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As filed with the Securities and Exchange Commission on January 15, 1997
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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PLYMOUTH COMMERCIAL MORTGAGE FUND
(Exact name of registrant as specified in its charter)
DELAWARE 74-6439983
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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C/O GREYSTONE ADVISERS, INC.
13333 BLANCO ROAD, SUITE 314
SAN ANTONIO, TEXAS 78216-7756
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(210) 493-3971
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Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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(NONE) (NOT APPLICABLE)
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON SHARES OF BENEFICIAL INTEREST, NO PAR VALUE
(Title of class)
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Pursuant to section 12(g)(1)(B) of the Securities Exchange Act of
1934, as amended (the "1934 Act"), the registration statement on Form 10 (the
"Registration Statement") that this filing amends became effective by the
passage of time on November 26, 1996 (the "Effective Date"), which is sixty
(60) days after its initial filing with the U.S. Securities and Exchange
Commission (the "SEC") on September 27, 1996. Unless otherwise specified, the
information herein is as of the Effective Date. The filing of this amendment
shall not under any circumstances create the implication that there has been no
change in the specific information included herein responding to the items of
Form 10 or in the general affairs of Plymouth Commercial Mortgage Fund (the
"Company") since the Effective Date. After the Effective Date, the reader may
wish to refer to the periodic reports on Forms 10-K or 10-Q and any current
reports on Form 8-K filed with the SEC by the Company, as well any Schedules
13D or 13G or other documents filed with the SEC by other persons with respect
to the Company.
ITEM 1. BUSINESS.
THE COMPANY
ORGANIZATION
Plymouth Commercial Mortgage Fund (the "Company" or "Plymouth") was
organized as a business trust under the laws of the State of Delaware on August
23, 1996. The Company is a closed-end management investment company.
Simultaneously with its initial filing with the U.S. Securities and Exchange
Commission (the "SEC") of this registration statement for its common shares of
beneficial interest, no par value ("Shares"), pursuant to section 12(g) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), on September 27,
1996, the Company also filed with the SEC a "Notification of Election to Be
Subject to Sections 55 through 65 of the Investment Company Act of 1940" on
Form N-54A pursuant to section 54(a) of the Investment Company Act of 1940, as
amended (the "1940 Act"), to be regulated as a business development company (a
"BDC") under the 1940 Act. The Company may not change the nature of its
business so as to cease to be, or withdraw its election as, a BDC unless
authorized by "the vote of a majority of its outstanding voting securities" as
defined in the 1940 Act.
Plymouth's operations began on September 27, 1996 with the acquisition
of all of the interests in SWF 1995 Limited Partnership, a Texas limited
partnership ("SWF-95"), through an offer made to SWF-95's investors to exchange
their equity and subordinated debt interests for Shares of Plymouth (the
"Exchange Offer"). Upon consummation of the acquisition transactions in
connection with the Exchange Offer on September 27, 1996, the aggregate value
of Plymouth's assets was $3,639,660. A total of 221,627 Shares had been issued
and were outstanding as of that date. SWF-95 was subsequently dissolved, and
its assets are now held directly either by the Company or by Plymouth REO,
Inc., a Delaware corporation ("REO Subsidiary"), which is a wholly-owned
subsidiary of the Company. On October 22, 1996, the Company commenced a
private cash offering to raise a minimum of $7.0 million and a maximum of $9.0
million in new equity capital (the "Subsequent Offering").
For working capital purposes, the Company arranged to borrow up to
$250,000 from SouthWest Federated Holding Company, Inc., a Delaware corporation
("SouthWest Holding"), which is the owner of 100% of the outstanding common
stock of SouthWest Federated, Inc., a Texas corporation ("SWFI"), the sole
general partner of SWF-95. As an incentive to make the loan, Plymouth also
issued to SouthWest Holding transferable warrants to purchase up to 200,000
Shares at $10 per Share, which expire ten years from the date of issuance, and
transferable rights to subscribe to 50,000 Shares at the greater of net asset
value or $10 per Share, which expire eight months from the date of issuance.
Unlike the rights to subscribe, which are exercisable immediately, the warrants
become exercisable upon the
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occurrence of certain conditions. Among these are a condition that the Company
raise a minimum of $10 million in new equity at a price of at least $15 per
Share and $20 per Share (in order to be able to exercise warrants for 150,000
Shares and 50,000 Shares, respectively) within three years after the
consummation of the first sale of any class of newly issued shares of
beneficial interest in Plymouth for cash consideration of at least $8.0
million.
BUSINESS
The Company's investment objective is to achieve a high level of
current income. It seeks to achieve this objective by acquiring, restructuring
and collecting impaired loans primarily made to small businesses and secured by
commercial real estate. After an initial investment period which is expected
to last one year but in any event may not last more than 2 1/2 years, at least
65% of the value of the Company's total assets will be invested in commercial
mortgages under normal circumstances. The Company's investments in loans are
directed by Greystone Advisers, Inc., a Delaware corporation (the "Adviser"),
the Company's investment adviser.
Generally, a loan is considered impaired when based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement unless the borrower receives material assistance. While several
types of impaired loans are available for purchase, Plymouth's portfolio will
be concentrated on impaired loans secured by commercial real estate. Because
these loans are secured, the cost to purchase such loans typically is higher
than for unsecured loans, but the opportunity to recover the cost and a profit
is usually more predictable. For both financial and regulatory reasons,
commercial banks, through the FDIC or directly, make these loans available in
packages which typically cost more than $1 million each. Quite often this
market for impaired loans offers creditors the only alternative to foreclosure.
Plymouth will purchase packages for an amount less than outstanding principal
and interest, and the Company intends to generate income by recovering more
than its cost in such packages through several resolution strategies including
debt forgiveness, revised terms and foreclosure (collectively, "resolve").
Typically an entire loan package can be resolved within 18 months of purchase.
Once a loan package is purchased, Plymouth contacts the borrowers with
the objective of confirming which manner of resolution is most appropriate. If
a borrower is able to repay or refinance the loan, then a price will be
negotiated that represents a discount to the contractual outstanding loan
balance and a premium to Plymouth's cost. Alternatively, should the borrower
not be able to fully repay a reduced amount, Plymouth's first objective will be
to restructure the loan to provide for monthly payments of principal and
interest. In the event a loan is restructured, it is the Company's intention
that the loan be sold to a third party after the borrower has established a
history of regular monthly payments. In the event a repayment or restructuring
of the loan is not possible, the collateral ordinarily will be foreclosed upon.
MANAGERIAL ASSISTANCE
The 1940 Act requires a BDC to be operated for the purpose of making
investments in certain prescribed types of securities and generally to "make
available significant managerial assistance" with respect to the issuers of
such securities. In this regard, the 1940 Act defines "making available
significant managerial assistance" as "any arrangement whereby a [BDC], through
its directors, officers, employees, or general partners, offers to provide,
and, if accepted, does so provide, significant guidance and counsel concerning
the management, operations, or business objectives and policies of a portfolio
company."
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Upon acquiring each newly purchased note, Plymouth will contact the
management of the small business borrower offering to assist the borrower first
by restructuring the loan and then by aiding the borrower to find a third-party
lender from which refinancing could be obtained.
SOURCES FOR THE ACQUISITION OF LOANS
The impaired loans in which the Company invests typically are offered,
in packages typically consisting of multiple individual loans, through auctions
that attract buyers nationwide. Sellers include entities such as the Federal
Deposit Insurance Corporation (the "FDIC"), banks, savings and loans, insurance
companies and other institutions.
Through previous business activity, the principals of the Adviser have
developed long-standing relationships with a large number of sellers of
impaired loans and intermediaries in various states who may or may not have a
contractual relationship with the Adviser. Any loan offered for sale to the
Company is evaluated by the Adviser using guidelines established by the
Company's board of trustees (the "Board of Trustees"). The loan packages are
typically offered at sealed-bid auctions. If and when a loan offered by an
intermediary is purchased, the intermediary is typically compensated by the
seller of the loan.
TEMPORARY INVESTMENTS
Pursuant to the Exchange Offer, the Company received loans
representing assets already invested according to its investment objective.
The proceeds of the Subsequent Offering are expected to be similarly invested
within one year, although the Company may take as long as 2 1/2 years to do so.
After this initial start-up phase, the Company intends to use its best to
efforts to hold the majority of its assets in the form of impaired loans at all
times.
To the extent the Company has uninvested cash either from an equity
offering or from the resolution of its impaired loans, it anticipates investing
such assets in U.S. government- or agency-issued or guaranteed securities,
typically backed by the full faith and credit of the United States, or other
high-grade short-term debt securities. The Company follows policies for
investment of uninvested cash that emphasize low risk and short-term
maturities.
BORROWING
For the purpose of making investments and to take advantage of the
difference between favorable interest rates available from lenders and the
expected rates of return from purchased loans, the Company intends to borrow
from Comerica Bank-Texas, a state banking association ("Comerica"), or other
financial institutions, in amounts not to exceed the maximum amount permitted
by the 1940 Act for a BDC (the "Credit Facility"). See "BDC Regulation."
The Credit Facility is secured by a perfected first security interest
in substantially all of the Company's assets. The interest rate is based upon
average borrowings under this facility. The interest rate on the Credit
Facility is prime plus 1.5% based on average outstanding borrowings of up to
$2.5 million for the previous quarter, prime plus 1.0% based upon average
outstandings of between $2.5 million and $5.0 million for the previous quarter,
and prime plus 1/2% based upon average outstandings of more than $5.0 million
for the previous quarter. Comerica's prime rate was 8.25% on November 26,
1996. Terms of the Credit Facility include periodic third-party appraisal of
the assets, a lock box for
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receipt of payments, custody by Comerica of primary collateral, certain other
fee payments, and loan covenants that may be difficult to maintain at all
times.
The Credit Facility allows the Company to borrow up to a maximum of
$2.5 million prior to completion of the Subsequent Offering. The outstanding
balance owed by the Company to Comerica on November 26, 1996 was approximately
$883,950. Upon completion of the Subsequent Offering, the Company may increase
its borrowings to $10.0 million. The Credit Facility expires on September 27,
1998. The Company may borrow up to 60% of the net cost of a note with base
curtailments according to the amount of time that Plymouth has held the loan,
as shown in the schedule below:
<TABLE>
<CAPTION>
Age of Note Receivable Maximum Advance
---------------------- ---------------
<S> <C>
0 to 6 months . . . . . . . . . . . . . . . . . 60% of net cost
6 to 9 months . . . . . . . . . . . . . . . . . 48% of net cost
9 to 12 months . . . . . . . . . . . . . . . . 45% of net cost
12 to 15 months . . . . . . . . . . . . . . . . 42% of net cost
15 to 18 months . . . . . . . . . . . . . . . . 32% of net cost
18 to 21 months . . . . . . . . . . . . . . . . 24% of net cost
21 to 24 months . . . . . . . . . . . . . . . . 18% of net cost
after 24 months . . . . . . . . . . . . . . . . . 0% of net cost
</TABLE>
The availability of borrowing under the Credit Facility is reduced as
the loan ages. Accordingly, if the Company is not successful in collecting a
loan within 24 months of purchase, the Credit Facility will not allow the
Company to borrow against that note. If the Company is not able to collect a
significant portion of notes purchased within 24 months, the Company may not be
able to reduce the Credit Facility to a level necessary to be in compliance
with this provision of the Credit Facility's loan agreement.
The Company cannot purchase a loan or loans from any one borrower
where the cost exceeds $1.5 million, without prior approval from Comerica.
Additionally, non-mortgage secured notes and unsecured notes cannot exceed 10%
of the net cost of the Company's portfolio at any given time. The Company will
be required to pay a 0.75% commitment fee based on the average unused portion
of the facility, paid quarterly in arrears. All advances under the Credit
Facility are subject to Comerica's discretion and Comerica's continued
satisfaction with the Company's business and financial condition and operations
at all times during the duration of the facility, and no material adverse
change in the business, operations or condition (financial or otherwise) of the
Company having occurred. The terms of the Credit Facility include numerous
affirmative covenants and negative covenants that are standard for loans of
this nature but which may be difficult to comply with at all times.
INVESTMENT ADVISER
Subject to the terms of an investment advisory agreement dated
September 22, 1996 (the "Agreement"), and the supervision and control of its
Board of Trustees, the investments of the Company will be directed by Greystone
Advisers, Inc. (the "Adviser"). The Adviser currently has seven professionals
and it expects to hire additional professionals during the Company's first
twelve months of operation. The Adviser is registered with the SEC under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"), and is
located at 13333 Blanco Road, Suite 314, San Antonio, Texas 78216-7756. From
August 27, 1996 (the date of filing its certificate of incorporation with the
State of Delaware), until October 28, 1996 (the date of filing a restated
certificate of incorporation with the State
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of Delaware changing its name), the legal name of the Adviser was "Emerald
Advisers, Inc.," as reflected in the Agreement.
OPERATIONS. The principal operating officers of the Adviser (i.e.,
Robert Swendson, Lon Critchfield, and Larry Krause) have extensive experience
in purchasing and resolving impaired loans. Since 1989, Robert R. Swendson and
Larry D. Krause, as well as other current personnel of the Adviser, have been
acquiring and resolving impaired loans for several different entities,
including SWF-95, as employees of SWFI. These entities have invested
approximately $20 million to purchase approximately $180 million in outstanding
principal balance in a variety of loan types and qualities. The difference
between the amount invested and the face amount of the loans reflects the deep
discounts at which impaired loans tend to be priced. SWFI's initial purchases
focused on unsecured loans, but as that market became more competitive and
returns declined, SWFI's management decide to focus on purchasing of impaired
loans secured by commercial real estate. As part of that change in focus, SWFI
hired Lon A. Critchfield in June 1995. Mr. Critchfield joined SWFI after a
long career in banking and with other purchasers of distressed debt. Since May
1995, when SWF-95 was formed, SWFI has purchased approximately $11 million in
impaired loans principally secured by commercial real estate, from which total
collections of approximately $15 million net of direct expenses are
anticipated. The purchases were made by SWFI on behalf of a variety of
entities, including SWF-95, and estimates of total collections are based on
SWFI's loan-by-loan evaluation. SWFI's success is attributed to thorough due
diligence prior to making bids for loan packages, experienced and patient
negotiations with borrowers and careful monitoring of payments from individual
borrowers.
Principals of the Adviser currently provide advice to Plymouth and
several other entities holding investments similar to those in which the
Company will invest. However, for a period beginning with the completion of
the Subsequent Offering and ending with the termination of the initial
Agreement on September 22, 1998, the Adviser has committed to provide
investment advice on new purchases solely to the Company. The Adviser has
agreed to assist other companies, including SWFI, with the collecting and
resolution of their investment portfolios, although it is anticipated that the
majority of this activity will be completed within 12 months.
OWNERSHIP. All of the shares of the Adviser's outstanding stock are
owned by Robert R. Swendson, and the Adviser has outstanding no options,
warrants or convertible equity securities of any nature. It is anticipated
that certain personnel of the Adviser may be allowed at some point to
participate in ownership of the Adviser.
INVESTMENT ADVISORY AGREEMENT. The Company entered into an investment
advisory agreement with the Adviser on September 22, 1996. By its terms, the
Agreement initially will remain in effect for two years and from year to year
thereafter as long as it is annually approved by the Board of Trustees,
including a majority of the Trustees who are not "interested persons" of the
Company within the meaning of the 1940 Act, or by vote of a majority of the
outstanding voting securities of the Company within the meaning of the 1940
Act. Nevertheless, the Board of Trustees expects to submit the Agreement to a
vote of the Company's shareholders at its first annual meeting, which is
anticipated to be held in April or May 1997. Pursuant to the Agreement, the
Adviser will direct the investments of the Company, subject to the supervision,
control and policies of the Board of Trustees. Specifically, the Adviser will
identify, evaluate, resolve and monitor the investments to be made by the
Company.
Under the Agreement, the Company will be required to pay certain
expenses incurred by it in connection with its operation. In general, the
Company will pay all of its operating expenses, except those specifically
required to be borne by the Adviser under the Agreement. The latter includes
the cost
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of office space, telephone, equipment and personnel required to satisfy its
obligations under the Agreement. Expenses borne by the Company include all
expenses of any offering and sale by the Company of its Shares; the fees and
disbursements of the Company's outside legal counsel and accountants and the
custodian of its investments; fees and expenses incurred in producing and
effecting filings with federal and state securities administrators; costs of
communications to shareholders; fees and expenses of members of the Board of
Trustees who are not directors, officers or employees of the Adviser; premiums
for the fidelity bond maintained by the Company; and all costs related to
portfolio investments including, without limitation, financing costs, legal and
accounting fees, other professional or technical fees, related expenses
incurred in acquiring, monitoring, negotiating, maintaining, and effecting
disposition of such investments (such as, credit reports, title searches and
delivery charges, property taxes, insurance premiums, long-distance telephone
charges, costs of specialized consultants such as accountants or
industry-specific technical experts, and travel expenses), and expenses
incurred in responding to any litigation arising therefrom. The Company will
pay the Adviser promptly for any expenses required to be borne by the Company.
Pursuant to the Agreement, the Company will earn a monthly management
fee which is based on end-of-month asset values, payable on the 15th day of the
following month, and calculated at the annual rate of 5.94% of the Company's
"invested assets," including those assets purchased with borrowed capital, and
0.48% of its cash and short-term investments. Asset values will be those
established by the Board of Trustees using their best judgment as required by
generally accepted accounting practices. For purposes of calculating the fee,
"invested assets" at the end of each month is defined as the value of all the
Company's assets as determined by the Board of Trustees as of the end of the
previous fiscal quarter minus cash, short-term investments, intangible assets,
and the amount of collections applied to the carrying value of the loan
portfolio since the end of the previous quarter, plus the cost of loans
purchased and capitalized items since the end of the previous quarter. The
percentage of assets being charged by the Adviser is substantially higher than
that paid by most investment companies because of the efforts and resources
associated with identifying, evaluating, purchasing, renegotiating and
collecting impaired loans and because of the relatively modest size of the
Company's total assets.
VALUATION PROCEDURES
Because no market quotations are available for the Company's invested
assets, the Board of Trustees on at least a quarterly basis reviews the status
of each impaired loan and determines, in good faith, the appropriate value for
the loan. Such values are based upon what the Company could reasonably expect
to receive for each impaired loans through an orderly disposition over a
reasonable time period. For the first six months after acquisition, the value
of an impaired loan is typically its assigned cost unless some event occurs
with respect to the note's issuer that warrants an upward or downward change in
its value as an asset of the Company.
Consistent with generally accepted accounting principles, the
Company's temporary investments are valued at either their then-current market
price or their amortized cost which within a relatively short period usually
approximates market value.
Although the Board of Trustees may revise its determination of the
fair value of an impaired loan in its portfolio at any time, the Board of
Trustees will ordinarily value the Company's invested assets as of the end of
each calendar quarter in connection with the preparation of the Company's
quarterly financial statements which are required to be included in its Form
10-Q or 10-K as filed with the SEC.
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BDC REGULATION
The Company filed this registration statement for the Shares under the
1934 Act in order to be eligible to make an election to be regulated as a BDC
pursuant to section 54 of the 1940 Act. Such an election is necessary to
obtain federal income tax treatment as a regulated investment company and,
thereby, maximize current income and capital gains to the Company's
shareholders. The election to be regulated as a BDC imposes certain
limitations upon the operations of the Company. Set forth below is an outline
of certain 1940 Act provisions governing BDCs.
In general, a BDC may not acquire any investment asset other than
certain specified assets ("Qualifying Assets") unless, at the time the
acquisition is made, Qualifying Assets represent at least 70% of the value of
the BDC's total investment assets (the "70% test"). Among the principal
categories of Qualifying Assets relevant to the business of the Company are the
following:
(1) Securities purchased in transactions not involving any public
offering, the issuer of which is an eligible portfolio
company. An "eligible portfolio" company is defined in the
1940 Act as any issuer that: (a) is organized under the laws
of, and has its principal place of business in, any state or
states or any possession or possessions of the United States;
(b) is neither an investment company (other than a "small
business investment company" which is licensed by the U.S.
Small Business Administration and wholly-owned by the BDC) nor
a company excluded from the definition of "investment company"
in the 1940 Act; and (c) does not have any class of securities
with respect to which a member of a national securities
exchange, broker, or dealer may extend or maintain margin
credit to or for a customer (e.g., publicly traded
securities).
(2) Securities of any eligible portfolio company that is
controlled by the BDC.
(3) Securities purchased in transactions not involving any public
offering from an issuer described in clauses (a) and (b) of
the above definition of "eligible portfolio company," or from
certain other persons including any person in transactions
incident thereto, if such securities were issued by an issuer
that, immediately prior to the purchase of such issuer's
securities by the BDC, was in bankruptcy proceedings or was
otherwise unable to meet its obligations as they came due
without material assistance other than conventional lending or
financing arrangements.
(4) Cash, cash items, or U.S. Government securities, or high
quality debt securities maturing in one year or less from the
time of investment.
In addition, a BDC must be operated for the purpose of making
investments in the types of securities described in (1) through (3) above and,
in order to treat the securities as Qualifying Assets for the purpose of the
70% test, generally must make available managerial assistance with respect to
the issuer of those securities. "Making available significant managerial
assistance" means, among other things, any arrangement whereby the BDC, through
its directors (i.e., Trustees), officers or employees, offers to provide and,
if accepted, does so provide significant guidance and counsel concerning the
management, operations, or business objectives and policies of a portfolio
company.
Regarding the degree of leverage in its capital structure, a BDC may
not issue any class of senior security representing an indebtedness or sell any
senior security representing an indebtedness of which it is the issuer unless,
immediately after such issuance or sale, it will have an asset coverage of at
least
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200%. "Asset coverage" of a class of senior security representing an
indebtedness of an issuer means the ratio which the value of the total assets
of such issuer, less all liabilities and indebtedness not represented by senior
securities, bears to the aggregate amount of senior securities representing
indebtedness of such issuer.
Having elected to be regulated as a BDC, the Company may not change
the nature of its business so as to cease to be, or withdraw its election as, a
BDC unless authorized by "the vote of a majority of its outstanding voting
securities" the 1940 Act. The Commission's Staff takes the position that a BDC
must obtain the approval of its shareholders for a change of its business
purpose if more than half of its total assets are not invested in the types of
securities described generally in (1) through (3) above, following an initial
investment period of 2 1/2 years.
EMPLOYEES
The Company has no employees, as all of its officers are employed by,
and receive their cash compensation from, the Adviser for investment advisory
and other investment management services provided to the Company.
ITEM 2. FINANCIAL INFORMATION.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has no historical performance for management to discuss
and analyze. The future success of the Company is highly uncertain and depends
upon the following factors, among others.
No Operating History or Investment Record. As of the Effective Date,
the Company is newly organized and, with the exception of certain loans held by
the Company or the REO Subsidiary as a result of the consummation of the
Exchange Offer, has not yet purchased any loans nor has it identified any
specific loans that it proposes to purchase. Plymouth will commence operations
only after the Exchange Offer is completed and will not purchase any new loans
until it raises at least the minimum capital from the proposed Subsequent
Offering. Moreover, shareholders will not have the opportunity to individually
evaluate the economic, financial and other information that will be used by the
Adviser and the Board of Trustees in the selection, evaluation, structuring,
monitoring and disposition of loans. Accordingly, an investor in Shares of the
Company must rely upon the ability of the Adviser to identify, acquire,
restructure and collect loans consistent with the Company's investment
objective and policies. It is also expected that after completion of the
Subsequent Offering, the Company may take up to two years to become fully
invested in loans.
Dependence on Management. The Company will be wholly dependent on the
diligence and skill of the Adviser for the selection, acquisition, monitoring
and collection of its loan investments. The management of the Adviser, in
turn, believes that the ability and experience of Robert R. Swendson and Lon A.
Critchfield are critical to its success. Neither of these officers has an
employment contract with the Adviser. The loss to the Adviser of one or both
of these officers could have a material adverse effect on the Company's
performance.
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Leverage. The Company intends to borrow funds from, and issue senior
debt securities to, banks, insurance companies or other lenders up to the limit
permitted by the 1940 Act or other applicable laws or agreements. The ability
of the Company to achieve its investment objective depends in part on its
ability to obtain debt financing on favorable terms and there can be no
assurance that such debt financing can in fact be obtained. When such
borrowings are incurred, the lenders of these funds will have fixed dollar
claims on the Company's assets superior to the claims of the Company's
shareholders. Any increase in the value of the Company's loan investments
would cause shareholders' net asset value to increase more than it would had
the borrowings not been incurred. Decreases in the value of the loan
investments below their value at the time of acquisition, however, would cause
the shareholders' net asset value to decline more sharply than it would had the
borrowings not been incurred. Similarly, any increase in the Company's rate of
income in excess of interest payable on the borrowed funds would cause its net
income to increase more than it would without the leverage, while any decrease
in rate of income would cause net income to decline more than it would had the
funds not been borrowed and invested. Additionally, the Company's lenders may
require the Company to comply with certain terms and conditions that restrict
the Company's ability to act. Failure to comply could result in default and
acceleration by the lender of the Company's debt obligations. Additionally,
these terms and conditions in certain circumstances may prohibit the Company
from making the distributions required to comply with Subchapter M of the Code.
Interest rates could also rise significantly, thus increasing the cost of
borrowed funds to the Company and adversely affecting the financial return to
shareholders.
Supply and Prices of Loan Packages. There is no assurance that the
Company will be the successful bidder for any loan packages. Additionally,
there is no guarantee that loans will continue to be offered for bid by the
FDIC or other financial entities. If the Company is unable to invest the
offering proceeds in loans, shareholders will have no opportunity to achieve a
return on their investment, the Company might be dissolved, and such funds as
are available, together with such earnings as may have been obtained thereon,
would be distributed to the shareholders in accordance with their respective
share ownership. This amount may be less than the value of the interests
originally exchanged by shareholders because of the expenses of both the
Exchange Offer and Subsequent Offering and operating expenses associated with
evaluating and bidding on loan packages.
Risks Regarding Restructuring of Impaired Loans. The Company's
anticipated business operations include the renegotiation or restructuring of
impaired loans that it may purchase or otherwise acquire. There can be no
assurance that the Company will be able to restructure such loans, that the
terms on which a borrower may be willing to restructure any such loan will be
acceptable to the Company, or that the borrower will not default on a
restructured loan. There also can be no assurance that other creditors will
not commence bankruptcy or insolvency proceedings against the borrower or that
borrowers will not seek protection from creditors, which may impose other
obstacles to, or delay substantially, any eventual loan restructuring that may
occur. Such delays or refusals to restructure loans on terms acceptable to the
Company may impact adversely the financial results of the Company. In the
event that any loan cannot be restructured, the Company may be required to hold
the loan and incur a loss upon default, or upon disposition of such loan at a
significant loss, as there is no established trading market in which such loans
are sold.
Subsequent Offering. After the Exchange Offer, the Company had
approximately $2.3 million of equity capital. Through the Subsequent Offering,
the Company intends to raise, on a best efforts basis, a minimum of $7.0
million before expenses by the sale of newly issued Shares at a price that is
equal to the Company's net asset value per Share on a date a close as
practicable to the offering's closing date. The Subsequent Offering will not
close until Plymouth has received certain "no-action" relief from the
- 9 -
<PAGE> 11
SEC. If the Subsequent Offering does not close, the Company may pursue one or
more of a number of options, including ceasing the purchasing of loans.
Requested SEC Relief. The Company has requested certain relief from
the SEC which would assure the Company that its operations are consistent with
the special requirements for BDCs under the 1940 Act. While the Company
believes that the requested relief will be granted, there is a possibility that
it may not. If the relief is not granted, the Company could not operate as a
BDC, and the Board of Trustees would be required to consider an alternate
course which may include a number of options, including ceasing the purchasing
of loans.
Non-registration/Illiquidity. There is no current market for the
Shares nor is one expected to develop in the near future. The Shares have not
been registered under the 1933 Act or registered or qualified under the
securities or "blue sky" laws of any state. These Shares have been issued and
sold in reliance on exemptions from registration under section 4(2) of the
Securities Act, and no such registration or qualification is contemplated.
Non-registration makes the Shares extremely illiquid and severely restricts the
ability of a shareholder to dispose of Shares. Unless the sale of the Shares
should otherwise qualify for another exemption, if the Company should fail to
comply with the requirements of such exemption from registration or
qualification, the shareholders would have the right to rescind their purchase
of Shares if they so desired. A similar situation may also be applicable with
respect to the transaction exemption from registration under many applicable
"blue sky" laws. If a number of shareholders were to seek rescission, the
Company would face severe financial demands which may adversely affect the
Company as a whole and, thus, the non-rescinding shareholders. The Company has
no obligation or intention to register the Shares or attempt to develop a
trading market for the Shares.
Conflicts of Interest. The Adviser will be using the same personnel
and other resources concurrently to resolve the Company's loans and to resolve
loans for other companies in which the Company has no interest. The
shareholders will have to rely upon the Adviser to allocate its resources
fairly between loans in which the Company owns no interest and loans owned by
the Company.
Competition. Competition for loan purchases has increased and is
expected to continue to do so. Such increased competition may adversely affect
the timing and amount of loans purchased, the quality of loans that the Company
purchases, and the acquisition cost. Because of competition, the Company may
not be able to purchase any loans or alternatively may not be able to purchase
an amount of loans sufficient to invest all the proceeds from the Subsequent
Offering plus the contemplated borrowing. Such events will have a material
adverse effect on the financial return to investors.
Tax Risks. The Company intends to elect Subchapter M tax treatment
for federal income tax purposes in order to distribute the net income to
shareholders of the Company without being subject to taxation at the corporate
level. This treatment may not be available if the Company is unable to comply
with any of the requirements contained in Subchapter M of the Code.
Non-availability of Subchapter M tax treatment would have a material adverse
effect on the financial return to shareholders. Even if the Company does
qualify for purposes of Subchapter M tax treatment, it may be subject to a 4%
excise tax and to federal and state taxes based on income if it fails to make
certain distributions in a timely manner. In certain instances the Company
might also be required to recognize income for federal income tax purposes
without a corresponding amount of cash being received. In order to meet the
Subchapter M distribution requirements, the Company may have to sell assets for
a price lower than the optimal value.
Environmental Law Considerations. The various types of real estate
properties which secure the mortgage loans held by the Company (the "mortgaged
properties"), and the businesses that operate at
- 10 -
<PAGE> 12
those properties, are subject to federal, state, and local environmental laws.
These laws, and related causes of action, could diminish the value of any
mortgage property in the event such property is discovered to be contaminated
or otherwise in violation of the environmental laws. As a general matter, the
current owner and operator of the property, and any individual or entity that
formerly owned or operated the property at the time contamination was
occurring, may be held responsible for cleaning up contamination on, or
originating from, the property. Persons or entities who hold a security
interest generally are exempted from this potential liability unless they
become involved in management of the property, either before or after a
foreclosure, and are be deemed "operators" for liability purposes. If the
Company was deemed to be an "operator" for liability purposes, the Company
could be liable for cleanup costs on its properties, even if it did not know of
and was not responsible for the presence or release of the hazardous or toxic
substances. Moreover, liability may not be limited to the value of the
affected mortgaged property and may extend to the Company as a whole.
Furthermore, the value of a security interest in an affected property may be
impaired if environmental liabilities cause a borrower to become insolvent, if
environmental liabilities cause a diminution in the value of the mortgaged
property, or if environmental liabilities render foreclosure on a property
impractical as a remedy. Moreover, under the laws of some states,
contamination may give rise to a "Superfund lien" which may take priority over
a property's existing mortgage lien.
Risks Related to Advisory Fees. The Adviser's compensation will be
based on the value of the Company's assets. In valuing its assets, the Board
of Trustees will estimate the fair value for the Company's invested assets
rather than necessarily using historical cost. Because there is not expected
to be an active market for the Company's invested assets, the Board of Trustees
will be required to use their best judgment. This practice may result in the
recognition of appreciation on loans or foreclosed real estate where the
Company has not received a corresponding amount of cash or where there is not a
corresponding amount of income recognized for federal income tax purposes.
Risks of Default, Noncollection and Loss. Loans to small businesses
involve a high risk of default. Impaired loans involve an even higher risk of
default if not restructured upon terms that place the restructured loan on a
performing basis and reduce the risk of default. The Company does not expect
that any of the loans that it proposes to acquire will benefit from any
government guarantees so that, in the event of default, the Company would have
to bear any loss.
Potential Conflicts. For the purpose of acquiring and carrying the
impaired loans from the FDIC, banks or other financial institutions, in which
the Company's portfolio will be invested, the Company or an entity or entities
through which the Company anticipates acquiring such loans are expected to
borrow significant amounts of funds from banks or other institutional lenders,
including SouthWest Holding. Such borrowings will cause the Company or such
entities to be leveraged and will cause the lenders of those funds, which could
include SouthWest Holding, to have fixed dollar claims on the assets of the
Company or such entities superior to the claims of the Company and, ultimately,
its shareholders. In view of the foregoing, it is possible that the interests
of SouthWest Holding, in its capacity as lender to the Company, may conflict
with the interest of the Company and its shareholders. Robert R. Swendson owns
100% of the outstanding stock of Advisers and 46% of the outstanding stock of
SouthWest Holding. Because Advisers may thus be deemed under common control
with SouthWest Holding, Adviser may have conflicts of interest with respect to
its management of the investments and operations of the Company. Mr. Swendson
is aware of this potential conflict of interest and has informed the Company
that he will take all reasonable steps to ensure that the Company's interests
will be protected.
- 11 -
<PAGE> 13
Interest Rate Fluctuations. Since all loans proposed to be purchased
by the Company may be made at fixed rates of interest, the return on, and value
of, the Company's investment in such loans could decline in the event of any
increase in prevailing interest rates. Likewise, the return on, and value of,
the Company's investment in any restructured loans made at fixed rates of
interest could decline in the event of any increase in prevailing interest
rates. Any substantial increase in market rates of interest may result in
greater rates of prepayments or defaults on performing portfolio loans. As the
Company or any entity or entities through which the Company proposes to acquire
and hold such loans may incur significant levels of indebtedness, increases or
decreases in market rates of interest may adversely impact any return to the
Company.
