRANSFER MAY BE MADE
WITHOUT REGISTRATION UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES
LAWS.
DUE TO THE PROVISIONS FOR FUNDINGS AND FOR THE PAYMENT OF PRINCIPAL CONTAINED
HEREIN, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS CERTIFICATE ON ANY PARTICULAR
DATE MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. ANYONE PURCHASING
THIS CERTIFICATE MAY ASCERTAIN THE OUTSTANDING PRINCIPAL AMOUNT HEREOF BY
INQUIRY OF THE TRUSTEE.
No. B-R $
--------------- -----------
PPN: 01747# AB 8
ALLEGIANCE CAPITAL TRUST I
CLASS B-R REVOLVING CERTIFICATE, SERIES 1998-1
Evidencing an undivided fractional interest in the Trust Estate, the property of
which includes, among other things, certain Loan Assets and monies on deposit in
the Collection Account.
(This Certificate does not represent an obligation of, or an
interest in, the Depositor, Allegiance Capital, LLC, the Trustee or
any of their respective affiliates or successors.)
Registered Owner:
---------------------
B-1
<PAGE>
DELIVERY DATE: SERIES TERMINATION DATE: July 15, 2019
--- --,---
THIS CERTIFIES THAT the registered owner specified above is the owner
of a(n) DOLLAR AND NO CENTS ($ ) nonassessable, fully paid,
---------- ----------
undivided fractional interest in the Allegiance Capital Trust I (the "Trust")
formed by Allegiance Funding Corp. I (the "Depositor"). The Trust was created
pursuant to the Trust Agreement, dated as of August 1, 1998, among the
Depositor, Manufacturers and Traders Trust Company, as Trustee (the "Trustee"),
and Point West Capital Corporation, as Servicer, and the Supplement to Trust
Agreement for Revolving Series 1998-1, dated as of August 1, 1998, among the
Depositor, the Trustee and Point West Capital Corporation, as Servicer
(collectively, the "Trust Agreement"). Reference is made to the Trust Agreement
for a statement of the respective rights thereunder of the Depositor, the
Trustee and the Holders of the Certificates, and the terms upon which the
Certificates are, and are to be, authenticated and delivered. To the extent not
otherwise defined herein, each capitalized term used herein has the meaning
assigned to it in the Trust Agreement.
This Certificate is one of a duly authorized issue of Certificates
designated as the Class B-R Revolving Certificates, Series 1998-1 having a
Scheduled Maturity of September 15, 1999 and a Series Termination Date of July
15, 2019 (herein called the "Class B-R Certificates") issued and to be issued
under the Trust Agreement. This Class B-R Certificate is issued under and is
subject to the terms, provisions and conditions of the Trust Agreement, to which
Trust Agreement the holder of this Class B-R Certificate by virtue of such
Holder's acceptance hereof assents and by which such Holder is bound.
The Holder of this Certificate is obligated to provide funds to the
Depositor on each Funding Date during the Funding Period subject to the
applicable terms and conditions set forth in the Transaction Documents. The
Fundings made by the Holder of this Certificate to the Depositor shall be
evidenced by this Certificate and the Certificateholder shall endorse on the
schedule annexed hereto and made a part hereof, or elsewhere in its internal
records, the date and amount of each Funding made by it to the Depositor and the
amount of each payment of principal made by the Depositor with respect thereto.
The Certificateholder is authorized and directed by the Depositor to endorse the
schedule attached hereto or maintain such records; provided that each
--------
Certificateholder's endorsements or records shall be effective only if they are
in agreement with the register maintained by the Trustee, absent manifest error
in such register. The failure of the Certificateholder to make, or an error in
making, a notation with respect to any Funding shall not limit or otherwise
affect the obligations of the Depositor hereunder or under the Trust Agreement.
The aggregate amount of all Fundings made by the Holder of this Certificate (as
reduced by any amounts distributed as principal during the Funding Period),
pursuant to this Certificate, shall not exceed ($ ).
---------
This Class B-R Certificate bears interest during each Accrual Period on
the Outstanding Principal Amount hereof (as of the first day of the Accrual
Period) at the Certificate Interest Rate, until and including the last day
preceding the Payment Date on which the Outstanding Principal Amount hereof has
been reduced to zero. Interest on the Outstanding Principal Amount hereof shall
be calculated on the basis of a 360-day year consisting of 12 months of 30 days
each. Interest shall be due and payable in arrears on each Payment Date. In
addition, with respect to any Funding by the Class B-R Certificates of this
Series occurring in any Accrual Period following the preceding Payment Date, the
related Funding Amounts shall accrue interest from the related Funding Date
through the end of the Accrual Period in which such Funding occurs in the amount
of the applicable First Period Interest, which interest shall be paid on the
next Payment Date. The First Period Interest on the Funding Amount shall be
determined on the Funding Date at the rate established on the applicable Reset
Date. Notwithstanding the foregoing, if the Outstanding Principal Amount of this
Certificate is not paid in full by its Scheduled Maturity, then, for any Accrual
Period commencing on or after such Scheduled Maturity, the Applicable Rate
Spread on this Certificate shall be increased by 1.00%. In making any interest
payment, if the interest calculation with respect to a Certificate
B-2
<PAGE>
shall result in a portion of such payment being less than $0.01, then such
payment shall be decreased to the nearest whole cent, and no subsequent
adjustment shall be made in respect thereof.
The principal of this Class B-R Certificate shall be payable in
installments ending no later than the Series Termination Date unless this Class
B-R Certificate becomes due and payable at an earlier date by call for
redemption or otherwise. All reductions in the principal amount of a Class B-R
Certificate effected by payments of installments of principal made on any
Payment Date shall be binding upon all future Holders of this Class B-R
Certificate and of any Class B-R Certificate issued upon the registration of
transfer hereof or in exchange herefor or in lieu hereof, whether or not such
payment is noted on this Class B-R Certificate. Each installment of principal
payable on this Class B-R Certificate shall be in an amount equal to this
Certificateholder's pro rata share of the Class B-R Principal Distribution
Amount available to be paid in accordance with the priorities of Section 3 of
the Supplement for this Series and Section 5.02 of the Trust Agreement. Subject
to the terms of the Trust Agreement, the principal payable on this Class B-R
Certificate shall be paid on each Payment Date during the term of the Trust
Agreement, beginning on the Initial Payment Date. All payments of principal with
respect to all of the Class B-R Certificates of a Series shall be made on a pro
rata basis based upon the ratio that the Outstanding Principal Amount of a Class
B-R Certificate bears to the Outstanding Principal Amount of all Class A-R
Certificates of such Series; provided that, if as a result of such proration a
--------
portion of such principal would be less than $0.01, then such payment shall be
reduced to the nearest whole cent.
In addition, the Certificate Prepayment Fee Amount, if any, shall be
distributed on each Payment Date to the Holders of the Class B-R Certificates to
the extent such Class is receiving a distribution of Prepaid Principal Amount on
such date. All payments of Certificate Prepayment Fee Amounts with respect to
the Class B-R Certificates shall be made prorata based upon the ratio of the
Outstanding Principal Amount of this Certificate to the Outstanding Principal
Amount of all Class B-R Certificates of this Series, provided that if as a
result of such proration, a portion of such payment would be less than $0.01,
then such payment shall be reduce to the nearest whole cent.
The interest and principal so payable on any Payment Date will, as
provided in the Trust Agreement, be paid to the Person in whose name this
Certificate is registered on the Record Date for such Payment Date, which shall
be the close of business on the last day of the month prior to such Payment Date
(whether or not a Business Day). The principal and interest on this Certificate
are payable by wire transfer in immediately available funds to the account
specified in writing to the Trustee by the Person whose name appears as the
Registered Holder of this Certificate on the Certificate Register received at
least five (5) Business Days prior to the Record Date for the Payment Date (or
if no such account is specified or if such wire fails, by check mailed by
first-class mail to the Person whose name appears as the Registered Holder of
this Certificate on the Certificate Register at the address of such Person as it
appears on the Certificate Register), in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts. Funds represented by checks returned undelivered will
be held for payment to the Person entitled thereto, subject to the terms of the
Trust Agreement, at the office or agency in the United States of America
designated as such by the Depositor for such purpose pursuant to the Trust
Agreement.
The Depositor has structured the Trust Agreement and the Certificates
with the intention that the Trust be treated as a partnership, with the assets
of the partnership including all of the assets of the Trust Estate and the
partners of the partnership being all of the Certificateholders and the
Depositor. The Depositor, the Trustee, the Servicer and each Certificateholder,
by acceptance of its Certificate (and any Person that is a beneficial owner of
any interest in a Certificate, by virtue of such Person's acquisition of a
beneficial interest therein), agree to report the transactions contemplated
thereby in accordance with such stated intentions unless and until determined to
the contrary by an applicable taxing authority.
B-3
<PAGE>
The property of the Trust Estate includes certain Loan Assets and
certain other assets described in the Trust Agreement. The Class B-R
Certificates of the 1998-1 Series and all other Series of Class B-R Certificates
issued under the Trust Agreement are payable out of the Trust Estate pari passu
among such Class B-R Certificateholders equally and ratably without prejudice,
priority or distinction between any Class B-R Certificate by reason of time of
issue or otherwise. The Class B-R Certificates are payable only out of the Trust
Estate and do not represent recourse obligations of the Depositor, Allegiance
Capital, LLC or any of their respective affiliates or successors. The Trust
Agreement pursuant to which this Class B-R Certificate is issued also provides
for the issuance of other Classes and Series of Certificates from time to time.
Payments of interest on the Class B-R Certificates are senior to such payments
on other Classes having a lower credit rating from the Rating Agency and are
subordinate to payments of interest on any Classes having a higher credit rating
form the Rating Agency. Payments of principal in the Class B-R Certificates are
senior to payments of principal on other classes having a lower credit rating
from the Rating Agency and are subordinate to such payments on any Class having
a higher credit rating from the Rating Agency.
Unless the Depositor exercises its Optional Termination rights, the
Certificates are payable only at the time and in the manner provided in the
Trust Agreement and are not redeemable or prepayable at the option of the
Depositor before such time, except that the Depositor may cause the Trust to
prepay on a dollar for dollar basis the principal, without penalty or premium,
of any Outstanding Series of Revolving Certificates with the proceeds of the
issuance of a Series of Term Certificates.
As provided in the Trust Agreement and subject to certain limitations
therein set forth, the transfer of this Certificate may be registered on the
Certificate Register of the Depositor upon surrender of this Certificate for
registration of transfer at the office or agency of the Depositor in the United
States of America maintained for such purpose, duly endorsed by, or accompanied
by a written instrument of transfer in form reasonably satisfactory to the
Depositor and the Trustee and duly executed by the holder hereof or his attorney
duly authorized in writing, and thereupon one or more new Class B-R Certificates
having the same Scheduled Maturity, Series Termination Date, authorized
denomination(s) and for the same initial aggregate principal amount will be
issued to the designated transferees.
Prior to due presentment for registration of transfer of this
Certificate, the Depositor, the Trustee and any agent of the Depositor or the
Trustee shall treat the Person in whose name this Certificate is registered as
the owner hereof for the purpose of receiving payment as herein provided and for
all other purposes whether or not this Certificate be overdue, and neither the
Depositor, the Trustee, nor any such agent shall be affected by notice to the
contrary.
The Holder of this Certificate, by acceptance of this Certificate,
agrees that for one year and one day after it has been paid hereunder, it or any
Affiliate thereof will not (without the consent of Holders holding at least 51%
of all Rated Certificates, by Outstanding Principal Amount) file any involuntary
petition or otherwise institute any bankruptcy, reorganization, arrangement,
insolvency or liquidation proceeding or other proceeding under any federal or
state bankruptcy or similar law against the Depositor.
The Trust Agreement permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Depositor and the rights of the Holders of the Certificates
under the Trust Agreement at any time by the Depositor, the Trustee and the
Servicer without the consent of the Holders of the Certificates.
The Certificates are issuable only in registered form without coupons
in such authorized denominations as provided in the Trust Agreement and subject
to certain limitations therein set forth.
B-4
<PAGE>
This Class B-R Certificate and the Trust Agreement shall be governed by
and construed in accordance with the internal laws of the State of New York,
without regard to conflicts of laws principles.
No reference herein to the Trust Agreement and no provision of this
Class B-R Certificate or of the Trust Agreement shall alter or impair the
obligation of the Trust Estate to pay the principal of and interest on this
Class B-R Certificate, but solely from the assets of the Trust Estate and the
Class B-R Certificate Insurance Policy at the times, place and rate, and in the
coin or currency, herein prescribed.
B-5
<PAGE>
IN WITNESS WHEREOF, Allegiance Funding Corp. I has caused this
instrument to be signed, manually, by its President or a Vice President.
ALLEGIANCE FUNDING CORP. I
By:
------------------------
Title:
------------------------
<PAGE>
CERTIFICATE OF AUTHENTICATION
This is one of the Class B-R Certificates described in the
within-mentioned Trust Agreement.
Dated:
--------------------------------
MANUFACTURERS AND TRADERS TRUST
COMPANY, as Trustee
By:
---------------------------------
Authorized Signatory
<PAGE>
Schedule to Class B-R Revolving Certificates, Series 1998-1
Disbursement Principal Payment
Date of Funding Amount of Funding and Date Paid
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT C
----------
FORM OF CLASS C-R REVOLVING CERTIFICATE
---------------------------------------
THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS IN
RELIANCE ON EXEMPTIONS PROVIDED BY THE SECURITIES ACT AND SUCH STATE SECURITIES
LAWS. THIS CERTIFICATE MAY NOT BE SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS SUCH RESALE, TRANSFER, PLEDGE OR HYPOTHECATION (A) IS MADE
IN ACCORDANCE WITH SECTION 2.06 OF THE TRUST AGREEMENT REFERRED TO HEREIN AND
(B) IS MADE (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, (ii) IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR (iii) TO A PERSON
WHO THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN
THE MEANING OF RULE 144A UNDER THE SECURITIES ACT WHO IS AWARE THAT THE RESALE
OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A. NEITHER ALLEGIANCE
FUNDING CORP. I (THE "DEPOSITOR") NOR MANUFACTURERS AND TRADERS TRUST COMPANY,
AS TRUSTEE (THE "TRUSTEE"), IS OBLIGATED TO REGISTER THE CERTIFICATES UNDER THE
SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAWS. IN THE EVENT THAT A
TRANSFER OF A CLASS C-R CERTIFICATE IS TO BE MADE, THE PROSPECTIVE TRANSFEREE
SHALL DELIVER AN INVESTMENT AND ASSUMPTION LETTER IN THE FORM REQUIRED UNDER THE
TRUST AGREEMENT AND, IF THE TRUSTEE SO REQUESTS (IN A TRANSFER OTHER THAN UNDER
RULE 144A), AN OPINION OF COUNSEL TO THE EFFECT THAT SUCH TRANSFER MAY BE MADE
WITHOUT REGISTRATION UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES
LAWS.
DUE TO THE PROVISIONS FOR FUNDINGS AND FOR THE PAYMENT OF PRINCIPAL CONTAINED
HEREIN, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS CERTIFICATE ON ANY PARTICULAR
DATE MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. ANYONE PURCHASING
THIS CERTIFICATE MAY ASCERTAIN THE OUTSTANDING PRINCIPAL AMOUNT HEREOF BY
INQUIRY OF THE TRUSTEE.
No. C-R $
---------------- ---------
PPN: 01747# AC 6
ALLEGIANCE CAPITAL TRUST I
CLASS C-R REVOLVING CERTIFICATE, SERIES 1998-1
Evidencing an undivided fractional interest in the Trust Estate, the property of
which includes, among other things, certain Loan Assets and monies on deposit in
the Collection Account.
(This Certificate does not represent an obligation of, or an
interest in, the Depositor, Allegiance Capital, LLC, the Trustee or
any of their respective affiliates or successors.)
Registered Owner:
------------------------
C-1
<PAGE>
DELIVERY DATE: SERIES TERMINATION DATE: July 15, 2019
---- --,----
THIS CERTIFIES THAT the registered owner specified above is the owner
of a(n) DOLLAR AND NO CENTS ($ ) nonassessable, fully paid,
---------- ----------
undivided fractional interest in the Allegiance Capital Trust I (the "Trust")
formed by Allegiance Funding Corp. I (the "Depositor"). The Trust was created
pursuant to the Trust Agreement, dated as of August 1, 1998, among the
Depositor, Manufacturers and Traders Trust Company, as Trustee (the "Trustee"),
and Point West Capital Corporation, as Servicer, and the Supplement to Trust
Agreement for Revolving Series 1998-1, dated as of August 1, 1998, among the
Depositor, the Trustee and Point West Capital Corporation, as Servicer
(collectively, the "Trust Agreement"). Reference is made to the Trust Agreement
for a statement of the respective rights thereunder of the Depositor, the
Trustee and the Holders of the Certificates, and the terms upon which the
Certificates are, and are to be, authenticated and delivered. To the extent not
otherwise defined herein, each capitalized term used herein has the meaning
assigned to it in the Trust Agreement.
This Certificate is one of a duly authorized issue of Certificates
designated as the Class C-R Revolving Certificates, Series 1998-1 having a
Scheduled Maturity of September 15, 1999 and a Series Termination Date of July
15, 2019 (herein called the "Class C-R Certificates") issued and to be issued
under the Trust Agreement. This Class C-R Certificate is issued under and is
subject to the terms, provisions and conditions of the Trust Agreement, to which
Trust Agreement the holder of this Class C-R Certificate by virtue of such
Holder's acceptance hereof assents and by which such Holder is bound.
The Holder of this Certificate is obligated to provide funds to the
Depositor on each Funding Date during the Funding Period subject to the
applicable terms and conditions set forth in the Transaction Documents. The
Fundings made by the Holder of this Certificate to the Depositor shall be
evidenced by this Certificate and the Certificateholder shall endorse on the
schedule annexed hereto and made a part hereof, or elsewhere in its internal
records, the date and amount of each Funding made by it to the Depositor and the
amount of each payment of principal made by the Depositor with respect thereto.
The Certificateholder is authorized and directed by the Depositor to endorse the
schedule attached hereto or maintain such records; provided that each
---------
Certificateholder's endorsements or records shall be effective only if they are
in agreement with the register maintained by the Trustee, absent manifest error
in such register. The failure of the Certificateholder to make, or an error in
making, a notation with respect to any Funding shall not limit or otherwise
affect the obligations of the Depositor hereunder or under the Trust Agreement.
The aggregate amount of all Fundings made by the Holder of this Certificate (as
reduced by any amounts distributed as principal during the Funding Period),
pursuant to this Certificate, shall not exceed ($ ).
-------
This Class C-R Certificate bears interest during each Accrual Period on
the Outstanding Principal Amount hereof (as of the first day of the Accrual
Period) at the Certificate Interest Rate, until and including the last day
preceding the Payment Date on which the Outstanding Principal Amount hereof has
been reduced to zero. Interest on the Outstanding Principal Amount hereof shall
be calculated on the basis of a 360-day year consisting of 12 months of 30 days
each. Interest shall be due and payable in arrears on each Payment Date. In
addition, with respect to any Funding by the Class C-R Certificates of this
Series occurring in any Accrual Period following the preceding Payment Date, the
related Funding Amounts shall accrue interest from the related Funding Date
through the end of the Accrual Period in which such Funding occurs in the amount
of the applicable First Period Interest, which interest shall be paid on the
next Payment Date. The First Period Interest on the Funding Amount shall be
determined on the Funding Date at the rate established on the applicable Reset
Date. Notwithstanding the foregoing, if the Outstanding Principal Amount of this
Certificate is not paid in full by its Scheduled Maturity, then, for any Accrual
Period commencing on or after such Scheduled Maturity, the Applicable Rate
Spread on this Certificate shall be increased by 1.00%. In making any interest
payment, if the interest calculation with respect to a Certificate
C-2
<PAGE>
shall result in a portion of such payment being less than $0.01, then such
payment shall be decreased to the nearest whole cent, and no subsequent
adjustment shall be made in respect thereof.
The principal of this Class C-R Certificate shall be payable in
installments ending no later than the Series Termination Date unless this Class
C-R Certificate becomes due and payable at an earlier date by call for
redemption or otherwise. All reductions in the principal amount of a Class C-R
Certificate effected by payments of installments of principal made on any
Payment Date shall be binding upon all future Holders of this Class C-R
Certificate and of any Class C-R Certificate issued upon the registration of
transfer hereof or in exchange herefor or in lieu hereof, whether or not such
payment is noted on this Class C-R Certificate. Each installment of principal
payable on this Class C-R Certificate shall be in an amount equal to this
Certificateholder's pro rata share of the Class C-R Principal Distribution
Amount available to be paid in accordance with the priorities of Section 3 of
the Supplement for this Series and Section 5.02 of the Trust Agreement. Subject
to the terms of the Trust Agreement, the principal payable on this Class C-R
Certificate shall be paid on each Payment Date during the term of the Trust
Agreement, beginning on the Initial Payment Date. All payments of principal with
respect to all of the Class C-R Certificates of a Series shall be made on a pro
rata basis based upon the ratio that the Outstanding Principal Amount of a Class
C-R Certificate bears to the Outstanding Principal Amount of all Class C-R
Certificates of such Series; provided that, if as a result of such proration a
--------
portion of such principal would be less than $0.01, then such payment shall be
reduced to the nearest whole cent.
In addition, the Certificate Prepayment Fee Amount, if any, shall be
distributed on each Payment Date to the Holders of the Class C-R Certificates to
the extent such Class is receiving a distribution of Prepaid Principal Amount on
such date. All payments of Certificate Prepayment Fee Amounts with respect to
the Class C-R Certificates shall be made prorata based upon the ratio of the
Outstanding Principal Amount of this Certificate to the Outstanding Principal
Amount of all Class C-R Certificates of this Series, provided that if as a
result of such proration, a portion of such payment would be less than $0.01,
then such payment shall be reduce to the nearest whole cent.
The interest and principal so payable on any Payment Date will, as
provided in the Trust Agreement, be paid to the Person in whose name this
Certificate is registered on the Record Date for such Payment Date, which shall
be the close of business on the last day of the month prior to such Payment Date
(whether or not a Business Day). The principal and interest on this Certificate
are payable by wire transfer in immediately available funds to the account
specified in writing to the Trustee by the Person whose name appears as the
Registered Holder of this Certificate on the Certificate Register received at
least five (5) Business Days prior to the Record Date for the Payment Date (or
if no such account is specified or if such wire fails, by check mailed by
first-class mail to the Person whose name appears as the Registered Holder of
this Certificate on the Certificate Register at the address of such Person as it
appears on the Certificate Register), in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts. Funds represented by checks returned undelivered will
be held for payment to the Person entitled thereto, subject to the terms of the
Trust Agreement, at the office or agency in the United States of America
designated as such by the Depositor for such purpose pursuant to the Trust
Agreement.
The Depositor has structured the Trust Agreement and the Certificates
with the intention that the Trust be treated as a partnership, with the assets
of the partnership including all of the assets of the Trust Estate and the
partners of the partnership being all of the Certificateholders and the
Depositor. The Depositor, the Trustee, the Servicer and each Certificateholder,
by acceptance of its Certificate (and any Person that is a beneficial owner of
any interest in a Certificate, by virtue of such Person's acquisition of a
beneficial interest therein), agree to report the transactions contemplated
thereby in accordance with such stated intentions unless and until determined to
the contrary by an applicable taxing authority.
C-3
<PAGE>
The property of the Trust Estate includes certain Loan Assets and
certain other assets described in the Trust Agreement. The Class C-R
Certificates of the 1998-1 Series and all other Series of Class C-R Certificates
issued under the Trust Agreement are payable out of the Trust Estate pari passu
among such Class C-R Certificateholders equally and ratably without prejudice,
priority or distinction between any Class C-R Certificate by reason of time of
issue or otherwise. The Class C-R Certificates are payable only out of the Trust
Estate and do not represent recourse obligations of the Depositor, Allegiance
Capital, LLC or any of their respective affiliates or successors. The Trust
Agreement pursuant to which this Class C-R Certificate is issued also provides
for the issuance of other Classes and Series of Certificates from time to time.
Payments of interest on the Class C-R Certificates are senior to such payments
on other Classes having a lower credit rating from the Rating Agency and are
subordinate to payments of interest on any Classes having a higher credit rating
form the Rating Agency. Payments of principal in the Class C-R Certificates are
senior to payments of principal on other classes having a lower credit rating
from the Rating Agency and are subordinate to such payments on any Class having
a higher credit rating from the Rating Agency.
Unless the Depositor exercises its Optional Termination rights, the
Certificates are payable only at the time and in the manner provided in the
Trust Agreement and are not redeemable or prepayable at the option of the
Depositor before such time, except that the Depositor may cause the Trust to
prepay on a dollar for dollar basis the principal, without penalty or premium,
of any Outstanding Series of Revolving Certificates with the proceeds of the
issuance of a Series of Term Certificates.
As provided in the Trust Agreement and subject to certain limitations
therein set forth, the transfer of this Certificate may be registered on the
Certificate Register of the Depositor upon surrender of this Certificate for
registration of transfer at the office or agency of the Depositor in the United
States of America maintained for such purpose, duly endorsed by, or accompanied
by a written instrument of transfer in form reasonably satisfactory to the
Depositor and the Trustee and duly executed by the holder hereof or his attorney
duly authorized in writing, and thereupon one or more new Class C-R Certificates
having the same Scheduled Maturity, Series Termination Date, authorized
denomination(s) and for the same initial aggregate principal amount will be
issued to the designated transferees.
Prior to due presentment for registration of transfer of this
Certificate, the Depositor, the Trustee and any agent of the Depositor or the
Trustee shall treat the Person in whose name this Certificate is registered as
the owner hereof for the purpose of receiving payment as herein provided and for
all other purposes whether or not this Certificate be overdue, and neither the
Depositor, the Trustee, nor any such agent shall be affected by notice to the
contrary.
The Holder of this Certificate, by acceptance of this Certificate,
agrees that for one year and one day after it has been paid hereunder, it or any
Affiliate thereof will not (without the consent of Holders holding at least 51%
of all Rated Certificates, by Outstanding Principal Amount) file any involuntary
petition or otherwise institute any bankruptcy, reorganization, arrangement,
insolvency or liquidation proceeding or other proceeding under any federal or
state bankruptcy or similar law against the Depositor.
The Trust Agreement permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Depositor and the rights of the Holders of the Certificates
under the Trust Agreement at any time by the Depositor, the Trustee and the
Servicer without the consent of the Holders of the Certificates.
The Certificates are issuable only in registered form without coupons
in such authorized denominations as provided in the Trust Agreement and subject
to certain limitations therein set forth.
C-4
<PAGE>
This Class C-R Certificate and the Trust Agreement shall be governed by
and construed in accordance with the internal laws of the State of New York,
without regard to conflicts of laws principles.
No reference herein to the Trust Agreement and no provision of this
Class C-R Certificate or of the Trust Agreement shall alter or impair the
obligation of the Trust Estate to pay the principal of and interest on this
Class C-R Certificate, but solely from the assets of the Trust Estate and the
Class C-R Certificate Insurance Policy at the times, place and rate, and in the
coin or currency, herein prescribed.
C-5
<PAGE>
IN WITNESS WHEREOF, Allegiance Funding Corp. I has caused this
instrument to be signed, manually, by its President or a Vice President.
ALLEGIANCE FUNDING CORP. I
By:
------------------------
Title:
------------------------
CERTIFICATE OF AUTHENTICATION
This is one of the Class C-R Certificates described in the
within-mentioned Trust Agreement.
<PAGE>
Dated:
--------------------------------
MANUFACTURERS AND TRADERS TRUST
COMPANY, as Trustee
By:
---------------------------------
Authorized Signatory
<PAGE>
Schedule to Class C-R Revolving Certificates, Series 1998-1
Disbursement Principal Payment
Date of Funding Amount of Funding and Date Paid
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT D
---------
FORM OF CLASS D-R REVOLVING CERTIFICATE
---------------------------------------
THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS IN
RELIANCE ON EXEMPTIONS PROVIDED BY THE SECURITIES ACT AND SUCH STATE SECURITIES
LAWS. THIS CERTIFICATE MAY NOT BE SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS SUCH RESALE, TRANSFER, PLEDGE OR HYPOTHECATION (A) IS MADE
IN ACCORDANCE WITH SECTION 2.06 OF THE TRUST AGREEMENT REFERRED TO HEREIN AND
(B) IS MADE (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, (ii) IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR (iii) TO A PERSON
WHO THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN
THE MEANING OF RULE 144A UNDER THE SECURITIES ACT WHO IS AWARE THAT THE RESALE
OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A. NEITHER ALLEGIANCE
FUNDING CORP. I (THE "DEPOSITOR") NOR MANUFACTURERS AND TRADERS TRUST COMPANY,
AS TRUSTEE (THE "TRUSTEE"), IS OBLIGATED TO REGISTER THE CERTIFICATES UNDER THE
SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAWS. IN THE EVENT THAT A
TRANSFER OF A CLASS D-R CERTIFICATE IS TO BE MADE, THE PROSPECTIVE TRANSFEREE
SHALL DELIVER AN INVESTMENT AND ASSUMPTION LETTER IN THE FORM REQUIRED UNDER THE
TRUST AGREEMENT AND, IF THE TRUSTEE SO REQUESTS (IN A TRANSFER OTHER THAN UNDER
RULE 144A), AN OPINION OF COUNSEL TO THE EFFECT THAT SUCH TRANSFER MAY BE MADE
WITHOUT REGISTRATION UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES
LAWS.
DUE TO THE PROVISIONS FOR FUNDINGS AND FOR THE PAYMENT OF PRINCIPAL CONTAINED
HEREIN, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS CERTIFICATE ON ANY PARTICULAR
DATE MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. ANYONE PURCHASING
THIS CERTIFICATE MAY ASCERTAIN THE OUTSTANDING PRINCIPAL AMOUNT HEREOF BY
INQUIRY OF THE TRUSTEE.
No. D-R $
-------------- ----------------
ALLEGIANCE CAPITAL TRUST I
CLASS D-R REVOLVING CERTIFICATE, SERIES 1998-1
Evidencing an undivided fractional interest in the Trust Estate, the property of
which includes, among other things, certain Loan Assets and monies on deposit in
the Collection Account.
(This Certificate does not represent an obligation of, or an
interest in, the Depositor, Allegiance Capital, LLC, the Trustee or
any of their respective affiliates or successors.)
Registered Owner:
-------------------
D-1
<PAGE>
DELIVERY DATE: SERIES TERMINATION DATE: July 15, 2019
-----------------
THIS CERTIFIES THAT the registered owner specified above is the owner
of a(n) DOLLAR AND NO CENTS ($ ) nonassessable, fully paid,
---------- -----------
undivided fractional interest in the Allegiance Capital Trust I (the "Trust")
formed by Allegiance Funding Corp. I (the "Depositor"). The Trust was created
pursuant to the Trust Agreement, dated as of August 1, 1998, among the
Depositor, Manufacturers and Traders Trust Company, as Trustee (the "Trustee"),
and Point West Capital Corporation, as Servicer, and the Supplement to Trust
Agreement for Revolving Series 1998-1, dated as of August 1, 1998, among the
Depositor, the Trustee and Point West Capital Corporation, as Servicer
(collectively, the "Trust Agreement"). Reference is made to the Trust Agreement
for a statement of the respective rights thereunder of the Depositor, the
Trustee and the Holders of the Certificates, and the terms upon which the
Certificates are, and are to be, authenticated and delivered. To the extent not
otherwise defined herein, each capitalized term used herein has the meaning
assigned to it in the Trust Agreement.
This Certificate is one of a duly authorized issue of Certificates
designated as the Class D-R Revolving Certificates, Series 1998-1 having a
Scheduled Maturity of September 15, 1999 and a Series Termination Date of July
15, 2019 (herein called the "Class D-R Certificates") issued and to be issued
under the Trust Agreement. This Class D-R Certificate is issued under and is
subject to the terms, provisions and conditions of the Trust Agreement, to which
Trust Agreement the holder of this Class D-R Certificate by virtue of such
Holder's acceptance hereof assents and by which such Holder is bound.
The Holder of this Certificate is obligated to provide funds to the
Depositor on each Funding Date during the Funding Period subject to the
applicable terms and conditions set forth in the Transaction Documents. The
Fundings made by the Holder of this Certificate to the Depositor shall be
evidenced by this Certificate and the Certificateholder shall endorse on the
schedule annexed hereto and made a part hereof, or elsewhere in its internal
records, the date and amount of each Funding made by it to the Depositor and the
amount of each payment of principal made by the Depositor with respect thereto.
The Certificateholder is authorized and directed by the Depositor to endorse the
schedule attached hereto or maintain such records; provided that each
--------
Certificateholder's endorsements or records shall be effective only if they are
in agreement with the register maintained by the Trustee, absent manifest error
in such register. The failure of the Certificateholder to make, or an error in
making, a notation with respect to any Funding shall not limit or otherwise
affect the obligations of the Depositor hereunder or under the Trust Agreement.
The aggregate amount of all Fundings made by the Holder of this Certificate (as
reduced by any amounts distributed as principal during the Funding Period),
pursuant to this Certificate, shall not exceed ($ ).
----------
Principal and other amounts distributable with respect to Class D-R
Certificates shall be payable only to the extent of amounts available in
accordance with, and to the extent of, the priorities for payment of Class D-R
Certificates set forth in Section 3 of the Supplement for this Series and
Section 5.02 of the Trust Agreement, in installments ending no later than the
Series Termination Date unless the Class D-R Certificates becomes due and
payable at an earlier date by call for redemption or otherwise. All reductions
in the principal amount of a Class D-R Certificate effected by distributions
made on any such Payment Date shall be binding upon all future Holders of this
Class D-R Certificate and of any Class D-R Certificate issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof,
whether or not such payment is noted on this Class D-R Certificate. All payments
with respect to all of the Class D-R Certificates of a Series shall be made on a
pro rata basis based upon the ratio that the Outstanding Principal Amount of
this Class D-R Certificate bears to the Outstanding Principal Amount of all
Class D-R Certificates of such Series; provided that, if as a result of such
--------
proration a portion of such payment would be less than $0.01, then such payment
shall be reduced to the nearest whole cent.
D-2
<PAGE>
In addition, the Certificate Prepayment Fee Amount, if any, shall be
distributed on each Payment Date to the Holders of the Class D-R Certificates to
the extent such Class is receiving a distribution of Prepaid Principal Amount on
such date. All payments of Certificate Prepayment Fee Amounts with respect to
the Class D-R Certificates shall be made prorata based upon the ratio of the
Outstanding Principal Amount of this Certificate to the Outstanding Principal
Amount of all Class D-R Certificates of this Series, provided that if as a
result of such proration, a portion of such payment would be less than $0.01,
then such payment shall be reduce to the nearest whole cent.
All amounts payable with respect to this Class D-R Certificate on any
Payment Date will, as provided in the Trust Agreement, be paid to the Person in
whose name this Certificate is registered on the Record Date for such Payment
Date, which shall be the close of business on the last day of the month prior to
such Payment Date (whether or not a Business Day). Such amounts are payable by
wire transfer in immediately available funds to the account specified in writing
to the Trustee by the Person whose name appears as the Registered Holder of this
Certificate on the Certificate Register received at least five (5) Business Days
prior to the Record Date for the Payment Date (or if no such account is
specified or if such wire fails, by check mailed by first-class mail to the
Person whose name appears as the Registered Holder of this Certificate on the
Certificate Register at the address of such Person as it appears on the
Certificate Register), in such coin or currency of the United States of America
as at the time of payment is legal tender for payment of public and private
debts. Funds represented by checks returned undelivered will be held for payment
to the Person entitled thereto, subject to the terms of the Trust Agreement, at
the office or agency in the United States of America designated as such by the
Depositor for such purpose pursuant to the Trust Agreement.
The Depositor has structured the Trust Agreement and the Certificates
with the intention that the Trust be treated as a partnership, with the assets
of the partnership including all of the assets of the Trust Estate and the
partners of the partnership being all of the Certificateholders and the
Depositor. The Depositor, the Trustee, the Servicer and each Certificateholder,
by acceptance of its Certificate (and any Person that is a beneficial owner of
any interest in a Certificate, by virtue of such Person's acquisition of a
beneficial interest therein), agree to report the transactions contemplated
thereby in accordance with such stated intentions unless and until determined to
the contrary by an applicable taxing authority.
The property of the Trust Estate includes certain Loan Assets and
certain other assets described in the Trust Agreement. The Class D-R
Certificates of the 1998-1 Series and all other Series of Class D-R Certificates
issued under the Trust Agreement are payable out of the Trust Estate pari passu
among such Class D-R Certificateholders equally and ratably without prejudice,
priority or distinction between any Class D-R Certificate by reason of time of
issue or otherwise. The Class D-R Certificates are payable only out of the Trust
Estate and do not represent recourse obligations of the Depositor, Allegiance
Capital, LLC or any of their respective affiliates or successors. The Trust
Agreement pursuant to which this Class D-R Certificate is issued also provides
for the issuance of other Classes and Series of Certificates from time to time.
Except as otherwise may be provided in future Supplements to the Trust
Agreement, payments on the Class D-R Certificates are subordinate to payments on
all other Classes of Certificates.
Unless the Depositor exercises its Optional Termination rights, the
Certificates are payable only at the time and in the manner provided in the
Trust Agreement and are not redeemable or prepayable at the option of the
Depositor before such time, except that the Depositor may cause the Trust to
prepay on a dollar for dollar basis the principal, without penalty or premium,
of any Outstanding Series of Revolving Certificates with the proceeds of the
issuance of a Series of Term Certificates.
D-3
<PAGE>
As provided in the Trust Agreement and subject to certain limitations
therein set forth, the transfer of this Certificate may be registered on the
Certificate Register of the Depositor upon surrender of this Certificate for
registration of transfer at the office or agency of the Depositor in the United
States of America maintained for such purpose, duly endorsed by, or accompanied
by a written instrument of transfer in form reasonably satisfactory to the
Depositor and the Trustee and duly executed by the holder hereof or his attorney
duly authorized in writing, and thereupon one or more new Class D-R Certificates
having the same Scheduled Maturity, Series Termination Date, authorized
denomination(s) and for the same initial aggregate principal amount will be
issued to the designated transferees.
Prior to due presentment for registration of transfer of this
Certificate, the Depositor, the Trustee and any agent of the Depositor or the
Trustee shall treat the Person in whose name this Certificate is registered as
the owner hereof for the purpose of receiving payment as herein provided and for
all other purposes whether or not this Certificate be overdue, and neither the
Depositor, the Trustee, nor any such agent shall be affected by notice to the
contrary.
The Holder of this Certificate, by acceptance of this Certificate,
agrees that for one year and one day after it has been paid hereunder, it or any
Affiliate thereof will not (without the consent of Holders holding at least 51%
of all Rated Certificates, by Outstanding Principal Amount) file any involuntary
petition or otherwise institute any bankruptcy, reorganization, arrangement,
insolvency or liquidation proceeding or other proceeding under any federal or
state bankruptcy or similar law against the Depositor.
The Trust Agreement permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Depositor and the rights of the Holders of the Certificates
under the Trust Agreement at any time by the Depositor, the Trustee and the
Servicer without the consent of the Holders of the Certificates.
The Certificates are issuable only in registered form without coupons
in such authorized denominations as provided in the Trust Agreement and subject
to certain limitations therein set forth.
This Class D-R Certificate and the Trust Agreement shall be governed by
and construed in accordance with the internal laws of the State of New York,
without regard to conflicts of laws principles.
No reference herein to the Trust Agreement and no provision of this
Class D-R Certificate or of the Trust Agreement shall alter or impair the
obligation of the Trust Estate to pay the principal of this Class D-R
Certificate, but solely from the assets of the Trust Estate and the Class D-R
Certificate Insurance Policy at the times, place and rate, and in the coin or
currency, herein prescribed.
D-4
<PAGE>
IN WITNESS WHEREOF, Allegiance Funding Corp. I has caused this
instrument to be signed, manually, by its President or a Vice President.
ALLEGIANCE FUNDING CORP. I
By:
------------------------
Title:
------------------------
<PAGE>
CERTIFICATE OF AUTHENTICATION
This is one of the Class D-R Certificates described in the
within-mentioned Trust Agreement.
<PAGE>
Dated:
--------------------------------
MANUFACTURERS AND TRADERS TRUST
COMPANY, as Trustee
By:
---------------------------------
Authorized Signatory
<PAGE>
Schedule to Class D-R Revolving Certificates, Series 1998-1
Disbursement Principal Payment
Date of Funding Amount of Funding and Date Paid
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LOAN ACQUISITION AGREEMENT
between
ALLEGIANCE CAPITAL, LLC
("Company")
and
ALLEGIANCE FUNDING CORP. I
("Depositor")
- -------------------------------------------------------------------------------
Dated as of August 1, 1998
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE ON
DEFINITIONS
Section 1.01 Defined Terms..........................................................................2
Section 1.02 Certain Rules of Construction..........................................................5
ARTICLE TWO
ACQUISITION OF LOAN ASSETS
Section 2.01 Conveyance of Loan Assets. ..........................................................7
Section 2.02 Authorization and Issuance of Common Stock by the Depositor. ..........................7
Section 2.03 Use of Proceeds........................................................................7
Section 2.04 Delivery of Loans; Filing of Financing Statements......................................8
Section 2.05 Servicing of Loans.....................................................................8
Section 2.06 Review of Loans........................................................................8
Section 2.07 Nature of Transfer. ..................................................................9
ARTICLE THREERE
PRESENTATIONS AND WARRANTIES
Section 3.01 Representations and Warranties of the Company.........................................10
Section 3.02 Representations and Warranties of the Depositor.......................................20
Section 3.03 Substitution or Repurchase of Loans. ................................................22
Section 3.04 Requirements for Purchase or Substitution of Loans....................................22
ARTICLE FOUR
COVENANTS OF THE COMPANY
Section 4.01 The Company Covenants. ...............................................................24
Section 4.02 Depositor Covenants. .................................................................27
Section 4.03 Assignment of Loan Assets. ...........................................................28
ARTICLE FIVE
CONDITIONS
Section 5.01 Conditions to the Depositor's Obligations. ...........................................29
Section 5.02 Conditions to the Company's Obligations. ............................................30
ARTICLE SIX
TERM AND TERMINATION
Section 6.01 Term. ................................................................................31
Section 6.02 Default by the Company. .............................................................31
i
<PAGE>
ARTICLE SEVEN
GENERAL PROVISIONS
Section 7.01 Amendments............................................................................32
Section 7.02 Governing Law. ......................................................................32
Section 7.03 Notices...............................................................................32
Section 7.04 Separability Clause. ................................................................32
Section 7.05 Assignment. .........................................................................32
Section 7.06 Further Assurances....................................................................32
Section 7.07 No Waivers; Cumulative Remedies.......................................................33
Section 7.08 Binding Effect; Third Party Beneficiaries.............................................33
Section 7.09 Set-Off...............................................................................33
<FN>
EXHIBITS
Exhibit A Form of Company Certificate
Exhibit D Pool Criteria
</FN>
</TABLE>
ii
<PAGE>
This LOAN ACQUISITION AGREEMENT (this "Agreement"), dated as of August
1, 1998, is entered into between Allegiance Capital, LLC, a Delaware limited
liability company (the "Company"), and Allegiance Funding Corp. I, a Delaware
corporation (the "Depositor").
RECITALS
The Depositor has entered into, or is in the process of entering into,
a Trust Agreement, dated as of August 1, 1998 (the "Trust Agreement"), with
Manufacturers and Traders Trust Company, a New York banking corporation (the
"Trustee"), Allegiance Capital, LLC, as special servicer (the "Special
Servicer"), and Point West Capital Corporation, as servicer (the "Servicer"),
pursuant to which the Depositor, on behalf of the Trust, has caused or will
cause the issuance of various Series of Revolving Certificates and various
Series of Term Certificates.
In furtherance thereof, the Company and the Depositor are entering into
this Agreement to provide for, among other things, the acquisition by the
Depositor of all of the Company's right, title and interest in and to certain
Loan Assets, which the Depositor will, in accordance with the Trust Agreement,
subsequently be conveying to the Trustee from time to time for inclusion in the
Trust Estate. As a precondition to the effectiveness of this Agreement, the
Depositor, the Trustee, the Servicer, the Special Servicer and the Servicing
Advisor will enter into the Servicing Agreement to provide for the servicing of
the Loan Assets.
In addition, the Depositor will be conveying to the Trustee, among
other things, all of the Depositor's rights derived under this Agreement and the
Servicing Agreement, and the Company agrees that all representations,
warranties, covenants and agreements made by it in this Agreement with respect
to the Loan Assets and otherwise shall also be for the benefit of the Trustee
and all Certificateholders. In consideration of the Company's contribution and
sale and the Company's representations, warranties, covenants and agreements
under this Agreement, the Company will be receiving all of the Common Stock and
such other consideration as is required to be paid from time to time hereunder.
