<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CREDITRUST CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MARYLAND 7389 52-1754916
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer Identification No.)
Classification Code Number)
</TABLE>
7000 SECURITY BOULEVARD
BALTIMORE, MARYLAND 21244-2543
(410) 594-7000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
JOSEPH K. RENSIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CREDITRUST CORPORATION
7000 SECURITY BOULEVARD
BALTIMORE, MARYLAND 21244
(410) 594-7000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR
SERVICE, SHOULD BE SENT TO:
<TABLE>
<S> <C>
HENRY D. KAHN, ESQUIRE ELIZABETH R. HUGHES, ESQUIRE
PIPER & MARBURY L.L.P. VENABLE, BAETJER & HOWARD, LLP
36 SOUTH CHARLES STREET TWO HOPKINS PLAZA, STE. 1800
BALTIMORE, MARYLAND 21201 BALTIMORE, MARYLAND 21201
410-539-2530 410-244-7400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement. If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered in connection with dividend or interest reinvestment
plans, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / / _____________________________________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / / _____________________________________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF SHARES TO BE REGISTERED PROPOSED MAXIMUM AGGREGATE OFFERING PRICE AMOUNT OF REGISTRATION FEE
<S> <C> <C>
Common Stock, $.01 par value.............. $34,500.00(1)(2) $11,897.00
</TABLE>
(1) Includes shares of Common Stock subject to an option granted to the
Underwriters solely to cover over-allotments, if any. See "Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION DATED APRIL 15, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE SECURITIES IN
ANY STATE IN WHICH SUCH OFFERS, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
ANY REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
2,000,000 SHARES
[LOGO]
COMMON STOCK
------------------------
All of the shares of Common Stock, par value $0.01 per share (the "Common
Stock"), offered hereby are being sold by Creditrust Corporation ("Creditrust"
or the "Company"). Prior to this offering (the "Offering"), there has been no
public market for the Common Stock of the Company. Joseph K. Rensin, President
and Chief Executive Officer of the Company, currently owns 100% of the
outstanding Common Stock. Upon completion of the Offering, Mr. Rensin will own
approximately 75% of the Company's outstanding Common Stock (approximately
71.25% if the Underwriters exercise their over-allotment option in full). For a
discussion of the factors considered in determining the initial public offering
price, see "Underwriting."
It is currently estimated that the initial public offering price will be
between $13.00 and $15.00 per share. The Company has applied for listing of the
shares of Common Stock for quotation on the Nasdaq National Market ("Nasdaq")
under the symbol "CRDT."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SHARES OF COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(1)(2)
<S> <C> <C> <C>
Per Share........................ $ $ $
Total(3)......................... $ $ $
</TABLE>
(1) Excludes a non-accountable expense allowance payable to the Representatives
of the Underwriters equal to 1% of the gross proceeds of the Offering. The
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $ , including the Representatives' non-accountable expense
allowance.
(3) The sole stockholder (the "Selling Stockholder") has granted the
Underwriters a 30-day option to purchase up to an additional 300,000 shares
of Common Stock on the same terms and conditions as set forth herein, solely
to cover over-allotments, if any. If the Underwriters exercise such option
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to the Selling Stockholder will be $ , $ , and
$ , respectively. See "Underwriting."
------------------------------
The shares of Common Stock are offered by the Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to their right to reject any order in whole or in
part. It is expected that delivery of certificates representing the shares of
Common Stock will be made against payment therefor at the offices of Ferris,
Baker Watts, Incorporated, 1720 Eye Street, N.W., Washington, D.C. or through
the Depository Trust Company, on or about , 1998.
------------------------
FERRIS, BAKER WATTS BOENNING & SCATTERGOOD, INC.
Incorporated
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
[THIS PAGE WILL CONTAIN SEVERAL PHOTOGRAPHS DEPICTING VARIOUS ASPECTS OF THE
REGISTRANT'S OPERATIONS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING ENTERING INTO STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS, AND THE MATTERS DESCRIBED UNDER "RISK
FACTORS." EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I)
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (II) GIVES
EFFECT TO A 60,000-FOR-1 STOCK SPLIT EFFECTED PRIOR TO THE DATE HEREOF.
THE COMPANY
Since 1991, Creditrust has been in the business of acquiring, managing and
collecting accounts of delinquent consumer debt (the "Receivables"). Acquired
Receivables are comprised of obligations of customers located throughout the
United States. The Receivables acquired by the Company primarily consist of
individual VISA-Registered Trademark-, MasterCard-Registered Trademark- and
private label credit card accounts and consumer loan accounts issued by
originating institutions ("Originating Institutions"), such as major banks and
merchants. Most of these Receivables have been charged-off by the Originating
Institution. Due to its ability to acquire large portfolios of Receivables,
Creditrust provides Originating Institutions with an opportunity to recoup a
portion of amounts that already have been charged-off. To date, the Company has
acquired control over or purchased in excess of $1.1 billion in Receivables, as
measured by the balance charged-off by the Originating Institutions. Since its
inception, the Company has collected in excess of $34 million on Receivables,
and Creditrust currently operates two facilities capable of accommodating over
900 account officers.
The Company believes that the amount of consumer credit card delinquencies
has grown and will continue to grow at a very rapid rate. According to the
NILSON REPORT, gross credit card charge-offs are expected to grow from $31.3
billion in 1997 to $38.8 billion in 2000 and $51.8 billion in 2005. In response
to this trend and in recognition of its competitive advantage, the Company
accelerated its growth plans in 1996 and 1997 by expanding its call center
operations and continuing to invest in state of the art information technology.
The Company's headquarters has capacity for a staff of approximately 225
associates, an increase from 50 in its former location. In June 1997, Creditrust
opened an Operations Center to house approximately 700 additional associates. A
dedicated fiber optic wide-area network connects the two facilities, which are
located less than 2 miles from each other.
The Company believes it acquires, manages, and liquidates Receivables more
efficiently than its competitors, Originating Institutions and collection
agencies. Substantially all of these Receivables have been deemed uncollectible
by the Originating Institutions. In many cases, the Receivables represent
obligations of individuals who have experienced some life-altering event, such
as divorce, career displacement or major medical illness in the past several
years and currently are recovering financially from their setback. Through the
use of proprietary software systems, state of the art computing and
telecommunications technology and procedures, the Company has a history of
recovering amounts that are multiples of the purchase price paid for the
Receivables. Unlike Originating Institutions and third-party collection
agencies, the Company has flexibility in structuring repayment plans that
accommodate the needs of its customers. For example:
- Creditrust is able to offer a significant discount on the overall
obligations because the Receivables have been acquired at a significant
discount from face value;
- Creditrust is able to tailor payment plans that provide for the payment of
the obligation as a component of the customer's monthly budget;
- Creditrust is not affected by many of the constraints that influence
account resolution decisions of banks and savings and loan institutions;
and
- Creditrust is not bound by the limited time periods to resolve Receivables
faced by third-party collection agencies nor is it subject to compensation
structures that favor one repayment option over another.
3
<PAGE>
Creditrust applies its proprietary software systems, procedures and state of
the art computing and telecommunications technology to all stages of its
business. Creditrust seeks to maximize its expected yield through the
application of its proprietary customer scoring models to portfolios of
Receivables for which it bids. To perform this evaluation, the Company employs
its extensive historical database and proprietary Portfolio Analysis Tool
("PAT"). The Company manages a large number of consumer accounts through
Mozart-TM-, its proprietary revenue and work flow management system. Creditrust
assimilates information on each Receivable by use of internally developed
proprietary and commercially available databases, allowing it the maximum
probability of contacting customers and ultimately collecting on the Receivable.
The Company offers a full complement of support services to its associates,
including continuous training, quality improvement, computer automated account
management and predictive dialing capacity, skiptrace and legal, thereby
providing the resources necessary to maximize collections. If other collection
methods are unsuccessful, Creditrust has access to its internal legal department
and its nationwide network of outside attorneys to assist in the collection of
the Receivable.
Creditrust strives to maintain and continually enhance its position as one
of the leading purchasers, managers and liquidators of defaulted consumer
receivables through an information-driven strategy, the key elements of which
are to (i) continue the development of proprietary portfolio analysis and
information and revenue management systems; (ii) maintain maximum flexibility in
the collection process; (iii) maintain strong relationships with Originating
Institutions for the purchase of Receivables; (iv) utilize trained professionals
to act as credit counselors in the collection process; (v) leverage its current
platform to service substantially larger Receivables volumes without
proportional cost increases; and (vi) accelerate growth through a range of
funding alternatives. The Company believes that implementing such a strategy
will enable it not only to participate in a rapidly expanding market, but also
to lead an emerging industry which can more efficiently process and maximize the
collection of distresed consumer Receivables.
The Company was incorporated in Maryland in 1991. The principal executive
offices of the Company are located at 7000 Security Boulevard, Baltimore,
Maryland 21244, and its telephone number is (410) 594-7000.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company....................... 2,000,000 shares
Common Stock to be outstanding
after the Offering............ 8,000,000 shares(1)
Use of Proceeds................. The proceeds of the Offering will be used (i) to repay
indebtedness aggregating approximately $6.5 million under
the Company's bank credit facility and Senior Subordinated
Notes, Series 1998 (the "Subordinated Notes") and (ii) for
working capital (principally to acquire additional
Receivables) and other general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq NMS Symbol...... "CRDT"
</TABLE>
- ------------------------
(1) Does not include 450,000 shares of Common Stock issuable upon exercise of
outstanding warrants (the "Warrants") issued to the holders of the Company's
Subordinated Notes and 375,000 shares of Common Stock issuable upon the
exercise of stock options granted under the Company's stock incentive plan.
See "Management--Compensation Pursuant to Plans" and "Description of Common
Stock."
4
<PAGE>
RISK FACTORS
Investment in the Common Stock offered hereby involves a high degree of
risk. Each prospective investor should carefully consider all of the matters
described herein under "Risk Factors."
SUMMARY FINANCIAL DATA
(dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Total Revenue.............................. $ 2,182 $ 3,639 $ 4,560 $ 5,521 $ 9,826
Total Expenses from Operations............. 1,681 2,984 3,114 4,518 8,782
Net Earnings............................... 110 265 734 474 456
Earnings per Common Share.................. $ .02 $ .04 $ .12 $ .08 $ .08
Weighted Average Number of Shares
Outstanding.............................. 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000
UNAUDITED OPERATING DATA:
Weighted Average Investment in Finance
Receivables(1)........................... 1,152 1,470 1,731 3,187 5,919
Collections on finance Receivables(2)...... 2,385 3,971 4,914 6,252 12,420
EBITDA(3).................................. 514 726 1,538 1,162 1,268
Adjusted EBITDA(3)......................... 741 1,054 2,208 1,994 3,379
Charged-off Balance
(at end of period)(2).................... $ 71,252 $ 119,256 $ 175,512 $ 434,563 $ 1,104,647
Number of Accounts......................... 27,366 55,524 84,528 213,899 580,353
Number of Employees........................ 44 44 61 125 245
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------
<S> <C> <C>
PRO FORMA
ACTUAL AS ADJUSTED(4)
--------- --------------
BALANCE SHEET DATA:
Cash................................................................................ $ 770 $ 23,274
Total Debt.......................................................................... 2,106 0
Total Stockholder's Equity.......................................................... 2,064 27,079
</TABLE>
- ------------------------
(1) Does not include the Serviced Receivables.
(2) Includes the Serviced Receivables as of December 31, 1997.
(3) EBIDTA is defined as the sum of earnings before interest, taxes,
depreciation and amortization. Adjusted EBITDA reflects EBITDA as defined
above adjusted for collections applied to principal of $227,000, $328,000,
$670,000, $832,000, and $2.1 million in 1993, 1994, 1995, 1996, and 1997,
respectively. EBITDA and Adjusted EBITDA are presented here, as management
believes they provide useful information regarding the Company's ability to
service existing debt, incur additional debt and fund the acquisition of
additional Receivables or meet other capital requirements. EBITDA and
Adjusted EBITDA should not be considered in isolation or as substitutes for
net earnings, cash flow or other statement of earnings or cash flow data
prepared in accordance with generally accepted accounting principles or as
measures of a company's profitability or liquidity.
(4) Gives effect to the issuance of the Subordinated Notes and the Warrants in
April 1998 and the 2,000,000 shares of Common Stock offered hereby and the
application of the net proceeds therefrom to repay indebtedness, including
the Subordinated Notes. As the result of the assumed repayment of
indebtedness and the write-off of related debt issuance costs, the Company
will recognize an extraordinary charge for early extinguishment of
indebtedness of approximately $631,000 (after-tax) upon the completion of
this Offering (ignoring any amortization of financing costs and original
issue discount that will have been expensed between the date of issuance and
the date of pay-off).
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS DISCUSSION ALSO
IDENTIFIES IMPORTANT CAUTIONARY FACTORS THAT COULD CAUSE THE COMPANY'S ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS
OF THE COMPANY MADE BY OR ON BEHALF OF THE COMPANY. IN PARTICULAR, THE COMPANY'S
FORWARD LOOKING STATEMENTS, INCLUDING THOSE REGARDING THE EFFECTIVE
IMPLEMENTATION OF THE COMPANY'S OPERATING STRATEGY, THE ADEQUACY OF THE
COMPANY'S CAPITAL RESOURCES AND OTHER STATEMENTS REGARDING TRENDS RELATING TO
VARIOUS REVENUE AND EXPENSE ITEMS, COULD BE AFFECTED BY A NUMBER OF RISKS AND
UNCERTAINTIES INCLUDING THOSE DESCRIBED BELOW.
COLLECTIBILITY OF RECEIVABLES
The business of the Company consists of acquiring and collecting previously
defaulted Receivables incurred in connection with consumer credit card and
installment account transactions. The Receivables generally are acquired by the
Company from Originating Institutions. Each of the Receivables consists of an
account balance that has been deemed uncollectible and, consequently,
written-off by the Originating Institution. Prior to the Company acquiring the
Receivables, numerous attempts generally have been made by the Originating
Institutions to collect on the defaulted accounts, typically through in-house
collection departments, as well as third-party collection agencies. The Company
acquires the Receivables from the Originating Institutions at a significantly
discounted price and believes it can successfully obtain recoveries on the
Receivables in amounts in excess of its acquisition cost for the Receivables.
Notwithstanding this belief, actual recoveries on the Receivables may vary as
the result of a variety of factors within and beyond the Company's control.
Accordingly, there can be no assurances as to the timing or amounts to be
collected in respect of the Receivables.
RISKS ASSOCIATED WITH RAPID GROWTH
The Company recently has experienced significant expansion, which has placed
significant demands on its management, administrative, operational and financial
resources. On August 6, 1997, the Company began servicing approximately 400,000
additional consumer accounts (the "Serviced Receivables"), an increase of 160%.
The Company seeks to continue such rapid growth, which could place additional
demands on its resources. Future internal growth will depend on numerous
factors, including the effective and timely initiation and development of
relationships with Originating Institutions, the availability of additional
financing to purchase additional Receivables, the ability to securitize
Receivables, the Company's ability to maintain the quality of services it
provides to its customers and to Originating Institutions and the recruitment,
motivation and retention of qualified personnel. Sustained growth also may
require the implementation of enhancements to its operational and financial
systems and will require additional management, operational and financial
resources. There can be no assurance that the Company will be able to manage its
expanding operations effectively or to maintain its historical collection rates,
or that it will be able to maintain or accelerate its growth, and any failure to
do so could have a materially adverse effect on the Company's business, results
of operations, and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
LABOR AVAILABILITY
The consumer accounts receivables management industry is very labor
intensive and generally experiences a high rate of turnover in personnel. The
Company experienced a weighted annual personnel turnover rate of approximately
17% for 1995, approximately 14% for 1996 and approximately 15% for 1997. The
weighted annual personnel turnover is computed by dividing the number of
employees at the end of each month that left the Company by the number of months
actually worked during the year by all employees. A higher turnover rate among
the Company's employees would increase the Company's recruiting and training
costs and could adversely impact the overall recovery of its Receivables. If the
6
<PAGE>
Company were unable to recruit and retain a sufficient number of employees, it
would be forced to limit its growth or possibly curtail its operations. Growth
in the Company's business will require it to continue to recruit and train
significant numbers of qualified personnel. There can be no assurance that the
Company will be able to continue to hire, train and retain a sufficient number
of qualified employees. Activities by other companies in this or similar
industries, including the agency collection industry and the teleservices
industry, to recruit available qualified employees, and the impact of new
companies on the labor market, could have a materially adverse effect on the
Company and the Company's ability to recruit, train and retain qualified
employees and may increase hourly wages and the costs of benefits necessary to
recruit and retain sufficient numbers of qualified employees. See "Business."
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL
The Company's success depends to a significant extent on the performance and
continued services of senior management and certain key personnel with
experience in developing, financing and operating the Company. The Company hired
Mr. Chandler, Vice President--Recovery, Mr. Palmer, Vice President, Treasurer
and Chief Financial Officer and Mr. Moore, Vice President--Acquisitions in 1996
and Mr. Elkes, Vice President--Information Technology and Mr. Dumser, Vice
President--General Counsel in 1997, respectively. The Company does not have an
employment agreement with Joseph K. Rensin, President and Chief Executive
Officer of the Company, but does maintain "key man" life insurance coverage of
$1,000,000 on Mr. Rensin which will be increased to $4 million prior to the
Offering. The Company has employment agreements with each of its other executive
officers. Such agreements cannot assure the continued services of such officers.
These agreements contain certain noncompetition provisions that survive the
termination of employment in certain circumstances. However, there can be no
assurance such noncompetition agreements will be enforceable. The loss of the
services of Mr. Rensin or one or more of the executive officers and key
employees could have a material adverse impact on the Company's financial
condition and results of operations. See "Management."
AVAILABILITY OF ADDITIONAL RECEIVABLES FOR PURCHASE
The Company's success is dependent on the continued availability of
Receivables that meet its requirements. The availability of portfolios of
Receivables for future purchase at prices favorable to the Company is dependent
on a number of factors outside of the control of the Company, including the
continuation of the current growth trend in consumer installment debt. See
"Business--Industry Overview." Curtailment of that trend could result in less
credit being extended by Originating Institutions and consequently fewer
Receivables available for purchase at prices that conform to the Company's
strategy for profitable collection. The possible entry of new competitors
(including competitors that historically have focused on the acquisition of
different asset types) may adversely affect the Company's access to Receivables.
In addition, overly aggressive pricing by competitors could have the effect of
raising the cost of portfolios of Receivables above those that conform to the
Company's pricing models.
AVAILABILITY OF FINANCING TO PURCHASE RECEIVABLES
The Company's continued success will be dependent on the availability of
capital for the purchase of new Receivables. The Company currently has an
existing credit facility with First Union National Bank (the "Existing Credit
Facility"), which the Company expects to pay off with a portion of the proceeds
of the Offering. See "Management." The Company is currently in discussions with
a number of financial institutions regarding the establishment of a new line of
credit following the Offering. While management believes it will be able to
secure such a line of credit, there can be no assurance that further financing
will be available on favorable terms, or at all. To the extent the Company is
unable to secure and maintain further financing, it may have a material adverse
effect on the Company. Financing for further purchases of Receivables is
dependent upon the Company's continued success in predicting collectibility and
cash flows from current holdings. There is no guarantee that the Company's
performance will be sufficient to
7
<PAGE>
attract further financing. The interest rates at which future financings are
attainable also can affect the value of future Receivables purchased and the
Company's profit margins on them.
RISKS ASSOCIATED WITH FLUCTUATION IN ECONOMIC CONDITIONS
The Company has experienced rapid growth since its inception in 1991. During
that time, the U.S. economy has been very strong and many economic factors have
been favorable. During strong economic cycles, available credit, including
consumer credit, increases but payment delinquencies and defaults generally
decrease. During periods of economic slowdown and recession, such delinquencies
and defaults generally increase, but Originating Institutions tighten lending
standards and the amount of consumer credit extended may decrease. No assurances
can be given that the Company's collection experience would not worsen in a weak
economic cycle. If the actual recovery experience with respect to the
Receivables is materially lower than that projected, the financial condition of
the Company may be materially adversely affected.
RISK OF FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have fluctuated in the past and
may fluctuate in the future as a result of a variety of factors which can affect
revenues, cost of collections and other expenses. These factors include costs
relating to personnel, communications and legal collections, as well as
variations in the value of portfolios of Receivables based on the accuracy of
the Company's pricing models, pricing pressures in connection with future
acquisitions and capital expenditures and other costs relating to the expansion
of its operations. In the third quarter of 1997, the Company made refinements in
its collection models which decreased net income for the year by $700,000 after
taxes from the amount which would have been computed prior to the change. To the
extent that estimated future cash flow discounted at the expected yield is less
than the recorded investment, the Company would record a provision for loss. In
addition, general economic conditions and specific economic conditions affecting
the consumer finance industry may also cause fluctuations in the Company's
quarterly operating results. Many of these factors are outside of the Company's
control. In the event that one or more of such factors cause fluctuations in the
Company's quarterly operating results, the price of Common Stock could be
materially adversely affected. The Company's net earnings for the quarter in
which this Offering is concluded will be adversely affected by a non-cash
extraordinary charge for early extinguishment of indebtedness.
CONTROL BY PRINCIPAL STOCKHOLDER
All of the Company's Common Stock currently is owned by Joseph K. Rensin.
Following completion of the Offering, Mr. Rensin will beneficially own
approximately 75% of the outstanding Common Stock (approximately 71% assuming
the exercise of all Warrants). See "Principal Stockholders." Accordingly, Mr.
Rensin will have control over the affairs of the Company, including the ability
to elect directors and determine the outcome of votes by the Company's
stockholders on all corporate matters, including mergers, sales of all or
substantially all of the Company's assets, charter amendments and other matters
requiring stockholder approval.
DEPENDENCE ON TECHNOLOGY/RISK OF BUSINESS INTERRUPTION
The Company's success is dependent in large part on its continued investment
in sophisticated telecommunications and computer systems, including predictive
dialers, automated call distribution systems and digital switching equipment.
The Company has invested significantly in technology in an effort to remain
competitive and anticipates that it will be necessary to continue to do so in
the future. Moreover, computer and telecommunications technologies are evolving
rapidly and are characterized by short product life cycles, which requires the
Company to anticipate and stay current with technological developments. There
can be no assurance that the Company will be successful in anticipating,
managing or adopting such technological changes on a timely basis or that the
Company will have the capital resources
8
<PAGE>
available to invest in new technologies. In addition, the Company's business is
highly dependent on its computer and telecommunications equipment and software
systems, the temporary or permanent loss of which, through casualty or operating
malfunction, could have a materially adverse effect on the Company's business.
In the normal course of its business, the Company must record and process
significant amounts of data quickly and accurately in order to properly bid on
prospective acquisitions of Receivables and to maintain and expand its
proprietary data bases. While the Company believes that its existing information
systems are sufficient to meet its current demands, the expected substantial
growth in the Company's operations may require additional investment. Any
simultaneous failure of both of the Company's fault tolerant information systems
or proprietary software and their backup systems could cause interruptions in
the Company's operation and could have a material adverse effect on the Company.
The Company's business is dependent on service provided by various local and
long distance telephone companies. A significant increase in the cost of
telephone services or any significant interruption in telephone services could
have a materially adverse impact on the Company.
COMPETITION
The consumer finance collections industry remains highly fragmented, with
approximately 6,000 consumer and commercial agencies and the top ten agencies
controlling less than 20% of industry revenue. Creditrust experiences
significant competition in the purchase and servicing of Receivables from
Commercial Financial Services, Tulsa, Oklahoma, West Capital, San Diego,
California, and Outsourcing Solutions, Inc., St. Louis, Missouri. These
companies may be larger and may have greater capital and other resources than
Creditrust. There can be no assurance that the Company will be able to compete
with its future or existing competitors. See "Business--Competition."
GOVERNMENT REGULATION
While the Company is not a credit card issuer, certain of its operations may
be affected by laws and regulations applicable to credit card issuers as well.
The relationship of a customer and a creditor is extensively regulated by
federal and state consumer protection and related laws and regulations.
Significant laws include the Fair Debt Collection Practices Act ("FDCPA"),
Federal Truth-In-Lending Act, Fair Credit Billing Act, Equal Credit Opportunity
Act, Fair Credit Reporting Act and Electronic Funds Transfer Act (and various
federal regulations which relate to these Acts), as well as applicable,
comparable statutes in the states in which customers reside. If certain of these
laws apply to the Company, the Company's failure to comply could have a material
adverse effect. Certain laws, including the laws described above, may limit the
Company's ability to collect amounts owing with respect to Receivables,
regardless of any act or omission on the part of the Company. No assurance can
be given that any indemnities received from Originating Institutions will be
adequate to protect the Company from losses on the Receivables or liabilities to
customers.