TAX STATUS
The Company intends to elect to be treated as, and to qualify for each
taxable year as, a "regulated investment company" under Subchapter M of the
Code. If the Company qualifies as a regulated investment company and
distributes to shareholders annually in a timely manner at least 90% of its
"investment company taxable income," as defined in the Code (i.e., net
investment income, including accrued discount, and net short-term capital gain)
(the "90% distribution requirement"), it will not be subject to federal income
tax on the portion of its investment company taxable income and net capital
gain distributed to shareholders as required under the Code. In addition, if
the Company distributes in a timely manner 98% of its net capital gain income
for each one-year period, and distributes 98% of its net ordinary income for
each calendar year (as well as any income not distributed in prior years), it
will not be subject to the 4% nondeductible federal excise tax imposed with
respect to certain undistributed income of regulated investment companies. If
the Company qualifies as a regulated investment company as it intends to do, it
generally will endeavor to distribute to shareholders all of its investment
company taxable income and its net capital gain, if any, for each taxable year
so that the Company will not incur any federal income and excise taxes on its
earnings.
In order to qualify as a regulated investment company for federal
income tax purposes, the Company must, among other things: (a) derive in each
taxable year at least 90% of its gross income from dividends, interest, gains
from the sale of stock or securities, or other income derived with respect to
its business of investing in such stock or securities; (b) derive in each
taxable year less than 30% of its gross income from the sale of stock or
securities held for less than three months ("30% Limitation"); and (c)
diversify its holdings so that at the end of each quarter of the taxable year
(i) at least 50% of the value of the Company's assets consists of cash, cash
items, U.S. government securities and other securities if such other securities
of any one issuer do not represent more than 5% of the Company's assets or 10%
of the outstanding voting securities of the issuer, and (ii) no more than 25%
of the value of the Company's assets is invested in the securities of one
issuer (other than U.S. government securities and securities of other regulated
investment companies) or of two or more issuers that are controlled (as
determined under applicable Code rules) by the Company and are engaged in the
same or similar trades or businesses.
If the Company acquires or is deemed to have acquired debt obligations
that were issued originally at a discount or that otherwise are treated under
applicable tax rules as having original issue discount, it will be required to
include in income each year a portion of the original issue discount that
accrues over the life of the obligation regardless of whether cash representing
such income is received by the Company in the same taxable year and to make
distributions accordingly.
The Company is authorized to borrow funds and to sell assets in order
to satisfy its distribution requirements. However, under the 1940 Act, the
Company will not be permitted to borrow funds to make distributions to
shareholders unless certain asset coverage tests are met. Moreover, the
Company's
- 12 -
<PAGE> 14
ability to dispose of assets to meet its distribution requirements may be
limited by other requirements relating to its status as a regulated investment
company, including the 30% Limitation and the diversification requirements. If
the Company disposes of assets in order to meet its distribution requirements,
it may make such dispositions at times which, from an investment standpoint,
are disadvantageous.
If the Company fails to satisfy the 90% distribution requirement or
otherwise fails to qualify as a regulated investment company in any taxable
year, it will be subject to tax in such year on all of its taxable income,
regardless of whether the Company makes any distributions to its shareholders.
In addition, in that case, all of the Company's distributions to its
shareholders will be characterized as ordinary income (to the extent of the
Company's current and accumulated earnings and profits). In contrast, as
explained below, if the Company qualifies as a regulated investment company, a
portion of its distributions may be characterized as long-term capital gain in
the hands of shareholders.
For any period during which the Company qualifies as a regulated
investment company for tax purposes, dividends to shareholders of the Company's
investment company taxable income will be taxable as ordinary income to
shareholders to the extent of the Company's current or accumulated earnings and
profits.
Distributions of the Company's net capital gain properly designated by
the Company as "capital gain dividends" will be taxable to shareholders as
long-term capital gain regardless of the shareholder's holding period for his,
her or its shares. To the extent the earnings of the Company represent capital
gains, the Company may designate a portion of its dividends as capital gain
dividends, which will be taxable as capital gain to shareholders.
ITEM 3. PROPERTIES.
Except for certain foreclosed-upon properties held by the REO
Subsidiary, which are not materially important, the Company does not own or
lease any physical properties or other tangible assets. Its business premises
are furnished to it by the Adviser.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
As of November 26, 1996, there were 221,627 Shares of the Company
outstanding. The tables below set forth the beneficial ownership of the
Company's securities by certain specified categories of persons as of that
date. As used herein, a beneficial owner of a security includes any person
who, directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise has or shares: (i) voting power which includes the
power to vote, or to direct the voting of, such security; and/or (ii)
investment power which includes the power to dispose of, or to direct the
disposition of, such security. Therefore, the number of securities of the same
class beneficially owned by a person is the sum of securities held of record by
that person plus securities attributed to that person because of certain formal
or informal arrangements. The same securities may be beneficially owned by
more than one person for purposes of these tables.
- 13 -
<PAGE> 15
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
The following persons are each known to the Company to be the
beneficial owner of more than five percent of any class of the Company's voting
securities:
<TABLE>
<CAPTION>
===========================================================================================================
Amount and nature of
beneficial Percent of
Title of class Name and address of beneficial owner ownership (1) class
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common shares of SouthWest Holding (2) 70,697 Shares (3) 26.03% (4)
beneficial
interest, no par SWFI (2) 20,697 Shares 9.34%
value ("Shares")
Robert R. Swendson (2) 70,747 Shares (5) 26.05% (4)
James R. Clifton (6) 50,000 Shares (7) 22.56%
Mary Lacy Clifton Chase (6) 26,160 Shares (8) 11.79%
William L. Clifton, Jr. (6) 50,000 Shares (9) 22.56%
Eddie W. Spalten 19,712 Shares 8.89%
800 Wyoming Street
San Antonio, TX 78203
Margaret Pace Willson 22,320 Shares (10) 10.07%
207 Terrell Road
San Antonio, TX 78209
Rhojcoamt Partnership, Ltd. (11) 12,320 Shares 5.56%
Richard H. Oldfather (11) 12,320 Shares (12) 5.56%
Janice C. Oldfather (11) 12,320 Shares (12) 5.56%
===========================================================================================================
</TABLE>
(1) Directly owned unless otherwise indicated.
(2) 13333 Blanco Road, Suite 314, San Antonio, TX 78216-7756.
(3) Includes 50,000 Shares that may be acquired under presently
exercisable subscription rights directly owned by SouthWest Holding
and 20,697 Shares directly owned by SWFI, a wholly-owned subsidiary of
SouthWest Holding. Does not include 200,000 Shares that may be
acquired upon exercise of certain conditional warrants.
(4) Reflects the dilutive effect of 50,000 Shares not outstanding, subject
to presently exercisable subscription rights, which are deemed to be
outstanding for the purpose of computing this percentage.
(5) Includes 100% of the Shares beneficially owned by SouthWest Holding,
the voting or disposition of which Robert R. Swendson may be deemed to
have the power to direct by virtue of his ownership of approximately
46% of SouthWest Holding's common stock. Mr. Swendson disclaims
beneficial ownership of those Shares.
(6) 4830 Lakewood, Suite 5, Waco, TX 76710.
(7) Includes 20,000 Shares owned by two family trusts of which James R.
Clifton is one of two trustees and 20,000 Shares owned by two family
trusts for the benefit of Mr. Clifton's children of which Mr. Clifton
is not a trustee. Mr. Clifton disclaims beneficial ownership of those
Shares.
- 14 -
<PAGE> 16
(8) Includes 10,000 Shares owned by a family trust for the benefit of Ms.
Chase's child of which Ms. Chase is not a trustee. Ms. Chase
disclaims beneficial ownership of those Shares.
(9) Includes 30,000 Shares owned by three family trusts of which William
L. Clifton, Jr., is one of two trustees and 20,000 Shares owned by two
family trusts for the benefit of Mr. Clifton's children of which Mr.
Clifton is not a trustee. Mr. Clifton disclaims beneficial ownership
of those Shares.
(10) Includes 10,000 Shares owned by a private charitable foundation of
which Ms. Willson is the sole trustee. Ms. Willson disclaims
beneficial ownership of those shares.
(11) 1100 NE Loop 410, #548, San Antonio, TX 78209.
(12) Includes 100% of the Shares beneficially owned by Rhojcoamt
Partnership, Ltd., a family limited partnership of which Richard H.
Oldfather and Janice C. Oldfather are the general partners. Mr. and
Mrs. Oldfather disclaim beneficial ownership of those Shares.
(b) SECURITY OWNERSHIP OF MANAGEMENT.
Beneficial ownership of each class of the Company's equity securities
by its Trustees and executive officers is as follows:
<TABLE>
<CAPTION>
============================================================================================================
Amount and nature of Percent of
Title of class Name of beneficial owner beneficial ownership (1) class
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common shares of Robert R. Swendson 70,747 Shares (2) 26.05% (3)
beneficial
interest, no par James R. Clifton 50,000 Shares (4) 22.56%
value ("Shares")
Ronald K. Calgaard 0 Shares ---
Lon A. Critchfield 0 Shares ---
Larry D. Krause 0 Shares ---
John C. Mosher 0 Shares ---
All Trustees and executive officers as
a group 120,747 Shares (2)(4) 44.45% (3)
============================================================================================================
</TABLE>
(1) Directly owned unless otherwise indicated.
(2) Includes 100% of the Shares beneficially owned by SouthWest Holding,
the voting or disposition of which Robert R. Swendson may be deemed to
have the power to direct by virtue of his ownership of approximately
46% of SouthWest Holding's common stock. Mr. Swendson disclaims
beneficial ownership of those Shares.
(3) Reflects the dilutive effect of 50,000 Shares not outstanding, subject
to presently exercisable subscription rights, which are deemed to be
outstanding for the purpose of computing this percentage.
(4) Includes 20,000 Shares owned by two family trusts of which James R.
Clifton is one of two trustees and 20,000 Shares owned by two family
trusts for the benefit of Mr. Clifton's children of which Mr. Clifton
is not a trustee. Mr. Clifton disclaims beneficial ownership of those
Shares.
- 15 -
<PAGE> 17
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
BOARD OF TRUSTEES
The following persons hold the office of Trustee of the Company until
the first annual meeting of the Company's shareholders and until their
successors are elected and qualify. All of the Company's Trustees are subject
to election at each annual meeting.
<TABLE>
<CAPTION>
Position with
Name and Address Company Age Principal Occupations During Past Five Years
---------------- ------------- --- --------------------------------------------
<S> <C> <C> <C>
Robert R. Swendson * Trustee, 52 Mr. Swendson, a founder of SouthWest
13333 Blanco Road, Suite 314 President and Federated, Inc. ("SWFI") (currently a
San Antonio, Texas 78216-7756 Chief Executive wholly-owned subsidiary of SouthWest Holding
Officer and the general partner of several
partnerships) in 1989, is its largest
shareholder. Mr. Swendson is President and
Chief Executive Officer of the Company, the
Adviser and SWFI.
James R. Clifton Trustee 46 Mr. Clifton is a founder of the Clifton
4830 Lakewood, Suite 5 Group, a private investment partnership
Waco, Texas 76710 formed in January 1996. From 1973 to
January 1996, Mr. Clifton worked for
Behrens, Inc., a family-owned (until 1994)
distributor of pharmaceuticals to
independent pharmacies, in a number of
positions, serving from 1986 until his
departure as Executive Vice President, Chief
Operating Officer, and Director.
Ronald K. Calgaard Trustee 59 Dr. Calgaard is President of Trinity
715 Stadium Drive University, a post he has held since 1979.
San Antonio, Texas 78212 He also serves as a Director of Valero
Energy Corporation, a Trustee of Southwest
Research Institute, a member of the Advisory
Board of the San Antonio Spurs, and a
Trustee of Texas Military Institute.
</TABLE>
- ----------------------------------
* "Interested person" of the Company as defined in the 1940 Act.
Robert R. Swendson owns 100% of the outstanding common stock of the
Adviser.
EXECUTIVE OFFICERS
Each of the following persons has been duly elected to and now holds
the office or offices of the Company set forth opposite his or her name to
serve at the pleasure of the Board of Trustees or until a successor is elected
and qualifies.
- 16 -
<PAGE> 18
<TABLE>
<CAPTION>
Position with
Name Company Age Principal Occupations During Past Five Years
---- ------------- --- --------------------------------------------
<S> <C> <C> <C>
Robert R. Swendson Trustee, 52 Mr. Swendson, a founder of SouthWest
President and Federated, Inc. ("SWFI") (currently a
Chief Executive wholly-owned subsidiary of SouthWest Holding
Officer and the general partner of several
partnerships) in 1989, is its largest
shareholder. Mr. Swendson is President and
Chief Executive Officer of the Company, the
Adviser and SWFI.
Lon A. Critchfield Senior Vice 54 Mr. Critchfield joined SWFI in June 1995.
President From January 1994 to May of 1995, Mr.
Critchfield was Senior Vice President of
General Financial Services (a purchaser of
debt). From January 1992 to April 1994, Mr.
Critchfield was Senior Vice President of
Federal Services, Inc. (a purchaser of
debt). From March 1990 to April 1992, he
was Senior Vice President of Remington
Investments (a purchaser of debt).
Larry D. Krause Senior Vice 48 Mr. Krause joined SWFI in 1989 and has been
President the controller since that time.
John C. Mosher Vice President 29 Mr. Mosher joined SWFI in February 1996.
and Chief Prior to joining SWFI, Mr. Mosher was an
Financial associate at Duncan-Smith Co., an investment
Officer banking firm, from June 1993, and in retail
sales prior to that date.
</TABLE>
ITEM 6. EXECUTIVE COMPENSATION.
Each member of the Board of Trustees who is not an officer of the
Company will receive a fee of $750 for each meeting of the Board of Trustees
that the Trustee attends. It is expected that the Board of Trustees will hold
at least four meetings per year. None of the Company's officers has been or
will hereafter be compensated by the Company for attending these meetings,
since all of them are compensated by the Adviser.
OPTIONS ON SHARES
The Company may determine in the future to issue options to purchase
newly issued Shares to officers of the Company or other individuals or
entities. Any issuance of such options must be authorized by the Company's
shareholders. The issuance of Shares of the Company pursuant to the exercise
of options could result in a dilution of the ownership interest and voting
power of then-existing shareholders.
- 17 -
<PAGE> 19
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS.
EXCHANGE OFFER
The Exchange Offer was approximately a $2.3-million transaction
involving the purchase of the various outstanding general partnership, limited
partnership, and subordinated debt interests in SWF-95 (the "SWF-95 interests")
by Plymouth in exchange for newly issued Shares or cash, at the option of the
seller of each interest. The Company's purchase price for the SWF-95 interests
was determined by the Company with the assistance of a third-party appraiser.
The following table identifies by name any of the following persons
who had a direct or indirect material interest in the Exchange Offer: each
Trustee or executive officer of the Company; each shareholder of the Company
who is known to own of record or beneficially more than 5% of any class of the
Company's voting securities; and any member of the immediate family of any of
the foregoing persons. The table also includes the following information: the
person's relationship to the Company; the nature and amount of the person's
interest in the Exchange Offer; and the cost of the person's interest.
<TABLE>
<CAPTION>
Original
Name of Person with Direct Amount of Cost of
or Indirect Material Person's Relationship Nature of Person's Person's
Interest in the Transaction to the Company Person's Interest Interest* Interest*
--------------------------- -------------- ----------------- --------- ---------
<S> <C> <C> <C> <C>
SouthWest Holding 5%+ owner 100% stockholder of $248,320 $166,000
SWFI
SWFI 5%+ owner General partner of $248,320 $166,000
SWF-95
Robert R. Swendson 5%+ owner; Trustee, 46% stockholder of $114,227 $76,860
President & Chief SouthWest Holding;
Executive Officer President of SWFI
James R. Clifton 5%+ owner; Trustee Owner of SWF-95 $105,100 $100,000
subordinated debt
Mary Lacy Clifton Chase 5%+ owner Limited partner of $169,842 $150,000
SWF-95 and owner of
SWF-95 subordinated
debt
Eddie W. Spalten 5%+ owner Limited partner of $207,173 $160,000
SWF-95
Margaret Pace Willson 5%+ owner Limited partner of $129,483 $100,000
SWF-95
Rhojcoamt Partnership, Ltd. 5%+ owner Owner of SWF-95 $129,483 $100,000
subordinated debt
</TABLE>
- 18 -
<PAGE> 20
<TABLE>
<CAPTION>
Original
Name of Person with Direct Amount of Cost of
or Indirect Material Person's Relationship Nature of Person's Person's
Interest in the Transaction to the Company Person's Interest Interest* Interest*
--------------------------- -------------- ----------------- --------- ---------
<S> <C> <C> <C> <C>
Lon A. Critchfield Senior Vice President Senior Vice President --- ---
of SWFI
Larry D. Krause Senior Vice President, Vice President, --- ---
Secretary/Treasurer Secretary/Treasurer
of SWFI
John C. Mosher Vice President & Chief Vice President & --- ---
Financial Officer Chief Financial
Officer of SWFI
</TABLE>
- ----------------------------
* Where determinable.
ISSUANCE OF SUBORDINATED NOTE, WARRANTS, AND RIGHTS TO SOUTHWEST HOLDING
For working capital purposes, the Company has arranged to borrow up to
$250,000 from SouthWest Holding, which is the owner of 100% of the outstanding
common stock of SWFI, the sole general partner of SWF-95. As an incentive to
make the loan, Plymouth also issued to SouthWest Holding transferable warrants
to purchase up to 200,000 Shares at $10 per Share, which expire ten years from
the date of issuance, and transferable rights to subscribe to 50,000 Shares at
the greater of net asset value or $10 per Share, which expire eight months from
the date of issuance. Unlike the rights to subscribe, which are exercisable
immediately, the warrants become exercisable upon the occurrence of certain
conditions. Among these are a condition that the Company raise a minimum of
$10 million in new equity at a price of at least $15 per Share and $20 per
Share (in order to be able to exercise warrants for 150,000 Shares and 50,000
Shares, respectively) within three years after the consummation of the first
sale of any class of newly issued shares of beneficial interest in Plymouth for
cash consideration of at least $8.0 million. As an officer or a shareholder of
SouthWest Holding, the following persons, which have the indicated
relationships with the Company, may be deemed to have a direct or indirect
material interest in the issuance of the subordinated note, warrants, and
rights to SouthWest Holding.
<TABLE>
<CAPTION>
Name of Person with
Direct or Indirect Material Person's Relationship Nature of Amount of
Interest in the Transaction to the Company Person's Interest Person's Interest*
--------------------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
SouthWest Holding 5%+ owner Holder of subordinated $250,000
notes, warrants, and
subscription rights
Robert R. Swendson 5%+ owner; Trustee, 46% stockholder & $115,000
President & Chief President of SouthWest
Executive Officer Holding
Larry D. Krause Senior Vice President, Secretary/Treasurer of ---
Secretary/Treasurer SouthWest Holding
</TABLE>
- ----------------------------
* Where determinable.
- 19 -
<PAGE> 21
CONTINGENT EXPENSE REIMBURSEMENT AGREEMENT
As memorialized in the letter agreement dated September 22, 1996, the
company has a contingent obligation to reimburse SWFI for various
organizational, consulting, and other exploratory expenses incurred thereby,
including cash disbursed and to be disbursed to various suppliers of products
and services, on behalf of the Company in connection with determining the
financial and legal feasibility of, and effecting preparations for, the
consummation of the Exchange Offer (collectively, "Start-Up Expenses").
Although the letter agreement imposed the contingent obligation on the Company
to reimburse SWFI for up to $250,000, the actual amount of Start-Up Expenses
incurred by SWFI on behalf of the Company was approximately $70,000. By virtue
of its 100% ownership of the common stock of SWFI, SouthWest Holding may be
deemed to have a indirect material interest in this contingent expense
reimbursement agreement. Similarity, Robert R. Swendson, the owner of 46% of
the outstanding stock of SouthWest Holding, as well as any other stockholders
and officers of SouthWest Holding listed in the table above, may also be deemed
to have an indirect material interest in this transaction.
(b) CERTAIN BUSINESS RELATIONSHIPS.
The relationship between the Company and the Adviser is described
under the heading "Investment Adviser" in Item 1, above. This relationship is
referenced here because Robert R. Swendson, a Trustee of the Company, owns 100%
of the outstanding common stock of the Adviser.
(c) INDEBTEDNESS OF MANAGEMENT.
(Not applicable)
(d) TRANSACTIONS WITH PROMOTERS.
In addition to the persons identified in Item 7(a) above, Duncan-Smith
Co. ("Duncan-Smith") may be deemed to be a promoter of the Company.
Duncan-Smith received a fee of $3,000 per month for consulting services from
May 1996 through November 1996 from the Company in connection with determining
the financial feasibility of, and effecting preparations for, the consummation
of the Exchange Offer. A wholly-owned subsidiary of Duncan-Smith, Duncan-Smith
Securities, Inc., was also expected to be the sole placement agent for the
Subsequent Offering, in which capacity it was expected to receive placement
fees, or to be allowed underwriting discounts and commissions, in the amount of
$426,000.
ITEM 8. LEGAL PROCEEDINGS.
The Company is not a party to, nor is any of its property the subject
of, any material pending legal proceedings other than ordinary routine
proceedings incidental to the business of the Company, including proceedings
involving SWF-95 from which the Company initially acquired substantially all of
its property. Such routine proceedings primarily consist of foreclosure
actions brought by SWF-95 or the Company pursuant to first mortgages and other
liens, to realize value from its security interests in real
- 20 -
<PAGE> 22
property and other collateral underlying its portfolio loans. To the knowledge
of the management of the Company, there are no material legal proceedings
contemplated or threatened against it.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the Company's common
shares of beneficial interest (the "Shares"). The Shares are not listed on the
Nasdaq Stock Market or any national securities exchange, and the Company has no
present intention to seek any such listing.
DIVIDENDS
The Company intends to distribute substantially all of its net income
as calculated for federal income tax purposes. Shareholder distributions are
expected to be made in the month following the end of each fiscal quarter. The
Company's fiscal year will end on December 31 of each year. Subject to
declaration by the Board of Trustees, the Company intends on a quarterly
schedule to distribute: 25% of its net income for the first three months of
each fiscal year; 50% of its net income for the first six months of each fiscal
year less the previous distribution; 75% of its net income for the first nine
months of each fiscal year less both previous distributions; and 100% of its
net income for each fiscal year less all previous distributions.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
On September 3, 1996, the Company sold, for cash in the amount of $10
per Share, 50 Shares to Robert R. Swendson for aggregate proceeds to the
Company of $500. The sale to Mr. Swendson, who is the President and Chief
Executive Officer of the Company and an "accredited investor" within the
meaning of Rule 501(a) under the Securities Act, was made pursuant to the
private placement exemption available under section 4(2) of the Securities Act.
These 50 Shares are restricted securities (i.e., unregistered under the
Securities Act). They are not listed on the Nasdaq Stock Market or any
national securities exchange. There is no market for the Shares, and none is
expected to develop.
On September 27, 1996, the Company issued and sold, in exchange for
outstanding securities of and other interests in SWF-95, 221,577 Shares to the
general partner, certain limited partners, and certain subordinated note
holders of SWF-95 pursuant to a confidential private placement memorandum which
had offered a maximum of 293,897 Shares (the "Exchange Offer"). These Shares
were also sold in reliance on section 4(2) of the Securities Act, are
restricted securities (i.e., unregistered under the Securities Act). They are
not listed on the Nasdaq Stock Market or any national securities exchange.
There is no market for the Shares, and none is expected to develop.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
Pursuant to its Declaration of Trust dated August 23, 1996, the
Company is authorized to issue 1,750,000 common shares of beneficial interest
with no par value ("Shares"). All Shares have equal rights as to earnings,
assets, dividends and voting privileges and, when issued, will be fully paid
and
- 21 -
<PAGE> 23
nonassessable. Shares have no preemptive, conversion or redemption rights and
are freely transferable to the extent applicable federal and state securities
law requirements are met. In the event of liquidation, each Share is entitled
to its proportion of the Company's assets after debts and expenses. Each Share
is entitled to one vote and does not have cumulative voting rights, which means
that holders of a minority of the Shares would, in that case, be unable to
ensure the election of any Trustee. The Company intends to hold annual
shareholders' meetings. The rights of holders of the Shares, as set forth in
the Company's Declaration of Trust, may be modified by amendment to the
Declaration of Trust. The Declaration of Trust may be amended at any time by
an instrument in writing signed by a majority of the Trustees then in office.
The offer and sale of Shares was and is not registered under the
federal securities laws. The Shares are not listed on the Nasdaq Stock Market
or any national securities exchange. There is no market for the Shares, and
none is expected to develop. The Company does not have a present intention to
register any of these outstanding Shares, or any additional Shares, under the
Securities Act for sale to the public.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
INDEMNIFICATION
The Trustees and officers of the Company are indemnified to the
maximum extent permitted by Delaware law, as indicated in the following
provisions of the Company's Declaration of Trust:
SECTION 1. INDEMNIFICATION OF COVERED PERSONS. Subject to the
exceptions and limitations contained in Section 2, every person who is, or has
been, a Trustee, officer, employee, or agent of the Company, including persons
who serve at the request of the Company as directors, trustees, officers,
employees, or agents of another organization in which the Company has an
interest as a shareholder, creditor, or otherwise (hereinafter referred to as a
"Covered Person"), shall be indemnified by the Company to the fullest extent
permitted by law against liability and against all expenses reasonably incurred
or paid by him in connection with any claim, action, suit, or proceeding in
which he becomes involved as a party or otherwise by virtue of his being or
having been such a Trustee, director, officer, employee, or agent and against
amounts paid or incurred by him in settlement thereof.
SECTION 2. EXCEPTIONS. No indemnification shall be provided
hereunder to a Covered Person:
(a) For any liability to the Company or its shareholders arising out
of a final adjudication by the court or other body before which the proceeding
was brought that he engaged in willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office;
(b) With respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interests of the Company; or
(c) In the event of a settlement or other disposition not involving a
final adjudication (as provided in paragraph (a) or (b) of this Section 2) and
resulting in a payment by a Covered Person, unless there has been either a
determination that such Covered Person did not engage in willful misfeasance,
- 22 -
<PAGE> 24
bad faith, gross negligence, or reckless disregard of the duties involved in
the conduct of his office by the court or other body approving the settlement
or other disposition, or a reasonable determination, based on a review of
readily available facts (as opposed to a full trial-type inquiry), that he or
she did not engage in such conduct, such determination being made by: (i) a
vote of a majority of the disinterested trustees (as such term is defined in
Section 5) acting on the matter (provided that a majority of disinterested
trustees then in office act on the matter); or (ii) a written opinion of
independent legal counsel.
SECTION 3. RIGHTS OF INDEMNIFICATION. The rights of indemnification
herein provided may be insured against by policies maintained by the Company,
and shall be severable, shall not affect any other rights to which any Covered
Person may now or hereafter be entitled, shall continue as to a person who has
ceased to be a Covered Person, and shall inure to the benefit of the heirs,
executors, and administrators of such a person. Nothing contained herein shall
affect any rights to indemnification to which Trust personnel other than
Covered Persons may be entitled by contract or otherwise under law.
SECTION 4. EXPENSES OF INDEMNIFICATION. Expenses of preparation and
presentation of a defense to any claim, action, suit, or proceeding subject to
a claim for indemnification herein provided shall be advanced by the Company
prior to final disposition thereof upon receipt of an undertaking by or on
behalf of the recipient to repay such amount if it is ultimately determined
that he is not entitled to indemnification herein provided that either:
(a) Such undertaking is secured by a surety bond or some other
appropriate security or the Company shall be insured against losses arising out
of any such advances; or
(b) A majority of the disinterested trustees acting on the matter
(provided that a majority of the disinterested trustees then in office act on
the matter) or independent legal counsel in a written opinion shall determine,
based upon a review of the readily available facts (as opposed to the facts
available upon a full trial), that there is reason to believe that the
recipient ultimately will be found entitled to indemnification.
SECTION 5. CERTAIN DEFINED TERMS RELATING TO INDEMNIFICATION. As
used herein, the following words shall have the meanings set forth below:
(a) A "disinterested trustee" is one (i) who is not an "interested
person" of the Company (including anyone, as such disinterested trustee, who
has been exempted from being an interested person by any rule, regulation, or
order of the Commission within the meaning of the 1940 Act), and (ii) against
whom none of such actions, suits, or other proceedings or another action, suit,
or other proceeding on the same or similar grounds is then or has been pending;
(b) "Claim," "action," "suit," or "proceeding" shall apply to all
claims, actions, suits, proceedings (civil, criminal, administrative, or other,
including appeals), actual or threatened; and
(c) "Liability" and "expenses" shall include without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines,
penalties, and other liabilities.
- 23 -
<PAGE> 25
INSURANCE
The Company may determine to purchase insurance protecting its
Trustees and officers against liabilities arising under the Securities Act.
Notwithstanding the Company's purchase of insurance against liabilities arising
under the Securities Act, no insurance will be purchased that protects or
purports to protect any Trustee or officer of the Company against any liability
to the Company or its securityholders to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her office.
However, the Company may not purchase any insurance which protects or purports
to protect any covered person against acts prohibited by section 17(h) of the
1940 Act.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Audited Financial Statements: Page
----
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Statement of Assets and Liabilities--September 4, 1996 . . . . . . . . . . . . . . . . . . 26
Notes to Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . . . 27
Interim Financial Statements:
Statement of Assets and Liabilities--September 27, 1996 (unaudited) . . . . . . . . . . . 31
Notes to Statement of Assets and Liabilities (unaudited) . . . . . . . . . . . . . . . . 32
</TABLE>
- 24 -
<PAGE> 26
KPMG Peat Marwick LLP
112 East Pecan, Suite 2400
San Antonio, TX 78205-1505
Independent Auditors' Report
The Board of Trustees and Shareholder of
Plymouth Commercial Mortgage Fund:
We have audited the accompanying statement of assets and liabilities of
Plymouth Commercial Mortgage Fund as of September 4, 1996. This financial
statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. Our procedures included confirmation of the cash held at
September 4, 1996 with the custodian bank. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of Plymouth
Commercial Mortgage Fund as of September 4, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
September 12, 1996
- 25 -
<PAGE> 27
Plymouth Commercial Mortgage Fund
Statement of Assets and Liabilities
September 4, 1996
<TABLE>
<S> <C>
Assets
------
Cash $ 500
-----------
Total Assets 500
Liabilities
-----------
Liabilities -
Net Assets
Common shares of beneficial interest, no par value;
1,750,000 shares authorized; 50 shares issued and outstanding 500
-----------
Net Assets $ 500
===========
Net Asset Value per share $ 10.00
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
- 26 -
<PAGE> 28
Plymouth Commercial Mortgage Fund
Notes to Statement of Assets and Liabilities
As of September 4, 1996
(1) ORGANIZATION
Plymouth Commercial Mortgage Fund (the Company) was organized under
the laws of Delaware on August 23, 1996 as a business trust that will
elect to operate as a business development company under Section 54
of the Investment Company Act of 1940. The Company has recently been
organized and currently has no operations. Once operations begin,
its business will consist of purchasing, restructuring, and selling
non-performing commercial mortgage loans.
The investment objective of the Company is to achieve a high level of
current income. To achieve that objective, the Company will purchase
impaired loans typically secured by commercial real estate. Sources
of loans include the FDIC, banks, insurance companies, and other
institutions. Impaired loans are typically offered in packages that
consist of loans of similar types, but which could vary in credit
quality. These loans are typically purchased at a discount to their
outstanding principal and interest balance. Once a loan package is
purchased, the objective will be to allow the borrower to refinance
the loan at a discount or to restructure the loan in such a manner as
to bring it to a performing status.
The Company intends to qualify to be treated as a "regulated
investment company" (RIC) under Subchapter M of the Internal Revenue
Code 1986, as amended (the "Code"). If the Company qualifies as a
regulated investment company and distributes to shareholders annually
in a timely manner at least 90% of its "investment company taxable
income," as defined by the Code (i.e., net investment income,
including accrued discount, and net short-term capital gain), it will
not be subject to federal income tax on the portion of its investment
company taxable income and net capital gain (net long term capital
gain in excess of net short-term capital loss) distributed to
shareholders as required under the Code. In addition, if the Company
distributes in a timely manner 98% of its net capital gain income for
each one-year period, and distributes 98% of its investment company
taxable income for each calendar year (as well as any income not
distributed in prior years), it will not be subject to the 4%
nondeductible federal excise tax imposed with respect to certain
undistributed income of regulated investment companies. If the
Company qualifies as a regulated investment company as it intends to
do, it generally will endeavor to distribute to shareholders all of
its investment company taxable income and its net capital gain, if
any, for each taxable year so that the Company will not incur income
and excise taxes on its earnings.
(Continued)
- 27 -
<PAGE> 29
Plymouth Commercial Mortgage Fund
The Company is currently offering to issue 293,897 of its common
shares of beneficial interest (Shares) in exchange for the conveyance
to the Company of the interests held by the general partner, limited
partners, and subordinated note holders of SWF 1995 Limited
Partnership, a Texas limited partnership ("SWF-1995"), through a
private placement offering (the "Exchange Offer"). The Exchange
Offer will terminate on September 16, 1996 unless extended for sixty
days. SouthWest Federated Holding Company, Inc., a Delaware
Corporation ("SouthWest Holding"), the parent company of SWF 1995
Limited Partnership's general partner, will pay the expenses of the
Company until the Exchange Offer is successful. The amounts paid by
SouthWest Holding will only become a liability to the Company if the
Exchange Offer is successful. The Exchange Offer will be considered
successful if at least 67% of SWF-1995's limited partnership
interests affirmatively participate.
For working capital purposes, the Company will arrange to borrow up
to $250,000 from SouthWest Holding. As an incentive to make the
loan, the Company will issue to SouthWest Holding transferable
warrants to purchase up to 200,000 Shares at $10 per share, which
expire ten years from the date of issuance, and transferable rights
to subscribe to 50,000 shares at the greater of net asset value or
$10 per share, which expire eight months from the date of issuance.
Unlike the rights to subscribe, which will become exercisable upon
issuance, the warrants will become exercisable upon the occurrence of
certain conditions. Among these is a condition that the Company
raise a minimum of $10 million in new equity at a price of at least
$15 per Share and $20 per Share (in order to be able to exercise
warrants for 150,000 Shares and 50,000 Shares, respectively) within
three years after the consummation of the first sale of any class of
newly issued shares of beneficial interest in the Company for cash
consideration subsequent to the date of issuance of such warrants.
Following the closing of the Exchange Offer, the Company intends to
initiate another private offering of Shares for a minimum of 800,000
Shares and a maximum of 1,100,000 Shares at $10.00 per Share (the
"Subsequent Offering"). The proceeds from the sale of Shares will be
invested in accordance with the Company's investment objectives and
policies.