In consideration of the mutual agreements contained herein and of other
good and valuable consideration (the receipt and adequacy of which are hereby
acknowledged), the parties hereto agree as follows:
1
<PAGE>
ARTICLE ONE
-----------
DEFINITIONS
-----------
Section 1.01 Defined Terms.
------------ --------------
Each capitalized term used herein but not otherwise defined has the
meaning assigned to such term in the Trust Agreement or, if not defined therein,
in the Servicing Agreement. For purposes of this Agreement, each of the
following terms has the meaning specified herein:
"Agreement": The meaning set forth in the introductory paragraph
hereof.
"Common Stock": All of the issued and outstanding shares of common
stock of the Depositor, which consist of one thousand (1,000) shares having a
par value of $0.01 per share.
"Company": The Person described in the introductory paragraph hereof
and all successors and permitted assigns of such Person under this Agreement.
"Company Address": 1700 Montgomery Street, Suite 250, San Francisco,
California 94111, or such other address furnished in writing to the Trustee, the
Certificateholders and the Depositor in accordance with the provisions hereof.
"Company Certificate": A certificate of the Company, substantially in
the form of Exhibit A.
----------
"Depositor": The Person described in the introductory paragraph hereof
and all successors and permitted assigns of such Person under the Trust
Agreement and this Agreement.
"Depositor Address": 1700 Montgomery Street, Suite 250B, San Francisco,
California 94111, or such other address furnished in writing to the Trustee, the
Certificateholders and the Company in accordance with the provisions hereof.
"Electronic Records": The electronic master records of all loans of the
Company or the Special Servicer similar to and including the Loans.
"Eligible Loan": A Loan that satisfies all of the criteria set forth in
Section 3.01(a) and does not cause the Loan Pool to violate the Pool Criteria.
"Environmental Laws": All federal, state, local and foreign statutes,
laws, regulations, ordinances, rules, judgments, orders, decrees, permits,
concessions, grants, franchises, licenses, agreements or other governmental
restrictions relating to the environment or to emissions, discharges or releases
of pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes into the environment,
including ambient air, surface water, ground water, or land, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants, petroleum or
petroleum products, chemicals or industrial, toxic or hazardous substances or
wastes or the cleanup or other remediation thereof.
"Existing Indebtedness": Any indebtedness of the Company that relates
to pre-existing financings of any Loans that are conveyed hereunder.
2
<PAGE>
"GAAP": With respect to any Loan, generally accepted accounting
principles in the United States consistently applied and, to the extent not in
conflict therewith, in the case of any accounting determination with respect to
the related Obligor(s), on a basis consistent with the financial statements of
such Obligor(s).
"Initial Delivery Date": The meaning set forth in the Trust Agreement.
"Lease": A lease for all or any portion of the real property comprising
the Mortgaged Property entered into with a third party, the lessee's interest in
which is held by an Obligor of the related Loan.
"Lien": Any security interest, lien, charge, pledge, equity or
encumbrance of any kind, other than any inchoate liens for taxes not yet due.
"Loan Assets": All of the Company's right, title and interest,
whenever existing or arising and whether now owned or hereafter acquired, in and
to the following: (a) the Loans and all rights with respect thereto, including
(i) all payments made or payable by or on behalf of any Obligor thereunder or
with respect thereto on or after the Cut-Off Date for such Loan, including all
periodic payments ( including all Scheduled Payments but excluding the portion
thereof representing interest accrued prior to the Cut-Off Date), all amounts
paid by any guarantor of a Loan, all payments made in respect of Defaulted
Loans, all Insurance Proceeds, all prepayments fees, all premiums, and all late
payment or other incidental charges or fees (including late fees, collection
fees and bounced check charges) and (ii) all guaranties, Insurance Policies, and
other agreements or arrangements of whatever character from time to time
supporting or securing payment of any Loan; (b) the Loan Files; (c) the security
interests and other Liens of the Company in the Loan Collateral; and (d) all
income and proceeds of the foregoing or relating thereto.
"Loan Collateral": The tangible and intangible assets (including
accounts, equipment, general intangibles, inventory, and real property) that
secure, directly or indirectly, all or any portion of a Loan.
"Loan File": With respect to any Loan, a file containing: (a) all of
the items on the Loan Funding Checklist for such Loan, including the original
manually executed credit agreement(s), loan agreement(s), promissory note(s),
Mortgage(s), assignment(s), consent(s), estoppel(s), guaranty(ies), security
agreement(s), and other agreements, documents and instruments (including any
Insurance Policies) evidencing or otherwise relating to such Loan, the original
credit application executed by the Obligor(s) thereunder, and all other
agreements, documents, and instruments required by the Loan Funding Checklist
(including any share certificates and related stock powers); (b) the related
loan application; (c) the related credit memorandum; (d) the related Valuation;
(e) the related ***; and (f) all related filings (including Uniform Commercial
Code filings), notices, transfers, assignments (including assignments of all
related Mortgages (in recordable form and duly executed) and Notes), stock or
other appropriate powers or instruments of transfer (duly executed in blank) and
recordings as required under Section 3.01(a)(ix) hereof, the Trust Agreement or
applicable law (i) to perfect the sale by the Company to the Depositor of such
Loan and the related Loan Assets being acquired hereunder, (ii) to assign to the
Trustee all Uniform Commercial Code financing statements perfecting the security
interest of the Depositor (as assignee of the Company) in the related Loan
Collateral, (iii) to perfect the first priority security interest of the Trustee
in the Depositor's rights therein, and (iv) to cause any related Loan Collateral
(including any related Mortgages) to name the Trustee as lienholder in
accordance with the provisions of the Trust Agreement.
"Loan Funding Checklist": The checklist of all required documentation
relating to any Loan, substantially in the form of Exhibit B.
---------
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
3
<PAGE>
"Mortgage": The mortgage, deed of trust or other instrument securing a
Loan, which creates a first lien on an unsubordinated fee, leasehold or ground
leasehold estate on real property.
"Mortgaged Property": Any real property (irrespective of whether a fee
or a leasehold estate) that is encumbered by a Mortgage and secures, directly or
indirectly, the repayment of all or any portion of any Loan or any guaranty
thereof or any debt evidenced by a Note.
"Note": The note or other evidence of indebtedness of an Obligor
evidencing a Loan.
"Pending Credit Schedule": A schedule, substantially in the form of
Exhibit C attached hereto, setting forth, with respect to each Loan, a summary
- ---------
of the financial terms of such Loan, a summary of the relevant documents and the
structure of the Loan and the security therefor.
"Pension Plans": The meaning set forth in Section 3.01(c)(xvi).
"Permitted Loan Collateral Liens": Collectively, with respect to any
Loan and the related Loan Collateral therefor: (a) Liens that are identified as
existing on the date of the related Loan closing or that are permitted under the
terms of the related Loan documents to arise thereafter, in each case as
approved in writing by the Depositor and the Certificateholder Agent; (b)
statutory Liens of landlords, carriers, warehousemen, mechanics, or materialmen,
and other Liens (other than Liens in connection with any Environmental Law and
any Lien imposed under ERISA) imposed by law and incurred in the ordinary course
of business of any related Obligor for sums either not yet delinquent or being
contested in good faith by appropriate proceedings promptly instituted and
diligently conducted and for which adequate reserves have been established in
accordance with GAAP (if so required); (c) Liens (other than Liens in connection
with any Environmental Law and any Lien imposed under ERISA) incurred or
deposits made in the ordinary course of business of any related Obligor in
connection with workers' compensation, unemployment insurance, and other types
of social security, or to secure the performance of statutory obligations,
surety and appeal bonds, leases, or other similar obligations; (d) non-material
easements, rights-of-way, restrictions, and other similar charges or
encumbrances not interfering in any material respect with the ordinary course of
business of any Obligor; (e) banker's Liens in the nature of rights of setoff
arising in the ordinary course of business of any related Obligor; (f) Liens on
property of any related Obligor to another related Obligor securing debt of the
one party owing to the other (but only if such debt is Loan Collateral); (g)
Liens for taxes, assessments or other governmental charges or statutory
obligations that are not delinquent or remain payable without any penalty or
that are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and for which adequate reserves have been
established in accordance with GAAP (if so required); and (h) Liens created by
the Loan documents in favor of the Company.
"Pool Criteria": The criteria set forth on Exhibit D.
----------
"Program Guidelines": The underwriting guidelines of the Company with
respect to the origination of the Loans, which are as set forth on Exhibit E
---------
attached hereto; provided that "Program Guidelines" shall not include any
--------
Proposed Revisions (as that term is defined in Section 4.01(r)) if the same is,
-------
or is deemed, rejected by the Depositor, the Rating Agency or the
Certificateholder Agent in accordance with Section 4.01(r).
-------
"Proposed Revisions": The meaning set forth in the Section 4.01(r).
4
<PAGE>
"Qualified Insurer": An insurance company duly qualified as such under
the laws of the states in which any applicable Loan Collateral is located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, and which is rated as to claims
paying ability as follows: (a) with respect to pre-need insurance for customers
of Obligors, at least *** or, in the case of ***; (b) with respect to life
insurance assigned by an Obligor under a Loan, at least *** or, if in excess of
the applicable state guaranty fund limits, at least ***; and (c) with respect to
all other insurance, at least ***.
"Servicer": The Person described in the recitals hereof until a
successor Person shall have (if applicable) become the Servicer pursuant to the
applicable provisions of the Servicing Agreement, whereupon "Servicer" shall
mean such successor Person.
"Servicing Advisor": The Person described in the introduction of the
Servicing Agreement until a successor Person shall have (if applicable) become
the Servicing Advisor pursuant to the applicable provisions of the Servicing
Agreement, whereupon "Servicing Advisor" shall mean such successor Person.
"Special Servicer": The Person described in the recitals hereof until a
successor Person shall have (if applicable) become the Special Servicer pursuant
to the applicable provisions of the Servicing Agreement, whereupon "Special
Servicer" shall mean such successor Person.
***
"Standard Forms": The forms of the documents attached hereto as Exhibit
-------
G with such changes thereto, if any, as are from time to time approved by both
- -
the Certificateholder Agent and the Rating Agency.
"Substitute Loan": The meaning set forth in Section 3.04(b).
"Transfer Taxes": The meaning set forth in Section 3.01(a)(viii).
"Trust Agreement": The meaning set forth in the recitals hereof.
"Trustee": The Person described in the recitals hereof until a
successor Person shall have (if applicable) become the Trustee pursuant to the
applicable provisions of the Trust Agreement, whereupon "Trustee" shall mean
such successor Person.
"Valuation": A valuation of an Obligor's business and assets comprising
the Loan Collateral, as prepared by an experienced and competent business
appraiser acceptable to the Certificateholder Agent and which, initially, shall
include ***.
Section 1.02 Certain Rules of Construction.
----------- ------------------------------
Unless the context of this Agreement clearly requires otherwise: (a)
references to the plural include the singular and to the singular include the
plural; (b) references to any gender include any other gender; (c) the words
"include" and "including" are not limiting; (d) the word "or" has the inclusive
meaning represented
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
5
<PAGE>
by the phrase "and/or"; (e) the words "hereof," "herein," "hereby," and
"hereunder," and any other similar words, refer to this Agreement as a whole and
not to any particular provision hereof; and (f) article, section, subsection,
clause, exhibit, and schedule references are to this Agreement. Article,
section, and subsection headings are for convenience of reference only, shall
not constitute a part of this Agreement for any other purpose, and shall not
affect the construction of this Agreement. All exhibits and schedules attached
hereto are incorporated herein by this reference. Any reference herein to this
Agreement or any other agreement, document, or instrument includes all permitted
alterations, amendments, changes, extensions, modifications, renewals, or
supplements thereto or thereof, as applicable.
6
<PAGE>
ARTICLE TWO
-----------
ACQUISITION OF LOAN ASSETS
--------------------------
Section 2.01 Conveyance of Loan Assets.
------------ ---------------------------
(a) In consideration of the Depositor's delivery to or upon the order
of the Company of the Common Stock and the net proceeds from the initial sale of
the Certificates, the Company does hereby sell, transfer, contribute, assign,
set over and otherwise convey to the Depositor, without recourse (except as
provided in Sections 2.06, 3.03 and 3.04), all of the Company's right, title and
interest now existing or hereafter arising in and to the Loan Assets related to
the Loans listed on each Loan Schedule. The Company, from time to time
hereafter, shall sell and contribute to the Depositor all of the Company's
right, title and interest then existing or thereafter arising in and to a
Funding Group or Substitute Loans (and, in each case, the related Loan Assets)
pursuant to a Company Certificate under the circumstances and in accordance with
the procedures set forth herein and in the Trust Agreement. The Company agrees
that all Loans sold, contributed, transferred and conveyed to the Depositor
hereunder shall be Eligible Loans and that all Loan Assets acquired by the
Depositor shall conform with all of the requirements hereof. The Company hereby
acknowledges that each transfer of the Loan Assets to the Depositor is absolute
and irrevocable, without reservation, retention of any interest, or recourse to
the Company, except as provided in Sections 2.06, 3.03 and 3.04.
(b) If, for any reason, the Company retains any portion of the Loan
File pertaining to any Loan sold to the Depositor hereunder, it shall hold such
documents as the Special Servicer in trust for the benefit of the Depositor and
the Trustee. The possession by the Company of any Loan File (or any portion
thereof) pertaining to any Loan is, and shall be, at the will of the Depositor
and the Trustee for the sole purpose of servicing such Loan Assets, and such
retention and possession by the Company is, and shall be, in a custodial
capacity only. Any Loan File or portion thereof relating to any Loan shall be
segregated from the books and records of the Company and shall be marked
appropriately to reflect clearly the sale of the related Loan Assets to the
Depositor and the conveyance thereof to the Trust.
Section 2.02 Authorization and Issuance of Common Stock by the
------------ --------------------------------------------------
Depositor.
- ----------
Subject to all the terms and conditions hereof and in reliance upon the
representations, warranties and covenants set forth in this Agreement, the
Depositor shall issue, as of the Initial Delivery Date, the Common Stock to the
Company. In accordance with all of the terms and conditions hereof: (a) the
Depositor shall issue the Common Stock in the name of, and shall deliver the
Common Stock directly to, the Company; and (b) the Company shall obtain the
Common Stock directly from the Depositor.
Section 2.03 Use of Proceeds.
------------ ----------------
Subject to all the terms and conditions hereof and in reliance upon the
representations, warranties and covenants set forth herein, the Depositor shall,
on the Initial Delivery Date and on any Acquisition Date, repay the Existing
Indebtedness, if any, with the proceeds of the sale of any Certificates
simultaneously upon the issuance of such Certificates.
7
<PAGE>
Section 2.04 Delivery of Loans; Filing of Financing Statements.
------------ --------------------------------------------------
(a) In connection with each Funding, the Company shall deliver to the
Depositor, the Certificateholder Agent and the Rating Agency a Pending Credit
Schedule, ***, a Funding Report and a Company Certificate in accordance with
Sections 4.03 and 4.04 of the Trust Agreement.
(b) Promptly upon the transfer by the Company to the Depositor of the
Loan Assets, the Company shall notify all Obligors in writing to send all
payments in respect of the Loans directly to the Lockbox Account.
(c) In connection with the Depositor's acquisition of any Loan Assets,
the Company, on behalf of the Depositor, shall deliver to the Trustee in
accordance with Section 4.06 of the Trust Agreement the original related Loan
Files and shall deliver to the Servicer and the Special Servicer a copy of such
Loan Files to assist them in their respective servicing obligations (as provided
under the Transaction Documents). In addition, in connection with the
Depositor's acquisition of any Loan Assets, the Company shall make, file, or
record, as applicable, on or prior to the acquisition of such Loan Assets all
filings (including Uniform Commercial Code filings), notices, transfers,
assignments (including assignments of all related Mortgages (in recordable form
duly executed) and Notes), stock or other appropriate powers or instruments of
transfer (duly executed in blank) and recordings as required under Section
3.01(a)(ix) hereof, the Trust Agreement or applicable law (i) to perfect the
sale by the Company to the Depositor of the Loans and the related Loan Assets
being acquired hereunder, (ii) to assign to the Trustee all Uniform Commercial
Code financing statements perfecting the security interest of the Depositor (as
assignee of the Company) in the related Loan Collateral, (iii) to perfect the
first priority security interest of the Trustee in the Depositor's rights
therein, and (iv) to cause any related Loan Collateral (including any Mortgages)
to name the Trustee as lienholder in accordance with the provisions of the Trust
Agreement.
(d) In connection with the Depositor's acquisition of any Loan Assets,
the Company shall promptly, at its own expense, cause all Electronic Records and
other records maintained by it to be marked to show that the Loan Assets have
been acquired by the Depositor in accordance herewith and subsequently conveyed
by the Depositor to the Trustee in accordance with the Transaction Documents..
Section 2.05 Servicing of Loans.
------------ -------------------
The Servicer and the Special Servicer shall service all Loan Assets for
the benefit of the Depositor (and its successors and assigns), the Trustee and
the Certificateholders, in accordance with the terms and conditions of the
Transaction Documents. Notwithstanding the foregoing, the Company acknowledges
and agrees that its obligations hereunder are independent of any obligations it
may have as the Special Servicer and that its obligations under this Agreement
will continue in full force and effect, whether or not it is acting as the
Special Servicer, until termination of this Agreement in accordance with Section
6.01.
Section 2.06 Review of Loans.
------------ ----------------
If the Company discovers or is notified by the Depositor or by the
Trustee on behalf of the Certificateholders or by the Certificateholder Agent
that any material document in any Loan File (including any Note, Mortgage or
other document specified in clause (f) of the definition of "Loan File"
contained herein) is missing or defective (that is, mutilated, damaged, defaced,
incomplete, improperly dated, clearly forged or otherwise physically altered) in
any material respect, the Company shall correct or cure such omission, defect or
other irregularity within forty-five (45) days from the date the Company
discovered, or
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
8
<PAGE>
is notified by the Depositor or the Trustee of, such omission or defect.
Otherwise, the Company shall repurchase such Loan from the Depositor or replace
such Loan with a Substitute Loan in accordance with Sections 3.03 and 3.04.
Section 2.07 Nature of Transfer.
------------ -------------------
(a) The transfers of Loan Assets by the Company to the Depositor
pursuant to this Agreement are intended to be absolute assignments of all of the
Company's right, title and interest in, to and under such Loan Assets, without
recourse (except as provided in Sections 2.06, 3.03 and 3.04), for all purposes.
(b) If the transfer of any or all of the Loan Assets from the Company
to the Depositor is deemed for any reason to be a secured financing, then the
Company shall be deemed hereunder to have granted to the Depositor, and the
Company does hereby grant to the Depositor, a first priority security interest
in all of the Loan Assets. For purposes of such grant, this Agreement shall
constitute a security agreement under applicable law.
(c) If the transfer contemplated by this Agreement is deemed for any
reason to be less than a transfer of complete legal title of all of the Loan
Assets, the parties hereto nevertheless intend that this Agreement operate to
transfer all of the Loan Assets to the Depositor.
9
<PAGE>
ARTICLE THREE
-------------
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 3.01 Representations and Warranties of the Company.
------------ ----------------------------------------------
(a) Subject to any exceptions reflected in a related Funding Report
that are approved by the Certificateholder Agent, the Company hereby makes the
following representations and warranties as to each Loan to the Depositor and
for the benefit of the Trustee and the Certificateholders, on which the
Depositor relies in acquiring the Loan and the other related Loan Assets, the
Trustee relies in accepting the Trust Estate and authenticating the Certificates
and the Certificateholders rely in acquiring the Certificates and making
advances under the Transaction Documents. Such representations and warranties
speak, unless otherwise indicated, as of the Acquisition Date with respect to
such Loan, but such representations and warranties shall survive any subsequent
transfer, assignment, contribution or conveyance of such Loan.
(i) The information set forth with respect to such Loan in the
Loan Schedule is true and correct as of the related Cut-Off Date and
Acquisition Date;
(ii) Such Loan is a senior secured commercial loan originated
in the United States of America by the Company in the ordinary course
of the Company's business. Such Loan is denominated and payable in
United States dollars. Such Loan is fully and properly executed by the
parties thereto. The rights with respect to such Loan are assignable by
the lender thereunder and its assignees without the consent of or
notice to any Person.
(iii) The Company shall hav delivered to the Depositor either
(A) the original manually executed Note relating to such Loan, all
other original documents evidencing such Loan (with the exception of
such original documents as have not yet been returned from the
appropriate filing/recordation office, which documents shall be
forwarded to the Trustee within one hundred twenty (120) days of the
date of the closing of such Loan; provided that, if such original
---------
documents are not forwarded to the Trustee on or before such date, then
the Company shall provide written notice to the Trustee and the
Certificateholder Agent of such fact, such written notice to provide
the circumstances of such failure and what steps the Company is taking
or is able to take in respect thereof (depending on information
supplied by the applicable filing/recordation office)), and the other
items comprising the Loan File related thereto or (B) executed Escrow
Instructions, or other evidence acceptable to the Depositor, the
Trustee and the Certificateholder Agent that such items have been
obtained from the Obligor and are being held in escrow; with delivery
of all original documents evidencing such Loan and the related Loan
File to be made within two (2) Business Days following the related
Acquisition Date (with the exception of such original documents as have
not yet been returned from the appropriate filing/recordation office,
which documents shall be forwarded to the Trustee within one hundred
twenty (120) days of the date of the closing of such Loan; provided
--------
that, if such original documents are not forwarded to the Trustee on or
before such date, then the Company shall provide written notice to the
Trustee and the Certificateholder Agent of such fact, such written
notice to provide the circumstances of such failure and what steps the
Company is taking or is able to take in respect thereof (depending on
information supplied by the applicable filing/recordation office)).
10
<PAGE>
(iv) There is only one original manually executed counterpart
of the Note relating to such Loan, which has been delivered to the
Trustee, and the Company's Electronic Records and other records have
been marked as provided in Section 2.04(d).
(v) Such Loan was not originated in, nor is it subject to the
laws of, any jurisdiction, the laws of which would make unlawful the
sale, transfer or assignment of such document under any of the
Transaction Documents, including any repurchase in accordance with the
Transaction Documents.
(vi) Such Loan is, and on the related Cut-Off Date and
Acquisition Date will be, in full force and effect in accordance with
its respective terms and neither the Company nor any Obligor has or
will have suspended or reduced any payments or obligations due or to
become due thereunder by reason of a default by the other party to such
Loan; and, as of the related Acquisition Date: (A) such Loan is not a
Delinquent Loan or a Defaulted Loan and (B) there are no proceedings
pending, or to the best of the Company's knowledge, threatened,
asserting the insolvency of an Obligor; and there are no proceedings
pending, or to the best of the Company's knowledge, threatened wherein
the Obligor or any governmental agency has alleged that such Loan is
illegal or unenforceable or which could reasonably be expected to have
a material adverse effect on the financial condition of the related
Obligor or the enforceability of the Loan; and no advances were made to
qualify the Loan under the eligibility criteria contained in this
Section 3.01.
(vii) To the best of the Company's knowledge,there has been no
advance of funds by a party other than the related Obligor(s) for the
payment of any amount required in respect of such Loan.
(viii) Such Loan is the valid, binding and legall enforceable
obligation of the parties thereto, enforceable in accordance with its
terms, subject, as to enforcement, to applicable bankruptcy,
insolvency, reorganization and other similar laws of general
applicability relating to or affecting creditors' rights generally and
to general principles of equity regardless of whether enforcement is
sought in a court of law or equity.
(ix) All related filings (including Uniform Commercial Code
filings and further including such Uniform Commercial Code filings
naming the Trustee as assignee of secured party with respect to the
Obligors under such Loan), notices, transfers, assignments (including
assignments of all related Mortgages (in recordable form and duly
executed)), stock or other appropriate powers or instruments of
transfer (duly executed in blank), recordings and other actions as
required under the Trust Agreement or applicable law to perfect the
first priority security interest of the Depositor in such Loan and the
related Loan Assets being acquired hereunder, to assign such security
interest to the Trustee, to perfect the first priority security
interest of the Trustee in the Depositor's rights therein and to cause
any related Loan Collateral (including any related Mortgages) to name
the Trustee as lienholder in accordance with the provisions of the
Trust Agreement have been accomplished and are in full force and effect
or will be accomplished within the time period specified in the
Transaction Documents. Such Loan creates a valid, subsisting and
enforceable first priority lien upon and security interest in the
related Loan Collateral subject only to Permitted Loan Collateral
Liens, securing such Loan in favor of the Company. Such Loan together
with the related lien and security interest in the Loan Collateral has
been duly assigned by the Company to the Depositor and by the Depositor
to the Trustee.
11
<PAGE>
(X) Each Loan (except as described below) is secured by a
related Mortgage, which is a valid and enforceable first lien on the
fee or leasehold estate (as indicated in the exhibit/attachment to the
Mortgage) of the related Mortgage Property, which estate is free and
clear of all other encumbrances and liens, except (in the case of a
mortgage of a fee estate) for (A) liens for real estate taxes and
special assessments not yet due and payable, (B) covenants, conditions
and restrictions, rights of way, easements and other matters of public
record as of the date of recording of such Mortgage, such exceptions
appearing of record being acceptable to commercial mortgage lending
institutions generally or specifically (i.e., not through a general
exception or exclusion) reflected in the title policy made in
connection with the origination of the related Loan, (C) other matters
to which like properties are commonly subject which do not individually
or in the aggregate, materially interfere with the benefits of the
security intended to be provided by such Mortgage, or (D) any other
lien as approved by the Company, the Depositor and the
Certificateholder Agent.
(xi) Such Loan is not cross-collateralized with any other
obligation other than the following: (A) a Loan that is a whole loan
and not a participation interest; or (B) an obligation not a Loan to
the extent that: (1) such obligation is a loan originated by the
Company; (2) such obligation has a debt service coverage ratio, fixed
charge coverage ratio or other similar measure analogous to the
Coverage Ratio applicable to the Loan of not less than ***;(3) the
proceeds of such other obligation are to be used solely for (y)
acquiring additional death care establishments or real property or
making any improvements relating thereto or (z) constructive business
purposes of the related Obligor, provided that no proceeds of any such
--------
obligation are used by or distributed to any Affiliate of the related
Obligor other than such Person's wholly owned subsidiaries; (4) such
other obligation will be serviced solely by the Servicer; (5) the
Company shall have entered into an intercreditor agreement in form and
substance reasonably satisfactory to the Certificateholder Agent and
the Rating Agency with the related creditor (or the assignee thereof)
of such other obligation; and (6) the Company shall have provided all
information with respect to such other obligation as shall have been
reasonably requested by the Certificateholder Agent and the Rating
Agency.
(xii) In the case of a Mortgage of a fee or leasehold estate in
connection with such Loan, the related Mortgaged Property is covered by
an ALTA or comparable lender's title insurance policy, issued by a
Qualified Insurer, insuring the Company, its successors and assigns
that the related Mortgage is a valid first lien on such Mortgaged
Property, subject (in the case of a Mortgage on a fee estate) only to
the matters set forth in Section 3.01(a)(x) and Permitted Loan
Collateral Liens. Such title insurance policy is in full force and
effect, is freely assignable to each of the Depositor and the Trustee,
as assignee of the Loan using a 104 or similar endorsement which
endorsement insures the holder of record that there is no prior
assignment of the Loan. Such title insurance policy insures the
Mortgaged Property in the amount required by the Program Guidelines.
The policy does not contain any special exceptions (other than standard
exclusions and endorsements) for zoning and uses or other special
exceptions (other than survey exceptions) that would render the
Mortgaged Property unmarketable. No claim has been made under such
title insurance policy. The Company has not done, by act or omission,
anything, and has no knowledge of any fact, which would materially
impair the coverage of any such title insurance policy. The title
policy has been marked to delete the intervening lien exception and all
premiums for such policy, including any premiums for endorsements and
special endorsements, have been paid.
(xiii) Any Mortgaged Property related to such Loan is insured by
a fire and extended perils insurance policy, issued by a Qualified
Insurer, providing coverage against loss or damage sustained by reason
of fire, lightning, windstorm, hail, explosion, riot, riot attending a
strike, civil
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
12
<PAGE>
commotion, aircraft, vehicles and smoke, and, to the extent required as
of the date of origination by the Company consistent with its
commercial lending practices and the Program Guidelines, against other
risks insured against by Persons operating like properties in the
locality of the Mortgaged Property, in an amount not less than that
specified by the Program Guidelines. The primary related Obligor also
maintains business interruption and rental continuation coverage
sufficient to protect against loss under a policy issued by a Qualified
Insurer in accordance with the Program Guidelines. If any portion of
the Mortgage Property is in an area identified by any federal
governmental department, agency or authority as having special flood
hazards, and flood insurance is available, a flood insurance policy
meeting the current guidelines of the Federal Insurance Administration
is in effect with a generally acceptable insurance carrier, in an
amount representing coverage not less than the least of the maximum
amount of insurance available under the Flood Disaster Protection Act
of 1973, as amended. All such insurance policies contain a standard
loss payable endorsement naming the Company, its successors and assigns
(including subsequent owners of the Loan), as mortgagee, and may not be
reduced, terminated or cancelled without thirty (30) days prior written
notice to the mortgagee. No such notice has been received by the
insured. All premiums on any such policy have been paid for at least
six (6) months following the related Loan closing date. The related
Mortgage obligates the related Obligor to maintain all such insurance
and, at such Obligor's failure to do so, authorizes the mortgagee to
maintain such insurance at the Obligor's cost and expense and to seek
reimbursement therefor from such Obligor.
(xiv) Such Loan was originated by the Company and each related
Loan Asset satisfies in all material respects the Program Guidelines.
(xv) The proceeds of such Loan have been fully disbursed and
there is no requirement for future advances thereunder and any and all
requirements stated in the commitment letter between the Company and
the related Obligors and the closing instructions of the Company as to
the escrow of any funds have been complied with except as described in
the related Loan File and approved in writing by the Depositor and the
Certificateholder Agent. Except for any escrowed funds deposited
pursuant to the related Loan documents, no cash deposits, letters of
credit, pledged account, surety bonds or other cash equivalent items
are held to assure compliance by any related Obligor with any of its
obligations in respect of the Loan.
(xvi) The Coverage Ratio relating to such Loan is not less
than ***.
(xvii) No Obligor with respect to such Loan is the United States
of America or any state, or agency, department or instrumentality or
political subdivision of the United States of America or any State.
(xviii) All requirements of any federal, state or local law
(including usury, truth in lending, real estate settlement procedures,
consumer credit protection, equal credit opportunity or disclosure
laws) applicable to the origination, conveyance and servicing of such
Loan have been complied with.
(xix) Such Loan is not and, to the best of the Company's
knowledge, will not be subject to any right of rescission, set-off,
claim, counterclaim or defense, including the defense of usury, whether
arising out of transactions concerning such Loan or otherwise; the
operation of any of the terms of such Loan or the exercise by the
Company or any related Obligor of any right under such Loan will not
render such Loan unenforceable in whole or in part, nor subject to any
claim, counterclaim, setoff, recision or defense, and no such right of
rescission, set-off, claim, counterclaim
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
13
<PAGE>
or defense has been asserted with respect thereto; provided that
--------
certain rights or defenses may exist under applicable law which,
individually or in the aggregate, do not make the remedies available to
the Company and its assignees with respect to such Loan inadequate for
the practical realization of the benefits provided thereby.
(xx) Proceeds of the Loans may be used for acquisitions, debt
refinancing, stock purchase, distribution and other legal purposes
specified in the Program Guidelines or otherwise approved by the
Certificateholder Agent. Except as expressly previously disclosed to
the Depositor and the Certificateholder Agent, to the best of the
Company's knowledge, the proceeds of such Loan have not been and will
not be used to satisfy, in whole or in part, any debt owed or owing by
any Obligor to any of its Affiliates.
(xxi) All existing indebtedness of the related primary Obligor
of such Loan shall be repaid prior to or concurrently upon the closing
of such Loan; provided that, subject to Section 3.01(a) (xvi),
--------
*** consistent with the Program Guidelines and as permitted under the
related Loan documents is permitted.
(xxii) There is no default, breach, violation or event of
acceleration existing with respect to such Loan, and no event (other
than payments due but not yet delinquent) which, with the passage of
time or with notice and the expiration of any grace or cure period,
would constitute a default, breach, violation or event of acceleration,
exists with respect to such Loan.
(xxiii) Such Loan is evidenced by document substantially in
the form of the Standard Forms. The related Note, the related Mortgage
and the other related Loan documents contain customary and enforceable
provisions such as to render the rights and remedies of the holder
thereof adequate for the realization against each related Obligor's
interest in the related Loan Collateral. Such Loan has a stated
maturity. Such Loan has scheduled monthly payments and an amortization
schedule that comply with the Program Guidelines; without limiting the
foregoing, the grace period with respect to any scheduled monthly
payment due in respect of such Loan is not greater than five (5) days.
(xxiv) To the extent such Loan is secured by a Mortgage that
is a deed of trust, a trustee, duly qualified under applicable law to
serve as such, has either been properly designated and currently so
serves or may be substituted in accordance with applicable law. Except
in connection with a trustee's sale after default by the related
Obligor, no fees or expenses are payable by the Company or the
Depositor to such trustee.
(xxv) With respect to each Loan which is secured by the
interest of an Obligor as lessee under a Lease, unless otherwise
approved in writing by the Depositor and the Certificateholder Agent:
(1) The lessor under such Lease has agreed in such
Lease or in another writing contained in the Loan File, or the
related Loan provides for the Obligor's agreement, that such
Lease may not be amended, modified, surrendered, cancelled or
terminated in any manner that would be materially adverse to
the Company without the prior written consent of the Company;
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
14
<PAGE>
(2) Such Loan provides that the original term of the
related Lease (plus all consecutive renewal terms which may be
exercised, and which under all circumstances would be
enforceable, by the Company, the Depositor and the Trustee, as
appropriate) extends beyond the stated maturity date for such
Loan, unless otherwise approved in writing by the Depositor
and the Certificateholder Agent;
(3) Such Lease or related lease estoppel requires the
lessor thereunder to give to the Company notice of any default
by the lessee, the opportunity to cure any such default, and
the right to enter into a new lease on substantially the same
terms as the Lease following a rejection thereof by a trustee
or debtor-in-possession in any bankruptcy or insolvency
proceeding or a termination of such Lease as a result of an
incurable default; and
(4) Such Lease is in full force and effect and no
default has occurred under such Lease, nor is there any
existing condition which, but for the passage of time or the
giving of notice, would result in a default under the terms of
such Lease.
(xxvi) The Company has duly fulfilled all obligations to be
fulfilled on the lender's part under or in connection with the
origination, acquisition and assignment of the Loan Assets related to
such Loan, including giving any notices or consents necessary to effect
the acquisition of such Loan Assets by the Depositor, and has done
nothing to impair the rights of the Trust Estate and the
Certificateholders in such Loan. The Company has obtained all necessary
licenses, permits and charters required to be obtained by the Company,
which failure to obtain would render any material portion of the Loan
documents unenforceable or would have a material adverse effect on the
Depositor or the Certificateholders.
(xxvii) Such Loan and the related Loan Assets have not been
sold, transferred, assigned or pledged by the Company to any Person
other than the Depositor (except for security interests in the Loan
Assets which shall be terminated on or prior to the related Cut-Off
Date), and upon execution and delivery of this Agreement by the Company
and the contemporaneous repayment of the Existing Indebtedness, the
Depositor will have all of the right, title and interest in and to the
Loan Assets, free and clear of all liens and encumbrances and any
interest of the Company or its successors, except for the interests of
any related Obligors in connection with the Loan and the lien of the
Trustee under the Trust Agreement. The sale to the Depositor of the
such Loan and the related Loan Assets does not violate the terms or
provisions of any loan or any other agreement to which the Company is a
party or by which it is bound.
(xxviii) The sale, transfer, assignment and conveyance of such
Loan and the related Loan Assets by the Company pursuant to this
Agreement is not subject to and will not result in any tax, fee or
governmental charge payable by the Company to any federal, state or
local government ("Transfer Taxes") other than Transfer Taxes that have
or will be paid by the Company as due. If the Depositor receives actual
notice of any Transfer Taxes arising out of the transfer, assignment
and conveyance of such Loan or the related Loan Assets, on written
demand by the Depositor, or upon the Company otherwise being given
notice thereof, then the Company shall pay, and otherwise indemnify and
hold the Depositor, the Trustee and the Trust harmless, on an after-tax
basis, from
15
<PAGE>
and against any and all such Transfer Taxes (it being understood that
the Certificateholders, the Trustee and the Trust shall have no
obligation to pay such Transfer Taxes).
(xxix) As of the related Acquisition Date, such Loan has not
been prepaid in full or in part (except for any partial prepayment
reflected in the Loan Balance as shown on the Loan Schedule).
(xxx) Such Loan has been originated at par (100% of the Note
amount) and all fees paid to the Company in connection with the
origination of such Loan have been disclosed in the related Loan File.
(xxxi) Such Loan has a final Scheduled Payment on or before
the date that is six months prior to the latest Series Termination
Date.
(xxxii) Such Loan has (A) an amortization schedule of not more
than *** months and (B) a remaining term of at least *** months and
not more than *** months.
(xxxiii) Except as disclosed in the Funding Report relating to
such Loan, to the best of the Company's knowledge, there is no
hazardous substance, or proceeding for remediation of any hazardous
substance, affecting any Mortgaged Property related to such Loan and
there is no material violation of any environmental law, regulation or
order affecting any Mortgaged Property relating to such Loan.
(xxxiv) There are no delinquent property taxes or similar
charges on or affecting any Mortgaged Property relating to such Loan.
(xxxv) Any improvements on any Mortgaged Property relating to
such Loan are in good repair, and, to the best of the Company's
knowledge, since the origination of such Loan, the operator of such
Mortgaged Property has maintained all material licenses, permits and
qualifications necessary for the operation of the Mortgaged Property,
and the Company has not received any notice of any proceeding to revoke
or suspend any such license, permit or qualification.
(xxxvi) Such Loan has been serviced solely by the Company or
the Servicer.
(b) The Company hereby makes, as of each Acquisition Date, the
following representations and warranties to the Depositor, and for the benefit
of the Trustee and the Certificateholders, on which the Depositor relies in
acquiring the Loan Assets and selling the Certificates, the Trustee relies in
accepting the Trust Estate and authenticating the Certificates and the
Certificateholders rely in acquiring the Certificates and making advances under
the Transaction Documents. Such representations and warranties speak as of each
Acquisition Date, as applicable, unless otherwise indicated, but shall survive
any subsequent transfer, assignment, contribution or conveyance of the Loans.
(i) The Company used no selection procedures that identified
the Loans being acquired as being less desirable or valuable than other
comparable loans, if any, originated by the Company.
(ii) The Loans comply with the Pool Criteria.
(iii) As of any Acquisition Date on which any Substitute Loans
are conveyed to the Depositor and the Trustee: (A) the weighted average
remaining term to maturity of the Loans
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
16
<PAGE>
immediately after the substitution of such Substitute Loans does not
vary by more than 1.5 months shorter or longer from the weighted
average remaining term to maturity immediately prior to such
substitution of Substitute Loans; (B) each Substitute Loan has a final
Scheduled Payment on or before the final scheduled maturity of all
other Loans; (C) the interest rate and prepayment premium with respect
to each Substitute Loan are not less than those on the Loan being
replaced.
(iv) As to any Loans acquired on any Acquisition Date while a
Swap Agreement is then in effect, the acquisition of such Loans will
not cause the weighted average interest rate on all Loans then held in
the Trust Estate (computed, prior to any default under the Swap
Agreement, by taking into account any Swap Payments anticipated to be
made in respect thereof) to be less than the weighted average interest
rate then accruing on Rated Certificates then Outstanding.
(c) The Company hereby makes the following representations and
warranties to the Depositor, and for the benefit of the Trustee and the
Certificateholders, on which the Depositor relies in acquiring the Loan Assets
and selling the Certificates, the Trustee relies in accepting the Trust Estate
and authenticating the Certificates and the Certificateholders rely in acquiring
the Certificates and making advances under the Transaction Documents. Such
representations and warranties speak as of the related Acquisition Date, unless
otherwise indicated, but shall survive any subsequent transfer, assignment,
contribution or conveyance of the Loans:
(i) The Company has been duly organized and is validly
existing and in good standing as a limited liability company under the
laws of its jurisdiction of organization with limited liability company
power and authority to own its properties and to transact the business
in which it is now engaged, and the Company is duly qualified to do
business in and is in good standing under the laws of each State in
which any Obligor or Mortgaged Property is located or is not required
under applicable law to effect such qualification, except where failure
to so qualify would not have a material adverse effect on the ability
of the Company to perform its obligations under the Transaction
Documents or under any of the Loans.
(ii) The performance of the obligations of the Company under
this Agreement and the other Transaction Documents and the consummation
of the transactions herein and therein contemplated will not conflict
with or result in any breach of any of the terms or provisions of, or
constitute with or without notice, lapse of time or both, a default
under any material indenture, agreement, mortgage, deed of trust or
other instrument to which the Company is a party or by which it is
bound, or result in the creation or imposition of any Lien (except the
Lien created by the Trust Agreement) upon any of the property or assets
of the Company pursuant to the terms of such indenture, mortgage, deed
of trust, or other agreement or instrument to which the Company is a
party or by which the Company is bound or to which any of the Company's
property or assets is subject, nor will such action conflict with or
result in any violation of the provisions of the Company's certificate
of formation or limited liability company operating agreement or any
statute or any order, rule or regulation of any court or any regulatory
authority or other governmental agency or body having jurisdiction over
the Company or any of its properties; and no consent, approval,
authorization, order, registration or qualification of or with or other
action of any court, or any such regulatory authority or other
governmental agency or body is required for consummation of the
transactions contemplated by this Agreement and the other Transaction
Documents except such consents, approvals and authorizations that have
been obtained or such registrations or qualifications that have been
made.
17
<PAGE>
(iii) Each of the Transaction Documents has been duly
authorized, executed and delivered by the Company by all necessary
corporate action and such agreements are the valid and legally binding
obligations of the Company, enforceable against the Company in
accordance with their respective terms, subject as to enforcement to
applicable bankruptcy, insolvency, reorganization and other similar
laws of general applicability relating to or affecting creditors'
rights generally and to general principles of equity regardless of
whether enforcement is sought in a court of law or equity.
(iv) The Company Address is the chief executive office and
chief place of business of the Company and the office where the Company
keeps its records concerning the Loans.
(v) The Company does not believe, nor does it have any
reasonable cause to believe, that it cannot perform each and every
covenant contained in this Agreement.
(vi) The transactions contemplated by the Transaction
Documents are being consummated by the Company in furtherance of its
ordinary business purposes, with no contemplation of insolvency and
with no intent to hinder, delay or defraud any of its present or future
creditors.
(vii) The consideration received by the Company as set forth
herein is fair consideration having value reasonably equivalent to or
in excess of the value of the Loan Assets and the performance of the
Company's obligations hereunder.
(viii) Neither on the date of the transactions contemplated by
the Transaction Documents or immediately before or after such
transactions, nor as a result of the transactions, will the Company:
(1) be insolvent such that the sum of its debts is
greater than all of its respective property, at a fair
valuation;
(2) be engaged in or about to engage in, business or
a transaction for which the Company will have unreasonably
small capital or the remaining assets of the Company will be
unreasonably small in relation to its respective business or
the transaction; and
(3) have intended to incur or believed it would
incur, debts that would be beyond its respective ability to
pay as such debts mature or become due. The Company's assets
and cash flow enable it to meet its present obligations in the
ordinary course of business as they become due.
(ix) Both immediately before and after the transactions
contemplated by the Transaction Documents: (A) the present fair salable
value of the Company's assets was or will be in excess of the amount
that will be required to pay its probable liabilities as they then
exist and as they become absolute and matured; and (B) the sum of the
Company's assets was or will be greater than the sum of its debts,
valuing its assets at a fair salable value.
18
<PAGE>
(x) The acquisition of the Loan Assets by the Depositor
pursuant to this Agreement is not subject to the bulk transfer or any
similar statutory provisions in effect in any applicable jurisdiction.
(xi) There are no proceedings or investigations pending, or to
the knowledge of the Company, threatened, against or affecting the
Company in or before any court, governmental authority or agency or
arbitration board or tribunal which, individually or in the aggregate,
if determined adversely to the Company, would materially and adversely
affect the ability of the Company to perform its obligations under, or
the validity or enforceability of, any of the Transaction Documents.
The Company is not in default with respect to any order of any court,
governmental authority or agency or arbitration board or tribunal.