Additional consumer protection laws may be enacted that could impose
requirements on the enforcement of, and collection on, consumer credit card or
installment accounts. Any new laws or rulings that may be adopted, and existing
consumer protection laws, may adversely affect the ability to collect on the
Receivables. In addition, the failure of Creditrust to comply with such
requirements could adversely affect the Company's ability to enforce the
Receivables.
DIVIDENDS
The Company has never declared or paid dividends on its Common Stock. Even
after the Offering, the Company expects that future earnings, if any, will be
used to acquire Receivables or otherwise be retained to finance the growth and
development of the Company's business. Accordingly, the Company does not intend
to declare or pay dividends on the Common Stock for the foreseeable future.
Under the Maryland General Corporation Law (the "MGCL"), the Company is
prohibited from paying a dividend unless, after giving effect to the payment of
the dividend, (i) the Company may continue to pay its debts in
9
<PAGE>
the ordinary course of business, and (ii) the Company's assets equal or exceed
its liabilities plus the preferences of any outstanding preferred equity
securities upon dissolution. Also, the terms of the Company's Existing Credit
Facility prohibit the Company from paying dividends while amounts are
outstanding under the Existing Credit Facility and without prior written consent
of the lender. It is anticipated that any new credit facility the Company may
enter into may contain similar or more restrictive provisions.
ABSENCE OF PRIOR PUBLIC MARKET; RELATIONSHIP OF OFFERING PRICE TO MARKET PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Although the Company has applied for listing of the Common Stock on Nasdaq,
there can be no assurance that an active trading market will develop or continue
after the Offering or that the market price of the Common Stock will not decline
below the initial public offering price. The initial public offering price of
the Common Stock will be determined by negotiations among the Company and
representatives of the Underwriters, and may not be indicative of the market
price for shares of Common Stock after the Offering. Prices for the shares of
Common Stock after the Offering will be determined in the market and may be
influenced by many factors, including the depth and liquidity of the market for
the Common Stock, investor perception of the Company, the consumer credit
industry as a whole and general economic and market conditions. See
"Underwriting."
VOLATILITY OF MARKET PRICE FOR COMMON STOCK
From time to time after the Offering, there may be significant volatility in
the market price of the Common Stock. Quarterly operating results of the Company
or of other companies viewed by investors as being in comparable industries,
changes in earnings estimated by analysts, changes in general conditions in the
economy or the financial markets or other developments affecting the Company
could cause the market price of the Common Stock to fluctuate substantially. See
"Risks Associated with Fluctuations in Quarterly Operating Results." In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to their
operating performance.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Charter could make a merger, tender
offer or proxy contest involving the Company more difficult, even if such events
were perceived by stockholders as beneficial to their interests. The Charter
empowers the directors to issue additional shares from authorized stock from
time to time as they shall determine. These provisions could frustrate attempts
to acquire sufficient shares to accomplish a change of control of the Company.
Thus the Board could issue additional shares and classes of stock that could
adversely affect the voting or other rights of holders of the Common Stock.
Other provisions of the Charter and Bylaws (i) provide that special meetings of
the stockholders may be called only by the Board of Directors or upon written
demand of the holders of not less than 25% of the votes entitled to be cast at a
special meeting and (ii) establish certain advance notice procedures for
nomination of candidates for election as directors by stockholders and/or
stockholder proposals to be considered at annual stockholder meetings. Mr.
Rensin would also have sufficient voting power to approve any amendment to the
Charter or Bylaws recommended by the Board of Directors without the affirmative
vote of any other stockholder.
DILUTION
The purchasers of the Common Stock offered hereby will experience immediate
and substantial dilution of $10.61 per share, the amount by which the purchase
price of the Common Stock offered hereby exceeds the net book value of the
Common Stock immediately following the Offering, assuming an initial public
offering price of $14.00 per share and after deducting estimated underwriting
discounts and
10
<PAGE>
expenses. In connection with the issuance of the Subordinated Notes, the Company
issued the Warrants to purchase 450,000 shares of Common Stock at an exercise
price of the lesser of $12.00 per share or 85% of the initial public offering
price of the Company's Common Stock. Investors will realize further dilution as
the result of exercise of the Warrants. See "Dilution." In the event the Company
issues additional Common Stock in the future, including shares which may be
issued in connection with future acquisitions or the exercise of outstanding
stock options, purchasers of Common Stock in this Offering may experience
further dilution in net book value per share of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be 8,000,000 shares of Common
Stock outstanding. Of these shares, the 2,000,000 (2,300,000 if the
over-allotment option is exercised in full) shares sold in the Offering will be
freely tradeable without restriction, except for any shares purchased by an
"affiliate" of the Company. The remaining 6,000,000 (5,700,000 if the
over-allotment option is exercised in full) shares of Common Stock have been
owned by Mr. Rensin for more than two years and have not been registered under
the Securities Act of 1933, as amended (the "Securities Act"). Such shares will
be subject to the provisions of Rule 144 of the Securities Act, including the
volume limitations thereunder. Sales of substantial numbers of shares of Common
Stock promptly after the Offering could adversely affect the market price for
the Common Stock. In addition, the Company, each of its directors and officers,
its stockholder and the holders of the Warrants to purchase 450,000 shares of
Common Stock have agreed, for a period of 180 days from the date of this
Prospectus, not to sell or otherwise dispose, directly or indirectly, of any
shares of Common Stock in the public market, without the prior written consent
of Ferris, Baker Watts, Incorporated. The market price of the Common Stock could
be materially and adversely affected by the sale or availability for sale of
shares, which may be issued under the Company's stock incentive plans.
The Company issued Warrants to purchase 450,000 shares of Common Stock in
connection with its issuance of the Subordinated Notes. The Company has agreed
with the holders of the Warrants to file a shelf registration statement
providing for the resale of the shares of Common Stock issuable upon exercise of
the Warrants within 60 days of the effectiveness of this Registration Statement
and to keep the Registration Statement effective until April 1, 2000.
FORWARD LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27(a) of the Securities Act, which are intended to be covered
by the safe harbors created thereby. These statements include the plans and
objectives of management for future operations, including plans and objectives
relating to future growth of the number of Receivables and availability of
financing. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. Assumptions relating
to the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the forward
looking statements included herein, the inclusion of such information should not
be regarded as a representation by the Company or by any other person that the
objectives and plans of the Company will be achieved.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, at an assumed offering price of $14.00 per share, are estimated
to be $25.2 million, after deducting underwriting discounts and commissions and
estimated offering expenses. The Company expects to use a portion of the net
proceeds from the sale of the Common Stock to repay outstanding indebtedness of
approximately $1.5 million under the Company's Existing Credit Facility and to
repay the $5.0 million of Subordinated Notes plus accrued interest of 10% per
annum through the date of closing.
The Existing Credit Facility bears interest at a fluctuating rate equal to
prime plus 1%. At December 31, 1997, the interest rate on amounts outstanding
under the Existing Credit Facility was 9.5%. Each advance is repayable in 24
equal monthly installments. All current advances were used to acquire
Receivables and have final installments due between October 1998 and March 1999.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Subordinated Notes were issued on April 2, 1998 in a private placement
transaction, bear interest at 10% per annum in 1998 and 15% per annum
thereafter, mature on March 31, 2001, and are required to be repaid upon the
Company's initial public offering. The net proceeds from the sale of the
Subordinated Notes were used for general working capital purposes, which may
include the purchase of additional portfolios of consumer Receivables. In
connection with the issuance of the Subordinated Notes, the Company issued the
Warrants.
The remaining net proceeds will be used to acquire Receivables, for working
capital, and for general corporate purposes. Pending such use, it is anticipated
that the Company will invest the net proceeds in short-term, investment grade
marketable securities.
12
<PAGE>
DIVIDEND POLICY
As a privately held corporation, the Company has never declared or paid
dividends on its Common Stock. The Company expects that future earnings, if any,
will be retained to finance the growth and development of the Company's business
and, accordingly, does not intend to declare or pay dividends on the Common
Stock for the foreseeable future. The declaration, payment and amount of future
dividends, if any, will be subject to the discretion of the Company's Board of
Directors and will depend upon, among other factors, the future earnings,
results of operations, financial condition and capital requirements of the
Company. In addition, the terms of the Company's Existing Credit Facility
prohibit the Company from paying dividends while amounts are outstanding under
the Existing Credit Facility. The Company expects that similar or more
restrictive covenants may apply in respect of any future credit facility that it
may enter. Also, under the MGCL, the Company is prohibited from paying any
dividend unless after giving effect to the payment of the dividend (i) the
Company may continue to pay its debts in the ordinary course of business, and
(ii) the Company's assets equal or exceed its liabilities plus the preferences
of any outstanding preferred equity securities upon dissolution. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
13
<PAGE>
DILUTION
At December 31, 1997, the pro forma net tangible book value of the Company
was $2.5 million or $.42 per share. Pro forma net tangible book value represents
the total assets less total liabilities of the Company adjusted for the assumed
issuance of the Warrants as of December 31, 1997. Net book value dilution per
share represents the difference between the amount per share paid by purchasers
of shares of Common Stock in the Offering and the pro forma net tangible book
value per share of Common Stock immediately after completion of the Offering.
After giving effect to the sale by the Company of the 2,000,000 shares of Common
Stock offered hereby at an assumed initial offering price of $14.00 per share,
the application of the proceeds therefrom to repay indebtedness, including the
Subordinated Notes, and the recognition of an extraordinary charge for
extinguishment of indebtedness, net of taxes, of $631,000 the pro forma net
tangible book value of the Company would have been $27.1 million or $3.39 per
share. This represents an immediate increase in pro forma net tangible book
value of $2.97 per share to the Company's existing stockholder and an immediate
dilution in net book value of $10.61 per share to new investors purchasing
shares of Common Stock in the Offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $ 14.00
Pro forma net book value prior to the Offering............ .42
Increase attributable to new investors.................... 2.97
---------
Pro forma net book value after the Offering............... 3.39
---------
Dilution in net book value to new investors................. $ 10.61
---------
---------
</TABLE>
The following table sets forth as of December 31, 1997, the difference
between the existing stockholder and the purchasers of shares in the Offering
with respect to the number of shares purchased from the Company, but without
giving effect to the assumed exercise of the Warrants, the total consideration
paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARED PURCHASED TOTAL CONSIDERATION
------------------------- ---------------------------- AVERAGE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PRICE PER SHARE
---------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Existing Stockholder.... 6,000,000 75% $ 112,724 .4% $ 0.02
New Investors........... 2,000,000 25% $ 28,000,000 99.6% $ 14.00
Total................... 8,000,000 100% $ 28,112,724 100%
</TABLE>
Upon the closing of the Offering and assuming an initial public offering
price of $14.00 per share, there will be outstanding Warrants to purchase
450,000 shares at $11.90 per share and options to purchase 375,000 shares of
Common Stock at the initial public offering price. To the extent that any of the
outstanding Warrants are exercised, there will be further dilution to new
investors. See "Shares Eligible for Future Sale."
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 on an actual, pro forma and pro forma as adjusted basis to
give effect: (i) on a pro forma basis, to the issuance of the Subordinated Notes
and the Warrants and the allocation of the total issuance price of these
securities to debt and paid-in capital, respectively and (ii) as further
adjusted, to the sale of the 2,000,000 shares of Common Stock offered hereby and
the application of the net proceeds therefrom to repay indebtedness under the
Company's Existing Credit Facility of $2.1 million and the Subordinated Notes at
the $5.0 million repayment price due at the time of the initial public offering
(which will result in a $631,000 non-cash extraordinary charge for early
extinguishment of indebtedness, after taxes, upon the retirement of the
Subordinated Notes). Net proceeds are estimated to be approximately $25.2
million based on an assumed initial offering price of $14.00 per share. The
following table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Financial Statements, including the notes thereto, and the other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA (1) AS ADJUSTED
--------- ------------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Notes Payable............................................................ $ 2,106 $ 2,106 $ 0
Subordinated Notes....................................................... 0 4,505 0
Stockholder's Equity:
Common stock, 20,000,000 shares authorized, 6,000,000 shares issued and
outstanding, 8,000,000 shares as adjusted, par value $0.01 per
share(2)............................................................... 60 60 80
Paid-in capital.......................................................... 53 488 25,678
Retained Earnings........................................................ 1,952 1,952 1,321
--------- ------ -----------
Total Stockholder's Equity............................................... 2,064 2,500 27,079
--------- ------ -----------
Total Capitalization..................................................... $ 4,170 $ 9,111 $ 27,079
--------- ------ -----------
--------- ------ -----------
</TABLE>
- ------------------------
(1) The Company issued the Subordinated Notes and Warrants for total
consideration of $5.0 million. This consideration was allocated to the
issuance price of the Subordinated Notes ($4.5 million) and the Warrants
($495,000) based on their respective fair values under the terms of the
Subordinated Notes. The Subordinated Notes must be repaid upon the Company's
initial public offering at $5.0 million, plus accrued interest. This will
also result in a non-cash charge for early extinguishment of indebtedness.
(2) Upon the closing of the Offering and assuming an initial public offering
price of $14.00 per share, there will be outstanding Warrants to purchase
450,000 shares at $11.90 per share and options to purchase 375,000 shares of
Common Stock at the initial public offering price.
15
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected balance sheet, income statement and
cash flow data of the Company as of and for each of the years in the five-year
period ended December 31, 1997. The selected financial data for the years ended
December 31, 1995, 1996 and 1997 have been derived from the Company's audited
financial statements included elsewhere in this Prospectus and should be read in
conjunction with those statements. The selected financial data for the years
ended December 31, 1993 and 1994 have been derived from unaudited financial
statements not included in this Prospectus. The selected financial data
presented below should be read in conjunction with the Company's financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" included in this Prospectus.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
STATEMENT OF EARNINGS DATA: (UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (AUDITED)
------------ ------------ ------------ ------------ ------------
Total Revenue.............................. $ 2,182 $ 3,639 $ 4,560 $ 5,521 $ 9,826
Expenses from Operations:
Personnel................................ 900 1,390 1,847 2,618 5,922
Communications........................... 246 361 404 573 912
Rent..................................... 123 216 240 382 853
Portfolio Repurchase Costs............... -- -- -- 384 --
Other Expenses........................... 412 1,016 624 562 1,095
------------ ------------ ------------ ------------ ------------
Total Expenses from Operations............. 1,681 2,984 3,114 4,518 8,782
Earnings from Operations................... 502 656 1,445 1,003 1,044
Other Income (Expense)..................... (344) (252) (249) (213) (363)
Earnings Before Income Tax................. 157 404 1,196 790 682
Net Earnings............................... 110 265 734 474 456
Earnings per Common Share.................. $ .02 $ .04 $ .12 $ .08 $ .08
Weighted Average Shares Outstanding........ 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000
UNAUDITED OPERATING DATA:
Weighted Average Investment in finance
Receivables(1)........................... $ 1,152 $ 1,470 $ 1,731 $ 3,187 $ 5,919
Collections on finance Receivables(2)...... 2,385 3,971 4,914 6,252 12,420
EBITDA(3).................................. 514 726 1,538 1,162 1,268
Adjusted EBITDA(3)......................... 741 1,054 2,208 1,994 3,379
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Charged-off Balance(2)..................... $ 71,252 $ 119,256 $ 175,512 $ 434,563 $ 1,104,647
Number of Accounts......................... 27,366 55,524 84,528 213,899 580,353
Number of Employees........................ 44 44 61 125 245
BALANCE SHEET DATA:
Cash....................................... $ 594 $ 289 $ 548 $ 476 $ 770
Total Debt................................. -- -- -- 3,793 2,106
Stockholder's Equity....................... $ 135 $ 400 $ 1,134 $ 1,608 $ 2,064
</TABLE>
- ------------------------
(1) Does not include the Serviced Receivables.
(2) Includes the Serviced Receivables as of December 31, 1997.
(3) EBIDTA is defined as the sum of earnings before interest, taxes,
depreciation and amortization. Adjusted EBITDA reflects EBITDA as defined
above adjusted for collections applied to principal of $227,000, $328,000,
$670,000, $832,000, and $2.1 million in 1993, 1994, 1995, 1996, and 1997,
respectively. EBITDA and Adjusted EBITDA are presented here, as management
believes they provide useful information regarding the Company's ability to
service existing debt, incur additional debt and fund the acquisition of
additional Receivables or meet other capital requirements. EBITDA and
Adjusted EBITDA should not be considered in isolation or as substitutes for
net earnings, cash flow or other statement of earnings or cash flow data
prepared in accordance with generally accepted accounting principles or as
measures of a company's profitability or liquidity.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND OTHER PARTS OF THIS PROSPECTUS CONTAIN, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE FOLLOWING DISCUSSION AND
ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE AUDITED FINANCIAL STATEMENTS OF
THE COMPANY, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company acquires, services and liquidates portfolios of distressed
Receivables and believes that it is one of the largest distressed consumer
receivables purchasers anywhere in the United States. From its founding in 1991,
the Company has acquired charged-off Receivable balances (measured at the amount
charged-off by the Originating Institution at the date of charge-off)
aggregating approximately $1.4 million in 1991, $22.6 million in 1992, $47.3
million in 1993, $48 million in 1994, $56.3 million in 1995, $259.1 million in
1996 and $670 million in 1997 (including certain Receivables obtained for
management in 1997 serviced by the Company (the "Serviced Receivables")), for a
total balance of acquired or Serviced Receivables exceeding approximately $1.1
billion as of December 31, 1997. The following table illustrates this growth:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PURCHASE AMOUNT ($MM) TOTAL PORTFOLIO ($MM)
<S> <C> <C>
1991 0.00 0.00
1992 45.00 45.00
1993 52.08 63.30
1994 48.17 102.07
1995 54.32 179.77
1996 275.23 452.16
1997 781.35 1193.27
</TABLE>
17
<PAGE>
The following table illustrates the Company's collection experience for the
three years ended December 31, 1997 and resulting revenue trends:
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED DECEMBER
31,
(DOLLARS IN THOUSANDS)
------------------------------------
<S> <C> <C> <C>
1995 1996 1997
---------- ---------- ------------
Collections(1)............................................................. $ 4,814 $ 6,252 $ 12,420
Income on receivables...................................................... $ 4,560 $ 5,521 $ 7,246
Servicing income........................................................... $ -- $ -- $ 2,580
Total receivables and servicing income..................................... $ 4,560 $ 5,521 $ 9,826
Weighted average investment in finance Receivables(2)...................... $ 1,731 $ 3,187 $ 5,919
Weighted average charged-off balance(1)(3)................................. $ 146,669 $ 248,990 $ 689,924
Charged-off balance at end of period(1)(4)................................. $ 178,512 $ 434,563 $ 1,104,647
</TABLE>
- ------------------------
(1) Includes the Serviced Receivables during the year ended December 31, 1997.
(2) Does not include the Serviced Receivables and represents the average
investment balance during the period measured by the financial statement
carrying value of portfolios of Receivables owned by the Company determined
by dividing the total values for the portfolio of Receivables at the end of
each month in the period by the number of months in the period.
(3) Represents the average of the charged-off balances acquired by the Company
determined by dividing the total charged-off balance at the end of each
month in the period by the number of months in the period, without regard to
collections or Receivables settled.
(4) Represents the balance of Receivables acquired by the Company as of the end
of the related period measured by balances charged-off by the Originating
Institutions, without regard to collections or Receivables settled.
The Company initially records purchased portfolios of consumer Receivables
on its balance sheet at the Company's acquisition cost. Collections are
allocated to income on finance Receivables and to reduce the carrying balance of
the Company's investment in finance Receivables. These allocations are based on
the effective interest rate method, which takes into account the Company's
estimates, derived from the Company's collection models, of future cash flows
from collections. Actual cash flows may vary from estimates. To the extent there
are variances in the actual cash collected from the amounts used in the
Company's estimates, the Company adjusts the yield accordingly. The Company
compares actual cash collections to estimates on a monthly basis and adjusts the
yield at least quarterly if needed. To the extent that interest accrued exceeds
cash collections, the Company records accretion to increase the carrying balance
of the finance Receivables. To the extent that estimated future cash flow
discounted at the expected yield is less than the recorded investment, the
Company would record a provision for loss. Management has determined that no
current portfolios require a provision for loss.
The Company continuously monitors its models with a view toward refining the
predictability of both the amount and timing of collections. For the years ended
December 31, 1995 and 1996, the Company relied largely on portfolio-wide past
performance characteristics. After extensive statistical analysis of portfolio
performance specifics during the year ended December 31, 1997, the Company
implemented a further refinement in its collection models. The refinement
included portfolio-specific estimates and had the effect of reducing total
future projected cash flows on a portfolio-wide basis. The total effect of this
change in estimate was to decrease net income for the year ended December 31,
1997, by approximately $700,000 after taxes from the amount which would have
been computed prior to this change. Total cash
18
<PAGE>
flow for 1997 was unaffected by the change in future estimates, with the result
that the reduction in income on finance Receivables was applied to increase the
amount of collections applied to finance Receivables. See Note C of Notes to
Financial Statements. While the Company believes that its collection models will
continue to provide accurate forecasts of future collections, changes in
collection patterns within the Company's portfolios, which may result from a
variety of factors beyond the Company's control, including changes in general
economic conditions and changes in consumer attitudes toward repayment of
defaulted obligations, may have an impact on the Company's future estimates.
The Company also receives servicing fees with respect to the Serviced
Receivables for which it applies the same collection techniques as it does for
owned portfolios of finance Receivables. In the quarter ended September 30,
1997, the Company began recognizing servicing income in connection with its
agreement to liquidate the Serviced Receivables, which are currently owned by a
financial institution. Under the terms of the servicing agreement, the financial
institution has agreed to accept any third-party offer to purchase or allow the
Company to securitize the Serviced Receivables provided the proceeds to the
financial institution exceed a minimum amount. See "Liquidity and Capital
Resources." In the future, the Company may seek to securitize certain portfolios
as an alternative to funding such purchases from cash or borrowings. It may also
enter into other contractual arrangements that result in servicing income. If in
the future the Company securitizes portfolios of Receivables previously acquired
by it, the Company will recognize gains or losses on portfolio sales upon
completing securitization transactions. The timing and extent of such gains or
losses could affect period-to-period comparisons of revenues and net income.
In April 1998, the Company issued, for $5.0 million in total consideration,
$5.0 million principal amount of Subordinated Notes and Warrants to purchase
450,000 shares of Common Stock at an exercise price, following completion of
this Offering, of $11.90 per share (assuming an initial public offering price of
$14.00 per share). The Company recorded the fair value of the Subordinated Notes
at $4.5 million and recorded as additional paid-in capital the remaining
consideration of $495,000 attributable to the fair value of the Warrants. Upon
the conclusion of the Offering, the Company will be required to repay the
Subordinated Notes at $5.0 million plus accrued interest to the date of
repayment. This will result in the Company recording an extraordinary charge for
the early repayment of indebtedness which, including debt issuance costs, will
result in an extraordinary charge of approximately $671,000 after-tax, ignoring
any amortization of financing costs and original issue discount that will have
been expensed between the date of issuance and the date of pay-off .
Accordingly, quarter-to-quarter comparisons of results for the quarter in which
this Offering is concluded will be adversely affected.
Income taxes have been provided for in the results of operations based on
the statutory federal and state rates on accounting income. Permanent
differences between the statutory rates and actual rates are minimal. Income on
finance Receivables for tax purposes is recognized on the cost recovery method.
Under the cost recovery method, gross collections on finance Receivables are not
taxable until the cost of the finance Receivables has been collected. Imputed
loan repayments and interest expense on payments to participants are recorded as
costs for tax purposes when due based on collection participation levels. In the
past the Company has financed certain portfolio purchases through participations
with certain investors, but does not anticipate that this will be used as a
funding source in the future. Temporary differences in recognition of income on
finance Receivables have resulted in deferred tax liabilities. Temporary
differences in recognition of payments to participants and deferred gain
generally have accumulated deferred tax assets. The Company's deferred tax
liabilities have grown as a result of the rapid increase in acquisitions of
Receivables by the Company, providing the Company with additional liquidity
offered by the deferred tax liabilities. Management expects deferred tax
liabilities to increase as long as the operating expenses on existing and
additional finance Receivables exceed collections on fully cost recovered
portfolios.