(2) INVESTMENT ADVISORY AGREEMENT
The Company proposes to enter into an Investment Advisory Agreement
(the Agreement) with Emerald Advisers, Inc., a Delaware Corporation
(the "Adviser"), a registered investment adviser under the Investment
Advisers Act of 1940, as amended. The Adviser is wholly owned by
Robert R. Swendson who is also the primary shareholder of SouthWest
Holding. The Agreement would remain in effect for two years from its
date of execution and thereafter from year to year as long as such
continuance is specifically approved at least annually by the Board
of Trustees, including a majority of its members casting their votes
in person who are not interested persons of the Company at a meeting
called for the purpose of
(Continued)
- 28 -
<PAGE> 30
Plymouth Commercial Mortgage Fund
voting on such approval, or by vote of a majority of the outstanding
voting securities of the Company. The Agreement can be terminated by
the Company at any time, without payment of any penalty, on sixty
days written notice to the Adviser if the decision to terminate has
been made by the Board of Trustees or by vote of a majority of the
outstanding voting securities of the Company. The Agreement will
terminate automatically in the event of its assignment.
Under the Agreement, the Adviser will manage the investments of the
Company, subject to the supervision and control of the Company's
Board of Trustees. Specifically, the Adviser will identify, evaluate,
structure, close and monitor the investments made by the Company.
The Adviser will be required to pay all expenses incurred by it in
rendering its services. Generally, these expenses include the cost
of office space, telephone service, equipment and personnel required
to perform its obligations under the Agreement. The Company will be
required to pay its operating expenses and reimburse the Adviser
promptly for expenses which the Adviser may pay on the Company's
behalf, except those specifically required to be borne by the Adviser
under the Agreement. Without limitation, such expenses will include
all expenses of any offering and sale by the Company of its shares;
the fees and disbursements of the Company's counsel, accountants, and
custodian; fees and expenses incurred in producing and effecting
filings with federal and state securities administrators; costs of
the Company's periodic reports to and other communications with the
Company's shareholders; fees and expenses of members of the Company's
Board of Trustees who are not directors, officers or employees of the
Adviser; premiums for the fidelity bond maintained by the Company;
all costs related to portfolio investments, including without
limitation financing costs, legal and accounting fees, expenses
related to protecting or maintaining the value of the loan portfolio
or its underlying collateral, and other professional or technical
fees and expenses (e.g., credit reports, title searches and delivery
charges, property taxes, insurance premiums, long-distance telephone
charges, costs of specialized consultants such as accountants or
industry-specific technical experts, and travel expenses) incurred in
acquiring, monitoring, negotiating, working-out, and effecting
disposition of such investments, as well as responding to any
litigation arising therefrom; and all expenses related to any
borrowings by the Company.
During the term of this agreement, the Company will pay to the
Adviser, on the 15th day of each month: (a) a fee calculated at an
effective annual rate of 5.94% of the Company's invested assets as of
the end of the previous month; and (b) a fee calculated at an
effective annual rate of 0.48% of the Company's cash and short-term
investments as of the end of the previous month. For purposes of
calculating the fee to be paid on a monthly basis, "invested assets"
means the
(Continued)
- 29 -
<PAGE> 31
Plymouth Commercial Mortgage Fund
asset value as determined by the Board as of the end of the previous
fiscal quarter minus cash, short-term investments, intangible assets,
and the amount of collections applied to the carrying value of the
loan portfolio since the end of the previous quarter, plus the cost
of loans purchased and capitalized advances to protect portfolio
investments or underlying collateral since the end of the previous
quarter. The fee paid on a monthly basis will be ratified on a
quarterly basis by the Board.
(3) NET ASSETS (SHAREHOLDER'S EQUITY)
The Company has 1,750,000 Shares authorized with no par value. All
Shares have equal rights as to earnings, assets, dividends and voting
privileges. As of September 4, 1996, there are 50 Shares issued and
outstanding.
- 30 -
<PAGE> 32
PLYMOUTH COMMERCIAL MORTGAGE FUND
Statement of Assets and Liabilities
September 27, 1996
(unaudited)
<TABLE>
<S> <C>
Assets
------
Cash $ 36,650
Accounts Receivable 210
Investments in securities at value, cost of $2,716,515 3,490,500
Investments in affiliates 500
Other Assets 111,800
-----------------
Total Assets $ 3,639,660
=================
Liabilities
-----------
Accounts Payable $ 66,393
Escrow Funds 14,414
Indebtedness 1,229,871
----------------
Total Liabilities 1,310,678
Net Assets
----------
Common shares of beneficial interest, no par value, 1,750,000 shares 1,690,621
authorized, 221,627 shares issued and outstanding
Accumulated undistributed income (135,624)
Unrealized gain on investments 773,985
-----------------
Total Net Assets 2,328,982
Total Liabilities & Net Assets $ 3,639,660
=================
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 31 -
<PAGE> 33
PLYMOUTH COMMERCIAL MORTGAGE FUND
Notes to Statement of Assets and Liabilities
As of September 27, 1996 (unaudited)
1. ORGANIZATION AND BUSINESS PURPOSE
Plymouth Commercial Mortgage Fund, a Delaware business trust, (the "Fund")
was organized on August 23, 1996 and had commenced operations on September 27,
1996. The Fund seeks to achieve a high level of current income. To achieve
this objective, the Fund purchases impaired loans typically secured by
commercial real estate. The Fund has elected to be regulated as a business
development company under the Investment Company Act of 1940, as amended ("1940
Act").
2. SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation - The financial statements included
herein have been prepared in accordance with generally
accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 6 of
Regulation S-X. Certain information and footnotes normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted, although the Fund believes that the disclosures
are adequate for a fair presentation. The information reflects
all adjustments (consisting of normal recurring adjustments)
which are, in the opinion of the Fund, necessary for a fair
presentation of the results of operations for the interim periods.
B. Security valuation - There is no ready market for the Fund's
impaired loans. The value for such loans is determined by the
Board of Trustees on at least a quarterly basis. Consistent
with generally accepted accounting principles, the Company's
temporary investments are valued at either their then current
market price or their amortized cost which within a relatively
short period is assumed to approximate market value.
C. Federal Income Taxes - The Fund intends to elect the special
income tax treatment available to "regulated investment
companies" under Subchapter M of the Internal Revenue Code.
If the Fund qualifies as a regulated investment company and
distributes to shareholders annually in a timely manner at
least 90% of its "investment company taxable income," as defined
by the Code (i.e., net investment income, including accrued
discount, and net short-term capital gain), it will not be
subject to federal income tax on the portion of its taxable
investment income and net capital gain distributed to
shareholders as required under the Code. In addition, if the
Fund distributes in a timely manner 98% of its net capital
gain income for each one-year period, and distributes 98% of
its investment company taxable income for each calendar year (as
well as any income not distributed in prior years), it will
not be subject to the 4% nondeductible federal excise tax
imposed with respect to certain undistributed income of
regulated investment companies.
D. Distributions to Shareholders - Dividends to shareholders are
recorded on the payment date.
E. Other - The Fund follows industry practice and records
security transactions on the trade date. Principal and
interest payments due on notes held by the Fund are recognized
on the date received. Interest income is typically not
accrued because of the impaired nature of the Fund's loan
portfolio. Dividend income is recognized on the ex-dividend date.
3. INVESTMENT ADVISORY AGREEMENT
The Fund has to entered into an Investment Advisory Agreement (the
"Agreement") with Emerald Advisers, Inc., a Delaware corporation, a registered
investment adviser, (the "Adviser"), under the Investment Advisers Act of 1940
(the "Adviser's Act"), as amended. (As of October 28, 1996, the Adviser
- 32 -
<PAGE> 34
changed its name from Emerald Advisers, Inc. to Greystone Advisers, Inc. No
change in the Adviser's operations was made in conjunction with the name
change.) Unless terminated as described, the Agreement remains in effect until
September 22, 1998. Thereafter it will need to be specifically approved at
least annually by the Board of Trustees, including a majority of its members
casting their votes in person who are not "interested persons" of the Fund (as
defined by the 1940 Act) at a meeting called for the purpose of voting on such
approval or by "vote of a majority of the outstanding voting securities" of the
Fund. The Agreement can be terminated by the Fund at any time, without payment
of any penalty, on sixty day's written notice to the Adviser if the decision to
terminate has been made by the Board of Trustees or by "vote of a majority of
the outstanding voting securities" of the Fund. The Agreement will terminate
automatically in the event of its assignment.
Under the Agreement, the Adviser will manage the investments of the Fund,
subject to the supervision and control of the Fund's Board of Trustees.
Specifically, the Adviser will identify, evaluate, structure, close and monitor
the investments made by the Fund.
The Adviser will be required to pay all expenses incurred by it in rendering
its services. Generally, these expenses include the cost of office space,
telephone service, equipment and personnel required to perform its obligations
under the Agreement. The Fund will be required to pay its operating expenses
and reimburse the Adviser promptly for expenses which the Adviser may pay on
the Fund's behalf, except those specifically required to be borne by the
Adviser under the Agreement. Without limitation, such expenses will include:
all expenses of any offering and sale by the Fund of its shares; the fees and
disbursements of the Fund's counsel, accountants, and custodian; fees and
expenses incurred in producing and effecting filings with federal and state
securities administrators; costs of the Fund's periodic reports to and other
communications with the Fund's shareholders; fees and expenses of members of
the Fund's Board of Trustees who are not directors, officers or employees of
the Adviser; premiums for the fidelity bond maintained by the Fund; all costs
related to portfolio investments, including without limitation financing costs,
legal and accounting fees, expenses related to protecting or maintaining the
value of the loan portfolio or its underlying collateral, and other
professional or technical fees and expenses (e.g., credit reports, title
searches and delivery charges, property taxes, insurance premiums,
long-distance telephone charges, costs of specialized consultants such as
accountants or industry-specific technical experts, and travel expenses)
incurred in acquiring, monitoring, negotiating, working-out, and effecting
disposition of such investments, as well as responding to any litigation
arising therefrom; and all expenses related to any borrowings by the Fund.
During the term of this Agreement, the Fund will pay to the Adviser, on the
15th day of each month: (a) a fee calculated at an effective annual rate of
5.94% of the Fund's invested assets as of the end of the previous month; and
(b) a fee calculated at an effective annual rate of 0.48% of the Fund's cash
and short-term investments as of the end of the previous month. For purposes
of calculating the fee to be paid on a monthly basis, "invested assets" means
the asset value as determined by the Board as of the end of the previous fiscal
quarter minus cash, short-term investments, intangible assets, and the amount
of collections applied to the carrying value of the loan portfolio since the
end of the previous quarter, plus the cost of loans purchased and capitalized
advances to protect portfolio investments or underlying collateral since the
end of the previous quarter.
4. INVESTMENTS
The Fund invests primarily in impaired loans of companies that qualify as
"eligible portfolio companies" as defined in Section 2(a)(46) of the 1940 Act
or in securities that otherwise qualify for investment as permitted in Section
55(a)(1) through (6). These loans are carried on the Statement of Assets and
Liabilities as of September 27, 1996, at fair value, as determined in good
faith by the Fund's Board of Trustees.
- 33 -
<PAGE> 35
These loans typically are offered at auction in packages of multiple loans.
Sellers include entities such as the Federal Deposit Insurance Corporation
("FDIC"), banks, savings and loans, insurance companies and other financial
institutions. The Fund's investments in loan packages will be directed by the
Adviser. The Fund holds its real estate assets in a wholly-owned subsidiary as
required in the agreement establishing its senior credit facility.
Generally, a loan is considered impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement unless the
borrower receives material assistance. While several types of impaired loans
are available for purchase, the Fund's portfolio will be concentrated in
impaired loans secured by commercial real estate. For both financial and
regulatory reasons, commercial banks, either directly or indirectly through the
FDIC, make these loans available for sale in packages with prices that are
typically more than $1 million per package. Quite often the sale of impaired
loans in this market offers creditors the only alternative to foreclosure.
5. INDEBTEDNESS
As of September 27, 1996, the Fund had indebtedness of $1,229,871. The
Fund owed $250,000 to SouthWest Federated Holding Company, Inc. which was
repaid on December 27, 1996 with the proceeds of the Fund's equity offering
(see "Subsequent Events").
A total of $979,871 was due from SWF 1995 Limited Partnership, a Texas
limited partnership, in the form of a bank line of credit ($379,871) and
subordinated debt due to six individuals ($600,000). The debt was assumed by
the Fund as a result of the acquisition of the partnership on September 27,
1996. The debt was initially repaid with proceeds advanced on a bank line of
credit established by the Fund and was subsequently repaid with the proceeds of
the Fund's equity offering (see "Subsequent Events").
6. SUBSEQUENT EVENTS
On December 26, 1996 the Fund completed an best-efforts private offering for
$7,000,000 at the Fund's net asset value per share (determined to be $10.00 on
December 13, 1996 by the Fund's Board of Trustees). Of the proceeds, $426,000
was used for underwriting fees and $904,557 was used to repay debt. The
remaining proceeds which are to be invested in impaired loans were temporarily
invested in government securities and other short-term high quality investments
maturing in less one year.
On December 13, 1996 the Fund's Board of Trustees approved a distribution of
$69,500.50 that was paid on December 19, 1996 to shareholders of record on
December 15, 1996. The distribution represented a partial distribution of the
Fund's unrealized gain on its investment portfolio.
On December 13, 1996, the Fund's Board of Trustees also approved the
distribution of the amount of federally taxable net investment income not
already distributed to be paid on or before January 20, 1997 to shareholders of
record on December 31, 1996.
- 34 -
<PAGE> 36
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS.
Audited Financial Statements:
Independent Auditors' Report
Statement of Assets and Liabilities--September 4, 1996
Notes to Statement of Assets and Liabilities
Interim Financial Statements:
Statement of Assets and Liabilities--September 27, 1996
(unaudited)
Notes to Statement of Assets and Liabilities (unaudited)
(b) EXHIBITS.
(3)(i) (A) Certificate of Trust of the Company, as filed
August 23, 1996 (1)
(B) Declaration of Trust of the Company, dated August 23,
1996 (1)
(3)(ii) Bylaws of the Company, dated September 3, 1996 (1)
(4) (A) Loan Agreement between Comerica Bank-Texas and the
Company, dated September 27, 1996 *
(B) Agreement to furnish to the Commission upon request a
copy of Subordinated Note Agreement between the
Company and SouthWest Federated Holding Company,
Inc., dated September 27, 1996 *
(10) (A) Investment Advisory Agreement by and between the
Company and Emerald Advisers, Inc. (former name of
Greystone Advisers, Inc.), dated September 22, 1996 *
(B) Custodial Agreement by and between Comerica
Bank-Texas and the Company, dated September 27, 1996 *
(27) Financial Data Schedule *
- -------------------
* Filed herewith.
(1) Incorporated herein by reference from the Company's initial
registration statement on Form 10 (File No. 0-21443), as filed with
the Commission on September 27, 1996.
- 35 -
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
PLYMOUTH COMMERCIAL MORTGAGE FUND
Date: January 15, 1997 By: /s/ John C. Mosher
----------------------------------
John C. Mosher
Vice President and Chief Financial
Officer
<PAGE> 38
EXHIBIT INDEX
Exhibit
Number Description
(4)(A) Loan Agreement between Comerica Bank-Texas and the Company, dated
September 27, 1996
(4)(B) Agreement to furnish to the Commission upon request a copy of
Subordinated Note Agreement between the Company and SouthWest
Federated Holding Company, Inc., dated September 27, 1996
(10)(A) Investment Advisory Agreement by and between the Company and
Emerald Advisers, Inc. (former name of Greystone Advisers, Inc.),
dated September 22, 1996
(10)(B) Custodial Agreement by and between Comerica Bank-Texas and the
Company, dated September 27, 1996
(27) Financial Data Schedule
<PAGE> 1
EXHIBIT 4(A)
LOAN AGREEMENT
BETWEEN
COMERICA BANK-TEXAS
AND
PLYMOUTH COMMERCIAL MORTGAGE FUND
DATED
SEPTEMBER 27, 1996
<PAGE> 2
LOAN AGREEMENT
THIS LOAN AGREEMENT is made and delivered this 27th day of September,
1996, by and between PLYMOUTH COMMERCIAL MORTGAGE FUND, a Delaware business
trust, and COMERICA BANK-TEXAS, a state banking association.
WITNESSETH:
WHEREAS, the Borrower desires to borrow from the Bank from time to
time an amount not to exceed in the aggregate at any one time outstanding the
Commitment Amount for the working capital needs of the Borrower and to finance
a portion of the cost of borrower's acquiring loans and/or portfolios of loans;
and
WHEREAS, the Bank is willing to supply such financing subject to the
terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the Borrower and the Bank agree as follows:
DEFINITIONS
1.1. Defined Terms. As used herein, the following terms shall have
the following respective meanings:
"ACCOUNTS," "CHATTEL PAPER," DOCUMENTS," "EQUIPMENT," "FIXTURES,"
"GENERAL INTANGIBLES," "GOODS," "INSTRUMENTS" AND "INVENTORY" shall have the
meanings assigned to them in the UCC on the date of this Agreement.
"ACCOUNT DEBTOR" shall mean, collectively, the "maker" and each other
obligor, guarantor or other liable party, primarily, secondarily or otherwise,
under an Acquired Loan.
"ACQUIRED LOAN" shall mean each loan (a) which the Borrower has
acquired from SWF 1995 Limited Partnership and which has not been disposed of,
(b) which the Borrower has acquired from an unaffiliated Person on an arm's
length basis and which has not been disposed of by the Borrower or (c) which is
evidenced by an REO Note. Each Acquired Loan shall be evidenced by a
promissory note and, if secured, by appropriate security documents. All
references to Acquired Loans are deemed to include the right to enforce and
receive payment of the respective promissory notes and to enforce and realize
the benefits of the respective security documents.
"ACQUIRED LOAN BORROWING BASE AMOUNT" shall mean (1) for any Eligible
Acquired Loan which is not an REO Note, the lesser of (a) the Net Acquisition
Cost of such Eligible Acquired Loan or (b) the Fair Market Value of such
Eligible Acquired Loan minus all principal payments made by
<PAGE> 3
the applicable Account Debtor on such Eligible Acquired Loan after the most
recent determination of Fair Market Value of such Eligible Acquired Loan,
multiplied by the Appropriate Conversion Factor for such Eligible Acquired
Loan, and (2) for any Eligible Acquired Loan which is an REO Note, the lesser
of (a) the Net Acquisition Cost of such Eligible Acquired Loan, (b) the face
principal amount of the REO Note comprising such Eligible Acquired Loan minus
all principal payments made by the REO Affiliate on the REO Note after the
execution date of the REO Note, or (c) the Fair Market Value of such Eligible
Acquired Loan minus all principal payments made by the REO Affiliate on the
Eligible Acquired Loan after the most recent determination of Fair Market Value
of such Eligible Acquired Loan, multiplied by the Appropriate Conversion Factor
for such Eligible Acquired Loan (calculated in accordance with the last
sentence of the definition of Appropriate Conversion Date).
"ACQUIRED LOAN DOCUMENTS" shall mean all promissory notes evidencing
Acquired Loans (including all REO Notes), all mortgages, deeds of trust and
other documents securing Acquired Loans (including all REO Security Documents)
and all loan agreements and other documents executed by Account Debtors in
connection with Acquired Loans or otherwise relating to the Acquired Loans.
"ACQUISITION COST" shall mean with respect to an Acquired Loan either
(a) the book value attributed to such Acquired Loan by SWF 1995 Limited
Partnership with respect to the initial Acquired Loans acquired by the Borrower
from SWF 1995 Limited Partnership on or about the first Disbursement Date or
(b) the actual cash price which the Borrower has paid or contractually
obligated itself to pay to the Person from whom the Borrower is acquiring or
has acquired such Acquired Loan with respect to all other Acquired Loans, plus
any accrued obligations relating to such Acquired Loan which the Borrower has
identified in its written bid worksheet applicable to such Acquired Loan and
which have been taken into account in calculating the purchase price of such
Acquired Loan, but excluding any legal, accounting, finder's, broker's, or
other's fees, any travel, due diligence and other "soft cost" type expenses
incurred by the Borrower with respect to such acquisition (or, if such
acquisition is effected on a pool or portfolio basis, the allocable portion of
such costs) and excluding any other costs associated with any such acquisition
paid by the Borrower including, but not limited to the costs (if any) of
recordation, title insurance endorsements, surveys, or environmental site
assessments. Without the written consent of the Bank, the Acquisition Cost of
any Acquired Loan may not exceed the unpaid principal balance of such Acquired
Loan.
"AFFILIATE" shall mean, when used with respect to any Person, any
other Person which, directly or indirectly, controls or is controlled by or is
under common control with such Person. For purposes of this definition,
"control" (including the correlative meanings of the terms "controlled by" and
"under common control with"), with respect to any Person, shall mean
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or by contract of otherwise.
"AGREEMENT" shall mean this Loan Agreement, as the same may be
amended, restated and modified from time to time.
2
<PAGE> 4
"ALLONGE" shall mean an endorsement on a separate sheet of paper
accompanying a promissory note, specifically describing such note by Maker,
original payee and face principal amount, and signed by the Borrower, endorsing
the note to the Bank or in blank.
"APPROPRIATE CONVERSION FACTOR" of any Eligible Acquired Loan shall
mean the percentage set forth below corresponding to the time elapsed since
such Eligible Acquired Loan was acquired by the Borrower:
<TABLE>
<S> <C>
Up to but less than 6 months 60%
6 months or more but less than 9 months 48%
9 months or more but less than 12 months 45%
12 months or more but less than 15 months 42%
15 months or more but less than 18 months 32%
18 months or more but less than 21 months 24%
21 months or more but less than 24 months 18%
24 months or more 0%
</TABLE>
For purposes of this definition, the date of acquisition of an Eligible
Acquired Loan which is an REO Note shall be deemed to be the date the original
Eligible Acquired Loan secured by the Underlying Real Estate was acquired by
the Borrower and not the date the REO Note which is secured by such Underlying
Real Estate is executed and delivered to the Bank.
"ASSET" shall mean each Acquired Loan, REO Note or other property
comprising an Asset Portfolio.
"ASSET FILE" shall mean all Acquired Loans and Acquired Loan Documents
assigned to the Bank as Collateral for the Loans, together with all other
documents relating to such Asset to be delivered to the Bank, any Servicer or
the Borrower.
"ASSET PORTFOLIO REPORT" shall mean a report in a form acceptable to
the Bank showing various information concerning each Asset Portfolio and each
Asset included therein as of the end of the week preceding delivery of such
report, including without limitation, weekly Gross Collections, the outstanding
balances of each Acquired Loan, the Fair Market Value of each Asset (to the
extent required under the terms of this Agreement), settlement information,
default status, and such other information as the Bank may otherwise request,
including any additional information in the asset status reports routinely
prepared by the Borrower related to such Assets.
"ASSET PORTFOLIOS" shall mean one or more pools or portfolios of
Acquired Loans comprised of:
(a) performing, nonperforming or under-performing
commercial loans, and/or
3
<PAGE> 5
(b) real estate or other assets acquired in connection
with the foreclosure, restructure or settlement of
nonperforming or under-performing loans, together
with all documents, instruments, certificates and
other information related thereto.
"BANK" shall mean Comerica Bank-Texas, a state banking association.
"BANKRUPTCY CODE" shall mean Title 11 of the United States Code, as
amended, or any successor act or code.
"BORROWER" shall mean Plymouth Commercial Mortgage Fund, a Delaware
business trust.
"BORROWING AUTHORIZATION" shall mean (i) with respect to a
corporation, a certificate of the Secretary or an Assistant Secretary of a
corporation as to the resolutions of the Board of Directors of such corporation
authorizing the execution, delivery and performance of the documents to be
executed by such corporation; the incumbency and signature of the officer of
such corporation executing such documents on behalf of such corporation, and
the Organizational Documents of such corporation and (ii) with respect to a
partnership, joint venture or other non-individual Person, such written
instruments as shall be required by the Bank authorizing the execution,
delivery and performance of the documents to be executed by such Person; the
incumbency and signature of the representative of such Person executing such
documents on behalf of such Person, and the Organizational Documents of such
Person.
"BORROWING BASE" shall mean, on any day, the aggregate of the Acquired
Loan Borrowing Base Amounts for all Eligible Acquired Loans. In the event that
the Borrower is purchasing Acquired Loans with the proceeds of an advance
hereunder, the Acquired Loan Borrowing Base shall also include the Acquired
Loan Borrowing Base Amounts for all such Acquired Loans being purchased with
the proceeds of such advance to the extent that such new Acquired Loans will
become Eligible Acquired Loans contemporaneously with such advance.
"BORROWING BASE CERTIFICATE" shall mean a certificate in the form of
Exhibit A to this Agreement, completed in all appropriate respects and executed
by the chief executive officer, chief financial officer, or treasurer of the
Borrower or by any other officer of the Borrower designated in writing by any
of the chief executive officer, chief financial officer or treasurer, such
designation to be acceptable to the Bank in its sole discretion, and setting
forth the Borrower's computation of the Borrowing Base as of the date of such
certificate, and attaching a schedule or schedules in a form acceptable to the
Bank detailing the Net Acquisition Cost, Fair Market Value (if available at
such time), Appropriate Conversion Factor and Acquired Loan Borrowing Base
Amount for each Eligible Acquired Loan included in the Borrowing Base.
"BUSINESS DAY" shall mean a day on which the Bank is open to carry on
its normal commercial lending business.
4
<PAGE> 6
"CASH COLLATERAL ACCOUNT(S)" shall mean a segregated cash collateral
account or accounts maintained with the Bank and styled "Comerica Bank-Texas
Cash Collateral Account for the benefit of Plymouth Commercial Mortgage Fund"
which account shall be (a) subject to the provisions of this Agreement, and (b)
pledged and assigned to the Bank as additional security for the payment,
performance and observance of the Loans.
"COLLATERAL" shall mean (a) all property of any Obligor in the actual
or constructive possession of the Bank or any Affiliate of the Bank (or as to
which the Bank or any Affiliate of the Bank now or hereafter controls
possession by documents or otherwise), (b) all amounts in any deposit or other
account of any Obligor with the Bank or any Affiliate of the Bank, including
without limitation the Escrow Account (to the extent of the Borrower's right,
title and interest therein) and the Cash Collateral Accounts, (c) all of the
Borrower's Accounts, Chattel Paper, Documents, Equipment, Fixtures, General
Intangibles, Goods, Instruments, and Inventory, and (d) all other property
subject to any Security Documents, including without limitation, all Acquired
Loan Documents and accounts and proceeds thereof, wherever located and whether
now owned or hereafter acquired, together with all replacements thereof,
substitutions therefor, accessions thereto, and all proceeds and products
thereof, and all additional property (real or personal) of the Borrower which
is now or hereafter subject to a security interest, mortgage, lien, claim, or
other encumbrance granted by the Borrower to, or in favor of, the Bank.
"COLLATERAL ASSIGNMENT" shall mean one or more security agreements,
assignment of notes and liens, pledge agreements or other similarly named
documents executed by the Borrower in favor of the Bank, as security for the
Loans, each of which Collateral Assignment is intended to cover all of the
Acquired Loans, all REO Notes and all renewals, modifications, amendments,
supplements and restatements thereof, which collateral assignment shall be in
the form and substance acceptable to the Bank and which Collateral Assignments
shall be duly signed and notarized in accordance with applicable state law and
in proper form for recording, in order to confirm and perfect the Bank's Liens
in the Collateral.
"COMMITMENT AMOUNT" shall mean, as of any applicable date of
determination, $1,800,000, or such other amount as may hereafter be established
pursuant to Section 2.2.3. hereof, not to exceed $10,000,000; provided,
however, that if the Borrower reduces the Commitment Amount from time to time
under Section 2.2.4. of this Agreement, the Commitment Amount shall be deemed
to be such lesser amount; and provided, further, that if the original term of
this Agreement is extended beyond the date two (2) years from the date of this
Agreement, then the Commitment Amount during any such extended period shall be
such amount as the parties then agree.
"CONTRACT RATE" shall mean, as of any date of determination, the
annual rate of interest which, pursuant to Section 2.4.1. of this Agreement
would be applicable to the Note if the annual rate of interest were determined
without the Maximum Legal Rate limitation.
"CUSTODIAL AGREEMENT" shall mean a Custodial Agreement, in form and
substance acceptable to the Bank, by and between the Bank and the Borrower, as
such Custodial Agreement
5
<PAGE> 7
may be amended or supplemented from time to time, together with any replacement
or substitution therefor.
"DEBT" shall mean, as of any applicable date of determination, all
items of indebtedness, obligation or liability of a Person, whether matured or
unmatured, liquidated or unliquidated, direct or indirect, absolute or
contingent, joint or several, that should be classified as liabilities in
accordance with GAAP.
"DEFAULT" shall mean a condition or event which, with the giving of
notice or the passage of time, or both, would become an Event of Default.
"DISBURSEMENT DATE" shall mean each date upon which the Bank makes a
loan to the Borrower under Section 2.1 of this Agreement.
"DOLLARS" or "$" shall mean United States Dollars.
"DUE DILIGENCE REPORTS" shall mean the various written reports,
information and other materials that the Borrower prepared or assembled
containing descriptions and evaluations of the Acquired Loans and Mortgaged
Properties included in a particular Asset Portfolio, and the Borrower's
assessments and projections regarding same, or other information regarding such
Assets, including copies of purchase agreements, copies of any appraisals or
environmental site assessments, and the due diligence reports for each such
Asset Portfolio summarizing the Borrower's due diligence regarding such Assets
and the Mortgaged Properties.
"EBITDA" shall mean, as of the date of determination, Net Income
before interest, income tax, depreciation and amortization expense.
"ELIGIBLE ACQUIRED LOANS" shall mean, as of the date of determination,
the Acquired Loans of the Borrower which satisfy the following criteria for
inclusion in the Borrowing Base:
(a) With the exception of REO Notes and the Acquired
Loans acquired by the Borrower contemporaneously with the execution of this
Agreement from SWF 1995 Limited Partnership, each such Acquired Loan was
acquired by the Borrower from an unaffiliated third party in an arm's length
transaction.
(b) Each such Acquired Loan is evidenced by a promissory
note enforceable against the Account Debtor with respect thereto in accordance
with its terms.
(c) Except within the dollar amount limitations provided
in the last paragraph of this definition and as disclosed on the schedule
attached to the Borrowing Base Certificate, each such Acquired Loan is a
commercial or business purpose loan and is not for personal, family, household,
consumer, or agricultural purposes.
6
<PAGE> 8
(d) Each such Acquired Loan, to the extent that it has
been characterized by the Borrower as a secured loan, is secured by a valid and
perfected first priority lien, mortgage, or other security instrument, subject
only to Permitted Prior Liens. To the extent that an Acquired Loan is excluded
from the Borrowing Base for the reason that it is subject to Liens other than
Permitted Prior Liens which the Borrower discovers after the acquisition date
of such Acquired Loan, such Acquired Loan will be considered an Eligible
Acquired Loan, to the extent all other criteria are satisfied, at such time as
the Borrower recalculates the Fair Market Value of such Acquired Loan to take
into effect the existence of such Lien.
(e) Each Acquired Loan complies in all material respects
with all laws, rules, regulations or other policies applicable to it or
applicable to any person owing, holding, or having an interest in it.
(f) Each such Acquired Loan represents a legally valid
and enforceable claim which is due and owing to the Borrower by the applicable
Account Debtor and for such amount as is represented by the Borrower to the
Bank on such Borrowing Base Certificate.
(g) The unpaid balance of such Acquired Loan as
represented by the Borrower to the Bank on such Borrowing Base Certificate is
not subject to any valid defense, counterclaim, setoff, credit, allowance or
adjustment by the applicable Account Debtor.
(h) The Borrower has granted to the Bank a perfected
security interest in each Acquired Loan (as an item of the Collateral) prior in
right to all other Persons, and such Acquired Loan has not been sold,
transferred or otherwise pledged or assigned by the Borrower to any person,
other than the Bank.
(i) The Account Debtor on each such Acquired Loan is not:
(i) an affiliate of the Borrower (other than the
REO Affiliate),
(ii) the United States of America or any
department, agency or instrumentality
thereof,
(iii) a citizen or resident of any jurisdiction
other than one of the United States.
(k) The Borrower has obtained, reviewed and approved, in
accordance with Standard Industry Practices, all due diligence information with
respect to such Acquired Loans, including without limitation Environmental Site
Assessments for the Underlying Real Estate which secures such Acquired Loan, a
Title Policy for such Acquired Loan, and all Acquired Loan Documents, and all
such items are in the form and contain the provisions required under Standard
Industry Practices.
7
<PAGE> 9
(l) The representations and warranties contained in
Section 8 with respect to all Underlying Real Estate and REO Property securing
the Acquired Loans are true and correct; provided, that if the Borrower has
disclosed to the Bank in writing the particular representations or warranties
with respect to such property which are not true and correct and the Bank has
not disapproved such Acquired Loan from inclusion in the Borrowing Base after
review of such information, such Acquired Loan shall be treated as having
satisfied this condition.
In the event that any of the foregoing are not true and correct as to
any Acquired Loan, or in the event that the Bank determines in its sole and
absolute discretion, for any or no reason, to exclude any Acquired Loan from
classification as an Eligible Acquired Loan (notwithstanding that such Acquired
Loan satisfies the criteria set forth above), such Acquired Loan shall be
excluded from the Borrowing Base and the Borrower shall immediately pay to the
Bank, as a prepayment on the Loans, any mandatory prepayment required under
Section 2.8 as a result of the exclusion of such Acquired Loan from the
Borrowing Base.
In addition to the foregoing, the Eligible Acquired Loans included in
the Borrowing Base shall also be subject to the following limitations: (i) in
the event that the lesser of the Fair Market Value or Acquisition Cost of all
Eligible Acquired Loans to any one Account Debtor exceeds $1,500,000, the
amount in excess of $1,500,000 shall not constitute Eligible Acquired Loans;
and (ii) in the event that the sum (as calculated on the basis of the lesser of
Fair Market Value or Acquisition Cost) of (A) Eligible Acquired Loans which
constitute "Consumer Credit" under 12 C.F.R. Section 226 (Regulation Z of the
Board of Governors of the Federal Reserve System) and (B) unsecured Eligible
Acquired Loans, exceeds ten percent (10%) of the total Eligible Acquired Loans,
the amount in excess of such ten percent (10%) shall not constitute Eligible
Acquired Loans.
Nothing contained in this definition is intended to limit the Bank's
Collateral for the Loans, it being understood and agreed that the Collateral
for the Loans includes, among other property, all Acquired Loans regardless of
whether such Acquired Loans constitute Eligible Acquired Loans.