(xii) All tax returns or extensions required to be filed by
the Company in any jurisdiction have in fact been filed, and all taxes,
assessments, fees and other governmental charges upon the Company, or
upon any of the respective properties, income or franchises of the
Company, shown to be due and payable on such returns have been, or will
be, paid when due. To the best of the Company's knowledge, all such tax
returns are true and correct and the Company has no knowledge of any
proposed additional tax assessment against it in any material amount
nor of any basis therefor. The provisions for taxes on the books of the
Company are in accordance with generally accepted accounting
principles.
(xiii) The Company (A) is not in violation of any laws,
ordinances, governmental rules or regulations to which it is subject,
(B) has not failed to obtain any licenses, permits, franchises or other
governmental authorizations necessary to the ownership of its property
or to the conduct of its business, and (C) is not in violation in any
material respect of any term of any agreement, charter instrument,
bylaw or instrument to which it is a party or by which it may be bound
which violation or failure to obtain would materially and adversely
affect the ability of the Company to perform its obligations under, or
the validity or enforceability of, any of the Transaction Documents.
(xiv) It is the intention of the Company that the Loan Assets
be acquired by the Depositor and that the beneficial interest in and
title to the Loan Assets not be part of the Company's estate in the
event of the filing of a bankruptcy petition by or against the Company
under any bankruptcy law.
(xv) As of the Initial Delivery Date and after giving effect
to the transactions contemplated hereby to be consummated on the
Initial Delivery Date, the Company is and will be the registered owner
of all of the issued and outstanding common stock of the Depositor, all
of which Common Stock is validly issued, fully paid and nonassessable.
(xvi) The present value of all benefits vested under all
"employee pension benefit plans," as such term is defined in Section 3
of ERISA, maintained by the Company, or in which employees of the
Company are entitled to participate, as from time to time in effect
(collectively, the "Pension Plans"), does not exceed the value of the
assets of the Pension Plans allocable to such vested benefits (based on
the value of such assets as of December 31, 1997, the last annual
valuation date). No prohibited transactions, accumulated funding
deficiencies, withdrawals or reportable events have occurred with
respect to any Pension Plans that, in the aggregate, could subject the
Company to any material tax, penalty or other liability. No notice of
intent to terminate a Pension Plan has been filed, nor has any Pension
Plan been terminated under Section 4041(f) of ERISA, nor has the
19
<PAGE>
Pension Benefit Guaranty Corporation instituted proceedings to
terminate, or appoint a trustee to administer, a Pension Plan and no
event has occurred or condition exists which might constitute grounds
under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Pension Plan.
(xvii) There has been no material adverse change in the
financial condition of the Company since April 28, 1998 and all
information concerning the Company and its Affiliates furnished by the
Company to the Depositor, the Certificateholder Agent, any
Certificateholder, the Trustee or the Rating Agency prior to such
Acquisition Date in connection with the Transaction Documents or any
transaction contemplated thereby was true and accurate in all material
respects or based on reasonable estimates (but, if based on estimates,
shall be identified as so based) on the date as of which such
information is stated or certified, as applicable, and no such
information contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances under which
such statements were made and taken as a whole, not misleading;
provided that, to the extent that the representations and warranties of
--------
the Company contained in this clause (xvii) relate to any such
information that was not prepared by the Company or any of its
Affiliates, then such representations and warranties are made by the
Company solely to the best of its knowledge. As used in this clause,
"information" does not include casual oral conversations or informal
oral statements of opinions on which it would be unreasonable to rely.
Notwithstanding that any representation or warranty set forth in this Section
3.01 is made to the best of the Company's knowledge (or to the best of the
Depositor's knowledge as such representation or warranty is applied to the
Depositor under the terms of the Trust Agreement), in the event any such
representation or warranty is found to be untrue or incorrect, the repurchase
and substitution provisions of Sections 3.03 and 3.04 shall apply as if such
representation or warranty was not conditioned on the Company's (or the
Depositor's) knowledge.
Section 3.02 Representations and Warranties of the Depositor.
------------ ------------------------------------------------
The Depositor hereby makes the following representations and warranties
to the Company, and for the benefit of the Trustee and the Certificateholders,
on which the Company relies in entering into this Agreement with the Depositor
the Trustee relies in accepting the Trust Estate and authenticating the
Certificates and the Certificateholders rely in acquiring the Certificates and
making Fundings. The Company agrees that any breach by the Depositor of any such
representations and warranties shall not limit or excuse the full performance of
the Company's obligations hereunder. Unless otherwise indicated, such
representations and warranties speak as of the Initial Delivery Date and each
Acquisition Date, but such representations and warranties shall survive any
subsequent transfer, assignment, contribution or conveyance of the Loan Assets:
(a) The Depositor has been duly organized and is validly existing in
good standing as a corporation under the laws of the State of Delaware, with
corporate power and authority to own its properties, perform its obligations
under the Transaction Documents and to transact the business in which it is now
engaged or in which it proposes to engage; the Depositor is duly qualified to do
business and is in good standing in each State in which the nature of its
business requires it to be so qualified, except where failure to so qualify
would not have a material adverse effect on the ability of the Depositor to
perform its obligations under the Transaction Documents.
20
<PAGE>
(b) The performance of the obligations of the Depositor under this
Agreement and the other Transaction Documents and the consummation of the
transactions herein and therein contemplated will not conflict with or result in
any breach of any of the terms or provisions of, or constitute with or without
notice, lapse of time or both, a default under any indenture, agreement,
mortgage, deed of trust or other instrument to which the Depositor is a party or
by which it is bound, or result in the creation or imposition of any Lien
(except the Lien created by the Trust Agreement) upon any of the property or
assets of the Depositor pursuant to the terms of such indenture, mortgage, deed
of trust, or other agreement or instrument to which the Depositor is a party or
by which the Depositor is bound or to which any of the Depositor's property or
assets is subject, nor will such action conflict with or result in any violation
of the provisions of the Depositor's certificate of incorporation or bylaws or
any statute or any order, rule or regulation of any court or any regulatory
authority or other governmental agency or body having jurisdiction over the
Depositor or any of its properties; and no consent, approval, authorization,
order, registration or qualification of or with or other action of any court, or
any such regulatory authority or other governmental agency or body is required
for consummation of the transactions contemplated by this Agreement and the
other Transaction Documents except such consents, approvals and authorizations
that have been obtained or such registrations or qualifications that have been
made.
(c) The Transaction Documents have been duly authorized, executed and
delivered by the Depositor by all necessary corporate action and constitute
valid and legally binding obligations of the Depositor, enforceable against the
Depositor in accordance with their terms, except that such enforcement may be
subject to bankruptcy, insolvency, reorganization and other similar laws of
general applicability relating to or affecting creditors' rights generally and
to general principles of equity regardless of whether enforcement is sought in a
court of equity or law.
(d) There are no proceedings or investigations to which the Depositor
is a party pending, or, to the knowledge of the Depositor, threatened, before
any court, regulatory body, administrative agency or other tribunal or
governmental instrumentality (i) asserting the invalidity of any Transaction
Document, (ii) seeking to prevent the issuance of the Certificates or the
consummation of any of the transactions contemplated by any of the Transaction
Documents, or (iii) seeking any determination or ruling that would materially
and adversely affect the performance by the Depositor of its obligations under,
or the validity or enforceability of, any of the Transactions Documents.
(e) All approvals, authorizations, consents, orders or other actions of
any Person or of any court, governmental agency or body or official, required in
connection with the execution and delivery of this Agreement have been or will
be taken or obtained on or prior to the Initial Delivery Date.
(f) The Depositor Address is the principal place of business and chief
executive office of the Depositor.
(g) All tax returns or extensions required to be filed by the Depositor
in any jurisdiction have in fact been filed, and all taxes, assessments, fees
and other governmental charges upon the Depositor, or upon any of the respective
properties, income or franchises of the Depositor, shown to be due and payable
on such returns have been, or will be, paid when due. To the best of the
Depositor's knowledge, all such tax returns are true and correct and the
Depositor has no knowledge of any proposed additional tax assessment against it
in any material amount nor of any basis therefor. The provisions for taxes on
the books of the Depositor are in accordance with generally accepted accounting
principles.
21
<PAGE>
(h) The Depositor (i) is not in violation of any laws, ordinances,
governmental rules or regulations to which it is subject, (ii) has not failed to
obtain any licenses, permits, franchises or other governmental authorizations
necessary to the ownership of its property or to the conduct of its business,
and (iii) is not in violation in any material respect of any term of any
agreement, charter instrument, bylaw or instrument to which it is a party or by
which it may be bound which violation or failure to obtain would materially and
adversely affect the ability of the Depositor to perform its obligations under,
or the validity or enforceability of, any of the Transaction Documents.
Section 3.03 Substitution or Repurchase of Loans.
----------- ------------------------------------
If (a) the Company, the Depositor, the Trustee, the Servicer or the
Special Servicer discovers or are notified of (i) the breach of any
representations or warranties set forth in Sections 3.01 or 3.02 that materially
and adversely affects the value of a Loan, an interest (of the Company, the
Depositor or the Trustee) in the related Loan Collateral, or the interests of
the Certificateholders, or (ii) the breach of any of the representations and
warranties set forth in Sections 3.01(a)(ii), 3.01(a)(v), 3.01(a)(viii) or
3.01(a)(xxvii), or (b) the Company or the Depositor discovers or is notified of
the occurrence of any missing or defective document as specified in Section
2.06, then the party discovering such breach or condition shall give prompt
written notice to the other parties and to the Trustee, the Certificateholder
Agent and each Certificateholder and, in the case of clause (a) of this Section,
the Company shall, within thirty (30) days from the date the Company was
notified of or otherwise discovers such breach, cure such breach, and in the
case of clause (b) of this Section, the Company shall, within forty-five (45)
days from the date the Company was notified of or otherwise discovers such
breach, cure such breach. If in the case of either clause (a) or (b) of this
Section, the Company fails to cure such breach in the applicable time period or
the Company or the Special Servicer is unable to cure such circumstance or
condition, then at the expiration of the applicable cure period the Company
shall either (A) purchase such Loan and the security interest in the related
Loan Collateral at the Repurchase Price or (B) provide a Substitute Loan
(together with a Company Certificate) and remit the applicable Repurchase Price,
if any, to the Collection Account. The Repurchase Price for a repurchased Loan
and, if any, for a Substitute Loan shall be paid and any Substitute Loan shall
be delivered, by the Company to the Collection Account in accordance with
Section 3.04. It is understood and agreed that the obligation of the Company to
cure or purchase or substitute any Loan as to which such a breach has occurred
shall constitute the sole remedy respecting such breach available to the
Depositor, the Certificateholders or the Trustee on behalf of such
Certificateholders (except for any indemnities provided under Section 4.01(j) or
under the Trust Agreement) for any losses, claims, damages and liabilities
arising from the Depositor's ownership of such Loan or the inclusion of such
Loan in the Trust Estate.
Section 3.04 Requirements for Purchase or Substitution of Loans.
------------ ---------------------------------------------------
(a) If the Company purchases any Loan under Sections 2.06 or 3.03, or
if the Depositor removes any Loan under Section 3.04 of the Trust Agreement,
such Loan shall be purchased by the Company or removed by the Depositor, as
applicable, at the Repurchase Price. All purchases and removals shall be
accomplished at the times specified in subsection (c) below.
(b) If the Company substitutes for any Loan under Section 2.06 or 3.03,
or if the Depositor substitutes any Loan under Section 3.04 of the Trust
Agreement (a "Substitute Loan"), each such Substitute Loan shall (i) be an
Eligible Loan, (ii) be written on one of the Standard Forms, (iii) be
accompanied by (A) a Company Certificate subjecting such Loan to the provisions
hereof and providing with respect to such Substitute Loan the related Loan
Schedule and (B) evidence of all required UCC filings and other actions required
under the Transaction Documents to perfect the interests of the Depositor and
the Trustee in such
22
<PAGE>
Substitute Loan and the related Loan Assets, and (iv) not have been selected
using any other procedures that identified the Loan as being less desirable or
valuable than other comparable loans owned by the Company. Upon the substitution
of any Substitute Loan pursuant to the provisions of this Section 3.04(b): (y)
such Substitute Loan will be subject to all the terms and provisions of this
Agreement, the Servicing Agreement and the Trust Agreement (including the
applicability and accuracy of all of the representations and warranties set
forth in Sections 3.01(a) and 3.01(b) as of the date of substitution) just as if
such Substitute Loan had been one of the original Loans acquired on the Initial
Delivery Date; and (z) the Depositor and the Company shall also comply with the
provisions and limitations set forth in the Trust Agreement. All substitutions
shall be accomplished at the time specified in subsection (c) below.
(c) Any purchase or substitution of a Loan by the Company in accordance
with Sections 2.06, 3.03 or this Section 3.04 shall be made by remittance of the
Repurchase Price directly to the Collection Account or by substitution of a
Substitute Loan and remittance of the applicable Repurchase Price, if any,
directly to the Collection Account, on or prior to the Determination Date next
following the expiration of the cure period set forth in Sections 2.06 or 3.03,
as applicable. In addition, the Trustee shall release the related Loan in
accordance with Section 3.05 of the Trust Agreement, and the Special Servicer
shall no longer hold the copy of the related Loan File in its capacity as the
Special Servicer in accordance with the provisions of the Servicing Agreement.
(d) Any voluntary purchase or substitution of a Loan by the Depositor
pursuant to the terms of the Trust Agreement in the event of a prepayment,
default or delinquency with respect to such Loan shall satisfy the same
requirements for a purchase or substitution, as the case may be, as are set
forth in this Section 3.04.
23
<PAGE>
ARTICLE FOUR
------------
COVENANTS OF THE COMPANY
------------------------
Section 4.1 The Company Covenants.
----------- ----------------------
The Company hereby covenants and agrees with the Depositor and for the
benefit of the Trustee and the Certificateholders as follows:
(a) Except as hereinafter provided, the Company will keep in full
effect its existence, rights and franchises as a limited liability company and
will obtain and preserve its qualification to do business as a foreign limited
liability company in each jurisdiction in which such qualification is or shall
be necessary to protect the validity and enforceability of the Transaction
Documents or any of the Loans and to perform its duties hereunder. The Company
may not merge or consolidate with, or sell all or substantially all of its
assets to, any other Person unless: (i) immediately after giving effect to such
transaction, no representation or warranty made pursuant to Section 3.01(c)
shall have been breached and no Default would occur as a result thereof, (ii)
such intended successor executes an agreement or assumption, in form reasonably
satisfactory to the Trustee, to perform every obligation under each of the
Transaction Documents to which it is to be a party, (iii) such intended
successor has a net worth that is sufficient to perform in accordance with the
Transaction Documents to which it is to be a party and at least approximately
equivalent to the net worth of the Company immediately prior to such intended
sale, merger or consolidation, (iv) the Company shall have delivered prior
written notice to the Certificateholder Agent, the Certificateholders and the
Trustee and shall have delivered to the Depositor, the Certificateholder Agent,
the Certificateholders and the Trustee an Officer's Certificate of the Company
and an Opinion of Counsel each stating that such intended consolidation, merger,
or succession and such agreement of assumption complies with this Section 4.01
and that all conditions precedent, if any, provided for in this Agreement
relating to such transaction have been complied with, and (v) the Company shall
have delivered to the Depositor, the Certificateholder Agent, the
Certificateholders and the Trustee an Opinion of Counsel either (A) stating
that, in the opinion of such Counsel, all financing statements, continuation
statements and amendments thereto have been executed and filed and, if
applicable, all other actions have been taken, to preserve fully the interest of
the Depositor in the Loans and the Loan Assets and reciting the details of such
filings and, if applicable, such actions, or (B) stating that, in the opinion of
such counsel, no such action shall be necessary to preserve and protect such
interest; whereupon such Person, upon consummation of such transaction shall
become the successor of the Company hereunder, without the execution or filing
of any paper or any further act on the part of any of the parties hereto.
(b) Neither the Company nor any of the directors, officers, employees
or agents of the Company shall be under any liability to the Depositor, the
Trustee or the Certificateholders for taking any action, or for refraining to
take any action, in good faith pursuant to this Agreement or for errors in
judgment unless such action or inaction involves recklessness or negligence;
provided that this provision shall not protect the Company against any breach of
- --------
warranties or representations made herein, any failure to perform its
obligations in strict compliance with this Agreement, or any liability which
would otherwise be imposed by reason of any breach of the terms and conditions
of this Agreement. The Company, and any director, officer, employee or agent of
the Company, may rely in good faith on any document of any kind prima facie
properly executed and submitted by any Person respecting any matters arising
hereunder. The Company shall not be under any obligation to appear in,
prosecute, or defend any legal action that is not incidental to its obligations
as the contributor of the Loan Assets hereunder and that in its opinion may
involve it incurring any expense or liability.
24
<PAGE>
(c) The Company, from time to time, at its own expense, shall execute
and file such additional financing statements (including continuation
statements) and take such other actions as may be necessary to preserve the
security interests and liens described in Section 3.01(a)(ix) as may be
reasonably requested by the Depositor or the Trustee and are reasonably
satisfactory in form and substance to the Trustee.
(d) The Company will not change its name, identity or corporate
structure in any manner that would, could, or might make any financing statement
or continuation statement misleading within the meaning of Section 9-402(7) of
the UCC, unless it shall have given the Depositor, the Certificateholder Agent
and the Trustee at least thirty (30) days prior written notice thereof and shall
have provided evidence of appropriate UCC filings.
(e) The Company will give the Depositor, the Certificateholder Agent
and the Trustee at least thirty (30) days prior written notice of any relocation
of its principal executive office and, if, as a result of such relocation, the
applicable provisions of the UCC would require the filing of any amendment of
any previously filed financing or continuation statement or of any new financing
statement and the Company, the Company shall provide evidence of appropriate UCC
filings.
(f) The Company will duly fulfill all obligations on its part to be
fulfilled under or in connection with each Loan, will not change or modify the
terms of the Loans except as expressly permitted by the terms of the Transaction
Documents and will do nothing to impair the rights of the Depositor or the
Trustee in the Loans or the Loan Collateral. If, for any reason, the rights of
the Company under any Loan (including under any guaranty of the related
Obligor's obligations under any Loan) are not assignable or have, in fact, not
been assigned to the Depositor or to the Trustee, then the Company will enforce
such rights on behalf of the Depositor and the Trustee.
(g) The Company will comply, in all material respects, with all acts,
rules, regulations, orders, decrees and directions of any governmental authority
applicable to the Loan Assets or any part thereof; provided that the Company may
--------
contest any act, regulation, order, decree or direction in any reasonable manner
which shall not materially and adversely affect the rights of the Depositor or
the Trustee in the Loan Assets.
(h) The Company will advise the Depositor, the Certificateholders and
the Trustee promptly, in reasonable detail, of the occurrence of any breach by
the Company, following discovery by the Company of such breach, of any of its
representations, warranties or covenants contained herein.
(i) The Company will execute or endorse, acknowledge, and deliver to
the Depositor, the Certificateholders and the Trustee from time to time such
schedules, confirmatory assignments, conveyances, powers of attorney, and other
reassurances or instruments and take such further similar actions relating to
the Loans and the rights covered by the Transaction Documents, as the Depositor
or the Trustee may reasonably request to preserve and maintain title to the Loan
Assets and the rights of the Trustee and the Certificateholders therein against
the claims of all Persons.
(j) The Company agrees to indemnify, defend and hold the Depositor,
the Trustee and the Certificateholders harmless from and against any loss,
liability, damage, judgment, claim, deficiency or expense (including interest,
penalties, reasonable attorney's fees and amounts paid in settlement) that is
caused by (i) a breach at any time by the Company of its representations,
warranties and covenants contained in Section 3.01 or this Section 4.01 or (ii)
any material information furnished by the Company that is set forth in any
schedule delivered hereunder, being untrue in any respect when any such
representation was
25
<PAGE>
made or schedule delivered; provided that the Company shall not have any
--------
liability with respect to a representation or warranty as to any specific Loan
other than to purchase such Loan or substitute for such Loan in accordance with
Sections 3.03 and 3.04 unless such breach of representation or warranty is the
result of the Company's fraud, gross negligence, bad faith or willful
misconduct. The Company shall also indemnify the Depositor, the Trustee and the
Certificateholders for any costs or expenses incurred by them in the enforcement
of this Agreement or as a result of the Company's failure to perform its
obligations hereunder. The obligations of the Company under this Section 4.01(j)
shall be considered to have been relied upon by the Depositor, the Trustee and
the Certificateholders and shall survive the execution, delivery and performance
of this Agreement, regardless of any investigation made by or on behalf of the
Depositor, the Trustee, the Certificateholder Agent or any Certificateholder
until termination of the Trust Agreement. If the Company has made any indemnity
payments pursuant to this Section 4.01(j) and thereafter any Person recovers the
amount of the related loss or any portion thereof from others, such Person will
promptly repay the amount recovered to the Company, without interest.
(k) The Company will not do anything to disturb or impair the
acquisition of the Loan Assets by the Depositor hereunder.
(l) The Company (i) will (A) maintain its books and records separate
from the books and records of the Depositor and (B) maintain bank accounts
separate from those of the Depositor and (C) maintain one (1) independent
director on the Depositor's board of directors, so long as the Company is a
shareholder of the Depositor and (ii) will not, and will not in any manner
encourage any other Person to, (A) take any action that would cause the
dissolution or liquidation of the Depositor, (B) guarantee (directly or
indirectly), endorse or otherwise become contingently liable (directly or
indirectly) for the obligations of the Depositor, or (C) institute against the
Depositor, or join any other Person in instituting against the Depositor, any
case, proceeding or other action under any existing or future bankruptcy,
insolvency or similar laws. This Section 4.01(l) shall survive termination of
this Agreement.
(m) The Company shall notify the Depositor, the Trustee, the
Certificateholder Agent and each Certificateholder promptly after becoming aware
of any Lien (other than a Permitted Loan Collateral Lien) on any Loan Asset.
(n) On each date as of which the Company substitutes a Substitute Loan
or Substitute Loans in accordance with Sections 2.06 or 3.04(b), the Company
shall provide to the Depositor (with a copy thereof to the Trustee, the
Certificateholder Agent and each Certificateholder) a Company Certificate with
respect to such Substitute Loan(s), subjecting such Loan(s) and the related Loan
Assets to the provisions hereof and providing with respect to such Loan(s) the
information required in the related amended Loan Schedule.
(o) The annual financial statements of the Company will reflect the
effects of the transactions contemplated by the Transaction Documents as a sale
by the Company and a sale by the Depositor in accordance with generally accepted
accounting principles. The financial statements of the Company and the Depositor
will also reflect that the assets of the Depositor are not available to pay
creditors of the Company. The resolutions, agreements and other instruments
underlying the Transaction Documents will be continuously maintained by the
Company as official records.
(p) The Company, in its capacity as the Special Servicer, will, at its
own cost and expense, (i) retain on its Electronic Records a master record of
the Loans for the benefit of the Depositor, the Trustee and other Persons, if
any, with interests in the Loans and (ii) mark its Electronic Records and all
other records
26
<PAGE>
to the effect that the Loan Assets have been acquired by the Depositor and that
they have been transferred and assigned to the Trustee pursuant to the Trust
Agreement.
(q) Except as otherwise agreed to in advance in writing by the
Controlling Holders, the Company will at all times own one hundred percent
(100%) of the Common Stock and will not pledge the Common Stock as security. If
(with such agreement of the Controlling Holders) the Company elects to transfer
the Common Stock to an affiliate or pledge a security interest in the Common
Stock, then, as a condition to such sale or pledge, the Company shall, on behalf
of the Depositor, obtain an agreement from the transferee or the secured party
that it will take no action that would cause the Depositor to breach any of its
covenants under any Transaction Document, and that for so long as the Trust
Agreement is in effect and for one year and one day thereafter, it will not file
any involuntary petition or otherwise institute any bankruptcy, reorganization,
insolvency or liquidation proceeding or other proceeding under any federal or
state bankruptcy or similar law against the Depositor and it will comply with
the Depositor's certificate of incorporation and the covenants of the Depositor
set forth in the Transaction Documents. Subject to the foregoing limitation, the
parties acknowledge and agree that the Company may in the future transfer the
Common Stock to a direct or indirect wholly owned subsidiary of the Company,
which subsidiary may pledge the Common Stock to or for the benefit of one or
more lenders or purchasers of its Certificates or other obligations.
(r) If the Company desires to amend or otherwise revise the Program
Guidelines, then the Company shall first deliver to the Depositor, the Trustee,
the Certificateholder Agent and the Rating Agency the final version of the
proposed amendments or other proposed revisions to the Program Guidelines (in
each instance and as so proposed, the "Proposed Revision"). Within thirty (30)
days following its receipt of any Proposed Revision, each of the Depositor, the
Rating Agency and the Certificateholder Agent shall deliver to the Company
written notice indicating whether the Depositor, the Rating Agency and the
Certificateholder Agent deem the Proposed Revision acceptable or not acceptable;
provided that the failure of the Depositor, the Rating Agency or the
- --------
Certificateholder Agent to provide such a written notice to the Company within
such time period shall be deemed to constitute rejection of such Proposed
Revision.
Section 4.02 Depositor Covenants.
------------ --------------------
The Depositor hereby covenants and agrees with the Company and for the
benefit of the Trustee and the Certificateholders as follows:
(a) If in any enforcement suit or legal proceeding it is held that the
Company may not enforce a Loan on the ground that it is not a real party in
interest or holder entitled to enforce the Loan, the Depositor shall, at the
Depositor's expense, take such steps as the Depositor deems necessary to enforce
the Loan, including bringing suit in the Depositor's name.
(b) The Depositor warrants that it will own and possess a first
priority security interest in the Loan Collateral (subject only to Permitted
Loan Collateral Liens) upon its acquisition of the Loan Assets and that it will
warrant and defend its interest in the Loan Collateral against all Persons,
claims and demands whatsoever. The Depositor shall not assign, sell, pledge, or
exchange, or in any way encumber or otherwise dispose of its interest in the
Loan Assets, except as permitted under the Trust Agreement.
27
<PAGE>
Section 4.03 Assignment of Loan Assets.
------------ --------------------------
The Company understands that the Depositor will convey and assign to
the Trustee all of its right, title and interest in and to this Agreement and
the Loan Assets. The Company consents to such assignment and grants and further
agrees that all representations, warranties, covenants and agreements of the
Company made herein shall also be for the benefit of and inure to the Trustee
and all Certificateholders.
28
<PAGE>
ARTICLE FIVE
------------
CONDITIONS
----------
Section 5.01 Conditions to the Depositor's Obligations.
------------ ------------------------------------------
The obligations of the Depositor to provide the Company with the
consideration provided for herein, and of the Certificateholders to make
Fundings on any Funding Date, shall be subject to the satisfaction of the
following conditions:
(a) On or before the Initial Delivery Date, the Depositor, the
Servicer, the Special Servicer, the Servicing Advisor and the Trustee shall have
entered into the Trust Agreement and the Servicing Agreement (to the extent they
are parties thereto);
(b) On the Initial Delivery Date, the Certificates to be sold on such
Date shall have been issued and sold and the Depositor shall have received the
full consideration due it upon the issuance of such Certificates.
(c) No Default (other than a Servicing Advisor Default), Depositor
Event of Default, Servicer Event of Default, Special Servicer Event of Default
or Servicing Advisor Event of Default shall have occurred and be continuing;
(d) The Company shall have delivered all other information previously
required or reasonably requested by the Depositor, the Trustee or the
Certificateholder Agent to be delivered by the Company hereunder, duly certified
by an officer of the Company, shall have complied with Section 2.04 and shall
have substantially performed all other obligations required to be performed by
it pursuant to the terms of the Transaction Documents;
(e) All representations and warranties of the Company contained in
Sections 3.01(a) and (b) and all information provided in any Loan Schedule
(including any related Funding Report and Pending Credit Schedule), as
applicable, shall be true and correct on the relevant Acquisition Date, all
representations and warranties in Sections 3.01(c) shall be true and correct as
of each Acquisition Date, and the Company shall have delivered to the Depositor
and the Trustee an Officer's Certificate to such effect;
(f) Within two (2) Business Days of each Acquisition Date, as
applicable, the Company shall have delivered, or cause to have been delivered,
to the Trustee, in the manner contemplated by Section 3.01(a)(iii), the original
manually executed Note relating to the Loans being acquired, all other original
documents evidencing such Loans (except as otherwise contemplated by Section
3.01(a)(iii)), and the other items comprising the Loans Files relating to such
Loans, and there shall have been made all filings, recordings or registrations,
and there shall have been given or taken any notice or any other action, as
applicable, as may be necessary in the reasonable opinion of the Depositor, the
Trustee and the Certificateholder Agent, in order to establish and preserve the
right, title and interest of the Depositor and the Trustee in the Loan Assets;
(g) On or prior to the second Business Day following delivery of each
of the documents specified in Section 3.01(a)(iii), the Servicer and the Special
Servicer shall have received a copy of such documents; and
29
<PAGE>
(h) On or before the Initial Delivery Date, the Depositor, the
Servicer, the Special Servicer, the Servicing Advisor and the Trustee shall have
entered into the Trust Agreement and the Servicing Agreement (to the extent they
are parties thereto).
Section 5.02 Conditions to the Company's Obligations.
------------ ----------------------------------------
The obligations of the Company to enter into this Agreement on the
Initial Delivery Date shall be subject to the satisfaction of the following
conditions:
(a) On or before the Initial Delivery Date, the Depositor, the
Servicer, the Special Servicer, the Servicing Advisor and the Trustee shall have
entered into the Trust Agreement and the Servicing Agreement;
(b) On the Initial Delivery Date, the Certificates shall have been
issued and sold and the Depositor shall have received the full consideration due
it upon the issuance of such Certificates; and
(c) The consideration set forth herein shall have been paid or
delivered to the Company simultaneously with the execution of this Agreement.
30
<PAGE>
ARTICLE SIX
-----------
TERM AND TERMINATION
--------------------
Section 6.01 Term.
------------ -----
This Agreement shall commence as of the date of execution and delivery
hereof and shall continue in full force and effect until the later of (a) the
final payment with respect to the last Loan Asset and (b) termination of the
Trust Agreement; provided that any obligations of the Depositor with respect to
--------
the acquisition of any Loans from and after the Initial Delivery Date shall
terminate upon the occurrence of a Funding Termination Event.
Section 6.02 Default by the Company.
------------ -----------------------
If the Company shall be in default under this Agreement and such
default shall not have been cured for a period of thirty (30) days, or if the
Company shall become insolvent or make an assignment for the benefit of its
creditors or have a receiver appointed for all or substantially all of its
properties, or if any proceedings are commenced, or consented to, by the Company
or are not stayed or dismissed within sixty (60) days after being commenced
against the Company under any bankruptcy, insolvency or other law for the relief
of debtors, then the Depositor shall have the right, with the prior written
consent of the Trustee, in addition to any other rights it may have under any
applicable law, to terminate its obligations under this Agreement upon thirty
(30) days prior written notice to the Company; provided that any termination of
--------
this Agreement pursuant to this Section 6.02 shall not release the Company from
any obligation under this Agreement.
31
<PAGE>
ARTICLE SEVEN
-------------
GENERAL PROVISIONS
------------------
Section 7.01 Amendments.
------------ -----------
This Agreement and the rights and obligations of the parties hereunder
may not be changed orally but only by an instrument in writing signed by the
party against whom enforcement is sought together with the prior written consent
of the Holders of not less than 51% of the Outstanding Principal Amount of each
affected Class (or, with respect to any affected Class during the Funding Period
applicable to such Class, of not less than 51% of the Maximum Series Amount of
such Class) of Rated Certificates. Promptly after the execution of any
amendment, the Depositor shall send to the Trustee, each Certificateholder, the
Certificateholder Agent and each Rating Agency a conformed copy of each such
amendment.
Section 7.02 Governing Law.
------------ --------------
This Agreement shall be construed in accordance with the internal laws
of the State of New York.
Section 7.03 Notices.
------------ --------
All demands, notices and communications hereunder shall be made in
accordance with the provisions of the Trust Agreement and shall be addressed, in
the case of the Company, to the Company Address, in the case of the Depositor,
to the Depositor Address, and in the case of any Certificateholders, to their
address set forth on the Certificate Register. All demands, notices and
communications made in accordance with the provisions hereof shall be deemed to
have been received or made (as applicable) as provided in the Trust Agreement.
Any Person may change the address for notices hereunder by giving notice of such
change to the other Person (or in the case of a Certificateholder, by causing
the Trustee to change its address as provided on the Certificate Register).
Section 7.04 Separability Clause.
------------ --------------------
Any provisions of this Agreement which are prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
Section 7.05 Assignment.
------------ -----------
Except as provided in Section 4.01(a), this Agreement may not be
assigned or delegated by the Company without the prior written consent of the
Depositor and the Trustee and may not be assigned or delegated by the Depositor
without the prior written consent of the Trustee.
Section 7.06 Further Assurances.
------------ -------------------
Each of the Company and the Depositor agrees to do such further acts
and things and to execute and deliver to the Trustee such additional
assignments, agreements, powers and instruments as are required by the Trustee
to carry into effect the purposes of this Agreement or to better assure and
confirm unto the Trustee or the Certificateholders their rights, powers or
remedies hereunder. If any Obligor shall be in
32
<PAGE>
default under any Loan, upon reasonable request from the Special Servicer or the
Trustee, the Company will take all reasonable steps to assist in enforcing such
Loan and preserving and maintaining title to the Loan Assets and the rights of
the Trustee and the Certificateholders therein against the claims of all persons
and parties to the extent the Company is capable of performing such requested
steps and the Special Servicer or the Trustee reasonably determines that the
assistance of the Company is necessary to effect the intent and purposes hereof.
Section 7.07 No Waivers; Cumulative Remedies.
------------ --------------------------------
No failure to exercise and no delay in exercising, on the part of the
Depositor, the Company, the Trustee or any other Person, any right, remedy,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise of any right, remedy, or privilege hereunder preclude
any other or further exercise hereof or the exercise of any other right, remedy,
power or privilege. The rights, remedies, powers and privileges herein provided
are cumulative and not exhaustive of any rights, remedies, powers and privilege
provided by law.
Section 7.08 Binding Effect; Third Party Beneficiaries.
------------ ------------------------------------------
This Agreement will inure to the benefit of and be binding upon the
parties hereto and shall inure to the benefit of the Trustee and the
Certificateholders, and their respective successors and permitted assigns, as
express third party beneficiaries.
Section 7.09 Set-Off.
------------ --------
(a) The Company hereby irrevocably and unconditionally waives all right
of set-off that it may have under contract (including this Agreement),
applicable law or otherwise with respect to any funds or monies of the
Depositor, the Trustee, each Certificateholder, the Certificateholder Agent, the
Servicer, the Special Servicer or the Servicing Advisor at any time held by or
in the possession of the Company.
(b) Each of the Depositor, the Trustee, the Certificateholders and the
Certificateholder Agent shall have the right to set-off against the Company any
amounts to which the Company may be entitled and to apply such amounts to any
claims the Depositor, the Trustee, any Certificateholder or the
Certificateholder Agent may have against the Company from time to time under
this Agreement. Upon any such set-off, the Person exercising such right shall
give notice of the amount thereof and the reasons therefor.
33
<PAGE>
IN WITNESS WHEREOF, the Company and the Depositor have caused this
Agreement to be duly executed by their respective officers thereunto duly
authorized as of the date first written above.
ALLEGIANCE CAPITAL, LLC,
Company
By: /s/ Alan B. Perper
-------------------------------
Name: Alan B. Perper
Title: President
ALLEGIANCE FUNDING CORP. I
Depositor
By: /s/ Alan B. Perper
-------------------------------
Name: Alan B. Perper
Title: President
<PAGE>
EXHIBIT A
---------
to Loan Acquisition Agreement
-----------------------------
COMPANY CERTIFICATE
-------------------
, 19
--------------- --
Pursuant to Section 2.01 of that certain Loan Acquisition Agreement,
dated as of August 1, 1998 (as amended or modified from time to time in
accordance with the terms thereof, the "Loan Acquisition Agreement"), between
Allegiance Capital, LLC (the "Company") and Allegiance Funding Corp. I (the
"Depositor"), attached hereto as Schedule A is a Loan Schedule related to the
requested Funding that includes information regarding the Loan Assets that are
hereby sold, transferred, contributed, assigned, set over and otherwise conveyed
by the Company to the Depositor in accordance with the Loan Acquisition
Agreement. Each capitalized term used herein that is not otherwise defined
herein has the meaning assigned thereto in the Loan Acquisition Agreement.
ALLEGIANCE CAPITAL, LLC,
Company
By :
---------------------------
Name:
---------------------------
Title:
---------------------------
ALLEGIANCE FUNDING CORP. I
Depositor
By:
---------------------------
Name:
---------------------------
Title:
---------------------------
A-1
<PAGE>
Schedule A to
-------------
Company Certificate
-------------------
Loan Schedule
A-2
<PAGE>
EXHIBIT D
---------
to Loan Acquisition Agreement
-----------------------------
POOL CRITERIA
-------------
(Dollar Percentage Limits Based on Greater of Pool Balance and $30,000,000)
---------------------------------------------------------------------------
***
- ----------------------
***
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
D-1
<PAGE>
***
- --------
***
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
D-2
SERVICING AGREEMENT
among
POINT WEST CAPITAL CORPORATION, as the Servicer,
ALLEGIANCE CAPITAL, LLC, as the Special Servicer,
*** as the Servicing Advisor,
ALLEGIANCE FUNDING CORP. I, as the Depositor,
and
MANUFACTURERS AND TRADERS TRUST COMPANY, as the Trustee,
- -------------------------------------------------------------------------------
Dated as of August 1, 1998
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
<S> <C> <C>
ARTICLE ONE
DEFINITIONS
Section 1.01 Defined Terms..........................................................................2
Section 1.02 Certain Rules of Construction..........................................................6
ARTICLE TWO
REPRESENTATIONS AND WARRANTIES
Section 2.01 Servicer Representations and Warranties................................................7
Section 2.02 Special Servicer Representations and Warranties........................................8
Section 2.03 Servicing Advisor Representations and Warranties.......................................9
ARTICLE THREE
ADMINISTRATION AND SERVICING OF LOANS
Section 3.01 Responsibilities of the Servicer......................................................12
Section 3.02 Responsibilities of Special Servicer..................................................12
Section 3.03 Responsibilities of the Servicing Advisor.............................................15
Section 3.04 Servicing Standard of Care............................................................15
Section 3.05 Lockbox Account; Remittances..........................................................15
Section 3.06 Financing Statements; Title Filings...................................................16
Section 3.07 Maintenance of Insurance Policy; Insurance Proceeds..................................16
Section 3.08 No Offset.............................................................................16
Section 3.09 Servicing Compensation................................................................17
Section 3.10 Prepayments Permitted; Substitution or Purchase of Loans..............................18
Section 3.11 Due-on-Sale Clauses; Assumptions; Due-on-Encumbrance Clauses..........................19
Section 3.12 Realization Upon Defaulted Loans......................................................20
Section 3.13 Title and Management of Repossessed Collateral........................................22
Section 3.14 Sale of Defaulted Loans and Repossessed Collateral....................................24
Section 3.15 Modifications, Waivers, Amendments and Consents.......................................26
ARTICLE FOUR
ACCOUNTINGS, STATEMENTS AND REPORTS
Section 4.01 Reports...............................................................................29
Section 4.02 Financial Statements; Certification as to Compliance; Notice of Default...............30
Section 4.03 Annual Independent Accountants' Reports...............................................32
Section 4.04 Access to Certain Documentation and Information.......................................32
Section 4.05 Other Necessary Data..................................................................33
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE FIVE
THE SERVICER, THE SPECIAL SERVICER AND THE DEPOSITOR
Section 5.01 Indemnification.......................................................................34
Section 5.02 Corporate Existence; Reorganizations..................................................34
Section 5.03 Limitation on Liability of the Servicer, the Special Servicer, the Servicing Advisor ...
and Others. .....................................................................35
Section 5.04 The Servicer, the Special Servicer and the Servicing Advisor Not to Resign............36
Section 5.05 Depositor Indemnification.............................................................36
ARTICLE SIX
SERVICING TERMINATION
Section 6.01 Events of Default.....................................................................37
Section 6.02 Appointment of Successor Servicer; Taking of Bids.....................................38
Section 6.03 Effects of Termination................................................................40
Section 6.04 No Effect on Other Parties. ..........................................................40
Section 6.05 Waiver of Past Defaults...............................................................40
Section 6.06 Notification to Certificateholders and the Certificateholder Agent....................40
ARTICLE SEVEN
GENERAL PROVISIONS
Section 7.01 Termination of the Agreement..........................................................41
Section 7.02 Amendments............................................................................41
Section 7.03 Governing Law.........................................................................42
Section 7.04 Notices...............................................................................42
Section 7.05 Severability of Provisions............................................................42
Section 7.06 Binding Effect........................................................................42
Section 7.07 Article Headings and Captions.........................................................42
Section 7.08 Legal Holidays........................................................................42
Section 7.09 Assignment for Security for the Certificates. ........................................43
Section 7.10 No Servicing Assignment...............................................................43
Section 7.11 Notifications.........................................................................43
Section 7.12 Successor Servicer....................................................................43
</TABLE>
<PAGE>
This SERVICING AGREEMENT (this "Agreement"), dated as of August 1,
1998, is entered into among Point West Capital Corporation, a Delaware
corporation (the "Servicer"), Allegiance Capital, LLC, a Delaware limited
liability company (the "Special Servicer"), *** corporation (the "Servicing
Advisor"), Allegiance Funding Corp. I, a Delaware corporation (the "Depositor"),
and Manufacturers and Traders Trust Company, a New York banking corporation (the
"Trustee").
RECITALS
--------
The Depositor has entered into a Trust Agreement dated as of August 1,
1998 (the "Trust Agreement"), with the Trustee and the Servicer, pursuant to
which the Depositor, on behalf of the Trust, has caused or will cause the
issuance of various Series of Revolving Certificates and various Series of Term
Certificates.
The Depositor and Allegiance Capital, LLC, a limited liability company
(the "Company"), have entered into a Loan Acquisition Agreement, dated as of
August 1, 1998 (the "Loan Acquisition Agreement"), providing for, among other
things, the contribution and sale, from time to time, by the Company to the
Depositor of all of its right, title and interest in and to certain Loan Assets
which the Depositor is and will be conveying to the Trustee pursuant to the
Trust Agreement. As a precondition to the effectiveness of the Loan Acquisition
Agreement, such agreement requires that the Servicer, the Servicing Advisor, the
Depositor and the Trustee enter into this Agreement to provide for the servicing
of the Loan Assets.
In addition, the Depositor is conveying to the Trustee, among other
things, all of the Depositor's rights derived under this Agreement and the Loan
Acquisition Agreement, and each of the Servicer, the Special Servicer and the
Servicing Advisor agrees that all representations, warranties, covenants and
agreements made by such Person herein with respect to the Loan Assets and
otherwise shall also be for the benefit of the Trustee and all
Certificateholders. For their services under this Agreement, the Servicer, the
Special Servicer and the Servicing Advisor will receive the compensation
described herein or in the Trust Agreement.
In consideration of the mutual agreements contained herein and of other
good and valuable consideration (the receipt and adequacy of which are hereby
acknowledged), the parties hereto agree as follows:
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
1
<PAGE>
ARTICLE ONE
------- ---
DEFINITIONS
-----------
Section 1.01 Defined Terms.
- ------------ --------------
Each capitalized term used herein but not otherwise defined has the
meaning assigned to such term in the Trust Agreement or, if not defined therein,
in the Loan Acquisition Agreement. For purposes of this Agreement, each of the
following terms has the meaning specified herein:
"Agreement": The meaning set forth in the introductory paragraph
hereof.
"Annual Pool Report": The annual report, substantially in the form of
Exhibit E, prepared by the Special Servicer pursuant to and in accordance with
- ---------
Section 4.01(c).
"Assuming Party": The meaning set forth in Section 3.11(a).
"Company": The Person described in the recitals hereof and all
successors and permitted assigns of such Person under the Loan Acquisition
Agreement.
***.
"Depositor": The Person described in the introduction hereto and all
successors and permitted assigns of such Person under the Trust Agreement.
"Directing Holders": The Holders of not less than 51% of the
Outstanding Principal Amount of the lowest Class of Certificates then
Outstanding (or Classes, if more than one Series is Outstanding).