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statement of earnings and
supplemental cash flow data on a historical basis, each a percentage of
revenues:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenue.................................................................................. 100.0% 100.0% 100.0%
Expenses:
Personnel.............................................................................. 40.5 47.4 60.3
Communications......................................................................... 8.9 10.4 9.3
Rent and Other Occupancy............................................................... 5.3 6.9 8.7
Portfolio Repurchase Costs............................................................. -- 7.0 --
Other Expenses......................................................................... 13.7 10.2 11.1
--------- --------- ---------
Total Expenses from Operations........................................................... 68.3 81.8 89.4
--------- --------- ---------
Earnings from Operations................................................................. 31.7 18.2 10.6
Other Income (Expense)................................................................... (5.5) (3.9) (3.7)
--------- --------- ---------
Earnings before Income Taxes............................................................. 26.2 14.3 6.9
Provision for Income Taxes............................................................... 10.1 5.7 2.3
--------- --------- ---------
Net Earnings............................................................................. 16.1% 8.6% 4.6%
--------- --------- ---------
--------- --------- ---------
EBITDA................................................................................... 33.7% 21.0% 12.9%
--------- --------- ---------
--------- --------- ---------
Adjusted EBITDA.......................................................................... 48.4% 36.1% 34.4%
--------- --------- ---------
--------- --------- ---------
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Total revenues for the year ended December 31, 1997 were $9.8
million compared to total revenues of $5.5 million for the year ended December
31, 1996, an increase of 78.0%. This increase in revenues was the result of an
increase in the weighted average investment in Receivables from $3.2 million in
1996 to $5.9 million in 1997, as well as the receipt of $2.6 million in
servicing income in 1997; there was no servicing income prior to 1997. The 31.2%
increase in income on finance Receivables resulted from the increase in the
amount of collections on higher levels of Receivables owned or serviced by the
Company in 1997. Offsetting the increase was a decrease of approximately $1.1
million ($700,000 net of deferred tax benefit) in income on finance Receivables
as a result of the change in estimate of future collections described above
under "Overview." Collections increased $6.2 million or 98.7%. The weighted
average charged-off balances owned or serviced by the Company increased from
$249.0 million at the end of 1996 to $689.9 million at the end of 1997, an
increase of 177.1%.
TOTAL EXPENSES FROM OPERATIONS. Total expenses from operations increased by
$4.3 million to $8.8 million in the year ended December 31, 1997 from $4.5
million in the year ended December 31, 1996. Total expenses from operations as a
percent of revenue were 81.8% and 89.4% in 1996 and 1997, respectively.
Operating expenses increased over 1996 by 94.4% due to (a) a 126.2% increase in
personnel costs as a result of growing total staff from 125 to 245 as of
December 31, 1996 and 1997, respectively; (b) a 123.4% increase in rent and
occupancy due to the relocation of the headquarters and operations groups into
larger
20
<PAGE>
space and the start up of the approximately 36,000 square foot operations center
in March, 1997; (c) increases in communications, other expenses and professional
fees as a result of usage increases in long distance, credit reporting,
facility, legal and accounting expenses; and (d) offset by the absence of
portfolio repurchase costs in 1997.
Expenses increased in 1997 primarily as a result of costs associated with
recovery on increased acquisitions of Receivables, including the Serviced
Receivables, and in anticipation of additional acquisitions in 1998. Management
believes that many of the expense categories discussed above can support the
servicing and the liquidation of substantially larger volumes of Receivables
without proportional expense increases.
Personnel expenses were $2.6 million or 47.4% of revenue in 1996 and $5.9
million or 60.3% of revenue for the year ended December 31, 1997. Major
categories of personnel expense increases included: (a) additional compensation
costs for development, installation and training associated with the expanded
information technology systems; and (b) a significant investment in senior
management infrastructure, including senior management staff in financing,
acquisitions, information technology, legal, recovery and skiptrace; and (c)
increase in the number of account officers to service larger volumes of
Receivables.
Rent and other occupancy costs were $382,000 or 6.9% of revenue and $853,000
or 8.7% of revenue in 1996 and 1997, respectively. This increase is attributable
to the leasing of additional office space for the headquarters for a full year
in 1997 as compared to eight months in 1996, the addition of 36,000 square feet
of space for the new operations center started up in the first half of 1997 and
depreciation expense increases due to equipment and furniture additions of
approximately $1 million for headquarters and the new operations center.
Professional fees were $156,000 or 2.8% of revenue and $504,000 or 5.1% of
revenue in 1996 and 1997, respectively. Included in professional fees in 1997
were $279,000 in fees related to the Company's initial efforts to undertake an
initial public offering and a securitization program, both of which efforts had
been deferred at December 31, 1997; additional fees related to these efforts
remain capitalized on the Company's balance sheet. See "Financial Condition."
EARNINGS FROM OPERATIONS. As the result of these factors, and particularly
the substantial growth in corporate infrastructure to support a substantially
larger base of operations, earnings from operations were $1.0 million or 18.2%
of revenues in 1996 and $1.0 million or 10.6% of revenues in 1997.
OTHER INCOME (EXPENSE). Interest expense increased from $288,000 in 1996 to
$377,000 in 1997. Interest attributable to amounts due to participants decreased
from $204,000 in 1996 to $21,000 in 1997, as a result of a decrease in the
average annual amount outstanding due to participants from $516,000 in 1996 to
$68,000 in 1997. The interest expense on the Company's Existing Credit Facility
increased from $60,000 in 1996 to $296,000 in 1997 as a result of the
establishment of the Existing Credit Facility on September 23, 1996, to provide
advances of up to $4.0 million for the acquisition of Receivables and the
increased volume of Receivables balances financed with this facility. Interest
expense further increased due to two additional equipment leases completed in
1997.
EARNINGS BEFORE INCOME TAXES. As the result of the trends in earnings from
operations and the interest costs discussed, earnings before income taxes were
$790,000 in the year ended December 31, 1996 and $682,000 in the year ended
December 31, 1997.
PROVISION FOR INCOME TAXES. Income taxes for the calendar year ended
December 31, 1996 and 1997 were at an effective tax rate of 39.9% and 33.0%,
respectively. The effective tax rate fluctuates as a result of changes in
pre-tax income and nondeductible expenses. Deferred tax liabilities increased
from $623,000 at December 31, 1996 to $1,094,000 at December 31, 1997,
principally due to growth in timing differences on finance Receivables as
significantly most of the carrying value in finance Receivables has been written
21
<PAGE>
off for tax purposes. The increase was partially offset by a deferred tax
benefit incurred on an increase of $195,000 in lease incentives attributable to
the free rent period on the operations center.
NET EARNINGS. Net earnings for the year ended December 31, 1996 was
$474,000 versus $456,000 for the year ended December 31, 1997. The 3.7% decrease
was attributable principally to higher revenues in 1997 over 1996 of $4.25
million offset by higher costs of $4.35 million and further increased by a
$90,000 decrease in tax expenses.
EBITDA, EBITDA increased $106,000 or 9.1% from $1.2 million to $1.3 million
from December 31, 1996 to 1997, respectively. EBITDA increased more than net
income due to a decline in the growth rate of interest expense, taxes and
depreciation relative to total revenues. However, EBITDA as a percentage of
revenues decreased 8.1% from 21.0% to 12.9%.
ADJUSTED EBITDA. Adjusted EBITDA increased from $2.0 million in 1996 to
$3.4 million in 1997 principally as a result of an increase of $1.3 million or
153.9% in collections applied to principal on finance Receivables from $832,000
in 1996 to $2.1 million in 1997, in addition to the increase in EBITDA.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Total revenues for the year ended December 31, 1996 were $5.5
million compared to $4.6 million for the year ended December 31, 1995, an
increase of 21.1%. This increase in revenues was the result of an increase in
the weighted average investment in Receivables to $3.2 million in 1996 from $1.7
million in 1995 and the effect of a full year's recoveries on Receivables
acquired in 1995. The weighted average charged-off balances acquired by the
Company increased from $146.7 million in 1995 to $249.0 million in 1996, or
69.7%.
TOTAL EXPENSES FROM OPERATIONS. Total expenses from operations increased by
$1.4 million to $4.5 million in the year ended December 31, 1996 from $3.1
million in the year ended December 31, 1995. Total expenses from operations as a
percent of revenue in 1995 and 1996 were 68.3% and 81.8%, respectively.
Operating expenses increased over 1995 by 45.1% due to (a) a 41.8% increase in
personnel costs as a result of growing total staff from 61 to 125 as of December
31, 1995 and 1996, respectively; (b) a 59.4% increase in rent and occupancy due
to the relocation of the headquarters and operations groups; (c) increases of
communications, professional fees, and other expenses as a result of usage
increases in long distance, first time auditing, credit reporting and facility
growth; and (d) portfolio repurchase costs as the result of the buyout of
certain participants in 1996.
Personnel expenses were $1.8 million or 40.5% of revenues and $2.6 million
or 47.4% of revenues for the years ended December 31, 1995 and 1996,
respectively. These increases related primarily to increases in account
officers, information technology personnel and senior management staff, as
described above in the comparison of 1997 versus 1996.
Communications expenses were $404,000 or 8.9% of revenue in 1995 and
$573,000 or 10.4% of revenue in 1996. The increase in communications expenses is
attributable primarily to increased long-distance telephone and credit report
usage on the higher volume of finance receivables owned and management
information services.
Rent and other occupancy costs, were 5.3% of revenue during 1995 and 6.9% of
revenue for 1996. This increase is attributable to the leasing of additional
office space, the relocation of the Company's headquarters in 1996 and increased
depreciation and maintenance charges as a result of the Company's purchase of
additional workstations during 1996 to support its increased recovery and
skiptrace personnel.
Among other cost variances, contingency legal collection costs declined as a
result of lower costs associated with a shift in emphasis from the use of
outside lawyers to the use of in-house personnel. In the third quarter of 1996,
the Company repurchased certain participants' interests in certain investments
in Receivables for approximately $550,000. The Company recorded a charge of
$384,000 in connection with
22
<PAGE>
this repurchase. The balance of the payment was imputed among interest and
principal payments on the participation accounted for as a loan.
EARNINGS FROM OPERATIONS. As the result of these factors, especially the
beginning of the growth of corporate staff and the new premises, all with the
goal to support a substantially larger base of operations, earnings from
operations were $1.0 million or 18.2% of revenue in 1996 and $1.4 million or
31.7% of revenues in 1995.
Interest expense increased from $270,000 in 1995 to $288,000 in 1996.
Interest attributable to amounts due to participants decreased as a result of a
decrease in the average annual amount outstanding due to participants. The
Company incurred interest on the Existing Credit Facility in 1996 as a result of
the establishment of the facility on September 23, 1997.
EARNINGS BEFORE INCOME TAXES. As the result of the trends in earnings from
operations and the interest costs discussed, earnings before income taxes were
$790,000 in the year ended December 31, 1996 and $1.2 million in the year ended
December 31, 1995.
PROVISION FOR INCOME TAXES. Income taxes for the calendar year ended
December 31, 1995 and 1996 were at an effective tax rate of 38.7% and 39.9%,
respectively. The effective tax rate fluctuates as a result of changes in
pre-tax income and nondeductible expenses. Deferred tax liabilities increased
from $374,000 at December 31, 1995 to $623,000 at December 31, 1996.
NET EARNINGS. Net earnings for the years ended December 31, 1995 and 1996
was $734,000 and $474,000, respectively. The decrease was attributable
principally to portfolio repurchase costs charged-off in 1996 of $384,000 and
deferred gain of $895,000 in 1996. In connection with the Company's intent to
reacquire participations, the Company recorded an expense of $384,000 relating
to such repurchases. In addition, in 1996, the Company deferred income of
$895,000 in connection with the settlement of litigation arising from the sale
of two portfolios of receivables acquired in 1996. For accounting purposes, the
Company expects to offset the cost of repurchasing receivables by the deferred
gain, which has been recognized in the first quarter of 1998. See "Financial
Condition and Liquidity-Deferred Income."
EBITDA. EBITDA decreased $300,000 or 24.5% from $1.5 million in 1995 to
$1.2 million in 1996, consistent with the change in net income. Interest, taxes
and depreciation decreased by $117,000; however, this was offset by an increase
in portfolio repurchase costs and other expenses.
ADJUSTED EBITDA. Adjusted EBITDA decreased from $2.2 million in 1995 to
$2.0 million in 1996 as a result of a decrease in EBITDA of $300,000 from $1.5
million in 1995 to $1.2 million in 1996 offset by an increase of $162,000 in
collections applied to principal of $670,000 in 1995 and $832,000 in 1996.
23
<PAGE>
QUARTERLY RESULTS
The following table sets forth selected historical financial data for
calendar quarters of 1997. This quarterly information is unaudited but has been
prepared on a basis consitent with the Company's audited financial statements
presented elsewhere herein and, in the Company's opinion, includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the information for the quarters presented. The operating
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
----------- ----------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue....................................................... $ 1,940 $ 1,953 $ 2,560 $ 3,373
Earnings from operations...................................... 398 178 149 319
Net earnings.................................................. 170 42 37 204
<CAPTION>
(AS A PERCENTAGE OF REVENUES)
<S> <C> <C> <C> <C>
Revenue....................................................... 100.0% 100.0% 100.0% 100.0%
Earnings from operations...................................... 20.5 9.1 5.8 9.5
Net earnings.................................................. 9.0 2.1 1.4 6.1
</TABLE>
Quarterly fluctuations in revenues and net earnings have been the result of
a variety of factors, including in the three months ended March 31, 1997, the
effect of portfolio acquisitions which occurred in late 1996 and, in the three
months ended June 30, 1997 and September 30, 1997, start-up costs with respect
to the Serviced Receivables. The Company further expects that in the quarter in
which this Offering is concluded, net earnings will be adversely affected by an
extraordinary non-cash charge of approximately $631,000 (after-tax) as the
result of an extraordinary charge for early extinguishment of indebtedness and
the write-off of related debt issuance costs.
FINANCIAL CONDITION
CASH. Cash increased 61.8% from $476,000 in 1996 to $770,000 in 1997,
primarily as a result of an increase in cash flow provided primarily by
collections on finance receivables and purchases of property and equipment net
of additional financing activities.
FINANCE RECEIVABLES. Finance Receivables decreased to $5.0 million, or
23.5%, in 1997 from $6.6 million in 1996 due to $2.1 million of collections
applied to principal offset by new investments of $557,000. Offsetting the
decrease in finance Receivables, the Company began its contract to liquidate the
Serviced Receivables in the second half of 1997. Collections applied to
principal increased from $832,000 in 1996 to $2.1 million in 1997. As a result
of the change in estimate of future collections described above under
"Overview," approximately $1.1 million of the increase was attributable to the
change in estimate.
PROPERTY AND EQUIPMENT. Property and equipment, net, increased an estimated
205.8% to $1.4 million as of December 31, 1997 from $469,000 as of December 31,
1996 due to $1.2 million in purchases (principally through capital leases) of
computer equipment, furniture and fixtures and leasehold improvements related to
facility expansion net of $209,000 of depreciation.
DEFERRED COSTS. Deferred costs were $535,000 in 1997; there were no
deferred costs in 1996. Deferred costs are due to $332,000 in capitalized
securitization development costs and $203,000 in capitalized initial public
offering development costs. Securitizations consist of the issuance of a series
of asset-backed certificates pursuant to which holders are entitled to payments
at interest rates based on the future recovery on the finance Receivables. Both
types of deferred costs are principally legal and accounting costs incurred in
1997 that management believes have a future benefit to the Company in its
efforts to securitize finance Receivables and in efforts to raise additional
equity capital in this Offering. In the event that either
24
<PAGE>
financing program is abandoned or delayed significantly, one or both of the
deferred cost categories would be charged to earnings in the period in which
such abandonment or delay occurred. Management expects to incur additional costs
in both endeavors, which costs could be significant. Management continues to
investigate a securitization program and in connection therewith may incur
additional costs; however, in the event that the securitization program is
abandoned or delayed significantly, the Company would be required to write off
its deferred securitization costs. Management believes that cash flow from
operations will be sufficient to fund future development costs for both of these
financing efforts. The Company also capitalized in the second quarter of 1998
approximately $540,000 in debt issuance costs related to the issuance of the
Subordinated Notes; the Company will be required to write off these costs at the
time of the consummation of the initial public offering and the mandatory
repayment of the Subordinated Notes.
NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS. Notes payable decreased
from $3.8 million as of December 31, 1996 to $2.1 million as of December 31,
1997. Capitalized lease obligations increased from $41,000 to $972,000 for the
same period. The decrease on the notes payable was attributable to net
repayments on the Company's Existing Credit Facility of $1.8 million. Interest
expense associated with the notes was $296,000 during 1997. As of December 31,
1997, the amount available to the Company under the notes was limited to the
amount outstanding. In connection with the Offering, the Company expects to
increase its credit availability by establishing a new credit facility. See
"Liquidity and Capital Resources."
DEFERRED INCOME. As of December 31, 1996 and 1997, the Company had deferred
income of $895,000. Historically, the Company purchased Receivables from time to
time with commitments from a third party to purchase a portion of the newly
acquired Receivables. The Company entered into three such transactions during
1996 resulting in gains totaling $996,000. In 1997, a complaint was filed
against the Company by one such purchaser. In June, 1997, the Company settled,
resulting in a dismissal of the complaint. Under the terms of the settlement,
the Company agreed to repurchase the Receivables for approximately $1.3 million,
as adjusted for collections until consummation of the repurchase, resulting in
deferred income of $895,000. The repurchase occurred in February 1998 for
approximately $1.0 million. The portfolio was resold in February 1998 to a major
financial institution for $800,000. The Company recognized approximately
$658,000 in gain on the sale in the first quarter of 1998, approximately
$404,000 after tax.
DEFERRED TAX LIABILITY. Deferred tax liability at December 31, 1997 is $1.1
million compared to $623,000 as of December 31, 1996. This increase was
primarily attributable to an increase in deferred tax liability on finance
Receivables.
TOTAL STOCKHOLDER'S EQUITY. Total stockholder's equity increased 28.4% to
$2.1 million at December 31, 1997 from $1.6 million at December 31, 1996 as a
result of net income of $456,000 during the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company derives substantially all of its cash flow from collections on
finance Receivables or servicing income on Serviced Receivables. Prior to the
establishment of the Existing Credit Facility in September 1996, the primary
sources of funds to acquire Receivables were cash flow and the sale of
participations to third parties. In September 1996, the Company entered into the
Existing Credit Facility with a commercial bank providing up to $4.0 million in
advances to finance the acquisition of finance Receivables. In 1997, the Company
was notified that the bank providing the Existing Credit Facility was being
acquired. The credit available to the Company under this agreement is the
current outstanding balance. At December 31, 1996, and December 31, 1997,
availability under the Existing Credit Facility was $207,000 and $0,
respectively.
The Company is in current discussions with several financial institutions
for a new acquisition facility of approximately $15 million but as of the date
hereof has received no commitments.
25
<PAGE>
In April 1998, the Company issued $5 million of the Subordinated Notes in a
private placement transaction. These notes are required to be repaid upon
consummation of this Offering. In connection with the private placement, the
Company issued Warrants to purchase 450,000 shares of Common Stock exercisable
at the lower of $12.00 per share or 85% of the initial public offering price.
As of December 31, 1997, the Company had cash of $770,000. Capital
expenditures from operations were $75,000, $332,000 and $123,000 for the years
ended December 31, 1995, 1996 and 1997, respectively. Capital additions made
pursuant to capital leases were $64,000 in 1995, $0 in 1996, and $1.1 million in
1997. Portfolio purchases were $1.2 million, $5.6 million and $557,000 for the
years ended December 31, 1995, 1996, and 1997, respectively.
As an additional means of increasing the amount of Receivables under
management, in August 1997, the Company entered into an exclusive servicing
agreement with a financial institution pursuant to which the Company services
approximately 400,000 additional accounts representing approximately $737
million of charged-off balances of Serviced Receivables. Under the terms of the
servicing agreement, the financial institution has agreed to accept any
third-party offer to purchase or allow the Company to securitize the Serviced
Receivables provided the proceeds to the financial institution exceed a minimum
amount.
Historically, as an additional source of cash flow, the Company has bought
and resold Receivables to third parties. As a result, the Company recorded
additional income on finance Receivables of $312,000 in 1995 and $101,000 in
1996. The cost of these Receivables was charged against the gain. Additionally,
in the first half of 1996 the Company sold two portfolios of Receivables to the
same party for $895,000 in excess of its cost basis. As of December 31, 1996 and
1997, the recognition of gain on the sale of these Receivables was deferred
pending a repurchase of the portfolios pursuant to an agreement to reacquire the
non-recovered accounts (the "Repurchase"). In February 1998, the Company
reacquired the portfolio for approximately $1.0 million and immediately resold
it for $800,000 to another financial institution. In the first quarter of 1998,
the Company recorded the resale and has recognized the net amount of the
previously deferred gain of approximately $658,000, resulting in an after-tax
increase in net income of approximately $404,000. The Company does not expect to
enter into similar arrangements in the future.
In April 1997, the Company acquired new computer equipment and furniture in
connection with the opening of its second operations facility, which can handle
up to an additional 640 account officers and a duplicate, concurrent back-up
computer center. In order to finance its capital requirements, substantially all
of the equipment and furniture was leased from a commercial bank leasing
division for approximately $836,000. The Company has invested an additional
$277,000 in the third quarter of 1997, primarily for additional computers,
telephones and predictive dialers. The Company's plans include further growth in
operations centers and may include the addition of a call center and/or
consolidation of existing recovery groups into larger or better-integrated
facilities. In January 1998, the Company entered into two additional equipment
leases aggregating approximately $120,000.
The debt service requirements associated with borrowings under any new
credit facility would significantly increase liquidity requirements. The Company
anticipates that its operating cash flow and proceeds from any capital event
will be sufficient to meet its anticipated future operating expenses and to
service its debt requirements as they become due. In order to continue its
growth, the Company will have to make future purchases of Receivables that will
require significant additional investment in excess of the capital raised in
this Offering. The Company anticipates financing such purchases with a portion
of the proceeds of any capital event and excess cash flows, if any, as well as
additional borrowings that may be available under any new credit facility. In
addition, the Company may secure additional funding through the development of
an asset-backed securitization program. To date, the Company has not completed
any securitization and no assurances can be given that it will be able to do so
in the future.
26
<PAGE>
YEAR 2000
The Year 2000 issue arises out of potential problems with computer systems
or any equipment with computer chips that use dates where the date has been
stored as just two digits (e.g. 98 for 1998). On January 1, 2000, any clock or
date recording mechanism, including date sensitive software, which uses only two
digits to represent the year, may recognize a date using 00 as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations and cause a disruption of operations, including, among other
things, a temporary inability to process transactions, send letters and
statements or engage in similar activities.
The Company believes it has replaced or modified all of its material
computer systems and business applications software so that its computer systems
would properly utilize dates beyond December 31, 1999 and does not believe that
any further material expenditures will be necessary to make these systems Year
2000 compliant. Most of the Company's major customers are the largest
Originating Institutions in the country. The Company has been able to convert
data received to be Year 2000 compliant and expects that the Originating
Institutions will become Year 2000 compliant due to the nature of their
businesses and the financial strength of these businesses.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the three years ended December 31, 1997.
27
<PAGE>
BUSINESS
GENERAL
Creditrust is in the business of acquiring, managing and collecting accounts
of delinquent consumer Receivables. Acquired Receivables are comprised of
obligations of customers located throughout the United States. The Receivables
acquired by the Company primarily consist of individual
VISA-Registered Trademark-, MasterCard-Registered Trademark- and private label
credit card accounts and consumer loan accounts issued by Originating
Institutions, such as major banks and merchants. Many of these Receivables have
been charged-off by the Originating Institution. Due to its ability to acquire
large portfolios of Receivables, Creditrust provides Originating Institutions
with an opportunity to recoup a portion of amounts that already have been
charged-off. To date, the Company has acquired control over or purchased in
excess of $1.1 billion in Receivables, as measured by the balance charged-off by
the Originating Institutions. Since its inception, the Company has collected in
excess of $34 million on Receivables.