"ENVIRONMENTAL LAWS" shall mean all requirements imposed by any
applicable law (including The Resource Conservation and Recovery Act and The
Comprehensive Environmental Response, Compensation, and Liability Act), rule,
regulation or order of any governmental authority in effect at the applicable
time which relate to (i) noise; (ii) pollution, protection or clean-up of the
air, surface water, ground water or land; (iii) solid, gaseous or liquid waste
gener ation, recycling, reclamation, treatment, storage, disposal or
transportation; (iv) exposure to Hazardous Substances; (v) the safety or health
of employees or (vi) regulation of the manufacture, processing, distribution in
commerce, use, discharge, release, threatened release, emission or storage of
Hazardous Substances.
"ENVIRONMENTAL SITE ASSESSMENT" shall mean an environmental site
assessment report conforming to standards reasonably acceptable to the Bank
(herein called the "ACCEPTABLE STANDARDS"), which is in all respects otherwise
satisfactory to the Bank and which has been prepared by a qualified
environmental firm reasonably satisfactory to the Bank (a) indicating that, on
the basis of an investigation conducted in accordance with the Acceptable
Standards, (i) the firm found no
8
<PAGE> 10
Hazardous Substances present on or in the property that is the subject of its
report at levels that require reporting or remediation, or both, pursuant to
any Environmental Laws that are applicable to such property ("PROHIBITED
HAZARDOUS SUBSTANCES"), (ii) it did not learn of any conditions on or in the
land adjacent to the property that is the subject of its report that would
cause it to believe that there might be Prohibited Hazardous Substances present
on or in the property that is the subject of its report, and (iii) no notice of
violation of any of the Environmental Laws, or other claim or order issued
pursuant to any of the Environmental Laws, has been duly filed against such
property by any governmental authority; or (b) if any Prohibited Hazardous
Substance is present on such property or if any such notice of violation, claim
or order has been filed, providing evidence satisfactory to the Bank as to the
extent and nature of the environmental problem caused thereby and the likely
costs and duration of any recommended remediation.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, or any successor act or code.
"ESCROW ACCOUNT" shall mean a non-interest bearing account established
by the Borrower with the Bank into which the Escrow Payments are to be
deposited.
"ESCROW PAYMENTS" shall mean all payments made by Account Debtors
(including REO Escrow Payments) for a specified purpose (such as real estate
tax payments, insurance payments, etc.) other than payments of principal,
interest, fees and other amounts owed to the Borrower with respect to the
Acquired Loans and all net insurance and condemnation proceeds received by the
Borrower which are not available to be applied to the outstanding balance under
the Acquired Loans in questions but rather are to be used for purposes of
repairing or rebuilding the real property in question.
"EVENT OF DEFAULT" shall mean any of those conditions or events listed
in Section 9.1. of this Agreement.
"FAIR MARKET VALUE" shall mean, as to any particular Asset, the fair
market value of such asset, as determined in accordance with GAAP.
"FINANCIAL STATEMENTS" shall mean all those balance sheets, earnings
statements and other financial data (whether of the Borrower, any other
Obligor, the Investment Adviser or any Servicer) which have been furnished to
the Bank for the purpose of, or in connection with, this Agreement and the
transactions contemplated hereby.
"FINANCING STATEMENTS" shall mean UCC financing statements describing
the Bank as secured party and the Borrower as debtor covering the Collateral
and otherwise in such form, for filing in such jurisdictions and with such
filing offices as the Bank shall reasonably deem necessary or advisable.
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"GAAP" shall mean, as to a particular Person, such accounting practice
as, in the opinion of the independent certified public accountants of
recognized national standing regularly retained by such Person and acceptable
to the Bank, conforms at the time to generally accepted accounting principles,
consistently applied. GAAP shall mean those principles and practices (a) which
are recognized as such by the Financial Accounting Standards Board, (b) which
are applied for all periods after the date hereof in a manner consistent with
the manner in which such principles and practices were applied to the most
recent audited financial statements of the relevant Person furnished to the
Bank, and (c) which are consistently applied for all periods after the date
hereof so as to reflect properly the financial condition, and results of
operations and changes in financial position, of such Person. If any change in
any accounting principle or practice is required by the Financial Accounting
Standards Board in order for such principle or practice to continue as a GAAP
or practice, all reports and financial statements required hereunder may be
prepared in accordance with such change only after written notice of such
change is given to the Bank.
"GROSS COLLECTIONS" an amount equal to any and all cash proceeds
received by each Obligor or any Servicer with respect to the Borrower's or such
other Obligor's ownership, management and/or disposition of any and all Assets
in any Asset Portfolio, including, without limitation, (i) all interest,
principal, and other payments on Acquired Loans from any source, (ii) all Net
Operating Income from REO Properties, (iii) loan settlement payments, any
restructure or commitment or other loan fees, payments on any judgments or
settlement of litigation with respect to Acquired Loans, (iv) net sales
proceeds from the sale of REO Properties, Acquired Loans, Mortgaged Property
and other items of Collateral, (v) income from any Mortgaged Property, (vi) all
insurance proceeds and condemnation proceeds, (vii) all payments received by
the Borrower from any seller of an Asset Portfolio pursuant to the applicable
sale agreement, including all proceeds of Assets "put back" to such seller, and
(viii) all interest, dividends and other earnings directly or indirectly paid
to the Borrower or any other Obligor on funds, accounts and investments of the
Borrower or such Obligor, but excluding any escrow deposits paid to the
Borrower or such Obligor for tax or insurance escrows under the Acquired Loans
which are deposited in the Escrow Account.
"GUARANTOR" shall mean each Subsidiary and REO Affiliate, jointly and
severally, whether one or more.
"GUARANTY" shall mean one or more guaranty agreements, executed by
each Guarantor in favor of the Bank, as the same may be amended, supplemented,
or restated.
"HAZARDOUS SUBSTANCE" shall mean any substance, product, waste,
pollutant, material, chemical, contaminant, constituent, or other material
which is or becomes listed, regulated, or addressed under any Environmental
Law, including, without limitation, asbestos, petroleum, and polychlorinated
biphenyls.
"INDEBTEDNESS" shall mean all loans, advances and indebtedness of the
Borrower to the Bank under this Agreement, and all other indebtedness,
obligations and liabilities whatsoever of the Borrower to the Bank, whether
matured or unmatured, liquidated or unliquidated, direct or indirect,
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<PAGE> 12
absolute or contingent, joint or several, due or to become due, now existing or
hereafter arising pursuant to the Loan Documents.
"INTEREST RATE ANNEX" shall mean Annex I, as it may from time to time
be amended, modified, restated or supplemented.
"INVESTMENT ADVISER" shall mean Emerald Advisers, Inc., a Delaware
corporation.
"LIEN" shall mean any mortgage, pledge, charge, encumbrance, security
interest, collateral assignment or other lien or restriction of any kind,
whether based on common law, constitutional provision, statute or contract, and
shall include reservations, exceptions, encroachments, easements, rights of
way, covenants, conditions, restrictions, leases and other title exceptions.
"LOAN DOCUMENTS" shall mean any and all papers now or hereafter
governing, evidencing, guaranteeing or securing or otherwise relating to all or
any part of the Indebtedness, including, without limitation, the Note, this
Agreement, the Security Documents, all instruments, certificates and agreements
now or hereafter executed or delivered to the Bank pursuant to any of the
foregoing or in connection with the Loans or any commitment regarding the Loans
and all amendments, modifications, renewals, extensions, increases and
rearrangements of, and substitutions for, any of the foregoing.
"LOANS" shall mean advances made by the Bank to the Borrower under
Section 2.1 of this Agreement.
"LOCKBOX" shall mean a Post Office Box specified in the Lockbox
Agreement established by the Borrower with the Bank for receipt of all payments
relating to an Asset Portfolio.
"LOCKBOX AGREEMENT" shall mean collectively, any and all agreements
between the Borrower and the Bank establishing a Lockbox, as the same may be
amended, restated, replaced, substituted for or supplemented from time to time.
"MAXIMUM AVAILABLE AMOUNT" shall mean, on any day, the lesser of (1)
the Commitment Amount (as it may be increased) or (2) the Borrowing Base.
"MAXIMUM LEGAL RATE" shall have the meaning set forth in Section 2.5
of this Agreement.
"MORTGAGE" shall mean any deed of trust or mortgage, (duly
acknowledged and in recordable form) covering a Mortgaged Property executed by
the Borrower or an REO Affiliate, as appropriate, granted to the Bank to secure
repayment of the Loans substantially in the form approved by the Bank, and all
renewals, extensions, modifications, amendments, or supplements thereto, and
all mortgages or deeds of trust given in renewal, extension, modification,
restatement or replacement thereof.
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<PAGE> 13
"MORTGAGED PROPERTY OR MORTGAGED PROPERTIES" shall mean any and all
lots or parcels of land which the Borrower or any REO Affiliate owns on the
date of this Agreement or which it may hereafter acquire as part of an Asset
Portfolio or any Underlying Real Estate which the Borrower or any REO Affiliate
may hereafter own as a result of a foreclosure or deed-in-lieu of foreclosure
or otherwise, and improvements, fixtures and personal property located thereon
and all other property referenced in and subject to the Mortgages. The
Mortgaged Property is intended to include all of the above-described real
property whether or not a Mortgage is actually granted or filed.
"NET ACQUISITION COST" shall mean, for any Acquired Loan, the
Acquisition Cost of such Acquired Loan minus all principal payments made by the
applicable Account Debtor on such Acquired Loan after the date of the
Borrower's acquisition of such Acquired Loan. The Net Acquisition Cost of any
REO Note comprising an Acquired Loan shall be the Net Acquisition Cost, on the
date of the applicable foreclosure, of the Acquired Loan which was originally
secured by the Underlying Real Estate which secures the REO Note, minus all
principal payments made by the REO Affiliate on such REO Note after such
foreclosure date.
"NET INCOME" shall mean the net income (or loss) of a Person for any
period determined in accordance with the federal income tax basis of accounting
but excluding in any event: (a) any gains or losses on the sale or other
disposition, not in the ordinary course of business, of investments or fixed or
capital assets, and any taxes on the excluded gains and any tax deductions or
credits on account of any excluded losses; and (b) in the case of the Borrower,
net earnings of any Person in which the Borrower has an ownership interest,
unless such net earnings shall have actually been received by the Borrower in
the form of cash distributions.
"NET OPERATING INCOME" shall mean, with respect to each REO Property,
for each calendar month, the excess of (a) all of the Borrower's or the REO
Affiliate's cash receipts related to such REO Property (including all rents and
other revenues but excluding security deposits) over (b) all reasonable and
customary expenses actually paid during such period which, in accordance with
the federal income tax basis of accounting, would be classified as operating
expenses for a property similar to such REO Property (including utility-related
expenses, taxes, insurance expenses, repair and maintenance expenses and
janitorial and property-management fees actually paid by the Borrower or the
REO Affiliate to an unrelated third party) plus all reasonable and customary
capital expenditures actually paid during such period for capital improvements
made in accordance with Standard Industry Practices and not reasonably
disapproved by the Bank.
"NOTE" shall mean a promissory note conforming to Section 2.3.1 of
this Agreement and in the form of Exhibit B to this Agreement, and any and all
renewals, extensions, modifications, rearrangements and/or replacements
thereof.
"OBLIGORS" shall mean the Borrower, all of its Subsidiaries, all REO
Affiliates, and any other Person now or hereafter primarily or secondarily
liable on the Loans to the Borrower under this Agreement, and "OBLIGOR" shall
mean any one of them.
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<PAGE> 14
"ORGANIZATIONAL DOCUMENTS" shall mean, with respect to a corporation,
the certificate of incorporation, articles of incorporation and bylaws of such
corporation; with respect to a partnership, the partnership agreement
establishing such partnership; with respect to a joint venture, the joint
venture agreement establishing such joint venture, and with respect to a trust,
the instrument establishing such trust; in each case including any and all
modifications thereof as of the date of the Loan Document referring to such
Organizational Document and any and all future modifications thereof which are
consented to by the Bank.
"PAST DUE RATE" shall mean on any day the lesser of (a) Prime Rate (as
defined in the Interest Rate Annex) for such day plus five percent (5%) per
annum and (b) the Maximum Legal Rate on such day.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
person succeeding to the present powers and functions of the Pension Benefit
Guaranty Corporation.
"PERMITTED LIENS" shall mean:
a. Liens and encumbrances in favor of the Bank;
b. Liens for taxes, assessments or other governmental
charges incurred in the ordinary course of business and not yet past due or
being contested in good faith by appropriate proceedings and, if requested by
the Bank, bonded in a manner satisfactory to the Bank;
c. Liens not delinquent created by statute in connection
with worker's compensation, unemployment insurance, social security and similar
statutory obligations; and
d. Permitted Prior Liens.
"PERMITTED PRIOR LIENS" shall mean Liens upon any REO Property,
Mortgaged Property or Underlying Real Estate existing on the date the Acquired
Loan secured by such property was originally acquired by the Borrower, only to
the extent that such prior Liens are disclosed by the Borrower to the Bank in
an Asset Portfolio Report submitted at the time of the acquisition of such
Acquired Loan. In the event any Liens are discovered by the Borrower after the
acquisition date of any Acquired Loan, such Acquired Loan shall be excluded
from the Borrowing Base in accordance with the requirements of the definition
of Eligible Acquired Loans. Upon the recalculation of Fair Market Value of
such Acquired Loan and its reinclusion in the Borrowing Base, such Lien shall
thereafter be a Permitted Prior Lien for purposes of this Agreement.
"PERSON" shall mean any individual, corporation, partnership, joint
venture, association, trust, unincorporated association, joint stock company,
government, municipality, political subdivision or agency or other entity.
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<PAGE> 15
"PLEDGE OF ACCOUNTS" shall mean one or more security agreements,
collateral assignments, pledge agreements or other similarly named documents in
form and substance acceptable to the Bank, executed by the Borrower in favor of
the Bank, evidencing a first priority security interest in and collateral
assignment of all deposit or other accounts of the Borrower with the Bank
including without limitation the Escrow Account and the Cash Collateral
Accounts.
"PROJECTED GROSS COLLECTIONS" shall mean the Gross Collections which
the Borrower and any Servicer reasonably expect to receive from an Asset
Portfolio which has been determined in a manner consistent with the Borrower's
and any such Servicer's past practices taking into consideration the Borrower's
and any such Servicer's historical performance in collecting assets similar to
the Collateral.
"PROTECTIVE ADVANCE" shall mean a payment of expenses by the Borrower
or any Servicer which in the reasonable determination of the Borrower or any
such Servicer shall be necessary to maintain the value of any asset securing
payment of an Acquired Loan (such expenses shall include without limitation, ad
valorem taxes, environmental assessments or inspections, environmental
remediation expenses, insurance expenses, security, deferred maintenance,
litigation expenses and expenses to enforce remedies).
"REO AFFILIATE" shall mean (a) Plymouth REO, Inc., a Delaware
corporation, and/or (b) any other entity that is controlled, directly or
indirectly, by the Borrower and owns or acquires title to any real property
securing an Acquired Loan.
"REO NOTE" shall mean, as to each REO Property, a demand promissory
note to be delivered by the REO Affiliate which owns the REO Property in
question to the Borrower that shall (a) be in a principal amount no greater
than the Fair Market Value of the REO Property at the time of foreclosure, (b)
require principal and interest payments due thereunder to be paid not less
frequently than the last day of each Interest Period (as defined in the
Interest Rate Annex), (c) require principal and interest payments to be in an
amount equal to all Net Operating Income received by such REO Affiliate with
respect to the underlying REO Property each calendar month, (d) provide that an
Event of Default shall constitute an event of default thereunder permitting the
acceleration of all amounts owing thereunder and (e) in all other respects be
in form and substance satisfactory to the Bank.
"REO PROPERTY" shall mean any and all real property (together with any
fixtures appurtenant thereto and any improvements thereon) or interest in real
property now or hereafter owned by any REO Affiliate including (a) as of the
effective date of any Loan, the real property specifically described on a
Schedule attached to the related Borrowing Request and (b) in general, any real
property that has been, or shall be, (i) foreclosed upon by a seller, the
Borrower or any REO Affiliate or (ii) conveyed to any REO Affiliate by a deed
in lieu of foreclosure, all of which shall be deemed to constitute proceeds of
the Collateral.
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<PAGE> 16
"REO PROPERTY MORTGAGE" shall mean a Mortgage, in form and substance
acceptable to the Bank, pursuant to which a REO Affiliate shall grant to the
Borrower a first-priority lien on and security interest in the REO Property,
subject only to Permitted Prior Liens.
"REO SECURITY DOCUMENTS" shall mean those certain mortgages or deeds
of trust, assignments of leases and rents, security agreements, and appropriate
UCC financing statements, all in form and substance satisfactory to the Bank,
as required by the Bank, for each REO Property, to be executed by each REO
Affiliate in favor of the Borrower and pursuant to the terms of which, as
security for the applicable REO Note (and, at the Bank's option, the Note),
there shall be (a) granted and conveyed to the Borrower Liens upon each REO
Property (including, all personal property associated therewith) owned by such
REO Affiliate from time to time as is described therein and (b) assigned to the
Borrower all leases and rents with respect thereto; as the same may be amended,
renewed, modified, extended or restated from time to time with the prior
written consent of the Bank.
"SECURITY DOCUMENTS" shall mean (a) the Collateral Assignments, (b)
the Pledge of Accounts, (c) the Financing Statements, (d) the Lockbox Agreement
and any and all other documentation reasonably required by the Bank to
establish a Lockbox with the Bank any and all other security agreements,
assignments, collateral assignments pledges, mortgages, deeds of trust and
guaranties from time to time securing the Indebtedness or any thereof, (e) one
or more other security agreements pursuant to which the Borrower grants to the
Bank a first priority security interest in any of the Collateral and (f) any
and all renewals, extensions, amendments, modifications, replacements,
supplements, substitutions and rearrangements thereof, thereto or therefor.
"SERVICER" shall mean any Person retained by the Borrower with the
written approval of the Bank or any replacement therefor designated pursuant to
the terms of any Servicing Agreement and approved in writing by the Bank.
Initially, there shall be no separate Servicer for the Acquired Loans and the
Borrower shall perform all functions normally performed, in accordance with
Standard Industry Practices, by a servicer of the Acquired Loans.
"SERVICING AGREEMENT" shall mean any Servicing Agreement, approved in
writing by the Bank, entered into by the Borrower and any Servicer with respect
to servicing the Collateral, together with all amendments and modifications
thereto, all of the Borrower's rights thereunder having been collaterally
assigned to the Bank under the Security Documents.
"STANDARD INDUSTRY PRACTICES" shall mean such due diligence,
collateral control and collection procedures that are customarily followed by
Persons actively engaged in the business of acquiring distressed assets in a
bulk transaction and managing and disposing of such assets, provided such due
diligence and collateral control and collection procedures shall be at least as
rigorous as the Borrower and the REO Affiliate apply in managing and disposing
of their assets.
"SUBSIDIARIES" shall mean any corporation (whether now existing or
hereafter organized or acquired) of which more than fifty percent (50%) of the
outstanding voting securities shall, as of any
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<PAGE> 17
applicable date of determination, be owned directly, or indirectly through one
or more intermediaries, by the Borrower.
"SUBORDINATED DEBT" shall mean the revolving line of credit in the
principal amount of $250,000 from Southwest Federated Holding Company, Inc. to
the Borrower, and all renewals, extensions and modifications, but not
increases, of such line of credit.
"SUBORDINATION AGREEMENT" shall mean that certain Subordination
Agreement dated on or about the date hereof by and among the Borrower, the Bank
and Southwest Federated Holding Company, Inc., pursuant to which payment of the
Subordinated Debt, and any Liens therefor, has been subordinated to the Loans
and the Liens therefor.
"TANGIBLE EFFECTIVE NET WORTH" shall mean, as of any applicable date
of determination, Tangible Net Worth plus Subordinated Debt.
"TANGIBLE NET WORTH" shall mean, as of any applicable date of
determination, the excess of (a) the net book value of all assets of a Person
(other than patents, patent rights, trademarks, trade names, franchises,
copyrights, licenses, goodwill and similar intangible assets) after all
appropriate deductions in accordance with the federal income tax basis of
accounting (including, without limitation, reserves for doubtful receivables,
obsolescence, depreciation and amortization), over (b) all Debt of such Person.
"TELEPHONE NOTICE AUTHORIZATION" shall mean a letter in the form and
content of Exhibit "D" to this Agreement authorizing telephone notice of
borrowing and establishing a codeword system of identification in connection
therewith.
"TERMINATION DATE" shall mean the earlier of (a) the date two (2)
years from the date of this Agreement; (b) the date on which the Bank's
commitment to make Loans is terminated by the Bank pursuant to Section 9.2; (c)
the date on which the Bank's commitment to make Loans is terminated by the
Borrower pursuant to Section 2.2.4.; provided, however, that if the original
term of this Agreement is extended pursuant to Section 2.12. hereof beyond the
date two (2) years from the date of this Agreement, then the Termination Date
shall be such date as the parties then agree in writing.
"TITLE COMPANY" shall mean a title company or title companies selected
by the Borrower and not disapproved by the Bank, that issues all or any part of
a Title Policy.
"TITLE POLICY" shall mean a Mortgagee or Loan Policy of Title
Insurance issued and underwritten by a Title Company for the benefit of (a) the
Bank covering that portion of the Mortgaged Property therein described and
insuring the lien of the Mortgage which covers such portion of the Mortgaged
Property, or (b) the Borrower insuring a lien on Underlying Real Estate
securing an Acquired Loan.
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<PAGE> 18
"UCC" shall mean the Uniform Commercial Code as in effect in the State
of Texas and as amended from time to time.
"UNDERLYING REAL ESTATE" shall mean the real property, together with
all improvements thereon, which secures any of the Acquired Loans, or any one
of such parcels of real property.
1.2. Accounting Terms. All accounting terms not specifically
defined in this Agreement shall be construed in accordance with GAAP, except as
otherwise specifically noted.
1.3. Singular and Plural. Where the context herein requires, the
singular number shall be deemed to include the plural, and vice versa.
SECTION 2. LOANS, INTEREST AND FEES.
2.1. Revolving Loan. Subject to the terms and conditions of this
Agreement and the other Loan Documents, the Bank agrees to make loans to the
Borrower on a revolving basis of such amount as the Borrower shall request
pursuant to Section 2.2. of this Agreement at any time from the date of this
Agreement until the Termination Date, up to an aggregate principal amount
outstanding at any time not to exceed the Maximum Available Amount, with the
Borrower having the right to borrow, repay and reborrow amounts hereunder,
provided that each Disbursement Date under this Agreement must be a Business
Day and provided that the principal amount of each Loan must be in the minimum
amount of $5,000.
2.2. Borrowing Procedures.
2.2.1. Notice. The Borrower shall give the Bank notice of
the Borrower's desire for a Loan by 2:00 p.m. (Austin, Texas time) on the day
of the requested Loan, otherwise the following Business Day shall be the
Disbursement Date. Such notice shall specify the proposed Disbursement Date
and the principal amount of the proposed Loan. Prior to such telephone notice,
the Borrower shall have executed and delivered to the Bank a Telephone Notice
Authorization.
2.2.2. Bank Obligations. The Bank agrees to make the Loan
on the Disbursement Date as set forth in a notice to the Bank from the Borrower
conforming to the requirements of Section 2.2.1 by crediting the Borrower's
general deposit account with the Bank in the amount of such Loan, provided,
however, that the Bank shall not be so obligated if:
(1) Any of the conditions precedent set forth in
Section 4. of this Agreement shall not have been satisfied or waived by the
Bank in accordance with Section 10.3. of this Agreement; or
(2) Such proposed Loan would cause the aggregate
unpaid principal amount of the Loans outstanding under this Agreement to exceed
the lesser of the Commitment Amount or the Borrowing Base, on the Disbursement
Date.
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2.2.3. Increase of Commitment Amount. Initially, the
Commitment Amount shall be equal to $1,800,000. Provided that it is in
compliance with all provisions of this Agreement and no Default or Event of
Default shall then exist, at any time prior to February 14, 1997 (but at no
time thereafter) the Borrower may unilaterally exercise the right to require
that the Commitment Amount be increased as follows:
(1) the Borrower must have actually received
additional paid-in equity capital for which it has issued beneficial ownership
interests, such equity capital to be over and above the equity capital
reflected on the Borrower's books and records in the most current Financial
Statements delivered to the Bank by the Borrower on or about the effective date
of this Agreement.
(2) the Borrower shall provide the Bank with a
written notice setting forth (i) the increase in the Borrower's paid-in equity
capital, (ii) the amount to which the Borrower desires to have the Commitment
Amount increased, which increase shall in no event be greater than the amount
of the increase in the Borrower's paid-in equity capital, and (iii) a current
Financial Statement reflecting the total amount of paid-in equity capital.
As long as by February 14, 1997, the written notification required above has
been received by the Bank and all other conditions to the increase have been
satisfied, as reasonably determined by the Bank, the Commitment Amount will be
increased effective five (5) Business Days after the receipt by the Bank of the
notice and supporting information required above.
In no event will the Commitment Amount be greater than $10,000,000 at any time.
2.2.4. Termination or Reduction in Commitment by Borrower.
The Borrower, at any time and from time to time (except as may hereinafter be
provided), upon at least five Business Days' prior written notice received by
the Bank, may permanently terminate the Bank's commitment to make Loans under
this Agreement or permanently reduce the Commitment Amount by an integral
multiple of $100,000. On the effective date of such termination or reduction,
the Borrower shall pay to the Bank, in the case of a termination, the aggregate
unpaid principal amount of all Loans, or, in the case of a reduction, the
amount, if any, by which the aggregate unpaid principal amount of all Loans
exceeds the then reduced Commitment Amount, together in either case with all
interest accrued and unpaid on the principal amounts so prepaid. The notice
shall specify the Termination Date or the reduced Commitment Amount and the
effective date of the reduction, as the case may be. The Borrower may not
revoke any such notice of termination or reduction without the prior written
consent of the Bank.
2.3. Note.
2.3.1. Revolving Note. The Loans shall be evidenced by the
Note, executed by the Borrower, dated the date of this Agreement, payable to
the Bank on the Termination Date (unless sooner accelerated pursuant to the
terms of this Agreement), in the principal amount of $10,000,000.
Notwithstanding that the full amount of the Note is $10,000,000, the Bank shall
in no event be
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<PAGE> 20
obligated to make any advance if after such advance the aggregate principal
amount of all Loans then outstanding would exceed the Commitment Amount at such
time. The date and amount of each Loan made by the Bank and of each repayment
of principal thereon received by the Bank shall be recorded by the Bank in its
records or, at the option of the Bank, on a schedule attached to the Note. The
aggregate unpaid principal amount so recorded by the Bank shall constitute the
best evidence of the principal amount owing and unpaid on the Note, provided,
however, that the failure by the Bank to so record any such amount or any error
in so recording any such amount (whether on the schedule attached to the Note
or otherwise) shall not limit or otherwise affect the obligations of the
Borrower under this Agreement or the Note to repay the principal amount of all
the Loans together with all interest accrued or accruing thereon.
2.4. Interest; Payments.
2.4.1. Interest. Subject to the provisions of Section 2.5.
below, the Note shall bear interest on the outstanding principal balance from
time to time outstanding at the rate or rates provided for in the Interest Rate
Annex.
2.4.2. Payments.
(a) Accrued and unpaid interest on the unpaid
principal balance of the Note shall be due and payable on the Interest Payment
Dates (as defined in the Interest Rate Annex) and the principal of the Note
shall be due and payable in full on the Termination Date; provided, that the
Borrower shall also make the principal prepayments on the Note provided under
Section 6.16.2.
(b) Except to the extent otherwise provided
herein, all payments of principal, interest and other amounts to be paid by the
Borrower to the Bank hereunder, under the Note and the other Loan Documents
shall be made in Dollars, in immediately available funds.
(c) If the due date of any payment hereunder or
under the Note falls on a day which is not a Business Day, the due date for
such payments (except as otherwise provided in the Interest Rate Annex) shall
be extended to the next succeeding Business Day and interest shall be payable
for the period of such extension.
2.5. Maximum Rate. The following provisions shall control this
Agreement and the Note:
(a) No agreements, conditions, provision or stipulations
contained in this Agreement, the Note, any of the other Loan Documents or in
any other agreement between the Borrower and the Bank, or the occurrence of an
Event of Default, or the exercise by the Bank of the right to accelerate the
payment of the maturity of principal and interest, or to exercise any option
whatsoever contained in this Agreement or any other agreement between the
Borrower and the Bank, or the arising of any contingency whatsoever, shall
entitle the Bank to collect, in any event, interest exceeding the maximum rate
of nonusurious interest allowed from time to time by applicable state or
federal laws as now or as may hereinafter be in effect (the "MAXIMUM LEGAL
RATE") and in no
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<PAGE> 21
event shall the Borrower be obligated to pay interest exceeding such Maximum
Legal Rate, and all agreements, conditions or stipulations, if any, which may
in any event or contingency whatsoever operate to bind, obligate or compel any
Obligor to pay a rate of interest exceeding the Maximum Legal Rate shall be
without binding force or effect, at law or in equity, to the extent only of the
excess of interest over such Maximum Legal Rate. In the event any interest is
charged in excess of the Maximum Legal Rate (the "EXCESS"), the Borrower
acknowledges and stipulates that any such charge shall be the result of an
accidental and bona fide error, and such Excess shall be, first, applied to
reduce the principal of any obligations due, and, second, returned to the
Borrower, it being the intention of the parties hereto not to enter at any time
into an usurious or otherwise illegal relationship. The parties hereto
recognize that with fluctuations in the Prime Rate from time to time announced
by the Bank and other fluctuations in the Contract Rate such an unintentional
result could inadvertently occur. By the execution of this Agreement, the
Borrower covenants that the credit or return of any Excess shall constitute the
acceptance by the Borrower of such Excess, and the Borrower shall not seek or
pursue any other remedy, legal or equitable, against the Bank based, in whole
or in part, upon the charging or receiving of any interest in excess of the
Maximum Legal Rate. For the purpose of determining whether or not any Excess
has been contracted for, charged or received by the Bank, all interest at any
time contracted for, charged or received by the Bank in connection with the
Borrower's obligations shall be amortized, prorated, allocated and spread in
equal parts during the entire term of this Agreement. If at any time the rate
of interest payable hereunder with respect to the Note shall be computed for
the Note on the basis of the Maximum Legal Rate, any subsequent reduction in
the Contract Rate shall not reduce such interest thereafter payable hereunder
with respect to the Note below the amount computed on the basis of the Maximum
Legal Rate until the aggregate amount of such interest accrued and payable
under this Agreement equals the total amount of interest which would have
accrued if such interest had been at all times computed solely on the basis of
the Contract Rate for the Note.
(b) Unless preempted by federal law, the rate of interest from
time to time in effect hereunder shall not exceed the "INDICATED RATE CEILING"
from time to time in effect under Chapter 1 of the Texas Credit Code (Vernon's
Texas Civil Statutes), Section (a)(1), art. 5069-1.04, as amended.
(c) The provisions of this Section shall be deemed to be
incorporated into every document or communication relating to the Indebtedness
which sets forth or prescribes any account, right or claims or alleged account,
right or claim of the Bank with respect to the Borrower (or any other Obligor
in respect of the Indebtedness), whether or not any provisions of this Section
is referred to therein. All such documents and communications and all figures
set forth therein shall, for the sole purpose of computing the extent of the
obligations asserted by the Bank thereunder, be automatically recomputed by the
Borrower or any other Obligor, and by any court considering the same, to give
effect to the adjustments or credits required by this Section.
(d) If the applicable state or federal law is amended in the
future to allow a greater rate of interest to be charged under this Agreement
than is presently allowed by applicable state or federal law, then the
limitation of interest hereunder shall be increased to the maximum rate of
interest allowed by applicable state or federal law, as amended, which increase
shall be effective hereunder
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on the effective date of such amendment, and all interest charges owing to the
Bank by reason thereof shall be payable upon demand.
(e) The provisions of Chapter 15 of the Texas Credit Code
(Vernon's Texas Civil Statutes), art. 5069-15, as amended, are specifically
declared by the parties hereto not to be applicable to this Agreement or any of
the other agreements executed in connection herewith or therewith or to the
transactions contemplated hereby or thereby.
2.6. Fees.
2.6.1. Preparation Fees. Upon demand of the Bank from time
to time, the Borrower shall pay to the Bank the amount of the expenses
(including reasonable attorney's fees and disbursements) incurred by the Bank
from time to time in connection with the preparation of this Agreement and the
other Loan Documents and/or the making (or preparation for the making) of
advances hereunder.
2.6.2. Commitment Fee. The Borrower agrees (subject to
Section 2.5 hereof) to pay to the Bank in arrears a commitment fee for the
period from and including the date of this Agreement to the Termination Date
equal to three-fourths of one percent (0.750%) per annum on the average daily
difference between the Commitment Amount (as it may be increased or decreased
from time to time) and the aggregate unpaid principal balance of the Loans.
Such commitment fee shall be payable quarterly on the first Business Day of
January, April, July and October during the term hereof, and on the Termination
Date, for the period ending such dates.
2.7. Basis of Computation. The amount of all accrued interest and
fees hereunder and under the Note shall be computed for the actual number of
days elapsed in a year consisting of 360 days, unless the Maximum Legal Rate
would thereby be exceeded, in which event, to the extent necessary to avoid
exceeding the Maximum Legal Rate, interest shall be computed on the basis of
the actual number of days elapsed in the applicable calendar year in which
accrued.
2.8. Mandatory Prepayments. The Borrower shall pay to the Bank the
amount, if any, by which the aggregate unpaid principal amount of all Loans
from time to time exceeds the lesser of the Commitment Amount or the Borrowing
Base, together with all interest accrued and unpaid on the amount of such
excess. Such prepayment shall be immediately due and owing without notice or
demand upon the occurrence of any such excess, and, at the option of the Bank,
any mandatory prepayment made under this Section 2.8 will reduce the Commitment
Amount. It is specifically noted that the prepayment of any outstanding
amounts or tranches subject to fixed rate financing by the Bank, including but
not limited to Eurodollar Borrowings (as defined in the Interest Rate Annex),
may result in the incurring by the Borrower of prepayment penalties and/or
other costs. The fact that a mandatory prepayment is effected with respect to
any fixed rate or Eurodollar Borrowings shall not operate to relieve the
Borrower of its obligations to pay such penalties and/or costs (if any).