"Eligible Account": One or more accounts (a) that are maintained with a
depository institution the long-term unsecured debt obligations of which have
been rated by the Rating Agency in one of its two highest rating categories at
the time of any deposit therein, (b) that are trust accounts with any depository
institution held by the depository institution in its capacity as a corporate
trustee, or (c) the deposits in which are insured by the FDIC (to the limits
established by the FDIC) and the uninsured deposits in which are otherwise
secured such that the Special Servicer has a claim with respect to the funds in
such accounts or a perfected first security interest against any collateral
securing such funds that is superior to claims of any other depositors or
creditors of the depository institution with which such accounts are maintained.
"Environmental Assessment": With respect to any Mortgaged Property, a
"Phase I" environmental assessment of such Mortgaged Property meeting the
applicable standards of the American Society for Testing Materials.
"Event of Default": The meaning set forth in Section 6.01.
"Hazardous Substances": All substances or materials: (a) that are or
become defined as hazardous wastes, hazardous substances, pollutants,
contaminants, or toxic substances under any Environmental Law; (b) that are
defined by any Environmental Law as toxic, explosive, corrosive, ignitable,
infectious, radioactive, mutagenic, or otherwise hazardous; (c) the presence of
which require investigation or response
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
2
<PAGE>
under any Environmental Law; (d) that constitute a nuisance, trespass, or health
or safety hazard to Person or neighboring properties; (e) that consist of
underground or aboveground storage tanks, whether empty, filled, or partially
filled with any substance; or (f) that contain, without limitation, asbestos,
polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum
hydrocarbons, petroleum derived substances or wastes, crude oil, nuclear fuel,
natural gas, or synthetic gas.
"Indemnified Party": The meaning set forth in Section 5.01(a).
"Interested Person": With respect to any specified Loan, a Person other
than an Independent Person.
"Liquidated Loan": Any Defaulted Loan with respect to which the
Servicer has determined, in accordance with Section 3.04, that all Recoveries
that it expects with respect to such Loan (a) have been received or (b) have
been identified and are reasonably expected to be received within ninety (90)
days from the date of such determination.
"Loan Acquisition Agreement": The meaning set forth in the recitals
hereof.
"Loan Payment Data": At any time, a record of the monthly Loan balance,
all loan payments received and application of interest, principal and other fees
for each Loan in the Loan Pool from the closing date of such Loan to the date of
such report.
"Lockbox Account": The meaning set forth in Section 3.05.
"Lockbox Bank": The meaning set forth in Section 3.05.
"Operating Account": The meaning set forth in Section 3.13.
"Outgoing Servicer": Any Person who receives a Termination Notice
pursuant to Section 6.01.
"Recovery Expenses": As of any date of determination, the sum of the
following: (a) all expenses, if any, incurred by the Servicer, the Special
Servicer or the Servicing Advisor, as the case may be, in connection with any
Defaulted Loan or Repossessed Collateral (including legal fees and expenses,
committee or referee fees, and, if applicable, brokerage commissions and
conveyance taxes) provided that, if any of the foregoing expenses are to be
--------
retained by the Servicer, the Special Servicer or the Servicing Advisor, as the
case may be, and not to be paid or reimbursed to an Independent Person, such
expenses shall not constitute "Recovery Expenses" unless such expenses were
approved in writing in advance by the Certificateholder Agent; (b) all advances
made to an Independent Person by the Servicer, the Special Servicer or the
Servicing Advisor, as applicable, with respect to any Defaulted Loan or
Repossessed Collateral and not previously reimbursed as provided for herein; and
(c) Workout Fees, if any, due to the Special Servicer.
"Report": Each of the Servicer Report, the Special Servicer Report, the
Annual Pool Report and the *** prepare pursuant to Section 4.01.
"Repossessed Collateral": Loan Collateral related to a Defaulted Loan
that has been repossessed.
"Request for Release of Documents": The request prepared by the
Servicer or the Special Servicer substantially in the form of Exhibit C.
----------
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
3
<PAGE>
"Servicer": The Person described in the introduction hereto until a
successor Person shall have become (if applicable) the Servicer pursuant to the
applicable provisions of this Agreement, whereupon "Servicer" shall mean such
successor Person.
"Servicer Default": Any occurrence or circumstance which with notice or
the lapse of time or both would be a Servicer Event of Default under this
Agreement.
"Servicer Event of Default": Each of the occurrences or circumstances
enumerated in Section 6.01(a) that occurs with respect to the Servicer.
"Servicer Financial Statements": The Servicer's audited consolidated
and consolidating balance sheet and income statement, consolidated and
consolidating statement of cash flows, auditors opinion letter regarding audited
financial statements, and all notes to such audited financial statements.
"Servicer Report": The monthly report, substantially in the form of
Exhibit A, prepared by the Servicer pursuant to and in accordance with Section
- ---------
4.01(a).
"Servicer State of Incorporation": The State of incorporation of the
Servicer, which, as of the Initial Delivery Date, is the State of Delaware.
"Servicer Termination Notice": A Termination Notice applicable to the
Servicer, as provided in Section 6.01(b).
"Servicing Advisor": The Person described in the introduction hereto
until a successor Person shall have (if applicable) become the Servicing Advisor
pursuant to the applicable provisions of this Agreement, whereupon "Servicing
Advisor" shall mean such successor Person.
"Servicing Advisor Default": Any occurrence or circumstance which with
notice or the lapse of time or both would be a Servicing Advisor Event of
Default under this Agreement.
"Servicing Advisor Event of Default": Each of the occurrences or
circumstances enumerated in Section 6.01(a) that occurs with respect to the
Servicing Advisor.
"Servicing Advisor Fee": With respect to each Loan, the monthly fee
payable on each Payment Date to the Servicing Advisor in consideration for its
performance of its duties as Servicing Advisor under this Agreement, in an
amount equal to the lesser of (a) $83.50 per Loan plus five hundred dollars
($500) for each *** delivered pursuant to Section 4.01(e) and (b) the amount
calculated in clause (a) of the definition of "Special Servicer Fee" contained
in the Trust Agreement.
"Servicing Advisor State of Incorporation": The State of incorporation
of the Servicing Advisor, which, as of the Initial Delivery Date, is the State
of ***.
"Servicing Advisor Termination Notice": A Termination Notice applicable
to the Servicing Advisor, as provided in Section 6.01(b).
"Servicing Guidelines": Part III of the Program Guidelines, which
relates to servicing generally.
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
4
<PAGE>
"Servicing Officer": As the context requires, any of the officers of
the Servicer, the Special Servicer or the Servicing Advisor, as applicable,
involved in, or responsible for, the administration and servicing of the Loans,
as identified on the list of Servicing Officers furnished by such Person to the
Trustee and the other parties hereto from time to time.
"Special Servicer": The Person described in the introduction hereto
until a successor Person shall have (if applicable) become the Special Servicer
pursuant to the applicable provisions of the Agreement, whereupon "Special
Servicer" shall mean such successor Person.
"Special Servicer Default": Any occurrence or circumstance which with
notice or the lapse of time or both would be a Special Servicer Event of Default
under this Agreement.
"Special Servicer Event of Default": Each of the occurrences or
circumstances enumerated in Section 6.01(a) that occurs with respect to the
Special Servicer.
"Special Servicer Report": The quarterly report, substantially in the
form of Exhibit B, prepared by the Special Servicer pursuant to and in
----------
accordance with Section 4.01(b).
"Special Servicer State of Incorporation": The State of organization of
the Special Servicer, which, as of the Initial Delivery Date, is Delaware.
"Special Servicer Termination Notice": A Termination Notice applicable
to the Special Servicer, as provided in Section 6.01(b).
"Specified Lockbox Account": The meaning set forth in Section 3.05.
"Successor Servicer": Any successor Servicer, successor Special
Servicer or successor Servicing Advisor appointed in accordance with Article 6.
"Termination Notice": The notice described in Section 6.01(b).
"Transition Costs": The meaning set forth in the Trust Agreement.
"Trust Agreement": The meaning set forth in the recitals hereof.
"Trustee": The Person described in the introduction hereto until a
0successor Person shall have become(if applicable) the Trustee pursuant to the
applicable provisions of the Trust Agreement, whereupon "Trustee" shall mean
such successor Person.
"Workout Fee": With respect to any Determination Date and any Loan that
is, at the beginning of the related Due Period, or became, at any time during
such Due Period, a Defaulted Loan (other than by reason of the breach of a
representation or warranty by the Company hereunder or defective documentation
that has a material adverse effect on Certificateholders), a fee payable to the
Special Servicer in an amount equal to (a) in the case of a Liquidated Loan or
in the case of a Defaulted Loan or any Repossessed Collateral that is sold or
repurchased pursuant to any provision of this Agreement during the related Due
Period, the product of (i) the amount equal to the product of (A) 1.25% and (B)
all Recoveries received on such Loan during such Due Period (reduced by the
amount of the unpaid accrued interest on such Loan during such Due Period) and
(ii) a fraction, the numerator of which is all of such Recoveries and the
denominator of which
5
<PAGE>
is the Loan Balance of such Loan at the time of disposition, or (b) in the case
of each other such Loan, the product of (i) 1.25% and (ii) an amount equal to
(A) the amount of Collections received with respect to such Loan during such Due
Period less (B) the aggregate amount of Recovery Expenses incurred with respect
thereto and not deducted from Collections received in a previous Due Period
pursuant to this clause (b); provided that the amount of Special Servicer Fees
--------
accrued from the date such Loan became a Defaulted Loan to the end of the
related Due Period shall be subtracted from the amount calculated in clause (a)
or (b)
Section 1.02 Certain Rules of Construction.
------------ ------------------------------
Unless the context of this Agreement clearly requires otherwise: (a)
references to the plural include the singular and to the singular include the
plural; (b) references to any gender include any other gender; (c) the words
"include" and "including" are not limiting; (d) the word "or" has the inclusive
meaning represented by the phrase "and/or"; (e) the words "hereof," "herein,"
"hereby," and "hereunder," and any other similar words, refer to this Agreement
as a whole and not to any particular provision hereof; and (f) article, section,
subsection, clause, exhibit, and schedule references are to this Agreement.
Article, section, and subsection headings are for convenience of reference only,
shall not constitute a part of this Agreement for any other purpose, and shall
not affect the construction of this Agreement. All exhibits and schedules
attached hereto are incorporated herein by this reference. Any reference herein
to this Agreement or any other agreement, document, or instrument includes all
permitted alterations, amendments, changes, extensions, modifications, renewals,
or supplements thereto or thereof, as applicable.
6
<PAGE>
ARTICLE TWO
-----------
REPRESENTATIONS AND WARRANTIES
-------------------------------
Section 2.01 Servicer Representations and Warranties.
------------ ----------------------------------------
The Servicer makes the following representations and warranties to the
Depositor, the Trustee and the Certificateholders as of the Initial Delivery
Date, which shall survive the Initial Delivery Date:
(a) The Servicer has been duly incorporated and is validly existing and
in good standing as a corporation under the laws of the Servicer State of
Incorporation, with requisite corporate power and authority to own its
properties, perform its obligations under each of the Transaction Documents to
which it is a party and to transact the business in which it is now engaged or
in which it proposes to engage.
(b) Each of the Transaction Documents to which it is a party has been
duly authorized, executed and delivered by the Servicer and constitutes the
valid and legally binding obligation of the Servicer, enforceable against the
Servicer in accordance with its terms, subject as to enforcement to any
bankruptcy, insolvency, reorganization and other similar laws of general
applicability relating to or affecting creditors' rights generally and to
general principles of equity regardless of whether enforcement is sought in a
court of equity or law.
(c) The execution and delivery by the Servicer of each of the
Transaction Documents to which it is a party and the performance by the Servicer
of its obligations under such documents and the consummation of the transactions
contemplated therein will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, or result in the creation
or imposition of any lien, charge or encumbrance upon any of the property or
assets of the Servicer pursuant to the terms of any material indenture,
mortgage, deed of trust or other agreement or instrument to which it is a party
or by which it is bound or to which any of its property or assets is subject,
nor will such action result in any violation of the provisions of its
Certificate of Incorporation or Bylaws, or any statute or any order, rule or
regulation of any court or any regulatory authority or other governmental agency
or body having jurisdiction over it or any of its properties; and no consent,
approval, authorization, order, registration or qualification of or with any
court, or any such regulatory authority or other governmental agency or body is
required for the Servicer to enter into each of the Transaction Documents to
which it is a party.
(d) There are no proceedings or investigations pending, or to the
knowledge of the Servicer, threatened against or affecting the Servicer in or
before any court, governmental authority or agency or arbitration board or
tribunal, which, individually or in the aggregate, involve the probability of
materially and adversely affecting the properties, business, prospects, profits
or condition (financial or otherwise) of the Servicer, or the ability of the
Servicer to perform its obligations under the Transaction Documents to which it
is a party. The Servicer is not in default with respect to any order of any
court, governmental authority or agency or arbitration board or tribunal.
(e) The Servicer (i) is not in violation of any laws, ordinances,
governmental rules or regulations to which it is subject, (ii) has not failed to
obtain any licenses, permits, franchises or other governmental authorizations
necessary to the ownership of its property or to the conduct of its business or
the performance of its obligations under the Transaction Documents to which it
is a party, and (iii) is not in violation in any material respect of any term of
any agreement, charter instrument, bylaw or instrument to which it is a party
7
<PAGE>
or by which it may be bound, which violation or failure to obtain materially
adversely affects the business or condition (financial or otherwise) of the
Servicer.
(f) The Servicer will service the Loans in accordance with the
terms and conditions contained herein.
(g) There has been no material adverse change in the financial
condition of the Servicer since April 28, 1998 and all information concerning
the Servicer furnished by it to the Depositor, the Certificateholder Agent, any
Certificateholder, the Trustee or the Rating Agency prior in connection with the
Transaction Documents or any transaction contemplated thereby is true and
accurate in all material respects or based on reasonable estimates (but, if
based on estimates, shall be identified as so based) on the date as of which
such information is stated or certified, as applicable, and no such information
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein or therein, in
light of the circumstances under which such statements were made and taken as a
whole, not misleading; provided that, to the extent that the representations and
--------
warranties of the Servicer contained in this subsection (g) relate to any such
information that was not prepared by the Servicer or any of its Affiliates, then
such representations and warranties are made by the Servicer solely to the best
of its knowledge. As used in this clause, "information" does not include casual
oral conversations or informal oral statements of opinions on which it would be
unreasonable to rely.
Section 2.02 Special Servicer Representations and Warranties.
------------ ------------------------------------------------
The Special Servicer makes the following representations and warranties
to the Depositor, the Trustee and the Certificateholders as of the Initial
Delivery Date, which shall survive the Initial Delivery Date:
(a) The Special Servicer has been duly organized and is validly
existing and in good standing as a limited liability company under the laws of
the Special Servicer State of Incorporation, with requisite limited liability
company power and authority to own its properties, perform its obligations under
the Transaction Documents to which it is a party and to transact the business in
which it is now engaged or in which it proposes to engage.
(b) Each of the Transaction Documents to which it is a party has been
duly authorized, executed and delivered by the Special Servicer and constitutes
the valid and legally binding obligation of the Special Servicer, enforceable
against the Special Servicer in accordance with its terms, subject as to
enforcement to any bankruptcy, insolvency, reorganization and other similar laws
of general applicability relating to or affecting creditors' rights generally
and to general principles of equity regardless of whether enforcement is sought
in a court of equity or law.
(c) The execution and delivery by the Special Servicer of each of the
Transaction Documents to which it is a party and the performance by the Special
Servicer of its obligations under such documents and the consummation of the
transactions contemplated therein will not conflict with or result in a breach
of any of the terms or provisions of, or constitute a default under, or result
in the creation or imposition of any lien, charge or encumbrance upon any of the
property or assets of the Special Servicer pursuant to the terms of any material
indenture, mortgage, deed of trust or other agreement or instrument to which it
is a party or by which it is bound or to which any of its property or assets is
subject, nor will such action result in any violation of the provisions of its
Certificate of Formation or Operating Agreement, or any statute or any order,
rule or regulation of any court or any regulatory authority or other
governmental agency or body
8
<PAGE>
having jurisdiction over it or any of its properties; and no consent, approval,
authorization, order, registration or qualification of or with any court, or any
such regulatory authority or other governmental agency or body is required for
the Special Servicer to enter into each of the Transaction Documents to which it
is a party.
(d) There are no proceedings or investigations pending, or to the
knowledge of the Special Servicer, threatened against or affecting the Special
Servicer in or before any court, governmental authority or agency or arbitration
board or tribunal, which, individually or in the aggregate, involve the
probability of materially and adversely affecting the properties, business,
prospects, profits or condition (financial or otherwise) of the Special
Servicer, or the ability of the Special Servicer to perform its obligations
under the Transaction Documents to which it is a party. The Special Servicer is
not in default with respect to any order of any court, governmental authority or
agency or arbitration board or tribunal.
(e) The Special Servicer (i) is not in violation of any laws,
ordinances, governmental rules or regulations to which it is subject, (ii) has
not failed to obtain any licenses, permits, franchises or other governmental
authorizations necessary to the ownership of its property or to the conduct of
its business or the performance of its obligations under the Transaction
Documents to which it is a party, and (iii) is not in violation in any material
respect of any term of any agreement, charter instrument, bylaw or instrument to
which it is a party or by which it may be bound, which violation or failure to
obtain materially adversely affects the business or condition (financial or
otherwise) of the Special Servicer.
(f) The Special Servicer will service the Loans in accordance with the
terms and conditions contained herein.
(g) There has been no material adverse change in the financial
condition of the Special Servicer since April 28, 1998 and all information
concerning the Special Servicer furnished by it to the Depositor, the
Certificateholder Agent, any Certificateholder, the Trustee or the Rating Agency
prior in connection with the Transaction Documents or any transaction
contemplated thereby is true and accurate in all material respects or based on
reasonable estimates (but, if based on estimates, shall be identified as so
based) on the date as of which such information is stated or certified, as
applicable, and no such information contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances under which such
statements were made and taken as a whole, not misleading; provided that, to the
--------
extent that the representations and warranties of the Special Servicer contained
in this subsection (g) relate to any such information that was not prepared by
the Special Servicer or any of its Affiliates, then such representations and
warranties are made by the Special Servicer solely to the best of its knowledge.
As used in this clause, "information" does not include casual oral conversations
or informal oral statements of opinions on which it would be unreasonable to
rely.
Section 2.03 Servicing Advisor Representations and Warranties.
------------ -------------------------------------------------
The Servicing Advisor makes the following representations and
warranties to the Depositor, the Trustee and the Certificateholders as of the
Initial Delivery Date, which shall survive the Initial Delivery Date:
(a) The Servicing Advisor has been duly incorporated and is validly
existing and in good standing as a corporation under the laws of the Servicing
Advisor State of Incorporation, with requisite corporate power and authority to
own its properties, perform its obligations under the Transaction Documents to
which it is a party and to transact the business in which it is now engaged or
in which it proposes to engage.
9
<PAGE>
(b) Each of the Transaction Documents to which it is a party has been
duly authorized, executed and delivered by the Servicing Advisor and constitutes
the valid and legally binding obligation of the Servicing Advisor enforceable
against the Servicing Advisor, in accordance with its terms, subject as to
enforcement to any bankruptcy, insolvency, reorganization and other similar laws
of general applicability relating to or affecting creditors' rights generally
and to general principles of equity regardless of whether enforcement is sought
in a court of equity or law.
(c) The execution and delivery by the Servicing Advisor of each of the
Transaction Documents to which it is a party and the performance by the
Servicing Advisor of its obligations under such documents and the consummation
of the transactions contemplated therein will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a default under, or
result in the creation or imposition of any lien, charge or encumbrance upon any
of the property or assets of the Servicing Advisor pursuant to the terms of any
material indenture, mortgage, deed of trust or other agreement or instrument to
which it is a party or by which it is bound or to which any of its property or
assets is subject, nor will such action result in any violation of the
provisions of its Articles of Incorporation or Bylaws, or any statute or any
order, rule or regulation of any court or any regulatory authority or other
governmental agency or body having jurisdiction over it or any of its
properties; and no consent, approval, authorization, order, registration or
qualification of or with any court, or any such regulatory authority or other
governmental agency or body is required for the Servicing Advisor to enter into
each of the Transaction Documents to which it is a party.
(d) Except as previously disclosed in writing, there are no proceedings
or investigations pending, or to the knowledge of the Servicing Advisor,
threatened against or affecting the Servicing Advisor in or before any court,
governmental authority or agency or arbitration board or tribunal, which,
individually or in the aggregate, involve the probability of materially and
adversely affecting the properties, business, prospects, profits or condition
(financial or otherwise) of the Servicing Advisor, or the ability of the
Servicing Advisor to perform its obligations under the Transaction Documents to
which it is a party. The Servicing Advisor is not in default with respect to any
order of any court, governmental authority or agency or arbitration board or
tribunal.
(e) The Servicing Advisor (i) is not in violation of any laws,
ordinances, governmental rules or regulations to which it is subject, (ii) has
not failed to obtain any licenses, permits, franchises or other governmental
authorizations necessary to the ownership of its property or to the conduct of
its business or the performance of its obligations under the Transaction
Documents to which it is a party, and (iii) is not in violation in any material
respect of any term of any agreement, charter instrument, bylaw or instrument to
which it is a party or by which it may be bound, which violation or failure to
obtain materially adversely affects the business or condition (financial or
otherwise) of the Servicing Advisor.
(f) The Servicing Advisor will provide all services in respect of the
Loans in accordance with the terms and conditions contained herein.
(g) There has been no material adverse change in the financial
condition of the Servicing Advisor since April 28, 1998 and all information
concerning the Servicing Advisor furnished by it to the Depositor, the
Certificateholder Agent, any Certificateholder, the Trustee or the Rating Agency
prior in connection with the Transaction Documents or any transaction
contemplated thereby is true and accurate in all material respects or based on
reasonable estimates (but, if based on estimates, shall be identified as so
based) on the date as of which such information is stated or certified, as
applicable, and no such information contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances under which such
statements were
10
<PAGE>
made and taken as a whole, not misleading; provided that, to the extent that the
--------
representations and warranties of the Servicing Advisor contained in this
subsection (g) relate to any such information that was not prepared by the
Servicing Advisor or any of its Affiliates, then such representations and
warranties are made by the Servicing Advisor solely to the best of its
knowledge. As used in this clause, "information" does not include casual oral
conversations or informal oral statements of opinions on which it would be
unreasonable to rely.
11
<PAGE>
ARTICLE THREE
--------------
ADMINISTRATION AND SERVICING OF LOANS
-------------------------------------
Section 3.01 Responsibilities of the Servicer.
------------ ---------------------------------
(a) The Servicer, for the benefit of the Depositor, the Trustee and the
Certificateholders, shall be responsible for, and shall perform, in accordance
with the Servicing Guidelines the duties of reporting and collecting on the
Loans, in accordance with the standards and procedures set forth in this
Agreement and any related provisions of the Trust Agreement and the Loan
Acquisition Agreement. The Servicer's responsibilities shall include sending
monthly billing and periodic reporting notices to the Obligors, collecting and
posting all payments, accounting for collections, furnishing monthly and annual
statements to the Special Servicer, the Servicing Advisor, the Trustee, the
Rating Agency, the Certificateholders and the Certificateholder Agent with
respect to payments and maintaining the perfected security interest of the
Trustee in the Trust Estate. The Servicer (at its expense), acting alone, shall
have full power and authority, acting at its sole discretion, to do any and all
things in connection with such reporting and collection that it may deem
necessary or desirable. Without limiting the generality of the foregoing, the
Servicer shall, and is hereby authorized and empowered by the Trustee, subject
to Section 3.04, to execute and deliver (on behalf of itself, the
Certificateholders, the Certificateholder Agent, the Trustee or any of them) any
and all instruments necessary to the performance of its obligations with respect
to the Loans and any files or documentation pertaining to the Loan Assets
(including the Loan Files). Subject to Section 3.04, the Servicer also may, in
its sole discretion, waive any late payment charge or penalty, or any other fees
that may be payable to it in the ordinary course of servicing any Loan.
Notwithstanding the foregoing, the Servicer shall not, except pursuant to a
judicial order from a court of competent jurisdiction, or as otherwise expressly
provided in this Agreement, release or waive the right to collect the Scheduled
Payments or any unpaid balance on any Loan or any prepayment or assumption fees.
The Trustee shall, at the expense of the Servicer, furnish the Servicer with any
powers of attorney and other documents necessary or appropriate to enable the
Servicer to carry out its duties hereunder, and the Trustee shall not be
responsible for the Servicer's application thereof.
(b) The Servicer shall cooperate with and take directions from the
Special Servicer in connection with the Loans, including any Delinquent Loan,
Defaulted Loan or Underperforming Loan.
(c) The Servicer shall monitor collections of Loan payments made to the
Lockbox Account and administer and update collection information, which
information shall be made available to the Servicer on a daily basis by
electronic transfer. The Servicer shall promptly, but within two (2) Business
Days of receipt thereof, remit to the Lockbox Account any Collections remitted
to or received by it.
(d) In the performance of its duties hereunder, the Servicer shall
comply with Section 3.04.
Section 3.02 Responsibilities of Special Servicer.
------------ -------------------------------------
(a) The Special Servicer, for the benefit of the Depositor, the Trustee
and the Certificateholders, shall be responsible for, and shall, in accordance
with the Servicing Guidelines, pursue the managing, servicing, administering and
enforcing of the Loans, the enforcement of the Trustee's interest in the Loan
and Assets conveyed and assigned pursuant to the Trust Agreement, the
repossession and sale of the Loan Collateral upon default of the related Loan
and the enforcement of all other remedies under the Loans, in accordance with
the standards and procedures set forth in this Agreement and any related
provisions of the
12
<PAGE>
Trust Agreement. The Special Servicer's responsibilities shall include
responding to inquiries of Obligors, investigating delinquencies, providing
appropriate federal income tax information to the Trustee for use in providing
information to the Certificateholders and the Certificateholder Agent and
maintaining Insurance Policies. Subject to Section 3.04 and the other provisions
contained herein, the Special Servicer (at its expense) shall have full power
and authority, acting at its sole discretion, to do any and all things in
connection with such management, servicing, administration, enforcement and such
sale of the Loan Collateral that it may deem necessary or desirable. Without
limiting the generality of the foregoing, the Special Servicer shall, and is
hereby authorized and empowered by the Trustee, subject to Section 3.04, to
execute and deliver (on behalf of itself, the Depositor, the Certificateholders,
the Certificateholder Agent, the Trustee or any of them) any and all instruments
of satisfaction or cancellation, or of partial or full release or discharge, and
all other comparable instruments, with respect to the Loans and any files or
documentation pertaining to the Loan Assets. Subject to Section 3.04, the
Special Servicer also may, in its sole discretion, waive any late payment charge
or penalty, or any other fees (but not, without the prior written consent of the
Certificateholder Agent, any prepayment fee or premium) that may be payable to
it in the ordinary course of servicing any Loan. Notwithstanding the foregoing,
the Special Servicer shall not, except pursuant to a judicial order from a court
of competent jurisdiction, or as otherwise expressly provided in this Agreement,
release or waive the right to collect the Scheduled Payments or any unpaid
balance on any Loan. The Trustee shall, at the expense of the Special Servicer,
furnish the Special Servicer with any powers of attorney and other documents
necessary or appropriate to enable the Special Servicer to carry out its
servicing and administrative duties hereunder, and the Trustee shall not be
responsible for the Special Servicer's application thereof.
(b) The Special Servicer shall conduct any Loan management, servicing,
administration or enforcement actions in the following manner:
(i) The Special Servicer, as agent for and on behalf of the
Depositor, the Trustee and the Certificateholders, with respect to any
Defaulted Loan, shall follow such practices and procedures as are
normal and consistent with the Special Servicer's standards and
procedures relating to its own loans and interests in collateral that
are similar to the Loans and the Loan Collateral, and in any event,
consistent with the standard of care described in Section 3.04,
including the taking of appropriate actions to foreclose or otherwise
liquidate any such Defaulted Loan, together with the related Loan
Collateral, to collect any Guaranty Amounts, and to enforce the
Depositor's rights under the Loan Acquisition Agreement. All
Collections (including Recoveries) in respect of any Loan or Loan
Collateral, if for any reason received by the Special Servicer, shall
be remitted to the Lockbox Account within two (2) Business Days of
receipt thereof;
(ii) The Special Servicer may sue to enforce or collect upon
the Loans as agent for the Certificateholders and the Trust Estate. If
the Special Servicer elects to commence a legal proceeding to enforce a
Loan, then the act of commencement shall be deemed to be an automatic
assignment of the Loan to the Special Servicer for purposes of
collection only, and a Servicing Officer shall deliver by facsimile a
Request for Release of Documents to the Trustee (with a copy to the
Certificateholder Agent) requesting delivery to the Special Servicer of
the Loan and stating the reasons for the delivery of any original
documents. Upon receipt of such delivery request, the Trustee shall
release such Loan to the Special Servicer within two (2) Business Days
of receipt of such request (receipt being deemed to have occurred upon
confirmation of facsimile transmission). Upon release of such items as
provided herein, the Special Servicer is authorized to execute an
instrument in satisfaction of such Loan and to do such other acts and
execute such other documents as it deems necessary to discharge the
Obligor thereunder and release any security interest in the
13
<PAGE>
Loan Collateral related thereto. The Special Servicer shall determine,
in accordance with the standard of care described in Section 3.04, when
a Loan has been paid in full and when a Loan has become a Liquidated
Loan. If in any enforcement suit or legal proceeding it is held that
the Special Servicer may not enforce a Loan on the ground that it is
not a real party in interest or a holder entitled to enforce the Loan,
then the Trustee on behalf of the Certificateholders shall, at the
Special Servicer's request and expense, take such steps as the Special
Servicer deems necessary and instructs the Trustee in writing to take
to enforce the Loan, including bringing suit in its name or the name of
the Depositor, as beneficial owner of the Loan, or the names of the
Certificateholders, as third party beneficiaries thereunder, and the
Trustee shall be indemnified by the Special Servicer for any such
action taken.
(iii) The Special Servicer shall exercise any rights of
recourse against third parties that exist with respect to any Loan in
accordance with the Special Servicer's usual practice and in any event,
consistent with the standard of care described in Section 3.04. In
exercising recourse rights, the Special Servicer is authorized on the
Trustee's behalf to reassign the Loan to the person against whom
recourse exists to the extent necessary, and at the price set forth in
the document creating the recourse. The Special Servicer will not
reduce or diminish such recourse rights, except to the extent that it
exercises such right;
(iv) The Special Servicer may waive, modify or vary any terms
of any Loan or consent to the postponement of strict compliance with
any such term solely in accordance with Section 3.15. The Special
Servicer shall provide the Servicer and the Trustee with an amended
Loan Schedule reflecting any modification of any Scheduled Payment.
(v) The Special Servicer shall not consent to the termination
of any Loan in connection with loss of or damage to the related Loan
Collateral unless the Obligor has paid an amount not less than an
amount equal to the Loan Balance of such Loan plus any accrued interest
thereon or, if less, the maximum amount legally collectible under the
related Loan. In the event of damage to any Loan Collateral
constituting a total loss, in lieu of terminating the related Loan, at
the request of the Obligor, the Special Servicer may allow the Obligor
to use the insurance proceeds to purchase Loan Collateral and
substitute such Loan Collateral for the damaged Loan Collateral under
the Loan if, in the reasonable judgement of the Special Servicer, doing
so would maximize the total recovery with respect to such Loan.
(vi) If the Special Servicer, in the enforcement of any Loan,
claims possession of the Loan Collateral from an Obligor, then the
Special Servicer shall use its best efforts to sell such Loan
Collateral promptly and consistent with the standard of care set forth
in Section 3.04. Any Recoveries related thereto shall be deposited in
accordance with Section 3.05.
(vii) Notwithstanding any provision to the contrary contained
in this Agreement, the Special Servicer shall use its best efforts to
exercise any right under a Defaulted Loan to accelerate the unpaid
Scheduled Payments due or to become due thereunder to the extent it
believes, consistently with the Servicing Guidelines, that such action
will maximize the net proceeds available to the Trust Estate; provided
--------
that the Special Servicer shall not accelerate any Scheduled Payment
unless permitted to do so by the terms of the Loan or under applicable
law.
(c) The Special Servicer shall hold copies of the Loan Files in its
capacity as Special Servicer for the benefit of the Depositor, the Trustee and
the Certificateholders. The possession of a copy of each
14
<PAGE>
Loan File by the Special Servicer is for the sole purpose of servicing the
related Loan. Upon the release of the lien of the Trust Agreement with respect
to any Loan in accordance with Section 3.05 of the Trust Agreement, the Special
Servicer will no longer hold the related Loan File in its capacity as Special
Servicer hereunder. Each Loan File shall be held and maintained by the Special
Servicer in accordance with the standard of care set forth in Section 3.04.
Section 3.03 Responsibilities of the Servicing Advisor.
------------ ------------------------------------------
The Servicing Advisor, for the benefit of the Depositor, the Trustee
and the Certificateholders, shall be responsible for, and shall, in accordance
with the Servicing Guidelines: (a) within ten (10) Business Days of the receipt
thereof, review the Special Servicer Report to ***;(b) in accordance with
Section 4.01(d), prepare and deliver to the Special Servicer ***; (c) in
accordance with Section 4.01(e), prepare and deliver to the Special Servicer
***; (d) respond to all inquiries of, and provide such further advice as
requested by the Special Servicer with respect to ***; and (e) at the direction
of the Special Servicer, oversee, either directly or indirectly through an
Affiliate of the Servicing Advisor, ***. Notwithstanding anything to the
contrary contained herein, the Servicing Advisor shall have no right to take any
action with respect to *** without the express prior authorization of the
Special Servicer.
Section 3.04 Servicing Standard of Care.
------------ ---------------------------
In managing, administering, servicing, enforcing and making collections
on the Loan Contracts and the Loan Assets pursuant to this Agreement: (a) each
of the Servicer and the Special Servicer will exercise that degree of skill and
care consistent with industry standards for the servicing of secured commercial
loans, and that which each of the Servicer and the Special Servicer, as
applicable, customarily exercises with respect to similar loan contracts and
interests in Loan Assets owned or originated by it in a manner consistent with
the Servicing Guidelines, and in any event, in a prudent and commercially
reasonable manner; and (b) in performing its duties under Section 3.03 (a)-(e)
inclusive, the Servicing Advisor will exercise that degree of skill and care
consistent with industry standards in financial and management consulting in the
death care industry and that which the Servicing Advisor customarily exercises
in performance of financial and management consulting services to clients in the
death care industry, will handle any funds collected by it in accordance with
the standards established by this Agreement and will act in a prudent and
commercially reasonable manner. Each of the Servicer, the Special Servicer and
the Servicing Advisor shall punctually perform all of its obligations and
agreements under this Agreement and shall comply with all applicable federal and
state laws and regulations, shall maintain all state and federal licenses and
franchises necessary for it to perform its responsibilities hereunder, and shall
not materially impair the rights of the Certificateholders in any Loans or
payments thereunder.
Section 3.05 Lockbox Account; Remittances.
------------ -----------------------------
The Servicer shall open and maintain one or more bank accounts at
Manufacturers and Traders Trust Company, located in Buffalo, New York or such
other bank as the Certificateholder Agent and the Trustee shall approve (which
approval shall not be unreasonably withheld) (the"Lockbox Bank"), in the name of
the Trustee for the benefit of the Certificateholders (individually, a
"Specified Lockbox Account" and, collectively, the "Lockbox Account"). The
Servicer shall provide three (3) Business Days prior written
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
15
<PAGE>
notice to the Depositor, the Trustee and the Certificateholder Agent of the
opening of any Specified Lockbox Account and the name of any new Lockbox Bank.
The Company shall, in writing, direct all Obligors to make all payments
(including Scheduled Payments) directly to the Lockbox Account. Notwithstanding
anything to the contrary contained herein, upon the occurrence and during the
continuation of a Servicer Default, (a) the Servicer shall not have the right to
establish any new Specified Lockbox Account and (b) the Certificateholder Agent
may direct, in writing, (i) the Trustee to establish a new Specified Lockbox
Account at any Lockbox Bank, whereupon the Trustee shall so establish a new
Specified Lockbox Account, and (ii) the Special Servicer to direct, in writing,
all Obligors to make all payments (including Scheduled Payments) directly to a
Specified Lockbox Account, whereupon the Special Servicer shall so direct all
Obligors. Neither the Servicer, the Special Servicer, the Servicing Advisor nor
the Depositor shall have any right to withdraw, or otherwise exercise any
control over, any amounts contained in any Specified Lockbox Account. The
Servicer and the Trustee shall provide standing instructions to each Lockbox
Bank that all amounts deposited in the Lockbox Account other than amounts
deposited in error (which are shown to be other than Collections) shall be
electronically transferred to the Collection Account on a daily basis after such
funds have been collected by the Lockbox Bank; none of the amounts deposited in
the Lockbox Account in error shall constitute the property of the Depositor, the
Trustee or the Certificateholders. If, for any reason, any Collections are
received by the Servicer or the Special Servicer, the Servicer and the Special
Servicer shall (i) send notice to the Obligor that future payments are to be
made directly to the applicable Specified Lockbox Account and (ii) hold in trust
for the benefit of the Trustee and the Certificateholders such Collections (in
the form received) until such time as amounts are transferred to the Lockbox
Account as required pursuant to Section 3.01(c).
Section 3.06 Financing Statements; Title Filings.
------------ ------------------------------------
The Servicer will make all UCC filings and recordings, and shall take
all other actions, as may be required pursuant to the terms of the Transaction
Documents to maintain perfected the interest of the Depositor and to maintain
the perfected security interest of the Trustee (for the benefit of the
Certificateholders) in the Trust Estate. The Servicer shall, in accordance with
its customary servicing procedures and at its own expense, be responsible for
taking such steps as are necessary to maintain perfection of such security
interests. The Trustee hereby authorizes the Servicer to re-perfect or to cause
the re-perfection of such security interest on its behalf as Trustee, as
necessary. The Servicer shall provide the Company, the Depositor and the Trustee
with copies of all such UCC filings and recordings.
Section 3.07 Maintenance of Insurance Policy; Insurance Proceeds.
----------- -----------------------------------------------------
The Special Servicer shall have the obligation to verify, monitor and
enforce the acquisition and maintenance of each Obligor's Insurance Policies.
Unless required to be held in trust in accordance with the related loan
document, any Insurance Proceeds shall be deposited in the Lockbox Account
pursuant to Section 3.05.
Section 3.08 No Offset.
------------ ----------
The obligations of the Servicer, the Special Servicer and the Servicing
Advisor under the Agreement shall not be subject to any defense, counterclaim or
right of offset that the Servicer or Special Servicer has or may have against
the Depositor or any other Person, whether in respect of this Agreement, any
Loan, any Loan Asset or otherwise.
16
<PAGE>
Section 3.09 Servicing Compensation.
------------ -----------------------
(a) As compensation for the performance of its obligations under this
Agreement, the Servicer shall be entitled to receive the Servicer Fee. The
Servicer Fee shall be paid monthly on each Payment Date in accordance with the
provisions of the Trust Agreement. The Servicer Fee shall be payable with
respect to the period commencing on the Initial Delivery Date and ending on the
first to occur of (i) the receipt of the last Scheduled Payment with respect to
the last remaining Loan, (ii) the receipt of all Recoveries with respect to the
last remaining Loan, (iii) the date on which the Depositor redeems the
Certificates pursuant to Article Ten of the Trust Agreement or (iv) the receipt
by the Servicer of a Servicer Termination Notice; provided that, after such
---------
receipt of the Servicer Termination Notice, the successor Servicer shall be
entitled to the Servicer Fee. The Servicer Fee shall be paid by the Trustee to
the Servicer at the times and in the priority as set forth in the Trust
Agreement. The Servicer shall also be entitled to receive any Servicing Charges
collected by it other than assumption and substitution fees pursuant to Section
3.11. The Servicer shall pay all expenses incurred by it in connection with its
servicing activities hereunder, including payment of the fees and disbursements
of the Independent Accountants and payment of expenses incurred by it in
connection with distributions and reports to the Trustee, the Special Servicer,
the Rating Agency, the Certificateholders and the Certificateholder Agent and
shall not be entitled to reimbursement for such expenses; provided that the
--------
Servicer will be entitled to prompt reimbursement from the Depositor, out of
amounts received as Recoveries with respect to a Defaulted Loan, for the
reasonable costs and expenses incurred by the Servicer (including reasonable
attorneys' fees and out-of-pocket expenses) in connection with the realization
or attempted realization upon, or the enforcement of rights and remedies with
respect to, such Defaulted Loan.
(b) As compensation for the performance of its obligations under this
Agreement, the Special Servicer shall be entitled to receive the Special
Servicer Fee and, with respect to Defaulted Loans not assigned to the Servicing
Advisor for collection in accordance with the terms hereof, the related Workout
Fees. The Special Servicer Fee and the Workout Fees shall be payable on each
Payment Date in accordance with the provisions of the Trust Agreement. The
Special Servicer Fee shall be payable with respect to the period commencing on
the Initial Delivery Date and ending on the first to occur of (i) the receipt of
the last Scheduled Payment with respect to the last remaining Loan, (ii) the
receipt of all Recoveries with respect to the last remaining Loan, or (iii) the
date on which the Depositor redeems the Certificates pursuant to Article Ten of
the Trust Agreement or (iv) the receipt by the Special Servicer of a Special
Servicer Termination Notice; provided that, after such receipt of the Special
--------
Servicer Termination Notice, the successor Special Servicer shall be entitled to
the Special Servicer Fee. The Special Servicer Fee shall be paid by the Trustee
to the Special Servicer at the times and in the priority as set forth in the
Trust Agreement. The Special Servicer shall also be entitled to retain any fees
collected by it from an Obligor in connection with activities permitted pursuant
to Sections 3.11 or 3.15 in an amount not to exceed 1% of the Loan Balance per
Loan assumption, substitution, modification or other permitted activity. The
Special Servicer shall pay all expenses incurred by it in connection with its
servicing activities hereunder, including payment of the fees and disbursements
of the Servicing Advisor and the Independent Accountants and payment of expenses
incurred in connection with distributions and reports to the Trustee, the
Servicer, the Rating Agency, the Certificateholders and the Certificateholder
Agent and shall not be entitled to reimbursement for such expenses; provided
--------
that the Special Servicer will be entitled to prompt reimbursement from the
Trust Estate, out of amounts received as Recoveries with respect to a Defaulted
Loan, for the reasonable costs and expenses incurred by the Special Servicer
(including reasonable attorneys' fees and out-of-pocket expenses) in connection
with the realization or attempted realization upon, or the enforcement of rights
and remedies with respect to, such Defaulted Loan.
17
<PAGE>
(c) As compensation for the performance of its obligations under the
Agreement, the Servicing Advisor shall be entitled to receive the Servicing
Advisor Fee and, with respect to Defaulted Loans assigned to it for collection
by the Special Servicer in accordance with the terms hereof, the related Workout
Fees. The Servicing Advisor Fee with respect to any Loan and the Workout Fees
shall be payable on each Payment Date in accordance with the provisions of the
Trust Agreement. The Servicing Advisor Fee shall be payable with respect to the
period commencing on the Initial Delivery Date and ending on the first to occur
of (i) the receipt of the last Scheduled Payment with respect to the last
remaining Loan, (ii) the receipt of all Recoveries with respect to the last
remaining Loan, or (iii) the date on which the Depositor redeems the
Certificates pursuant to Article Ten of the Trust Agreement or (iv) the receipt
by the Servicing Advisor of a Servicing Advisor Termination Notice; provided
--------
that, after such receipt of the Servicing Advisor Termination Notice, the
successor Servicing Advisor shall be entitled to the Servicing Advisor Fee. The
Servicing Advisor Fee shall be paid by the Special Servicer at the times and in
the priority as set forth in the Trust Agreement. The Servicing Advisor shall
pay all expenses incurred by it in connection with its servicing activities
hereunder; provided that the Servicing Advisor will be entitled to prompt
--------
reimbursement from the Special Servicer, out of amounts received as Recoveries
with respect to a Defaulted Loan, for the reasonable costs and expenses incurred
by the Servicing Advisor (including reasonable attorneys' fees and out-of-pocket
expenses) in connection with the realization or attempted realization upon, or
the enforcement of rights and remedies with respect to, such Defaulted Loans.
(d) Notwithstanding anything to the contrary contained herein, all
payments made or reimbursed to the Servicer, the Special Servicer or the
Servicing Advisor hereunder (including Recovery Expenses) shall be made, and all
services shall be performed, without duplication, and no such Person shall
receive any amounts for services actually performed by any other such Person.
Section 3.10 Prepayments Permitted; Substitution or Purchase of Loans.
------------ ---------------------------------------------------------
(a) The Servicer shall accept prepayments and terminations of the Loans
in accordance with their terms, provided that all amounts due under such Loans
--------
are deposited in the Lockbox Account pursuant to Section 3.05. All amounts
collected with respect to prepaid Loans shall be deposited in the Lockbox
Account and held in trust for the benefit of the Certificateholders in
accordance with Section 3.05.