The Company believes it acquires, manages and liquidates Receivables more
efficiently than its competitors, Originating Institutions and collection
agencies. Substantially all of these Receivables have been deemed uncollectible
by the Originating Institutions. In many cases, the Receivables represent
obligations of individuals who have experienced some life-altering event, such
as divorce, career displacement or major medical illness in the past several
years and currently are recovering financially from their setback. Through the
use of proprietary software systems, state of the art computing and
telecommunications technology and procedures, the Company has a history of
recovering amounts that are multiples of the purchase price paid for the
Receivables. Unlike Originating Institutions and third-party collection
agencies, the Company has flexibility in structuring repayment plans that
accommodate the needs of its customers. For example:
- Creditrust is able to offer a significant discount on the overall
obligations because the Receivables have been acquired at a significant
discount from face value;
- Creditrust is able to tailor payment plans that provide for the payment of
the obligation as a component of the customer's monthly budget;
- Creditrust is not affected by many of the constraints that influence
account resolution decisions of banks and savings and loan institutions;
and
- Creditrust is not bound by the limited time periods to resolve Receivables
faced by third-party collection agencies nor is it subject to compensation
structures that favor one repayment option over another.
Creditrust applies its proprietary software systems, procedures and state of
the art computing and telecommunications technology to all stages of its
business. Creditrust seeks to maximize its expected yield through the
application of its proprietary customer scoring models to portfolios of
Receivables for which it bids. To perform this evaluation, the Company employs
its extensive historical data base and proprietary Portfolio Analysis Tool, PAT.
The Company manages a large number of consumer accounts through Mozart-TM-, its
proprietary revenue and work flow management system. Creditrust assimilates
information on each Receivable by use of internally developed proprietary and
commercially available databases, with the goal of increasing the probability of
contacting customers and ultimately collecting on the Receivable. The Company
offers a full complement of support services to its associates, including
continuous training, quality improvement, computer automated account management
and predictive dialing capacity, skiptrace and legal, thereby providing the
resources necessary to maximize collections. If other collection methods are
unsuccessful, Creditrust has access to its internal legal department and its
nationwide network of outside attorneys to assist in the collection of the
Receivable.
With the growth in consumer debt, and consequent increased rate of default
of consumer credit obligations, the Company accelerated its growth plans in 1996
by expanding to new headquarters in April.
28
<PAGE>
The Company's headquarters has capacity for a staff of approximately 225
associates, in comparison to its former facility which had the capacity for a
staff of 50 associates. In June 1997, Creditrust opened an Operations Center to
accommodate approximately 700 additional associates. A dedicated fiber optic
wide-area network connects the two facilities, which are located less than 2
miles from each other.
INDUSTRY OVERVIEW
The dollar amount of consumer debt has increased from $.84 trillion in 1993
to $1.19 trillion in 1996 and is projected by Duff & Phelps to continue to grow
to over $1.48 trillion by the year 2000. The dollar amount of bank card
delinquencies has correspondingly increased from $11.2 billion to $22.5 billion
between 1993 and 1996. In line with these increases, credit card debt
delinquencies on VISA-Registered Trademark- and MasterCard-Registered Trademark-
accounts totaled $7.2 billion and $17.7 billion in 1993 and 1996, respectively
(Source: NILSON REPORT, November 1997).
According to the publisher of the NILSON REPORT, credit card debt
represented 30% of all consumer installment and open-end credit debt in 1990.
The percentage of credit card debt to total consumer installment and open-end
credit debt will rise to 43% in 1997, 54% in 2000 and 59% in 2005. As the amount
of credit card debt has risen, total delinquencies have grown as well. Gross
credit card charge-offs as of 1990 represented 3.83% of outstanding credit card
receivables ($9.1 billion). As set forth in the chart below, the June 1997
NILSON REPORT predicts that number to rise to 5.69% in 1997 ($31.3 billion), but
decline to 4.95% in 2000 ($38.8 billion) and 4.39% in 2005 ($51.8 billion).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PERCENT OF CREDIT CARD
DEBT
<S> <C> <C>
$ Billions of Charge-offs
1990 $9.1 3.83%
1997 $31.3 5.69%
2000 $38.8 4.95%
2005 $51.8 4.39%
</TABLE>
Source: NILSON REPORT
Concurrently with the increase in the level of charged-off consumer debt,
Originating Institutions have sought a variety of ways to increase their
collections. Generally, there are three alternatives Originating Institutions
have to collect outstanding indebtedness: (i) maintain an internal collection
staff, (ii) outsource collection efforts to traditional third-party debt
collection agencies, or (iii) sell portfolios of charged-off debt to third
parties such as Creditrust who are willing to pay cash for those accounts.
Historically, Originating Institutions have relied upon large internal
collection staffs for their initial collection efforts, which efforts tended to
be transferred to outside collection agencies for accounts
29
<PAGE>
delinquent for more than 180 days. In an effort to focus on core business
activities and to take advantage of economies of scale, better performance and
the lower cost structure offered by third parties, many Originating Institutions
have chosen to outsource some or all of their collection efforts. Further,
Originating Institutions have realized that by removing non-performing consumer
loans from their systems and balance sheets through bulk sales of portfolios of
non-performing consumer loans, they can redirect their personnel and assets to
service their performing loan customer base and can receive immediate cash flow
in the amount of the discounted sale price.
The secondary market for charged-off credit card portfolios has expanded as
a result of the significant growth in delinquent credit card portfolios at major
credit card issuing banks and the increasing tendency for banks to sell their
portfolios of non-performing consumer loans to asset recovery specialists. The
NILSON REPORT publisher states that this secondary market which was $2.2 billion
when it was just beginning in 1990 reached $15.5 billion in 1997, and is
projected to reach $25.0 billion by 2000.
In the early 1990's, Originating Institutions began selling charged-off
consumer Receivables as an alternative to maintaining a large, in-house
collection staff and/or paying the commission-based fee structure mandated by
traditional third-party collection agencies. As an early entrant, Creditrust
pioneered those purchasers that began to develop and access sophisticated
databases of consumer information that could be used by a dedicated staff of
collection professionals in an effort to increase the rates of recovery on
charged-off Receivables. Through the use of these additional resources and by
focusing solely on the collection of Receivables, these companies have been able
to increase the rate of recovery over the rates historically experienced by
Originating Institutions and traditional third-party collection agencies.
Portfolios of Receivables typically are purchased at a discount from the
aggregate principal value and accrued interest on the Receivables, with an
inverse correlation between purchase price and the perceived effort necessary to
recover the Receivables. Purchasers have developed a variety of ways to finance
such acquisitions. Some Originating Institutions pursue an auction type sales
approach of constructing a portfolio of Receivables and seeking bids from
specially invited competing parties. This has resulted in an increase in the
number of portfolios of Receivables offered for sale by account brokers. Other
means of acquiring Receivables include privately negotiated direct sales when
the Originating Institution contacts known, reputable purchasers and the terms
are negotiated. Originating Institutions have also entered into "forward flow"
contracts that provide for an Originating Institution to sell some or all of its
Receivables over a period of time to a single third party on the terms agreed to
in a contract.
STRATEGY
Creditrust's goals are to maintain and continually enhance its position as
one of the leading purchasers, managers, and liquidators of defaulted consumer
receivables. Creditrust's operating strategy is keyed to its proprietary
information technology-driven systems. Creditrust's business and growth
strategies are summarized below:
STATE-OF-THE-ART INFORMATION TECHNOLOGY SYSTEMS. Creditrust has developed
and is continually upgrading its state-of-the art, proprietary software tools
which it uses to analyze and score portfolios offered to it for sale and to
manage the collections and information flow process. These systems allow the
Company to (i) buy portfolios on more favorable terms than competing buyers who
lack its information technology advantage; (ii) collect the portfolios
efficiently and (iii) identify trends in defaulted consumer portfolios earlier
than its competitors who lack Creditrust's knowledge advantage. Creditrust's
information technology tools enable it to buy portfolios which management
believes can yield the most attractive returns on its investments. Through its
sophisticated revenue management systems, Creditrust can facilitate the
allocation of resources during the recovery process to those accounts with the
most appropriate collection process for an individual account.
30
<PAGE>
MAXIMUM FLEXIBILITY IN COLLECTION PROCESS. The Company believes that it can
collect more on defaulted Receivables than the Originating Institutions or
traditional agency collection firms. The Company is not faced with the various
regulatory and financial reporting constraints that many Originating
Institutions face. Because Creditrust's only business is the collection of
defaulted Receivables, it is not subject to some of the business and customer
relations constraints faced by Originating Institutions which must consider
collection decisions in the context of the traditional credit process. In the
case of the agency collectors, the Company is able to offer credit terms which
most other collectors cannot. Agency collectors normally work on a cycle which
requires them to complete working a portfolio in a specified period of time.
These considerations work together to enable the Company to structure repayment
plans that are flexible and present, in the Company's belief, more attractive
and realistic repayment prospects.
RELATIONSHIPS WITH LEADING ORIGINATING INSTITUTIONS. The Company pioneered
the purchase of defaulted credit card and installment receivables and has
developed strong relationships with many of the largest Originating Institutions
from which it is a frequent buyer. These relationships offer the Company the
regular opportunity to be invited to bid on a range of portfolios. The diversity
of the Originating Institutions and their respective customer bases also allows
the Company to maintain geographically diversified portfolios.
TRAINED PROFESSIONALS. The Company has developed highly effective training
programs and methods. In contrast to many agency collection firms, the Company
trains its account officers to function in a manner similar to financial
counselors. The account officers routinely help customers with issues related to
their financial health and credit history. The Company seeks to instill in its
account officers a culture of professionalism and reinforces this message
through incentive arrangements intended to moderate the rate of turnover in an
industry that typically has high turnover rates.
CAPABILITY OF CURRENT PLATFORM TO SUSTAIN RAPID GROWTH. In 1996 and 1997,
the Company made extensive commitments to expand its operations by moving into
new corporate headquarters and opening a servicing center. It has invested in
information technology and telephony systems capable of supporting as many as
900 account officers. Key members of the management team have been added. As a
result of these investments, Creditrust is capable of servicing substantially
larger volumes of Receivables without incurring proportional infrastructure and
other fixed costs.
ACCELERATE GROWTH THROUGH DEVELOPMENT OF DIVERSE FUNDING ARRANGEMENTS. The
Company has historically funded its growth through bank borrowings and
participation arrangements. In 1997, it acquired control over the Serviced
Receivables through an arrangement with an investor that was a financial
institution. The Company has also investigated in considerable detail various
securitization arrangements, and will seek to develop and place an
investment-grade rated securitization program. As the result of the capital
raised in a recent private placement and in this Offering and capital that may
become available following this offering from lending and securitization
programs, the Company believes that it can accelerate it acquisition of
Receivables and capitalize on its information technology and other competitive
advantages, as well as its first mover advantage in this market.
ANALYSIS OF RECEIVABLES TO ACQUIRE
The Company's Acquisitions Department locates and develops new and
continuing sources of portfolios of Receivables for purchase. Once such
portfolios are located, the Acquisitions Department is responsible for
coordinating due diligence, including site visits as needed, coordinating
ordering, receipt, tracking and distribution of account documentation and media,
and insuring that Creditrust's acquisition costs stay within clearly defined
parameters. The Acquisitions Department also supervises the Post-Purchase
Liaison Group, a group that provides support to sellers after acquisition,
manages Receivables that are returnable under purchase agreements and
coordinates buybacks and returns.
31
<PAGE>
In order for Creditrust to consider a potential seller as a portfolio
source, a variety of factors must be considered. A seller should be able to
demonstrate a significant volume of Receivables available for sale and the
reasonable expectation of significant capacity for subsequent sales. To attempt
to avoid an unacceptable level of returned accounts resulting from verified
fraud, prior satisfaction or erroneous sale, all qualified sellers must be able
to demonstrate that they have satisfactory procedures in place for internal
audits, underwriting criteria, post-sales support and return/buy-back
warranties.
Creditrust acquires Receivables that primarily consist of defaulted consumer
debt obligations. Generally, the obligations have been incurred through
VISA-Registered Trademark-, MasterCard-Registered Trademark-, private label
credit cards and consumer loans issued by major banks and merchants. The
Receivables typically are charged-off by the Originating Institutions after a
default-period of 180 days. The Company focuses on purchasing such charged-off
Receivables, generally targeting portfolios that average 18 to 30 months past
due. From the time of purchase, the Company estimates that the average portfolio
of Receivables will have a 60-month life.
Prior to acquiring any Receivables, Creditrust receives a due diligence disk
or tape containing information about each of the accounts being proposed for
sale. Creditrust thoroughly analyzes electronic information provided on each
Receivable account being proposed for sale in its PAT software. PAT reviews and
analyzes each account and compares its asset type, last known geographic
location of the obligor, age since last collection, charged-off dollar balance
and other characteristics with Creditrust's recovery results from similar
Receivables to date. This computer model is updated automatically every time a
customer payment is received, and PAT produces a comprehensive breakdown of the
proposed portfolio. This report compares Receivables in the proposed portfolio
with Creditrust's recovery history on similar Receivables in other portfolios.
PAT then summarizes all anticipated recoveries and projects a value expressed in
both dollars and liquidation percentages for the first year, as well as the
total recovery for the portfolio's anticipated five-year life. This projection
is taken in concert with the Company's knowledge of the current consumer credit
marketplace and any subjective factors that may be available regarding the
portfolio or seller. Internally, the Company also has guidelines, which restrict
it to bidding a maximum percentage of the PAT-projected recovery for any given
portfolio.
It is not uncommon for a seller to require an almost immediate analysis and
funding. The Company's ability to accomplish next-day turnaround on pricing and
funding provides it with a significant competitive advantage.
PAT was developed based on the theory that each portfolio, no matter how
similar it may appear to other like-size portfolios, has its own unique
"fingerprint," because of the component Receivables of which it is comprised.
Therefore, no two portfolios will score the same on PAT due to the fundamental
differences in the Receivables they contain. For example, two similarly aged
portfolios would score differently because the underlying Receivables are
located in different geographic areas.
PAT utilizes a sophisticated CHAID (Chi-squared Automatic Interaction
Detector) algorithm to sort each account in the proposed portfolio (the
population) and constructs classification trees evaluating distinct segments of
the population based upon one or more predictor variables. CHAID is an algorithm
that calculates the probability that the observed relationship between the
predictor and the dependent variable would occur if the predictor and the
dependent variable were statistically independent of each other. Using
statistical significance, CHAID automatically subgroups the data into exhaustive
and exclusive segments which differ significantly in terms of a target variable
(exhaustive means that every data point belongs to at least one segment, while
exclusive means that every data point belongs to only one segment). This method
of analysis is very flexible. Classification trees can examine the effects of
predictor variables one at a time, unlike regression, which examines them all at
once.
The CHAID analysis begins by dividing the population into two or more
distinct segments based upon predictor variables. It continues by segmenting
each of the newly created sub-segments, or nodes, based
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<PAGE>
upon a secondary predictor variable. This process is repeated until no more
distinct subgroups can be created.
In Creditrust's situation, the liquidity of accounts would be Y, while those
factors which are related to liquidity would be X. The target variable is
predicted liquidity, and the predictor variables are factors which are related
to the ability to collect payments, including numerous cohorts such as age of
the account, size of the account balance and geographical location. The average
historical liquidity for each segment is then used to forecast future liquidity
for any accounts which fall into the specific segment. A relationship between Y
and X does not fit any mathematical functional form. The majority of accounts
will have zero liquidity as most of Creditrust's collections come from a small
number of customers. This skewed distribution does not lend itself to
traditional regression analysis. Moreover, it is accurate to separate accounts
into groups and identify those customers who have a high likelihood of
collection. For this reason, the CHAID algorithm is utilized to forecast
liquidity as it appears to exhibit a relatively high confidence level for
predictive analysis of recovery on these accounts.
In analyzing a portfolio of Receivables for acquisition, the Company reviews
various characteristics of the individual Receivables within the portfolio. The
following tables illustrate certain of the characteristics of Receivables owned
by the Company at specified dates. Because a significant portion of the
Company's customers recently have experienced some life-altering event, the
Company has found that a period of time must pass before those customers are
able to commence recovering financially. Additionally, newer Receivables (i.e.,
Receivables that are between three and eighteen months past due) generally are
more expensive to acquire than older Receivables. Accordingly, management
believes that certain older Receivables may be more desirable than certain newer
ones, though the Company does not eliminate portfolios solely on the basis of
age. The range of age since default on Receivables owned by the Company in
respect of both number of Receivables and dollar value as of December 31, 1995,
1996 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
1995 1996 1997
- ----------------------------------- ----------------------------------- -----------------------------------
NO. OF NO. OF NO. OF
RECEIVABLES BALANCE RECEIVABLES BALANCE RECEIVABLES BALANCE
YEAR ACCOUNTS (MILLIONS) YEAR ACCOUNTS (MILLIONS) YEAR ACCOUNTS (MILLIONS)
--- ----------- ----------- --- ----------- ----------- --- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0-2 29,415 $ 57.8 0-2 89,548 $ 167.6 0-2 73,685 $ 146.9
2-4 29,633 $ 67.0 2-4 57,809 $ 130.7 2-4 428,646 $ 796.1
4-6 7,258 $ 14.1 4-6 30,999 $ 66.5 4-6 52,454 $ 117.5
6+ 1,337 $ 2.3 6+ 15,210 $ 21.4 6+ 25,553 $ 44.0
</TABLE>
Creditrust specializes in purchasing larger balance Receivables. The Company
has found the best cost-to-collect ratio generally occurs when the average
balance is at least $1,000, and typically less than $5,000. Select ranges of
charged-off dollar balances of Receivables owned by the Company as of December
31, 1995, 1996, and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
- ----------------------------------------- ----------------------------------------- -----------------------------------------
CHARGE-OFF NO. OF BALANCE CHARGE-OFF NO. OF BALANCE CHARGE-OFF NO. OF BALANCE
AMOUNT RECEIVABLES (MILLIONS) AMOUNT RECEIVABLES (MILLIONS) AMOUNT RECEIVABLES (MILLIONS)
- --------------- ----------- ----------- --------------- ----------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$0-$1,000 17,664 $ 9.8 $0-$1,000 70,680 $ 40.2 $0-$1,000 184,176 $ 113.4
$1,001-$5,000 46,645 $ 109.7 $1,001-$5,000 109,703 $ 251.2 $1,001-$5,000 362,891 $ 764.5
>$5,001 3,334 $ 21.7 >$5,001 13,183 $ 94.7 >$5,001 33,271 $ 226.7
</TABLE>
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<PAGE>
The Company's Receivables grouped by asset type as of December 31, 1995,
1996 and 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- -----------------------------------------------------------------------------
1995 1996
- ------------------------------------- -------------------------------------
NO. OF BALANCE NO. OF BALANCE
ASSET TYPE RECEIVABLES (MILLIONS) ASSET TYPE RECEIVABLES (MILLIONS)
- ----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Visa/ Visa-Registered Trademark-/
Mastercard-Registered Trademark- 36,125 $85.1 Mastercard-Registered Trademark- 102,969 $229.0
Private Private
Label/ Label/
Discover-Registered Trademark- 0 $ 0.0 Discover-Registered Trademark- 38,032 $ 39.0
Installment Installment
Obligations 31,518 $56.1 Obligations 52,565 $118.1
<CAPTION>
- -----------
1997
- ----------- -------------------------------------
NO. OF BALANCE
ASSET TYPE ASSET TYPE RECEIVABLES (MILLIONS)
- ----------- ----------- ----------- ----------
<S> <C> <C> <C>
Visa/ Visa-Registered Trademark-/
Mastercard- Mastercard-Registered Trademark- 487,249 $942.4
Private Private
Label/ Label/
Discover-Re Discover-Registered Trademark- 38,077 $ 39.1
Installment Installment
Obligations Obligations 55,012 $123.1
</TABLE>
The seller must be able to demonstrate that the Receivables originated from
a satisfactory geographic distribution, because the Company has found that heavy
concentration in a single state or area creates a substantially greater risk of
non-recovery and that the size of Receivables balances falls within the range
that the Company has found to provide the best cost-to-collect ratio. Creditrust
also reviews the geographic distribution of the proposed Receivables for reasons
other than to avoid portfolios concentrated in one or a few areas. For example,
certain states have more debtor-friendly laws than others and, therefore, would
be less desirable from an account officer's perspective. Additionally, different
regions may place differing degrees of importance on fiscal responsibility and
creditworthiness. Based on experience and historical data, the Company attempts
to determine the future recovery potential of the Receivables in a given
portfolio.
State credit laws, population demographics and population size affect the
number of accounts originating from a particular state, as well as the
collectibility of these accounts. The Company's portfolios are broadly dispersed
across the United States, as shown in the following chart:
PORTFOLIO COMPOSITION BY STATE
[PIE CHART SHOWING GEOGRAPHIC
DISTRIBUTION OF CREDITRUST'S CUSTOMERS]
<TABLE>
<S> <C> <C>
/ / California 16.2
/ / Texas 14.6
/ / Florida 10.2
/ / New York 9.7
/ / Pennsylvania 4.3
/ / Massachusetts 3.9
/ / Maryland 3.6
/ / New Jersey 3.2
/ / Illinois 3.1
/ / North Carolina 2.7
/ / Other 28.5
</TABLE>
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<PAGE>
This quantitative and qualitative data is taken in concert with Creditrust's
knowledge of the current debt marketplace and any subjective factors that may be
available regarding the portfolio or the seller. An internal credit committee
must decide unanimously whether to pursue the portfolio and, based on the
Company's internal guidelines and limited by the specific portfolio's PAT score,
the committee determines the maximum price that Creditrust would be willing to
pay for the given portfolio and the bid price which will maximize yield on the
Receivables. Once a particular purchase has been agreed upon, the acquisition is
documented in an agreement that contains customary terms and conditions.
SERVICING ORGANIZATION
Creditrust utilizes two state of the art servicing facilities. The
headquarters facility, approximately 19,000 sq. ft., houses the executive
offices and servicing facilities for approximately 225 associates. The second
facility, approximately 36,000 sq. ft., which opened in June 1997, serves as
Creditrust's primary operations center and is designed to house approximately
700 additional associates, along with information systems and recruiting
departments. Currently, the Company has approximately 300 employees and is
organized into five functional departments: Information Technology;
Acquisitions; Skiptrace; Recovery and Legal.
INFORMATION TECHNOLOGY DEPARTMENT
The Information Technology ("IT") Department is the backbone of the
Company's operations, handling all computer and telephone systems and providing
for the ongoing development necessitated by both technological advances and
business needs. The IT Department is responsible for continually enhancing the
Company's proprietary software (Mozart-TM- and PAT) and servicing reports and
database developments. The IT Department regularly reports to all credit bureaus
on the Company's entire portfolio. The IT Department works in concert with the
Acquisitions Department to import, analyze and evaluate all prospective
purchases using PAT. The technologies serviced by this department include:
SOFTWARE. The Company's portfolio analysis (PAT) and recovery (Mozart-TM-)
programs were created and modified in-house by Creditrust's programmers. The
software is written in a high-speed, relational database language and is
designed to reside on powerful, but readily available, servers. Both programs
have been in use for more than six years and are considered to be bug-free.
Back-up tapes of Account information are recorded each day and are stored at an
off-site location for safety and security.
COMPUTER HARDWARE AND NETWORKS. The software programs reside on three
Novell-based servers and are connected via fiber-optic wide area networks
("WANs") and local area networks ("LANs") to Intel
Pentium-Registered Trademark--based PCs. The call centers have been fully wired
so that additional account officer terminals simply may be placed onto an open
desk and plugged into the network. The architecture of the system has been
constructed to be at the forefront of the technological edge, while remaining
easily scaleable and updateable, two features critical to the rapid growth
anticipated by the Company. The current architecture is capable of supporting
1,500 account officers with the simple addition of PCs. This should allow the
Company significant growth without a need for further upgrade in the near-term.
The systems are fully redundant so as to ensure the uninterrupted process of the
recovery efforts. The Company has extensive emergency plans in place for access
to an off-site call center location, should that contingency be necessary.
TELEPHONY. The Company employs the latest technology in telephony,
including predictive dialers, automatic routers, two top of the line AT&T
Definity-Registered Trademark- G-3 telephone systems (capable of handling over
1,500 account officers) and many other state-of-the art components. The call
centers have been fully wired so that additional account officer telephones may
simply be placed onto an open desk and plugged into the network. The
architecture has been designed at the cutting edge, while remaining scaleable
and updateable.
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<PAGE>
VERIFICATION AND RESEARCH OF ACCOUNT INFORMATION. When a portfolio of
Receivables is acquired, each account automatically is run through an extensive
series of proprietary and commercially available databases to compile as much
information about each Receivable as possible. The information is combined with
the information already provided by the Originating Institution and
automatically entered into the Company's proprietary account tracking and
management software system (Mozart-TM-).