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2.9. Basis of Payments; Application. All sums payable by the
Borrower to the Bank under this Agreement or the other Loan Documents shall be
paid directly to the Bank at its principal office in Dollars in immediately
available funds, without setoff, deduction or counterclaim. In its sole
discretion, the Bank may charge any and all deposit or other accounts
(including without limitation, an account evidenced by a certificate of
deposit) of the Borrower with the Bank for all or part of the Indebtedness then
due; provided, however, that this authorization shall not affect the Borrower's
obligation to pay, when due, any Indebtedness whether or not account balances
are sufficient to pay amounts dues. All payments and prepayments shall be
applied first to interest, the balance to principal. Except as provided in the
Interest Rate Annex or the Note, the Note may be prepaid in whole or in part
without the payment of any premium or fee.
2.10. Receipt of Payments. Any payment of the Indebtedness made by
mail will be deemed tendered and received only upon actual receipt by the Bank
at the address designated for such payment, whether or not the Bank has
authorized payment by mail or any other manner, and shall not be deemed to have
been made in a timely manner unless received on the date due for such payment,
time being of the essence. The Borrower expressly assumes all risks of loss or
liability resulting from non-delivery or delay of delivery of any item of
payment transmitted by mail or in any other manner. Acceptance by the Bank of
any payment in an amount less than the amount then due shall be deemed an
acceptance on account only, and the failure to pay the entire amount then due
shall be and continue to be an Event of Default, and at any time thereafter and
until the entire amount then due has been paid, the Bank shall be entitled to
exercise any and all rights conferred upon it herein upon the occurrence of an
Event of Default. The Borrower waives the right to direct the application of
any and all payments at any time or times hereafter received by the Bank from
or on behalf of the Borrower. The Borrower expressly agrees that to the extent
that the Bank receives any payment or benefit and such payment or benefit, or
any part thereof, is subsequently invalidated, declared to be fraudulent or
preferential, set aside or is required to be repaid to a trustee, receiver, or
any other party under any bankruptcy act, state or federal law, common law or
equitable cause, then to the extent of such payment or benefit, the
Indebtedness or part thereof intended to be satisfied shall be revived and
continued in full force and effect as if such payment or benefit had not been
made and, further, any such repayment by the Bank, to the extent that the Bank
did not directly receive a corresponding cash payment, shall be added to and be
additional Indebtedness payable upon demand by the Bank.
2.11. Recordation by the Bank of Amounts Due. The date and amount
of each Loan made by the Bank and of each repayment of principal and interest
thereon received by the Bank shall be recorded by the Bank in its records. The
aggregate unpaid amount so recorded by the Bank shall constitute the best
evidence of the amount owing and unpaid on the Indebtedness; provided, however,
that the failure by bank so to record any such amount or any error in so
recording any such amount shall neither increase nor limit the Borrower's
obligations under this Agreement or the Note to repay the principal amount of
all the Loans together with all interest accrued or accruing thereon.
2.12 Term of Agreement. Subject to the Bank's and the Borrower's
rights to terminate this Agreement earlier as set forth herein, the Bank's
commitment to make Loans shall be for an original period extending from the
initial Disbursement Date through the date two (2) years from the date of
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<PAGE> 24
this Agreement. If, after the Bank's receipt and review of all financial
statements required to be delivered to the Bank under this Agreement at such
time, the Bank desires to extend its commitment to make Loans hereunder for an
additional period of time, the Bank will notify the Borrower of the terms upon
which the Bank would be willing to do so. Notwithstanding any such notice or
any negotiations between the parties with respect to the terms of any proposed
extension, the Bank shall not be deemed to have committed to any extension or
renewal term until actual approval thereof by the Bank's loan committee.
Failing such loan committee approval, this Agreement and the Bank's commitment
to make Loans hereunder shall terminate as aforesaid not later than the date
two (2) years from the date of this Agreement. Subsequent renewal periods, if
any, shall be negotiated from time to time in a like manner.
SECTION 3. SECURITY.
To secure full and timely performance of the Borrower's covenants set
out in this Agreement and to secure the repayment of the Note and all other
Indebtedness whatsoever of the Borrower to the Bank, the Borrower agrees to
grant and assign a lien upon and security interest in the Collateral pursuant
to the Security Documents and other instruments and agreements satisfactory to
the Bank, and agrees to cause each Guarantor, whether now or hereafter in
existence, to execute and deliver a Guaranty to the Bank.
SECTION 4. CONDITIONS PRECEDENT TO OBLIGATIONS OF BANK.
4.1. Conditions to First Disbursement. The obligations of the Bank
under this Agreement are subject to the occurrence, prior to or on the
Disbursement Date first occurring, of each of the following conditions, any or
all of which may be waived in whole or in part by the Bank in writing:
4.1.1. Documents Executed and Filed. The Borrower shall
have executed (or caused to be executed) and delivered to the Bank, and, as
appropriate, there shall have been filed with such filing offices as the Bank
shall deem appropriate, the following, all in form satisfactory to the Bank:
(a) The Note;
(b) The Financing Statements;
(c) An initial Borrowing Base Certificate;
(d) The Guaranty;
(e) The other Security Documents;
(f) The Subordination Agreement;
(g) The Telephone Notice Authorization; and
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(h) Such other documents and instruments as the
Bank shall reasonably require.
4.1.2. Borrowing Authorizations. The Borrower shall have
furnished to the Bank a copy of resolutions of the Borrowing Authorization for
the Board of Directors of any Obligor which is a corporation authorizing the
execution, delivery and performance of this Agreement, the borrowing hereunder,
the Note and the other Loan Documents, which shall have been certified by the
Secretary or Assistant Secretary of each Obligor as of the Disbursement Date
first occurring.
4.1.3. Certified Organizational Documents. The Borrower
shall have furnished to the Bank a copy of the Organizational Documents of each
of the Obligors and the Investment Adviser.
4.1.4. Certificates of Existence, Good Standing and
Qualification. The Borrower shall have furnished to the Bank a certificate of
existence and, if available, good standing with respect to each Obligor and the
Investment Adviser for the respective state of incorporation or formation,
which shall have been certified by the state agencies issuing the same as of a
date reasonably near the Disbursement Date first occurring.
4.1.5. Audits. The Bank shall have received a report of an
independent collateral field examiner (which may be, or be affiliated with, the
Bank) with respect to the Acquired Loans of the Borrower in existence on the
Disbursement Date first occurring, prepared at the sole cost and expense of the
Borrower, with all matters disclosed therein being satisfactory to the Bank in
its discretion.
4.1.6. UCC Lien Searches. The Bank shall have received UCC
record and copy searches evidencing the appropriate filing and recording of the
Financing Statements and disclosing no notice of any liens or encumbrances
filed against any of the Collateral in any relevant jurisdiction other than as
relate to Permitted Liens.
4.1.7. Hazard Insurance. The Borrower shall have furnished
to the Bank, in form, content and amounts and with companies satisfactory to
the Bank in accordance with Section 6.5. hereof, evidence of hazard insurance
policies naming the Bank as "loss/payee" and "Mortgagee" under a standard
mortgage clause, and relating to the assets and properties (including, but not
limited to, the Collateral) of the Borrower.
4.1.8. Approval of Bank Counsel. All actions, proceedings,
instruments and documents required to carry out the transactions contemplated
by this Agreement or incidental thereto and all other related legal matters
shall have been satisfactory to and approved by Liddell, Sapp, Zivley, Hill &
LaBoon, L.L.P., legal counsel for the Bank or other counsel retained by the
Bank from time to time, and said counsel shall have been furnished with such
certified copies of actions and proceedings and such other instruments and
documents as they shall have reasonably requested.
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4.1.9. Financial Statements. The Borrower shall have
furnished to the Bank current Financial Statements on the Borrower and the
Investment Adviser, a current Borrowing Base Certificate and Asset Portfolio
Report and all other reports and certificates required under Section 6.1.
4.1.10. Collateral. With respect to each Acquired Loan in
existence on the Disbursement Date first occurring, the Bank shall have
received (i) the originally executed REO Notes and promissory notes evidencing
each of the Account Debtor's obligations to repay the Acquired Loans, endorsed
in blank by Allonge, or on the face of the notes themselves, as such notes may
have been amended, supplemented or otherwise modified as of the date of
delivery, (ii) originals of the fully executed Collateral Assignments of the
Acquired Loan Documents, and (iii) full and complete copies, certified by the
Borrower as being true and correct copies thereof, of the fully executed
Acquired Loan Documents (other than the promissory notes originals of which are
required as provided above) related to such Acquired Loans, with the originals
of the Acquired Loan Documents to be delivered within thirty (30) days of the
first Disbursement Date.
4.1.11. Diligence Reports. If requested by the Bank, with
respect to each Acquired Loan included in existence on the Disbursement Date
first occurring, the Bank shall have received copies of the Due Diligence
Reports and any additional information, report or documentation that may be
reasonably requested by the Bank or its counsel.
4.1.12. Purchase Documentation. With respect to each
Acquired Loan in existence on the Disbursement Date first occurring, the Bank
shall have received certified copies of all documentation related to the
Borrower's acquisition of the Asset Portfolio thereto (including the applicable
sale agreement, any assignments to the Borrower related thereto and the related
closing statement) and the REO Affiliate's acquisition of title to REO Property
together with evidence that all such documents (including the applicable sale
agreement) have been duly authorized, executed and delivered by the parties
thereto.
4.1.13. Opinion of Counsel. The Bank shall have received the
favorable, written opinions of (i) Kenneth L. Benight, Jr. and Sutherland,
Asbill & Brennan, counsel to the Borrower, each REO Affiliate and the
Investments Adviser regarding the Borrower, each REO Affiliate, the Investment
Adviser, the Loan Documents, and the transactions contemplated by the Loan
Documents; (ii) counsel satisfactory to the Bank qualified in such
jurisdictions as the Bank deems appropriate to the effect that the Bank's
security interest in the Acquired Loans is perfected by possession of the notes
held by the Bank and that the recording of an assignment of mortgage is not
necessary to perfect such security interest; and (iii) such other opinions as
the Bank may reasonable request.
4.1.14. Other Information and Documentation. The Bank shall
have received such other information, certificates, executed documents, and
reference and background checks, including without limitation reference and
background checks on Robert Swendson and Lon Critchfield and reference check on
Duncan-Smith Co., as it shall have requested and all such information, etc.,
must
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be prepared by a Person acceptable to the Bank at the borrower's sole cost and
expense, and must be acceptable to the Bank in its sole and absolute
discretion.
4.1.15. Payment of Existing Debt. The Borrower shall have
furnished to the Bank, in form and content satisfactory to the Bank, evidence
that Bank One-Texas, N.A. and all other Persons have terminated all security
interests in or collateral assignments of all of the Collateral.
4.2. Conditions to All Disbursements and Issuances. The obligation
of the Bank to make any Loan on any Disbursement Date, including, but not
limited to, the Disbursement Date first occurring, are subject to the
occurrence, prior to or on the Disbursement Date related to such Loan, of each
of the following conditions, any or all of which may be waived in whole or in
part by the Bank in writing:
4.2.1. Certificate. If such Loan is to made after the date
hereof and is not being made pursuant to an automated advance and repayment
mechanism provided to the Borrower by the Bank, the Bank shall have received a
certificate substantially in the form of Exhibit C attached hereto and
incorporated herein by reference for all purposes, executed by the chief
executive or chief financial officer of the Borrower, certified as of such
Disbursement Date, and confirming that, as of such Disbursement Date:
(a) No Default or Event of Default has occurred
and is continuing; and
(b) The warranties and representations set forth
in Section 5. of this Agreement are true and correct in all material respects
on and as of such Disbursement Date.
4.2.2. Bank Satisfaction. The Bank shall not know or have
any reasonable reason to believe that, as of such Disbursement Date:
(a) Any Default or Event of Default has occurred
and is continuing;
(b) Any warranty or representation set forth in
Section 5. of this Agreement shall not be true and correct in all material
respects; or
(c) Any provision of law, any order of any court
or other agency of government or any regulation, rule or interpretation thereof
has had a material adverse effect on the validity or enforceability of any Loan
Document.
4.2.3. Requirements for New Acquired Loans. Prior to making
any advance hereunder after the first Disbursement Date, if such advance is for
the purpose of acquiring any Acquired Loans after the first Disbursement Date
and the following conditions have not previously been satisfied with respect to
such new Acquired Loans or if such advance will be secured by Acquired Loans
acquired after the first Disbursement Date and the following conditions have
not previously been satisfied with respect to such new Acquired Loans, the
following conditions shall
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have been, in the Bank's opinion, satisfied in full, any and all of which may
be waived in whole or in part by the Bank in writing:
(a) The Borrower shall have executed (or caused to be
executed) and delivered to the Bank, and, as appropriate, there shall have been
filed with such filing offices as the Bank shall deem appropriate, a
"Supplement" (as defined in the Collateral Assignment) covering such new
Acquired Loans;
(b) With respect to each new Acquired Loan, the Bank
shall have received either (i) the originally executed REO Notes and promissory
notes evidencing each of the Account Debtor's obligations to repay the Acquired
Loans, endorsed in blank by Allonge, or on the face of the notes themselves, as
such notes may have been amended, supplemented or otherwise modified as of the
date of delivery, or (ii) confirmation from the Borrower and the seller of such
Acquired Loans, by written facsimile transmission, that the Borrower has paid
in full all amounts required to be paid for the purchase of the Acquired Loans
other than the amounts to be paid with the Loan proceeds requested by the
Borrower in connection with such acquisition and either (A) written
confirmation from the Borrower, by facsimile transmission, that the Borrower is
in possession of all such notes, properly endorsed as required above, and that
the Borrower will deliver such notes to the Bank within two (2) Business Days
of the date of the disbursement of Loan proceeds by the Bank in connection
therewith or (B) a fully executed Possession Letter, in the form of Exhibit E
attached hereto, pursuant to which the seller of such notes has agreed to
deliver such notes, properly endorsed as required above, to the Bank within ten
(10) Business Days of the date of the disbursement of Loan proceeds by the Bank
in connection therewith. In the event that the procedure outlined in clause
(ii) of this subsection is applicable and such notes are not delivered to the
Bank within the 2-day or 10-day period, as the case may be, such Acquired Loans
shall immediately cease to be Eligible Acquired Loans and the Borrower shall
pay to the Bank upon demand any mandatory prepayment required under Section 2.8
of this Agreement on account of the exclusion of such Acquired Loans from the
Borrowing Base.
(c) With respect to each new Acquired Loan, the Bank
shall have received confirmation from the Borrower that copies, certified by
the Borrower as being true and correct, of all other fully executed Acquired
Loan Documents, other than the original promissory notes to be delivered to the
Bank in accordance with the preceding subsection, related to such new Acquired
Loans will be delivered to the Bank within two (2) Business Days of the
Borrower's acquisition thereof (it being understood and agreed that the
Borrower shall deliver the originals of the other fully executed Acquired Loan
Documents to the Bank within thirty (30) days of the purchase by the Borrower
of such Acquired Loans). If such Acquired Loan Documents are not delivered to
the Bank within the applicable time period described above, such Acquired Loans
shall immediately cease to be Eligible Acquired Loans and the Borrower shall
pay to the Bank upon demand any mandatory prepayment required under Section 2.8
of this Agreement on account of the exclusion of such Acquired Loans from the
Borrowing Base.
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(d) If requested by the Bank, with respect to each
new Acquired Loan, the Bank shall have received copies of the Due Diligence
Reports and any additional information, report or documentation that may be
reasonably requested by the Bank or its counsel.
(e) With respect to each new Acquired Loan, the Bank
shall have received confirmation from the Borrower that certified copies of all
documentation related to the Borrower's acquisition of such Acquired Loans
(including the applicable sale agreement, any assignments to the Borrower
related thereto and the related closing statement) and the REO Affiliate's
acquisition of title to any REO Property together with evidence that all such
documents (including the applicable sale agreement) have been duly authorized,
executed and delivered by the parties thereto, will be delivered to the Bank
within two (2) Business Days of the Borrower's acquisition thereof. If such
items are not delivered to the Bank within such 2-day period, such Acquired
Loans shall immediately cease to be Eligible Acquired Loans and the Borrower
shall pay to the Bank upon demand any mandatory prepayment required under
Section 2.8 of this Agreement on account of the exclusion of such Acquired
Loans from the Borrowing Base.
(f) With respect to each new Acquired Loan secured by
Underlying Real Estate located in jurisdictions in which the Bank has not
previously received such an opinion under this Agreement, the Bank shall have
received (i) the favorable, written opinions of counsel satisfactory to the
Bank qualified in such jurisdictions as the Bank deems appropriate to the
effect that the Bank's security interest in such Acquired Loans is perfected by
possession of the notes held by the Bank and that the recording of an
assignment of mortgage is not necessary to perfect such security interest; and
(ii) such other opinions as the Bank may reasonable request.
(g) With respect to each new Acquired Loans, the Bank
shall have received such other information, certificates, and executed
documents as it shall have reasonably requested in a timely manner and all such
information, etc., must be prepared by a Person acceptable to the Bank at the
Borrower's sole cost and expense, and must be acceptable to the Bank in its
sole and absolute discretion.
(h) With respect to each new Acquired Loans, the Bank
shall have received confirmation from the Borrower that within two (2) Business
Days of the acquisition date thereof the Borrower shall furnish to the Bank, in
form and content satisfactory to the Bank, evidence that all Persons, other
than the Bank, have terminated or released, as the case may be, all Liens
affecting such Acquired Loans. If such evidence is not furnished to the Bank
within such 2-day period, such Acquired Loans shall immediately cease to be
Eligible Acquired Loans and the Borrower shall pay to the Bank upon demand any
mandatory prepayment required under Section 2.8 of this Agreement on account of
the exclusion of such Acquired Loans from the Borrowing Base.
4.2.4. Approval of Bank Counsel. All actions, proceedings,
instruments and documents required to carry out the transactions contemplated
by this Agreement or incidental thereto and all other related legal matters
shall have been satisfactory to and approved by legal
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counsel for the Bank, and said counsel shall have been furnished with such
certified copies of actions and proceedings and such other instruments and
documents as they shall have reasonably requested.
SECTION 5. WARRANTIES AND REPRESENTATIONS.
The Borrower represents and warrants to the Bank that:
5.1. Existence and Power. The Borrower is a Delaware business
trust duly organized, validly existing and in good standing under the laws of
the State of Delaware; each of the Subsidiaries, the REO Affiliate, the
Investment Adviser and any Servicer is a corporation duly organized, validly
existing and in good standing under the law of the state of its incorporation,
and, to the extent required by applicable law, qualified to do business in the
State of Texas. Each of the Obligors, the Investment Adviser, and any Servicer
has the power and authority to own their respective properties and assets and
to carry out their respective business as now being conducted and are qualified
to do business and in good standing in every jurisdiction where such
qualification is necessary. The Borrower has the co-requisite power and
authority to execute and perform this Agreement, to borrow money in accordance
with its terms, to execute and deliver the Note and other Loan Documents, to
grant to the Bank liens and security interest in the Collateral as hereby
contemplated and to do any and all other things required of it hereunder, and
each of the other Obligors, the Investment Adviser, and any Servicer has the
requisite power and authority to enter into the transactions which each has
entered into, and perform the respective obligations.
5.2. Authorization and Approvals. The execution, delivery and
performance of this Agreement, the borrowings hereunder, the execution and
delivery of the Note and other Loan Documents to which any of the Obligors is a
party and the execution and delivery of any other documents related hereto to
which any of the Obligors, the Investment Adviser or any Servicer is a party
have been duly authorized by all requisite organizational action, do not
require registration with or consent or approval of, or other action by, any
federal, state or other governmental authority or regulatory body, or, if such
registration, consent or approval is required, the same has been obtained and
disclosed in writing to the Bank or will be completed or obtained concurrently
with the execution and delivery of this Agreement, will not violate any
provision of law, any order of any court or other agency of government, the
Organizational Documents of any such Person, any provision of any indenture,
agreement or other instrument to which any of such Person is a party, or by
which it or any of its properties or assets are bound, will not be in conflict
with, result in a breach of or constitute (with or without notice or passage of
time) a default under any such indenture, agreement or other instrument, and
will not result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever upon any of the properties or assets of
any of the Obligors other than in favor of the Bank and as contemplated hereby.
5.3. Valid and Binding Agreement. This Agreement is, and the Note,
the Security Documents, all other Loan Documents to which any of the Obligors
is a party and all other documents related hereto to which any of the Obligors,
the Investment Adviser or any Servicer is a party, will be, when delivered,
valid and binding obligations of such Person, enforceable in accordance
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with their respective terms except for laws and equitable principles affecting
the enforcement of creditors' rights generally.
5.4. Actions, Suits or Proceedings. Except as disclosed on
Schedule 5.4, there are no actions, suits or proceedings, at law or in equity,
and no proceedings before any arbitrator or by or before any governmental
commission, board, bureau or other administrative agency, pending, or, to the
best knowledge of the Borrower, threatened against or affecting any Obligor,
the Investment Adviser, any Servicer or any properties or rights of any such
Person which, if adversely determined, could materially impair the right of any
such Person to carry on business substantially as now conducted or could have a
material adverse effect upon the financial condition of any such Person.
5.5. Subsidiaries and REO Affiliates. The Borrower has no
Subsidiaries. The only REO Affiliate is Plymouth REO, Inc., a Delaware
corporation.
5.6. No Liens, Pledges, Mortgages or Security Interests. Except
for Permitted Liens, none of the assets and properties of the Obligors, the
Investment Adviser or any Servicer, including, without limitation, the
Collateral, is subject to any mortgage, pledge, lien, security interest or
other encumbrance of any kind or character.
5.7. Accounting Principles. The Financial Statements have been
prepared in accordance with GAAP and fully and fairly present the financial
condition of each Obligor as of the dates, and the results of their operations
for the periods, for which the same are furnished to the Bank. To the best of
the Borrower's knowledge and belief, no Obligor, Investment Adviser or Servicer
has any material contingent obligations, liabilities for taxes, long-term
leases or unusual forward or long-term commitments not disclosed by, or
reserved against in, the Financial Statements. Notwithstanding the foregoing,
it is understood that the monthly financial statements of the Borrower required
under Section 6.1.3. will be prepared on a tax basis as opposed to GAAP.
5.8. Financial Condition. Each of the Obligors, the Investment
Adviser and any Servicer is solvent, able to pay its debts as they mature, has
capital sufficient to carry on its business and has assets the fair market
value of which exceed its liabilities, and none will be rendered insolvent,
undercapitalized or unable to pay maturing debts by the execution or
performance of this Agreement or the other documents contemplated hereby.
There has been no material adverse change in the business, properties (on a
company-wide basis) or condition (financial or otherwise) of any Obligor, the
Investment Adviser or any Servicer since the date of the latest of the
Financial Statements.
5.9. No Adverse Changes. There has been no material adverse change
in the business, properties (on a company-wide basis) or condition (financial
or otherwise) of any of the Obligors since the date of the latest of the
Financial Statements.
5.10. Conditions Precedent. As of each Disbursement Date, all
conditions precedent referred to in Section 4. hereof required to be satisfied
shall have been satisfied (or waived in writing by the Bank).
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5.11. Taxes. Each of the Obligors, the Investment Adviser and any
Servicer has filed by the due date therefor all federal, state and local tax
returns and other reports they are required by law to file and which are
material to the conduct of their respective businesses, have paid or caused to
be paid all taxes, assessments and other governmental charges that are shown to
be due and payable under such returns, and have made adequate provision for the
payment of such taxes, assessments or other governmental charges which have
accrued but are not yet payable. The Borrower has no knowledge of any
deficiency or assessment in a material amount in connection with any taxes,
assessments or other governmental charges not adequately disclosed in the
Financial Statements of any such Person.
5.12. Compliance with Laws. Except as disclosed on Schedule 5.12
and otherwise permitted under this Agreement, each of the Obligors, the
Investment Adviser, and any Servicer has complied with all applicable laws, to
the extent that failure to comply would materially interfere with the conduct
of the business of any such Person. The Borrower has timely made all filings
and made all disclosures required to be made pursuant to federal securities
laws and the securities laws of each state to whose laws the Borrower is
subject.
5.13. Indebtedness. Except as permitted by Sections 7.4., 7.5. and
7.6. of this Agreement, and as otherwise disclosed on Schedule 5.13, none of
the Obligors, the Investment Adviser or any Servicer has any indebtedness for
money borrowed and no direct or indirect obligations under any leases (whether
or not required to be capitalized under GAAP) or any agreements of guarantee or
surety except for the endorsement of negotiable instruments in the ordinary
course of business for deposit or collection.
5.14. Material Agreements. Except as disclosed on Schedule 5.14,
none of the Obligors, the Investment Adviser or any Servicer has any material
leases, contracts or commitments of any kind (including, without limitation,
employment agreements, collective bargaining agreements, powers of attorney,
distribution contracts, patent or trademark licenses, contracts for future
purchase or delivery of goods or rendering of services, bonus, pension and
retirement plans, or accrued vacation pay, insurance and welfare agreements);
to the best knowledge of the Borrower, all parties to such agreements
(including, without limitation, the Obligors, the Investment Adviser or any
Servicer) have complied with the provisions of such leases, contracts or
commitments; and to the best knowledge of the Borrower, no party to such
agreements (including, without limitation, the Obligors, the Investment Adviser
or the Servicer) is in default thereunder, nor has there occurred any event
which with notice or the passage of time, or both, would constitute such a
default.
5.15. Margin Stock. No Obligor is engaged principally, or as one of
its important activities, in the business of extending credit for the purpose
of purchasing or carrying any "MARGIN STOCK" within the meaning of Regulation U
of the Board of Governors of the Federal Reserve System, and no part of the
proceeds of any Loan will be used, directly or indirectly, to purchase or carry
any margin stock or to extend credit to others for the purpose of purchasing or
carrying any margin stock or for any other purpose which might violate the
provisions of Regulation G, T, U or X of the said Board of Governors. The
Borrower does not own any margin stock.
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5.16. Pension Funding. No Obligor has incurred any material
accumulated funding deficiency within the meaning of ERISA and has not incurred
any material liability to the PBGC in connection with any employee benefit plan
established or maintained by such Obligor and no reportable event or prohibited
transaction, as defined in ERISA, has occurred with respect to such plans.
5.17. Misrepresentation. Except as disclosed in the letter from
Sutherland, Asbill & Brennan to the Securities and Exchange Commission,
attached as Scheduled 5.17, no warranty or representation by any Obligor, the
Investment Adviser or any Servicer contained herein or in any certificate or
other document furnished by such Person pursuant hereto contains any untrue
statement of material fact or omits to state a material fact necessary to make
such warranty or representation not misleading in light of the circumstances
under which it was made. There is no fact which the Borrower has not disclosed
to the Bank in writing which materially and adversely affects nor, so far as
the Borrower can now foresee, is likely to prove to affect materially and
adversely the business, operations, properties, prospects, profits or condition
(financial or otherwise) of any of the Obligors, the Investment Adviser or any
Servicer or ability of such Person to perform their respective obligations
under the Loan Documents or the other documents related thereto.
5.18. Borrowing Base Components. As to each Acquired Loan
represented by the Borrower to be an "ELIGIBLE ACQUIRED LOAN" on a Borrowing
Base Certificate, as of the date of each such Borrowing Base Certificate, each
such Acquired Loan constitutes an Eligible Acquired Loan.
5.19. Assumed Names; Other Names. The Borrower has not changed its
name during the last five (5) years.
5.20. No Conflicting Agreements. None of the Obligors, the
Investment Adviser or any Servicer is in default under any shareholder
agreement, preferred stock agreement or any other agreement to which it is a
party or by which it or any of its property is bound, the effect of which might
have a material adverse effect on the business or operations of such Person.
No provision of the Organizational Documents or preferred stock, if any, of any
such Person, and no provision of any existing mortgage, indenture, note,
contract, agreement, statute (including, without limitation any applicable
usury or similar law), rule, regulation, judgment, decree or order binding on
any such Person or affecting its property conflicts with, or requires any
consent under, or would in any way prevent the execution, delivery or carrying
out of the terms of, this Agreement and the documents contemplated hereby, and
the taking of any such action will not constitute a default under, or result in
the creation or imposition of, or obligation to create any lien upon the
property of any such Person pursuant to the terms of any such mortgage,
indenture, note, contract or agreement.
5.21. Representations and Warranties with Respect to Investment
Adviser. Notwithstanding anything to the contrary contained herein, the
representations and warranties contained in this Agreement and the other Loan
Documents with respect to the Investment Adviser shall be deemed made only on
the date of this Agreement. No reaffirmation of any of the representations and
warranties required under this Agreement or the other Loan Documents shall be a
reaffirmation of
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the representations and warranties with respect to the Investment Adviser
unless such reaffirmations specifically recite otherwise by reference to the
Investment Adviser. Nothing contained herein shall limit the reaffirmation of
such representations and warranties with respect to any other Person.
SECTION 6. AFFIRMATIVE COVENANTS.
From the date hereof until the principal of and interest on the Note
and other Indebtedness is paid in full, and the ability, if any, of the
Borrower to obtain Loans hereunder has irrevocably terminated, the Borrower
covenants and agrees that it will (or will cause each other Obligor to):
6.1. Financial and Other Information.
6.1.1. Annual Financial Reports.
(a) Furnish to the Bank in form satisfactory to
the Bank not later than ninety (90) days after the close of each fiscal year of
the Borrower beginning with its fiscal year ending June 30, 1997, on a
consolidated and consolidating basis, a balance sheet of the Borrower at the
close of each such fiscal year, statements of income and statements of cash
flows of the Borrower for each such fiscal year, and such other comments and
financial details as are usually included in similar reports. Such reports
shall be prepared in accordance with GAAP by independent certified public
accountants of recognized standing selected by the Borrower and acceptable to
the Bank and shall contain unqualified opinions that the financial statements
present fairly the Borrower's financial position and results of operations in
all material respects.
(b) Furnish to the Bank in form satisfactory to
the Bank not later than ninety (90) days after the close of the Investment
Adviser's fiscal year beginning with its 1996 fiscal year, a balance sheet of
the Investment Adviser as at the close of each such fiscal year, and statements
of income and statements of cash flows for the Investment Adviser for each such
fiscal year, all on a consolidated basis. These statements shall be prepared
on substantially the same accounting basis as the statements required in
Section 6.1.1.(a) of this Agreement and shall be in such detail as the Bank may
reasonably require, and the accuracy of the statements shall be certified by
the chief executive or financial officer of the Investment Adviser.
6.1.2. Quarterly GAAP Financial Statements. Furnish to the
Bank not later than thirty (30) days after the end of each quarter of each
fiscal year of the Borrower, beginning with December 31, 1996, financial
statements containing the balance sheet of the Borrower up to the end of such
period, all on a consolidated basis, and containing a schedule itemizing the
Fair Market Value of each Acquired Loan as of the end of such quarter. These
statements shall be prepared on substantially the same basis as the statements
required in Section 6.1.1.(a) of this Agreement and shall be in such detail as
the Bank may reasonably require, and the accuracy of the statements shall be
certified by the chief executive or financial officer of the Borrower.
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6.1.3. Monthly Tax Basis Financial Statements. Furnish to
the Bank not later than twenty (20) days after the close of each month of each
fiscal year of the Borrower, beginning with the month in which the Borrower
commences operations, financial statements containing the balance sheet of the
Borrower as of the end of each such period, statements of income and statements
of cash flows of the Borrower up to the end of such period, all on a
consolidated basis. These statements shall be prepared in accordance with the
federal income tax basis of accounting and shall be in such detail as the Bank
may reasonably require, and the accuracy of the statements shall be certified
by the chief executive or financial officer of the Borrower.
6.1.4. No Default Certificate. Together with each delivery
of the financial statements required by Sections 6.1.1.,6.1.2. and 6.1.3. of
this Agreement, furnish to the Bank a compliance certificate substantially in
the form of Exhibit C attached hereto and incorporated herein by reference for
all purposes, duly executed by its chief executive or financial officer
stating, among other things, that no Event of Default or Default has occurred,
or if any such Event of Default or Default exists, stating the nature thereof,
the period of existence thereof and what action the Borrower propose to take
with respect thereto accompanied by such supporting calculations contained in
such certificate as the Bank may request.
6.1.5. Borrowing Base Certificate and Asset Portfolio
Reports. Furnish to the Bank on the first Business Day of each week during the
term hereof, a Borrowing Base Certificate as of the last Business Day of the
preceding week, confirming that the aggregate unpaid principal balance of all
the Loans does not exceed the Maximum Available Amount as then in effect (or if
such is not the case, accompanied by a prepayment of the Note in accordance
with Section 2.8. of this Agreement), and contemporaneously with such Borrowing
Base Certificate, an Asset Portfolio Report as of the last Business Day of the
preceding week. Within ten (10) days of each month end, furnish to the Bank a
monthly Borrowing Base Certificate as of the end of such month and Asset
Portfolio Report for such preceding month, but otherwise in the form required
by the previous sentence. If requested by the Bank, each Borrowing Base
Certificate shall be accompanied by a listing of all Acquired Loans which do
not constitute Eligible Acquired Loans and the reasons for the exclusion from
classification as an Eligible Acquired Loan.
6.1.6. Adverse Events. Promptly inform the Bank of the
occurrence of any Event of Default or Default, or of any occurrence which has
or could reasonably be expected to have a materially adverse effect upon any
Obligor's, the Investment Adviser's or the Servicer's business, properties,
financial condition or ability to comply with any obligations hereunder or
related hereto.
6.1.7. Shareholder Reports. Promptly furnish to the Bank
upon becoming available a copy of all financial statements, reports, notices,
proxy statements and other communications sent by any Obligor, the Investment
Adviser or any Servicer to their respective stockholders, and all regular and
periodic reports filed by any such Person with any securities exchange, the
Securities and Exchange Commission, or other governmental authority.
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6.1.8. Management Letters. Furnish to the Bank, promptly
upon receipt thereof, copies of all management letters and other reports of
substance submitted to any Obligor, the Investment Adviser or any Servicer by
independent certified public accountants in connection with any annual or
interim audit of the books of such Person.
6.1.9. Tax Returns. Within ten (10) days of the filing of
each tax return of each Obligor with the United States Internal Revenue
Service, furnish to the Bank each Obligor's federal tax return.
6.1.10. Governmental Reports. Within ten (10) days of the
filing thereof by any Obligor with any governmental authority, including
without limitation the Securities and Exchange Commission, furnish to the Bank
copies of each filing. The Borrower shall promptly deliver to the Bank copies
of any correspondence, filings or other documentation furnished to or received
from any governmental authority relating to the Borrower's status as a Business
Development Company.