(b) Notwithstanding any other provision to the contrary contained
herein, neither the Special Servicer nor the Servicer shall, with respect to a
Defaulted Loan (i) negotiate or enter into a new loan with the Obligor relating
to the Loan Assets or the Obligor's obligations under such Defaulted Loan, or
(ii) allow the Obligor thereunder to resume its rights under such Defaulted
Loan, unless the Depositor has removed or made a substitution for such Defaulted
Loan in the manner set forth in the Trust Agreement and the Loan Acquisition
Agreement or, subject to Section 3.04(d) of the Trust Agreement, otherwise
received the prior written consent of the Directing Holders and the Controlling
Holders.
(c) If the Company is required to repurchase or substitute a Loan
pursuant to the terms of the Loan Acquisition Agreement, the Special Servicer
shall permit such repurchase or substitution only in accordance with the terms
of the Loan Acquisition Agreement and the terms hereof.
18
<PAGE>
Section 3.11 Due-on-Sale Clauses; Assumptions; Due-on-Encumbrance
(a) If any Loan contains a provision in the nature of a "due-on-sale"
clause, which by its terms:
(i) provides that such Loan shall (or may at the lender's
option) become due and payable upon the sale or other transfer of an
interest in the related Loan Collateral; or
(ii) provides that such Loan may not be assumed without the
consent of the lender in connection with any such sale or other
transfer;
then, for so long as such Loan is included in the Trust Estate, the Special
Servicer, on behalf of the Trust Estate, will enforce and may not waive any
due-on-sale clause contained in the related Note or Mortgage. The Special
Servicer is authorized to take or enter into an assumption agreement from or
with the Person to whom such property has been or is about to be conveyed (the
"Assuming Party"), and to release the original Obligor from liability upon the
Loan and substitute such Assuming Party as obligor thereon; provided that: (i)
--------
the Special Servicer shall re-underwrite the Loan in a manner consistent with
the Program Guidelines and shall not approve any assumption unless the Loan and
the Assuming Party qualify under the Program Guidelines; (ii) the
Certificateholder Agent shall have been provided with any information reasonably
requested and shall have approved in writing in advance such assumption, which
approval shall in the absence of material deviations from the Program Guidelines
not be unreasonably withheld; and (iii) the terms of any such assumption or
substitution agreement shall not be materially different from those in the
original Note or Mortgage. The Special Servicer shall notify the Trustee, the
Certificateholder Agent and the Rating Agency that any such assumption or
substitution agreement has been completed and forward to the Trustee the
original of such agreement, which original shall be added by the Trustee to the
related Loan File, and shall, for all purposes, be considered a part of such
Loan File to the same extent as all other documents and instruments constituting
a part thereof. In connection with any such assumption or substitution
agreement, the interest rate, principal amount and other material payment terms
of the Loan pursuant to the related Note shall not be changed, except as
otherwise permitted by Section 3.15. Subject to Section 3.09(b), any fee
collected by the Special Servicer for entering into an assumption or
substitution agreement will be retained by it.
(b) For so long as such Loan is included in the Trust Estate, the
Special Servicer shall enforce any provision in any Loan in the nature of a
"due-on-encumbrance" clause, which by its terms:
(i) provides that such Loan shall (or may at the lender's
option) become due and payable upon the creation of any lien or other
encumbrance on the related Loan Collateral; or
(ii) requires the consent of the related mortgagee to the
creation of any such lien or other encumbrance on the related Loan
Collateral.
(c) Nothing in this Section 3.11 shall constitute a waiver of the
Trustee's right, if it becomes the mortgagee of record or beneficiary of record
under any Mortgage, to receive notice of any assumption of a Loan, any sale or
other transfer of the related Mortgaged Property or the creation of any lien or
other encumbrance with respect to such Mortgaged Property.
(d) Except as otherwise permitted by this Section, the Special Servicer
shall not agree to modify, waive or amend, and no assumption or substitution
agreement entered into pursuant this Section 3.11 shall contain any terms that
are different from, any term of any Loan or the related Note.
19
<PAGE>
Section 3.12 Realization Upon Defaulted Loans.
------------ ---------------------------------
(a) Subject to Section 3.14, the Special Servicer shall repossess,
foreclose upon or otherwise comparably convert the ownership of assets securing
such of the Loans as come into and continue in default and as to which no
satisfactory arrangements can be made for collection of delinquent payments
pursuant to the Servicing Guidelines and the provisions of the Agreement, and
which are not released from the Trust Estate pursuant to any other provision
hereof, if the Special Servicer determines, in a manner consistent with the
servicing standard set forth in Section 3.04, that such action would be in the
best economic interest of the Certificateholders. The Special Servicer shall
advance the costs and expenses of any such proceeding unless it makes a
determination, in its reasonable business judgment, that such advance, if made,
would be nonrecoverable. The Special Servicer shall be entitled to reimbursement
of advances made pursuant to the preceding sentence from Recoveries on such
Loan.
If the Special Servicer elects to proceed with a foreclosure
in accordance with the laws of the state where the Loan Collateral is located,
the Special Servicer shall not be required to pursue a deficiency judgment
against the related Obligor or any other liable party if the laws of the state
do not permit such a deficiency judgment after such foreclosure or if the
Special Servicer determines, in its best judgment, that the likely recovery if a
deficiency judgment is obtained will not be sufficient to warrant the cost,
time, expense or exposure of pursuing the deficiency judgment. If title to any
Mortgaged Property is acquired in foreclosure or by deed in lieu of foreclosure,
then the deed or certificate of sale shall be issued to the Trustee, or to its
nominee on behalf of Certificateholders.
(b) Notwithstanding any provision to the contrary contained in this
Agreement, the Special Servicer shall not, on behalf of the Trust Estate, obtain
title to a Mortgaged Property as a result of or in lieu of foreclosure or
otherwise, and shall not otherwise acquire possession of, or take any other
action with respect to, any Mortgaged Property if, as a result of any such
action, the Trustee, the Servicer, the Depositor, the Company or the
Certificateholders, would be considered to hold title to, to be a "mortgagee-in-
possession" of or to be an "owner" or "operator" of such Mortgaged Property
within the meaning of the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended from time to time, or any comparable law,
unless the Special Servicer has previously determined in accordance with this
Section 3.12, based on an Environmental Assessment report prepared by an
Independent Person satisfying the requirements set forth in the first sentence
of Section 3.12(c), that:
(i) such Mortgaged Property is in compliance with applicable
environmental laws (in the reasonable judgment of such Independent
Person based upon all available information) or, if not, that it would
be in the best economic interest of the Trust Estate and there would be
no adverse effect on the Servicer, Special Servicer, Trustee or
Depositor to take such actions as are necessary to bring such Mortgaged
Property in compliance therewith, and
(ii) there are no circumstances present at such Mortgaged
Property relating to the use, management or disposal of any Hazardous
Substances for which investigation, testing, monitoring, containment,
clean-up or remediation could be required under any currently effective
federal, state or local law or regulation (in the reasonable judgment
of such Independent Person based upon all available information), or
that, if any such Hazardous Substances are present for which such
action could be required, it would be in the best economic interest of
the Trust Estate and there would be no adverse effect on the Servicer,
Special Servicer, Trustee or the Depositor to take such actions with
respect to the affected Mortgaged Property.
20
<PAGE>
In the event that the Environmental Assessment first obtained
by the Special Servicer with respect to a Mortgaged Property indicates that such
Mortgaged Property may not be in compliance with applicable environmental laws
or that Hazardous Substances may be present but does not definitively establish
such fact, the Special Servicer shall cause such further environmental tests to
be conducted by an Independent Person who regularly conducts such tests as the
Special Servicer shall deem prudent to protect the interests of
Certificateholders. Any such tests shall be deemed part of the Environmental
Assessment obtained by the Special Servicer for purposes of this Section 3.12.
(c) The Environmental Assessment contemplated by Section 3.12(b) shall
be prepared by any Independent Person who regularly conducts environmental
audits for purchasers of commercial property, as determined by the Special
Servicer in a manner consistent with the servicing standard set forth in Section
3.04. The Special Servicer shall advise the Trustee by delivery of a certificate
of a Special Servicer Officer of the cost of preparation of an Environmental
Assessment, and the Trustee shall pay such cost from amounts on deposit in the
Collection Account. The Trustee may rely conclusively on such certificate and
shall have no duty or obligation to re-calculate the amounts stated therein. To
the extent that amounts on deposit in the Collection Account are insufficient,
the Special Servicer shall advance the amount of such insufficiency as an
advance unless the Special Servicer makes a determination, in its reasonable
business judgment, that such advance would be nonrecoverable.
(d) If the Special Servicer determines pursuant to Section 3.12(b)(i)
that a Mortgaged Property securing a Defaulted Loan is not in compliance with
applicable environmental laws but that it is in the best economic interest of
the Trust Estate to take such actions as are necessary to bring such Mortgaged
Property in compliance therewith, or if the applicable Special Servicer
determines pursuant to Section 3.12(b)(ii) that the circumstances referred to
therein relating to Hazardous Substances are present on a Mortgaged Property
securing a Defaulted Loan but that it is in the best economic interest of the
Trust Estate to take such action with respect to the containment, clean-up or
remediation of Hazardous Substances affecting such Mortgaged Property as is
required by law or regulation, the Special Servicer shall take such action as it
deems to be in the best economic interest of the Trust Estate and that would not
have an adverse effect on the Servicer, the Special Servicer, the Depositor, the
Trustee or the Certificateholders; provided that, in advance of any such action,
--------
the Trustee shall mail notice to the Certificateholders and the
Certificateholder Agent of such proposed action, which notice shall be prepared
by the Special Servicer, and if the Trustee receives, within thirty (30) days of
such notification, instructions from the Directing Holders directing the Special
Servicer not to take such action, then the Special Servicer shall so refrain;
provided further that, if there has occurred a Depositor Event of Default, then
- -------- -------
the Special Servicer shall act without the instructions of the Directing
Holders, unless, in the case of a Depositor Event of Default under Section
6.01(a), (b) or (c) of the Trust Agreement, the Directing Holders are
Independent. The Special Servicer shall advise the Trustee by delivery of an
Officer's Certificate of the cost of any such compliance, containment, clean-up
or remediation, and the Trustee shall pay such cost from amounts on deposit in
the Collection Account. To the extent that amounts on deposit in the Collection
Account are insufficient, the Special Servicer shall advance the amount of such
shortfall unless the Special Servicer makes a determination, in its reasonable
business judgment, that such advance, if made, would be nonrecoverable. The
Special Servicer shall be entitled to reimbursement of advances made pursuant to
the preceding sentence from Recoveries on such Loan.
(e) The Servicer shall report to the Internal Revenue Service and to
the related Obligor, in the manner required by applicable law, the information
required to be reported regarding any Mortgaged Property or any mortgagor
including regarding any Mortgaged Property that is abandoned or foreclosed. The
Servicer shall concurrently deliver a copy of any such report to the Trustee.
The Special Servicer, on
21
<PAGE>
a timely basis, shall provide the Servicer with such information as to any Loan
as is necessary to enable the Servicer to comply with this Section 3.12(e).
(f) The Special Servicer shall cause an updated Valuation to be
prepared with respect to any Loan (i) promptly upon such Loan becoming a
Defaulted Loan and (ii) so long as such Loan remains a Defaulted Loan, on each
six (6) month anniversary of the date such Loan became a Defaulted Loan. Such
updated Valuation shall be prepared by an Independent Person or the Servicing
Advisor (or an Affiliate thereof) for an amount not to exceed the lesser of (A)
the lowest amount then being quoted to or available to the Special Servicer for
the preparation of such a Valuation and (B) $5,000, adjusted for inflation based
on changes in the "Consumer Price Index" since the date of this Agreement. Upon
its receipt of each updated Valuation, the Special Servicer shall promptly
provide a copy thereof to the Servicer, the Servicing Advisor, the Directing
Holders, the Trustee and the Certificateholder Agent. The cost of all updated
Valuation(s) made in accordance with this Section 3.12(f) shall be an expense of
the Trust Estate.
(g) Upon any Defaulted Loan becoming a Liquidated Loan, the Servicer
shall deliver a certificate of a Servicing Officer to the Depositor, the Trustee
and the Certificateholder Agent specifying (i) the actual amount of all
Recoveries received by the Servicer in respect of such Loan to the date of such
certificate, and (ii) the amount of all other Recoveries, if any, that the
Servicer expects to be recovered in the future with respect to such Loan.
Section 3.13 Title and Management of Repossessed Collateral.
------------ -----------------------------------------------
(a) In the event that title to any Loan Collateral is acquired for the
benefit of Certificateholders, by foreclosure, by deed in lieu of foreclosure or
upon abandonment or reclamation from bankruptcy, the deed or certificate of sale
shall be taken in the name of the Trustee, or its nominee, on behalf of the
Trust Estate. The Special Servicer shall manage, conserve, protect and operate
any Repossessed Collateral for the Certificateholders solely for the purpose of
its prompt disposition and sale.
(b) The Special Servicer shall not be required to remit to the Lockbox
Account, but shall segregate and hold, all funds collected and received in
connection with the operation of any Repossessed Collateral (including among
other things, rent, insurance proceeds and liquidation proceeds) separate and
apart from its own funds and general assets and shall establish and maintain
with respect to any Repossessed Collateral an account held in trust for the
Trust Estate for the benefit of the Certificateholders (the "Operating
Account"), which shall be an Eligible Account, and will account separately for
funds received or expended with respect to the Repossessed Collateral of any
Loan. The Special Servicer shall notify the Trustee, the Servicer and the
Certificateholder Agent in writing of the location and account number of each
Operating Account immediately upon its establishment and shall notify the
Trustee, the Servicer and the Certificateholder Agent prior to any subsequent
change thereof. Amounts on deposit in any Operating Account shall not be
invested.
(c) The Special Servicer shall have full power and authority, subject
only to the specific requirements and prohibitions of this Agreement, to do any
and all things in connection with any Repossessed Collateral as are commercially
reasonable and not inconsistent with the manner in which the Special Servicer
manages and operates similar property owned or managed by the Special Servicer
or any of its Affiliates, all on such terms and for such period as the Special
Servicer deems to be in the best interests of the Certificateholders and in
accordance with Section 3.04. In connection therewith, the Special Servicer
shall deposit or cause to be deposited on a daily basis in the Operating Account
all revenues received by it with respect to any Repossessed Collateral and the
related Loan, and shall withdraw therefrom funds
22
<PAGE>
necessary for the proper operation, management and maintenance of any
Repossessed Collateral and for other property protection expenses, including:
(i) all insurance premiums due and payable in respect of
any Repossessed Collateral;
(ii) all property taxes and assessments in respect of any
Repossessed Collateral that may result in the imposition of a lien
thereon; and
(iii) all costs and expenses necessary to maintain, manage or
operate any Repossessed Collateral.
If the amounts on deposit in the Operating Account are
insufficient for the purposes set forth in clauses (i) through (iii) above, then
the Special Servicer shall advance the amount of any such shortfall unless the
Special Servicer makes a determination, in its reasonable business judgment,
that such advance is not reasonably recoverable from anticipated Recoveries with
respect to such Repossessed Collateral. The Special Servicer shall be entitled
to reimbursement of advances made pursuant to the preceding sentence from
Recoveries on such Loan or Repossessed Collateral.
(d) The Special Servicer shall or shall direct the Servicing Advisor to
use its best efforts to contract with any Independent Person for the operation
and management of any Repossessed Collateral, provided that:
(i) the terms and conditions of any such contract shall not be
inconsistent herewith;
(ii) any such contract shall require that the Independent
Person pay all costs and expenses incurred in connection with the
operation and management of such Repossessed Collateral, including
those listed above, and return all related revenues (net of such costs
and expenses);
(iii) none of the provisions of this Section 3.13(c) relating
to any such contract or to actions taken through any such Independent
Person shall be deemed to relieve the Special Servicer or the Servicing
Advisor of any of its duties and obligations to the Trust Estate, the
Servicer or the Trustee on behalf of the Certificateholders with
respect to the operation and management of any such Repossessed
Collateral;
(iv) the Special Servicer shall be obligated with respect
thereto to the same extent as if it alone were performing all duties
and obligations in connection with the operation and management of such
Repossessed Collateral; and
(v) the Servicing Advisor, and if the Independent Person shall
be the Servicing Advisor or an Affiliate, the Special Servicer, shall
have delivered a written opinion to the Special Servicer, and the
Special Servicer shall have delivered a copy thereof to the Trustee and
the Certificateholder Agent, to the effect that any such hiring of an
Independent Person, in light of among other things any fees which may
be charged, will maximize ultimate proceeds to the Trust Estate with
respect to the related Repossessed Collateral.
The Special Servicer shall be entitled to enter into any
agreement with any Independent Person performing services for it related to its
duties and obligations hereunder for indemnification of the Special Servicer by
such Independent Person, and nothing in this Agreement shall be deemed to limit
or
23
<PAGE>
modify such indemnification. Fees, if any, owed to any Independent Person
other than the Special Servicer, Servicing Advisor or an Affiliate thereof shall
be payable from amounts on deposit in the Operating Account or, if the amount on
deposit therein is insufficient therefor, the Special Servicer shall advance
such fees unless the Special Servicer makes a determination, in its reasonable
business judgment, that such advance is not reasonably recoverable from the
operation or sale of the related Repossessed Collateral. The Special Servicer
shall be entitled to reimbursement of such advances from Recoveries on such Loan
or Repossessed Collateral. Notwithstanding anything to the contrary contained in
any of the Transaction Documents, for purposes of this Section 3.13(d) (but not
for purposes of the definition of "Recovery Expenses" contained herein), an
"Independent Person" shall, prior to the delivery of a Servicing Advisor
Termination Notice with respect to the initial Servicing Advisor, include the
initial Servicing Advisor or an Affiliate thereof.
(e) On each Determination Date, the Special Servicer shall withdraw
from the Operating Account and deposit into the Collection Account the proceeds
and collections received during the related Due Period, net of expenses;
provided, that the Special Servicer may retain in the Operating Account such
- --------
portion of such proceeds and collections as may be necessary to maintain in the
Operating Account sufficient funds for the proper operation, management and
maintenance of the Repossessed Collateral, including without limitation the
creation of reasonable reserves for repairs, replacements and necessary capital
improvements and other related expenses. On the first Business Day prior to each
Determination Date, the Special Servicer shall notify the Servicer of the amount
of all such deposits (and the Loans to which the deposits relate) to be made
into the Collection Account on the following Determination Date.
(f) Promptly following any acquisition by the Trust Estate of any
Repossessed Collateral, the Special Servicer shall, upon the request of the
Certificateholder Agent, determine the fair market value of such Repossessed
Collateral based on an appraisal, conducted within sixty (60) days of such
acquisition. Such appraisal shall be prepared by an Independent Person or by the
Special Servicer (or an Affiliate thereof) for an amount not to exceed the
lesser of (i) the lowest amount then being quoted to the Servicing Advisor for
the preparation of such an appraisal and (ii) $5,000, adjusted for inflation
based on changes in the "Consumer Price Index" since the date of this Agreement.
Notwithstanding anything to the contrary contained herein, if an appraisal or
Valuation with respect to such Repossessed Collateral has previously been
conducted, whether pursuant to Section 3.12(f) or otherwise, within six (6)
months of such acquisition by the Trust Estate, then no new appraisal shall be
required. The cost of any appraisal made in accordance with this Section 3.13(f)
shall be an expense of the Trust Estate.
Section 3.14 Sale of Defaulted Loans and Repossessed Collateral.
------------ ---------------------------------------------------
(a) The Special Servicer may offer to sell to any Person (including the
Special Servicer) any Defaulted Loan or any Repossessed Collateral, if and when
the Special Servicer determines, with the advice of the Servicing Advisor and
consistent with the servicing standard set forth in Section 3.04, that such a
sale would be in the best economic interests of the Trust Estate. The Special
Servicer shall give the Servicer, the Depositor, the Trustee, the
Certificateholder Agent and the Directing Holders not less than ten (10)
Business Days prior written notice of its intention to (i) purchase any
Defaulted Loan or Repossessed Collateral (which purchase must be approved in
writing in advance by the Controlling Holders) or (ii) sell any Defaulted Loan
or Repossessed Collateral. Subject to the repurchase or purchase rights, as the
case may be, of the Depositor and the Directing Holders pursuant to Section
3.04(d) of the Trust Agreement, the Special Servicer may purchase such Defaulted
Loan or Repossessed Collateral unless a higher bid is received from another
Person. The Special Servicer shall accept the highest bid received from any
Person for any Defaulted Loan or any Repossessed Collateral in an amount at
least equal to the Repurchase Price therefor.
24
<PAGE>
In the absence of any such bid, the Special Servicer shall
accept the highest bid received from any Person that is determined by the
Special Servicer, with the advice of the Servicing Advisor, to be a fair price
for such Defaulted Loan or Repossessed Collateral, if the highest bidder is a
Person other than an Interested Person, or is determined to be such a price by
the Trustee, if the highest bidder is an Interested Person. Notwithstanding
anything to the contrary herein: (i) neither the Trustee, in its individual
capacity, nor any of its Affiliates may bid for or purchase any Defaulted Loan
or any Repossessed Collateral; and (ii) any sale to an Interested Person must be
consented to in writing in advance by the Controlling Holders (which consent may
not be unreasonably withheld).
Subject to the repurchase or purchase rights, as the case may
be, of the Depositor and the Directing Holders pursuant to Section 3.04(d) of
the Trust Agreement, the Special Servicer shall not be obligated by either of
the foregoing paragraphs or otherwise to accept the highest bid if the Special
Servicer determines, or is advised by the Servicing Advisor, in accordance with
the servicing standard stated in Section 3.04, that rejection of such bid would
be in the best interests of the Certificateholders. In addition, the Special
Servicer may accept a lower bid if it determines, with the advice of the
Servicing Advisor, and in accordance with the servicing standard stated in
Section 3.04, that acceptance of such bid would be in the best interests of the
Certificateholders (for example, if the prospective buyer making the lower bid
is more likely to perform its obligations, or the terms offered by the
prospective buyer making the lower bid are more favorable).
(b) In determining whether any bid constitutes a fair price for any
Defaulted Loan or any Repossessed Collateral, the Special Servicer or the
Trustee, and the Servicing Advisor, shall take into account, as applicable,
among other factors, the period and amount of any delinquency on the affected
Defaulted Loan, the physical condition of the related Repossessed Collateral and
the state of the local economy. The Special Servicer shall dispose of
Repossessed Collateral in accordance with Section 3.02(b)(vi).
(c) Subject to the provisions of the preceding Section 3.14(a) and (b),
the Special Servicer and the Trustee shall act on behalf of the Trust Estate in
negotiating and taking any other action necessary or appropriate in connection
with the sale of any Defaulted Loan or Repossessed Collateral, including the
collection of all amounts payable in connection therewith. Any sale of a
Defaulted Loan or any Repossessed Collateral shall be without recourse to, or
representation or warranty by, the Trustee, the Depositor, the Servicer, the
Special Servicer or the Trust Estate (except that any contract of sale and
assignment and conveyance documents may contain customary warranties of title,
so long as the only recourse for breach thereof is to the Trust Estate), and, if
consummated in accordance with the terms of this Agreement, none of the
Servicer, the Special Servicer, the Depositor or the Trustee shall have any
liability to the Trust Estate or any Certificateholder with respect to the
purchase price therefor accepted by the Special Servicer or the Trustee.
(d) The net proceeds of any sale after deduction of the expenses of
such sale incurred in connection therewith shall be promptly deposited in the
Collection Account.
25
<PAGE>
Section 3.15 Modifications, Waivers, Amendments and Consents.
------------ ------------------------------------------------
(a) None of the Servicer, the Special Servicer or the Servicing Advisor
shall have any right to agree to any modification, waiver or amendment of any
term of any Loan, or to any substitution of collateral, except as provided in
Section 3.11 and this Section 3.15. The Special Servicer may agree to any
modification, waiver or amendment of any term of any Defaulted Loan, or to any
substitution of collateral securing a Defaulted Loan, without the consent of the
Trustee, the Servicer or any Certificateholder, to the extent permitted by
paragraphs (b) through (h) of this Section 3.15. All modifications, waivers or
amendments of any such Loan shall be in writing and shall be consistent with the
servicing standard set forth in Section 3.04.
(b) The Special Servicer shall not agree to any modification, waiver
(other than a waiver referred to in Section 3.11 which waiver, if any, shall be
governed by Section 3.11) or amendment of any term of any Loan if such
modification, waiver or amendment would:
(i) result in the forgiveness of any Scheduled Payment on such
Loan;
(ii) decrease any Scheduled Payment or the interest or coupon
rate applicable to such Loan;
(iii) defer the payment of any principal or interest of any
Scheduled Payment on such Loan, other than an extension of not more
than one Scheduled Payment per year, in accordance with the Servicing
Guidelines, provided that the Special Servicer shall not defer
--------
Scheduled Payments for any one Loan more than five times in the
aggregate, provided further that no such deferral may be to a date
-------- -------
later than the earlier of (A) the original maturity date of the Loan
and (B) the Determination Date immediately preceding the date that is
six (6) months prior to the Series Termination Date;
(iv) reduce the Loan Balance of such Loan (except in
connection with actual payments attributable to such Loan Balance);
(v) prevent the complete amortization of the Loan Balance of
such Loan from occurring by the Determination Date immediately
preceding the Series Termination Date; or
(vi) result in a release of the lien of the Loan (or related
Mortgage) or related on any material portion of the related Loan
Collateral without a corresponding principal prepayment (and any
corresponding prepayment fee or premium) in an amount not less than the
fair market value (as determined by an appraisal delivered to the
Special Servicer) of the property to be released, or would in the
Special Servicer's judgment, otherwise materially impair the security
for such Loan or reduce the likelihood of timely payment of amounts due
thereon.
(c) Notwithstanding subsection (b) above, the Special Servicer may
extend the date on which any balloon payment is scheduled to be due, without the
consent of the Trustee, the Servicer, or any Certificateholder if, but only if:
(i) any such extension shall be for a period of not more than
twelve (12) months and each monthly payment shall be in an amount at
least sufficient to pay interest accrued and principal payments
sufficient to meet the amortization schedule on the related Loan since
the immediately preceding Due Date;
26
<PAGE>
(ii) the Special Servicer has previously determined in its
reasonable business judgment, with the advice of the Servicing Advisor,
that (A) such extension is reasonably likely to produce a greater
recovery than liquidation of the related Loan, (B) no material damage
or deferred maintenance exists at the related Mortgaged Property and
(C) the Obligor is in material compliance with all applicable federal
and state regulations governing the operation of the related Mortgaged
Property.
(d) The Special Servicer must provide that any interest deferred shall
be added to the principal balance of the related Loan (and shall be due on the
maturity date of such Loan, or such earlier date as the Special Servicer may
deem appropriate), and such deferred interest shall accrue interest at the
related Loan interest rate.
(e) The Special Servicer may, as a condition to granting any request by
a Obligor for consent, modification, waiver or indulgence or any other matter or
thing, the granting of which is not prohibited by the terms of this Agreement,
require that such Obligor pay to the Special Servicer, as additional servicing
compensation, a reasonable or customary fee for the additional services
performed in connection with such request, together with any related costs and
expenses incurred by the Special Servicer.
(f) The Special Servicer shall notify the Trustee, the
Certificateholder Agent, the Rating Agency and the Servicer of any modification,
waiver or amendment of any term of any Loan and the date and terms thereof
(including the fees and expenses payable to the Special Servicer), and shall
deliver to the Trustee for deposit in the related Loan File, an original
counterpart of the agreement relating to such modification, waiver or amendment,
promptly following the execution thereof.
(g) The Special Servicer may from time to time permit an Obligor to
substitute collateral for all or a portion of the related Mortgaged Property or
pledge additional collateral for the related Loan, or may release part of the
related Mortgaged Property from the lien of the related Mortgage; provided that
--------
(i) if such release is not in accordance with the related Loan, the Special
Servicer shall: (A) (i) provide the Certificateholder Agent with any information
reasonably requested by the Certificateholder Agent and (ii) obtain the prior
written consent of the Certificateholder Agent to such release, which consent
shall, in the absence of material deviations from the Program Guidelines, not be
unreasonably withheld; and (B) obtain the prior written confirmation from the
Rating Agency that such release shall not result in the downgrade, qualification
or withdrawal of the ratings then assigned to any Series or Class of
Certificates, and (ii) the Special Servicer shall not permit an Obligor to
substitute any Loan Collateral pursuant to this Section 3.15 unless (A) the
Special Servicer shall have first determined, in accordance with the servicing
standard set forth in Section 3.04, and based upon an Environmental Assessment
prepared by an Independent Person satisfying the requirements set forth in
Section 3.12, at the expense of the Obligor, that such substitute Loan
Collateral is in compliance with applicable environmental laws and that there
are no circumstances present at such substitute Loan Collateral relating to the
use, management or disposal of any Hazardous Substances for which investigation,
testing, monitoring, containment, clean-up or remediation would be required
under any then effective federal, state or local law or regulation, or, if any
such containment, clean-up or remediation is required, that adequate funds
therefor have been placed in escrow with the Special Servicer by or on behalf of
the Obligor, and (B) the Certificateholder Agent shall have been provided with
any information reasonably requested and shall have approved in writing in
advance such substitution, which approval shall, in the absence of material
deviations from the Program Guidelines, not be unreasonably withheld. In the
event that the Special Servicer intends to permit an Obligor to substitute Loan
Collateral for all or any portion of a Mortgaged Property or pledge additional
Loan Collateral for the related Loan as permitted hereunder, if the security
interest of the Trust Estate in such collateral would be perfected by
27
<PAGE>
possession, or if such collateral requires special care or protection, then,
prior to agreeing to such substitution or addition of Loan Collateral, then the
Special Servicer shall make arrangements for such possession, care or protection
and, prior to agreeing to such substitution or addition of collateral (or such
arrangement for possession, care or protection), shall obtain the prior written
consent of the Trustee (which consent shall not be unreasonably withheld,
delayed or conditioned) and the written confirmation by the Rating Agency with
respect thereto to the effect that such substitution or addition of collateral
shall not result in the downgrade, qualification or withdrawal of the ratings
then assigned to the Certificates.
(h) The Special Servicer shall have no liability to the Trust Estate,
the Certificateholders or any other Person if its analysis and determination
that the modification, waiver or amendment is reasonably likely to produce a
greater recovery on a present-value basis than liquidation proves to be wrong or
incorrect, so long as the analysis and determination was made in the good faith
reasonable business judgment of the Special Servicer.
Section 3.16 Fidelity Bond; Directors and Officers Insurance.
------------ ------------------------------------------------
Each of the Servicer, the Special Servicer and, at any time that the
Servicing Advisor possesses signatory authority with respect to any Specified
Lockbox Account or Operating Account, the Servicing Advisor shall maintain, at
such Person's own expense, a blanket fidelity bond on all officers and employees
of such Person with respect to actions concerning the handling of funds or
documents or other papers relating to the Loans. Each of the Servicer and the
Special Servicer shall maintain, at such Person's own expense, directors and
officers liability insurance covering all Servicing Officers with respect to
wrongful acts relating to the servicing of the Loans. Such fidelity bond and
directors and officers insurance shall be substantially in the form and shall
provide for coverage in the amounts indicated on Exhibit F. No provision of this
Section 3.16 shall diminish or relieve the Servicer, the Special Servicer and
the Servicing Advisor, as applicable, from their respective duties and
obligations as set forth in this Agreement. Each of the Servicer and the Special
Servicer shall cause to be delivered to the Trustee (with a copy to the
Certificateholder Agent) on or before the initial Funding Date, and the
Servicing Advisor shall cause to be delivered to the Trustee (with a copy to the
Certificateholder Agent) at such time as it is required to maintain a fidelity
bond hereunder): (a) a certified true copy of the fidelity bond and directors
and officers insurance, as applicable, respecting such Person; (b) a written
statement from each surety issuing such fidelity bond and directors and officers
insurance, as applicable, that such fidelity bond or directors and officers
insurance, as applicable, shall in no event be terminated or materially modified
without thirty (30) days prior written notice to the Trustee; and (c) written
evidence reasonably satisfactory to the Trustee and the Certificateholder Agent
that such fidelity bond and directors and officers insurance, as applicable,
provides that the Trustee, on behalf of the Certificateholders, is the
beneficiary or loss payee, as applicable, thereunder.
28
<PAGE>
ARTICLE FOUR
------------
ACCOUNTINGS, STATEMENTS AND REPORTS
-----------------------------------
Section 4.01 Reports.
------------ --------
(a) No later than 10:00 a.m., California time, on each Determination
Date, the Servicer shall deliver the Servicer Report to the Depositor, the
Certificateholder Agent, the Certificateholders, the Special Servicer and the
Trustee, and not later than the following Business Day the Trustee will deliver
the Servicer Report to the Rating Agency with respect to the activity in the
immediately preceding Due Period. In the course of preparing the Servicer
Report, the Servicer shall seek direction from the Depositor as to remittance of
any funds to be paid pursuant to Section 5.02 of the Trust Agreement and any
related Supplement(s). The Servicer shall identify Loans which have been
substituted with a Substitute Loan or purchased by the Company or removed by the
Depositor by Obligor loan number on the Servicer Report. On each Determination
Date, the Servicer shall deliver to the Trustee a computer diskette in a format
acceptable to the Trustee containing the Loan Payment Data. Nothing in this
Section shall limit or otherwise affect the Trustee's obligations under Section
5.03 of the Trust Agreement to deliver the Servicer Report.
(b) On the second Determination Date following the end of each calendar
quarter, the Special Servicer shall deliver the Special Servicer Report to the
Depositor, the Certificateholders, the Certificateholder Agent, the Servicer,
the Servicing Advisor and the Trustee, and the Trustee will deliver the Special
Servicer Report to the Rating Agency with respect to the Loan Collateral
performance in the preceding calendar quarter. Nothing in this Section shall
limit or otherwise affect the Trustee's obligations under Section 5.03 of the
Trust Agreement to deliver the Special Servicer Report.
(c) 3Not later than May 31 of each year, the Special Servicer shall
deliver to the Depositor, the Certificateholders, the Certificateholder Agent
and the Servicer, and, not later than the following Business Day, the Trustee
shall deliver to the Rating Agency, the Annual Pool Report prepared by the
Special Servicer with respect to the performance of the Loans and the related
Loan Collateral during the immediately preceding calendar year.
(d) Not later than May 15 of each year, the Servicing Advisor shall
deliver to the Special Servicer, and not later than May 31 of each year the
Special Servicer shall deliver to the Depositor, the Trustee, the
Certificateholder Agent, and, if requested, the Rating Agency, ***.
(e) Following a written request by the Special Servicer, within 15
Business Days following the later of (i) such request and (ii) the receipt by
the Servicing Advisor of such financial statement data concerning the related
Obligor and Loan Collateral as has been reasonably requested by it, the
Servicing Advisor shall also prepare and deliver to the Special Servicer, the
Depositor, the Trustee, the Certificateholder Agent, and, if requested, the
Rating Agency, ***.
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
29
<PAGE>
(f) If a Swap Agreement is in effect with respect to any Due Period,
the Servicer shall also include in the Servicer Report delivered in connection
with such Due Period the computations with respect to and the amounts of any
Swap Payments due under such Swap Agreement with respect to such Due Period.
Section 4.02 Financial Statements; Certification as to Compliance;
------------ -----------------------------------------------------
Notice of Default.
- -------------------
(a) The Servicer will deliver to the Trustee, the Special Servicer, the
Rating Agency, the Certificateholder Agent and each Certificateholder:
(i) within one hundred twenty (120) days after the end of each
fiscal year, a copy of either (A) the Servicer Financial Statements for
such Servicer, all in reasonable detail and accompanied by an opinion
of the Independent Accountant stating that such financial statements
present fairly the financial condition of the Servicer (or, in the case
of a successor Servicer, such successor Servicer's financial condition)
and have been prepared in accordance with generally accepted accounting
principles consistently applied (except for changes in application in
which such accountants concur), and that the examination of such
accountants in connection with such financial statements has been made
in accordance with generally accepted auditing standards, and
accordingly included such tests of the accounting records and such
other auditing procedures as were considered necessary in the
circumstances or (B) the Servicer's Form 10-K for such fiscal year;
(ii) with each set of Servicer Financial Statements or Form
10-K delivered pursuant to subsection (a)(i) above, the Servicer will
deliver an Officer's Certificate stating that such officer has reviewed
the relevant terms of the Trust Agreement, the Loan Acquisition
Agreement and this Agreement and has made, or caused to be made, under
such officer's supervision, a review of the transactions and condition
of the Servicer during the period covered by the Servicer Financial
Statements then being furnished, that the review has not disclosed the
existence of any Servicer Default or Servicer Event of Default or, if a
Servicer Default or Servicer Event of Default exists, describing its
nature and what action the Servicer has taken and is taking with
respect thereto, and that on the basis of such review the officer
signing such certificate is of the opinion that during such period the
Servicer has serviced the Loans in compliance with the procedures
hereof except as disclosed in such certificate;
(iii) immediately upon becoming aware of the existence of any
condition or event which constitutes a Servicer Default, Servicer Event
of Default, Depositor Event of Default, Special Servicer Default,
Special Servicer Event of Default, Servicing Advisor Default or
Servicing Advisor Event of Default, a written notice describing its
nature and period of existence and what action the Servicer or, if
known to the Servicer, such other Person, as applicable, is taking or
proposes to take with respect thereto;
(iv) promptly upon the Servicer's becoming aware of:
(A) any proposed or pending investigation of it or
the Depositor, the Servicer, the Special Servicer or the
Servicing Advisor by any governmental authority or agency, or
(B) any pending or proposed court or administrative
proceeding which involves or may involve the probability of
materially and adversely affecting the properties, business,
prospects, profits or condition
30
<PAGE>
(financial or otherwise) of the Depositor, the Servicer,
the Special Servicer or the Servicing Advisor,
a written notice specifying the nature of such investigation or
proceeding and what action the Servicer or, if known to the Servicer,
such other Person, as applicable, is taking or proposes to take with
respect thereto and evaluating its merits;
(v) with reasonable promptness any other data and information
with respect to the Servicer, the Depositor or the Loan Assets which
may be reasonably requested from time to time, including any
information required to be made available at any time to any
prospective transferee of any Certificates in order to satisfy the
requirements of Rule 144A under the Securities Act of 1933, as amended;
and
(vi) within sixty (60) days following the end of a fiscal
quarter, either (A) the Service's most recent Form 10-Q or (B)
unaudited Servicer Financial Statements for such fiscal quarter.
(b) The Special Servicer will deliver to the Trustee, the Servicer, the
Rating Agency, the Certificateholder Agent and each Certificateholder:
(i) immediately upon becoming aware of the existence of any
condition or event which constitutes a Servicer Default, Servicer Event
of Default, Depositor Event of Default, Special Servicer Default,
Special Servicer Event of Default, Servicing Advisor Default, Servicing
Advisor Event of Default or non-compliance with the Pool Performance
Condition, a written notice describing its nature and period of
existence and what action the Special Servicer or, if known to the
Special Servicer, such other Person, as applicable, is taking or
proposes to take with respect thereto;
(ii) promptly upon the Special Servicer's becoming aware of:
(A) any proposed or pending investigation of it or
the Depositor, the Servicer, the Special Servicer or the
Servicing Advisor by any governmental authority or agency, or
(B) any pending or proposed court or administrative
proceeding which involves or may involve the probability of
materially and adversely affecting the properties, business,
prospects, profits or condition (financial or otherwise) of
the Depositor, the Servicer, the Special Servicer or the
Servicing Advisor,
a written notice specifying the nature of such investigation or
proceeding and what action the Special Servicer or, if known to the
Special Servicer, such other Person, as applicable is taking or
proposes to take with respect thereto and evaluating its merits; and
(iii) with reasonable promptness any other data and
information with respect to the Special Servicer, the Depositor or the
Loan Assets which may be reasonably requested from time to time,
including any information required to be made available at any time to
any prospective transferee of any Certificates in order to satisfy the
requirements of Rule 144A under the Securities Act of 1933, as amended.
31
<PAGE>
(c) On the Determination Date occurring in March, beginning in 1998, so
long as any of the Certificates are Outstanding, each of the Servicer and the
Special Servicer shall furnish to the Trustee and the Certificateholder Agent an
Officer's Certificate either stating that such action has been taken with
respect to the recording, filing, and rerecording and refiling of any financing
statements and continuation statements, and all other actions, as necessary to
maintain the perfected security interest of the Trustee (for the benefit of the
Certificateholders) in the Trust Estate and to maintain the interest of the
Depositor (assigned to the Trustee) in the Loan Assets and reciting the details
of such actions or stating that no such actions are necessary to maintain such
interest. Such Officer's Certificates shall also describe the recording, filing,
rerecording and refiling of any financing statements and continuation
statements, and such other actions, that will be required to maintain the
perfected security interest of the Trustee (for the benefit of the
Certificateholders) in the Trust Estate until the date such next Officer's
Certificates are due. On the Payment Date following such Determination Date, the
Trustee shall furnish a copy of such Officer's Certificates to each
Certificateholder. In addition, on the Determination Date occurring in March,
2002, and on each five (5) year anniversary thereof so long as any of the
Certificates are Outstanding, the Special Servicer shall furnish to the Trustee
and the Certificateholder Agent an Opinion of Counsel stating that, in the
opinion of such counsel, either (a) such action has been taken with respect to
the recording, filing, and rerecording and refiling of any financing statements
and continuation statements, and all other actions, as necessary to maintain the
perfected security interest of the Trustee (for the benefit of the
Certificateholders) in the Trust Estate and to maintain the interest of the
Depositor (assigned to the Trustee) in the Loan Assets and reciting the details
of such actions or (b) no such actions are necessary to maintain such interest.
Such opinion shall also specify any actions necessary to be taken prior to the
expected date of the next opinion in order to maintain the perfected security
interest of the Trustee (for the benefit of the Certificateholders).
Section 4.03 Annual Independent Accountants' Reports.
------------ ----------------------------------------
Commencing with the fiscal year ending December 31, 1998, and each
fiscal year thereafter, the Servicer at its expense shall cause the Independent
Accountant (who may also render and deliver other services to the Servicer and
its Affiliates) to undertake agreed upon procedures (as of the close of such
fiscal year) and prepare a report in respect thereof, substantially in the form
of Exhibit G hereto, addressed to each of the Special Servicer, the Trustee, the
Certificateholders, the Certificateholder Agent and the Rating Agency, so long
as Rated Certificates are Outstanding. The Servicer shall deliver to the Special
Servicer, the Servicing Advisor, the Trustee, the Certificateholders, the
Certificateholder Agent and the Rating Agency, so long as Certificates are
Outstanding, a copy of any such statement within one hundred twenty (120) days
of the close of the relevant fiscal year.
Section 4.04 Access to Certain Documentation and Information.
------------ ------------------------------------------------
(a) The Servicer, the Special Servicer, the Servicing Advisor and the
Depositor shall provide to the Servicer, the Special Servicer, the Servicing
Advisor, the Trustee, the Rating Agency, the Certificateholder Agent or any
Certificateholder and their duly authorized representatives, attorneys or
accountants access to any and all documentation regarding the Trust Estate
(including the Loan Schedule) that the Servicer, the Special Servicer, the
Servicing Advisor or the Depositor may, as the case may be, possess, such access
being afforded without charge but only upon reasonable request and during normal
business hours so as not to interfere unreasonably with such party's normal
operations or customer or employee relations, at offices of such party
designated by such party.
(b) At all times during the term hereof, the Servicer shall keep
available at its principal executive office for inspection by
Certificateholders, the Certificateholder Agent, the Rating Agency, the Trustee,
the Special Servicer and the Servicing Advisor a list of all Loans then held as
a part of the Trust
32
<PAGE>
Estate, together with a reconciliation of such list to that set forth in the
Loan Schedule and each of the Servicer Reports, indicating the cumulative
addition and removal of Loans from the Trust Estate.
(c) The Servicer will maintain accounts and records as to each
respective Loan serviced by the Servicer that are accurate and sufficiently
detailed as to permit (i) the reader thereof to know as of the most recent
Determination Date the status of such Loan, including any payments and
Recoveries received or owing (and the nature of each) thereon and (ii) the
reconciliation between payments or Recoveries on (or with respect to) each Loan
and the amounts from time to time deposited in the Collection Account in respect
of such Loan.