Within 24 hours of importing the Receivable into Mozart-TM-, account
officers begin calling every telephone number available, and within days a
letter is sent out to the customer advising that Creditrust has purchased the
Receivable. This initial letter is designed to invite discussion or the
resolution of the Receivable and generally contains an offer of settlement at a
modest discount.
SKIPTRACE DEPARTMENT--LOCATING CUSTOMERS
Skiptracers are technology-driven telephone detectives. In the event that
contact is not made with a customer based on the compiled information for that
Receivable, the account is automatically transferred to the Skiptrace
Department. The Skiptrace Department is divided into multiple teams, each of
which is headed by a supervisor. As an initial step to locate customers, each
skiptracer endeavors to compile a complete "electronic profile" for each
customer and to find every possible telephone number for the customer.
Skiptracers utilize internally developed databases consisting of more than
65,000 creditors, plus a variety of public databases and third-party database
providers. The Skiptrace Department has the capability of accessing real-time
customer credit reports, electronic nationwide directory assistance, an
internally maintained "neighbors file" of over 100 million nationwide residents
and numerous other resources. The Company maintains over 800 million individual
database records on its current and potential customers. Employing any or all of
these tools frequently enables the Skiptracers to locate otherwise lost
Receivables. Of those customers transferred to the Skiptrace Department, a
working phone number is frequently found. Once a customer is found, Mozart-TM-
automatically assigns the customer to one of the teams in the Recovery
Department.
RECOVERY DEPARTMENT--SERVICING CUSTOMERS AND COLLECTION OF RECEIVABLES
The Recovery Department, unlike an old-fashioned "collections shop," is
tasked with providing recovery service and credit rehabilitation to the
customers. Instead of simply calling about an old bill, Creditrust's account
officers work to maximize yield through credit restoration while minimizing
customer negativity and maintaining a positive working environment for the
staff.
The Recovery Department is responsible for recovering account balances and
selling customer service and credit rehabilitation to its customers. The Company
employs advanced Pentium-Registered Trademark- PC Workstations and sophisticated
telephone call management systems to maximize its employee productivity and
thereby increase recovery from its accounts. The telephone call management
systems include predictive dialers, automated call and account distribution
systems, digital switching and customized computer software. Mozart-TM- provides
the Recovery Department with real-time customer reporting; full customer account
data information; collection discussion notes on each account; telephone numbers
and addresses; payment history; automatic notice of acquisition, settlement
letters, reminders and late payment notices; automatic legal pleadings
production; automatic account distribution to account officers; surveillance of
on-screen activity and telephone conversations for quality control, productivity
and regulatory compliance and exception reports on payment plans. Creditrust's
account officers work to maximize yield through credit restoration while
minimizing customer apprehension and maintaining a positive working environment
for the staff. The Recovery Department currently is organized into teams of 16
with one supervisor per team. The supervisors work with the team members and
assist account officers with quality control and productivity. Through the
Company's extensive network of computer and telephone systems, each team member
in the Recovery Department is responsible for contacting customers, explaining
the benefits of paying Creditrust, working with customers to develop acceptable
means to satisfy their obligations to Creditrust and recovering the Receivables.
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MAKING CUSTOMER CONTACT. When an account officer is able to establish
contact with a given customer, the customer's account automatically is placed
inside that account officer's work queue. Each account officer is assigned a
number of dedicated customer accounts depending on the account officer's skill
level. This work queue automatically is replenished on a daily basis, by
Mozart-TM-, as the Receivables are resolved, whether favorably or unfavorably.
In addition to their group of dedicated accounts, account officers receive
Receivables from a general pool daily. Typically, the Company collects some
portion of the Receivables balance from only a portion of the customers with
whom it makes contact.
On the initial customer contact call, the customer is given a standardized
and strictly controlled presentation regarding the benefits of resolving its
account with Creditrust. Emphasis is placed on determining the reason for the
customer's default in order to better assess the customer's situation and to
assist in creating a plan for repayment. Creditrust account officers are trained
to follow rigid Receivables resolution priorities.
Mozart-TM- presents the account officer with all available information and a
variety of resolution options. A large emphasis is placed by the account officer
on making the customer aware of all possible alternative methods available. The
computer system will not allow an account officer to exceed his or her specified
settlement authority without electronic authorization of a supervisor approval
code. Once a customer and the account officer agree to a repayment schedule, the
account officer records the terms of the arrangement in Mozart-TM-. The computer
system then automatically will generate a series of letters reminding the
customer of important dates.
CASH MANAGEMENT. Creditrust, through its strong emphasis on technology and
innovation, has built a customer base that is not exclusively dependent on the
postal service to deliver payments. As a result, more than 70% of all payments
are completed by either the Western Union Quick Collect-TM- program or by
proprietary QuickChek pre-authorized checks drawn on the customer's checking
account. Creditrust has developed a proprietary system ("QuickChek") that allows
the account officer to obtain the customer's authorization to reproduce an
actual check, drawn on the customer's checking account on an agreed upon date
over a series of months and for the exact amount of the agreed payment.
Creditrust participates as an authorized agent for the Quick Collect-TM- program
and is therefore able to receive payments directly in its offices within
minutes.
DELINQUENCY FOLLOW-UP. The problem of delinquent or late payments on
established repayment plans is greatly mitigated through the use of the Quick
Collect-TM- and QuickChek programs. However, some customers cannot or will not
participate in one of these plans. The Company has developed a system to deal
with late payments to minimize the drain on the productivity of the account
officers. In the event that payment is not received within one day of the
scheduled due date, Mozart-TM- automatically issues a late payment letter to the
customer. This is followed by a second letter ten days after the due date.
Unless a scheduled payment is received on or before the day it is due,
Mozart-TM- automatically moves the Receivable to the account officer's late
queue for immediate customer contact.
LATE PAYMENT COLLECTOR. When a customer falls more than 30 days late in a
payment plan, the Receivable automatically is transferred to a specially
trained, dedicated Late Payment Collector. These individuals are tasked with
getting the customer back on track according to the terms of his or her payment
plan or, in certain circumstances, negotiating revised terms for payment. In
some instances, a customer's financial circumstances may have worsened and a
plan that accurately fits the new situation is necessary. In other cases, the
customer is able to dispense with the perceived burden of monthly installments
by making a lump sum payment. The Company induces resolution through a variety
of methods. Late Payment Collectors act as a counselor to the customer and may
assist the customer in securing new resources for the resolution of its account.
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LEGAL DEPARTMENT
An important component of the Company's collections effort involves the
Legal Department and the pursuit of those customers who have the ability, but
not the willingness, to resolve their obligations. Creditrust employs two
in-house attorneys, several paralegals and a dedicated support staff to process
tens of thousands of court cases each year. The Legal Department has the
capacity to internally prepare and file collection proceedings in multiple
jurisdictions. The Legal Department is responsible for coordinating a network of
in excess of forty-five attorneys nationwide, determining the suit criteria for
each individual jurisdiction, placing cases for immediate suit, obtaining
judgment, seizing bank accounts, repossessing automobiles that have equity,
coordinating sales of property and instituting wage garnishments to satisfy
judgments. In addition, the Legal Department is responsible for overseeing the
Company's compliance with applicable laws, rules and regulations associated with
the conduct of its business. See "Business - Government Regulation."
FORECLOSURE AND ASSET DISPOSITION. Creditrust, through its Legal
Department, occasionally engages in the execution and foreclosure of real
property. In the event that a judgment has been secured, and real estate has
been verified as belonging solely to the customer, foreclosure in support of
execution of judgment is considered. Unlike foreclosure pursuant to the power of
sale contained in a mortgage or deed of trust, a judicial sale of real property
follows the state court rules for sheriff's levy and seizure of property. Those
rules vary widely by state.
COMPLIANCE PROCEDURES. The Company believes it is compliant with all
provisions of the FDCPA and applicable state laws, although it may not be
specifically subject thereto. The Company continuously monitors account officer
activity through its Quality Improvement Group. Account officers are trained and
tested on their knowledge of the FDCPA, and they are telephonically monitored
for compliance with the FDCPA and the Company's stringent standards of absolute
customer satisfaction and complaint-free Receivables resolution. In conjunction
with telephonic monitoring, an account officer's Receivables activities are
monitored through the Company's proprietary DoubleVision system, which allows a
supervisor or manager to observe exactly what the account officer sees on the
computer monitor, including every keystroke and every system activity generated.
On a daily basis, a series of audit reports is generated automatically by
Mozart-TM-, including daily management reports, liquidity reports, telephone
reports, skiptrace reports and account officer cash transaction reports. The
flexibility of Mozart-TM- allows real-time query of any information necessary.
COMPETITION
The consumer finance collections industry is highly competitive, and the
Company expects that competition from new and existing competitors will
intensify. The Company experiences competition in acquiring Receivables,
including from purchasers with substantially greater resources than the Company.
The Company competes with a wide range of third-party collection companies and
other financial services companies, which may have substantially greater
personnel and financial resources than the Company. In addition, certain of its
competitors may have signed "forward flow" contracts pursuant to which certain
Originating Institutions have agreed to transfer distressed Receivables in the
future, which could restrict those Originating Institutions from selling certain
Receivables to Creditrust. The Company seeks to compete with these companies on
the basis of its superior information technology capabilities, which enables it
to evaluate, purchase, and collect on Receivables more effectively than certain
of its competitors. The Company believes its major competitors include
Commercial Financial Services ("CFS"), Tulsa, Oklahoma, West Capital Corporation
("WCC"), San Diego, California and Outsourcing Solutions, Inc. ("OSI"),
Chesterfield, Missouri.
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TRADEMARKS AND PROPRIETARY INFORMATION
The Company has filed trademark applications with the United States Patent
and Trademark Office with respect to the names "Mozart-TM-" and "Creditrust" and
the Creditrust logo.
The Company uses a variety of management information and telecommunications
systems to enhance productivity in all areas of its business. The Company has
developed its own software system tailored to the needs of the particular
customer base it serves. The Company uses readily available
Pentium-Registered Trademark- PC based hardware configurations to operate a
combination of proprietary and commercially available software. The majority of
the Company's software can be customized to accommodate the specific work
standards required by the Company's account officers and skiptracers.
GOVERNMENT REGULATION
The FDCPA and comparable state statutes establish specific guidelines and
procedures which debt collectors must follow to communicate with consumer
debtors, including the time, place and manner of such communications. It is the
Company's policy to comply with the provisions of the FDCPA and comparable state
statutes in all of its collection activities, although it may not be
specifically subject thereto. If these laws apply to some or all of the
Company's collection activities, the Company's failure to comply with such laws
could have a materially adverse effect on the Company. The relationship of a
customer and a credit card issuer is extensively regulated by federal and state
consumer protection and related laws and regulations. While the Company is not a
credit card issuer, because many of its Receivables were originated through
credit card transactions, certain of the Company's operations are affected by
such laws and regulations. Significant laws include the Federal Truth-In-Lending
Act, the Fair Credit Billing Act, the Equal Credit Opportunity Act, the Fair
Credit Reporting Act and the Electronic Funds Transfer Act (and the Federal
Reserve Board's Regulations which relate to these Acts), as well as comparable
statutes in those states in which customers reside or in which the Originating
Institutions are located. State laws may also limit the interest rate and the
fees that a credit card issuer may impose on its customers. Among other things,
the laws and regulations applicable to credit card issuers impose disclosure
requirements when a credit card account is advertised, when it is applied for
and when it is opened, at the end of monthly billing cycles and at year end.
Federal law requires credit card issuers to disclose to consumers the interest
rates, fees, grace periods and balance calculation methods associated with their
credit card accounts, among other things. In addition, customers are entitled
under current laws to have payments and credits applied to their credit card
accounts promptly, to receive prescribed notices and to require billing errors
to be resolved promptly. In addition, some laws prohibit certain discriminatory
practices in connection with the extension of credit. Failure by the Originating
Institutions to have complied with applicable statutes, rules and regulations
could create claims and rights offset by the customers that would reduce or
eliminate their obligations under their Receivables, and this could have a
materially adverse effect on the Company. Pursuant to agreements under which the
Company acquired Receivables, the Company is normally indemnified against losses
caused by the failure of the Originating Institution to have complied with
applicable statutes, rules and regulations relating to the Receivables before
they are sold to Creditrust.
Certain laws, including the laws described above, may limit the Company's
ability to collect amounts owing with respect to the Receivables regardless of
any act or omission on the part of the Company. For example, under the federal
Fair Credit Billing Act, a credit card issuer is subject to all claims (other
than tort claims) and defenses arising out of certain transactions in which a
credit card is used if the obligor has made a good faith attempt to obtain
satisfactory resolution of a disagreement or problem relative to the transaction
and, except in cases where there is a specified relationship between the person
honoring the card and the credit card issuer, the amount of the initial
transaction exceeds $50.00 and the place where the initial transaction occurred
was in the same state as the customer's billing address or within 100 miles of
that address. As a purchaser of credit card Receivables, the Company may acquire
certain Receivables subject to legitimate defenses on the part of the customer.
The statutes further provide that, in certain
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cases, customers cannot be held liable for, or their liability is limited with
respect to, charges to the credit card account that were a result of an
unauthorized use of the credit card. No assurances can be given that certain of
the Receivables were not established as a result of unauthorized use of a credit
card, and, accordingly, the amount of such Receivables could not be collected by
the Company. Pursuant to some agreements under which the Company acquired
Receivables, the Company is indemnified against certain losses with respect to
such Receivables regardless of any act or omission on the part of the Company or
the Originating Institution.
Additional consumer protection laws may be enacted that would impose
requirements on the enforcement of and collection on consumer credit card or
installment accounts. Any new laws, rules or regulations that may be adopted as
well as existing consumer protection laws, may adversely affect the ability of
the Company to collect the Receivables. In addition, the failure of Creditrust
to comply with such requirements could adversely affect the Company's ability to
enforce the Receivables.
PROPERTIES
Creditrust is headquartered in a leased facility comprised of approximately
19,000 square feet at 7000 Security Boulevard, Baltimore, Maryland 21244. The
headquarters facility has capacity for approximately 225 associates and houses
all of the training facilities and administrative offices. The Company recently
leased an additional facility located approximately two miles from its
headquarters at 1705 Whitehead Road, Baltimore, Maryland 21244. This operations
center comprises approximately 36,000 square feet and has the capacity to
accommodate approximately 700 additional associates and expanded training and
recruiting departments. The operations center houses the Company's updated
communications and software systems center, which is fully redundant to the
computer center, located at the corporate headquarters.
EMPLOYEES
As of December 31, 1997, the Company had 245 full-time employees. None of
the Company's employees are represented by a labor union. The Company believes
that its relations with its employees are good.
LEGAL PROCEEDINGS
The Company is subject to routine litigation in the ordinary course of
business, including contract, collections and employment-related litigation.
None of these routine matters, individually or in the aggregate, is believed by
the Company to be material to its business or financial condition.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information concerning each of the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Joseph K. Rensin.................... 32 Chairman of the Board, President and Chief Executive Officer
Frederick W. Glassberg(1)(2)........ 64 Director
John G. Moran(1)(2)................. 52 Director
Harry G. Pappas, Jr.(1)(2).......... 49 Director
Michael S. Witlin................... 30 Director
Rick W. Chandler.................... 50 Vice President, Recovery
John L. Davis....................... 35 Vice President, Business Development and Corporate Secretary
J. Barry Dumser..................... 49 Vice President, General Counsel
David A. Elkes...................... 28 Vice President, Information Technology
Jefferson B. Moore.................. 36 Vice President, Acquisitions
Richard J. Palmer................... 46 Vice President, Chief Financial Officer and Treasurer
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
JOSEPH K. RENSIN, CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE
OFFICER--Mr. Rensin founded Creditrust in 1991 and has been instrumental in all
aspects of the Company's development, including the Company's state of the art
Receivables recovery computer database and systems software, as well as the
customer relations approach to collections and recovery. Prior to founding
Creditrust, he founded two different technology-related companies, which he sold
profitably. He attended the University of Maryland College Park from 1983 to
1987. While in college, he wrote three books on computers published by
Prentice-Hall.
FREDERICK WILLIAM GLASSBERG, DIRECTOR--Mr. Glassberg joined the Creditrust
Board in 1997. Mr. Glassberg is president of Dornbush Enterprises, Inc., d/b/a
Crystal Hill Advisors in Columbia, Maryland, which provides commercial real
estate management advice and financial advisory services to corporate and
municipal clients. Since January 1, 1997, Mr. Glassberg has served on the Board
of Directors of the following three subsidiaries of The Enterprise Foundation:
Cornerstone/Progressive Grove, Inc., a tax-exempt Georgia corporation that owns
apartments; Cornerstone/Robbins, Inc., tax-exempt Georgia corporation that owns
apartments; and Cornerstone/Spring Creek, Inc., a Texas corporation with a
tax-exempt status application pending, which owns apartments. Prior to that
time, Mr. Glassberg served as Chief Financial Officer of a subsidiary of The
Rouse Company for nine years.
JOHN G. MORAN, DIRECTOR--Mr. Moran joined the Creditrust Board in 1997. He
is Associate Dean and Executive-in-Residence of the Sellinger School of Business
and Management at Loyola College in Baltimore, Maryland. He also is President of
The Moran Group, LTD, which offers management consulting services to for-profit
and not-for-profit organizations. From 1986 until he entered his academic and
business positions in 1995, Mr. Moran was President of Household Bank, FSB
(Eastern Division), which had 39 branches in Maryland and Virginia and deposits
of approximately $1.5 billion.
HARRY G. PAPPAS, JR., DIRECTOR--Mr. Pappas joined the Creditrust Board in
1997. From July 1992 to the present, Mr. Pappas has been the principal of Harry
G. Pappas, Jr. Consulting, specializing in financial consulting services to
businesses and business owners. In addition, effective January 1998, Mr. Pappas
became Managing Director, Finance and Administration, and Chief Financial
Officer of Partners' First Holdings, LLC, a credit card services joint venture
among Bank of Montreal, Bank Boston and First
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Annapolis Consulting. Mr. Pappas acted as the Chief Financial Officer of
Precision Auto Care, Inc. from February 1997 to May 1997; of Youth Services
International, Inc. from September 1994 to May 1995 and of Meridian Healthcare
from July 1993 to May 1994. From February 1991 to July 1992, he was Vice
Chairman and Chief Financial Officer of MBNA Corporation in Newark, Delaware.
Prior to this, Mr. Pappas was Chief Financial Officer at MNC Financial, Inc. and
Equitable Bancorporation, and he was a partner with Ernst & Young LLP. Mr.
Pappas also serves on the board of directors of Precision Auto Care, Inc.
MICHAEL S. WITLIN, DIRECTOR--Mr. Witlin co-founded Creditrust with Mr.
Rensin in 1991. He served as Vice President of the Company and participated in
management of the Company until 1995. For two years thereafter, he was an
Associate Consultant at Company Entier where he provided consulting services in
business process re-engineering and systems design to privately held and public
companies as well as federal agencies.
RICK W. CHANDLER, VICE PRESIDENT, RECOVERY--Prior to joining Creditrust in
1996, Mr. Chandler served as Vice President of Consumer Collections for Bank
One, Dayton, Ohio, for two years. During his tenure with Bank One he was
responsible for over 400 employees and managed $2.3 billion in receivables.
Prior to Bank One, Mr. Chandler was Director of Assets for six years for SPS
Transaction Services, a subsidiary company of Morgan Stanley, Dean Witter & Co.
At SPS he managed over 280 employees and had responsibility for over $1 billion
dollars in assets.
JOHN L. DAVIS, VICE PRESIDENT, BUSINESS DEVELOPMENT AND CORPORATE
SECRETARY--Mr. Davis joined Creditrust in 1993 as a member of the Recovery
Department. Shortly thereafter, he moved to the Legal Department as a Legal
Coordinator. In that role, he became familiar with the nationwide network of
attorneys that the Company retains and was responsible for increasing the growth
of that network to the present level of over 45 attorneys. Mr. Davis became the
Manager of the Legal Department in January 1994. Prior to joining Creditrust, he
worked in the Creditors' Rights Department of the Baltimore based law firm of
Wright, Constable & Skeen for three years. Prior to this, he worked full time
for the law firm of Greenan, Walker, Steuart, Trainor & Billman while
simultaneously earning his Bachelor of Science degree in Paralegal Studies at
the University of Maryland.
J. BARRY DUMSER, VICE PRESIDENT, GENERAL COUNSEL--Mr. Dumser joined
Creditrust in 1997 after serving as Vice President, Chevy Chase Bank where his
duties included management of the bank's bankruptcy and deceased processing
units. Mr. Dumser held additional responsibilities including the litigation
unit, which supported the bank's collection effort with its 2.5 million
customer's and over $5.5 billion in receivables. Prior to joining Chevy Chase
Bank, Mr. Dumser served as Vice President and Counsel to Matterhorn Bank
Programs. Mr. Dumser's responsibilities with the Company include management of
the in-house legal staff as well as management of the network of over 40 outside
attorneys, established to handle the nation-wide litigation efforts on a
percentage of the Company's accounts. Mr. Dumser received his BS in Economics
from Wharton School of Finance and Commerce and his MBA from Boston University
School of Management. Mr. Dumser received his JD from the University of
Baltimore School of Law in 1993 and was admitted to the Maryland Bar that same
year.
DAVID A. ELKES, VICE PRESIDENT, INFORMATION TECHNOLOGY--Mr. Elkes joined
Creditrust in 1997 after serving as Vice President, Engineering for CRSS Data
Systems in Baltimore where his responsibilities included managing the
Engineering, Training and Internet Services divisions, engineering customers'
data systems solutions and designing and implementing customers' internet
solutions. Prior to CRSS, Mr. Elkes was a Senior Network Engineer for Skills
Bank Corporation in Baltimore. His duties there included managing, maintaining
and supporting a 100 node, corporate data network consisting of multiple
servers, topologies, operating systems and communications protocols, and writing
software in support of corporate sales and data analysis efforts. He currently
is responsible for the management of the Company's information technology team
and its programmers. Mr. Elkes has knowledge and experience in a wide variety of
computer hardware and software. He received his BA degree from The Johns Hopkins
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University in Baltimore, MD. Mr. Elkes is a Master Certified Network Engineer
and holds many other professional certifications.
JEFFERSON BARNES MOORE, VICE PRESIDENT, ACQUISITIONS--Mr. Moore joined
Creditrust in 1997 after serving since 1991 as the Vice President of Koll-Dove
Global Disposition Services, LLC, the largest third party consumer receivable
transaction clearing house in the United States. At Koll-Dove, Mr. Moore was
personally responsible for $2.5 billion in consumer charge off sales, involving
over 75 separate transactions and over 25 banks and multiple purchasers in 1996
alone. He brings to Creditrust extensive experience in evaluating portfolios and
a database of institutional issuers of consumer Receivables, which is unmatched
in the industry. During his tenure with Koll-Dove, he was instrumental in the
RTC and FDIC loan auction programs. Prior to Koll-Dove, Mr. Moore was involved
in commercial real estate sales for 12 years. Mr. Moore received his Bachelor of
Science degree in Business Administration from the University of Missouri,
Columbia.
RICHARD J. PALMER, VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND
TREASURER--Prior to joining Creditrust in 1996, Mr. Palmer served as Chief
Financial Officer of CRI, Inc., a national real estate investment company with
headquarters in Rockville, Maryland, for 11 years. Mr. Palmer joined CRI, Inc.
in 1983 as Assistant to the President, became director of Tax Policy in 1984 and
CFO in 1985. Prior to CRI, Inc. he was with Grant Thornton LLP for seven years
culminating in the position of Tax Manager. Mr. Palmer joined KPMG Peat, Marwick
in 1973 shortly after graduating with a Bachelor of Science degree in accounting
from Florida Atlantic University in Boca Raton, Florida. He received his Florida
certified public accounting certificate in 1974 and received reciprocity in the
District of Columbia in 1976.
The Company's officers are elected annually by and serve at the discretion
of the Board of Directors. Creditrust's Board of Directors is not divided into
classes. At each annual meeting of stockholders, directors are elected to serve
until the next annual meeting of stockholders and until their successors have
been elected and qualified.
The Board of Directors has standing Audit and Compensation Committees. The
Audit Committee annually recommends to the Board the appointment of independent
certified public accountants for the Company, reviews the scope and fees of the
annual audit and any special audit, and reviews the results with the auditors.
It further reviews accounting practices and policies of the Company with the
auditors and the adequacy of the accounting and financial controls of the
Company and submits recommendations to the Board regarding oversight and
compliance with accounting principles and legal requirements. The Compensation
Committee reviews and makes recommendations to the Board regarding salaries and
benefits of officers of the Company and administers the Company's stock option
and employee stock purchase plans.