6.1.11. Other Information as Requested. Promptly furnish
(or cause to be furnished) to the Bank such other information regarding the
operations, business affairs and financial condition of the Obligors, the
Investment Adviser, any Servicer or any Collateral for the Loans as the Bank
may reasonably request from time to time and permit the Bank, its employees,
attorneys and agents, to inspect all of the books, records and properties of
the Obligors at any reasonable time.
6.2. Collateral Audits. Permit the Bank to conduct audits of the
Collateral as often as the Bank, in its credit judgment, deems such audits to
be necessary. Upon the Bank's request, except as provided below, the Borrower
shall reimburse the Bank for the reasonable costs and expenses expended by the
Bank in connection with such audits. Without limiting the Bank's right to
conduct more frequent audits, the Bank acknowledges that it currently intends
to conduct four such audits in each twelve (12) month period. Notwithstanding
the foregoing or anything to the contrary contained herein, as long as no
Default or Event of Default shall then exist, the Borrower shall not be
obligated to reimburse the Bank for the cost of more than six (6) such audits
in any 12-month period.
6.3. Appraisals and Reports to be Provided. The Bank (by its
officers, employees, directors or agents) at any time and from time to time,
and at the Borrower's sole cost and expense (to the extent not prohibited by
applicable law), may contract for the services of an appraiser approved by the
Bank in its sole discretion to perform a written appraisal of any of the
Mortgaged Property, REO Property or Underlying Real Estate (herein called the
"Property" for purposes of this paragraph). Any such appraisal may be
performed at any time or times upon reasonable notice to the Borrower, as long
as it does not unreasonably interfere with the Borrower's, the applicable REO
Affiliate's or other party in possession of the Property's use of the Property.
Specifically, any such appraiser is authorized to enter upon, and the Borrower
shall use its best efforts to cause such appraiser to have access to, the
Property as may be necessary in the opinion of such appraiser to perform its
professional services. The Borrower will also furnish or cause to be furnished
to such appraiser such historical and operational information regarding the
Property as may be reasonably requested by such appraiser and as may be in the
possession or control of the Borrower to facilitate
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preparation of an appraisal and will make available for meetings with such
appraiser appropriate personnel having knowledge of such matters. The Borrower
will permit, or use its best efforts to cause to be permitted, the Bank and its
agents, independent contractors, representatives, employees and officers at all
reasonable times to go upon, examine, inspect and remain on the Property for
any lawful purpose and will furnish to the Bank on request all pertinent
information in regard to the development, operation, use and status of the
Property which is in the Borrower's possession or control. In addition to the
foregoing, promptly upon the Bank's request, the Borrower agrees, at the
Borrower's sole cost and expense (to the extent not prohibited by applicable
law):
(a) to cause an inspection and written appraisal of any
of the Property (or such parts of it as are designated in the Bank's request)
to be made by a qualified appraiser approved by the Bank; and
(b) to cause to be conducted or prepared any other
written report, Environmental Site Assessment, summary, opinion, inspection,
review, survey, audit or other professional service relating to any of the
Property or any operations in connection with it (all as designated in the
Bank's request), including any accounting, architectural, consulting,
engineering, design, legal, management, pest control, surveying, toxic or
hazardous materials survey, inspection, removal or cleanup work, title
abstracting or other technical, managerial or professional service relating to
the Property or its operations.
Without limiting the Bank's rights to require more frequent appraisals and/or
Environmental Site Assessments, the Bank acknowledges that it currently intends
to require such items if in its reasonable determination such items are
necessary to confirm the Borrower's valuation of such Property or the existence
or nonexistence of Hazardous Substances on or about such Property.
6.4. Business Development Company. The Borrower will, at its sole
costs and expense and so long as this Agreement remains in effect, take all
steps necessary to retain its status as a "registered investment company" as
defined in Section 851(a) of the Internal Revenue Code and its implementing
regulations and revenue rulings, and as a "business development company" under
the Investment Company Act of 1940, as amended, and its implementing
regulations, including, but not limited to maintaining its status as a Delaware
business trust under the laws of the State of Delaware.
6.5. Insurance. Keep its (and cause the Subsidiaries and the REO
Affiliates to keep their respective) insurable properties (including, but not
limited to, the Collateral) adequately insured and maintain insurance against
fire and other risks customarily insured against by companies engaged in the
same or a similar business to that of the Borrower, the Subsidiaries or the REO
Affiliates, whichever is applicable, necessary worker's compensation insurance,
public liability and product liability insurance, and such other insurance as
may be required by law or as may be reasonably required in writing by the Bank,
all of which insurance shall be in such amounts, containing such terms, in such
form, for such purposes and written by such companies as may be satisfactory to
the Bank. All such policies shall contain a provision whereby they may not be
canceled except upon thirty days' prior written notice to the Bank. The
Borrower will deliver to the Bank, at the Bank's
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request, evidence satisfactory to the Bank that such insurance has been so
procured, including satisfactory loss payable endorsements naming the Bank as
loss/payee and additional insured and mortgagee under a standard mortgagee
clause and as its interest may appear. The Borrower (a) shall promptly notify
the Bank if it has knowledge of the failure of any Account Debtor under an
Acquired Loan to maintain the insurance required under such Acquired Loan and
(b) if requested by the Bank, make a Protective Advance to procure the required
coverage. If the Borrower fails to maintain or cause to be maintained
satisfactory insurance as herein provided, the Bank shall have the option to do
so, and the Borrower agrees to repay the Bank, with interest at the Past Due
Rate, all amounts so expended by the Bank. The Borrower hereby appoints the
Bank as the Borrower's attorney-in-fact, which appointment is coupled with an
interest and irrevocable, to endorse any check or draft payable to the Borrower
in connection with returned or unearned premiums on said insurance or the
proceeds of said insurance, and any amount so collected may be applied toward
satisfaction of the Indebtedness, provided, however, that the Bank shall not be
required hereunder so to act. The Borrower shall furnish the Bank the
insurance required under this Section 6.5 with respect to Acquired Loans in
existence on the date hereof on or prior to the first Disbursement Date. The
Borrower shall furnish such insurance with respect to Acquired Loans acquired
after the date of this Agreement within 30 days of the acquisition of such new
Acquired Loans. Notwithstanding anything to the contrary contained in this
Agreement, (a) the Borrower shall not be obligated to deliver such insurance to
the Bank with respect to an Acquired Loan (other than an Acquired Loan which is
also an Eligible Acquired Loan) with a Fair Market Value of $25,000 or less,
and (b) the Borrower shall not be obligated to deliver such insurance to the
Bank with respect to an Eligible Acquired Loan with a Fair Market Value of
$1,000 or less; provided, that the aggregate Fair Market Value of all Acquired
Loans (including Eligible Acquired Loans) for which such insurance is not
delivered to the Bank shall not exceed $250,000 at any one time. The
provisions of this Section are in addition to and cumulative of the insurance
provisions set forth in the other Loan Documents.
6.6. Taxes. Pay promptly and within the time that they can be paid
without interest or penalty all taxes, assessments and similar imposts and
charges of every kind and nature lawfully levied, assessed or imposed upon the
Borrower, the Subsidiaries, the REO Affiliates and their respective property,
except to the extent being contested in good faith and, if requested by the
Bank, bonded in a manner satisfactory to the Bank or for which the Borrower has
made reserve by depositing amounts satisfactory to the Bank in the Escrow
Account. If the Borrower shall fail to pay or cause to be paid such taxes and
assessments by their due date, the Bank shall have the option to do so, and the
Borrower agrees to repay the Bank, with interest at the Past Due Rate, all
amounts so expended by the Bank.
6.7. Maintain Corporation and Business. Do or cause to be done all
things necessary to preserve and keep in full force and effect the Borrower's,
the Subsidiaries', the REO Affiliates', and any Servicer's existence, rights
and franchises, if any, and comply with all applicable laws; continue to
conduct and operate their respective businesses substantially as conducted and
operated during the present and preceding calendar year at all times maintain,
preserve and protect all franchises and trade names and preserve all the
remainder of their respective property used or useful in the conduct of their
respective business and keep the same in good repair, working order and
condition; and from
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time to time make, or cause to be made, all needed and proper repairs,
renewals, replacements, betterments and improvements thereto so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times. This is in addition to and not in replacement of or by
way of modification to the Borrower's covenant in Section 6.4. hereof to
maintain its status as status as business development corporation.
6.8. Maintain Tangible Net Worth. At all times maintain, on a
consolidated statement basis, Tangible Net Worth (as determined on the federal
income tax basis of accounting) of at least $1,400,000. From and after the
effective date of any successful offering of any beneficial interests in the
Borrower occurring after the first Disbursement Date, the minimum Tangible Net
Worth requirements of this Section shall be increased by an amount equal to 85%
of the paid-in equity capital (net of all reasonable expenses associated with
such equity offering) received by the Borrower in connection with such
offering.
6.9. Maintain Debt Ratio. Maintain the ratio of its (a) Debt minus
accrued dividends payable and Subordinated Debt to (b) Tangible Effective Net
Worth (on a consolidated and consolidating basis if the Borrower then has any
Subsidiaries) of not less than 1.15 to 1.00 at all times (as determined on the
federal income tax basis of accounting).
6.10. Maintain Interest Coverage Ratio. Beginning December 31, 1997
and at all times thereafter, maintain the ratio of its (a) EBITDA for the
12-month period preceding the date of determination to (b) accrued interest on
its Debt for such period (on a consolidated and consolidating basis if the
Borrower then has any Subsidiaries) of not less than 3.00 to 1.00, (as
determined on the federal income tax basis of accounting).
6.11. Maintain Net Income. Maintain Net Income (on a consolidated
and consolidating basis if the Borrower then has any Subsidiaries) of not less
than the following (as determined on the federal income tax basis of
accounting):
(a) -$50,000 for the quarter period ending December 31, 1996
(excluding up to $250,000 of costs associated with equity offerings in
the Borrower occurring prior to such date);
(b) -$100,000 for each quarter period of the Borrower's fiscal
year other than the quarter period ending December 31, 1996;
(c) -$200,000 for any fiscal year.
6.12. Liquidity Maintenance Provision. For twelve (12) months after
the effective date of the first successful offering of beneficial interests in
the Borrower occurring after the first Disbursement Date, maintain unencumbered
(except for Liens in favor of the Bank) short term assets in the form of (i)
readily available cash in Dollars, (ii) certificates of deposit with maturities
of one year or less of United States commercial banks with capital, surplus and
undivided profits in excess
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of $100,000,000, (iii) direct obligations of the United States Government
maturing within one year from the date of acquisition thereof, or (iv) other
short term securities acceptable to the Bank in its sole discretion, in an
amount not less than $150,000 (excluding any such assets evidenced by amounts
in the Escrow Account).
6.13. ERISA. At all times meet and cause each of the other Obligors
and any Servicer to meet the minimum funding requirements of ERISA with respect
to such Person's employee benefit plans subject to ERISA; promptly after the
Borrower knows or has reason to know of the occurrence of any event, which
would constitute a reportable event or prohibited transaction under ERISA, or
that the PBGC or the Borrower, any other Obligor or any Servicer has instituted
or will institute proceedings to terminate an employee pension plan, deliver to
the Bank a certificate of the chief financial officer of such Person setting
forth details as to such event or proceedings and the action which such Person
proposes to take with respect thereto, together with a copy of any notice of
such event which may be required to be filed with the PBGC; and furnish to the
Bank (or cause the plan administrator to furnish the Bank) a copy of the annual
return (including all schedules and attachments) for each plan covered by
ERISA, and filed with the Internal Revenue Service by any such Person not later
than ten (10) days after such report has been so filed.
6.14. Compliance with Legal Requirements; Governmental Notices. The
Borrower will conduct, and will cause each of the Obligors and any Servicer to
conduct, its business, and will maintain its property, and cause each such
Person to maintain their respective properties, in full compliance with all
applicable legal requirements. The Borrower will fully comply with and
punctually perform, and cause each of the Obligors and any Servicer to fully
comply with and punctually perform, all of the covenants, agreements and
obligations imposed on any of them or their respective property. The Borrower
will furnish to the bank copies of notices and reports received or sent by any
of the Obligors, the Investment Adviser and any Servicer to or from each
governmental authority within three (3) days of the receipt or giving thereof.
6.15. Use of Loan Proceeds. Use the proceeds of any Loan for the
purpose set forth in the recitals to this Agreement.
6.16. Lockbox Deposits; Distributions of Gross Collections.
6.16.1 Cash Collateral Accounts. All Gross Collections
shall be directed to and deposited into the Cash Collateral Accounts and shall
be accounted for and tracked on an Acquired Loan basis. Any payments or other
proceeds of Collateral received by the Borrower shall be deemed received by the
Borrower in trust and shall be forthwith deposited by the Borrower, immediately
upon receipt, into the Cash Collateral Accounts in the form received, duly
endorsed by the Borrower for deposit into the Cash Collateral Accounts.
6.16.2 Distributions of Gross Collections. On each Business
Day, the Gross Collections will be withdrawn from the Cash Collateral Accounts
and applied in the following priorities:
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i. First, to the payment to the Bank of all accrued and unpaid
interest on the Loans then due and payable;
ii. Second, to the payment of any fees and expenses then due and
payable to the Bank under this Agreement or any of the other
Loan Documents;
iii. Third, to the Bank, to be applied as principal prepayments on
any Base Rate Borrowings (as defined in the Interest Rate
Annex);
iv. Fourth, to the Bank, to be applied as principal prepayments on
any Eurodollar Borrowings (as defined in the Interest Rate
Annex) having an Interest Period which ends on such date; and
v. Fifth, the balance to the Borrower, by depositing such amounts
in the Borrower's operating account.
To the extent that any such Gross Collections constitute Escrow Payments made
with respect to any of the Acquired Loans, the Borrower, upon obtaining
knowledge that such amounts have been paid to the Cash Collateral Account,
shall deposit an amount equal to the Escrow Payments in the Escrow Account,
either by requesting a Loan under this Agreement or by using other funds
available to the Borrower.
Notwithstanding any of the foregoing, if any Default or Event of Default shall
have occurred and be continuing, all Gross Collections shall be distributed and
applied as the Bank shall direct in its sole discretion, and the Bank shall be
entitled to withdraw and apply all Gross Collections and all amounts on deposit
with the Bank to pay down amounts outstanding hereunder and under the Loans, in
such order and manner of application as the Bank may elect in its discretion.
6.17. Notice of Events. Notify the Bank immediately upon acquiring
knowledge of the occurrence of, or if any of the Obligors, the Investment
Adviser or any Servicer causes or intends to cause, as the case may be: (1)
the institution of any lawsuit or administrative proceeding affecting any such
Person involving monetary claims in excess of $100,000 or the institution of
any lawsuit or administrative proceeding affecting such Person, the adverse
determination under which could have a material adverse effect on the business,
condition (financial or otherwise), operations, property or prospects of such
Person or on its ability to perform any of its obligations under any Loan
Document or other document related hereto to which it is a party; (2) any
material adverse change, either in any case or in the aggregate, in the assets,
liabilities, business, condition (financial or otherwise), operations, property
or prospects of any such Person on a consolidated basis; (3) any Event of
Default or any Default, together with a detailed statement by an appropri ate
officer or other responsible party acceptable to the Bank one behalf of the
Borrower of the steps being taken to cure the effect of such Event of Default
or Default; (4) the occurrence of a default or event of default by any of the
Obligors, or any Servicer under any agreement or series of related agreements
to which it is a party where such default could result in monetary damages in
excess of $100,000, and (5) any
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change in the accuracy of the representations and warranties in any material
respects of any Person, other than the Bank, in this Agreement, any other Loan
Document or any other agreement related hereto. The Borrower will notify the
Bank in writing within thirty (30) days prior to the date that any of the
Obligors, the Investment Adviser, or any Servicer changes its name or the
location of its chief executive office or principal place of business or the
place where it keeps its books and records. Any notice of a name change
delivered to the Bank shall be accompanied by such certificates of governmental
authorities as the Bank may require substantiating such name change.
6.18. Custodial Agreement. The Bank requires that the promissory
notes and security agreements relating to the Acquired Loans be kept by a
custodian acceptable to it. The Borrower has requested and the Bank has agreed
that the Bank will serve as custodian. The Bank and the Borrower will enter
into a Custodial Agreement, in form and substance satisfactory to each of them,
setting forth the rights and duties of the parties with respect to the Acquired
Loans and the Bank's compensation for serving as custodian. Without limiting
the generality of the foregoing, nothing herein shall be deemed to make the
Bank a Servicer with respect to any Acquired Loan.
6.19. Budgets. The Borrower will deliver to the Bank, within ninety
(90) days of the acquisition of any new Asset Portfolio purchased after the
date of this Agreement, as part of an Asset Portfolio Report, a budget for each
Asset comprising such Asset Portfolio, reflecting the Projected Gross
Collections for each such Asset and an operating reserve for each Asset
Portfolio. The Bank shall have the right to review and approve each such
budget.
6.20. Collection Efforts. The Borrower will exercise, and will
cause any Servicer to exercise, collection efforts with respect to the Acquired
Loans as is consistent with sound business practice. The Borrower will at all
times comply with Standard Industry Practices and the Borrower's past
procedures related to due diligence, collateral control, collection and
reporting procedures with respect to all Acquired Loans. The Borrower's books,
records and files related to the Acquired Loans (including, without limitation,
the Due Diligence Reports) shall at all times be maintained at the Borrower's
offices set forth elsewhere in this Agreement. The Borrower shall maintain all
files related to the Acquired Loans in a reasonably prudent manner.
6.21. Grant of Specific Liens. The Borrower will, at any time
Underlying Real Estate is foreclosed upon by the Borrower, at the request of
the Bank, grant to the Bank a Lien upon such Underlying Real Estate, and if the
foreclosed Underlying Real Estate of the note secured by the Underlying Real
Estate being foreclosed upon has been conveyed to an REO Affiliate, the
Borrower will obtain an REO Note following the assignment to the REO Affiliate,
and will ensure the REO Affiliate grants (a) to the Bank, if requested by the
Bank, a Lien securing its Guaranty obligations, subject only to Permitted Prior
Liens and the Lien in favor of the Borrower securing the REO Note, and (b) to
the Borrower a Lien securing the REO Note, subject only to Permitted Prior
Liens, in such Underlying Real Estate, following the foreclosure. The Borrower
shall cause all such documentation required to effectuate the provisions of
this Section to be recorded in all appropriate jurisdictions at the Borrower's
sole cost and expense.
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6.22. Lien on REO Properties. Except as disclosed on Schedule 6.22
attached hereto, each REO Property shall be owned by an REO Affiliate, it being
understood that except as noted on Schedule 6.22 the Borrower shall not take
title to any REO Property. Immediately upon the acquisition of title to an REO
Property by an REO Affiliate, the Borrower (a) will cause such REO Affiliate to
execute and deliver to the Borrower an REO Note (which shall be endorsed by the
Borrower to the Bank, and delivered to the Bank), security instruments granting
to the Bank, if requested by the Bank, a Lien on such REO Property, subject
only to Permitted Prior Liens and the Lien in favor of the Borrower securing
the REO Note, and REO Security Documents granting to the Borrower a Lien on
such REO Property, subject only to Permitted Prior Liens, and (b) will execute
and deliver to the Bank a Collateral Assignment which shall be in form and
substance satisfactory to the Bank, pursuant to which the Borrower shall
collaterally assign to the Bank, as security for the Loans, all of the
Borrower's rights under such REO Note and REO Security Documents. In order to
facilitate foreclosure of the Underlying Real Estate serving as Acquired Loan,
the Borrower may transfer such Acquired Loan to an REO Affiliate prior to the
time that the REO Affiliate takes title to the REO Property; provided, however,
that as a condition to such transfer, the Borrower must cause the REO Affiliate
to (a) execute and deliver to the Borrower an REO Note (which shall be endorsed
by the Borrower to the Bank, and delivered to the Bank) in an amount no greater
than the Fair Market Value of the Acquired Loan transferred to the REO
Affiliate, with such payment terms as are acceptable to the Bank in its
discretion, and (b) execute such security instruments as the Bank may require
in connection therewith. The Borrower (at its own expense) shall record such
security instruments, REO Security Documents and any related assignment(s) of
lien with such filing offices as may be required by the Bank to perfect and
record the Borrower's and the Bank's respective interests in such REO Property.
At the Bank's request, prior to the taking of title to any REO Property by an
REO Affiliate, the Borrower shall provide the Bank with an Environmental Site
Assessment with respect to such REO Property or an update of the Environmental
Site Assessment which was delivered to the Bank in connection with the closing
of the Loan (if any), and the Bank shall have ten (10) Business Days to
disapprove or object to such Environmental Site Assessment (in which event the
REO Note shall be excluded from the Borrowing Base). In addition, for any REO
Property, the Borrower shall take all such actions as are requested by the Bank
to ensure that the Collateral and the Bank's interest therein complies with all
legal requirements applicable to the Bank, including without limitation the
Financial Institutions Reform, Recovery and Enforcement Act of 1989, as
amended.
SECTION 7. NEGATIVE COVENANTS.
From the date hereof until the principal of and interest on the Note
and other Indebtedness is paid in full, the Borrower covenants and agrees that
it will not and will not permit any other Obligor, or any Servicer to:
7.1. Stock Issuance. Except for the warrants listed on Schedule
7.1, issue any additional beneficial ownership interests, or any warrant, right
or option relating thereto or any security convertible into any of the
foregoing; provided, that as long as either Robert Swendson or Lon Critchfield
is continuing to serve in a position of management with the Borrower in
substantially the
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capacity and with substantially the same powers of the date hereof, the
Borrower shall be entitled to issue additional beneficial ownership interests
for cash.
7.2. Stock Acquisition. Purchase, redeem, retire or otherwise
acquire any of the shares of its capital stock, or make any commitment to do so
without the written consent of the Bank.
7.3. Liens and Encumbrances. Create, incur, assume or suffer to
exist any mortgage, pledge, encumbrance, security interest, lien or charge of
any kind (including any charge upon property purchased or acquired under a
conditional sales or other title-retaining agreement or lease required to be
capitalized under GAAP) upon any of its property or assets, whether now owned
or hereafter acquired, other than Permitted Liens.
7.4. Indebtedness. Unless consented to by the Bank in writing,
incur, create, assume or permit to exist any Debt or liability on account of
deposits or advances or any Debt or liability for borrowed money, or any other
Debt or liability evidenced by notes, bonds, debentures or similar obligations,
or any other indebtedness whatsoever, except for (a) the Indebtedness; (b) the
indebtedness of the REO Affiliates to the Borrower under the REO Notes; (c)
indebtedness secured by any Permitted Liens (provided that the stated principal
balance thereof shall not be increased); (d) the Subordinated Debt (provided
that the stated principal balance thereof shall not be increased); and (e)
trade indebtedness, accrued dividends payable and other normal and customary
accruals incurred and paid in the ordinary course of business.
7.5. Extension of Credit. Make loans, advances or extensions of
credit to any Person except for the acquisition of Acquired Loans and the
renewal, extension, rearrangement and reorganization of the Acquired Loans
pursuant to Standard Industry Practices and normal, customary and reasonable
travel expenses and other similar prepaid expenses incurred in the ordinary
course of business.
7.6. Guarantee Obligations. Guarantee or otherwise, directly or
indirectly, in any way be or become responsible for obligations of any other
Person, whether by agreement to purchase the indebtedness of any other Person,
agreement for the furnishing of funds to any other person through the
furnishing of goods, supplies or services, by way of stock purchase, capital
contribution, advance or loan, for the purpose of paying or discharging (or
causing the payment or discharge of) the indebtedness of any other person, or
otherwise, except for the endorsement of negotiable instruments by the Borrower
in the ordinary course of business for deposit or collection.
7.7. Subordinate Indebtedness. Subordinate any indebtedness due to
it from a Person to indebtedness of other creditors of such Person.
7.8. Property Transfer, Merger and Formation of Subsidiaries.
Sell, lease, transfer or otherwise dispose of all or, except as to the sale of
Acquired Loans and REO Property in the ordinary course of business and in
accordance with the terms of this Agreement, any material part of its
properties and assets (whether in one transaction or in a series of
transactions), change its name,
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consolidate with or merge into any other corporation, permit another
corporation to merge into it, acquire all or substantially all the properties
or assets of any other Person, enter into any reorganization or
recapitalization or reclassify its capital stock, enter into any sale-leaseback
transaction, or form, acquire or permit to exist any Subsidiary without the
express written consent of the Bank given in its sole and absolute discretion.
Nothing contained in this Agreement or any of the other Loan Documents
(including, without limitation, the references to Subsidiaries or consolidated
and consolidating financial statements) shall be deemed or construed as a
consent to the Borrower's creation or acquisition of any Subsidiary. Should
the Bank in its sole and absolute discretion consent to the creation or
acquisition of any Subsidiary, then a Subsidiary wholly owned by the Borrower
may be merged into, or consolidated with, the Borrower or another Subsidiary
wholly owned by the Borrower, and such Subsidiary may sell, lease or transfer
all or a substantial part of its assets to the Borrower or another Subsidiary
wholly owned by the Borrower, and the Borrower or such Subsidiary may acquire
all or substantially all of the properties and assets of the Subsidiary so to
be merged into, or consolidated with, it or so to be sold, leased or
transferred to it.
7.9. Acquire Securities. Except for the purchase of Acquired Loans
in accordance with the terms of this Agreement, purchase or hold beneficially
any stock or other securities of, or make any investment or acquire any
interest whatsoever in, any other Person except for certificates of deposit
with maturities of one year or less of United States commercial banks with
capital, surplus and undivided profits in excess of $100,000,000, U.S.
Government or agency issued or guaranteed securities backed by the full faith
and credit of the United States, and other securities acceptable to the Bank.
7.10. Acquire Fixed Assets. Acquire or expend for, or commit itself
to acquire or expend for, fixed assets by lease, purchase or otherwise in an
aggregate amount that exceeds $50,000.00 in any fiscal year, except for the
acquisition of REO Property.
7.11. Pension Plans. Allow any fact, condition or event to occur or
exist with respect to an employee pension or profit sharing plan which might
constitute grounds for termination of any such plan or for the appointment by a
United States District Court of a trustee to administer any such plan, or
permit any such plan to be the subject of termination proceedings (whether
voluntary or involuntary) from which termination proceedings there may result a
liability of any of the Obligors or any Servicer to the PBGC which in the
opinion of the Bank, will have a materially adverse effect upon the operations,
business, property, assets, financial condition or credit of such Person.
7.12. Misrepresentation. Furnish (or permit any other Obligor, the
Investment Adviser or any Servicer to furnish) the Bank with any certificate or
other document that contains any untrue statement of a material fact or omits
to state a material fact necessary to make such certificate or document not
misleading in light of the circumstances under which it was furnished.
7.13. Margin Stock. Apply any of the proceeds of the Note to the
purchase of carrying of any "MARGIN STOCK" within the meaning of Regulation U
of the Board of Governors of the Federal Reserve System, or any regulations,
interpretations or rulings thereunder.
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7.14. Compliance with Environmental Laws. Use (or permit any tenant
to use) any of its respective properties or assets for the handling,
processing, storage, transportation, or disposal of any Hazardous Substance
except in all respects in compliance with Environmental Laws, generate any
Hazardous Substance except in all respects in compliance with Environmental
Laws, conduct any activity which is likely to cause a release of any Hazardous
Substance, or otherwise conduct any activity or use any of its respective
properties or assets in any manner that is likely to violate any Environmental
Law.
7.15. Dividends. Except for dividends paid by the Borrower which it
is allowed to make under applicable law and still retain its status as a
"Business Development Company," declare or pay any dividend (other than
dividends payable solely in shares of its capital stock) (or permit any other
Obligor to do so) on, or make any other distribution with respect to (whether
by reduction of capital or otherwise), any shares of its capital stock except
dividends from a Subsidiary to the Borrower.
7.16. Disposition of Acquired Loans or REO Properties. Dispose of,
or permit any Servicer to dispose of, an Acquired Loan or otherwise settle the
amount owed on any Acquired Loan, or permit any REO Affiliate to dispose of any
REO Property, except in accordance with Standard Industry Practices.
7.17. Certain Payments. Make any payment under the Servicing
Agreement or any agreement with the Investment Adviser at any time any Event of
Default exists hereunder or if such payment would cause an Event of Default
hereunder.
7.18. Subsidiaries and REO Affiliates. Form or create any
Subsidiaries, other than the REO Affiliate, without the prior written consent
of the Bank.
7.19. Modification of Key Agreements. Without the Bank's prior
written approval, modify, amend, or increase any payments under any Servicing
Agreement or any agreement between the Borrower and the Investment Adviser.
SECTION 8. PROVISIONS REGARDING ENVIRONMENTAL LAWS.
8.1 Covenants Regarding Environmental Compliance. The Borrower
hereby covenants and agrees with the Bank as follows:
8.1.1. Hazardous Substance Use, Manufacture. The Borrower
shall not use, generate, manufacture, produce, store, release, discharge, or
dispose of, or permit to be used, generated, manufactured, produced, stored,
released, discharged or disposed of, on, under, or about any of the Mortgaged
Property or transport to or from, or permit to be transported to or from, any
of the Mortgaged Property any Hazardous Substance, or allow any other person or
entity to do so on any of the Mortgaged Property, except in strict compliance
with all applicable laws (including all applicable Environmental Laws), except
in accordance with Standard Industry Practices as disclosed to the Bank in
writing.
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8.1.2. Compliance with Environmental Laws. The Borrower
shall keep and maintain, and cause to be kept or maintained, the Mortgaged
Property in compliance with, and shall not cause or permit the Mortgaged
Property to be in violation of, any applicable Environmental Law, except in
accordance with Standard Industry Practices as disclosed to the Bank in
writing.
8.1.3. Notices. The Borrower shall give prompt written
notice to the Bank of:
(a) any proceeding or written inquiry by any
governmental authority with respect to the presence of any Hazardous Substance
on any of the Mortgaged Property or the migration thereof from or to other
property;
(b) all written claims made or threatened by any
third party against any Obligor or any of the Mortgaged Property relating to
any loss or injury resulting from any Hazardous Substance;
(c) the Borrower's discovery of any occurrence of
condition on any real property adjoining or in the vicinity of any of the
Mortgaged Property that would reasonably be expected to cause any of the
Mortgaged Property or any part thereof to be subject to any material
restrictions on the ownership, occupancy, transferability or use of any of the
Mortgaged Property under any applicable Environmental Law, or to be otherwise
subject to any material restrictions on the ownership, occupancy,
transferability or use of any of the Mortgaged Property under any applicable
Environmental Law;
(d) any written notice of violation or complaint
from a governmental authority and relating to an applicable Environmental Law;
(e) any written notices or report any Obligor,
the Investment Adviser or any Servicer provides to a governmental authority
relating to instances of non-compliance with an applicable Environmental Law;
and
(f) any written application any Obligor, the
Investment Adviser or any Servicer provides to a governmental authority to
obtain or amend a permit or approval relating to the generation, storage,
treatment, or disposal of a Hazardous Substance or air contaminant.
8.1.4. Delivery of Premises to the Bank. In the event any
Mortgage is foreclosed or the applicable Obligor tenders a deed in lieu of
foreclosure with respect to any Mortgaged Property, the Mortgaged Property
shall be delivered to the Bank free of any and all Hazardous Substances (except
to the extent previously disclosed to the Bank in writing) so that the
condition of such Mortgaged Property shall not be a violation of any
Environmental Laws (except to the extent previously disclosed to the Bank in
writing, but in any event in accordance with Standard Industry Practices).
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8.1.5. Indemnity. The Borrower shall defend, indemnify and
hold harmless the Bank, its employees, agents, officers, directors, successors
and assigns from and against any and all claims, demands, penalties, fines,
liabilities, settlements, damages, costs or expenses of whatever kind or
nature, including, without limitation, attorney's and consultant's fees (said
attorneys and consultants to be selected by the Bank), investigation and
laboratory fees, environmental studies required by the Bank (whether prior to
foreclosure or otherwise), court costs and litigation expenses, any of which
arise out of or are related to: (a) the use, generation, manufacture,
production, storage, presence, disposal, release or threatened release of any
Hazardous Substance on, from or affecting any of the Mortgaged Property or the
soil, water, vegetation, buildings, personal property, persons or animals
thereon, (b) any personal injury (including wrongful death) or property damage
(real or personal) arising out of or related to such Hazardous Substance, (c)
any lawsuit brought or threatened, settlement reached, or governmental order
relating to such Hazardous Substances, (d) the cost of removal of all such
Hazardous Substances from all or any portions of any of the Mortgaged Property,
(e) taking necessary precautions to protect against the release of Hazardous
Substances on or affecting any of the Mortgaged Property, (f) complying with
all applicable Environmental Laws, (g) any violation of Environmental Laws or
requirements of the Bank which are based upon or in any way related to such
Hazardous Substances, and/or (h) the costs of any repair, cleanup or
remediation of any of the Mortgaged Property and the preparation and
implementation of any closure, remedial or other plans required to be
undertaken by applicable Environmental Laws. Upon the Bank's request, the
Borrower shall execute a separate indemnity covering the foregoing matters.
8.1.6. Remedial Work. In the event that any investigation,
site monitoring, containment, cleanup, removal, restoration or other remedial
work of any kind or nature (the "Remedial Work") is required to be undertaken
under any applicable local, state or federal law or regulation, any judicial
order, or by any governmental entity because of, or in connection with, the
current or reasonably threatened future presence or release of a Hazardous
Substance in or into the air, soil, ground water, surface water or soil vapor
at, on, about, under of with any of the Mortgaged Property (or any portion
thereof), the Borrower shall promptly after written demand for performance
thereof by appropriate governmental authorities or the Bank (or such shorter
period of time as may be required under any applicable law, regulation, order
or agreement), commence and thereafter diligently prosecute to completion, all
such Remedial Work. All Remedial Work shall be performed by contractors
selected by the Borrower and approved in advance by the Bank, and under the
supervision of a consulting engineering selected by the Borrower and approved
by the Bank (which approval the Bank shall not unreasonably withhold). All
costs and expenses of such Remedial Work shall be paid by the Borrower
including, but not limited to, the Bank's reasonable attorneys' fees and
reasonable costs incurred in connection with its monitoring or review of such
Remedial Work.
8.1.7. Certain Rights of the Bank. Upon the Bank's receipt
of notice from any source concerning the existence of any Hazardous Substance
or the noncompliance by the Borrower or any of the Mortgaged Property with any
Environmental Law, which matter, if true, could result in an order, suit or
other action against the Borrower and/or any of the Mortgaged Property and
which could, in the Bank's sole opinion, jeopardize the Borrower's ability to
repay the Indebtedness or the Bank's collateral security, the Bank shall have
the right (but not the obligation) to enter any such
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Mortgaged Property or to take any other actions that the Bank deems appropriate
to clean up, remove, resolve or minimize the adverse impact of any such matter.