(d) The Servicer, the Special Servicer and the Depositor will maintain
all computerized accounts and records so that, from and after the Initial
Delivery Date and each Acquisition Date, the accounts and records (including any
back-up computer archives) that refer to any Loan conveyed on such date indicate
clearly that the Loans and perfected first priority security interest in the
Loan Collateral are owned by the Depositor and pledged to the Trustee for the
benefit of the Certificateholders. Indication of the Trustee's interest in a
Loan will be deleted from or modified on the accounts and records when, and only
when, the Loan has been paid in full, replaced with a Substitute Loan, purchased
by the Company or removed by the Depositor.
(e) Nothing in this Section 4.04 shall affect the obligation of the
Servicer or the Special Servicer to observe any applicable law prohibiting
disclosure of information regarding the Obligors, and the failure to provide
information otherwise required by this Section 4.04 as a result of such
observance by the Servicer or the Special Servicer shall not constitute a breach
of this Section 4.04.
(f) All information obtained by the Trustee, the Rating Agency, the
Servicer, the Special Servicer, the Servicing Advisor, the Certificateholder
Agent or any Certificateholder regarding the Obligors and the Loans, whether
upon exercise of its rights under this Section 4.04 or otherwise, shall be
maintained by the Trustee, the Rating Agency, the Servicing Advisor, the
Certificateholder Agent or the Certificateholder, as applicable, in confidence
and shall not be disclosed to any other Person (other than to or among such
other Persons), unless ordered by a court of applicable jurisdiction, provided
--------
that the Certificateholder Agent and the Certificateholders may disclose such
information to the extent permitted by the applicable Certificate Purchase
Agreement.
Section 4.05 Other Necessary Data.
------------ ---------------------
(a) The Servicer shall, on request of the Special Servicer or the
Trustee, (i) on reasonable notice, furnish the Trustee such data necessary for
the administration of the Trust Estate as can be reasonably generated by the
Servicer's existing data processing systems, and (ii) on and after a Servicer
Event of Default, within five (5) Business Days, provide the Trustee and the
Special Servicer with access to the Servicer's existing data processing systems
and any files or records with respect to the Loan Assets that it may have.
(b) The Special Servicer shall, on request of the Servicer or the
Trustee, (i) on reasonable notice, furnish the Trustee such data necessary for
the administration of the Trust Estate as can be reasonably generated by the
Special Servicer's existing data processing systems, and (ii) on and after a
Special Servicer Event of Default, within five (5) Business Days, provide the
Trustee and the Servicer with access to the Special Servicer's existing data
processing systems and any files or records with respect to the Loan Assets that
it may have.
33
<PAGE>
ARTICLE FIVE
------------
THE SERVICER, THE SPECIAL SERVICER AND THE DEPOSITOR
-----------------------------------------------------
Section 5.01 Indemnification.
----------- ----------------
(a) The Servicer, the Special Servicer and the Servicing Advisor shall
indemnify and hold harmless the Trustee, the Depositor, the Trust Estate, the
Certificateholder Agent and each Certificateholder (each, an "Indemnified
Party") from and against any loss, liability, claim, expense, damage or injury
suffered or sustained to the extent that such loss, liability, claim, expense,
damage or injury arose out of or was imposed by reason of the failure by such
Servicer, Special Servicer or Servicing Advisor to perform its duties under the
Agreement or are attributable to errors or omissions of the Servicer, the
Special Servicer or the Servicing Advisor related to such duties; provided that
--------
none of the Servicer or the Special Servicer or the Servicing Advisor shall
indemnify any party to the extent that acts of fraud, gross negligence or breach
of fiduciary duty by such party contributed to such loss, liability, claim,
expense, damage or injury.
(b) The Servicer, the Special Servicer and the Servicing Advisor shall
have the right to defend any such action, suit or proceeding; provided that an
--------
Indemnified Party shall have the right to employ separate counsel in any such
action, suit or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless the Servicer, the Special Servicer or the Servicing Advisor agrees
to pay such fees and expenses or the Servicer, the Special Servicer or the
Servicing Advisor fails to assume the defense of such action, suit or proceeding
or fails to employ counsel reasonably satisfactory to such Indemnified Party in
any such action, suit or proceeding; it being understood, however, that the
Servicer, the Special Servicer and the Servicing Advisor shall not, in
connection with any one such action or proceeding or separate but substantially
similar or related actions or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys at any time acting for all
Indemnified Parties unless the named parties to any such action, suit or
proceeding include more than one of any Indemnified Party and the Servicer, the
Special Servicer and the Servicing Advisor and the Indemnified Party shall have
been advised that there may be one or more defenses available to such
Indemnified Party which are different from those available to the Servicer, the
Special Servicer or the Servicing Advisor or any other Indemnified Party. The
Servicer, the Special Servicer and the Servicing Advisor shall not be liable for
any settlement of any action or claim effected without its consent. If the
Servicer, the Special Servicer or the Servicing Advisor has made any indemnity
payments to the Trustee or the Certificateholders pursuant to this Section and
such party thereafter collects any of such amounts from others, such party will
promptly repay such amounts collected to the Servicer, the Special Servicer or
the Servicing Advisor, as applicable, without interest. The provisions of this
Section 5.01 shall survive any expiration or termination of the Agreement.
Section 5.02 Corporate Existence; Reorganizations.
------------ -------------------------------------
(1) Each of the Servicer, the Special Servicer and the Servicing
Advisor shall keep in full effect its existence and good standing as a
corporation in the Servicer State of Incorporation, Special Servicer State of
Incorporation or the Servicing Advisor State of Incorporation, as applicable,
and will obtain and preserve its qualification to do business as a foreign
corporation in each jurisdiction in which such qualification is or shall be
necessary to enable such Servicer, Special Servicer or Servicing Advisor to
perform its duties under the Agreement, except where the failure to so qualify
would not have a material adverse effect on the Trust Estate or the ability of
the Servicer, the Special Servicer or the Servicing Advisor, as applicable, to
perform its duties hereunder; provided that the Servicer, the Special Servicer
--------
or the Servicing Advisor may reincorporate in another state if to do so would be
in the best interests of the Servicer, the Special Servicer
34
<PAGE>
or the Servicing Advisor, as applicable, and would not have a material adverse
effect upon the Certificateholders as evidenced by an Opinion of Counsel
delivered to the Certificateholders and the Certificateholder Agent prior to
such reincorporation.
(b) Except as hereinafter provided, each of the Servicer, the Special
Servicer and the Servicing Advisor will keep in full effect its existence,
rights and franchises as a corporation or limited liability company, as
appropriate, and will obtain and preserve its qualification to do business as a
foreign corporation or limited liability company, as appropriate, in each
jurisdiction in which such qualification is or shall be necessary to protect the
validity and enforceability of this Agreement or any of the Loans and to perform
its duties hereunder. Any Person into which the Servicer, the Special Servicer
or the Servicing Advisor may be merged or consolidated, or to whom the Servicer,
the Special Servicer or the Servicing Advisor may sell substantially all of its
assets, or any Person resulting from any merger, conversion or consolidation to
which the Servicer, the Special Servicer or the Servicing Advisor shall be a
party, or any Person succeeding to the business of the Servicer, the Special
Servicer or the Servicing Advisor shall be the successor of such Servicer, the
Special Servicer or the Servicing Advisor, as applicable, hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything herein to the contrary notwithstanding; provided that
--------
(i) immediately after giving effect to such transaction, no representation or
warranty made pursuant to Section 2.01, 2.02 or 2.03 shall have been breached,
(ii) such successor executes an agreement or assumption, in form reasonably
satisfactory to the Trustee, to perform every obligation under this Agreement,
(iii) such successor has a net worth that is sufficient to perform in accordance
with the Transaction Documents and at least approximately equivalent to the net
worth of the Servicer, the Special Servicer or the Servicing Advisor, as
applicable, immediately prior to such sale, merger or consolidation, (iv) the
Servicer, the Special Servicer or the Servicing Advisor, as applicable, shall
have delivered to the Depositor, the Trustee, the Certificateholder Agent and
each Certificateholder a certificate of an officer of the Servicer, the Special
Servicer or the Servicing Advisor, as applicable, and an Opinion of Counsel each
stating that such consolidation, merger, or succession and such agreement of
assumption complies with this Section 5.02 and that all conditions precedent, if
any, provided for in this Agreement relating to such transaction have been
complied with, and (v) the Servicer, the Special Servicer or the Servicing
Advisor, as appropriate, shall have delivered to the Depositor and the Trustee
an Opinion of Counsel either (A) stating that, in the opinion of such counsel,
all financing statements, continuation statements and amendments thereto have
been executed and filed and, if applicable, all other actions have been taken to
preserve fully the interest of the Depositor in the Loans and the Loan Assets
and reciting the details of such filings and, if applicable, such actions, or
(B) stating that, in the opinion of such counsel, no such action shall be
necessary to preserve and protect such interest. The Servicer, the Special
Servicer or the Servicing Advisor, as applicable, will provide written notice to
the Rating Agency prior to the effective date of any such transaction.
Section 5.03 Limitation on Liability of the Servicer the Special
------------ ----------------------------------------------------
Servicer, the Servicing Advisor and Others.
- ---------------------------------------------
Except as provided herein, none of the Servicer or the Special Servicer
or the Servicing Advisor or any of the officers, directors, employees or agents
of such Persons shall be under any liability for any action taken or for
refraining from the taking of any action in its capacity as Servicer, Special
Servicer or Servicing Advisor, as appropriate, pursuant to this Agreement;
provided that this provision shall not protect the Servicer, the Special
- --------
Servicer or the Servicing Advisor or any such person against any liability which
would otherwise be imposed by reason of breach of any provision of this
Agreement by such Person or willful misconduct, bad faith or gross negligence
(which includes negligence with respect to the duties of the Servicer, the
Special Servicer or the Servicing Advisor explicitly set forth in this
Agreement) in the performance of its duties hereunder. The Servicer, the Special
Servicer and the Servicing Advisor and any
35
<PAGE>
officer, director, employee or agent of the Servicer, the Special Servicer or
the Servicing Advisor may rely in good faith on any document of any kind prima
-----
facie properly executed and submitted by any Person with respect to any matters
- -----
arising hereunder. The Servicer, the Special Servicer or the Servicing Advisor
may from time to time request such additional information and documentation from
each other as any of them deems reasonably necessary to perform such Person's
duties hereunder; the Person from whom the information or documentation is
requested shall provide such information or documentation to the requesting
Party, as available. No implied covenants or obligations shall be read into this
Agreement against the Servicer, the Special Servicer or the Servicing Advisor.
In the event the Servicer, the Special Servicer or the Servicing Advisor
performs any activities beyond the requirements hereof, such Servicer, Special
Servicer or Servicing Advisor shall have the option but will not be required to
perform such activities in the future.
Section 5.04 The Servicer, the Special Servicer and the Servicing
------------ ----------------------------------------------------
Advisor Not to Resign.
- ----------------------
(a) None of the Servicer, the Special Servicer or the Servicing Advisor
shall resign from the duties and obligations hereby imposed on it except upon a
determination by its respective Board of Directors that by reason of change in
applicable legal requirements, with which the Servicer, the Special Servicer or
the Servicing Advisor, as applicable, cannot reasonably comply, the continued
performance by the Servicer, the Special Servicer or the Servicing Advisor, as
applicable, of its duties hereunder would cause it to be in violation of such
legal requirements, said determination to be evidenced by a resolution from its
Board of Directors to such effect, accompanied by an Opinion of Counsel to such
effect and reasonably satisfactory to the Trustee.
(b) No such resignation shall become effective until a Successor
Servicer shall have assumed the responsibilities and obligations of the
Servicer, the Special Servicer or the Servicing Advisor, as appropriate,
hereunder.
(c) Except as provided in Sections 5.02 and 6.01, the duties and
obligations of the Servicer, the Special Servicer and the Servicing Advisor
under the Agreement shall continue until this Agreement shall have been
terminated as provided in Section 7.01, and shall survive the exercise by the
Depositor or the Trustee of any right or remedy under this Agreement, or the
enforcement by the Depositor, the Trustee or any Certificateholder of any
provision of the Certificates or this Agreement.
Section 5.05 Depositor Indemnification.
------------ --------------------------
The Depositor shall indemnify and hold harmless the Servicer, the
Special Servicer, the Servicing Advisor, the Certificateholder Agent and each
Certificateholder from and against any loss, liability, expense, damage or
injury suffered or sustained by the Servicer, the Special Servicer, the
Servicing Advisor, the Certificateholder Agent and each such Certificateholder,
including any judgment, award, settlement, reasonable attorneys' fees and other
costs and expenses incurred in connection with the defense of any actual or
threatened action, proceeding or claim, which arises out of the Service's, the
Special Servicer's or the Servicing Advisor's activities hereunder; provided
--------
that the Depositor shall not indemnify the Servicer, the Special Servicer, the
Servicing Advisor, the Certificateholder Agent or any such Certificateholder if
such Service's, Special Servicer's, Servicing Advisor's, Certificateholder
Agent's or Certificateholder's activities constituted fraud, willful misconduct,
gross negligence (which includes negligence with respect to the duties of the
Servicer, the Special Servicer or the Servicing Advisor which are explicitly set
forth herein) or breach of fiduciary duty by such Servicer, Special Servicer or
Servicing Advisor.
36
<PAGE>
ARTICLE SIX
-----------
SERVICING TERMINATION
---------------------
Section 6.01 Events of Default.
- ------------ ------------------
(a) Any of the following acts or occurrences shall constitute an Event
of Default:
(i) any failure by a Person to deliver to the Trustee for
payment to Certificateholders any proceeds or payments received from an
Obligor or in respect of the Trust Estate and required to be so
delivered under the terms of the Trust Agreement and this Agreement
that continues unremedied until 10:00 a.m., California time, on the
following Business Day; provided that the Trustee, upon receiving
--------
actual knowledge of such failure, shall give such Person prompt
written, telecopied or telephonic notice of such failure.
Notwithstanding the foregoing, any failure by the Trustee to deliver
such notice to the Person shall not prevent the occurrence of an Event
of Default under this Section 6.01(a)(i); or
(ii) any failure by a Person to deliver a Report as required
under Section 4.01(a) or (b) that continues unremedied until 10:00
a.m., California time, the following Business Day; provided that, if
--------
the Person has not delivered the Report by 12:00 p.m., California time,
on the Determination Date, the Trustee shall give the Person notice of
such failure. Notwithstanding the foregoing, any failure by the Trustee
to deliver such notice to such Person shall not prevent the occurrence
of an Event of Default under this Section 6.01(a)(ii); or
(iii) any failure on the part of a Person duly to observe or
perform in any material respect any other covenants or agreements of
such Person set forth in this Agreement, or if any representation or
warranty of the Person set forth in Section 2.01 shall prove to be
incorrect or misleading in any material respect, which failure or
breach continues unremedied for a period of thirty (30) days after the
earlier of the date on which such Person becomes aware of such failure
or breach or written notice of such failure or breach, requiring the
situation giving rise to such breach or non-conformity to be remedied,
shall have been given to a Servicing Officer of such Person by the
Trustee, the Depositor, the Certificateholder Agent or any
Certificateholder; or
(iv) the entry of a decree or order for relief by a court
having jurisdiction in respect of a Person or a petition against a
Person in an involuntary case under any federal bankruptcy laws, as now
or hereafter in effect, or any other present or future federal or state
bankruptcy, insolvency or similar law, or appointing a receiver,
liquidator, assignee, trustee, sequestrator or other similar official
for such Person or for any substantial part of such Person's property,
or ordering the winding up or liquidation of the affairs of the Person
and the continuance of any such decree or order unstayed and in effect
for a period of sixty (60) consecutive days; or
(v) the commencement by a Person of a voluntary case under any
federal bankruptcy laws, as now or hereafter in effect, or any other
present or future federal or state bankruptcy, insolvency,
reorganization or similar law, or the consent by a Person to the
appointment of or taking possession by a conservator, receiver,
liquidator, assignee, trustee, sequestrator or other similar official
in any insolvency, readjustment of debt, marshaling of assets and
liabilities, bankruptcy or similar proceedings of or relating to a
Person or relating to a substantial part of its property, or the making
by the Person of an assignment for the benefit of creditors, or the
failure by the Person generally to pay its debts as such debts become
due or if the Person shall admit in writing its
37
<PAGE>
inability to pay its debts as they become due, or the taking of
corporate action by the Person in furtherance of any of the foregoing.
(b) So long as an Event of Default shall not have been remedied within
the period set forth in (i), (ii), (iii) or (iv) above, as applicable, or if an
Event of Default described in (v) above occurs, the Trustee shall, at the
direction of the Controlling Holders or upon exercise by the Controlling Holders
of their rights under Section 6.02(b) of the Trust Agreement, give notice (the
"Termination Notice") in writing to the Person(s) to whom the Event of Default
concerns (or to any or all of such Persons if such notice is given pursuant to
Section 6.02(b) of the Trust Agreement) of the termination of all, but not less
than all, of the rights and the servicing obligations of such Person(s) under
this Agreement; provided that such Termination Notice shall not relieve or
--------
exculpate such Person(s) from any liability for any action or inaction of such
Person(s) hereunder prior to the delivery of such Termination Notice.
Notwithstanding the foregoing, no Termination Notice shall take effect until a
Successor Servicer has assumed its responsibilities.
(c) On or after the receipt by a Person of a Termination Notice, all
authority and power of such Person under this Agreement, whether with respect to
the Certificates or the Loans or otherwise, shall pass to and be vested in a
Successor Servicer appointed pursuant to Section 6.02, and, without limitation,
such Successor Servicer is hereby authorized and empowered to execute and
deliver, on behalf of the Outgoing Servicer, as attorney-in-fact or otherwise,
any and all documents and other instruments, and to do or accomplish all other
acts or things necessary or appropriate to effect the purposes of such notice of
termination, whether to complete the transfer of the Loans and related
documents, or otherwise. The Outgoing Servicer agrees to cooperate with the
Trustee, the others of the Servicer, the Special Servicer and the Servicing
Advisor and the Successor Servicer in effecting the termination of the
responsibilities and rights of the Outgoing Servicer hereunder, including the
transfer to the Successor Servicer for administration by it of all cash amounts
that shall at the time be held by the Outgoing Servicer for deposit, or have
been deposited by the Outgoing Servicer, in the Collection Account or thereafter
received with respect to any of the Loans. To assist the Successor Servicer in
enforcing all rights under the Loans, the Outgoing Servicer, at its own expense,
shall transfer its records (electronic and otherwise) relating to such Loans to
the Successor Servicer in such form as the Successor Servicer may reasonably
request and shall transfer all other records, correspondence and documents
relating to the Loans that it may possess to the Successor Servicer in the
manner and at such times as the Successor Servicer shall reasonably request.
Section 6.02 Appointment of Successor Servicer; Taking of Bids.
------------ ---------------------------------------------------
(a) On and after the time any Servicer, the Special Servicer or
Servicing Advisor, as applicable, receives a Termination Notice hereunder, the
Depositor, by a Board Resolution, shall promptly appoint a Successor Servicer,
as applicable, reasonably satisfactory to the Trustee, on behalf of the
Certificateholders; provided that such appointment shall be subject to the prior
---------
approval of the Certificateholder Agent and, unless waived by the Controlling
Holders, the written confirmation from the Rating Agency that such appointment
would not result in a rating downgrade. If no such Successor Servicer shall have
been so appointed within thirty (30) days of notice of removal or resignation
and shall have accepted appointment, then the Trustee, on behalf of the
Certificateholders, shall appoint a Successor Servicer, as appropriate. If a
Depositor Event Default exists and is continuing, the Trustee, acting with the
advice of the Certificateholder Agent, shall appoint a Successor Servicer and
the Depositor shall have no right to make any such appointment. If the Trustee,
on behalf of the Certificateholders shall fail to appoint a Successor Servicer
within thirty (30) days, then any of the Controlling Holders or the Directing
Holders may petition any court of competent jurisdiction for the appointment of
a Successor Servicer.
(b) Any Successor Servicer shall be a Person experienced with
performing the responsibilities of the Outgoing Servicer it replaces. In the
case of the Successor Servicer replacing the Servicer, the
38
<PAGE>
applicable experience required shall include experience in servicing either
commercial mortgage or other secured business loans. In the case of the
Successor Servicer replacing the Special Servicer, the applicable experience
required shall include experience in the management and disposition of
underperforming, non-performing and defaulted commercial mortgage or other
secured business loans. In the case of the Successor Servicer replacing the
Servicing Advisor, such Successor Servicer shall be a Person (i) that has as its
principal employees or officers one or more persons whose primary business for
at least ten (10) years has been providing advisory, valuation and consulting
services to funeral home and cemetery businesses and (ii) who is approved by the
Controlling Holders (which approval shall not be unreasonably withheld).
(c) The Successor Servicer shall be the successor in all respects to
the Servicer, the Special Servicer or the Servicing Advisor, as applicable, in
its capacity as Servicer, Special Servicer or Servicing Advisor, as applicable,
under the Transaction Documents and the transactions set forth or provided for
therein and shall be subject to all the responsibilities, duties and liabilities
relating thereto placed on the Successor Servicer, as appropriate, by the terms
and provisions hereof; provided that the Successor Servicer shall not be liable
--------
for any acts or omissions of the Outgoing Servicer or for any breach by the
Outgoing Servicer of any of its representations and warranties contained herein
or in any related document or agreement. The Successor Servicer shall be
entitled to the applicable Servicer Fee, Special Servicer Fee or Servicing
Advisor Fee and, as applicable, all Servicing Charges.
(d) The Servicer, the Special Servicer, the Servicing Advisor, the
Depositor, the Trustee and such Successor Servicer shall take such action,
consistent with this Agreement, as shall be necessary to effectuate any such
succession. The Successor Servicer, as appropriate (or the Trustee or the
Certificateholders if such Certificateholders have previously reimbursed the
Successor Servicer therefor) shall be reimbursed for Transition Costs, if any,
incurred in connection with the assumption of responsibilities of the Successor
Servicer, upon receipt of documentation of such costs and expenses and in
accordance with Section 5.02 of the Trust Agreement. The Successor Servicer
shall have no claim against the Depositor or the Trust Estate for any costs and
expenses incurred in effecting such succession in excess of the amount specified
in the definition of "Transition Costs."
(e) Solely for purposes of establishing the fee to be paid to the
Successor Servicer, and only if the Successor Servicer would require a fee
higher than the fee previously paid, the Successor Servicer shall solicit
written bids, with a copy to the Certificateholders and the Certificateholder
Agent (such bids to include a proposed servicer fee and servicing transfer
costs) from not less than three (3) Persons experienced in the servicing of
loans similar to the Loans and that are not Affiliates of the Trustee, the
Servicer, the Special Servicer, the Servicing Advisor or the Depositor and are
reasonably acceptable to the Controlling Holders. The Depositor and the
Certificateholder Agent may also solicit additional bids from other such
entities. Any such written solicitation shall prominently indicate that bids
should specify any applicable Transition Costs and that any such transfer costs
in excess of the Servicer Fee, the Special Servicer Fee, or the Servicing
Advisor Fee shall be paid only pursuant to Section 5.02 of the Trust Agreement.
The Successor Servicer shall act as Servicer, Special Servicer, or Servicing
Advisor, as appropriate, hereunder and shall, subject to the availability of
sufficient funds in the Collection Account pursuant to Section 5.02 of the Trust
Agreement (up to the Servicer Fee, the Special Servicer Fee, or the Servicing
Advisor Fee, as applicable, and up to any Successor Servicer's Transition
Costs), receive as compensation therefor a fee equal to the fee proposed in the
bid so solicited which provides for the lowest combination of servicer fee and
transition costs, as reasonably determined by the Controlling Holders.
39
<PAGE>
Section 603 Effects of Termination.
------------ -----------------------
(a) Upon the appointment of a Successor Servicer, the applicable
Outgoing Servicer shall remit any Scheduled Payments and any other payments or
proceeds that it may receive pursuant to any Loan or otherwise to the Successor
Servicer after such date of appointment.
(b) After the delivery of a Servicer Termination Notice, Special
Servicer Termination Notice or Servicing Advisor Termination Notice and the
acceptance of appointment by a Successor Servicer, the Outgoing Servicer shall
continue to have all of its obligations with respect to the management,
administration, servicing, enforcement, custody or collection of the Loans in
full until such time as the Successor Servicer has assumed its responsibilities.
Thereafter, the Successor Servicer shall have all of such obligations, except
that the Outgoing Servicer shall transmit or cause to be transmitted directly to
the Successor Servicer, promptly on receipt and in the same form in which
received, any amounts held or received by the Outgoing Servicer (properly
endorsed where required for the Successor Servicer to collect them) received as
payments upon or otherwise in connection with the Loans. The Outgoing Servicer's
indemnification obligations pursuant to Section 5.01 will survive the
termination of such Outgoing Servicer but will not extend to any acts or
omissions of a Successor Servicer.
Section 6.04 No Effect on Other Parties.
------------ ---------------------------
Upon any termination of the rights and powers of the Servicer, the
Special Servicer or the Servicing Advisor pursuant to Section 6.01 or Section
6.02, or upon any appointment of a Successor Servicer, all the rights, powers,
duties and obligations of the other parties under the Transaction Documents
shall remain unaffected by such termination or appointment and shall remain in
full force and effect thereafter.
Section 6.05 Waiver of Past Defaults.
------------ --------------------------
The Trustee shall, at the direction of the Controlling Holders, waive
any default by any of the Servicer, the Special Servicer or the Servicing
Advisor in the performance of its obligations hereunder and its consequences,
other than a default with respect to required deposits and payments in
accordance with Article Three or a default of the type set forth in clauses (iv)
or (v) of Section 6.01(a), which waiver shall require the consent of each
Certificateholder. Upon any such waiver of a past default, such default shall
cease to exist and any Servicer Event of Default, Special Servicer Event of
Default or Servicing Advisor Event of Default arising therefrom shall be deemed
to have been remedied for every purpose of this Agreement. No such waiver shall
extend to any subsequent or other default or impair any right consequent thereon
except to the extent expressly waived.
Section 6.06 Notification to Certificateholders and the
------------ -------------------------------------------
Certificateholder Agent.
- ------------------------
The Servicer, the Special Servicer or the Servicing Advisor, as
appropriate, shall promptly notify the Successor Servicer, the
Certificateholders, the Certificateholder Agent, the others of the Servicer, the
Special Servicer, and the Servicing Advisor, the Depositor, the Rating Agency
and the Trustee of any Servicer Event of Default, Special Servicer Event of
Default or Servicing Advisor Event of Default upon actual knowledge thereof by a
Servicing Officer. Upon any termination of, or appointment of a successor to,
the Servicer, the Special Servicer or the Servicing Advisor pursuant to this
Article 6, the Trustee shall give prompt written notice thereof to the Rating
Agency and the Certificateholder Agent and to the Certificateholders at their
respective addresses appearing on the Certificate Register.
40
<PAGE>
ARTICLE SEVEN
-------------
GENERAL PROVISIONS
------------------
Section 7.01 Termination of the Agreement.
------------ -----------------------------
(a) Except with respect to a particular party under Sections 5.01,
5.02, 5.04, 6.01 or 6.03, the respective duties and obligations of the Servicer,
the Special Servicer, the Servicing Advisor, the Depositor and the Trustee
created by this Agreement shall terminate upon the discharge of the Trust
Agreement in accordance with its terms; provided that no resignation or removal
--------
of the Trustee and no appointment of a successor Trustee shall become effective
until the acceptance of appointment by the successor Trustee under Section 7.09
of the Trust Agreement. Upon the termination of this Agreement pursuant to this
Section 7.01(a), the Servicer and the Special Servicer shall pay to the
Depositor (or upon the Depositor's order) all monies with respect to the Loan
Assets held by the Servicer or the Special Servicer and to which such Person is
not entitled.
(b) This Agreement shall not be automatically terminated as a result of
an Event of Default under the Trust Agreement or any action taken by the Trustee
thereafter with respect thereto, and any liquidation or preservation of the
Trust Estate by the Trustee thereafter shall be subject to the rights of the
Servicer and Special Servicer to service the Loans and the Loan Collateral and
to collect servicing compensation as provided hereunder.
Section 7.02 Amendments.
----------- -----------
(a) This Agreement and the rights and obligations of the parties
hereunder may not be changed orally but only by an instrument in writing signed
by the party against whom enforcement is sought together with the prior written
consent of the Holders of not less than 51% of the Outstanding Principal Amount
of each affected Class (or, with respect to any affected Class during the
Funding Period applicable to such Class, of not less than 51% of the Maximum
Series Amount of such Class) of Rated Certificates; provided that no such
---------
amendment shall, without the consent of each Certificateholder, (i) alter the
method of computing any allocation of funds under this Agreement or the priority
of any funds to be allocated under this Agreement, (ii) permit the creation of
any Lien on the Trust Estate (other than the Lien of the Trust Agreement) or any
portion thereof or deprive any such Certificateholder of the benefit of this
Agreement with respect to the Trust Estate or any portion thereof, or (iii)
modify this Section 7.02.
(b) Promptly after the execution of any amendment hereto, the Special
Servicer shall send to the Servicer, the Servicing Advisor, the Depositor, the
Trustee, the Certificateholder Agent, each Certificateholder and each Rating
Agency a conformed copy of each such amendment.
(c) It shall be necessary, in obtaining the consent of a
Certificateholder under this Section 7.02, for the Certificateholder to approve
the particular form of any proposed amendment. The manner of obtaining such
consent and of evidencing the authorization of the execution thereof by
Certificateholders shall be subject to such reasonable regulations as the
Trustee may prescribe.
(d) Any amendment or modification effected contrary to the provisions
of this Section 7.02 shall be void.
41
<PAGE>
Section 7.03 Governing Law.
------------ --------------
This Agreement shall be construed in accordance with the internal laws
of the State of New York without regard to conflict of laws principles and the
obligations, rights and remedies of the parties hereunder shall be determined in
accordance with such laws.
Section 7.04 Notices.
------------ --------
All demands, notices and communications hereunder shall be in writing,
shall be made in accordance with the provisions of the Trust Agreement, and
shall be addressed, if to the Depositor, at 1700 Montgomery Street, Suite 250B,
San Francisco, California 94111 Fax 415-394-6703, if to the Servicer, at 1700
Montgomery Street, Suite 250, San Francisco, California 94111 Fax 415-394-9471,
if to the Special Servicer at 1700 Montgomery Street, Suite 250, San Francisco,
California 94111 Fax 415-394-9471, if to the Servicing Advisor, at ***Fax ***,
if to the Certificateholders, to their address set forth on the Certificate
Register, and if to the Trustee, at One M&T Plaza, 7th Floor, Buffalo, New York
14203-2399 Fax 716-842-4474. All demands, notices and communications made in
accordance with the provisions hereof shall be deemed to have been received or
made (as applicable) as provided in the Trust Agreement. Any Person may change
the address for notices hereunder by giving notice of such change to the other
Persons (or in the case of a Certificateholder, by causing the Trustee to change
its address as provided on the Certificate Register).
Section 7.05 Severability of Provisions.
------------ ---------------------------
If one or more of the provisions of this Agreement shall be for any
reason whatsoever held invalid, such provisions shall be deemed severable from
the remaining covenants and provisions of this Agreement, and shall in no way
affect the validity or enforceability of such remaining provisions, the rights
of any parties hereto, or the rights of the Trustee or any Certificateholder. To
the extent permitted by law, the parties hereto waive any provision of law which
renders any provision of this Agreement prohibited or unenforceable in any
respect.
Section 7.06 Binding Effect.
------------ ---------------
All provisions of this Agreement shall be binding upon and inure to the
benefit of the respective successors and assigns of the parties hereto, and all
such provisions shall inure to the benefit of the Certificateholders. This
Agreement may not be modified except by a writing signed by all parties hereto.
Section 7.07 Article Headings and Captions.
------------ ------------------------------
The article headings and captions in this Agreement are for convenience
of reference only, and shall not limit or otherwise affect the meaning hereof.
Section 7.08 Legal Holidays.
------------ ---------------
In the event that where the date on which any action required to be
taken, document required to be delivered or payment required to be made is not a
Business Day, such action, delivery or payment need not be made on such date,
but may be made on the next succeeding Business Day.
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
42
<PAGE>
Section 7.09 Assignment for Security for the Certificates.
------------ ---------------------------------------------
The Servicer, the Special Servicer, the Servicing Advisor and the
Trustee understand that the Depositor will assign to the Trustee all its right,
title and interest to this Agreement. The Servicer, the Special Servicer, the
Servicing Advisor and the Trustee consent to such assignment and further agree
that all representations, warranties, covenants and agreements of the Servicer,
the Special Servicer, and the Servicing Advisor made herein shall also be for
the benefit of and inure to the Trustee and all Certificateholders.
Section 7.10 No Servicing Assignment.
------------ ------------------------
Notwithstanding anything to the contrary contained herein, except as
provided in Sections 5.02 and 5.04, this Agreement may not be assigned by the
Depositor, the Servicer, the Special Servicer or the Servicing Advisor without
the prior written consent of the Controlling Holders.
Section 7.11 Notifications.
------------ --------------
Notwithstanding any provision to the contrary contained in this
Agreement, all reports, notices, consents and communications which are required,
by the terms of this Agreement, to be delivered by the Certificateholders, the
Certificateholder Agent or the Directing Holders to the Trustee, as the context
requires, shall be required to be delivered to the Trustee in writing.
Section 7.12 Successor Servicer.
------------ -------------------
(a) Notwithstanding anything contained in this Agreement to the
contrary, any Successor Servicer shall promptly after it assumes the role obtain
state and federal qualifications, licenses and franchises necessary for it to
perform its servicing responsibilities under this Agreement.
(b) Notwithstanding anything contained in this Agreement to the
contrary, the Successor Servicer shall only be required to perform its
obligations in the time and manner set forth in this Agreement if, and to the
extent, any information which is required to be delivered to the Successor
Servicer or any information on which the Successor Servicer is authorized to
rely on, is delivered to the Successor Servicer in accordance with provisions of
this Agreement; provided that nothing in this clause (b) shall be construed to
--------
relieve the Successor Servicer of its obligations under this Agreement if the
failure appropriately to deliver or provide any such information to the
Successor Servicer is remedied.
43
<PAGE>
IN WITNESS WHEREOF, the Depositor, the Servicer, the Special Servicer,
the Servicing Advisor and the Trustee have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of the date
and year first above written.
MANUFACTURERS AND TRADERS TRUST
COMPANY, as Trustee
By: /S/ Russell T. Whitley
--------------------------------
Name: Russell T. Whitley
Title: Assistant Vice President
ALLEGIANCE CAPITAL, LLC,
Special Servicer
By: /s/ Alan B. Perper
--------------------------------
Name: Alan B. Perper
Title: President
POINT WEST CAPITAL CORPORATION, as Servicer
By: /s/ Alan B. Perper
--------------------------------
Name: Alan B. Perper
Title: President
***
Servicing Advisor
By: /s/ ***
--------------------------------
Name: ***
Title: President
ALLEGIANCE FUNDING CORP. I,
Depositor
By: /s/ Alan B. Perper
--------------------------------
Name: Alan B. Perper
Title: President
***Confidential information omitted purusant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
--------------------------------------------------------
OF
--
ALLEGIANCE CAPITAL, LLC
------------------------
This AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this
"Agreement"), dated as of January 1, 1998, is entered into among the parties
---------
listed on the signature pages hereof.
RECITALS
--------
A. Point West Capital Corporation, Michael W. McDermitt and Daniel M.
Isard have previously entered into that certain Limited Liability Company
Agreement of Allegiance Capital, LLC, dated as of September 5, 1997 (as amended
or modified to the date hereof, the "Original Agreement"); and
------------------
B. The parties to the Original Agreement desire to amend and restate
the Original Agreement in its entirety on the terms and conditions contained
herein;
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, and for other good and valuable consideration (the receipt and adequacy
of which are hereby acknowledged), the parties hereto, by this Agreement, set
forth the limited liability company agreement for the Company under the laws of
the State of Delaware.
ARTICLE 1
=========
Certain Defined Terms; Certain Rules of Construction
====================================================
1.1 Certain Defined Terms. As used herein:
---------------------
"Act" means the Delaware Limited Liability Company Act, codified at
---
Delaware code Title 6, Sections 18.101 et seq.
-- ---
"Adjusted Capital Contribution" means, with respect to Point West as of
-----------------------------
any date of determination, the Capital Contributions of Point West made pursuant
to Section 3.1.1, increased by the amount of the Point West Primary Preferred
---------
Return accrued thereon (computed without regard to the limits on allocation set
forth in Section 6.1.2(a)), by the amount of the Point West Secondary Preferred
Return accrued thereon (computed without regard to the limits on allocation set
forth in Section 6.1.2(b), and by the amount of the Point West Tertiary
Preferred Return accrued thereon (computed with regard to the limits on
allocation set forth in Section 6.1.2(c)) and reduced by the cumulative amounts
-------
distributed to Point West pursuant to Section 6.5.1.
"Affiliate" means, as to any Person, any other Person directly or
---------
indirectly controlling, controlled by, or under common control with such Person.
The term "control," as used in the immediately preceding sentence, means the
-------
possession, whether direct or indirect, of the power to direct or cause the
direction of the management and policies of another Person.
<PAGE>
"Agreement" has the meaning set forth in the introduction hereto.
---------
"Approved Appraiser" has the meaning set forth in Section 7.6.1.
------------------
"Bankruptcy" means: (a) the filing of an application by a Member for,
----------
or such Person's consent to, the appointment of a trustee, receiver, or
custodian of such Person's assets; (b) the entry of an order for relief with
respect to a Member in proceedings under the federal bankruptcy code, as amended
or superseded from time to time; (c) the making by a Member of a general
assignment for the benefit of creditors; (d) the entry of an order, judgment, or
decree by any court of competent jurisdiction appointing a trustee, receiver, or
custodian of the assets of a Member unless the proceedings and the Person
appointed are dismissed within ninety (90) days; or (e) the failure by a Member
generally to pay such Person's debts as such debts become due within the meaning
of the federal bankruptcy code, as determined by the relevant bankruptcy court,
or by the admission in writing of such Person's inability to pay such Person's
debts as they become due.
"Capital Account" means, as to any Member, the capital account which
----------------
the Company establishes and maintains for such Member pursuant to Section 3.4.
"Capital Contribution" means as to any Member, the total amount of cash
--------------------
and the fair market value of property (including promissory notes or other
obligations to contribute cash or property) contributed to the Company by such
Member pursuant to Section 3.1 or 3.2.
"Certificate" means the Certificate of Formation for the Company.
-----------
"Code" means the Internal Revenue Code of 1986 and any applicable
----
Regulations thereunder.
"Company" has the meaning set forth in the recitals hereto.
-------
"Company Minimum Gain" has the meaning ascribed to the term
------------------------
"Partnership Minimum Gain" in Regulations Section 1.704-2(d).
"Dissolution Event" means, with respect to any Member, one or
------------------
more of the following: the death, insanity, withdrawal, resignation, Bankruptcy,
dissolution, or liquidation of any Member.
"Fair Market Value" has the meaning set forth in Section 7.6.1.
-----------------
"Fiscal Year" means the Company's fiscal year, which is the calendar
-----------
year.
"Forfeiture Event" means the disability, voluntary resignation or
-----------------
termination for cause of a Specified Member, as provided under the Isard
Employment Agreement or the McDermitt Employment Agreement, as applicable.
"Indemnified Person" has the meaning set forth in Section 10.1.
------------------
"Initial Financing Date" means the date of the first funding under the
-----------------------
initial warehouse or
2
<PAGE>
securitization facility of the Company.
"Initial Membership Interest" means with respect to any Member, such
-----------------------------
Member's Membership Interest as of the effective date hereof.
"Isard" means Daniel M. Isard, an individual.
-----
"Isard Employment Agreement" means that certain Employment Agreement,
---------------------------
dated as of September 5, 1997, between Isard and the Company.
"Majority Voting Interest" means more than fifty percent (50%) of all
--------------------------
Voting Interests.
"Manager" has the meaning set forth in Section 5.1.2.
-------
"McDermitt" means Michael W. McDermitt, an individual.
---------
"McDermitt Employment Agreement" means that certain Employment
----------------------------------
Agreement, dated as of September 5, 1997, between McDermitt and the Company.
"Member" means each Person who: (a) is an initial signatory to thi
------
Agreement, has been admitted to the Company as a Member in accordance with the
Certificate and this Agreement, or is an assignee who has been substituted as a
Member in accordance with Article 7; and (b) is not the subject of a Dissolution
Event.
"Member Nonrecourse Debt" has the meaning ascribed to the term "Partner
-----------------------
Nonrecourse Debt" in Regulations Section 1.704-2(b)(4).
"Member Nonrecourse Deductions" means items of Company loss, deduction
-----------------------------
or Code Section 705(a)(2)(B) expenditures which are attributable to Member
Nonrecourse Debt.
"Membership Interest" means, as to any Member, the percentage interest
--------------------
set forth opposite the name of such Member under the column "Member's Percentage
Interest" on Schedule I attached hereto, as such percentage may be adjusted from
----------
time to time pursuant to the terms hereof.
"Membership Interest Option" has the meaning set forth in Section 4.4.2
--------------------------
(a).
"Membership Interest Option Date" means the date of a Specified
----------------------------------
Member's timely and complete exercise of his Membership Interest Option in
accordance with Section 4.4.2(b).
"Membership Interest Option Period" means the period from and including
the Initial Financing Date to and including the date that is three hundred
ninety (390) days thereafter.
"Net Profits" and "Net Losses" means the income, gain, loss,
------------ ------------
deductions, and credits of the Company in the aggregate or separately stated, as
appropriate, determined in accordance with the method of accounting used in the
preparation of the Company's partnership tax return filed for federal income tax
purposes.
3
<PAGE>
"Nonrecourse Liability" has the meaning set forth in Regulations
---------------------
Section 1.752-l(a)(2).
"Option Condition" means the Company's financial performance achievin
----------------
net income, calculated on a cash basis utilizing the principles used to
calculate the items of income and expense set forth in the Company's Year 1
Projected Income Statement (a copy of which is attached hereto as Exhibit O-1),
-----------
of at least $633,660 for the one year period ending on the first anniversary of
the Initial Financing Date.
"Person" means an individual, general partnership, limited partnership,
------
limited liability company, corporation, trust, estate, real estate investment
trust, association, organization, including a government or political
subdivision or an agency or instrumentality thereof, or any other entity.
"Point West" means Point West Capital Corporation.
----------
"Point West Primary Carryforwards" has the meaning set forth in Section
--------------------------------
6.1.2(a).
"Point West Primary Preferred Return" means, for any taxable year (or
portion thereof) during the term hereof: (a) occurring prior to the Initial
Financing Date, an amount equal to ninety-nine and one-half percent (99.50%) of
all interest accruing to the Company during such period on all loans made by the
Company that were outstanding during such period; and (b) occurring on or after
the Initial Financing Date, an amount equal to the product of (i) the positive
difference, if any, by which (A) the average outstanding daily amount of the
Adjusted Capital Contribution during such period exceeds (B) Three Million
Dollars ($3,000,000) and (ii) a per annum interest rate equal to the weighted
average interest rate charged by the Company on all loans made by the Company
that were outstanding during such period.
"Point West Purchase Right" has the meaning set forth in Section 7.6.
-------------------------
2.1.
"Point West Secondary Carryforwards" has the meaning set forth in
----------------------------------
Section 6.1.2(b).
"Point West Secondary Preferred Return" means, for any taxable year (or
-------------------------------------
portion thereof) during the term hereof, an amount equal to a return of ten
percent (10%) per annum, compounded monthly, on the amount of the Adjusted
Capital Contribution as of the close of each month.
"Point West Tertiary Preferred Return" means, for any taxable year (or
-------------------------------------
portion thereof) during the term hereof, an amount equal to a return of five
percent (5%) per annum, compounded monthly, on the amount of the Adjusted
Capital Contribution as of the close of each month.
"Regulations" means, unless the context clearly indicates otherwise,
-----------
the federal income tax code regulations currently in force as final or temporary
that have been issued by the U.S. Department of Treasury pursuant to its
authority under the Code.
"Securities Act" means the Securities Act of 1933.
--------------
"Specified Member" means each of McDermitt and Isard; provided that,
----------------- --------
from and after the date
4
<PAGE>
a Forfeiture Event has occurred with respect to either
such Person, such Person shall no longer constitute a "Specified Member."
----------------
"Specified Member Carryforwards" has the meaning set forth in Section
------------------------------
6.1.2(b).
"Specified Member Return" means, for any taxable year (or portion
-------------------------
thereof) during the term hereof occurring prior to the Initial Financing Date,
an amount equal to one-half of one percent (0.5%) of all interest charged by the
Company on all loans made by the Company that were outstanding during such
period.
"Specified Members' Purchase Right" has the meaning set forth in
---------------------------------
Section 7.6.2.2.
"Threshold Date" means September 30, 1998.