COMPENSATION OF DIRECTORS
Directors of the Company who are also employees of the Company do not
receive additional compensation for their services as directors. Upon
consummation of the Offering, directors who are not employees of the Company
will receive annual director compensation consisting of shares of Common Stock
with a value of $10,000 pursuant to the Company's 1998 Stock Incentive Plan and
$5,000 in cash. Each director who is not an employee will receive $1,500 for
each Board meeting attended in person and $500 for each Board meeting attended
telephonically. In addition, each director will receive $500 for each committee
meeting attended in person and $300 for each committee meeting attended
telephonically. Directors also are reimbursed for expenses incurred to attend
meetings of the Board of Directors and its committees. Mr. Witlin also has been
granted an option to purchase 35,714 (assuming an initial public offering price
of $14.00 per share) shares of Common Stock on the same terms as the grants to
executive officers described below under "Compensation Pursuant to Plans."
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
earned by the Company's executive officers. As of December 31, 1997, no stock
options or stock appreciation rights had been granted or were outstanding.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- --------------------------------------------------- --------- ---------- ---------- ----------------- -------------
Joseph K. Rensin................................... 1997 $ 150,010 $ 0 $ 0 $ 0
President and Chief Executive Officer
Rick W. Chandler................................... 1997 101,637 22,667 0 0
Vice President, Recovery
John L. Davis...................................... 1997 150,010 16,777 0 1,772
Vice President, Business Development
Jefferson Barnes Moore............................. 1997 138,470 2,000 0 0
Vice President, Acquisitions
Richard J. Palmer.................................. 1997 150,010 118,589 0 188
Vice President, Chief Financial Officer
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Palmer,
Moore, Chandler and Davis. The employment agreements entitle Messrs. Palmer and
Moore to incentive compensation in an amount up to $100,000 in the discretion of
the Compensation Committee, in addition to an annual base compensation of
$150,000. Mr. Davis receives annual compensation of $150,000. Mr. Chandler
receives annual compensation of $100,000 and incentive compensation based upon
the performance of the Recovery Department. Effective April 14, 1998, Mr.
Rensin's annual salary was increased by the Compensation Committee to $250,000.
Mr. Rensin will also be entitled to incentive compensation in an amount up to
$100,000 in the discretion of the Compensation Committee.
Messrs. Palmer, Moore, Chandler and Davis are entitled to all Company
benefits to which employees generally are eligible, and each is subject to a
confidentiality agreement that prohibits him from disclosing the Company's
proprietary information, removing Company documents or soliciting other
employees for outside employment for two years after he leaves the Company. In
the event of a breach of the confidentiality agreement, the Company is entitled
to liquidated damages of $100 per day for each day the agreement is violated,
among other remedies.
Messrs. Palmer, Moore, Chandler and Davis each agreed not to compete with
the Company anywhere in the United States for three years from the date he
leaves the Company. Pursuant to their employment agreements, the Company
reimbursed Messrs. Moore and Chandler for $15,000 and $10,000, respectively, in
moving expenses in connection with relocating to Maryland and $10,000 each for
their temporary residence costs during the first several months of their
employment. Mr. Moore also received certain temporary financial assistance in
connection with his relocation. See "Certain Transactions."
COMPENSATION PURSUANT TO PLANS
1998 STOCK INCENTIVE PLAN. The Company has reserved a total of 800,000
shares of Common Stock for issuance pursuant to the Creditrust 1998 Stock
Incentive Plan (the "Stock Plan"). The Stock Plan was
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established in contemplation of this Offering to provide incentives to motivate
and retain key employees of the Company. The Stock Plan is administered by the
Compensation Committee of the Board of Directors and provides for the grant of
incentive stock options and non-qualified stock options, as well as stock
appreciation rights, restricted or unrestricted stock awards, phantom stock,
performance awards, or any combination of the foregoing. The Compensation
Committee is authorized to grant options under the Stock Plan to all eligible
employees of the Company, including executive officers. Directors who are not
also employees of the Company are eligible for grants under the Stock Plan.
Options granted under the Stock Plan are granted on such terms and at such
prices as are determined by the Compensation Committee, except that the per
share exercise price of options granted under the Stock Plan cannot be less than
the fair market value of the Common Stock on the date of grant. Each option is
exercisable after the period or periods specified in the option agreement, but
no option may be exercisable after the expiration of 10 years from the date of
grant. No option may be granted under the Stock Plan after April 6, 2008.
Options granted to an individual who owns (or is deemed to own) 10% or more of
the total combined voting power of all classes of stock of the Company must have
an exercise price of at least 110% of the fair market value of the Common Stock
on the date of grant, and a term of no more than ten years. The Board of
Directors has the authority to amend or terminate the Stock Plan, provided that
no such amendment or termination may adversely affect the rights of the holder
of any outstanding option without the written consent of such holder and certain
amendments are subject to stockholder approval.
In connection with the Offering, the Compensation Committee granted options
to purchase certain shares of Common Stock in an amount to be based on the
initial public offering price to Messrs. Chandler, Davis, Moore, Palmer, Dumser
and Elkes and to certain other employees of the Company. Each of these options
is a non-qualified stock option under the Internal Revenue Code of 1986, as
amended (the "Code"), and is contingent upon the consummation of the Offering.
The terms of the options include an exercise price equal to the initial price to
the public at which the shares of Common Stock are offered hereby, have a
10-year term and vest 20% on the date on which the Offering is consummated and
20% on the anniversary thereof during each of the next four years. Upon
consummation of the Offering, there will be 800,000 shares of Common Stock
available for issuance under the Stock Plan, of which 375,000 shares will be
subject to outstanding options.
The following table sets forth certain information with respect to the
non-qualified stock options granted under the Stock Plan in connection with the
Offering (assuming an initial public offering price of $14.00 per share). In
accordance with regulations promulgated by the Securities and Exchange
Commission, the table also describes the hypothetical gains that would exist for
the respective options granted based on assumed rates of annual stock price
appreciation of 5% and 10% from the date of the consummation of the Offering to
the end of the option term. These hypothetical gains are based on assumed rates
of appreciation and, therefore, the actual gains, if any, on stock option
exercises are dependent on the future performance of the Common Stock, overall
stock market conditions, and the continued employment of the named individuals
with the Company. As a result, the amounts reflected in this table may not
necessarily be achieved.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES
-------------------------------------------------------- OF STOCK
NUMBER OF % OF TOTAL PRICE APPRECIATION
SECURITIES OPTIONS FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES PRICE EXPIRATION --------------------
NAME GRANTED IN FISCAL YEAR ($/SH) DATE 5% 10%
- ------------------------------------------ ------------- --------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Joseph K. Rensin.......................... -- -- -- -- -- --
Rick W. Chandler.......................... 71,429 19.0% $ 14.00 4/6/08 $ 628,575 $1,593,581
John L. Davis............................. 71,429 19.0% $ 14.00 4/6/08 628,575 1,593,581
Jefferson B. Moore........................ 71,429 19.0% $ 14.00 4/6/08 628,575 1,593,581
Richard J. Palmer......................... 71,429 19.0% $ 14.00 4/6/08 628,575 1,593,581
</TABLE>
45
<PAGE>
STOCK PURCHASE PLAN. The Company has reserved a total of 100,000 shares of
Common Stock for issuance pursuant to the Creditrust 1998 Employee Stock
Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan was
established in contemplation of the Offering to promote the long-term success of
the Company by providing employees of the Company with a convenient opportunity
to become stockholders. Options granted and shares of Common Stock purchased
under the Stock Purchase Plan are intended to qualify for the favorable tax
treatment for employees available under Section 423 of the Code.
The Compensation Committee administers the Stock Purchase Plan. Under the
terms of the Stock Purchase Plan, all eligible employees of the Company on the
date on which the Offering is consummated will be provided the opportunity to
purchase Common Stock through payroll deductions. The purchase price shall be
85% of the lesser of (i) the fair market value of a share of Company Common
Stock on the offering date; or (ii) the fair market value of a share of Company
Common Stock on the purchase date, provided that the price per share is not less
than par value. The fair market value on any offering date shall be the average
on that date of the high and low prices of a share of Company Common Stock on
the principal national securities exchange on which the shares are trading. The
maximum number of shares for which each employee may purchase options in each
annual period shall be 15% of the employee's compensation divided by 85% of the
fair market value of a share of Company Common Stock on the offering date of the
offering period. The Plan limits purchases to $25,000 per participant for each
calendar year. The aggregate amount of Common Stock that has been reserved is
subject to adjustment for recapitalization, stock dividend, reorganization,
merger, consolidation, or other change in capital affecting the Common Stock.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the Company's Amended and Restated Charter and Bylaws, the
Company is obligated to indemnify each of its directors and officers to the
fullest extent permitted by the MGCL with respect to all liability and losses
suffered and reasonable expenses incurred in any action, suit or proceeding in
which such person was or is made or threatened to be made a party or is
otherwise involved by reason of the fact that such person is or was a director
or officer of the Company. The Company is obligated to pay the reasonable
expenses of the directors or officers incurred in defending such proceedings if
the indemnified party agrees to repay all amounts advanced by the Company if it
is ultimately determined that such indemnified party is not entitled to
indemnification. See "Description of Capital Stock--Limitations on Liability of
Officers and Directors."
46
<PAGE>
CERTAIN TRANSACTIONS
Mr. Rensin has unconditionally and personally guaranteed (the "Guaranty")
the Existing Credit Facility, including attorneys fees and expenses, incurred by
First Union in enforcing its rights under the Guaranty. Mr. Rensin may terminate
the Guaranty upon notice to the Bank but would remain liable for all obligations
incurred under it up to that point. A portion of the proceeds of the Offering
will be used to pay off and terminate the Existing Credit Facility, and,
consequently will terminate the Guaranty.
Mr. Rensin also has unconditionally and personally guaranteed (the
"Subordinated Guaranty") the Subordinated Notes. A portion of the proceeds of
the Offering will be used to repay the Subordinated Notes and consequently will
terminate the Subordinated Guaranty.
Jefferson B. Moore, who has served as the Company's Vice President,
Acquisitions since January 22, 1997, received a loan of $78,000 on February 28,
1997 pursuant to his employment agreement. The Company issued the loan to Mr.
Moore and his wife to assist with their purchase of a residence in Maryland. Mr.
and Mrs. Moore paid a $38,000 installment on May 30, 1997, leaving a balance of
$40,000.
The Company remitted payments on loans due participants (including interest)
of approximately $416,000, $743,000 and $58,000 to Mr. Rensin and various
investment vehicles owned or controlled by Mr. Rensin during the years ended
December 31, 1995, 1996 and 1997, respectively.
The Company also remitted a payment of $66,000 to a corporation, of which
Mr. Glassberg is an executive officer, as a finder's fee in connection with the
contract for the Serviced Receivables.
Any future transactions will be on terms at least as favorable to the
Company as available from third parties and will be approved by a majority of
the disinterested directors.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of Common Stock by (i) each person known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii)
each director and executive officer of the Company and (iii) all directors and
executive officers of the Company as a group. Unless otherwise indicated, each
of the shareholders listed below has sole voting and investment power with
respect to the shares beneficially owned.
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL PERCENTAGE OWNED
OWNERSHIP ----------------------------------------------
SHARES(1) BEFORE OFFERING(1) AFTER OFFERING(1)(2)(3)
----------------------------- --------------------- -----------------------
<S> <C> <C> <C>
Joseph K. Rensin
7000 Security Blvd.
2nd Floor
Baltimore, MD 21244................. 6,000,000 100% 75.0%
Frederick W. Glassberg................ 714 *% *%
John G. Moran......................... 714 *% *%
Harry G. Pappas, Jr................... 714 *% *%
Michael S. Witlin..................... 7,142 *% *%
Rick W. Chandler...................... 14,286 *% *%
John L. Davis......................... 14,286 *% *%
J. Barry Dumser....................... 3,572 *% *%
David A. Elkes........................ 3,572 *% *%
Jefferson B. Moore.................... 14,286 *% *%
Richard J. Palmer..................... 14,286 *% *%
All directors and executive officers
as a group (11 persons)............. 6,073,572 100% 75.2%
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes in the case of Messrs. Glassberg, Moran, and Pappas shares issuable
as director compensation at the time of the Offering and in the case of
Messrs. Witlin, Chandler, Davis, Dumser, Elkes, Moore and Palmer only the
portion of outstanding employee stock options that will be exercisable upon
the completion of this Offering. A total of 375,000 shares are subject to
outstanding options. Assuming full exercise, all directors and officers as a
group, excluding Mr. Rensin, would beneficially own 4.5% of the outstanding
Common Stock.
(2) Assumes the Underwriters' over-allotment option is not exercised.
(3) Upon the closing of the Offering and assuming an initial public offering
price of $14.00 per share, there will be outstanding Warrants to purchase
450,000 shares at $11.90 per share and options to purchase 375,000 shares of
Common Stock at the initial public offering price. To the extent that any of
the outstanding Warrants are exercised, there will be further dilution to
new investors. See "Shares Eligible for Future Sale."
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 20,000,000 shares of Common Stock, $0.01
par value per share, and 5,000,000 shares of preferred stock, $0.01 par value
per share (the "Preferred Stock"). Upon completion of the Offering, the Company
will have 8,000,000 shares of Common Stock and no shares of Preferred Stock
outstanding. The following description of capital stock of the Company is
qualified in its entirety by reference to the Company's Amended and Restated
Charter, a copy of which is filed as an exhibit to the Registration Statement of
which this Prospectus is a part. An additional 1,350,000 shares of Common Stock
are reserved for issuance, of which 450,000 shares are reserved for issuance
upon exercise of the Warrants and 900,000 shares are reserved for issuance under
employee stock incentive and stock purchase plans (of which 375,000 shares are
reserved for issuance under outstanding stock options). See
"Management--Compensation Pursuant to Plans."
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders generally. Stockholders have no right to
cumulate their votes in the election of directors. Accordingly, holders of a
majority of the outstanding shares of Common Stock entitled to vote in any
election of directors may elect all of the directors standing for election.
Because Mr. Rensin will own 75% of the aggregate number of shares of Common
Stock outstanding following the Offering, Mr. Rensin will be able to decide all
matters that come before the stockholders. Holders of Common Stock are entitled
to receive dividends and other distributions pro rata when, as and if declared
from time to time by the Board of Directors out of funds legally available
therefor. The Company does not intend to declare or pay any dividends on the
shares of its Common Stock in the near future. See "Dividend Policy." In the
event of a voluntary or involuntary liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, including all distributions to
holders of Preferred Stock having a liquidation preference over the Common
Stock. The Company's Amended and Restated Charter gives the holders of Common
Stock no preemptive or other subscription or conversion rights, and there are no
redemption provisions with respect to such shares. All outstanding shares of
Common Stock are, and the shares offered hereby will be, when issued and paid
for, fully paid and non-assessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of holders of shares of any series of Preferred Stock, which the Company
may designate and issue in the future from time to time.
PREFERRED STOCK
Under the Amended and Restated Charter, the Board of Directors is authorized
to issue Preferred Stock, in one or more series, and to fix the number of shares
constituting such series and the designation of such series, the voting powers
(if any) of the shares of such series, and the preferences and relative,
participating, optional or other special rights, if any, and any qualifications,
limitations or restrictions thereof, of the shares of such series. The Company
has no present intention to issue any series of Preferred Stock.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Company's Amended and Restated Charter and Bylaws provide for mandatory
indemnification of the officers and directors of the Company to the fullest
extent permitted by the MGCL, including some instances in which indemnification
is otherwise discretionary under MGCL. The Amended and Restated Charter contains
provisions that eliminate the personal liability of the Company's directors for
monetary damages resulting from breaches of their fiduciary duties as directors
other than for a judgment or other final adjudication adverse to the officer or
director that is entered based on a finding of active or deliberate
49
<PAGE>
dishonesty, payment of unlawful distributions, or for any transaction from which
the director derived an improper personal benefit. The Company believes that
these provisions are essential to attracting and retaining qualified persons as
directors.
There is no pending litigation or proceeding involving a director or officer
of the Company as to which indemnification is being sought, and the Company is
not aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
ANTI-TAKEOVER PROVISIONS
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and (i) any person who beneficially owns 10% or more of the voting
power of the corporation's shares, (ii) an affiliate or associate of such
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then-outstanding voting stock of the corporation (in either case, an "interested
stockholder"), or (iii) any affiliate of an interested stockholder, are
prohibited for five years after the most recent date on which the interested
stockholder became an interested stockholder, and thereafter must be recommended
by the board of directors of the Maryland corporation and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by holders
of its outstanding voting shares, and (b) two-thirds of the votes entitled to be
cast by holders of such outstanding voting shares, other than shares held by the
interested stockholder with whom the business combination is to be effected;
unless, among other things, the corporation's stockholders receive a minimum
price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the interested
stockholder for its shares. These provisions of the MGCL do not apply to
business combinations that are approved or exempted by the board of directors of
the corporation prior to the time that the interested stockholder becomes an
interested stockholder.
The Company generally will be governed by the MGCL's business combinations
statute. However, the stockholders have approved an amendment to the Charter of
the Corporation exempting any business combination with Mr. Rensin or his
present or future affiliates from its application.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast by
stockholders, excluding shares of stock as to which the acquiring person,
officers of the corporation and directors of the corporation who are employees
of the corporation are entitled to exercise or direct the exercise of the voting
power of the shares in the election of directors. "Control shares" are voting
shares of stock which, if aggregated with all other shares of stock previously
acquired by such person, would entitle the acquirer to exercise voting power in
electing directors within one of the following ranges of voting power; (i)
one-fifth or more but less than one-third, (ii) one-third or more but less than
a majority, or (iii) a majority of all voting power. Control shares do not
include shares that the acquiring person is entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition, directly or indirectly, of control shares, subject to
certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares.
If voting rights are not approved at the meeting or if the acquirer does not
deliver an acquiring person statement as required by the statute, then subject
to certain conditions and limitations, the corporation
50
<PAGE>
may redeem any or all of the control shares, except those for which voting
rights have previously been approved, for fair value determined, without regard
to voting rights, as of the date of the last control share acquisition or of any
meeting of stockholders at which the voting rights of such shares are considered
and not approved. If voting rights for control shares are approved at a
stockholders' meeting and the acquirer becomes entitled to vote a majority of
the shares entitled to vote, all other stockholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per share paid in the
control share acquisition, and certain limitations and restrictions generally
applicable to the exercise of appraisal rights do not apply in the context of a
control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction or to acquisitions approved or excepted by the charter or the bylaws
of the corporation.
The business combination statute and the control share acquisition statute
could have the effect of discouraging unsolicited offers to acquire the Company
and of increasing the difficulty of consummating any such offer.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is .
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 8,000,000 shares of
Common Stock outstanding. Of those shares, the 2,000,000 shares of Common Stock
sold in the Offering will be freely transferable without restriction or
registration under the Securities Act of 1933, as amended (the "Act"), unless
purchased by persons deemed to be "affiliates" of the Company (as that term is
defined in the Act) ("Affiliates"). The remaining 6,000,000 shares of Common
Stock to be outstanding (5,700,000 shares if the Underwriters' over-allotment
option is exercised in full) immediately following the Offering ("Restricted
Shares") may only be sold in the public market if such shares are registered
under the Act or sold in accordance with Rule 144 promulgated under the Act. In
general, under Rule 144 a person (or persons whose shares are aggregated)
including an Affiliate, who has beneficially owned the shares for two years, may
sell in the open market within any three-month period a number of shares that
does not exceed the greater of (i) 1% of the then outstanding shares of the
Company's Common Stock (approximately 80,000 shares immediately after the
Offering), or (ii) the average weekly trading volume in the Common Stock on the
Nasdaq National Market System during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain limitations on the manner
of sale, notice requirements and availability of current public information
about the Company. A person (or persons whose shares are aggregated) who is
deemed not to have been an Affiliate of the Company at any time during the 90
days preceding a sale by such person and who has beneficially owned his shares
for at least two years, may sell such shares in the public market under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
notice requirements or availability of current information referred to above.
Restricted shares properly sold in reliance upon Rule 144 are thereafter freely
tradeable without restrictions or registration under the Act, unless thereafter
held by an Affiliate of the Company.
The Company has reserved an aggregate of 800,000 shares of Common Stock for
issuance pursuant to the Stock Plan and 100,000 shares for issuance under the
Stock Purchase Plan and the Company intends to register such shares on Form S-8
following the Offering. Subject to restrictions imposed pursuant to the Stock
Plan and the Stock Purchase Plan, shares of Common Stock issued pursuant to the
Stock Plan or Stock Purchase Plan after the effective date of any Registration
Statement on Form S-8 will be available for sale in the public market without
restriction to the extent they are held by persons who are not Affiliates of the
Company, and by Affiliates pursuant to Rule 144.
The Company issued Warrants to purchase 450,000 shares of Common Stock in
connection with its issuance of the Subordinated Notes. The Company has agreed
with the holders of these Warrants to file a shelf registration statement
providing for the resale of the Warrants within 60 days of the effectiveness of
this Registration Statement and to keep the Registration Statement effective
until April 2, 2000. Only warrant holders who have agreed to a 180-day lock-up
with the Company may include shares of Common Stock in the shelf registration
statement.
Prior to the Offering, there has been no trading market for the Common
Stock. No prediction can be made as to the effect, if any, that future sales of
shares pursuant to Rule 144 or otherwise will have on the market price
prevailing from time to time. Sales of substantial amounts of Common Stock into
the public market following the Offering could adversely affect the then
prevailing market price. All of the 6,000,000 shares of Common Stock held by Mr.
Rensin will be eligible for sale under Rule 144 commencing 90 days after
consummation of the Offering. Mr. Rensin has agreed that he will not sell or
otherwise transfer any shares of Common Stock to the public for 180 days after
the Offering without the prior written consent of Ferris, Baker Watts,
Incorporated on behalf of the Underwriters. See "Underwriting."
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to each of the underwriters named below (the
"Underwriters"), for whom Ferris, Baker Watts, Incorporated and Boenning &
Scattergood, Inc. are acting as representatives (the "Representatives"), and
each of the Underwriters has severally agreed to purchase from the Company the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Ferris, Baker Watts, Incorporated................................................
Boenning & Scattergood, Inc......................................................
Total.......................................................................... 2,000,000
----------
----------
</TABLE>
The nature of the respective obligations of the Underwriters is such that
all of the shares of Common Stock must be purchased if any are purchased. The
Underwriting Agreement provides that the obligations of the Underwriters to pay
for and accept delivery of the shares of Common Stock are subject to certain
conditions, including the approval of certain legal matters by counsel.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock initially at the public offering
price set forth on the cover page of this Prospectus and to certain selected
dealers at such price less a concession not to exceed $ per share; that the
Underwriters may allow, and such selected dealers may reallow, a concession to
certain other dealers not to exceed $ per share; and that after the
commencement of the Offering, the public offering price and the concessions may
be changed.
Mr. Rensin has granted the Underwriters an option to purchase in the
aggregate up to 300,000 additional shares of Common Stock solely to cover
over-allotments, if any. The option may be exercised in whole or in part at any
time within 30 days after the date of this Prospectus. To the extent the option
is exercised, the Underwriters will be severally committed, subject to certain
conditions, to purchase the additional shares of Common Stock in proportion to
their respective purchase commitments as indicated in the preceding table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and, where such
indemnification is unavailable, to contribute to payments that the Underwriters
may be required to make in respect of such liabilities.
The Company, the executive officers, directors and stockholder of the
Company, and the holders of the Warrants have agreed that they will not offer,
sell, contract to sell or grant an option to purchase or otherwise dispose of
any shares of the Company's Common Stock, options to acquire shares of Common
Stock or any securities exercisable for, or convertible into Common Stock owned
by them, for a period of 180 days from the date of this Prospectus, without the
prior written consent of Ferris, Baker Watts, Incorporated. The Company also has
agreed not to offer, sell or issue any shares of Common Stock, options to
acquire Common Stock or any securities exercisable for, or convertible into
Common Stock, for a period of 180 days from the date of this Prospectus, without
the prior written consent of Ferris, Baker Watts, Incorporated, except that the
Company may issue securities pursuant to the Company's stock option and
incentive plans.
The Representatives acted as agent in the placement of the Subordinated
Notes and Warrants and in connection therewith received fees of $400,000 plus
reimbursement of expenses. An affiliate of one of the Placement Agents purchased
$600,000 principal amount of the Subordinated Notes and Warrants to purchase
54,000 Shares of Common Stock on the same terms as all other investors in the
private placement.