The foregoing sentence shall not be deemed to limit any other rights the Bank
may have under this Agreement, any other document, or at law or in equity. All
reasonable costs and expenses incurred by the Bank in the exercise of any such
rights shall become part of the Indebtedness, shall be secured by the
collateral contemplated hereunder, and shall be payable by the Borrower upon
demand.
8.2 Representations and Warranties Relating to Environmental
Matters. The Borrower represents and warrants to the Bank that, except as
disclosed on Schedule 8.2 hereto and in any Asset Portfolio Report hereafter
provided to the Bank in connection with Acquired Loans acquired after the date
of this Agreement, to the best of its knowledge:
8.2.1. No Existing Violation. None of the Mortgaged
Property, any Obligor, the Investment Adviser or any Servicer is in violation
of or subject to any existing, pending or, to the knowledge of the Borrower,
threatened investigation by any governmental authority under any Environmental
Law.
8.2.2. Previous Uses. The Borrower or its environmental
advisors has made diligent inquiry into previous uses and ownership of the
Mortgaged Property, and based upon such inquiry has no knowledge of any
Hazardous Substance disposed of or released on or to the Mortgaged Property.
8.2.3. Underground Storage. Except as disclosed to the Bank
in writing, no underground storage tanks, whether or not containing any
Hazardous Substances, are located on or under the Mortgaged Property.
8.3. Environmental Risk Assessment. At any time (a) that the Bank
reasonably believes that Hazardous Substances have been disposed of on, or have
been released to or from any of the Mortgaged Property in violation of
Environmental Laws, or (b) after an Event of Default arising under Section 9,
within 30 days after a written request therefor by the Bank, the Borrower shall
deliver to the Bank a current Environmental Site Assessment prepared at the
Borrower's cost and expense by an environmental consultant acceptable to the
Bank, detailing the results of an environmental investigation concerning the
Mortgaged Property, including results of any soil and ground water samples that
may have been taken in connection with such investigation.
8.4. Survival of Obligations. The provisions of this Section 8
shall be in addition to any and all other obligations and liabilities the
Borrower may have to the Bank at common law or pursuant to any other agreement
and, notwithstanding anything in Section 10.21 hereof to the contrary, shall
survive (a) the repayment of the Note and all other Indebtedness, (b) the
satisfaction of all of the Borrower's other obligations hereunder and under the
other Loan Documents, (c) the discharge of any Mortgage hereafter granted to
the Bank, and (d) the foreclosure or acceptance of a deed in lieu of
foreclosure of any Mortgage hereafter granted to the Bank.
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SECTION 9. EVENTS OF DEFAULT-ENFORCEMENT-APPLICATION OF PROCEEDS.
9.1. Event of Default. The occurrence of any of the following
events shall constitute an Event of Default (herein so called) hereunder:
9.1.1. Failure to Pay Monies Due. If any principal of or
accrued interest on the Note, any fees under Section 2.6. of this Agreement or
any other Indebtedness shall not be paid when due, by acceleration or
otherwise, unless such failure to pay is cured within five (5) calendar days of
such Default.
9.1.2. Misrepresentation. If any warranty or representation
of any of the Obligors or any Servicer in connection with or contained in this
Agreement or any other document related hereto, or if any financial data or
other information now or hereafter furnished to the Bank by or on behalf of any
Obligor or any Servicer shall prove to be false or misleading in any material
respect.
9.1.3. Noncompliance with Bank Agreements. If any Obligor
or the Servicer shall fail to perform any of its covenants under, or shall fail
to comply with any of the provisions of, this Agreement or any other agreement
with the Bank to which it may be a party, unless such Default is fully cured
and satisfied within fifteen (15) calendar days of the date the Bank gives
notice to the Borrower of such Default.
9.1.4. Other Defaults. If any Obligor shall default in the
due payment of any of its indebtedness (other than the Indebtedness) or in the
observance or performance of any term, covenant or condition in any agreement
or instrument evidencing, securing or relating to such indebtedness and such
default results in the acceleration of the Debt, irrespective of whether any
such default shall be forgiven or waived by the holder thereof, unless such
payment is being contested in good faith and adequate reserves for the payment
thereof have been established.
9.1.5. Judgments. If there shall be rendered against any
Obligor or any Servicer one or more judgments or decrees involving an aggregate
liability of $50,000 or more, which has or have become nonappealable and shall
remain undischarged, unsatisfied by insurance and unstayed for more than 20
days, whether or not consecutive; or of a writ of attachment or garnishment
against the property of any such Person shall be issued and levied in an action
claiming $100,000 or more and not released or appealed and bonded in a manner
satisfactory to the Bank.
9.1.6. Business Suspension, Bankruptcy, Etc. If any Obligor
or any Servicer shall voluntarily suspend transaction of its business; or if
any such Person shall not pay its debts, generally, as they mature or shall
make a general assignment for the benefit of creditors; or proceedings in
bankruptcy, or for reorganization or liquidation of any such Person under the
Bankruptcy Code or under any other state or federal law for the relief of
debtors shall be commenced by any such Person or shall be commenced against any
such person and shall not be discharged within sixty (60) days of commencement;
or a receiver, trustee or custodian shall be appointed for any such Person or
for any substantial portion of its respective properties or assets.
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9.1.7. Change of Management. If both Robert Swendson and
Lon Critchfield shall cease to serve in positions of management with the
Borrower in substantially the same capacities and with substantially the same
powers as they currently serve or have.
9.1.8. Inadequate Funding or Termination of Employee/Benefit
Plan(s). If any Obligor or any Servicer shall fail to meet its minimum funding
requirements under ERISA with respect to any employee benefit plan established
or maintained by such Person, or if any such plan shall be the subject of
termination proceedings (whether voluntary or involuntary) and there shall
result from such termination proceedings a liability of such Person to the PBGC
which in the opinion of the Bank will have a materially adverse effect upon the
operations, business, property, assets, financial condition or credit of such
Person.
9.1.9. Occurrence of Certain Reportable Events. If there
shall occur, with respect to any pension plan maintained by any Obligor or any
Servicer any reportable event (within the meaning of Section 4043(b) of ERISA)
which the Bank shall determine in good faith constitutes a ground for the
termination of any such plan, and if such event continues for thirty (30) days
after the Bank gives written notice to the Borrower, provided that termination
of such plan or appointment of such trustee would, in the opinion of the Bank,
have a materially adverse effect upon the operations, business, property,
assets, financial condition or credit of any such Person.
9.1.10. Loss or Damage. If any loss, theft, substantial
damage or destruction to or of any material portion of the Collateral
comprising a material portion of the Borrower's assets occurs which is not
fully covered by insurance.
9.1.11. Adverse Change. If any material and adverse
change in the business operations and condition, financial or otherwise, of any
Obligor or any Servicer occurs.
9.1.12. PBGC. Except as expressly permitted herein, if a
notice of lien, levy or assessment is filed of record with respect to all or
any of the assets of any Obligor or any Servicer by the United States of
America, or any department, agency, or instrumentality thereof, or by any
state, county, municipal or other governmental agency, including, without
limitation, the PBGC, or if any taxes or debts owing at any time or times
hereafter to any one of them becomes a lien or encumbrance upon the Collateral
or any other assets of any such Person.
9.2. Remedies. Upon the occurrence of any Event of Default, and at
any time thereafter, the obligation, if any, to make a Loan shall cease and
terminate, and the Bank shall have the right, at its option, to declare the
unpaid balance of the Indebtedness to be immediately due and payable without
further notice (including notice of intent to accelerate and notice of
acceleration), protest or demand or presentment for payment, all of which are
hereby expressly waived by the Borrower, and to enforce or avail itself of any
and all powers, rights and remedies available at law or provided in this
Agreement, the Note, the other Loan Documents or any other document executed
pursuant hereto or in connection herewith. Notwithstanding any provision in
this Section to the contrary, upon the occurrence of any Event of Default, the
Bank shall have the right, immediately and without notice,
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<PAGE> 52
to take possession of and exercise possessory rights with regard to any
Collateral. Every power, right or remedy of the Bank set forth in this
Agreement, the Note and the other Loan Documents or any other document executed
pursuant hereto or in connection herewith, or afforded by law may be exercised
from time to time, and as often as may be deemed expedient by the Bank.
9.3. Application of Proceeds. The proceeds of any sale or other
disposition of the Collateral authorized by this Agreement shall be applied by
the Bank, first upon all expenses authorized by the Uniform Commercial Code and
all reasonable attorneys' fees and legal expenses incurred by the Bank; the
balance of the proceeds of such sale or other disposition shall be applied to
the payment of the Indebtedness, first to interest, then to principal; and the
surplus, if any, shall be paid over to the Borrower or to such other person or
persons as may be entitled thereto under applicable law. The Borrower shall
remain jointly and severally liable for any deficiency, which the Borrower
shall pay to the Bank immediately upon demand.
9.4. Cumulative Remedies. The remedies provided for herein are
cumulative to the remedies for collection of the Indebtedness as provided by
law, in equity or by any mortgage, security agreement or other document
contemplated hereby. Nothing herein contained is intended, nor should it be
construed, to preclude the Bank from pursuing any other remedy for the recovery
of any other sum to which the Bank may be or become entitled for the breach of
this Agreement by the Borrower.
SECTION 10. MISCELLANEOUS.
10.1. Independent Rights. No single or partial exercise of any
right, power or privilege hereunder, or any delay in the exercise thereof,
shall preclude other or further exercise of the rights of the parties to this
Agreement.
10.2. Covenant Independence. Each covenant in this Agreement shall
be deemed to be independent of any other covenant, and an exception in one
covenant shall not create an exception in another covenant.
10.3. Waivers and Amendments. No forbearance on the part of the
Bank in enforcing any of its rights under this Agreement, nor any renewal,
extension or rearrangement of any payment or covenant to be made or performed
by the Borrower hereunder or by any Obligor under any of the other Loan
Documents, shall constitute a waiver of any of the terms of this Agreement or
of any such right. No Default or Event of Default shall be waived by the Bank
except in writing signed and delivered by an officer of the Bank, and no waiver
of any Default or Event of Default shall operate as a waiver of any other
Default or Event of Default or of the same Default or Event of Default on a
future occasion. No other amendment, modification or waiver of, or consent
with respect to, any provision of this Agreement or the Note or other documents
contemplated hereby shall be effective unless the same shall be in writing and
signed and delivered by an officer of the Bank.
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10.4. GOVERNING LAW. THIS AGREEMENT, AND EACH AND EVERY TERM AND
PROVISION HEREOF, SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW OF THE
STATE OF TEXAS.
10.5. Survival of Warranties, Etc. All of the covenants,
agreements, representations and warranties made by any Obligor in connection
with this Agreement and any document contemplated hereby shall survive the
borrowing and the delivery of the Note hereunder and shall be deemed to have
been relied upon by the Bank, notwithstanding any investigation heretofore or
hereafter made by the Bank. All statements contained in any certificate or
other document delivered to the Bank at any time by or on behalf of any
Obligor, the Investment Adviser or any Servicer pursuant hereto or in
connection with the transactions contemplated hereby shall constitute
representations and warranties by the Borrower in connection with this
Agreement.
10.6. Binding Effect. This Agreement shall inure to the benefit of
and shall be binding upon the parties hereto and their respective successors
and assigns; provided, however, the Borrower may not assign or transfer its
rights or obligations hereunder without the prior written consent of the Bank.
10.7. Maintenance of Records. The Borrower will keep all of its
records concerning the Collateral at its principal place of business. The
Borrower will give the Bank prompt written notice of any change in its
principal place of business, or in the location of said records.
10.8. Notices. All notices and communications provided for herein
or in any document contemplated hereby or required by law to be given shall be
in writing (unless expressly provided to the contrary) and, if personally
delivered, effective when delivered at the address below or, in the case of
mailing, effective two days after sending by first class mail, postage prepaid,
addressed as follows, or to such other address as a party shall have designated
to the other in writing in accordance with this section:
If to Borrower: Plymouth Commercial Mortgage Fund
c/o Emerald Advisers, Inc.
13333 Blanco, Suite 314
San Antonio, Texas 78216
Attention: Robert R. Swendson
If to Bank: Comerica Bank-Texas
1601 Elm Street
Dallas, Texas 75201
P. O. Box 650282
Dallas, Texas 75262-0282
Attention: Gary W. Orr
with a copy to: Comerica Bank-Texas
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<PAGE> 54
114 W. 7th Street
Austin, Texas 78701
P. O. Box 2727
Austin, Texas 78768
Attention: David W. Whiting
The giving of at least five (5) days notice before the Bank shall take any
action described in any notice shall conclusively be deemed reasonable for all
purposes; provided, that this shall not be deemed to require the Bank to give
five (5) days notice or any notice if not specifically required in this
Agreement.
10.9. Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures were upon the same
instrument.
10.10. Headings. Article and section headings in this Agreement
are included for the convenience of reference only and shall not constitute a
part of this Agreement for any purpose.
10.11. Capital Adequacy. If as a result of any regulatory change
directly or indirectly affecting the Bank or any of the Bank's affiliates there
shall be imposed, modified or deemed applicable any tax, reserve, special
deposit, minimum capital, capital ratio, or similar requirement against or with
respect to or measured by reference to loans made or to be made hereunder or
participations therein, and the result shall be to increase the cost to the
Bank or any of the Bank's affiliates of making or maintaining any loan
hereunder or to any other party maintaining any participation therein, or
reduce any amount receivable in respect of any such loan (which increase in
cost, or reduction in amount receivable, shall be the result of the Bank's or
the Bank's affiliated company's reasonable allocation among all affected
customers of the aggregate of such increases or reductions resulting from such
event), then, within ten (10) days after receipt by the Borrower of a
certificate from the Bank containing the information described in this Section
below which shall be delivered to the Borrower, the Borrower agrees from time
to time to pay the Bank such additional amounts as shall be sufficient to
compensate the Bank or any of the Bank's affiliates (for as long as such
increased costs or reductions in amount receivable exist) for such increased
costs or reductions in amount receivable which the Bank determines in the
Bank's sole discretion are material. The certificate requesting compensation
under this Section shall identify the regulatory change which has occurred, the
requirements which have been imposed, modified or deemed applicable, the amount
of such additional cost or reduction in amount receivable and the way in which
such amount has been calculated.
10.12. Costs and Attorneys' Fees. If the Bank retains an attorney
in connection with any default or to collect, enforce or defend this Agreement,
the Note or any of the Loan Documents in any lawsuit or in any probate,
reorganization, bankruptcy or other proceeding, or if the Borrower sues the
Bank in connection with this Agreement, the Note or any of the Loan Documents
and does not prevail, then the Borrower agree to pay to the Bank, in addition
to principal and interest, all reasonable costs and expenses incurred by the
Bank in trying to collect this note or in any such suit
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<PAGE> 55
or proceeding, including reasonable attorneys' fees. To the extent not
prohibited by applicable law, the Borrower will pay all costs and expenses and
reimburse the Bank for any and all expenditures of every character incurred or
expended from time to time, regardless of whether or not a default has
occurred, in connection with (a) the preparation, negotiation, documentation,
closing, renewal, revision, modification, increase, review or restructuring of
this Agreement or any of the other Loan Documents including, without
limitation, legal, accounting, auditing, architectural engineering and
inspection services and disbursements, or in connection with collecting or
attempting to enforce or collect this Agreement, the Note or any of the other
Loan Documents, (b) the Bank's evaluating, monitoring, administrating and
protecting any Collateral now or hereafter securing payment of any part of the
Indebtedness and (c) the Bank's creating, perfecting and realizing upon the
Bank's security interests in and liens on any Collateral, and all costs and
expenses relating to the Bank's exercising any of its rights and remedies
hereunder or under any other Loan Document or at law, including, without
limitation, all appraisal fees, consulting fees, filing fees, taxes, brokerage
fees and commissions, title review and abstract fees, UCC search fees, other
fees and expenses incident to title searches, reports and security interests,
escrow fees, attorneys' fees, legal expenses, court costs, other fees and
expenses incurred in connection with any complete or partial liquidation of any
Collateral and all fees and expenses for any professional services relating to
the Collateral or any operations conducted in connection with it; provided,
that no right or option granted by the Borrower to the Bank or otherwise
arising pursuant to any provision of this or any other instrument shall be
deemed to impose or admit a duty on the Bank to supervise, monitor or control
any aspect of the character or condition of the Collateral or any operations
conducted in connection with it for the benefit of the Borrower or any other
Person other than the Bank. The Borrower agrees to indemnify, defend and hold
the Bank, its shareholders, directors, officers, agents and employees
(collectively "INDEMNIFIED PARTIES") harmless from and against any and all
loss, liability, obligation, damage, penalty, judgment, claim, deficiency,
expense, action, suit, cost and disbursement of any kind or nature whatsoever
(including interest, penalties, attorneys' fees and amounts paid in
settlement), REGARDLESS OF WHETHER CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE
OF ANY OF THE INDEMNIFIED PARTIES, imposed on, incurred by or asserted against
the Indemnified Parties growing out of or resulting from this note, any Loan
Document or any transaction or event contemplated herein or therein (except
that such indemnity shall not be paid to any Indemnified Party to the extent
that such loss, etc. directly results from the gross negligence or willful
misconduct of that Indemnified Party). Any amount to be paid under this
Paragraph by the Borrower to the Bank shall be a demand obligation owing by
such the Borrower to the Bank and shall bear interest from the date of
expenditure until paid at the Past Due Rate.
10.13. Gender. Throughout this Agreement, the masculine
shall include the feminine and vice versa and the singular shall include the
plural and vice versa, unless the context of this Agreement indicates
otherwise.
10.14. Cross Default; Cross Collateral. The Borrower hereby
agrees that all other agreements between the Borrower and the Bank or any of
its affiliates is hereby amended so that a default under this Agreement is a
default under all other agreements and a default under any one of the other
agreements is a default under this Agreement, and the collateral under this
Agreement
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<PAGE> 56
secures the obligations now or hereafter outstanding under all other agreements
between the Borrower and the Bank or any of its affiliates and the collateral
pledged under any other agreement with the Bank or any of its affiliates
secures the obligations under this Agreement.
10.15. Joint and Several Obligations. The Borrower shall be
jointly and severally liable for the payment and performance of the
Indebtedness without regard to which the Borrower receives the proceeds hereof.
The Borrower hereby acknowledges that it expects to derive economic advantage
from each of the Loans.
10.16 Severability of Provisions. Any provision of this
Agreement, the Note or any other Loan Documents that is 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 of this Agreement, the Note or such other
documents or affecting the validity or enforceability of such provision in any
other jurisdiction.
10.17. Assignment. The Bank shall have the absolute and
unrestricted right to sell, assign, transfer, or grant participation in, all or
any portion of the loans and any collateral, guaranties or other security
relating thereto without the consent of the Borrower; provided, however, no
such action on the part of the Bank shall have the effect of changing any of
the Borrower's obligations hereunder without the written consent of the
Borrower. The Bank shall give the Borrower written notice of any absolute
assignment of any of the loans if the result thereof will be to cause the
Borrower to deal directly with another financial institution which is not the
successor in interest by merger to the Bank.
10.18. Power of Attorney. Without limiting any other rights
and remedies available to the Bank hereunder, the Borrower hereby appoints the
Bank as the Borrower's attorney-in-fact, with full power of substitution, for
the purpose of carrying out the provisions of this Agreement or any Loan
Documents and taking any action and executing in the name of the Borrower,
without recourse to the Borrower, any document or instrument, which the Bank
may deem necessary or advisable to accomplish the purposes hereof and of any
Loan Document (including, without limitation, perfecting or protecting the
liens on and security interests in any Collateral) which appointment is coupled
with an interest and is irrevocable. The Borrower hereby authorizes the Bank
in its discretion at any time and from time to time, regardless of whether any
Default or Event of Default shall have occurred, to exercise such Power of
Attorney, including without limitation (a) completing any Collateral Assignment
which heretofore was, or hereafter at any time may be, executed and delivered
by the Borrower to the Bank so that such assignment describes a mortgage which
is security for any Acquired Loan now or hereafter at any time constituting
Collateral and recording same, and (b) completing any other assignment or
endorsement that was delivered in blank hereunder or pursuant to the terms
hereof.
10.19. Venue. This Agreement and the other Loan Documents
is performable in Dallas County, Texas, which shall be a proper place of venue
for suit on or in respect of this Agreement and the other Loan Documents. The
Borrower irrevocably agrees that any legal proceeding in respect of this
Agreement and the other Loan Documents shall be brought in the district courts
of Dallas
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<PAGE> 57
County, Texas or the United States District Court for the Northern District of
Texas, Dallas Division (collectively, the "Specified Courts"). The Borrower
hereby irrevocably submits to the nonexclusive jurisdiction of the state and
federal courts of the State of Texas. The Borrower hereby irrevocably waives,
to the fullest extent permitted by law, any objection which it may now or
hereafter have to the laying of venue of any suit, action or proceeding arising
out of or relating to any Loan Document brought in any Specified Court, and
hereby further irrevoca bly waives any claims that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient forum.
Nothing herein shall affect the right of the Bank to commence legal proceedings
or otherwise proceed against any Obligor in any jurisdiction or to serve
process in any manner permitted by applicable law. The Borrower agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law.
10.20. Inconsistency with Other Agreements. Except as
provided below, to the extent any terms or provisions contained in this
Agreement shall be inconsistent with any provision in any other document or
instrument executed in connection herewith, this Agreement shall control.
Notwithstanding the foregoing, the Custodial Agreement shall control over this
Agreement to the extent of the matters contained therein.
10.21. Release and Discharge. Upon full payment of the
Indebtedness and performance by the Borrower of all its other obligations
hereunder, except as otherwise expressly provided herein, the parties shall
thereupon automatically each be fully, finally and forever released and
discharged from any claim, liability or obligation in connection with this
Agreement and the other documents contemplated hereby.
10.22. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK
HEREBY IRREVOCABLY WAIVE THE RIGHT TO TRAIL BY JURY WITH RESPECT TO ANY AND ALL
ACTIONS OR PROCEEDINGS AT ANY TIME IN WHICH THE BORROWER AND THE BANK ARE
PARTIES ARISING OUT OF THIS AGREEMENT. THE BORROWER HAS REVIEWED THE FOREGOING
WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS
JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
10.23. POST-CLOSING LETTER. PURSUANT TO LETTER OF EVEN DATE
ATTACHED HERETO, BORROWER IS MAKING CERTAIN ADDITIONAL REPRESENTATIONS AND
AGREEMENTS.
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10.24. ORAL AGREEMENTS INEFFECTIVE. THIS AGREEMENT AND THE
OTHER "LOAN AGREEMENTS" (AS DEFINED IN SECTION 26.02(A)(2) OF THE TEXAS
BUSINESS AND COMMERCE CODE, AS AMENDED) REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES, AND THIS AGREEMENT AND THE OTHER WRITTEN LOAN AGREEMENTS MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
IN WITNESS WHEREOF, the Borrower and the Bank have caused this
Agreement to be executed by their duly authorized officers as of the day and
year first written above.
PLYMOUTH COMMERCIAL MORTGAGE FUND,
a Delaware business trust
By:/s/ John C. Mosher
-------------------------------------
Name: John C. Mosher
----------------------------------
Title: Vice President
----------------------------------
COMERICA BANK-TEXAS, a state banking
association
By:/s/ Andrew A. Britton
-------------------------------------
Name: Andrew A. Britton
----------------------------------
Title: Senior Vice President
-----------------------------------
57
<PAGE> 1
EXHIBIT 4(B)
PLYMOUTH COMMERCIAL MORTGAGE FUND
c/o Greystone Advisers, Inc.
13333 Blanco Road, Suite 314
San Antonio, Texas 78216-7756
November 26, 1996
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Agreement to Furnish to the Commission upon Request a
Copy of the Subordinated Note Issued to SouthWest
Federated Holding Company, Inc.
Dear Commissioners:
Plymouth Commercial Mortgage Fund, a Delaware business trust
("Plymouth"), hereby agrees to furnish to the U.S. Securities and Exchange
Commission (the "Commission") a copy of the $250,000 subordinated note it has
issued to SouthWest Federated Holding Company, Inc., a Delaware corporation
(the "Subordinated Note"). Plymouth is entering into this letter agreement as
a condition of not filing with the Commission the Subordinated Note as an
exhibit to the registration statement on Form 10 for Plymouth's common shares
of beneficial interest, no par value (File No. 0-21443). Consistent with Item
601(b)(4)(iii)(A) of Regulation S-K, the total amount of securities authorized
under the Subordinated Note does not exceed 10 percent of the total assets of
Plymouth and its subsidiary on a consolidated basis.
Sincerely,
/s/ John C. Mosher
John C. Mosher
Vice President and
Chief Financial Officer
<PAGE> 1
EXHIBIT 10(A)
PLYMOUTH COMMERCIAL MORTGAGE FUND
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made by and between Plymouth Commercial Mortgage
Fund, a Delaware business trust (the "Company"), and Emerald Advisers, Inc., a
Delaware corporation (the "Adviser").
1. PURPOSE OF THE COMPANY
The Company is a closed-end management investment company that will
elect to be regulated as a business development company under the Investment
Company Act of 1940, as amended (the "1940 Act").
2. THE INVESTMENT ADVISER
The Adviser is registered as an investment adviser with the U.S.
Securities and Exchange Commission (the "SEC") under the Investment Advisers
Act of 1940, as amended (the "Advisers Act"), and has entered into this
Agreement with the Company to act as its investment adviser on the terms set
forth herein.
3. OBLIGATIONS OF THE ADVISER
The Company hereby engages the Adviser's services as the Company's
investment adviser. As such, the Adviser will:
(a) advise the Company as to the acquisition and disposition of
securities, loans, real estate interests and other assets in
accordance with the Company's investment policies;
(b) assist the Company in making available and, if requested by
entities in which the Company has invested or is proposing to
invest, in rendering managerial assistance to such entities;
(c) provide to the Company, to the extent required, office space and
facilities and the services of the Adviser's officers and
employees;
(d) maintain the Company's books of account and other records and
files;
(e) report to the Company's Board of Trustees (the "Board"), or to any
committee thereof or officer of the Company acting pursuant to the
authority of the Board, at such times and in such detail as the
Board deems appropriate in order to enable the Company to determine
that its investment policies are being observed and implemented and
that the Adviser's obligations hereunder are being fulfilled. Any
investment program undertaken by the Adviser pursuant hereto and
any other activities undertaken by the Adviser on the Company's
behalf shall at all times be subject to any directives of the Board
or any duly constituted committee thereof or officer of the Company
acting pursuant to authority of the Board;
<PAGE> 2
(f) subject to the Company's investment policies and any specific
directives from the Board, effect acquisitions and dispositions for
the Company's account in the Adviser's discretion and to arrange
for the documents evidencing securities, loans, real estate
interests and other assets acquired on behalf of the Company to be
delivered to a custodian of the Company;
(g) on a continuing basis, monitor, manage and service the Company's
loan portfolio and other investments; and
(h) comply with all applicable rules and regulations of the SEC and, in
addition, conduct its activities under this Agreement in accordance
with other applicable law.
4. STATUS OF THE ADVISER
For a period of two years after the completion of the sale by
Plymouth of newly issues common shares of beneficial interest for cash pursuant
to an offering to be commenced in or about October 1996, the services of the
Adviser to the Company with regard to advice on new loan package purchases are
to be deemed exclusive, and the Adviser shall not be free to render similar
services to others. After this period, the services of the Adviser to the
Company are not to be deemed exclusive, and the Adviser shall be free to render
similar services to others so long as its services to the Company are not
impaired thereby. The Adviser shall be deemed to be an independent contractor
and shall, unless otherwise expressly provided or authorized, have no authority
to act for or represent the Company in any way or otherwise be deemed an agent
of the Company. To the extent that the purchase or sale of securities or other
investments of any issuer may be deemed by the Adviser, and to the extent
permitted by applicable law, to be suitable for two or more accounts managed by
the Adviser, the available securities or investments may be allocated in a
manner believed by the Adviser to be equitable to each account. It is
recognized that in some cases this may adversely affect the price paid or
received by the Company or the size or position obtainable for or disposed of
by the Company.
5. EXPENSES TO BE PAID BY THE ADVISER
The Adviser shall pay all expenses incurred by it in rendering the
services to be rendered by the Adviser hereunder. Generally, and except as may
otherwise be specified in this Agreement, these expenses include the cost of
office space, telephone service, equipment and personnel required to perform
its obligations under this Agreement. Without limiting the generality of the
foregoing, the Adviser will pay the salaries and other employee benefits of the
persons in its organization whom the Adviser may engage to render such
services, including without limitation persons who may from time to time act as
the Company's officers. Notwithstanding the foregoing, the Board may, in its
sole discretion, award to such officers options to acquire shares of beneficial
interest in the Company, which options shall not be deemed part of their
salaries or other employee benefits for the purpose of this paragraph.
6. EXPENSES TO BE PAID BY THE COMPANY
In general, the Company shall pay all of its operating expenses and
reimburse the Adviser promptly for expenses which the Adviser may pay on the
Company's behalf, except those
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<PAGE> 3
specifically required to be borne by the Adviser under this Agreement.
Expenses borne by the Company include but are not limited to:
(a) all expenses of any offering and sale by the Company of its shares,
including promotional expenses;
(b) fees and disbursements of the Company's outside legal counsel and
accountants and the custodian of its investments;
(c) fees and expenses incurred in producing and effecting filings with
federal and state securities administrators;
(d) costs of the Company's periodic reports to (and other
communications with) shareholders;
(e) fees and expenses of members of the Board who are not directors,
officers or employees of the Adviser;
(f) premiums for the fidelity bond maintained by the Company;
(g) all costs related to portfolio investments, including without
limitation financing costs, legal and accounting fees, expenses
related to protecting or maintaining the value of the loan
portfolio or its underlying collateral, and other professional or
technical fees and expenses (e.g., credit reports, title searches
and delivery charges, property taxes, insurance premiums,
long-distance telephone charges, costs of specialized consultants
such as accountants or industry-specific technical experts, and
travel expenses) incurred in acquiring, monitoring, negotiating,
working-out, and effecting disposition of such investments, as well
as responding to any litigation arising therefrom; and
(h) all expenses related to any borrowings by the Company.
7. COMPENSATION TO THE ADVISER
During the term of this Agreement, the Company will pay to the
Adviser, on the 15th day of each month: (a) a fee calculated at an effective
annual rate of 5.94% of the Company's invested assets as of the end of the
previous month; and (b) a fee calculated at an effective annual rate of 0.48%
of the Company's cash and short-term investments as of the end of the previous
month.
For purposes of calculating the fee to be paid on a monthly basis,
"invested assets" means the asset value as determined by the Board as of the
end of the previous fiscal quarter minus cash, short-term investments,
intangible assets, and the amount of collections applied to the carrying value
of the loan portfolio since the end of the previous quarter, plus the cost of
loans purchased and capitalized advances to protect portfolio investments or
underlying collateral since the end of the previous quarter. Such values shall
be established using generally accepted accounting principles ("GAAP"). The
fee paid on a monthly basis will be ratified on a quarterly basis by the Board.
- 3 -
<PAGE> 4
8. CERTAIN RECORDS
The Adviser shall keep and maintain all books and records with
respect to the Company's portfolio transactions required by Rule 31a-1 under
the 1940 Act and shall render to the Board such periodic and special reports as
the Board may reasonably request. The Adviser shall also furnish to the
Company any other information that is required to be filed by the Company with
the SEC or sent to shareholders under the 1940 Act (including rules adopted
thereunder) or any exemptive or other relief that the Adviser or the Company
obtains from the SEC. The Adviser agrees that the records that it maintains on
behalf of the Company are the property of the Company and the Adviser will
surrender promptly to the Company any of such records upon the Company's
request; provided, however, that the Adviser may retain a copy of such records.
In addition, for the duration of this Agreement, the Adviser shall preserve for
the periods prescribed by Rule 31a-2 under the 1940 Act any such records as are
required to be maintained by it pursuant to this Agreement, and shall transfer
said records to any successor investment adviser upon the termination of this
Agreement (or, if there is no successor investment adviser, to the Company.)
9. LIABILITY OF THE ADVISER AND INDEMNIFICATION
The duties of the Adviser shall be confined to those expressly set
forth herein, and no implied duties are assumed by or may be asserted against
the Adviser hereunder. The Adviser may rely on information reasonably believed
by it to be accurate and reliable. The Adviser shall not be liable to the
Company or to any shareholder of the Company for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in carrying out its duties hereunder, except:
(a) for a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder, except
as may otherwise be provided under provisions of applicable state
law which cannot be waived or modified hereby;
(b) to the extent specified in Section 36(b) of the 1940 Act concerning
losses resulting from a breach of fiduciary duty with respect to
the Adviser's receipt of compensation; and
(c) for a loss resulting from any breach of any representation and
warranty of the Adviser contained in this Agreement.
In the absence of willful misfeasance, bad faith, gross negligence
or reckless disregard of obligations or duties hereunder on the part of the
Adviser, to the fullest extent permitted by applicable law, the Company hereby
agrees to indemnify and hold the Adviser harmless from and against all claims,
actions, suits and proceedings at law or in equity, whether brought or asserted
by a private party or a governmental agency, instrumentality or entity of any
kind, relating to the sale, purchase, pledge of, advertisement of, or
solicitation of sales or purchases of any security (whether of the Company or
otherwise) by the Company, its officers, trustees, employees or agents in
alleged violation of applicable federal, state or foreign laws, rules or
regulations.
- 4 -
<PAGE> 5
As used in this Section 9, the term "Adviser" shall include any
affiliates of the Adviser performing services for the Company contemplated
hereby and the directors, officers, employees and other corporate agents of the
Adviser and such affiliates.
10. APPROVAL OF THE AGREEMENT
The Company represents that: (a) the terms of this Agreement were
approved by the Board, including a majority of its members casting their votes
in person who are not "interested persons" of the Company, at a meeting held on
September 13, 1996, called for the purpose of voting on such approval; and (b)
this Agreement was approved by the "vote of a majority of the outstanding
voting securities" (as defined in Section 2(a)(42) of the 1940 Act) of the
Company, at a meeting held on September 13, 1996. This Agreement shall
continue in effect for two (2) years from the date of its execution and
thereafter from year to year as long as such continuance is specifically
approved at least annually by the Board, including a majority of its members
casting their votes in person who are not "interested persons" of the Company
at a meeting called for the purpose of voting on such approval, or by "vote of
a majority of the outstanding voting securities" of the Company.