--------------
"Trigger Event" has the meaning set forth in Section 7.6.2.2.
-------------
"Valuation Date" means the date that is the fifth anniversary of the
---------------
Initial Financing Date; provided that, if such day is not a business day, then
the "Valuation Date" shall be the next succeeding business day.
--------------
"Valuation Period" means the period commencing on the date that is six
-----------------
(6) months prior to the Valuation Date and ending on the date that is five (5)
months prior to the Valuation Date.
"Voting Interest" means: (a) in the case of Isard, the lesser of (i)
----------------
2-1/2% and (ii) Isard's Membership Interest; (b) in the case of McDermitt, the
lesser of (i) 2-1/2% and (ii) McDermitt's Membership Interest; and (c) in the
case of Point West, the greater of (i) 95% and (ii) Point West's Membership
Interest; provided that each Member's Voting Interest shall equal the same
--------
percentage as its Membership Interest from and after the earlier of: (A) the
consummation of an initial public offering for interests of the Company or (B) a
sale, in accordance with Article 7, by Point West of all or any part of its
interest in the Company to any party other than Isard or McDermitt.
1.2 Certain Rules of Construction. References to the plural include the
-----------------------------
singular and to the singular include the plural. References to any gender
include any other gender. The part includes the whole. The term "including" is
not limiting, and the term "or" has, except where otherwise indicated, the
inclusive meaning represented by the phrase "and/or." The words "hereof,"
"herein," "hereby," and "hereunder," and any other similar words, refer to this
Note as a whole and not to any particular provision of this Agreement. Section,
subsection, clause, exhibit, and schedule references are to this Agreement
unless otherwise indicated. Section, subsection, clause, exhibit, and schedule
headings are for convenience of reference only, shall not constitute a part of
this Agreement for any other purpose, and shall not affect the construction of
this Agreement. Any reference to this Agreement or any other agreement,
document, or instrument (including the Certificate) includes all permitted
alterations, amendments, changes, extensions, modifications, renewals, or
supplements thereto or thereof, as applicable. Any reference herein to the Code,
the Regulations, the Act, the Corporations Code or other statutes or laws will
include all amendments, modifications, or replacements of the specific sections
and provisions concerned. Each exhibit and schedule attached hereto is
incorporated herein by this reference.
5
<PAGE>
ARTICLE 2
----------
Organization of the Company
---------------------------
2.1 Formation. Pursuant to the Act, the Members have formed a limited
----------
liability company under the laws of the State of Delaware by filing the
Certificate with the Delaware Secretary of State and entering into this
Agreement. The rights and liabilities of the Members shall be as provided in the
Act, except as specifically modified by this Agreement. If the rights or
obligations of any Member are different by reason of any provision of this
Agreement than they would be in the absence of such provision, then this
Agreement shall, to the extent permitted by the Act, control.
2.2 Name. The name of the Company shall be "Allegiance Capital, LLC."
----
2.3 Term. The term of this Agreement shall be co-terminus with the
----
period of duration of the Company provided in the Certificate, unless extended
or sooner terminated as hereinafter provided.
2.4 Office and Agent. The principal executive office of the Company
----------------
shall be located at 1700 Montgomery Street, Suite 250, San Francisco, CA 94111.
The Manager may, from time to time, upon 30-days advance written notice to each
Member, change the principal place of business of the Company or, without such
notice, establish additional places of business of the Company. The registered
agent shall be as stated in the Certificate or as otherwise determined by the
Manager, and the Manager, may, from time to time, change the registered agent
(or its office) through appropriate filings with the Delaware Secretary of
State.
2.5 Addresses of the Members and the Manager. The respective addresses
----------------------------------------
for each Member and for the Manager are set forth on Schedule I attached hereto.
----------
2.6 Purpose of Company. The purpose of the Company is to engage in any
------------------
lawful activity for which a limited liability company may be organized under the
Act. Notwithstanding the foregoing, without the prior written consent of all of
the Members, the Company shall not engage in any business other than (i)
conducting a lending business focused on the death care industry, including
originating, acquiring, holding, servicing and disposing of loans and other
forms of financing for funeral homes, cemeteries and other businesses in the
death care industry and (ii) other activities directly related to the foregoing
business as may be necessary, advisable, or appropriate to further the foregoing
business.
6
<PAGE>
ARTICLE 3
---------
Contributions to Capital
------------------------
3.1 Initial Capital Contributions. Members shall make initial
---------------------------------
contributions as follows and shall receive in exchange therefore the Membership
Interest set forth opposite such Member's name on Schedule I attached hereto:
3.1.1 Initial Point West Contributions. Point West shall
--------------------------------
contribute:
(a) $50,000 at the time of execution of this
Agreement and from time to time thereafter, as needed, up to an
additional $450,000 to be used as working capital for the Company,
(b) approximately $1,500,000, as needed from time to
time to support the warehousing and equity components of loans to be
funded in connection with an initial securitization, and
(c) at Point West's discretion, after completion of
an initial securitization by the Company, up to approximately
$1,500,000 to be used to support the warehousing and equity components
of a second securitization.
All such Capital Contributions shall be entitled to earn the Point West
Secondary Preferred Return and the Point West Tertiary Preferred Return pursuant
to the terms of this Agreement.
3.1.2 Initial Contributions by Isard and McDermitt. Isard and
--------------------------------------------
McDermitt shall contribute to the Company all their interest in any agreements,
rights, intellectual property, written presentations or other written or
electronic materials previously developed or collected by them in respect of the
business of the Company. It is agreed by the parties that such property will be
deemed to have no value for purposes of Capital Account computations hereunder.
3.2 Additional Contributions. If the Manager determines that additional
------------------------
funds are required or advisable for the operation of the business of the
Company, it may request additional Capital Contributions from the Members. Such
request shall be in writing and shall indicate the purpose, amount, timing and
terms of the additional Capital Contributions being requested and such other
information as the Members may reasonably request. All Members shall have the
opportunity but not the obligation to participate in the making of such Capital
Contributions on a pro rata basis in accordance with their Membership Interests.
No Capital Contributions in addition to those provided for in Section 3.1 shall
be accepted absent approval of the terms thereof by the Members holding 100% of
the Voting Interests. Each Member's Capital Account shall be credited for such
contribution in accordance with Section 3.4 and the Membership Interests, as
reflected on Schedule I shall be adjusted, if and as agreed upon by the Members,
----------
to reflect the new relative Membership Interests of the Members. If the Members
do not consent to the additional Capital Contributions proposed by the Manager,
the Manager may lend or contribute capital to the Company on such terms as it
deems appropriate; provided however, that the Members shall have a right of
first refusal to cause the Company to obtain funds from another source on better
terms, using procedures similar to those provided for in Section 7.6.
7
<PAGE>
3.3 Liability for Promised Contributions. A Member is obligated for any
------------------------------------
promise to make a Capital Contribution, even if the Member is unable to perform
for any reason (including death or disability).
3.4 Capital Accounts. The Company shall establish an individual Capital
----------------
Account for each Member. If a Member transfers all or a part of such Member's
Membership Interest in accordance with this Agreement, then such Member's
Capital Account attributable to the transferred Membership Interest shall carry
over to the new owner of such Membership Interest pursuant to Regulations
Section 1.704-1(b)(2)(iv). Each Member's Capital Account shall equal the value
of the Capital Contribution initially made by it pursuant to Section 3.1 and
shall be (a) increased by the amount of (i) Net Profits allocated to the Member
---------
and (ii) any subsequent Capital Contributions by the Member to the Company in
accordance with Section 3.2, and (b) decreased by the amount of (i) Net Losses
---------
allocated to the Member and (ii) all cash and property distributed to the
Member. Each Capital Account shall otherwise be kept in accordance with the
applicable Regulations promulgated under Section 704(b) of the Code. No Member
has any obligation to restore, or make contributions to the Company to restore,
a deficit balance in such Member's Capital Account.
3.5 No Interest; Return of Contributions. No Member shall be entitled
-----------
to receive any interest on such Member's Capital Contributions. Except as
otherwise provided in this Agreement, no Member shall have the right to receive
the return of any Capital Contribution or any withdrawal from the Company,
except upon a dissolution of the Company.
3.6 Organizational Costs. Upon receipt of reasonable documentation, the
--------------------
Company shall reimburse each Member for its reasonable out-of-pocket expenses
incurred on or after August 6, 1997 in connection with the organization of the
Company or advanced with respect to the Company on or before the date of
execution of this Agreement.
8
<PAGE>
ARTICLE 4
==========
Certain Rights and Liabilities of Members
==========================================
4.1 Limited Liability. Except as required under the Act or as expressly
-----------------
set forth in this Agreement, no Member shall be personally liable for any debt,
obligation, or liability of the Company, whether that liability or obligation
arises in contract, tort, or otherwise.
4.2 Admission of Additional Members. The Manager, with the approval of
-------------------------------
all of the Members, may admit additional members to the Company. Any additional
Members shall obtain Membership Interests and will participate in the
management, Net Profits, Net Losses, and distributions of the Company on such
terms as are provided herein and as may be approved by the Members.
Notwithstanding the foregoing, substitute members may only be admitted in
accordance with Article 7.
4.3 Withdrawals or Resignations. Except as otherwise specifically
------------------------------
provided herein, no Member may withdraw or resign from the Company.
4.4 Forfeiture or Reduction of Membership Interests; Membership
----------------------------------------------------------
Interest Option.
- ---------------
4.4.1 Forfeiture or Reduction of Membership Interests.
-----------------------------------------------------
Notwithstanding anything to the contrary contained in Section 7.5:
(a) If the Initial Financing Date does not occur on
or before the Threshold Date, then the Initial Membership Interests of
each of the Specified Members shall automatically be forfeited on and
as of such date. In the event of such forfeiture, the forfeited
Membership Interest of such Persons shall automatically be allocated to
Point West.
(b) If, on or prior to the Threshold Date, a
Forfeiture Event occurs with respect to either or both of the Specified
Members and the Initial Financing Date has not occurred, then the
Initial Membership Interest of such Person(s) shall automatically be
forfeited on and as of the date of the occurrence of such Forfeiture
Event. In the event of such forfeiture, the forfeited Membership
Interest of such Person shall automatically be allocated to the
remaining Specified Member (if any) and Point West in the proportion
that their respective Membership Interests bears to the sum of their
Membership Interests.
(c) If the Initial Financing Date occurs on or before
the Threshold Date, and, following the Initial Financing Date, a
Forfeiture Event occurs with respect to a Specified Member, then:
(i) (A) if such Forfeiture Event relates to
McDermitt and occurs prior to the first anniversary of the
Initial Financing Date, then McDermitt's Membership Interest
shall automatically be reduced by that number of percentage
points equal to the excess of (1) 15 over (2) the product of
the length of time in quarters since the Initial Financing
Date and 1.25; or (B) if such Forfeiture Event relates to
McDermitt and occurs on or after the first anniversary of the
Initial Financing Date, then McDermitt's Membership Interest
shall automatically be reduced by that number of percentage
points equal to the excess of (1) 10 over (2) the product of
(y) a fraction, the numerator of
9
<PAGE>
which is the length of time in months since the first
anniversary of the Initial Financing Date and the denominator
of which is 48 and (z) ten (10).
(ii) if such Forfeiture Event relates to
Isard, then Isard's Membership Interest shall automatically be
reduced by that number of percentage points equal to the
excess of (A) 20 over (B) the product of (1) a fraction, the
numerator of which is the length of time in months since the
Initial Financing Date and the denominator of which is sixty
(60) and (2) 20.
The amount by which either Specified Member's
Membership Interest is reduced pursuant to this Section 4.4.1(c) shall
automatically be allocated to the remaining Specified Member (if any)
and Point West in the proportion that their respective Membership
Interests bears to the sum of their Membership Interests.
4.4.2 Membership Interest Option. Notwithstanding anything
---------------------------
to the contrary contained in Section 7.5:
(a) During the Membership Interest Option Period, but
only so long as the Initial Financing Date shall have occurred and the
Option Condition has been satisfied, each of the Specified Members
shall have the option to acquire an additional 2.5% Membership Interest
in the Company from Point West (each such Person's option, a
"Membership Interest Option"); provided that if, on or prior to the
---------------------------- --------
exercise by a Specified Member of such Person's Membership Interest
Option, a Forfeiture Event has occurred with respect to such Person,
then such Person shall not be entitled to exercise his Membership
Interest Option and his Membership Interest Option shall automatically
be transferred to the remaining Specified Member or if there is no
remaining Specified Member, to Point West.
(b) Subject to Section 4.4.2(a), a Specified Member
may exercise his Membership Interest Option solely by (i) providing
written notice of such exercise to Point West during the Membership
Interest Option Period and (ii) simultaneously paying Point West
consideration in an amount equal to One Dollar ($1.00). If such written
notice and payment are not timely delivered by a Specified Member to
Point West, then such Specified Member's Membership Interest Option
shall automatically terminate. If such written notice is timely
delivered, then Point West and the Company shall take all steps that
are reasonably necessary to effect, and reflect on the Company's books
and records, the transfer of the appropriate amount of Point West's
Membership Interest to such Specified Member (with respect to either
Specified Member, the "Specified Membership Interest Amount"), such
---------------------------------------
transfer to be effective as of the Membership Interest Option Date.
(c) If, following the proper exercise by a Specified
Member of such Person's Membership Interest Option, a Forfeiture Event
occurs with respect to a Specified Person, then such Person's Specified
Membership Interest Amount shall automatically be reduced to an amount
equal to the product of (i) a fraction, the numerator of which is the
length of time in months since the Initial Financing Date and the
denominator of which is the length of time in months between the
Initial Financing Date and the Valuation Date and (ii) his Specified
Membership Interest Amount.
10
<PAGE>
(d) The amount by which either Specified Member's
Specified Membership Interest Amount is reduced pursuant to Section
4.4.2(c) shall automatically be allocated to the remaining Specified
Member (if applicable) and Point West in the proportion that their
respective Membership Interests bears to the sum of their Membership
Interests.
4.4.3 Adjustment of Capital Accounts. The Capital Accounts of
------------------------------------
all Members shall be adjusted in accordance with Section 3.4 to reflect the
transfers effected in accordance with Sections 4.4.1 or 4.4.2.
4.5 Repurchase of a Membership Interest. Upon the transfer of a
--------------------------------------
Member's Membership Interest in violation of this Agreement or the occurrence of
a Dissolution Event as to a Member that does not result in the dissolution of
the Company, such Member's Voting Interest shall terminate and the Company shall
have the right to purchase the Membership Interest of such Member at the fair
value of such interest, and if the Company does not exercise such right to
purchase the remaining Members shall have such right on the same terms. Failure
to exercise such right of purchase shall not limit any right of first refusal
otherwise available under this Agreement. Each Member acknowledges and agrees
that this provision is not unreasonable under the circumstances existing as of
the date hereof.
4.6 Transactions with the Company. Notwithstanding that it may
--------------------------------
constitute a conflict of interest, any Member, or any of such Member's
Affiliates, may engage in any transaction with the Company (including making
loans or causing loans to be made to the Company) so long as: (a) such
transaction is not expressly prohibited by this Agreement; (b) the terms and
conditions of such transaction, on an overall basis, are fair and reasonable to
the Company and are at least as favorable to the Company as those that are
generally available from Persons, not Members (or their Affiliates), dealing
with the Company on an arms-length basis; (c) the nature of such transaction is
fully disclosed to the Manager; and (d) any such transaction that involves a
contract for services is approved by Members holding 100% of the Voting
Interests and not otherwise the subject of Section 4.5.
4.7 Remuneration to Members. Except as otherwise specifically provided
-----------------------
herein, no Member is entitled to remuneration for acting in the Company
business, subject to the entitlement of Members winding up the affairs of the
Company to reasonable compensation pursuant to Section 9.3.
4.8 Members Are Not Agents. The management of the Company is vested in
----------------------
the Manager. The Members shall have no power to participate in the management of
the Company except as expressly authorized by this Agreement or the Certificate
and except as expressly required by the Act. Unless expressly and duly
authorized in writing to do so by the Manager, no Member shall have any power or
authority to bind or act on behalf of the Company in any way (as agent or
otherwise).
4.9 Voting Rights. Except as otherwise specifically provided herein,
-------------
Members shall have no voting, approval, or consent rights. A Member may vote
either in person or by written proxy or consent signed by the Member or such
Members duly authorized attorney-in-fact. Members shall have the right to
approve or disapprove matters as specifically stated in this Agreement,
including the following:
4.9.1 Unanimous Approval. The following matters shall require
------------------
the vote, approval or consent of Members holding 100% of the Voting Interests
and who are not otherwise the subject Section 4.5: (a) a decision to continue
the business of the Company after the occurrence of a Dissolution Event;
11
<PAGE>
(b) the transfer of a Membership Interest except as permitted in Article 7 or
the admission of an assignee as a substitute Member of the Company; (c) a change
in the purpose of the Company other than as provided in Section 2.6; (d) the
admission of a new member to the Company; (e) the merger or consolidation of the
Company or a sale of substantially all of its assets that is coupled with the
granting of a noncompete; (f) any amendment of the Certificate or this Agreement
that could have a material adverse effect on the economic interests of a Member;
(g) a decision to compromise the obligation of a Member to make a Capital
Contribution or return money or property paid or distributed in violation of the
Act; (h) the declaration or making of any payment or distribution not
contemplated by Article 6; or (i) any other matter for which unanimous consent
is specifically provided for in this Agreement.
4.9.2 Approval by Point West and Members. Except as set forth
----------------------------------
in Section 4.9.1(f), no amendment of Sections 4.4, 7.6.1 and 7.6.2 may be made
without the approval or consent of Point West and the other Members.
4.9.3 Approval by Members Holding a Majority Voting Interest.
-------------------------------------------------------
Except as set forth in Sections 4.9.1 and 4.9.2, in all other matters in which a
vote, approval or consent of the Members is required, the vote, consent, or
approval of Members holding a Majority Voting Interest (or, in instances in
which there are defaulting or interested members, non-defaulting or
disinterested Members, as applicable, who hold a majority of the Voting
Interests held by all non-defaulting or disinterested, as applicable, Members)
shall be sufficient to authorize or approve such act. Without limiting the
generality of the foregoing or any other provision to the contrary, but subject
to Sections 4.9.1 and 4.9.2, the affirmative vote or written consent of Members
holding a Majority Voting Interest shall be required to approve the following
matters (provided that the Members shall not vote for or consent to any such
action if prohibited under any contract or agreement to which the Company is a
party): (a) the dissolution or winding up of the Company; (b) the sale,
exchange, mortgage, pledge, encumbrance, lease or other disposition or transfer
of all or substantially all of the assets of the Company that is not coupled
with the granting of a noncompete; or (c) the declaration or payment of any
payment or distribution contemplated by Article 6. Prior to taking any action
taken pursuant to an affirmative vote under subsections (a) or (b) above, the
dissenting Members shall have the right to propose, within thirty (30) days of
such vote, a more economically advantageous alternative to the proposed action.
If such a proposal is made, the Members shall hold a meeting in accordance with
Section 4.10 to discuss and vote on it.
4.10 Meetings.
--------
4.10.1 Meetings of Members. Meetings of Members for any proper
-------------------
purpose may be called at any time and from time to time by any Member. Members
may participate in any meeting through the use of a conference telephone or
similar communications equipment by means of which all individuals participating
in the meeting can hear each other, and such participation shall constitute
presence in person at the meeting. The Company shall give written notice of the
date, time, place and purpose of any meeting to all Members at least ten (10)
days and not more than sixty (60) days prior to the date fixed for the meeting.
Notice may be waived by any Member, which waiver will be in writing.
4.10.2 Consent of Members. Any action required or permitted to
------------------
be taken at any annual or special meeting of Members may be taken by a written
consent without a meeting, without prior notice and without a vote. The written
consent shall set forth the action so taken and shall be
12
<PAGE>
signed by Members having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all Members
entitled to vote thereon were present and voting. Prompt notice of the taking of
action by written consent shall be given to all Members who did not sign the
written consent.
13
<PAGE>
ARTICLE 5
=========
Management and Control of the Company
=====================================
5.1 Management of the Company by the Manager.
----------------------------------------
5.1.1 Exclusive Management by the Manager. Except for
----------------------------------------
situations in which the approval of the Members is expressly required by the
Certificate or this Agreement, the business, property, and affairs of the
Company shall be managed exclusively by, or under the authority of, the Manager.
The Manager may, from time to time, appoint Persons to act on behalf of the
Company and may hire employees and agents and appoint officers to perform such
functions as from time to time shall be delegated to such employees, agents, and
officers by the Manager. The Manager may, from time to time, determine the
compensation of any employees, agents, or officers of the Company or may
delegate some or all compensation decisions to officers or employees of the
Company. Pursuant and subject to the terms and conditions of the McDermitt
Employment Agreement, the Manager hereby appoints McDermitt as the initial
President of the Company. Pursuant and subject to the terms and conditions of
the Isard Employment Agreement, the Manager hereby appoints Isard as the initial
Vice President of Marketing of the Company.
5.1.2 Initial Manager; Term. The initial Manager shall be
----------------
Point West. The Manager shall hold office until the effective date of the
earlier of its resignation or removal hereunder. Any new or replacement Manager
shall be elected by the affirmative vote or written consent of Members holding
100% of the Voting Interest, which consent shall not be unreasonably withheld.
The Manager need not be a Member, an individual, a resident of the State of
Delaware, or a citizen of the United States.
5.1.3 Resignation. The Manager may resign at any time by
-----------
giving written notice to the Members without prejudice to the rights, if any, of
the Company under any contract to which the Manager is a party; provided that,
--------
if the Manager is also a Member, then the Manager's resignation shall not affect
the Manager's rights as a Member or constitute a withdrawal of such Member and
provided, further, unless the Manager cannot act as a matter of law, no such
- -------- -------
resignation shall be effective until a replacement manager has been appointed.
The Manager shall immediately tender its resignation upon any transfer for value
(other than by way of general encumbrance, pledge, lien or the like or pursuant
to Section 7.4) and upon any admission of a substitute Member as to all or
substantially all of its Membership Interest (other than pursuant to Section
7.4).
5.1.4 Removal. The Manager may be removed with or without
-------
cause by the affirmative vote of Members holding a Majority Voting Interest;
provided that, if the Manager is also a Member, then such removal shall not
- --------
affect the Manager's rights as a Member or constitute a withdrawal of such
Member and provided, further, unless the Manager cannot act as a matter of law,
-------- -------
no such removal shall be effective until a replacement manager has been
appointed.
5.15 Standard of Operations. The Manager shall, to the extent
----------------------
practicable, consistent with its responsibilities and those of the Company under
this Agreement, and adhering to professional lending and credit standards,
manage the Company with a view towards maximizing the monetary value to the
Members (taken as a whole) of the Company as an operating entity independent
from its Members. Notwithstanding the foregoing, if the Manager is also a
Member, nothing in this provision shall be construed so as to impose an economic
obligation on such Member other than that imposed on Members
14
<PAGE>
generally under this Agreement.
5.16 Executive Committee. Prior to taking actions material to
-------------------
the operations of the Company, the Manager shall consult with an Executive
Committee which shall be comprised of Isard, McDermitt, Alan Perper, Brad Rotter
and Ward Rotter and shall make non-binding recommendations.
5.2 Performance of Duties: Liability of the Manager. The Manager shall
------------------------------------------------
carry out its duties hereunder in good faith and with reasonable care. Subject
to the foregoing, the Manager shall not be liable to the Company or to any
Member for any loss or damage sustained by the Company or any Member, unless the
loss or damage shall have been the result of fraud, deceit, gross negligence,
willful or reckless misconduct, or a knowing violation of law by the Manager. In
performing its duties, the Manager shall be entitled to rely on information,
opinions, reports, or statements, including financial statements and other
financial data, from officers, agents, attorneys, accountants, or other Persons
employed by the Company or the Manager, unless it has knowledge concerning the
matter in question that would cause such reliance to be unwarranted.
5.3 Devotion of Time. The Manager is not obligated to devote all of its
----------------
time or business efforts to the affairs of the Company. The Manager shall devote
whatever time, effort, and skill as it reasonably deems appropriate for the
operation of the Company.
5.4 Competing Activities. While acting as Manager of the Company and
---------------------
for 18 months thereafter, the Manager and its officers, directors, shareholders,
partners, members, managers, agents, employees, and Affiliates shall not engage
or invest in, independently or with others, any business activity of any type or
description that might be the same as or similar to the Company's business as
described in the second sentence of Section 2.6 and that might be in direct or
indirect competition with the Company. Notwithstanding the foregoing, no
activity involving any of the following shall be deemed to be in competition
with the business of the Company: (i) the origination, acquisition, holding or
disposition of viatical settlements, (ii) the acquisition, holding or
disposition of debt or equity securities of any public company or investment
vehicle, or (iii) any transactions or programs directly by the Manager or
indirectly through a debtor of the Manager involving the extension of credit of
any type which transactions or programs do not describe or promote activities
that are the same as or in competition with the Company's business as described
in the second sentence of Section 2.6. The Members acknowledge that the Manager
and its Affiliates own or manage other businesses, including businesses that may
compete with the Company for the Manager's time. Except as provided in Section
5.3 and this Section, the Members hereby waive any and all rights and claims
which they may otherwise have against the Manager and its officers, directors,
shareholders, partners, members, managers, agents, employees, and Affiliates as
a result of any of such activities.
5.5 Transactions between the Company and the Manager. Notwithstanding
-------------------------------------------------
that it may constitute a conflict of interest, the Manager may, and may cause
its Affiliates to, engage in any transaction (including the purchase, sale,
lease, or exchange of any property or the rendering of any service, or the
establishment of any salary, other compensation, or other terms of employment)
with the Company so long as: (a) such transaction is not expressly prohibited by
this Agreement; and (b) the terms and conditions of such transaction, on an
overall basis, are (i) fair and reasonable to the Company and are at least as
favorable to the Company as those that are generally available from Persons
capable of similarly performing them and in similar transactions between parties
operating at arm's length and
15
<PAGE>
(ii) approved in writing by more than fifty percent (50%) of the Membership
Interests of Members having no interest in such transaction (other than their
interests as Members), which consent shall not be unreasonably withheld.
5.6 Payments to the Manager. The Manager shall not be entitled to any
-----------------------
compensation for its services as Manager, but shall be reimbursed by the Company
for any reasonable out-of-pocket expenses incurred by the Manager on behalf of
the Company.
5.7 Limited Liability of the Manager. Except as required under the Act
--------------------------------
or as expressly set forth in this Agreement, no Person who is a Manager shall be
personally liable under any judgment of a court, or in any other manner, for any
debt, obligation, or liability of the Company, whether that liability or
obligation arises in contract, tort, or otherwise.
16
<PAGE>
ARTICLE 6
=========
Allocations of Net Profits, Net Losses and Distributions
========================================================
6.1 Allocations of Net Profit and Net Loss.
--------------------------------------
6.1.1 Net Loss. Net Loss for each taxable year shall be
---------
allocated as follows:
(a) First, to the Members in accordance with their
respective Membership Interests until the cumulative amount of Net
Losses allocated to the Members pursuant to this Section 6.1.1(a)
equals the cumulative amount of Net Profits allocated to the Members
pursuant to Section 6.1.2(e);
(b) Second, to Point West until the cumulative amount
of Net Losses allocated to Point West pursuant to this Section 6.1.1(b)
equals the sum of the cumulative amount of Net Profits allocated to it
pursuant to Section 6.1.2(a), (b) and (c) plus its Capital
Contributions included for purposes of the Adjusted Capital
Contribution; and
(c) Third, to the Members in accordance with their
respective Membership Interests.
Notwithstanding the foregoing, loss allocations to a Member shall be
made only to the extent that such loss allocations will not create a deficit
Capital Account balance for that Member in excess of an amount, if any, equal to
such Member's share of Company Minimum Gain that would be realized on a
foreclosure of the Company's property. Any loss not allocated to a Member
because of the foregoing provision shall be allocated to the other Members (to
the extent the other Members are not limited in respect of the allocation of
losses under this Section 6.1.1). Any loss reallocated under this Section 6.1.1
shall be taken into account in computing subsequent allocations of income and
losses pursuant to this Article 6, so that the net amount of any item so
allocated and the income and losses allocated to each Member pursuant to this
Article 6, to the extent possible, shall be equal to the net amount that would
have been allocated to each such Member pursuant to this Article 6 if no
reallocation of losses had occurred under this Section 6.1.1.
6.1.2 Net Profit. Net Profit of the Company for each
----------
taxable year shall be allocated as follows:
(a) First, pro rata, (i) to Point West in an amount
equal to the sum of the Point West Primary Preferred Return plus any
Point West Primary Carryforwards; provided that, if the Company does
--------
not have sufficient Net Profits in a given year to make such allocation
in full, then any shortfall (the "Point West Primary Carryforwards")
--------------------------------------
shall be carried forward indefinitely to the next taxable year or years
in which Net Profits are sufficient to make such allocation and (ii) to
the Specified Members (according to their Membership Interests) in an
aggregate amount equal to the sum of the Specified Member Return plus
any Specified Member Carryforwards; provided that, if the Company does
--------
not have sufficient Net Profits in a given year to make such allocation
in full, then any shortfall (the "Specified Member Carryforwards")
--------------------------------
shall be carried forward indefinitely to the next taxable year or years
in which Net Profits are sufficient to make such allocation;
17
<PAGE>
(b) Second, to Point West in an amount equal to the
sum of the Point West Secondary Preferred Return plus any Point West
Secondary Carryforwards; provided that, if the Company does not have
--------
sufficient Net Profits in a given year to make such allocation in full,
then any shortfall (the "Point West Secondary Carryforwards") shall be
-----------------------------------
carried forward indefinitely to the next taxable year or years in which
Net Profits are sufficient to make such allocation;
(c) Third, to Point West in an amount equal to the
Point West Tertiary Preferred Return; provided that, if the Company
--------
does not have sufficient Net Profits in a given year to make such
allocation, then any shortfall shall not be carried forward;
(d) Fourth, to Point West to the extent of any Net
Losses allocated to Point West pursuant to Section 6.1.1(b); and
(e) Fifth, to the Members in accordance with their
respective Membership Interests.
6.2 Special Allocations.
-------------------
6.2.1 Minimum Gain Chargeback. Notwithstanding Section 6.1, if
-----------------------
there is a net decrease in Company Minimum Gain during any Fiscal Year, each
Member shall be specially allocated items of Company income and gain for such
Fiscal Year (and, if necessary, in subsequent fiscal years) in an amount equal
to the portion of such Member's share of the net decrease in Company Minimum
Gain that is determined in accordance with Regulations Section 1.704-2(g)(2).
This Section 6.2.1 is intended to comply with the minimum gain chargeback
requirement contained in Regulations Section 1.704-2(f) and shall be interpreted
consistently therewith.
6.2.2 Chargeback of Minimum Gain Attributable to Member
-------------------------------------------------------
Nonrecourse Debt. Notwithstanding Section 6.1 of this Agreement, if there is a
- ----------------
net decrease in Company Minimum Gain attributable to a Member Nonrecourse Debt,
during any Fiscal Year, each Member who has a share of the Company Minimum Gain
attributable to such Member Nonrecourse Debt shall be specially allocated items
of Company income and gain for such Fiscal Year (and, if necessary, in
subsequent Fiscal Years) in an amount equal to that portion of such Member's
share of the net decrease in Company Minimum Gain attributable to such Member
Nonrecourse Debt. A Member's share of net decrease in Company Minimum Gain
attributable to each Member Nonrecourse Debt shall be determined pursuant to
Regulations Section 1.702-2(g)(2). This Section 6.2.2 is intended to comply with
the minimum gain chargeback requirement contained in Regulations Section
1.704-2(i)(4) and shall be interpreted consistently therewith.
6.2.3 Nonrecourse Deductions. Notwithstanding Section 6.1, any
----------------------
nonrecourse deductions (as defined in Regulations Section 1.704-2(b)(1)) for any
Fiscal Year or other period shall be specially allocated to the Members in
proportion to their Membership Interests.
6.2.4 Member Nonrecourse Deductions. Notwithstanding Section
------------------------------
6.1, those items of Company loss, deduction, or Code Section 705(a)(2)(B)
expenditures which are attributable to Member
18
<PAGE>
Nonrecourse Debt for any Fiscal Year or other period shall be specially
allocated to the Member who bears the economic risk of loss with respect to the
Member Nonrecourse Debt to which such items are attributable in accordance with
Regulations Section l.704-2(i).
6.2.5 Qualified Income Offset. Notwithstanding Section 6.1, if
-----------------------
a Member unexpectedly receives any adjustments, allocations, or distributions
described in Regulations Section 1.704-l(b)(2)(ii)(d)(4), (5) or (6), or any
other event creates a deficit balance in such Member's Capital Account in excess
of such Member's share of Company Minimum Gain, items of Company income and gain
shall be specially allocated to such Member in an amount and manner sufficient
to eliminate such excess deficit balance as quickly as possible. Any special
allocations of items of income and gain pursuant to this Section 6.2.5 shall be
taken into account in computing subsequent allocations of income and gain
pursuant to this Article 6 so that the net amount of any item so allocated and
the income, gain, and losses allocated to each Member pursuant to this Article 6
to the extent possible, shall be equal to the net amount that would have been
allocated to each such Member pursuant to the provisions of this Section 6.2.5
if such unexpected adjustments, allocations, or distributions had not occurred.
6.3 Code Section 704(c) Allocations. Notwithstanding any other
-----------------------------------
provision in this Article 6, in accordance with Code Section 704(c) and the
Regulations promulgated thereunder, income, gain, loss, and deduction with
respect to any property contributed in-kind to the capital of the Company shall,
solely for tax purposes, be allocated among the Members so as to take account of
any variation between the adjusted basis of such property to the Company for
federal income tax purposes and its fair market value on the date of
contribution. Allocations pursuant to this Section 6.3 are solely for purposes
of federal, state and local taxes. As such, they shall not affect or in any way
be taken into account in computing a Member's Capital Account or share of
profits, losses, or other items of distributions pursuant to any provision of
this Agreement.
6.4 Allocation of Net Profits and Losses and Distributions in Respect
-------------------------------------------------------------------
of a Transferred Interest. If any Membership Interest is transferred, or is
- --------------------------
increased or decreased by reason of the admission of a new Member or otherwise,
during any Fiscal Year of the Company, unless the Members determine that another
method permitted under the Code is more equitable, each item of income, gain,
loss, deduction, or credit of the Company for such Fiscal Year shall be assigned
pro rata to each day in the particular period of such fiscal year to which such
item is attributable (i.e., the day on or during which it is accrued or
otherwise incurred) and the amount of each such item so assigned to any such day
shall be allocated to the Member based upon such Person's respective Membership
Interest at the close of such day.
However, for purposes of accounting convenience and simplicity, the
Company shall treat a transfer of, or an increase or decrease in, a Membership
Interest which occurs at any time during a semi-monthly period (commencing with
the semi-monthly period including the date hereof) as having been consummated on
the last day of such semi-monthly period, regardless of when during such
semi-monthly period such transfer, increase, of decrease actually occurs (i.e.,
sales and dispositions made during the first fifteen (15) days of any month will
be deemed to have been made on the fifteenth day of the month).
Notwithstanding any provision above to the contrary, gain or loss of
the Company realized in connection with a sale or other disposition of any of
the assets of the Company shall be allocated solely
19
<PAGE>
to the parties owning Membership Interests as of the date such sale or other
disposition occurs.
6.5 Distributions by the Company. Subject to applicable law and any
-----------------------------
limitations contained elsewhere in this Agreement, distributions of cash or
other assets of the Company shall be made in the following order of priority:
6.5.1 first, to Point West an amount sufficient to reduce the
Adjusted Capital Contribution to zero; and
6.5.2 Second, to the Members in accordance with their
Membership Interests.
Notwithstanding the foregoing, to the extent that cash would be
available for distribution hereunder, the Company shall first (i) advance to
each Member an amount (a "Tax Advance") sufficient to cover the estimated
------------
federal and state taxes of such Member (based on the combined maximum effective
federal and state income tax rates then in effect for each such Member)
resulting from estimated allocations of Net Profits to such Member for prior
quarters and for which no prior Tax Advance or distribution has been made and
(ii) upon filing of the Company's federal and state tax returns for a Fiscal
Year, distribute an amount to each Member at least equal to the amount of such
Member's federal and state taxes (based on the combined maximum effective
federal and state income tax rates then in effect for each such Member) on the
Net Profits actually allocated to such Member for such Fiscal Year, computed
taking into account any prior allocations of Net Losses available to offset such
income and other distributions to such Member in such Fiscal Year and each
Member shall repay any outstanding Tax Advances related to such Fiscal Year.
All distributions shall be made only to the Persons who, according to
the books and records of the Company, are the holders of record of the
Membership Interests in respect of which such distributions are made on the
actual date of distribution. Neither the Company nor any Member shall incur any
liability for making distributions in accordance with this Section 6.5.
6.6 Form of Distribution. A Member, regardless of the nature of the
---------------------
Member's Capital Contribution, has no right to demand and receive any
distribution from the Company in any form other than cash. Except upon a
dissolution and the winding up of the Company, or as agreed to by Members
holding 100% of the Voting Interests, no Member may be compelled to accept, nor
shall it accept, a distribution in kind.
6.7 Restriction on Distributions.
----------------------------
6.7.1 No distribution shall be made if, after giving effect to
the distribution: (a) the Company would not be able to pay its debts as they
become due in the usual course of business; (b) the Company's ability to effect
its business plan over the following twelve months would be impaired; or (c) the
Company's total assets would be less than the sum of its total liabilities plus,
unless this Agreement provides otherwise, the amount that would be needed if the
Company were to be dissolved at the time of the distribution, to satisfy the
preferential rights of other Members, if any, upon dissolution that are superior
to the rights of the Member receiving the distribution.
6.7.2 The Manager may base a determination that a distribution
is not prohibited on
20
<PAGE>
any of the following: (a) financial statements prepared on the basis of
generally accepted accounting practices and principles then generally employed
by the Company; (b) a determination of fair market value by a qualified
unrelated third party or, if agreed to by the Members holding 100% of the Voting
Interests, by the Manager; or (c) any other method that is reasonable in the
circumstances and agreed to by Members holding 100% of the Voting Interests.
The effect of a distribution is measured as of the date the
distribution is authorized if the payment occurs within 120 days after the date
of authorization, or the date payment is made if it occurs more than 120 days of
the date of authorization.
6.7.3 A Member or Manager who votes for a distribution in
violation of this Agreement or the Act is personally liable to the Company for
the amount of the distribution that exceeds what could have been distributed
without violating this Agreement or the Act if it is established that the Member
or Manager did not act in compliance with Section 6.7.2 or Section 9.4. Any
Member or Manager who is so liable shall be entitled to compel contribution
from: (a) each other Member or Manager who also is so liable; and (b) each
Member or Manager for the amount the Member received with knowledge of facts
indicating that the distribution was made in violation of this Agreement or the
Act.
6.8 Return of Distributions. Except for distributions made in violation
-----------------------
of the Act or this Agreement, no Member shall be obligated to return any
distribution to the Company or pay the amount of any distribution for the
account of the Company or to any creditor of the Company. The amount of any
distribution returned to the Company by a Member or paid by a Member for the
account of the Company or to a creditor of the Company shall be added to the
account or accounts from which it was subtracted when it was distributed to the
Member.
6.9 Obligations of Members to Report Allocations. The Members are aware
--------------------------------------------
of the income tax consequences of the allocations made by this Article 6 and
hereby agree to be bound by the provisions of this Article 6 in reporting their
shares of Company income and loss for income tax purposes.
6.10 Withholding. Each of the Members hereby authorizes the Company to
-----------
withhold from distributions to be made to such Member, or with respect to
allocations to be made to such Member, and to pay over to a federal, state or
local government, any amounts required to be withheld pursuant to the Code or
any provisions of any other federal, state or local law. Any amounts so withheld
shall be treated as distributed to such Member pursuant to this Article 6 for
all purposes of this Agreement and shall be offset against the net amounts
otherwise distributable to such Member. The Company may also withhold from
distributions that would otherwise be made to such Member, and apply to the
obligations of such Member, any amounts that such Member owes to the Company. In
addition, any tax imposed upon the Company resulting from the Membership
Interest of any Member shall be treated as a distribution to such Member and
shall be offset against future distributions to such Member.
6.11 Status of the Company. The Members acknowledge that this Agreement
---------------------
creates a partnership for federal and state income tax purposes (and only for
such purposes) and hereby agree not to elect to be excluded from the application
of Subchapter K of Chapter 1 of Subtitle A of the Code or any similar state
statute.
21
<PAGE>
6.12 Tax Elections. The Manager shall, upon the written request of any
-------------
ember benefitted thereby, cause the Company to file an election under Section
754 of the Code and the Treasury Regulations thereunder to adjust the basis of
the Company assets under Section 734(b) or 743(b) of the Code and a
corresponding election under the applicable sections of state and local law. The
Manager shall have the authority to make all other Company elections permitted
under the Code, including elections of methods of depreciation.
6.13 Company Tax Returns. The Manager shall cause the necessary federal
-------------------
income and other tax returns and information returns for the Company to be
prepared. Each Member shall provide such information, if any, as may be needed
by the Company for purposes of preparing such tax returns and information
returns. The Manager shall deliver to each Member within ninety (90) days after
the end of each fiscal year a copy of the federal income tax returns for the
Company as filed with the appropriate taxing authorities, and upon the written
request of any Member, a copy of any state and local income tax return as filed.
6.14 Certain Tax Matters.
-------------------
6.14.1 The Manager is hereby appointed as the initial tax
matters partner of the Company. The tax matters partner of the Company is
authorized to and shall (a) maintain Capital Accounts and make partnership
allocations and (b) file, if necessary, a Form 8832 with the Internal Revenue
Service and make the election provided for to have the Company be classified as
a partnership for federal income tax purposes. If at any time the Manager cannot
or elects not to serve as the tax matters partner of the Company, is removed by
the Members from acting in such capacity, or ceases to be a Member, Members
holding a Majority Voting Interest shall select another Member to be the tax
matters partner of the Company. The tax matters partner of the Company, as an
authorized representative of the Company, shall direct the defense of any claims
made by the Internal Revenue Service or other tax authority to the extent that
such claims relate to the adjustment of Company items at the Company level.
6.14.2 The Manager shall promptly deliver to each Member a
copy of all notices, communications, reports or writings of any kind with
respect to income or similar taxes received from any state or local taxing
authority relating to the Company that might materially and adversely affect any
Member, and shall keep Members advised of all material developments with respect
to any proposed adjustment of Company items that come to its attention.
6.14.3 Each Member shall continue to have the rights described
in this Section 6.14 with respect to tax matters relating to any period during
which it was a Member, whether or not it is a Member at the time of the tax
audit or contest.
22
<PAGE>
ARTICLE 7
=========
Transfers of Membership Interests; Admission of Members
=======================================================
7.1 Transfers of Member Interests Generally.
---------------------------------------
7.1.1 No Member shall be entitled to transfer, assign, convey,
sell, encumber or in any way alienate all or any part of such Person's
Membership Interest or to cause any permitted transferee to become a substituted
Member except as provided in Section 7.2, 7.3 and 7.4 below. The consent of any
Member that is required pursuant to this Article may be given or withheld,
conditioned or delayed (as allowed by this Agreement or the Act), as such Member
may determine in its sole discretion. Notwithstanding any transfer of any part
of a Membership Interest, the Membership Interest so transferred shall continue
to be subject to the terms and provisions of this Agreement and any further
transfers shall be required to comply with all the terms and provisions of this
Agreement.