53
<PAGE>
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price for the shares of Common Stock included in
this Offering has been determined by negotiation among the Company and the
Representatives. Among the factors considered in determining such price were the
history of and prospects for the Company's business and the industry in which it
operates, an assessment of the Company's management, past and present revenues
and earnings of the Company, the prospects for growth of the Company's revenues
and earnings and currently prevailing conditions in the securities markets,
including current market valuations of publicly traded companies which are
comparable to the Company. There can be no assurance, however, that the prices
at which the shares of Common Stock will sell in the public market after this
Offering will not be lower than the price at which it is sold by the
Underwriters.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Certain persons participating in the Offering may over allot or engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock, including entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting any purchase for the purpose of pegging, fixing
or maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the Offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
Offering when the Common Stock sold by the syndicate member is purchased in
syndicate covering transactions. Any of the transactions described above may
result in the maintenance of the price of the Common Stock at a level above that
which might otherwise prevail in the open market. Such stabilizing activities,
if commenced, may be discontinued at any time.
The Company has also agreed to pay the Representatives a non-accountable
expense allowance equal to 1% of the gross proceeds to the Company for expenses
in connection therewith.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock are being passed upon for the Company by Piper & Marbury L.L.P.,
Baltimore, Maryland. Certain legal matters will be passed upon for the
Underwriters by Venable, Baetjer and Howard, LLP, Baltimore, Maryland.
EXPERTS
The financial statements for each of the years ended December 31, 1995, 1996
and 1997 included in this Prospectus have been audited by Grant Thornton LLP,
independent certified public accountants, as stated in their reports thereon
appearing elsewhere herein, and are included in reliance on their authority as
experts in accounting and auditing.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
On November 11, 1997, the Audit Committee of the Board of Directors
recommended the appointment of Grant Thornton LLP as the Company's auditors for
the years ended December 31, 1995, 1996 and 1997. The Board of Directors
previously had appointed Arthur Andersen L.L.P. ("Andersen") for the 1995 and
1996 financial statements. The reports of Andersen on the financial statements
of the Company for each of the two years in the period ended December 31, 1996,
did not contain any adverse opinion or disclaimer of an opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the two fiscal years in the period ended December 31, 1996, and the
subsequent interim periods preceding the Company's decision, there were no
disagreements with Andersen on any matter of
54
<PAGE>
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure or any reportable events (as that term is used in Regulation
S-K, Item 304).
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus, which is a part of
the Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is
hereby made to the Registration Statement and the exhibits and schedules filed
as a part thereof. Statements contained in the Prospectus concerning the
provisions or contents of any contract, agreement or any other document referred
to herein are not necessarily complete. With respect to each such contract,
agreement or document filed as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description of the matters
involved, and each statement shall be deemed qualified in its entirety by such
reference to the copy of the applicable document filed with the Commission. A
copy of the Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following Regional Offices of the Commission: New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048; and
Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of the Registration Statement and the exhibits and schedules
thereto can be obtained from the Public Reference Section of the Commission upon
payment of prescribed fees. The Commission maintains an Internet web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The address of
that site is http://www.sec.gov.
Prior to filing the Registration Statement of which this Prospectus is a
part, the Company was not subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Upon effectiveness of the Registration Statement, the Company will become
subject to the informational and periodic reporting requirements of the Exchange
Act, and in accordance therewith, will file periodic reports, proxy statements
and other information with the Commission. Such periodic reports, proxy
statements and other information will be available for inspection and copying at
the public reference facilities and other regional offices referred to above.
The Company intends to register the securities offered by the Registration
Statement under the Exchange Act simultaneously with the effectiveness of the
Registration Statement and to furnish its shareholders with annual reports
containing audited financial statements and quarterly reports for the first
three fiscal quarters of each fiscal year containing unaudited interim financial
information.
55
<PAGE>
CREDITRUST CORPORATION
CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS............................... F-2
FINANCIAL STATEMENTS.............................................................
Balance Sheets as of December 31, 1995, 1996 and 1997.......................... F-3
Statements of Earnings for the years ended
December 31, 1995, 1996 and 1997............................................. F-4
Statements of Stockholder's Equity for the years ended December 31, 1995, 1996,
and 1997..................................................................... F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997......................................................................... F-6
Notes to Financial Statements.................................................. F-7-F-17
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Creditrust Corporation
We have audited the accompanying balance sheets of Creditrust Corporation (the
Company) as of December 31, 1995, 1996 and 1997, and the related statements of
earnings, stockholder's equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Creditrust Corporation as of
December 31, 1995, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Grant Thornton LLP
Vienna, Virginia
February 24, 1998
F-2
<PAGE>
CREDITRUST CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1995 1996 1997
------------ ------------ ------------
ASSETS
Cash.................................................................... $ 548,234 $ 475,635 $ 769,576
Accounts Receivable..................................................... 90,000 13,250 55,766
Income Taxes Receivable................................................. -- 6,414 200,163
Finance Receivables..................................................... 1,852,110 6,603,735 5,049,839
Prepaid Expenses........................................................ 17,215 2,813 59,122
Property and Equipment.................................................. 221,312 469,001 1,434,218
Deferred Costs.......................................................... -- -- 534,700
Other Assets............................................................ 9,380 2,700 100,852
------------ ------------ ------------
Total Assets............................................................ $ 2,738,251 $ 7,573,548 $ 8,204,236
------------ ------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Due to Participants..................................................... $ 947,454 $ 84,131 $ 51,181
Servicing Remittances Due............................................... -- -- 101,358
Income Taxes Payable.................................................... 109,038 -- --
Accounts Payable and Accrued Expenses................................... 112,176 457,186 653,065
Notes Payable........................................................... -- 3,792,842 2,105,972
Capitalized Lease Obligations........................................... 61,749 40,744 972,342
Deferred Income......................................................... -- 895,449 895,449
Lease Incentives........................................................ -- 72,000 266,630
Deferred Tax Liability.................................................. 373,715 623,177 1,093,846
------------ ------------ ------------
Total Liabilities....................................................... 1,604,132 5,965,529 6,139,843
Stockholder's Equity
Preferred stock, $.01 par value; 5,000,000 shares authorized, none
issued and outstanding.............................................. -- -- --
Common stock, $.01 par value; 20,000,000 shares authorized, 6,000,000
shares issued and outstanding....................................... 60,000 60,000 60,000
Paid-in capital....................................................... 52,824 52,824 52,824
Retained earnings..................................................... 1,021,295 1,495,195 1,951,569
------------ ------------ ------------
Total Stockholder's Equity.............................................. 1,134,119 1,608,019 2,064,393
------------ ------------ ------------
Total Liabilities and Stockholder's Equity.............................. $ 2,738,251 $ 7,573,548 $ 8,204,236
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CREDITRUST CORPORATION
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE
Income on finance receivables......................................... $ 4,559,542 $ 5,521,063 $ 7,245,744
Servicing fees........................................................ -- -- 2,580,200
------------ ------------ ------------
4,559,542 5,521,063 9,825,944
EXPENSES
Personnel............................................................. 1,846,605 2,617,862 5,922,172
Contingency legal and court costs..................................... 374,492 212,530 320,104
Communications........................................................ 404,021 573,118 911,508
Rent and other occupancy.............................................. 239,603 382,020 853,344
Professional fees..................................................... 117,094 155,754 504,003
General and administrative............................................ 132,244 193,221 270,509
Portfolio repurchase costs............................................ -- 383,736 --
------------ ------------ ------------
3,114,059 4,518,241 8,781,640
------------ ------------ ------------
EARNINGS FROM OPERATIONS................................................ 1,445,483 1,002,822 1,044,304
OTHER INCOME (EXPENSE)
Interest and other.................................................... 20,533 74,307 14,755
Interest expense...................................................... (269,634) (287,530) (377,410)
------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES............................................ 1,196,382 789,599 681,649
PROVISION FOR INCOME TAXES.............................................. 462,759 315,699 225,275
------------ ------------ ------------
NET EARNINGS............................................................ $ 733,623 $ 473,900 $ 456,374
------------ ------------ ------------
EARNINGS PER COMMON SHARE............................................... $ .12 $ .08 $ .08
------------ ------------ ------------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING DURING THE YEAR.... 6,000,000 6,000,000 6,000,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CREDITRUST CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ADDITIONAL
COMMON COMMON PAID-IN PREFERRED PREFERRED RETAINED
SHARES STOCK CAPITAL SHARES STOCK EARNINGS TOTAL
---------- ----------- ----------- ----------- ----------- ------------ ------------
Balance at January 1,
1995...................... 6,000,000 $ 60,000 $ 52,824 -- $ -- $ 287,672 $ 400,496
Net Earnings for the Year... -- -- -- -- 733,623 733,623
---------- ----------- ----------- ----------- ----------- ------------ ------------
Balance at December 31,
1995...................... 6,000,000 60,000 52,824 -- -- 1,021,295 1,134,119
Net Earnings for the Year... -- -- -- -- -- 473,900 473,900
---------- ----------- ----------- ----------- ----------- ------------ ------------
Balance at December 31,
1996...................... 6,000,000 60,000 52,824 -- -- 1,495,195 1,608,019
Net Earnings for the Year... -- -- -- -- -- 456,374 456,374
---------- ----------- ----------- ----------- ----------- ------------ ------------
Balance at December 31,
1997...................... 6,000,000 $ 60,000 $ 52,824 -- $ -- $ 1,951,569 $ 2,064,393
---------- ----------- ----------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ----------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CREDITRUST CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings....................................................... $ 733,623 $ 473,900 $ 456,374
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation................................................... 72,189 84,463 208,643
Deferred tax expense........................................... 321,247 249,462 470,670
Loss on abandoned property..................................... 28,880 -- --
Changes in assets and liabilities
(Increase) decrease in accounts receivable................... (90,000) 76,750 (42,516)
(Increase) decrease in other assets.......................... (9,380) 6,680 (98,152)
(Increase) decrease in prepaid expenses...................... (12,895) 14,402 (56,309)
(Decrease) increase in accounts payable and accrued
expenses................................................... (109,319) 345,010 195,879
Increase in servicing remittances due........................ -- -- 101,358
Increase in lease incentives................................. -- 72,000 194,630
Increase (decrease) in current income taxes payable/
receivable................................................. 47,512 (115,452) (193,749)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 981,857 1,207,215 1,236,828
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Collections applied to principal on finance receivables............ 669,770 831,505 2,111,394
Purchases of property and equipment................................ (75,051) (332,152) (122,668)
Acquisitions of finance receivables................................ (1,179,430) (5,583,130) (557,498)
Deferred gain on sale of finance receivables....................... -- 895,449 --
------------- ------------- -------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES.................. (584,711) (4,188,328) 1,431,228
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings from participants......................... 956,563 -- --
Principal payments on borrowings from participants................. (1,086,865) (863,323) (32,950)
(Payments on) proceeds from notes payable, net..................... (7,705) 3,771,837 (1,806,465)
Deferred costs..................................................... -- -- (534,700)
------------- ------------- -------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES.................. (138,007) 2,908,514 (2,374,115)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH...................................... 259,139 (72,599) 293,941
------------- ------------- -------------
CASH AT BEGINNING OF YEAR............................................ 289,095 548,234 475,635
------------- ------------- -------------
CASH AT END OF YEAR.................................................. $ 548,234 $ 475,635 $ 769,576
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
NOTE A--ORGANIZATION AND BUSINESS
Creditrust Corporation (the Company), formerly Oxford Capital Corporation,
was incorporated in Maryland on October 17, 1991. The Company acquires and
liquidates consumer finance receivables originated and charged off by national
financial and retail institutions. The Company's customers are located
throughout the United States. The Company does not currently extend credit or
originate loans. Acquisitions are financed by operations and through loans from
third parties.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Company's accounts are presented on the accrual basis of accounting in
accordance with generally accepted accounting principles.
SIGNIFICANT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Significant estimates have been made by management with respect to the
collectibility of future cash flows of portfolios. Actual results could differ
from these estimates making it reasonably possible that a change in these
estimates could occur within one year. On a quarterly basis, management reviews
the estimate of future collections, and it is reasonably possible that its
assessment of collectibility may change based on actual results and other
factors.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities purchased with a maturity
of three months or less to be cash equivalents.
FINANCE RECEIVABLES/INTEREST INCOME
Finance receivables consist of portfolios of charged-off consumer
receivables and are initially recorded at acquisition cost. The Company uses the
effective interest rate method of accounting for finance receivables and
recognizes interest income based on the estimated yield for each individual
portfolio. The estimated yield for each portfolio is based on estimates of
future cash flows from collections, and actual cash flows may vary from current
estimates. To the extent the estimated future cash flow, discounted at the
estimated yield increases or decreases, the Company adjusts the yield
accordingly. To the extent the estimated future cash flow, discounted at the
estimated yield is less than the recorded investment, a provision for loss would
be recorded by the Company.
SERVICING REVENUE
Servicing fees are recognized when earned based on a percentage of monthly
net collections from a servicing contract. Net collections due the owner under
the servicing contract are paid after month-end
F-7
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and are recorded as servicing remittances due. The Company does not service
accounts for third parties except in connection with one significant portfolio.
DEFERRED COSTS
The Company accounts for expenditures, principally legal and accounting fees
in connection with its preparation to sell stock in an initial public offering
as capitalized and deferred until an offering occurs. At that time, the costs
will be netted against the capital raised in the offering. The Company accounts
for legal and professional fees in connection with its initial securitization
efforts as capitalized and deferred until it closes a securitization. At that
time, the costs may be either netted against the proceeds of the securitization
or amortized over the term of the financing, depending on the exact structure of
the securitization.
DUE TO PARTICIPANTS DEBT/INTEREST EXPENSE
The Company sold rights to a portion of the future proceeds from receivable
collections to certain related parties and third parties. The Company accounted
for the financings as loans. The loans are repaid using only the future
collections of the portfolios. The Company has no obligation to repay the loans
from funds outside the collections on the portfolios. Using the Company's
internally developed cash flow model, future payments on loans were projected.
These projections have been utilized to impute an effective interest rate on
each loan. Monthly interest expense is calculated based on the imputed rates.
The projections of future payments are based on estimates, and ultimate payments
may vary from current estimates.
DEPRECIATION
Property and equipment, consisting of computer equipment, furniture and
fixtures and leasehold improvements, are stated at cost and are depreciated
using a straight-line method of depreciation (using a half-year assumption for
the year of purchase) over the lives of the assets, which range from five to
seven years. Leasehold improvements are amortized over the shorter of the lease
term or estimated useful life. Accelerated methods are used for tax purposes.
REPORTING COMPREHENSIVE INCOME
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This Statement
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. This Statement requires all items required
to be recognized under accounting standards as components of comprehensive
income, to be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement. The Statement requires that an enterprise classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Reclassification of financial statements for earlier
F-8
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
periods provided for comparative purposes is required. The Company will comply
with the disclosure requirements of SFAS No. 130 in fiscal year 1998.
STOCK SPLIT/AUTHORIZATION
On February 19, 1998, the Company effected a 60,000-for-1 stock split of its
common stock in the form of a stock dividend. Pursuant to the split, the Company
increased the number of shares of common stock authorized for issuance from
1,000 to 20,000,000. The stated par value of each common share was changed from
no par to $0.01. In addition, the Company authorized 5,000,000 shares of
preferred stock, with a par value of $0.01.
The accompanying financial statements, including stockholder's equity and
per share amounts, give retroactive effect to the stock split.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share" (EPS). The Statement replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS calculation. At December 31, 1997 the Company had no common
stock equivalents.
NOTE C--FINANCE RECEIVABLES
The Company acquires charged off consumer receivables at a discount from the
actual principal balance. The following summarizes the change in finance
receivables as of December 31:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Balance, at beginning of year....................... $ 1,342,450 $ 1,852,110 $ 6,603,735
Acquisitions of finance receivables............... 1,179,430 5,583,130 557,498
Collections applied to principal on finance
receivables..................................... (669,770) (831,505) (2,111,394)
------------ ------------ ------------
Balance, at end of year............................. $ 1,852,110 $ 6,603,735 $ 5,049,839
------------ ------------ ------------
</TABLE>
To the extent a specific portfolio's estimated future cash flow, discounted
at the estimated yield rate, is less than the recorded investment, a provision
for loss would be recorded. As of December 31, 1995, 1996 and 1997, no provision
for loss has been recorded.
CHANGE IN ESTIMATE
The Company continuously monitors its projection models with a view towards
enhancing predictability of both the amount and timing of collections. In 1995
and 1996, the principal model relied on the best available information at the
time, largely based on portfolio-wide past performance characteristics. After
extensive statistical analysis of specific portfolio performances in 1997, the
Company implemented a refinement in its analysis of projected collections used
to compute the effective interest rate for income
F-9
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
NOTE C--FINANCE RECEIVABLES (CONTINUED)
recognition. The refinement included portfolio-specific estimates and had the
effect of reducing total future projected cash flows on a portfolio-wide basis.
Management believes the change reflects a more predictable and conservative
estimate. The total effect of the change in estimate was to decrease net income
for 1997 by approximately $700,000.
NOTE D--FAIR VALUE OF FINANCIAL INSTRUMENTS
The accompanying financial statements include various estimated fair value
information as of December 31, 1995, 1996 and 1997, as required by SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." Such information, which
pertains to the Company's financial instruments, is based on the requirements
set forth in the Statement and does not purport to represent the aggregate net
fair value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
fair value.
CASH
The carrying amount approximates fair value.
ACCOUNTS RECEIVABLE
Accounts receivable for the years 1996 and 1997 represent loans to
non-stockholder employees of the Company. The carrying amount of such loans
approximates the fair value because of the nature of the transactions and the
rates of interest corresponding to quoted market prices available to the
Company.
FINANCE RECEIVABLES
The Company records finance receivables at cost, which is discounted from
the actual principal balance. The fair value of finance receivables was
estimated based upon discounted expected cash flows. Finance receivable
portfolios are reviewed by management on a quarterly basis to ensure the
discount rate reflects management's best estimate of expected future cash flows.
The discount rate is based upon an acceptable rate of return adjusted for
specific risk factors inherent in each individual finance receivable portfolio.
The carrying value of finance receivables approximates fair value at December
31, 1995, 1996 and 1997.
DUE TO PARTICIPANTS
Due to participants represents loans to the Company from selling the rights
to a portion of the future income on certain finance receivable portfolios. The
Company accounts for these transactions as loans, imputing the interest rate
using the amounts financed and the projected future payments on the debt. At
December 31, 1995, 1996, and 1997 the carrying amount of due to participants
approximates fair value.
NOTES PAYABLE
Quoted market prices for the same or similar issues or the current rate
offered to the Company for debt of the same remaining maturities are used to
estimate the fair value of the Company's notes payable. At December 31, 1996 and
1997, the carrying amount of the notes payable approximates fair value.
F-10
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
NOTE E--PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- ------------
<S> <C> <C> <C>
Computer equipment..................................... $ 142,552 $ 198,710 $ 845,215
Furniture and fixtures................................. 152,565 410,240 855,631
Leasehold improvements................................. -- 13,145 95,109
---------- ----------- ------------
295,117 622,095 1,795,955
Less accumulated depreciation and amortization......... (73,805) (153,094) (361,737)
---------- ----------- ------------
$ 221,312 $ 469,001 $ 1,434,218
---------- ----------- ------------
</TABLE>
NOTE F--DEFERRED COSTS
The Company has deferred certain costs related to ongoing securitization and
initial public offering efforts. Deferred costs consist of the following at
December 31, 1997:
<TABLE>
<S> <C>
Securitization.................................................... $ 331,595
Initial public offering........................................... 203,105
---------
$ 534,700
---------
</TABLE>
NOTE G--DUE TO PARTICIPANTS
The Company periodically finances purchases of finance receivables by
selling rights to a portion of the future collections on the receivables. The
Company accounts for the financings as loans, imputing the interest rate using
the amounts financed and the projected future payments on the debt. As of
December 31, 1995, 1996 and 1997, the balance of due to participants was
$947,454, $84,131 and $51,181, respectively, which represents the discounted
estimated future payments to participants. Interest expense due to participants
was $269,634, $204,448 and $20,574 for the years ended December 31, 1995, 1996
and 1997, respectively.
NOTE H--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December
31:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Accounts payable............................................................. $ 43,504 $ 216,215 $ 238,684
Accrued other liabilities.................................................... 22,908 68,425 105,350
Accrued salaries, taxes and fringe benefits.................................. 45,764 172,546 309,031
---------- ---------- ----------
$ 112,176 $ 457,186 $ 653,065
---------- ---------- ----------
</TABLE>
F-11
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1995, 1996 AND 1997
NOTE I--NOTES PAYABLE
On September 23, 1996, the Company entered into a credit facility with a
commercial bank to provide acquisition financing for finance receivables. As of
December 31, 1996 and 1997, the Company had borrowed $3,792,842 and $2,105,972,
respectively, net of principal payments made, pursuant to this facility. Each
advance is repayable over 24 equal monthly installments. All the advances have
final installments due between October 1998 and March 1999. Interest is payable
monthly at 1% over the bank's prime rate, which was 9.25% and 9.5% at December
31, 1996 and 1997, respectively. The Company has pledged all its receivables,
property and intangible assets to secure the facility which is guaranteed by the
Company's stockholder. The facility contains certain covenants, the most
restrictive ones of which stipulate a minimum level of net worth, cash flow to
current funded debt and a debt service coverage ratio. The Company had complied
with all covenants as of December 31, 1996 and 1997. As of December 31, 1996 and
1997, interest expense associated with this facility totaled $59,827 and
$296,189, respectively. As of December 31, 1996, the amount available to the
Company under this agreement totaled $207,158. There was no amount available to
the Company under this agreement as of December 31, 1997.
For the year ended December 31, 1997, required principal payments were as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 2,011,838
1999............................................................................ 94,134
------------
$ 2,105,972
------------
</TABLE>
NOTE J--CAPITALIZED LEASE OBLIGATIONS
The Company has entered into capital lease obligations to finance the
purchase of computer equipment and furniture. The terms of these leases range
from 36 to 48 months. The balance due on the leases was $61,749, $40,744 and
$972,342 as of December 31, 1995, 1996 and 1997, respectively. Interest rates
range from 7% to 12.7%; and interest expense was $739, $3,629 and $60,647 in
1995, 1996 and 1997, respectively.
For the year ended December 31, 1997, future minimum annual lease payments
under capital leases together with their present value were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 325,324
1999............................................................................ 305,534
2000............................................................................ 305,534
2001............................................................................ 239,307
------------
Total minimum lease payments.................................................... 1,175,699
Amount representing interest.................................................... (203,357)
------------
Present value of minimum lease payments......................................... $ 972,342
------------
</TABLE>
F-12
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
NOTE K--INCOME TAXES
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities, following the guidance of SFAS No.
109, "Accounting for Income Taxes." These differences are primarily the result
from the use of the cost recovery method of accounting for finance receivables
for income tax purposes versus the effective interest rate method for financial
reporting purposes.
The provision for income taxes consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Current expense (refund)................................
Federal............................................... $ 115,811 $ 52,794 $ (161,050)
State................................................. 25,701 13,443 (39,113)
---------- ---------- -----------
141,512 66,237 (200,163)
Deferred
Federal............................................... 263,020 204,246 346,519
State................................................. 58,227 45,216 78,919
---------- ---------- -----------
321,247 249,462 425,438
---------- ---------- -----------
Total................................................... $ 462,759 $ 315,699 $ 225,275
---------- ---------- -----------
</TABLE>
The net deferred tax liability consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ------------ ------------
<S> <C> <C> <C>
Deferred tax assets
Due to/from participants............................ $ 323,714 $ 29,213 $ 7,378
Deferred income..................................... -- 345,822 345,822
Net operating loss carryforward..................... -- -- 230,674
Other............................................... 43,534 71,340 147,308
---------- ------------ ------------
Gross deferred tax assets............................. 367,248 446,375 731,182
Deferred tax liabilities
Finance receivables................................. 712,430 1,026,765 1,733,864
Other............................................... 28,533 42,787 91,164
---------- ------------ ------------
Gross deferred tax liabilities........................ 740,963 1,069,552 1,825,028
---------- ------------ ------------
Net deferred tax liability............................ $ 373,715 $ 623,177 $ 1,093,846
---------- ------------ ------------
</TABLE>
F-13
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
NOTE K--INCOME TAXES (CONTINUED)
The differences between the total income tax expense and the income tax
expense computed using the federal income tax rate were as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
Pretax income.......................................... $ 1,196,382 $ 789,599 $ 681,649
------------ ---------- ----------
Computed federal income taxes at 34%................... 406,770 268,464 231,761
Computed state income taxes, net of federal benefits... 55,272 36,479 31,492
Permanent differences.................................. 717 10,756 (37,978)
------------ ---------- ----------
Income tax expense..................................... $ 462,759 $ 315,699 $ 225,275
------------ ---------- ----------
</TABLE>
In 1997, the Company generated a net operating loss of approximately
$1,114,000 for tax purposes, of which approximately $517,000 will be carried
back to prior years resulting in a refund of approximately $200,000. The
remaining tax loss of approximately $597,000 is available to offset future
taxable earnings of the Company and expires on December 31, 2012.