11. TERMINATION OF THE AGREEMENT
The foregoing notwithstanding, this Agreement may be terminated by
the Company at any time, without payment of any penalty, on sixty (60) days'
written notice to the Adviser if the decision to terminate has been made by the
Board or by "vote of a majority of the outstanding voting securities" of the
Company. This Agreement will terminate automatically in the event of its
"assignment" (as defined in Section 2(a)(4) of the 1940 Act). The Adviser may
also terminate this Agreement on sixty (60) days' written notice to the
Company; provided, however, that the Adviser may not terminate this Agreement
unless: (a) the terms of a new investment advisory agreement with the Adviser
or another investment adviser have been approved by the Board, including a
majority of its members casting their votes in person who are not parties to
such agreement or "interested persons" of any such party, at a meeting called
for the purpose of voting on such approval; and (b) such new investment
advisory agreement has been approved by the "vote of a majority of the
outstanding voting securities" of the Company.
12. JURISDICTION
This Agreement shall be governed by the laws of the State of Texas.
13. SEVERABILITY
If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby.
* * *
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<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement on and
as of September 22, 1996.
PLYMOUTH COMMERCIAL EMERALD ADVISERS, INC.
MORTGAGE FUND
By: /s/ Robert R. Swendson By: /s/ John C. Mosher
---------------------- ------------------
Name: Robert R. Swendson Name: John C. Mosher
Title: President Title: Vice President
Attest: /s/ Larry D. Krause Attest: /s/ Larry D. Krause
-------------------- --------------------
Name: Larry D. Krause Name: Larry D. Krause
Title: Senior Vice President/Secretary Title: Senior Vice
President/Secretary
- 6 -
<PAGE> 1
EXHIBIT 10(B)
CUSTODIAL AGREEMENT
This Custodial Agreement is entered into as of the 27th day of
September, 1996, by and among (i) COMERICA BANK - TEXAS, a Texas state banking
association, when acting in its capacity as custodian (the "Custodian"), (ii)
COMERICA BANK - TEXAS, acting in its capacity as a party to that certain Loan
Agreement of even date herewith with Borrower (the "Lender"), and (iii)
PLYMOUTH COMMERCIAL MORTGAGE FUND, a Delaware business trust ("Borrower").
R E C I T A L S:
WHEREAS, Borrower and Lender have entered into that certain Loan
Agreement of even date herewith, as amended from time to time hereafter (the
"Loan Agreement"); and
WHEREAS, pursuant to the terms of the Loan Agreement and other
documents executed in connection with the Loan Agreement, Borrower is obligated
to deliver possession of the Acquired Loans and certain collateral therefor
which is required to be possessed by a secured party to obtain and maintain
perfection of the security interests in such Collateral of Lender; and
WHEREAS, Borrower will collect and service the Acquired Loans and REO
Property for the benefit of Borrower and Lender in accordance with the terms of
the Loan Agreement; and
WHEREAS, Borrower and Lender have requested Custodian to Serve as
custodian for Lender with regard to the Possessory Collateral (as hereinafter
defined) during the terms of the Loan Agreement and any refinancings thereof,
to provide for perfection of the security interests held by Lender according to
the terms and conditions of this Custodial Agreement and to accommodate the
needs of the parties with respect to having access to Loan Documents in order
to manage and collect and dispose of the Acquired Loans and the REO Property;
and
WHEREAS, Custodian has agreed to serve as custodian for Lender with
regard to the Possessory Collateral in accordance with the terms and conditions
of this Agreement.
NOW, THEREFORE, in consideration of their mutual promises, covenants
and agreements set forth below, the parties hereto agree as follows:
1. Definitions.
1.1 For purposes of this Custodial Agreement, the terms
defined in this Section 1, unless the context otherwise requires, will have the
meanings applied to them in this Section 1 and will include the plural as well
as the singular. Additional definitions may be found throughout this Custodial
Agreement. In addition, capitalized terms used in this Custodial Agreement and
not otherwise defined in this Agreement shall have the meaning set forth in the
Loan Agreement. All terms defined in the Uniform Commercial Code, as adopted
in the State of Texas (the "Code") shall have the meaning as defined therein
unless expressly defined otherwise in this Custodial Agreement.
<PAGE> 2
1.2 As used in this Custodial Agreement, the following terms
will have the following meanings unless the context requires otherwise:
1.2.1 Chattel Paper shall have the meaning set forth
in the Code.
1.2.2 Instruments shall have the meaning set forth
in the Code.
1.2.3 Leases shall mean agreements providing for
payment to the owner of good(s) for the right to possession and use of such
good(s) for a specified period of time and shall include an agreement
determined to be a lease or a security interest under the Code. The term
"Lease" as used herein shall only include the agreement evidencing the
obligation of the lessee to make payments to Borrower as lessor, and shall not
include, or require Custodian to maintain possession or custody of, any bills
of sale, certificates of title, security agreements or other documents or
writings relating to the goods covered by the Lease.
1.2.4 Possessory Collateral shall mean (a) any and
all Chattel Paper, Instruments and Leases which relate to or evidence Acquired
Loans or collateral therefor, including without limitation all promissory notes
evidencing the Acquired Loans and such other documents, instruments and
agreements as Lender may from time to time designate as Possessory Collateral.
2. Delivery of Acquired Loans and Possessory Collateral.
2.1 Lender authorizes Borrower to (and Borrower agrees
to) deliver, or cause to be delivered, full and complete possession of all
Possessory Collateral to Custodian, which Possessory Collateral, along with
other items not delivered to Custodian, shall serve as security for the payment
of the Loans and shall be subject to a first priority lien in favor of Lender
pursuant to the terms of the Loan Documents to secure the promissory note
executed and delivered by Borrower to Lender pursuant to the terms of the Loan
Agreement. While the purpose of this Agreement is to protect, preserve and
perfect the interests of the Lender in the Possessory Collateral, the parties
hereto recognize that the Borrower retains ownership rights therein. The
various references throughout this Agreement to the Lender's interests in the
Possessory Collateral are not meant to negate the interest of Borrower stated
above, provided, however, that until the payment in full of the Loans,
Borrower's interest in the Possessory Collateral shall be subordinate in all
respect to the interests of Lender and the Possessory Collateral shall not be
in any manner or to any extent subject to the direction or control of Borrower.
2.2 On the Closing Date, all of the original promissory
notes evidencing the Acquired Loans shall be delivered to Lender or Lender's
agent for the purpose of receiving possession of the Acquired Loans. Lender
shall deliver the Acquired Loans to Custodian at Custodian's office specified
in Section 15, and only upon delivery to said office shall the Acquired Loans
be deemed received by Custodian. Custodian shall have no responsibility for
risk of loss to the Acquired Loans while the Acquired Loans are in the
possession of Lender or Lender's Agent. The Lender is delivering such Acquired
Loans at the request of and risk of Borrower.
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<PAGE> 3
2.3 Borrower shall provide to Custodian at the time of
delivery to Custodian of any Possessory Collateral, a detailed listing of each
of the Acquired Loans and the associated Possessory Collateral comprising each
Acquired Loan.
2.4 Upon receipt of the Possessory Collateral, Custodian
will, promptly and with due care, review the listing of Acquired Loans and
Possessory Collateral received by it to ascertain that all Possessory
Collateral set forth in the listing has been received by Custodian and provide
a trust receipt to Lender acceptable to Lender, evidencing receipt of the
Possessory Collateral. If requested by Lender, Custodian will, on or before
ten (10) Business Days following receipt of the detailed listing, provide all
parties to this Custodial Agreement with a listing setting forth the Acquired
Loans and the Possessory Collateral received by it with respect thereto and
also specifying any Possessory Collateral set forth on the listing which have
not been placed in the actual possession of Custodian.
3. Custody of Acquired Loans and Possessory Collateral. Custodian
agrees to hold the Possessory Collateral in trust for the benefit of and on
behalf of Lender, and as Lender's agent in accordance with the provisions of
this Custodial Agreement. Except as otherwise provided in this Custodial
Agreement, Custodian shall, during the term of this Custodial Agreement,
segregate and maintain continuous actual custody, possession and control of the
Possessory Collateral deposited with it for and on behalf of Lender. Custodian
shall release the Possessory Collateral to Lender, as required in this
Custodial Agreement. Custodian may release Possessory Collateral, from time to
time, to Borrower solely in accordance with the provisions of this Custodial
Agreement.
4. Location of Acquired Loans and Possessory Collateral. Borrower
and Lender agree that the Possessory Collateral received by Custodian may be
maintained in a segregated and divided space in a vault or other secure
facility at any of Custodian's places of business in the State of Texas.
Custodian shall provide a 2-hour fire resistant facility to be located within
the storage area, the combination or keys for which shall be solely within the
custody of Custodian.
5. Examination of Possessory Collateral. Lender shall have and is
hereby granted right to examine and to obtain copies (to be made under
Custodian's supervision or by Custodian, as Custodian may require) of the
Possessory Collateral and related documents in Custodian's possession.
Custodian is hereby directed and Custodian hereby agrees to permit Lender and
its agents and representatives to exercise such rights on the premises of
Custodian during normal business hours on any Business Day, subject to
compliance with Custodian's security regulations and procedures. To the extent
required by law, Possessory Collateral may be inspected during Custodian's
normal business hours by representatives (employees or agents) of the
Securities and Exchange Commission who may be accompanied, unless otherwise
directed by order of the Securities and Exchange Commission, by one or more
officers of Borrower authorized by a resolution of Borrower described in
Paragraph 12.2. Furthermore, representatives of Borrower's independent public
accountants, accompanied either by any two persons specified in a resolution of
Borrower described in Paragraph 12.2. or by properly authorized officers or
employees of Custodian, may physically inspect Possessory Collateral for
verification purposes. Custodian and Lender may, but neither is obligated to,
have one
-3-
<PAGE> 4
or more of their respective officers or employees present at any physical
inspection of any Possessory Collateral.
6. Continuation of Custody. Until the occurrence of termination
of this Agreement pursuant to the terms hereof, the Custodian's custody of the
Possessory Collateral shall continue, and neither Borrower nor Lender shall
have the right to retake the Possessory Collateral, except as permitted by
Sections 7, 8, 9 and 10 hereof.
7. Release of Acquired Loans and Possessory Collateral for
Collections or Foreclosure. Subject to Section 9 below, from time to time, to
the extent necessary in connection with foreclosure or collection proceedings
with respect to any Acquired Loan, the Custodian shall, upon Custodian's
receipt of a "Release Request" from Borrower (in accordance with Section 9
below), deliver to Borrower (or to such other party as may be designated in
such Release Request) such Possessory Collateral with respect to the Acquired
Loan in question as is listed in such Release Request. No original promissory
notes, Instruments or Leases comprising a part of the Acquired Loan shall be
delivered to Borrower (or to such other party as may be designated in the
Release Request) unless notice of the assignment thereof to Lender has been
placed on or attached to same. No legend shall be placed upon any other
Possessory Collateral.
The following legend shall be a satisfactory notice of the assignment
to Lender:
NOTICE: THIS PROMISSORY NOTE, INSTRUMENT OR CHATTEL PAPER AND ALL
DOCUMENTS EXECUTED IN CONNECTION HEREWITH HAVE BEEN TRANSFERRED AND ASSIGNED AS
COLLATERAL TO COMERICA BANK - TEXAS, P.O. BOX 650282, DALLAS, TEXAS
75262-0282.
Lender, in its sole discretion, may, pursuant to a written direction,
allow Custodian to release Possessory Collateral with respect to a specified
Acquired Loan without a legend where necessary to allow Borrower to pursue
collection of foreclosure.
8. Release of Possessory Collateral in Preparation of Payment of
Loan in Full or Sale. Subject to Section 9 below, from time to time in order
to facilitate a sale of an Acquired Loan or a payment in full of such Acquired
Loan, the Custodian shall, upon Custodian's receipt of a "Release Request" from
Borrower (in accordance with Section 9 below), deliver to Borrower (or such
other party as may be designated in such Release Request) such Possessory
Collateral with respect to the Acquired Loan in question as is listed in such
Release Request.
9. General Provisions Applicable to Releases of Possessory
Collateral.
9.1 All releases of Possessory Collateral pursuant to
Section 7 or Section 8 above shall be subject to the provisions of this Section
9.
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<PAGE> 5
9.2 Each Release Request shall be in the form of Exhibit
A attached hereto (a "Release Request") and shall have been consented to in
writing by Lender. Each Release Request shall set forth (i) the Acquired Loan
in question, (ii) a listing of the specific Possessory Collateral being
requested, (iii) the purpose for the release of the Possessory Collateral in
question and (iv) an acknowledgment of the continuing application of the
security interests of the Lender in the Acquired Loan and Possessory Collateral
in question and any proceeds thereof. Each such fully-executed Release Request
must be received by Custodian at least two (2) Business Days prior to the date
that possession of the Possessory Collateral in question is required.
9.3 Within two (2) Business Days after Custodian receives
a Release Request whereupon Lender has indicated in writing its consent to said
release, Custodian shall cause the requested Possessory Collateral to be
delivered to Borrower (or such other party as may be designated in such Release
Request) via overnight courier.
9.4 Contemporaneously with the delivery of any such
Released Possessory Collateral, Borrower shall execute and cause to be received
by Custodian a Trust Receipt in the form attached hereto as Exhibit B (a "Trust
Receipt"), or, if the Released Possessory Collateral is released to another
party designated in the Release Request, Borrower shall cause such party to
execute and cause to be received by Custodian a Trust Receipt; which Trust
Receipt shall set forth (i) the Acquired Loan in question, (ii) a listing of
the specific Possessory Collateral delivered and an acknowledgment of receipt
of same and (iii) an acknowledgment of the continuing application of the
security interest of Lender in the Acquired Loan and Possessory Collateral in
question and any proceeds thereof.
9.5 With respect to any Possessory Collateral released
pursuant to this Section, Borrower (and such other party as may be designated
in the Release Request) shall hold such Possessory Collateral as the subagent
of Custodian pursuant to the terms and conditions of this Agreement. Borrower
(and such other party as may be designated in the Release Request) may not
release any Possessory Collateral to any other party unless there has been
remitted to the Cash Collateral Account an amount in immediately available
funds equal to or greater than the minimum disposition amount with respect to
the Acquired Loan in question as specified in such Release Request approved by
Lender. The minimum disposition amount with respect to an Acquired Loan is an
amount equal to the Fair Market Value of such Acquired Loan, or if no such Fair
Market Value is then available, such other amount as is acceptable to Lender.
9.6 Borrower shall be fully responsible to Lender for the
value of all Possessory Collateral in its possession, which value shall be no
less than the minimum disposition amount allocated to the Acquired Loan in
question, unless (a) within ten (10) Business Days after such delivery of the
Possessory Collateral, there has been received at the Cash Collateral Account
an amount in immediately available funds equal to the minimum disposition
amount specified in the Release Request, or (b) within ten (10) Business Days
after such delivery (except to the extent, if any, that Lender shall have
consented in writing to a longer period) Borrower has delivered or caused the
Possessory Collateral to be received by the Custodian. Except as provided
above or as otherwise
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<PAGE> 6
consented to by Lender, Borrower (and such other party as may be designated in
the Release Request) shall have no right to retain any Possessory Collateral
for a period of more than ten (10) Business Days after delivery by Custodian of
such Possessory Collateral. Promptly upon Lender's demand, Borrower shall pay
to the Cash Collateral Account any amounts owed by Borrower under this Section
(except to the extent that breach of this section has been cured as of the date
of such demand).
10. Return of Possessory Collateral for Exercise of Rights. Upon
request from time to time of Lender, Custodian shall promptly cause to be
delivered to and received by Lender such Possessory Collateral as is requested
by Lender.
11. Reports. If requested by Lender, the Custodian shall advise
Lender by monthly written reports to be provided within ten (10) Business Days
following the end of each calendar month, and more frequently upon written
request by Lender of a detailed listing of the Possessory Collateral then held
by the Custodian and a detailed listing of Possessory Collateral released
pursuant to Sections 7 and 8.
12. Other Special Terms Affecting Withdrawal and Access.
12.1 PROVIDED, that Lender has been paid in full and no
longer claims a security interest or other rights in or to the Possessory
Collateral, or any of it, and FURTHER PROVIDED, that Custodian is still in
possession of Possessory Collateral and holding same pursuant to this
Agreement, Borrower may withdraw or order the withdrawal of Possessory
Collateral and need not maintain with Custodian:
a. Possessory Collateral on loan to third
parties which is collateralized to the full extent of this market value
(provided, however, that Custodian shall be under no duty to inquire as to the
details of any such loan of Possessory Collateral or to ascertain the adequacy
of any collateral or security therefor);
b. Possessory Collateral hypothecated, pledged,
or placed in escrow for Borrower's account in connection with a loan or other
transaction authorized by specific resolution of Borrower's Board of Trustees
(provided, however, that Custodian shall be under no duty to inquire as to the
terms of any such loan or other transaction or to obtain evidence or proof of
its authorization); or
c. Possessory Collateral in transit in
connection with its sale, exchange, redemption, maturity, or conversion, the
exercise of warrants or other rights, or assents to changes in the terms of
Possessory Collateral, or other transactions necessary or appropriate in the
ordinary course of Borrower's business relating to the management of Possessory
Collateral.
12.2 Except as otherwise provided for by law or provided
for herein, no person shall be authorized or permitted to have access to the
Possessory Collateral deposited in accordance with
-6-
<PAGE> 7
Paragraph 2 except pursuant to a resolution of Borrower's Board of Trustees.
Each such resolution shall designate not more than five (5) persons who shall
be officers or employees of Borrower. Such resolution(s) shall provide that
access to Possessory Collateral shall be had only by two or more persons
jointly, at least one of whom must be an officer of Borrower.
13. Other Records. In addition to any other records provided for
herein, each person, when depositing, withdrawing, or ordering the withdrawal
of Possessory Collateral, shall sign a notation with respect to such deposit,
withdrawal, or order which shall show:
a. the date and time of the deposit, withdrawal, or
order;
b. the identity of the Possessory Collateral made the
subject of such deposit, withdrawal, or order, describing it with reasonable
particularity to enable the reader of such notation to identify the specific
Possessory Collateral to which it relates;
c. the manner of acquisition of such Possessory
Collateral deposited or the purpose for which it is withdrawn or ordered to be
withdrawn; and
d. if such person delivered withdrawn Possessory
Collateral to another person, the name of such person.
Such notation shall be transmitted promptly to an officer or trustee of
Borrower designated by Borrower's Board of Trustees who shall not be a person
authorized to withdraw or order the withdrawal of Possessory Collateral;
PROVIDED, however that Custodian shall be under no duty to make inquiry or
determine that the officer(s) or trustee(s) so designated actually meet the
foregoing criteria. All such notations shall be on serially numbered forms,
and Custodian will retain copies of all executed notations for a period of one
year.
14. Termination of the Custodial Agreement.
14.1 Custodian may terminate this Custodial Agreement by
serving written notice of the intention to terminate to all other parties to
the Custodial Agreement not less than thirty (30) days prior to the intended
date of termination. In addition, this Custodial Agreement may be terminated
by Lender upon its serving notice to Custodian. Immediately upon termination
of this Custodial Agreement, Custodian shall deliver all of the Possessory
Collateral in its custody to Lender or a successor custodian specified in
writing by Lender at such location as Lender shall specify in writing. In the
event that the appropriate party, either Lender or a successor custodian,
specified in writing by Lender fails to accept delivery of the Possessory
Collateral within fifteen (15) days after termination of this Custodial
Agreement, then Custodian, at the expense of Borrower, shall deliver the
Possessory Collateral to Lender if the successor custodian failed to accept
delivery. The Possessory Collateral shall be delivered together with a
complete accounting of all of the Possessory Collateral released at the time of
such termination.
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<PAGE> 8
14.2 The termination of this Custodial Agreement by
Borrower may only occur after the payment in full of the Note and the
termination of the Loan Agreement.
14.3 Borrower shall pay all reasonable costs associated
with termination of this Custodial Agreement, including, but not limited to,
cost of shipping and transporting all Possessory Collateral and any
out-of-pocket expenses incurred by the Custodian.
15. Notice. Any notice, request or demand to or upon the parties
hereto must be given in writing. Notices shall be sent certified, postage
prepaid and shall be addressed to the party to receive the same as follows or
to such other addressee as may be hereafter designated in writing by the
respective parties hereto:
<TABLE>
<S> <C>
To Custodian: COMERICA BANK-TEXAS
Independent Collateral Custody Department
1601 Elm Street
2nd floor
Dallas, Texas 75201
P. O. Box 650282
Dallas, Texas 75262-0282
Attention: Sheridan Benson
To Lender: COMERICA BANK-TEXAS
1601 Elm Street
Dallas, Texas 75201
P. O. Box 650282
Dallas, Texas 75262-0282
Attention: Gary W. Orr
with a copy to: COMERICA BANK-TEXAS
114 W. 7th Street
Austin, Texas 78701
Attention: David W. Whiting
To Borrower: PLYMOUTH COMMERCIAL MORTGAGE FUND
c/o Emerald Advisers, Inc.
13333 Blanco, Suite 314
San Antonio, Texas 78216
Attention: Robert R. Swendson
</TABLE>
All notices and other communications given to any party hereto in
accordance with the provisions of this Custodial Agreement shall be deemed to
have been given to any party five (5) days after being sent by registered or
certified mail, if by mail, in each case addressed to such party as provided
herein or in accordance with the latest unrevoked written notice from such
party in accordance with this Section.
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<PAGE> 9
16. Facsimile Notices. All parties to this Custodial Agreement
agree that where any written consent or notice is required of any party that a
facsimile transmission signed on behalf of that party will be sufficient to
serve as such written consent or notice. The Custodian may act upon any
instrument or other writing believed by it in good faith to be genuine, and to
be signed or presented by the proper person. Each party to this Custodial
Agreement shall provide Custodian with notice executed by an officer of such
party containing the names of persons authorized, subject to change by
subsequent notice executed by an officer of such party and received in writing
by Custodian, to receive the Possessory Collateral, to sign notice or otherwise
act on behalf of those respective parties. Such notice shall additionally
provide sample signatures for such authorized persons. Custodian shall have no
liability and shall be held harmless by Borrower for any action that it takes
or fails to take in reliance on the signature or facsimile thereof provided
pursuant to this Section and not revoked in writing.
17. Replacement of Custodian. Lender and Borrower agree that upon
designation of a third party custodian, all parties to this Custodial Agreement
(except Custodian) will enter into a new custodial agreement with the third
party custodian. The agreement with the replacement custodian will require the
written consent of all parties to this Custodial Agreement (except Custodian)
to the release of any Possessory Collateral by the third party custodian, other
than the release of any Possessory Collateral to Lender which not require the
consent of any party other than Lender. The custodial agreement with the third
party custodian will additionally acknowledge that the third party custodian
holds the Possessory Collateral in trust as agent for Lender and will
acknowledge the residuary interest of Borrower in the Possessory Collateral.
18. No Qualification to do Business. Nothing in this Custodial
Agreement shall be deemed to impose upon the custodian any duty to qualify to
do business in any state other than the State of Texas.
19. Prior Agreements. This Custodial Agreement supersedes all
prior and contemporaneous agreements and understandings relating to the subject
matter hereof. This Custodial Agreement may not be changed, waived, discharged
or terminated orally, but rather only by an instrument in writing signed by the
parties hereto.
20. Compensation of Custodian. In consideration of the services
to be performed by Custodian hereunder, Borrower agrees to pay to Custodian the
custodial fees set forth on Exhibit C attached hereto (collectively the
"Custodial Fee"), together with all other out-of-pocket expenses and costs
incurred by Custodian in performing its duties hereunder.
The Custodial Fee is payable monthly with respect to fees incurred in
the prior month as invoiced to Borrower. The Custodial Fee includes all
services to be provided under the terms of this Custodial Agreement. In the
event that additional services are required of Custodian, the Custodial Fee
shall be increased to take into account such additional services to be provided
by Custodian. Custodian reserves the right to adjust any fee shown on the
above schedule every year. Custodian
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<PAGE> 10
anticipates the fee increases over the life of the Agreement will not exceed
general inflationary or consumer price indices.
21. Prohibition on Assignment. Custodian shall not delegate,
assign or sub-contract any of its rights or obligations under this Custodial
Agreement except to an Affiliate of Custodian.
22. Termination of Obligations of Custodian. Unless the Loan
Agreement contemplates the delivery of additional Possessory Collateral to the
Custodian, the Custodian's obligations under this Custodial Agreement shall
cease upon the delivery or surrender of all of the Possessory Collateral then
in its possession pursuant to Section 12.
23. Limitation of Liability of Custodian. Except from the time of
receipt by Custodian of any item of Possessory Collateral until the time of
delivery by Custodian of such item of Possessory Collateral, the Custodian
shall not be liable for the physical loss of or damage to such time of
Possessory Collateral, including loss or damage caused by fire, water, theft or
burglary, riots, civil strife or commotion, force majeure, acts of God or acts
of war. Except as to physical loss of or damage to items of Possessory
Collateral occurring from the time of receipt of same by Custodian until the
time of delivery of same by Custodian, the Custodian shall not be liable in
connection with the performance of its fiduciary duties pursuant to the
provisions of this Custodial Agreement, except for: (i) liability arising from
Custodian's gross negligence; (ii) willful misconduct; (iii) intentional
breaches of this Custodial Agreement; or (iv) dishonest or fraudulent acts.
Borrower shall hold harmless and indemnify Custodian and its officers,
directors, employees and affiliates against all losses, damages, costs and
expenses (including, without limitation, reasonable legal fees) to the extent
arising from claims made against Custodian for any action or inaction which
does not constitute gross negligence, willful misconduct, intentional breaches
of this Custodial Agreement or dishonest or fraudulent acts. Under no
circumstances shall Custodian be liable for any consequential, incidental or
indirect damages, even if advised of the possibility of same.
24. Limitation of Duties of Custodian. Except as set forth in
this Custodial Agreement, the duties of the Custodian are specifically limited
to receiving actual possession of the Possessory Collateral delivered to it,
notifying (if requested by Lender) the parties of its receipt or non-receipt of
Possessory Collateral set forth in the listings provided by Borrower,
maintaining actual possession and custody of the Possessory Collateral subject
to temporary release thereof as set forth in this Custodial Agreement, and
ultimately delivering Possessory Collateral as specified in this Custodial
Agreement. Custodian shall have no responsibility with respect to any
Possessory Collateral or to notify any party concerning its possession or lack
of receipt of any Possessory Collateral except as to those items of Possessory
Collateral listed in the listings described in Section 2.23 of this Custodial
Agreement. Custodian shall not be responsible for determining the sufficiency
of any documentation or other actions required for perfection of the security
interest of Lender in the Possessory Collateral. Custodian shall not be
responsible for determining the authenticity of any documents provided to it,
but shall advise Borrower and Lender if it believes that any documents provided
to it are not authentic or otherwise are not what they purport to be on such
listing, though Custodian shall have no liability for failure to do so.
Custodian shall not be responsible for taking possession of any consumer goods,
-10-
<PAGE> 11
certificates of title or other items of collateral or property (except for the
Possessory Collateral). Custodian shall not be responsible for maintaining
custody of any files, documents, or other materials in addition to the
Possessory Collateral.
25. Modification. This Agreement and the procedures described
herein may be modified from time to time but only in writing and in an
instrument executed by all of the parties hereto.
26. Negation of Partnership. The relationship between the
Borrower and Lender is that of debtor and creditor. Nothing contained in this
Agreement will be deemed to create a partnership or joint venture between any
of the parties hereto or between Custodian and any other party, or to cause
Custodian to be liable or responsible in any way for the actions, liabilities,
debts, or obligations of the borrower or any other party.
27. Indemnification.
27.1. Borrower agrees to indemnify and hold harmless
Custodian and its directors, officers, agents and employees against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursement of any kind or nature whatsoever which
may be imposed upon, incurred by or asserted against Custodian or such
directors, officers, agents or employees, by reason of any action taken or
omitted to be taken by Custodian as Custodian under this agreement, except such
liabilities, obligations losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from Custodian's own gross
negligence or willful misconduct, or from Custodian's refusal to follow the
specific directions of Lender in compliance with this Agreement requiring the
immediate transfer of any item of Possessory Collateral.
27.2. The indemnification obligations of Borrower shall
survive termination of this Agreement.
27.3. Acceptance by the Custodian of its duties under this
Agreement is subject to the following terms and conditions, which the parties
to this Agreement hereby agree shall govern and control the rights, duties and
immunities of the Custodian:
(i) The duties and obligations of the Custodian
shall be determined solely by the express provisions of this Agreement and the
Custodian shall not be liable except for performance of such duties and
obligations as are specifically set out in this Agreement;
(ii) The Custodian shall be fully protected by
Borrower in acting or relying upon any written notice, direction, request,
waiver, consent, receipt or other paper or document which the Custodian in good
faith believes to be genuine and to have been signed or presented by the proper
party or parties;
(iii) The Custodian shall not be liable for any
error of judgment, or for any act done or step taken or omitted by it in good
faith or for any mistakes of fact or law, or for anything
-11-
<PAGE> 12
which it may do or refrain from doing in connection herewith, except its own
gross negligence or willful misconduct;
(iv) Custodian shall not be responsible to any
party hereto for any recitals, statements, representations or warranties
contained in the Loan Agreement or in any Loan Document; or for the execution,
effectiveness, genuineness, validity, enforceability, collectability, or
sufficiency of the Loan Agreement or any other Loan Documents or instruments
executed and delivered, or which could have been executed or delivered in
connection with the Loan Agreement or the other Loan Documents, including
without limitation the attachment, creation, effectiveness or perfection of the
security interest granted or purported to be granted hereunder in and to the
Possessory Collateral. Custodian shall be entitled to refrain from exercising
any discretionary powers or actions under this Agreement until Custodian shall
have received the prior written consent of Lender to such action; and
(v) The Custodian may seek the advice of legal
counsel in the event of any dispute or question as to the construction of any
of the provisions of this Agreement or its fully protected in respect of any
action taken, omitted or suffered by it in good faith in accordance with the
written opinion of such counsel.
28. No Waiver of Lender's Rights. The Agreement and the documents
executed in connection herewith by Lender shall not constitute a waiver or
accord and satisfaction of any of Lender's rights and remedies pursuant to any
of the Loan Documents and applicable law, and Lender hereby expressly affirms
its retention of all of their rights pursuant to such loan documents and
applicable law to effect collection of the amounts due it from the Borrower.
Nothing contained herein shall be deemed an election by Lender of any of its
rights and remedies under such loan documents or applicable law against
Borrower or any collateral securing the loans by Lender to Borrower.
29. Conflicts. Solely in the event that any term or condition
contained in this Agreement conflicts or is inconsistent with a provision in
any of the loan documents of Lender, the terms and conditions of this Agreement
shall supersede and control. In all other respects, the provisions of such
loan documents shall remain in full force and effect, including, without
limitation, any and all additional terms or conditions therein which are not in
conflict with the provisions of this Agreement.
30. Headings. Paragraph or other headings contained in this
Agreement are for reference purposes only and are not intended to affect in any
way the meaning or interpretation of this Agreement.
31. Counterpart Execution. This Agreement may be executed in
counterparts, each of which will be deemed an original document, but all of
which will constitute a single document.
32. Cumulative Remedies. This Agreement and each of the documents
to be executed in connection herewith and the obligations of the Borrower
hereunder and thereunder are in addition
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<PAGE> 13
to and not in substitution for any other obligations or security interests now
or hereafter held by Lender and shall not operate as a merger of any contract
or debt or suspend the fulfillment of or affect the rights, remedies, powers,
or privileges of either Lender in respect of any obligation or other security
interest held by it for the fulfillment thereof.
33. Cooperation. The Borrower agrees to execute and deliver, or
to cause to be executed and delivered, those documents and to do, or cause to
be done, such other acts and things as might reasonably be requested by Lender
to assure that the benefits of this agreement are realized by the Lender.
34. Attorney's Fees and Expenses. Each prevailing party shall be
entitled to be reimbursed jointly and severally by the non-prevailing parties
for all reasonable costs and expenses (including reasonable attorneys' fees and
disbursements) in its successful prosecution or defense of any provision of
this Agreement.
35. Severability. In the event that any term or provision of this
Agreement or the application thereof to any person or circumstance shall, to
any extent, be held invalid or unenforceable, the remainder of this Agreement
or the application of such term or provision to persons or circumstances other
than those to which it is held invalid or unenforceable, shall be valid and
enforceable to the fullest extent permitted by law.
36. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
37. Successors and Assigns. This Agreement shall inure to the
benefit of and be binding on the successors and assigns of the Lender and the
Borrower; provided, however, the foregoing shall not be deemed to allow any
assignment or delegation by Borrower in violation of the terms of the Loan
Agreement. Any such assignment or delegation shall be void.
38. Survival. The provisions of Section 14.3, 16, 20, 23, 24, 27
and 34 shall surive the termination of this Agreement.
The parties to this Custodial Agreement have caused it to be executed
by their duly authorized officers and/or representatives as of the day and year
first above written.
BORROWER:
PLYMOUTH COMMERCIAL MORTGAGE FUND
By: /s/ John C. Mosher
------------------------------
Name: John C. Mosher
----------------------------
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<PAGE> 14
Title: Vice President
----------------------------
CUSTODIAN:
COMERICA BANK-TEXAS
By: /s/ Andrew A. Britton
------------------------------
Name: Andrew A. Britton
----------------------------
Title: Senior Vice President
---------------------------
-14-
<PAGE> 15
LENDER:
COMERICA BANK-TEXAS
By: /s/ ANDREW A. BRITTON
-------------------------------
Name: ANDREW A. BRITTON
-----------------------------
Title: Senior Vice President
----------------------------
-15-
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains Summary Financial Information extracted from the
registrant's Statement of Assets and Liabilities as of September 27, 1996
(unaudited) and is qualified in its entirety by reference to such Statement of
Assets and Liabilities.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-27-1996
<INVESTMENTS-AT-COST> 2,717,015
<INVESTMENTS-AT-VALUE> 3,491,000
<RECEIVABLES> 36,860
<ASSETS-OTHER> 111,800
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,639,660
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 1,229,871
<OTHER-ITEMS-LIABILITIES> 80,807
<TOTAL-LIABILITIES> 1,310,678
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,690,621
<SHARES-COMMON-STOCK> 221,627
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (135,624)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 773,985
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 2,328,982
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 221,627
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,328,982
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.51
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 1,229,871
<AVG-DEBT-PER-SHARE> 5.55
</TABLE>