7.1.2 Notwithstanding any provision of this Article 7 other
than Section 7.6.3, no admission (or purported admission) of a Member, and no
transfer (or purported transfer) of all or any part of a Member's interest
(economic or otherwise) in the Company, whether to another Member or to a Person
not a Member, shall be effective, and any such admission or transfer (or
purported admission or transfer) shall be void ab initio, and no Person shall
---------
otherwise become a Member if (a) at the time of such admission or transfer (or
purported admission or transfer) any interest (economic or otherwise) in the
Company is traded on an established securities market or readily tradeable on a
secondary market or the substantial equivalent thereof or (b) after such
admission or transfer (or purported admission or transfer) the Company would
have more than 100 Members. For purposes of clause (a) of the immediately
preceding sentence, an established securities market is a national securities
exchange that is either registered under Section 6 of the Securities Exchange
Act of 1934 or exempt from registration because of the existence or involvement
of a limited volume of transactions, a foreign securities exchange that, under
the law of the jurisdiction where it is organized, satisfies regulatory
requirements that are analogous to the regulatory requirements of the Securities
Exchange Act of 1934, a regional or local exchange, or an interdealer quotation
system that regularly disseminates firm buy or sell quotations by identified
brokers or dealers by electronic means or otherwise. For purposes of such clause
(a), any interest (economic or otherwise) in the Company is readily tradeable on
a secondary market or the substantial equivalent thereof if (i) interests
(economic or otherwise) in the Company are regularly quoted by any Person, such
as a broker or dealer, making a market in the interests, (ii) any Person
regularly makes available to the public (including customers or subscribers) bid
or offer quotes with respect to interests (economic or otherwise) in the Company
and stands ready to effect buy or sell transactions at the quoted prices for
itself or on behalf of others, (iii) the holder of an interest (economic or
otherwise) in the Company has a readily available, regular, and ongoing
opportunity to sell or exchange such interest through a public means of
obtaining or providing information of offers to buy, sell or exchange such
interests, or (iv) prospective buyers and sellers otherwise have the opportunity
to buy, sell or exchange interests (economic or otherwise) in the Company in a
time frame and with the regularity and continuity that is comparable to that
described in clauses (i), (ii) and (iii) of this sentence. For purposes of
determining whether the Company will have more than 100 Members, each Person
indirectly owning an interest (economic or otherwise) in the Company through a
partnership (including any entity treated as a partnership for federal income
tax purposes), a grantor trust or an S corporation shall be treated as a Member
unless the Manager determines in its sole and absolute discretion that less than
substantially all of the value of the beneficial owner's interest in any such
entity is attributable to
23
<PAGE>
such entity's interest (direct or indirect) in the Company.
7.2 Permitted Transfers. A Member shall be permitted to transfer,
--------------------
assign, convey, sell, encumber or otherwise alienate its economic rights
associated with its Membership Interest without the consent of other Members so
long as such transaction: (a) is not prohibited by Section 7.1.2 or Section
11.9, (b) would not cause a material adverse tax consequence to the Company or
the other Members, and (c) has complied with Section 7.5. If a permitted
transfer of a Membership Interest does not comply with Section 7.3 as to
admissions, the transferee shall have no right to vote or participate in the
management of the business, property and affairs of the Company or to exercise
any rights of a Member other than the right to receive proceeds of a Membership
Interest.
7.3 Admission and Substitution of Members. A new Member may be admitted
-------------------------------------
only if (a) Members holding 100% of the Voting Interests consent to such
admission; (b) such Person becomes a party and agrees to be bound by the terms
and provisions of this Agreement; and (c) such Person pays any reasonable
expenses in connection with such Person's admission as a Member. A permitted
transferee of a Membership Interest shall have the right to be admitted as a
substitute Member only if the requirements of Sections 7.1 and 7.2 have been met
and the conditions set forth in the prior sentence have been met. The admission
of a substitute Member shall not result in the release of the Member who
assigned the Membership Interest from any liability of such Member accrued prior
to such date.
7.4 Family and Affiliate Transfers. Subject to compliance with Section
------------------------------
7.1, 7.2 and 7.3(b) and (c), the Membership Interest of any Member may be
transferred as follows, and the transferee thereof admitted as a substitute
Member without the prior written consent of all Members but with the consent of
the Manager, which shall not be unreasonably withheld: (a) by inter vivos gift
or by testamentary transfer to any spouse, parent, sibling, in-law, child or
grandchild of the Member, or to a trust for the benefit of the Member or such
spouse, parent, sibling, in-law, child or grandchild of the Member; or (b) to
any Affiliate of the Member so long as such Affiliate is majority owned and
controlled by such Member; it being agreed that, in executing this Agreement,
each Member has consented to such transfers.
7.5 Right of First Refusal. Subject to Section 7.6, each time a Member
----------------------
proposes to transfer, assign, convey, sell, encumber, or in any way alienate all
or any part of such Person's Membership Interest, including by operation of law,
by foreclosure or other involuntary transfer but not including a transfer
pursuant to Section 7.4 or the granting by a Member of a security interest in
its assets generally, such Member shall first offer such Membership Interest to
the Company and the non-transferring Members in accordance with the following
provisions:
7.5.1 Such Member shall deliver a written notice (a "Transfer
--------
Notice") to the Company and the other Members stating: (a) such Member's bona
- -----
fide intention to transfer such Membership Interest; (b) the name and address of
the proposed transferee; (c) the Membership Interest to be transferred; and (d)
the terms of payment for which the Member proposes to transfer such Membership
Interest.
7.5.2 Within thirty (30) days after receipt of the Transfer
Notice, each non-transferring Member shall notify the other Members in writing
of such Person's desire to purchase a portion of the
24
<PAGE>
Membership Interest being so transferred. The failure of any Member to submit a
notice within the applicable period shall constitute an election on the part of
that Member not to purchase any of the Membership Interest which may be so
transferred. Each Member so electing to purchase shall be entitled to purchase a
portion of such Membership Interest in the same proportion that the Membership
Interest of such Member bears to the aggregate of the Membership Interests of
all of the Members electing to so purchase the Membership Interest being
transferred. In the event any Member elects to purchase none or less than all of
such Person's pro rata share of such Membership Interest, then the other Members
can elect to purchase more than their pro rata share. If such Members fail to
purchase the entire Membership Interest being transferred, the Company may, with
the consent of the non-transferring Members, purchase any remaining share of
such Membership Interest.
7.5.3 Within sixty (60) days after receipt of the Transfer
Notice, the Company and the Members electing to purchase such Membership
Interest shall have the first right to purchase or obtain such Membership
Interest upon the price and terms of payment designated in such notice. If such
notice provides for the payment of non-cash consideration, then the Company and
such purchasing Members each shall pay the consideration in cash equal to the
good faith estimate of the present fair market value of the noncash
consideration offered.
7.5.4 If the Company or the other Members elect not to
purchase or obtain all of the Membership Interest designated in such notice,
then the transferring Member may transfer the Membership Interest described in
the notice to the proposed transferee, providing such transfer: (a) is completed
within thirty (30) days after the expiration of the Company's and the other
Members' right to purchase such Membership Interest; (b) is made substantially
on the terms designated in the Transfer Notice; and (c) the requirements of
Section 7.2 are otherwise met. If such Membership Interest is not so
transferred, then the transferring Member must give notice in accordance with
this Section prior to any other or subsequent transfer of such Membership
Interest.
7.6 Purchase Rights; Sale of Company. Notwithstanding anything to
--------------------------------
the contrary contained herein:
7.6.1 Valuation of the Company. During the Valuation Period,
------------------------
Point West and the Specified Members shall attempt to agree upon a fair market
value of the Company as of the Valuation Date (the "Fair Market Value"). If the
-----------------
Members are unable to agree upon the Fair Market Value during the Valuation
Period, then, within ten (10) business days after the end of the Valuation
Period, each of Point West, on the one hand, and the other Members, on the other
hand, shall appoint, at such party's sole cost and expense, an appraiser (a)
with at least five (5) years of experience in appraising businesses, (b) with
experience appraising finance companies, and (c) who is independent, i.e., has
not previously acted in any capacity for any of Point West, Isard or McDermitt
(all of such qualifications, the "Qualifications," and each appraiser so
appointed, an "Approved Appraiser") to estimate, in its reasonable judgment, the
Fair Market Value (each such evaluation, an "Appraisal"). Each Appraisal shall
be completed within twenty (20) business days following the end of the Valuation
Period, and copies of each Appraisal shall be delivered to Point West and the
other Members immediately upon completion thereof. If, pursuant to the second
sentence of this paragraph, only one Approved Appraiser is appointed, then such
Approved Appraiser's Appraisal shall constitute the Fair Market Value. If an
Approved Appraiser is appointed by each of the two eligible parties pursuant to
the second sentence of this paragraph, then such Approved Appraisers shall meet
promptly after both Appraisals have been
25
<PAGE>
completed and delivered and attempt to agree jointly upon the Fair Market Value.
If they are unable to agree upon the Fair Market Value within five (5) business
days following the completion of both Appraisals, then within the five (5)
business days thereafter such Approved Appraisers shall jointly select a third
appraiser with the Qualifications (such appraiser, the "Determining Appraiser"),
and the Determining Appraiser, within ten (10) Business Days after its
selection, shall determine the Fair Market Value by selecting the one Appraisal
that, in its reasonable judgment, most accurately and truly reflects the Fair
Market Value. After determining the Fair Market Value, the Determining Appraiser
shall immediately notify Point West and the other Members. The other Member(s),
on the one hand, and Point West, on the other hand, shall each bear one-half of
the costs of appointing the Determining Appraiser and of paying the Determining
Appraiser's fee.
7.6.2 Purchase Rights.
---------------
7.6.2.1 Point West's Purchase Right. Following the
-----------------------------
determination of the Fair Market Value in accordance with Section 7.6.1, Point
West shall have the first and exclusive right (the "Point West Purchase Right")
--------------------------
to purchase all, but not less than all, of the then Membership Interests of the
other Members for an aggregate purchase price equal to the product of (a) the
Fair Market Value and (b) a fraction, the numerator of which is the then
Membership Interests of the other Members and the denominator of which is the
sum of the then Membership Interests of all Members. Point West shall give
written notice to the other Members of its intention to exercise the Point West
Purchase Right within thirty (30) days following the determination of the Fair
Market Value in accordance with Section 7.6.1; any failure to deliver such
written notice within such period shall constitute an election not to exercise
the Point West Purchase Right. If Point West provides timely written notice of
its intention to exercise the Point West Purchase Right, then Point West shall
consummate the purchase of the other Members= Membership Interests within
forty-five (45) days following the giving of such notice. Point West shall pay
the purchase price for such Membership Interests, and otherwise consummate such
purchase, in accordance with Section 7.6.2.3.
7.6.2.2 Specified Members' Purchase Right. If Point
---------------------------------
West does not give written notice of its intention to exercise the Point West
Purchase Right by the end of the time period permitted under Section 7.6.2.1 or
if, during such period, Point West gives notice of its intention not to exercise
the Point West Purchase Right (the earlier of such dates, the "Trigger Event"),
--------------
then the Specified Members shall, and if more than one, shall jointly, have an
exclusive right (the "Specified Members' Purchase Right") to purchase all, but
-----------------------------------
not less than all, of the then Membership Interests of all other Members,
including Point West, for a purchase price equal to the product of (a) the Fair
Market Value and (b) a fraction, the numerator of which is the then Membership
Interest of all other Members, including Point West, and the denominator of
which is the sum of the then Membership Interests of all Members. The Specified
Members shall give written notice to the other Members of their intention to
exercise the Specified Members= Purchase Right within thirty (30) days following
the Trigger Event; any failure to deliver such written notice within such period
shall constitute an election not to exercise the Specified Members' Purchase
Right. If the Specified Members provide timely written notice of their intention
to exercise the Specified Members= Purchase Right, then the Specified Members
shall consummate the purchase of all other Members', including Point West's,
Membership Interest within forty-five (45) days following the giving of such
notice. The Specified Members shall pay the purchase price for such Membership
Interests, and otherwise consummate such purchase, in accordance with Section
7.6.2.3.
26
<PAGE>
7.6.2.3 Consummation of Purchase; Payment of Purchase
---------------------------------------------
Price. Any purchase of another Member's Membership Interest pursuant to this
- -----
Section 7.6.2 shall be consummated pursuant to documentation reasonably
satisfactory to the parties to such purchase. The Members agree to act
reasonably in good faith and to cooperate so as to effectuate the purchase and
sale of Membership Interests pursuant to this Section 7.6.2. The appropriate
purchase price shall be paid on or before the date specified for the payment
thereof in this Section 7.6.2 and shall be paid in full in immediately available
federal funds according to such written instructions as are specified by the
receiving party not less than two (2) business days prior to the consummation of
the purchase or as otherwise may be agreed upon between the parties.
7.6.3 Sale of the Company. If neither the Point West Purchase
-------------------
Right nor the other Members= Purchase Right is exercised and consummated in
accordance with the terms hereof, then the Manager shall use its best efforts to
effect a sale of the Company which maximizes gross proceeds to the Members as a
whole, whether a sale of the Membership Interests or a sale of the Company's
assets. The Company shall solicit bona fide offers from third parties and shall
promptly provide written notice of such offers to the Members. Such notice shall
contain: (a) the name(s) of the proposed purchaser; (b) the type, structure and
form of transaction contemplated; (c) the offered purchase price; and (d) the
terms of the payment of the purchase price. Upon receipt of such notice by the
Members, the Members shall consider the proposed offer. The Members, on behalf
of the Company, shall have fourteen (14) calendar days from the date of receipt
of such notice to irrevocably notify the Manager of their decision to accept or
reject such offer; if all of the Members shall not reject the third party's
offer within such time period, the Members shall be deemed to have accepted such
offer. If the Members shall have elected or be deemed to have elected to accept
an offer from a third party, then the Manager, on behalf of the Company, shall
take all steps that are reasonably necessary (including the execution and
delivery of definitive purchase documentation in form and substance acceptable
to the Manager) to effect the purchase by such third party of the Company.
27
<PAGE>
ARTICLE 8
=========
Accounting, Records, and Reporting
===================================
8.1 Books and Records. The Company shall maintain complete and accurate
-----------------
books and records of the Company's business and affairs in accordance with
generally accepted accounting principles, consistently applied. The books and
records shall be maintained at the principal place of business of the Company
and shall be accessible to the Members in accordance with the Act.
8.2 Fiscal Year; Accounting. The Company's fiscal year shall be the
-----------
calendar year. The accounting methods and principles to be followed by the
Company shall be those selected from time to time by the Manager and approved in
advance by Members holding 100% of the Voting Interests.
8.3 Reports. The Company shall provide to the Members reports
-------
concerning the financial condition and results of operation of the Company and
the Members' Capital Accounts within ninety (90) days after the end of each
fiscal year and interim operating reports at least quarterly.
8.4 Bank Accounts. The Manager shall maintain the funds of the Company
------------
in one or more separate bank accounts in the name of the Company and shall not
permit the funds of the Company to be commingled in any fashion with the funds
of any other Person. The funds of the Company shall be deposited in such bank or
other financial institution account or accounts, or invested in such
interest-bearing or non-interest-bearing investments, as shall be designated by
the Manager in investments that are at least rated investment grade by one
nationally recognized statistical rating agency. All withdrawals from any such
bank account(s) shall be made only by the Manager or by such Persons as are duly
appointed by the Manager.
28
<PAGE>
ARTICLE 9
=========
Dissolution and Winding Up
--------------------------
9.1 Dissolution. The Company shall be dissolved, its assets shall be
-----------
disposed of, and its affairs wound up on the first to occur of the following:
(a) upon the happening of any event of dissolution specified in the Certificate;
(b) 90 days after the occurrence of a Dissolution Event with respect to any
Member unless the remaining Members vote within such 90 days to continue the
Company; (c) upon the entry of a decree of judicial dissolution pursuant to the
Act; (d) 60 days after the vote of Members holding a Majority in Interest or of
non-defaulting Members holding a majority of the Membership Interests held by
all non-defaulting Members (provided that the Members shall not vote for or
consent to a dissolution or winding up of the Company if prohibited under any
agreement or contract to which the Company is a party); or (e) the sale of all
or substantially all of the assets of Company.
9.2 Certificate of Dissolution. As soon as possible following the
----------------------------
occurrence of any of the events specified in Section 9.1, the Manager, to the
extent it has not wrongfully dissolved the Company, or, if so, then the Members,
shall execute a Certificate of Dissolution in such form as shall be prescribed
by the Delaware Secretary of State and file such certificate as required by the
Act.
9.3 Winding Up. Upon the occurrence of any event specified in Section
----------
9.1, the Company shall continue solely for the purpose of winding up its affairs
in an orderly manner, liquidating its assets, and satisfying the claims of its
creditors. The Manager, to the extent it has not wrongfully dissolved the
Company, or, if so, then the Members, shall be responsible for overseeing the
winding up and liquidation of Company. The Persons winding up the affairs of the
Company shall be entitled to such reasonable compensation as has been approved
by the Members.
9.4 Distributions in Kind. Any noncash asset distributed to one or more
---------------------
Members shall first be valued at its fair market value to determine the Net
Profit or Net Loss that would have resulted if such asset were sold for such
value, such Net Profit or Net Loss shall then be allocated pursuant to Article
6, and the Members' Capital Accounts shall be adjusted to reflect such
allocations. The amount distributed and charged to the Capital Account of each
Member receiving an interest in such distributed asset shall be the fair market
value of such interest (net of any liability secured by such asset that such
Member assumes or takes subject to). The fair market value of such asset shall
be determined by a qualified unrelated third party, or if Members holding 100%
of the Voting Interest shall agree, the Manager.
9.5 Distribution of Assets. Upon the dissolution or winding up of the
----------------------
Company, the Manager shall pay or make reasonable provision to pay all claims
and obligations of the Company, including all costs and expenses of the
liquidation and all contingent, conditional, or unmatured claims and obligations
that are known to the Manager but for which the identity of the claimant is
unknown. If there are sufficient assets, then such claims and obligations shall
be paid in full and any such provision shall be made in full. If there are
insufficient assets, then such claims and obligations shall be paid or provided
for according to their priority and, among claims and obligations of equal
priority, ratably to the extent of assets available therefor. Any remaining
assets shall be distributed to the Members in accordance with their respective
positive Capital Accounts, after giving effect to all Capital Contributions,
distributions, and allocations for all periods.
9.6 Limitations on Payments Made in Dissolution. Except as otherwise
--------------------------------------------
specifically
29
<PAGE>
provided in this Agreement, each Member shall only be entitled to look solely at
the assets of Company for the return of such Member's positive Capital Account
balance and shall have no recourse for such Member's Capital Contribution or
share of Net Profits (upon dissolution or otherwise) against the Manager or any
other Member except as provided in Article 10.
30
<PAGE>
ARTICLE 10
==========
Indemnification and Insurance
=============================
10.1 Indemnification of Agents. To the fullest extent permitted by law,
-------------------------
the Company shall be permitted to indemnify any Person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit, or proceeding by reason of the fact that such Person is or was a Member,
Manager, officer, employee, attorney, accountant, or other agent of the Company
or that, being or having been such a Manager, Member, officer, employee,
attorney, accountant, or other agent of the Company, such Person is or was
serving at the request of the Company as a manager, director, officer, employee,
attorney, accountant, or other agent of another limited liability company,
corporation, partnership, joint venture, trust, or other enterprise (any such
Person being referred to hereinafter as an "Indemnified Person") against all
-------------------
claims, damages, liabilities, losses, expenses (including reasonable attorneys=
fees and expenses and other costs and expenses incurred in defending such
action, suit, or proceeding), judgments, fines, and amounts paid in settlement
actually incurred by such Indemnified Person in connection with such action,
suit, or proceeding, except to the extent that such claims, damages,
liabilities, losses, expenses, judgments, fines, or amounts paid in settlement
arise by virtue of such Indemnified Person's fraud, deceit, gross negligence, or
willful misconduct. The Manager is authorized, on behalf of the Company, to
enter into indemnity agreements from time to time with any Person entitled to be
indemnified by the Company hereunder (i) consistent with the foregoing (or
lesser) terms, or (ii) on such other terms as Members holding 100% of the Voting
Interests may approve.
10.2 Expenses. Expenses (including attorneys' fees and expenses)
-------
incurred by an Indemnified Person in defending a civil, criminal,
administrative, or investigative action, suit, or proceeding may be paid by the
Company in advance of the final disposition of such action, suit, or proceeding
upon receipt of an undertaking, in form and substance acceptable to the Manager,
by or on behalf of the Indemnified Person to repay such amount if it shall
ultimately be determined that such Indemnified Person is not entitled to be
indemnified by the Company under this Article 10 or under any other contract or
agreement between such Indemnified Person and the Company. Such expenses
(including attorneys' fees and expenses) incurred by employees or agents of the
Company may be so paid upon the receipt of the undertaking previously referred
to and such other terms and conditions, if any, as the Manager deems
appropriate.
10.3 Not Exclusive. The indemnification and advancement of expenses
-------------
provided by this Article 10 shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any by-law, agreement, vote of Members or otherwise, both as to action in
such Indemnified Person's official capacity and as to action in another capacity
while holding such office, and shall continue as to a Person who has ceased to
be a Member, Manager, officer, employee, attorney, accountant, or other agent
and shall inure to the benefit of the successors, assigns, heirs, executors and
administrators of such a Person.
10.4 Insurance. The Company shall have the power to purchase and
---------
maintain insurance on behalf of any Person who is or was an Indemnified Person
against any liability asserted against such Person and incurred by such Person
in any such capacity, or arising out of such Person's status as an Indemnified
Person, whether or not the Company would have the power to indemnify such Person
against such liability under the provisions of Section 10.1 or under applicable
law.
31
<PAGE>
ARTICLE 11
==========
Investment Representations
==========================
Each Member represents and warrants to, and agrees with, the other
Members and the Company as follows:
11.1 Pre-existing Relationship or Experience. (a) Such Member has a
-----------------------------------------
preexisting personal or business relationship with the Company or one or more of
the other Members; or (b) by reason of such Member's business or financial
experience, or by reason of the business or financial experience of such
Member's financial advisor who is unaffiliated with and who is not compensated,
directly or indirectly, by the Company or any affiliate or selling agent of the
Company, such Member is capable of evaluating the risks and merits of the
investment to be made by such Person hereunder and of protecting such Person's
interests in connection with such investment.
11.2 No Advertising. Such Member has not seen, received, been presented
--------------
with, or been solicited by any leaflet, public promotional meeting, newspaper or
magazine article or advertisement, radio or television advertisement, or any
other form of advertising or general solicitation with respect to the sale of
the Membership Interests.
11.3 Investment Intent. Such Member is acquiring a Membership Interest
-----------------
for investment purposes and for such Person's own account only and not with a
view to, or for sale in connection with, any distribution of all or any part of
the Membership Interests, and no other Person will have any direct or indirect
beneficial interest in or right to the Membership Interests purchased by such
Person except as permitted hereby.
11.4 Purpose of Entity. If such Member is a corporation, partnership,
-----------------
limited liability company, trust, or other entity, then (a) such Member was not
organized for the specific purpose of acquiring any Membership Interests, and
(b) such Member may legally acquire, invest in and own Membership Interests, and
(c) such Member may legally act as Manager of the Company.
11.5 Economic Risk. Such Member is financially able to bear the
--------------
economic risk of the investment being made by such Member, including the total
loss of such Person's Membership Interests.
11.6 No Registration of Membership Interests. Such Member acknowledges
---------------------------------------
that: (a) the sale of the Membership Interests referred to herein has not been
registered under the Securities Act or qualified under the Delaware General
Corporation Law, as amended, or any other applicable securities or blue sky laws
of any state or jurisdiction in reliance, in part, on such Member's
representations, warranties, and agreements contained herein; and (b) the
Membership Interests may not be resold unless the resale is registered under the
Securities Act and qualified under all applicable securities or blue sky laws
(or is exempt from these registration and qualification requirements).
11.7 Membership Interests are Restricted Securities. Such Member
--------------------------------------------------
understands that the Membership Interests are or may be restricted securities
under the Securities Act in that the Membership Interests will be acquired from
the Company in a transaction not involving a public offering, and that the
Membership Interests may be resold without registration under the Securities Act
only in certain limited circumstances and that otherwise the Membership
Interests must be held indefinitely. In this connection,
32
<PAGE>
such Member understands the resale limitations imposed by the Securities Act and
is familiar with SEC Rule 144, as presently in effect, and the conditions which
must be met in order for that Rule to be available for resale of restricted
securities, including the requirement that the securities must be held for at
least two (2) years after purchase thereof from the Company prior to resale
(three (3) years in the absence of publicly available information about the
Company) and the condition that there be available to the public current
information about the Company under certain circumstances. Such Member
understands that the Company has not made such information available to the
public and has no present plans to do so.
11.8 No Obligation to Register. Such Member represents, warrants, and
--------------------------
agrees that the Company and the other Members are under no obligation to
register or qualify the Membership Interests under the Securities Act or under
any state securities or blue sky laws, or to assist such Member in complying
with any exemption from registration and qualification.
11.9 No Disposition in Violation of Law. Without limiting the
---------------------------------------
representations set forth above or the other provisions of this Agreement, such
Member shall not make any disposition of all or any part of such Person's
Membership Interests which would result in the violation by such Person or by
the Company of the Securities Act, the Act, Delaware General Corporation Law, as
amended, or any other applicable securities or blue sky laws. Without limiting
the generality of the foregoing, such Member agrees not to make any disposition
of all or any part of the Membership Interests acquired by such Person unless
and until: (a) there is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement and any applicable requirements
of state securities laws; or (b) such Person has notified the Company of the
proposed disposition and has furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and, if reasonably
requested by the other Members, such Person has furnished the Company with a
written opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of any securities under the Securities
Act or the consent of or a permit from appropriate authorities under any
applicable state securities law.
In the case of any disposition of all or any part of such Member's
Membership Interests pursuant to SEC Rule 144, such Person shall, among other
things, promptly forward to the Company a copy of any Form 144 filed with the
SEC with respect to such disposition and a letter from the executing broker
satisfactory to the Company evidencing compliance with SEC Rule 144. If SEC Rule
144 is amended or if the SEC's interpretations thereof in effect at the time of
any such disposition have changed from its present interpretations thereof, such
Member shall provide the Company with such additional documents as the other
Member or the Company may reasonably require.
11.10 Legends. Such Member understands that the certificates (if any)
-------
evidencing the Membership Interests may bear one or all of the following legends
or other legends as may be appropriate:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER THE SECURITIES OR BLUE
SKY LAWS OF ANY STATE OR JURISDICTION, INCLUDING THE STATE OF DELAWARE, AND HAVE
BEEN TAKEN BY THE ISSUEE FOR SUCH PERSON'S OR ENTITY'S OWN ACCOUNT AND NOT WITH
A VIEW TO THEIR DISTRIBUTION. NEITHER SUCH SECURITIES
33
<PAGE>
NOR ANY INTEREST THEREIN MAY BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF UNLESS THEY ARE REGISTERED UNDER SUCH ACT AND QUALIFIED
UNDER ALL APPLICABLE SECURITIES AND BLUE SKY LAWS, OR IN THE OPINION OF COUNSEL
TO THE COMPANY, EXEMPTIONS FROM REGISTRATION AND QUALIFICATION ARE AVAILABLE.
THESE SECURITIES ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS DESCRIBED IN THE
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT DATED AS OF JANUARY 1,
1998, AS AMENDED FROM TIME TO TIME."
(b) Any legend required by applicable state securities or blue
sky laws.
11.11 Investment Risk. Such Member acknowledges that such Member's
----------------
investment as provided for herein is a speculative investment that involves a
substantial degree of risk of loss by such Member, including such Person's
entire investment in the Company, that such Member understands and takes full
cognizance of the risk factors related to such Person's investment outlined
herein, and that the Company is newly organized and has no financial or
operating history.
11.12 Investment Experience. Unless otherwise disclosed, such Member is
---------------------
an experienced investor in unregistered and restricted securities of
corporations, limited liability companies, limited partnerships, or closely held
companies.
11.13 Restrictions on Transferability. Such Member acknowledges that
--------------------------------
there are substantial restrictions on the transferability of the Membership
Interests pursuant to this Agreement, that there is no public market for the
Membership Interests and none is expected to develop, and that, accordingly, it
may not be possible for such Member to liquidate such Member's investment in the
Company.
11.14 Information Reviewed. Such Member has received and reviewed all
---------------------
information such Person considers necessary or appropriate for deciding whether
to make the investment contemplated hereby, has had an opportunity to ask
questions and receive answers from the Company and the other Members regarding
the terms and conditions of the investments contemplated hereby (including the
purchase of the Membership Interests) and regarding the business, financial
affairs, and other aspects of the Company, and has had the opportunity to obtain
all information (to the extent the Company possesses or can acquire such
information without unreasonable effort or expense) which such Person deems
necessary to evaluate the investment and to verify the accuracy of information
otherwise provided to such Person.
11.15 No Representations by the Company. Neither any Manager, nor any
---------------------------------
agent or employee of the Company or of any Manager, nor any other Person has at
any time expressly or implicitly represented, guaranteed, or warranted to such
Member that such Member may freely transfer any of the Membership Interests
acquired by such Member pursuant to the terms hereof, that past performance or
experience on the part of any such Person or their Affiliates or any other
Person in any way indicates the predictable results of the ownership of the
Membership Interests or of the overall Company business, that any cash
distributions from Company operations or otherwise will be made to the
Membership Interests by any specific date or will be made at all, or that any
specific tax benefits will accrue as a result of an investment in the Company.
34
<PAGE>
11.16 Consultation with Attorney. Such Member has been advised to
----------------------------
consult with such Member's own attorney regarding all legal matters concerning
an investment in the Company and the tax consequences of investing and
participating in the Company and has either done so or voluntarily and knowingly
elected not to seek such advice.
11.17 Tax Consequences; Consultation with Tax Advisors. Such Member
---------------------------------------------------
acknowledges that the tax consequences to such Member of the transactions
contemplated hereby will depend on such Member's particular circumstances, and
neither the Company, nor the Manager, nor the other Members, nor the partners,
shareholders, members, managers, agents, officers, directors, employees,
Affiliates, attorneys, accountants or consultants of any of them will be
responsible or liable for the tax consequences to such Member of its investment
or participation in the Company unless otherwise expressly agreed. Such Member
has and will look solely to, and rely upon, such Member's own tax advisors with
respect to the tax consequences of its investment and participation in the
Company.
11.18 Indemnity. Such Member shall indemnify and hold harmless the
---------
Company, each and every Manager, each and every other Member, and any officers,
directors, shareholders, managers, members, employees, partners, agents,
attorneys, accountants, registered representatives, and control persons of any
such entity who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, by reason of or arising from any
misrepresentation or misstatement of facts or omission to represent or state
facts made by such Member, including the information in this Agreement, against
losses, liabilities, and expenses of the Company, each and every Manager, each
and every other Member, and any officers, directors, shareholders, managers,
members, employees, partners, attorneys, accountants, agents, registered
representatives, and control persons of any such Person (including attorneys'
fees, judgments, fines, and amounts paid in settlement, payable as incurred)
incurred by such Person in connection with such action, suit, proceeding, or the
like.
35
<PAGE>
ARTICLE 12
==========
General Provisions
==================
12.1 Further Assurances. Each party to this Agreement shall perform any
------------------
further acts and execute and deliver any additional documents that may be
reasonably necessary to carry out the provisions of this Agreement.
12.2 Time. Time is of the essence in the performance of all provisions
----
under this Agreement.
12.3 Remedies Cumulative. The remedies under this Agreement are
--------------------
cumulative and shall not exclude any other remedies to which any person may be
lawfully entitled.
12.4 Estoppel Certificate. Each Member shall, within ten (10) days
---------------------
after written request by any Manager or other Member, deliver to the requesting
Person a certificate stating, to the Member's knowledge, that: (a) this
Agreement is in full force and effect; (b) this Agreement has not been modified
except by any instrument or instruments identified in the certificate; and (c)
there is no default hereunder by the requesting Person or, if there is a
default, the nature or extent thereof.
12.5 Specific Performance. The parties recognize that irreparable
---------------------
injury will result from a breach of any provision of this Agreement and that
money damages will be inadequate to fully remedy the injury. Accordingly, in the
event of a breach or threatened breach of one or more of the provisions of this
Agreement, any party who may be injured (in addition to any other remedies which
may be available to that party) shall be entitled to one or more preliminary or
permanent orders: (a) restraining and enjoining any act which would constitute a
breach; or (b) compelling the performance of any obligation which, if not
performed, would constitute a breach.
12.6 Authority of Persons Signing Agreement. Each Member represents and
--------------------------------------
warrants to the other Members that it is duly authorized to enter into this
Agreement and that the Agreement is valid, binding and enforceable as to it. If
a Member is not a natural person, neither the Company nor any Member will: (a)
be required to determine the authority of the individual signing this Agreement
to make any commitment or undertaking on behalf of such Person or to determine
any fact or circumstance bearing upon the existence of the authority of such
individual; or (b) be responsible for the application or distribution of
proceeds paid or credited to individuals signing this Agreement on behalf of
such Person.
12.7 Parties in Interest. Except as expressly provided in the Act,
--------------------
nothing in this Agreement shall confer any rights or remedies under or by reason
of this Agreement on any Persons other than the Members and their respective
successors and assigns nor shall anything in this Agreement relieve or discharge
the obligation or liability of any other Person to any party to this Agreement,
nor shall any provision give any other Person any right of subrogation or action
over or against any party to this Agreement.
12.8 Notices. All notices required to be given to any party hereunder
-------
shall be deemed given upon the first to occur of: (a) either (i) five days after
deposit thereof in the United States mail, certified mail, First Class postage
prepaid or (ii) forty-eight (48) hours after delivery to an aviation express
delivery service; and transmittal by electronic means (with a copy sent by
regular United States mail) to a receiver under the control of the party to whom
notice is being given; or (b) actual receipt by the party
36
<PAGE>
to whom notice is being given, or an employee or agent of thereof. For purposes
hereof, the addresses of the parties are as set forth on Schedule I hereof or as
-----------
may otherwise be specified from time to time in a writing sent to the other
parties in accordance with the provisions of this Section.
12.9 Amendments and Waivers. The provisions of this Agreement may be
------------------------
waived, altered, amended, or repealed in whole or in part only upon the written
consent of the Members as provided in Section 4.9. Any waiver of any of the
terms hereof shall only be valid and effective in the instance given and shall
not be valid or effective in any other instance. No waiver of any of the terms
hereof shall require or imply that a like waiver will be made in any other
instance(s). Copies of all proposed waivers or amendments to this Agreement or
the Certificate shall be delivered to all Members 3 days prior to their becoming
effective.
12.10 Severability of Provisions. If any one or more of the provisions
--------------------------
contained in this Agreement is held to be invalid, illegal, or unenforceable in
any respect, then such provision(s) shall be ineffective only to the extent of
such prohibition or invalidity, and the validity, legality, and enforceability
of the remaining provisions contained herein shall not in any way be affected or
impaired thereby.
12.11 Successors and Assigns. Subject to the provisions hereof relating
----------------------
to transferability, this Agreement shall be binding on and shall inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
successors, and assigns.
12.12 Counterparts; Amendment and Restatement; Effectiveness. This
---------------------------------------------------------
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if all signatures were upon the same
instrument. Delivery of an original executed counterpart of the signature page
to this Agreement by telefacsimile shall be effective as manual delivery of an
original executed original counterpart of this Agreement, and any party
delivering such an original executed counterpart of the signature page to this
Agreement by telefacsimile to any other party shall thereafter also promptly
deliver an original executed counterpart of this Agreement to such other party
by mail or personal delivery, provided that the failure to so deliver such
--------
original executed counterpart shall not affect the validity, enforceability, or
binding effect of this Agreement. This Agreement amends and restates the
Original Agreement in its entirety. This Agreement shall become effective as of
the date first written above upon the execution and delivery of a counterpart
hereof by each of Point West, Isard, and McDermitt.
12.13 Legal Counsel and Representation; Accountants. The parties hereto
---------------------------------------------
have agreed to the preparation of this Agreement by Giancarlo & Gnazzo, A
Professional Corporation, counsel for Point West, not withstanding any conflict
of interest(s) that may exist between or among any of the other parties hereto
or the Company. Each Member who is a party hereto and not represented by
Giancarlo & Gnazzo, A Professional Corporation further acknowledges that such
Person has been advised to seek advice of such Person's own independent counsel
regarding the transactions contemplated herein and has either done so or
voluntarily and knowingly elected not to seek such advice. Each such Person
further acknowledges that this Agreement and any other agreements, documents,
and instruments referenced herein may have tax consequences for such Person and
that such Person has been advised to seek advice of independent accountants or
other tax advisors as to such matters and has either done so or voluntarily and
knowingly elected not to seek such advice.
12.14 Ambiguities. The parties have carefully read all of the terms of
-----------
this Agreement and all
37
<PAGE>
of the agreements attached hereto and have had an opportunity to ask questions
regarding the language used therein and to suggest changes thereto. Therefore,
the parties waive any rule of construction that ambiguities are to be construed
more harshly against any party as drafter.
12.15 Fees, Costs, and Expenses; Recovery. The prevailing party in any
------------------------------------
action, proceeding or arbitration arising out of or related to this Agreement or
any agreement, document, or instrument referred to herein, shall be entitled to
reasonable fees, costs, and expenses (including reasonable attorneys' fees,
costs, and expenses) incurred by or on behalf of such Person in connection with
such action or proceeding, as determined by the court or arbitrator(s).
12.16 Complete Agreement. This Agreement and the Certificate constitute
------------------
the complete and exclusive statement of agreement among the Members with respect
to the subject matter herein and therein and replace and supersede all prior
written and oral agreements, representations, or statements by and among the
Members or any of them. No representation, statement, condition or warranty not
contained in this Agreement or the Certificate will be binding on the Members or
have any force or effect whatsoever. To the extent that any provision of the
Certificate conflicts with any provision of this Agreement, the Certificate
shall control.
12.17 Arbitration. ANY CONTROVERSY OR CLAIM BETWEEN THE PARTIES HERETO
-----------
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREUNDER, INCLUDING, WITHOUT LIMITATION, THE CONSTRUCTION OR APPLICATION OF ANY
OF THE TERMS, COVENANTS, OR CONDITIONS OF THIS AGREEMENT, SHALL, ON WRITTEN
REQUEST OF ONE PARTY SERVED UPON THE OTHER, BE SUBMITTED TO FINAL AND BINDING
ARBITRATION GOVERNED BY THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN
ARBITRATION ASSOCIATION AND, TO THE EXTENT NOT INCONSISTENT, THE CALIFORNIA CODE
OF CIVIL PROCEDURE. THE ARBITRATOR SHALL MAKE THE DETERMINATION AS TO WHETHER
THE CONTROVERSY IS SUBJECT TO THIS ARBITRATION PROVISION; IN ADDITION, THE
ARBITRATOR SHALL HAVE THE POWER TO ISSUE INJUNCTIVE RELIEF. THE ARBITRATION
SHALL TAKE PLACE IN THE CITY OF SAN FRANCISCO, CALIFORNIA AND SHALL BE CONDUCTED
BY ONE (1) ARBITRATOR. EACH OF THE PARTIES SPECIFICALLY ACKNOWLEDGES THAT THE
OTHER PARTY IN SUCH ARBITRATION SHALL HAVE THE RIGHT TO DISCOVERY. ARBITRATION
SHALL BE THE EXCLUSIVE REMEDY OF EACH OF THE PARTIES HEREUNDER AND ANY AWARD OF
THE ARBITRATOR(S) SHALL BE FINAL AND BINDING UPON THE PARTIES HERETO. JUDGMENT
UPON THE ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION.
12.18 Governing Law. EXCEPT AS SPECIFICALLY STATED IN SECTION 12.17,
--------------
THIS AGREEMENT AND ALL TRANSACTIONS CONTEMPLATED HEREUNDER OR EVIDENCED HEREBY
SHALL BE GOVERNED BY, CONSTRUED UNDER, AND ENFORCED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF DELAWARE.
38
<PAGE>
IN WITNESS WHEREOF, all of the Members of the Company have executed
this Agreement as of the date first written above.
POINT WEST CAPITAL CORPORATION
By: /s/ Alan B. Perper
---------------------------------
Title: President
---------------------------------
/s/ Michael W. McDermitt
----------------------------------
MICHAEL W. McDERMITT, an individual
/s/ Daniel M. Isard
----------------------------------
DANIEL M. ISARD, an individual
<PAGE>
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
---------------------------------------------
OF
--
ALLEGIANCE CAPITAL, LLC
-----------------------
SCHEDULE I
==========
Member Information Member's Percentage Interest
================== =============================
Point West Capital Corporation 65%
c/o Dignity Partners, Inc.
1700 Montgomery Street, Suite 250
San Francisco, CA 94111
Attn: Alan Perper
TIN: 94-3165263
Telephone Number: (415) 394-9467
Facsimile Number: (415) 394-9471
Michael W. McDermitt 15%
c/o Allegiance Capital, LLC
1700 Montgomery Street, Suite 250
San Francisco, CA 94111
SSN: ###-##-####
Telephone Number: (415) 394-5180
Facsimile Number: (415) 394-9471
Daniel M. Isard 20%
c/o Foresight Analysts, Inc.
5353 N. 16th Street, Suite 370
Phoenix, AZ 85016
SSN: ###-##-####
Telephone Number: (602) 274-6464
Facsimile Number: (602) 277-6722
with a copy to:
Renee Gerstman, Esq.
Gerstman & Associates, PC
5353 N. 16th Street, Suite 320
Phoenix, AZ 85016
Facsimile Number: 602-265-9415
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-q FOR THE QUARTERLY PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANICAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> Dec-31-1998 Dec-31-1997
<PERIOD-START> Jan-01-1998 Jan-01-1997
<PERIOD-END> Sep-30-1998 Sep-30-1997
<CASH> 8,389,169 18,247,437
<SECURITIES> 13,487,150 5,750,508
<RECEIVABLES> 7,093,698 146,000
<ALLOWANCES> 0 0
<INVENTORY> 34,060,167 <F1> 37,586,356 <F1>
<CURRENT-ASSETS> 645,532 724,854
<PP&E> 29,833 0
<DEPRECIATION> (2,784) 0
<TOTAL-ASSETS> 63,702,765 62,455,155
<CURRENT-LIABILITIES> 552,458 4,426,647
<BONDS> 41,528,914 <F2> 38,804,107 <F2>
0 0
0 0
<COMMON> 42,918 42,918
<OTHER-SE> 21,578,475 19,181,483
<TOTAL-LIABILITY-AND-EQUITY> 63,702,765 62,455,155
<SALES> 430,819 377,450
<TOTAL-REVENUES> 1,988,416 3,489,545
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 3,639,897 2,386,362
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,697,587 2,721,030
<INCOME-PRETAX> (4,349,068) (1,617,847)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,349,068) (1,617,847)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 2,300,037 2,827,594
<CHANGES> 0 0
<NET-INCOME> (2,049,031) 1,209,747
<EPS-PRIMARY> (0.63) 0.33
<EPS-DILUTED> (0.63) 0.33
<FN>
<F1> INCLUDES ASSETS HELD FOR SALE AND PURCHASED LIFE INSURANCE POLICIES.
<F2> REPRESENTS LONG TERM BORROWINGS OF THE COMPANY.
</FN>
</TABLE>
Exhibit 99.1
SUBSIDIARIES
Dignity Partners Funding Corp. I, a Delaware Corporation
Fourteen Hill Capital, L.P., a Delaware Limited Partnership
Fourteen Hill Management, LLC, a Delaware Limited Liability Company
Allegiance Capital, LLC, a Delaware Limited Liability Company
Allegiance Funding Corp. I, a Delaware Corporation
November 13, 1998
FOURTEEN HILL CAPITAL, L.P.
---------------------------
ANNOUNCES THIRD QUARTER FINANCINGS
------------------------------------
SAN FRANCISCO-(November 13, 1998) Fourteen Hill Capital, L.P., a majority owned
affiliate of Point West Capital Corporation (which trades on NASDAQ under the
symbol PWCC) today announced that, during the third quarter of 1998, it closed
two financings in the aggregate amount of $1,250,000.
Fourteen Hill purchased an additional $1,000,000 of convertible preferred stock
of FlashNet, Inc. FlashNet (www.flash.net) is a national Internet Service
Provider headquartered in Ft. Worth, Texas. FlashNet is one of the largest
privately held ISPs in the country, providing Internet access to over 200,000
individual and business customers throughout the United States.
Fourteen Hill purchased a $250,000 note from Homeseekers.com, Inc.
HomeSeekers.com (www.homeseekers.com) is a leading provider of on-line
residential real estate listing information for use by home buyers, real estate
agents, mortgage and title insurance companies and others. The Company's on-line
system currently hosts more than 660,000 residential real estate listings.
Homeseekers.com trades on the OTC bulletin board under the symbol HMSK.
<PAGE>
Fourteen Hill is a Small Business Investment Company licensed by the Small
Business Administration. Fourteen Hill provides capital to small businesses
(generally businesses whose tangible net worth does not exceed $18 million and
whose average net income during the preceding two years did not exceed $6
million) whose primary businesses are located in the United States.
Commenting on the financings, Chris Rodskog, Senior Vice President of Fourteen
Hill Capital, said, "We intend to continue to seek out investments in growing
technology companies, and we believe that recent turbulence in public equity
markets will provide us with more attractive investment opportunities in this
area."
Additional information about Fourteen Hill Capital is available on the company's
Web site, http://www.fourteenhill.com, or by calling 415-394-9467.
(KEYWORD CALIFORNIA AND INDUSTRY KEYWORD: Venture Capital, Internet).
--------------- --------
CONTACTS: FOURTEEN HILL CAPITAL, SAN FRANCISCO.
CHRIS RODSKOG, 415/394-9467
[email protected]