NOTE L--DEFERRED INCOME
Occasionally, the Company purchases portfolios with commitments from a third
party to purchase a portion of the newly acquired portfolio. During 1996, a
complaint was filed against the Company by a buyer. On June 16, 1997, management
settled the litigation which resulted in the complaint being dismissed, and the
Company will repurchase the portfolio for $1,037,819, as adjusted for
collections until execution of the repurchase. As a result, management has
deferred the gain on the transaction totaling $895,449.
On February 9, 1998, the Company purchased the portfolio that was the
subject of the deferral of income in 1996 for $1,037,819, and immediately resold
the portfolio for $800,000 to an unrelated major credit card issuer.
Consequently, in the first quarter of 1998, the Company will record a gain net
of taxes on the resale and recognition of previously deferred income as follows:
<TABLE>
<S> <C>
Proceeds from resale............................................ $ 800,000
Deferred income recognized...................................... 895,449
Cost of portfolio............................................... (1,037,819)
----------
Gain on resale.................................................. 657,630
Deferred taxes.................................................. (253,976)
----------
Gain after taxes................................................ $ 403,654
----------
</TABLE>
NOTE M--COMMITMENTS AND CONTINGENCIES
LEASES
The Company's former headquarters was leased until December 31, 1996. Rent
expense under this lease for the years ended December 31, 1995 and 1996, was
$131,275 and $120,983, respectively.
F-14
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
NOTE M--COMMITMENTS AND CONTINGENCIES (CONTINUED)
In January 1996, the Company entered into an agreement to lease new
headquarters and collection facility to accommodate future expansion. The lease
commenced on May 1, 1996. The lease also provided reimbursement to the Company
of $10,000 per month to cover rent expense at the former headquarters from the
date of occupancy through December 31, 1996, which totaled $80,000 for the year.
The Company recorded this amount as a lease incentive and is amortizing it
straight-line over the term of the new lease. Rent expense for this lease for
the years ended December 31, 1996 and 1997, net of the offset amortized, was
$140,027 and $210,040, respectively.
In September 1997, the Company entered into an agreement to lease additional
office space for its operations center to accommodate future expansion. The
lease required no payments for the first six months. The Company recorded the
free rent period as a lease incentive and is amortizing it straight-line over
the term of the lease. The Company issued a $250,000 letter of credit as a
deposit on the lease. This letter of credit expires January 10, 1999, unless
renewed. Rent expense for this lease for 1997 was $331,932 including $204,541 of
accrued lease incentive.
Future minimum operating lease commitments, net of reimbursements, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 641,229
1999............................................................................ 667,953
2000............................................................................ 695,948
2001............................................................................ 725,219
2002............................................................................ 756,127
------------
$ 3,486,476
------------
</TABLE>
LITIGATION
The Company is involved in various litigation incurred in the ordinary
course of business. Management believes these items, individually or in
aggregate, will not have a material, adverse impact on the Company.
NOTE N--SERVICING REVENUE
In June 1997, the Company arranged for a commercial bank to acquire, under
an exclusive purchasing agent agreement, a portfolio of approximately $737
million of charged-off balances of Visa and Mastercard accounts originated by a
major money center bank. In August 1997, the Company closed the acquisition for
the bank and acquired the exclusive rights to the servicing, re-marketing and
securitization of, and a majority interest in the underlying recoverable value
of the portfolio. Under the contract, the Company receives servicing income of
85% of net collections through February 1998, 60% of collections until the bank
receives a required amount under the contract which reduces over time by
collections remitted to the bank estimated to be for 18 to 24 months, and 90% of
net collections thereafter in perpetuity. The Company may also cause the resale
or securitization of the portfolio and earns disposition fees of 90% of proceeds
over the bank's required amount. The bank owns the receivables, and the Company
is under no obligation to acquire the portfolio. The contract contains servicer
performance provisions, the most restrictive of which require minimum cumulative
owner's remittance targets until the bank receives its
F-15
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
NOTE N--SERVICING REVENUE (CONTINUED)
targeted remittances. Should the servicer fail to meet these provisions, the
bank could remove the Company as servicer.
NOTE O--RELATED PARTY TRANSACTIONS
The Company remitted payments on loans due participants (including interest)
of approximately $416,000, $743,000 and $58,000 to related parties during the
years ended December 31, 1995, 1996 and 1997, respectively.
Additionally, included in accounts receivable are amounts due from
non-stockholder employees of $13,250 and $55,766 as of December 31, 1996 and
1997, respectively.
The Company also remitted a payment of $66,329 to a non-stockholder related
party as a finder's fee in connection with the servicing contract.
NOTE P--RETIREMENT PLAN
The Company has a profit-sharing retirement plan which conforms to the
provisions of Section 401(a) of the Internal Revenue Code. The plan covers all
full-time employees after one year of service and allows employees voluntarily
to defer a certain percentage of their income through contributions to the plan.
The Company matches up to 25% of the first 10% of an employee's deferral. For
the years ended December 31, 1995, 1996 and 1997, the Company's contribution was
$5,203, $4,379 and $3,168, respectively.
NOTE Q--SUPPLEMENTAL CASH FLOWS INFORMATION
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
The Company paid the following amounts for interest and income taxes during
the year ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest................................................. $ 269,634 $ 287,530 $ 377,410
---------- ---------- ----------
Income taxes............................................. $ 94,000 $ 181,681 $ 8,000
---------- ---------- ----------
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company financed the following purchases of property and equipment with
capitalized lease obligations during the years ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ------------
<S> <C> <C> <C>
Equipment and furniture purchases......................... $ 64,081 $ -- $ 1,051,193
</TABLE>
F-16
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
NOTE R--SUBSEQUENT EVENTS (UNAUDITED)
ISSUANCE OF THE SENIOR SUBORDINATED NOTES AND ATTACHED WARRANTS
In April 1998, the Company sold $5,000,000 aggregate principal amount of
senior subordinated notes, Series 1998, together with common stock purchase
warrants exercisable for an aggregate of 450,000 shares of the Company's common
stock. Each of the 50 units was sold for $100,000 principal amount for the note
and a warrant exercisable for 9,000 shares.
The notes currently bear an annual interest rate of 10%, payable quarterly;
beginning January 1, 1999, the interest rate increases to 15% annually, payable
monthly. The principal payments on each note will be paid in eight equal
quarterly installments beginning March 31, 1999. Upon the closing of the initial
public offering or change in control of the Company, the notes plus accrued
interest become immediately redeemable. The notes are unsecured, are
subordinated to the Company's existing and future credit facilities and
guaranteed by the Company's sole stockholder.
The warrants are exercisable, at the option of the holder, at the lesser of
$12 or 85% of the Company's initial public offering price. The warrants expire
five years after their issuance.
EMPLOYEE STOCK PURCHASE PLAN
In conjunction with the initial public offering, the Company has reserved a
total of 100,000 shares of common stock for issuance pursuant to the 1998
Creditrust Employee Stock Purchase Plan. The plan is administered by the Board
of Directors and is open to all eligible employees, who will be able to purchase
shares at a discount to the fair market value subject to certain annual
limitations.
STOCK INCENTIVE PLAN
In conjunction with the initial public offering, the Company has reserved a
total of 800,000 shares of common stock for issuance pursuant to the Creditrust
1998 Stock Incentive Plan. The Stock Incentive Plan is administered by the Board
of Directors and provides for the grant of stock options and other stock grants
to directors and to all eligible employees of the Company, including executive
officers and directors. Options granted under the plan are granted on such terms
and at such prices as determined by the Board of Directors, except the per share
exercise price may not be less than the fair market value of the common stock on
the date of the grant. The Board of Directors has the authority to amend or
terminate the plan, provided no such amendment or termination adversely affects
the rights of any holder of any outstanding option without the written consent
of such holder.
In connection with the initial public offering, the Board of Directors
granted nonqualified options to key executives and employees which options are
contingent upon the consummation of the offering.
REVISION TO EMPLOYMENT AGREEMENTS
In conjunction with the initial public offering, the Company revised
employment agreements with two executive officers in April 1998. The employment
agreements entitle each officer to incentive compensation up to $100,000 at the
discretion of the Board of Directors, in addition to annual base compensation.
Each agreement contains non-compete and confidentiality clauses. These
employment agreements are for a term of one year and will automatically renew
for succeeding periods unless sooner terminated.
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 6
Use of Proceeds................................. 12
Dividend Policy................................. 13
Dilution........................................ 14
Capitalization.................................. 15
Selected Financial Data......................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 17
Business........................................ 28
Management...................................... 41
Certain Transactions............................ 47
Principal Stockholders.......................... 48
Description of Capital Stock.................... 49
Shares Eligible for Future Sale................. 52
Underwriting.................................... 53
Legal Matters................................... 54
Experts......................................... 54
Change in Independent Public Accountants........ 54
Available Information........................... 55
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FERRIS, BAKER WATTS
Incorporated
BOENNING & SCATTERGOOD, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses in connection with the distribution
of the securities being registered hereunder, other than underwriting discounts
and commissions:
<TABLE>
<S> <C>
Securities and Exchange Commission Fee............................ $ 11,897
NASD filing fee................................................... 3,950
Blue Sky fees and expenses*....................................... 5,000
Printing and engraving expenses*.................................. 120,000
Legal fees and expenses*.......................................... 250,000
Accounting fees and expenses*..................................... 150,000
Transfer agent and registrar's fees*.............................. 5,000
Miscellaneous expenses*........................................... 16,050
---------
Total*........................................................ $ 550,000
---------
---------
</TABLE>
- ------------------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Amended and Restated Charter of the Company provides that, to the
fullest extent permitted by the MGCL, the Company shall indemnify current and
former directors and officers of the Company against any and all liabilities and
expenses in connection with their services to the Company in such capacities.
The Amended and Restated Charter further mandate that the Company shall advance
expenses to its directors and officers to the full extent permitted by the MGCL.
The Articles of Incorporation also permit the Company, by action of its Board of
Directors, to indemnify its employees and agents with the same scope and effect
as the foregoing indemnification of directors and officers.
The Amended and Restated Charter of the Company provides that, to the
fullest extent permitted by the MGCL, no director or officer of the Company
shall be personally liable to the Company or its stockholders for monetary
damages. Under current MGCL, the effect of this provision is to eliminate the
rights of the Company and its stockholders to recover monetary damages against a
director or officer except for the director or officer's (a) willful misconduct,
(b) knowing violation of any criminal law or of any federal or state securities
law, including (without limitation), any claim of unlawful insider trading or
manipulation of the market for any security, or (c) payment of unlawful
distributions, including dividends and stock redemptions.
The Amended and Restated Charter of the Company authorizes the Company to
purchase liability insurance for its officers and directors and the Company
currently maintains such insurance coverage on behalf of its officers and
directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On April 2, 1998 the Registrant issued in a private placement transaction
$5,000,000 principal amount of Senior Subordinated Notes, Series 1998 and
Warrants to purchase 450,000 shares of Common Stock in a private placement
transaction exempt from registration under Rule 506 of the Securities Act of
1933, as amended. The Placement Agents were Ferris, Baker Watts, Incorporated
and Boenning & Scattergood,
II-1
<PAGE>
Inc. The net proceeds were added to working capital and may be used to accrue
additional distressed consumer Receivables.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement among Creditrust Corporation (the "Company"), Ferris, Baker Watts,
Incorporated and Boenning & Scattergood, Inc.*
3.1 Amended and Restated Charter of the Company.*
3.2 By-Laws of the Company.*
4.1 Form of stock certificate.*
4.2 Form of Senior Subordinated Note, Series 1998
4.3 Form of Common Stock Purchase Warrant
4.4 Senior Subordinated Note Series and Common Stock Warrant Purchase Agreement
4.5 Registration Rights Agreement
5 Opinion of Piper & Marbury L.L.P.*
10.1 Creditrust 1998 Stock Incentive Plan.*
10.2 Creditrust 1998 Employee Stock Purchase Plan.*
10.3 Employment Agreement between the Company and Jefferson Moore.*
10.4 Employment Agreement between the Company and Richard Palmer.*
10.5 Employment Agreement between the Company and Rick Chandler.*
10.6 Employment Agreement between the Company and John Davis.*
10.7 Agreement dated March 13, 1997 by and between Crystal Hill Advisors and the Company.*
10.8 Servicing Agreement, dated August 6, 1997, by and between Creditrust Corporation and Heartland Bank.
10.9 Loan and Security Agreement, dated September 23, 1996, by and between Oxford Capital Corporation and
Signet Bank.
10.10 Lease Agreement, dated January 24, 1996, by and between BRIT Limited Partnership and Oxford Capital
Corporation.
10.11 Lease Agreement, dated January 22, 1997, by and between A&E Partners and Creditrust Corporation.
10.12 First Amendment to Lease, dated February 27, 1997, by and between A&E Partners and Creditrust
Corporation.
16 Letter from Arthur Andersen LLP.*
23.1 Consent of Grant Thornton LLP.
23.2 Consent of Piper & Marbury L.L.P. (included in the opinion filed as Exhibit 5).*
24 Powers of Attorney.
</TABLE>
- ------------------------
* To be filed by amendment.
(b) Financial Statement Schedules:
None.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions of its Amended
and Restated Charter, Bylaws or laws of the State of Maryland or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is
II-2
<PAGE>
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration in reliance upon Rule 403A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Baltimore, State of
Maryland, on April 15, 1998.
<TABLE>
<S> <C> <C>
CREDITRUST CORPORATION
By: /s/ JOSEPH K. RENSIN
-----------------------------------------
Joseph K. Rensin
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on this 15th day of April, 1998.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ JOSEPH K. RENSIN Chairman of the Board,
- ------------------------------ President and Chief April 15, 1998
Joseph K. Rensin Executive Officer
Vice President, Chief
/s/ RICHARD J. PALMER Financial Officer and
- ------------------------------ Treasurer (Principal April 15, 1998
Richard J. Palmer Financial and Accounting
Officer)
*
- ------------------------------ Director April 15, 1998
Frederick W. Glassberg
*
- ------------------------------ Director April 15, 1998
John G. Moran
*
- ------------------------------ Director April 15, 1998
Harry G. Pappas, Jr.
*
- ------------------------------ Director April 15, 1998
Michael S. Witlin
* By: /s/ JOSEPH K. RENSIN
Joseph K. Rensin April 15, 1998
ATTORNEY-IN-FACT
II-4
<PAGE>
Exhibit 4.2
THIS SECURITY IS SUBJECT TO SUBSTANTIAL RESTRICTIONS ON
TRANSFER, AS SET FORTH IN THE RESTRICTIVE TRANSFER LEGENDS
CONTAINED ON PAGES R-10 AND R-11 ON THE REVERSE HEREOF.
CREDITRUST CORPORATION
Senior Subordinated Note, 1998 Series
$5,000,000 No. G-1
Creditrust Corporation, a corporation duly organized and existing under
the laws of the State of Maryland (herein called the "Company," which term
includes any successor to the Company by merger, consolidation, or operation of
law), for value received, hereby promises to pay to the order of Ferris, Baker
Watts, Incorporated, or its registered assigns, the principal sum of Five
Million Dollars ($5,000,000), by making equal quarterly principal repayments in
the amount of $625,000 on the last business day of each calendar quarter
commencing March 31, 1999 and concluding on December 31, 2000 (at which time
this Note will be surrendered to the Company), and to pay interest on the unpaid
principal balance thereon from April 2, 1998 or from and including the most
recent date to which interest has been paid or duly provided for, quarterly
during 1998 on the last business day of June, September, and December,
commencing June 30, 1998, at the rate of 10% per annum, and thereafter monthly,
on the last business day of each month, at the rate of 15% per annum until this
Note has been paid in full. Interest will be paid to the person in whose name
this Note is registered at the close of business on the 15th calendar day of the
month in which the interest is payable. Payment of the principal of and interest
on this Note will be made in same day funds on or prior to the respective
payment dates.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions are incorporated herein
and shall for all purposes have the same effect as if set forth at this place.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under seal.
Dated: April 2, 1998
ATTEST: CREDITRUST CORPORATION
By: (seal)
- --------------------------- ---------------------------
Name: Name:
---------------------- ----------------------------
Title: Title:
---------------------- ----------------------------
F-1
<PAGE>
CREDITRUST CORPORATION
Senior Subordinated Note, 1998 Series
Reverse of Security
Preliminary Statement
$5,000,000 principal amount of Company's Senior Subordinated Notes,
1998 Series (the "Notes") have been issued pursuant to a Senior Subordinated
Note and Warrant Purchase Agreement dated as of April 2, 1998, among Creditrust
Corporation, Ferris, Baker Watts, Incorporated, Boenning & Scattergood, Inc.,
and the Purchasers listed on Exhibit A attached thereto (the "Agreement"). The
Notes are issued subject to the following terms and conditions. Reference is
made to the Agreement for a description of certain additional terms and
conditions pursuant to which the Notes have been issued. Any capitalized term
used herein without a definition shall have the meaning set forth in the
Agreement.
Mandatory Redemption by Company
Subject to the Subordination provisions of this Note, the Notes shall
be redeemed by the Company in full at a redemption price of 100% of the
principal amount and all unpaid interest accrued to but not including the
redemption date upon: (a) the closing of an initial public offering of the
Company's Common Stock pursuant to a registration statement filed with the
Securities and Exchange Commission, or (ii) a "Change-in-Control" of the
Company.
For purposes hereof, a "Change-in-Control" shall occur when: (i) all or
substantially all of the Company's assets are sold (other than in the ordinary
course of business, which shall include, without limitation, any financing or
securitization of, and/or master servicing or seller servicing arrangement
covering, any or all of the Company's assets), as an entirety to any person or
related group of persons other than Joseph K. Rensin or a corporation,
partnership, limited liability company or other business entity in which Joseph
K. Rensin, individually or in concert with others, has a controlling interest;
(ii) there shall be consummated any consolidation or merger of the Company (A)
in which the Company is not the continuing or surviving corporation (other than
a consolidation or merger with a wholly owned subsidiary of the Company in which
all shares of Common Stock outstanding immediately prior to the effectiveness
thereof are changed into or exchanged for the same consideration) or (B)
pursuant to which the Company's Common Stock would be converted into cash,
securities or other property, in each case, other than a consolidation or merger
of the Company in which the holders of the Company's Common Stock immediately
prior to the consolidation or merger have, directly or indirectly, at least a
majority of the total voting power of all classes of capital stock entitled to
vote generally in the election of directors of the continuing or surviving
corporation immediately after such consolidation or merger in substantially the
same proportion as their ownership of common stock
R-1
<PAGE>
immediately before such transaction; or (iii) any person, or any persons acting
together which would constitute a "group" for purposes of Section 13(d) of the
Exchange Act (a "Group"), together with any Affiliates thereof, shall
beneficially own (as defined in Rule 13d-3 under the Exchange Act) at least 50%
of the total voting power of all classes of capital stock of the Company
entitled to vote generally in the election of directors of the Company, except
for a person or Group in which Joseph K. Rensin, individually or in connection
with others, has a controlling interest.
Subordination; Restrictions Concerning Subordinated Indebtedness
The indebtedness evidenced by this Note is, in all respects,
subordinate and subject in right of payment to the prior payment in full of all
Senior Indebtedness of the Company, and this Note is issued subject to the
following provisions respect thereto. Each Holder of this Note by accepting the
same, (a) agrees to and shall be bound by such provisions, (b) authorizes and
directs Ferris, Baker Watts Incorporated on his behalf to take such action as
may be necessary or appropriate to effectuate or confirm the subordination so
provided, and (c) appoints Ferris, Baker Watts Incorporated his attorney-in-fact
for any and all such purposes, including without limitation the execution and
delivery of any consents or instruments that may be required by the Company's
existing or future holders of Senior Indebtedness with respect to this
indebtedness.
For purposes hereof, "Senior Indebtedness" means (a) the principal of
and premium, if any, and interest and any other amounts due (including without
limitation, any interest or fees accruing with respect to the Senior
Indebtedness in accordance with the documents evidencing such Senior
Indebtedness after the commencement or filing of any bankruptcy or other
reorganization, liquidation or insolvency case or proceeding involving Company,
whether or not such interest or fees would be allowable or payable by Company in
such case or proceeding) on (i) all indebtedness of the Company for money
borrowed under the Company's bank credit facilities whether outstanding as of
the date of this Note or thereafter created, incurred or assumed, including
without limitation the Company's existing credit facilities with First Union
National Bank ("First Union"), as the same may from time to time be amended,
extended, renewed or replaced, and any bank credit facility entered into after
the date of this Note and (ii) all indebtedness of the Company for money
borrowed not described in clause (a)(i), whether outstanding on April 2, 1998 or
thereafter created, incurred or assumed, except any such other indebtedness that
by the terms of the instrument or instruments by which such indebtedness was
created or incurred expressly provides that (A) it is junior in right of payment
to the Notes or (B) it ranks pari passu in right of payment with the Notes, (b)
all obligations of the Company (whether directly or as a guarantor) to Persons
other than Company Affiliates with respect to the purchase, sale and/or
servicing of Company assets, the assets of Company Affiliates, or the assets of
others, whether now existing or hereafter incurred, including obligations to
indemnify and to repurchase assets, (c) all reimbursement and other obligations
of the Company with respect to letters of credit issued for the account of the
Company, both now existing and hereafter arising, and (d) any amendments,
renewals, extensions, modifications, refinancings and
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refundings of the foregoing. For the purposes of this definition, "indebtedness
for money borrowed" when used with respect to the Company means (i) any
obligation of, or any obligation guaranteed by, the Company for the repayment of
borrowed money (including without limitation fees, penalties or other
obligations in respect thereof), whether or not evidenced by bonds, debentures,
notes or other written instruments, (ii) any deferred payment obligation of, or
any such obligation guaranteed by, the Company for the payment of the purchase
price of property or assets evidenced by a note or similar instrument, but not
including accounts payable or other liabilities to trade creditors arising in
the ordinary course of business, whether or not evidenced by instruments, and
(iii) any obligation of, or any such obligation guaranteed by, the Company for
the payment of rent or other amounts under a lease of property or assets which
obligation is required to be classified and accounted for as a capitalized lease
on the balance sheet of the Company under generally accepted accounting
principles. The holder of this Note hereby waives notice of acceptance of this
Agreement with respect to all Senior Indebtedness that may now exist or may
hereafter come into existence.
In the event of (a) any insolvency or bankruptcy case or proceeding, or
any receivership, liquidation, reorganization or other similar case or
proceeding, relative to the Company or to its creditors, as such, or to a
substantial part of its assets, or (b) any proceeding for the liquidation,
dissolution or other winding up of the Company, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or (c) any general
assignment for the benefit of creditors or any other marshaling of assets and
liabilities of the Company, then and in any such event the holders of Senior
Indebtedness shall be entitled to receive payment in full of all amounts due or
to become due on or in respect of all Senior Indebtedness, or provision shall be
made for such payment in money or money's worth, before the Holders of the Notes
are entitled to receive any payment or distribution of any kind or character,
whether in cash, property or securities, on account of principal of or premium,
if any, or interest on the Notes, and to that end the holders of Senior
Indebtedness shall be entitled to receive, for application to the payment
thereof, any payment or distribution of any kind or character, whether in cash,
property or securities, including any such payment or distribution which may be
payable or deliverable by reason of the payment of any other indebtedness of the
Company being subordinated to the payment of the Notes, which may be payable or
deliverable in respect of the Notes in any such case, proceeding, dissolution,
liquidation or other winding up or event.
No payment, directly or indirectly, by way of setoff, by reason of any
other obligation, indebtedness or liabilities of the Company being subordinated
to this Note, or in any other manner, shall be made by the Company or collected
or received by the Holder of this Note with respect to the principal of or
interest on any Note, (including, but not limited to, the redemption price in
the case of a mandatory redemption referred to above), if a default in the
payment of principal, premium, interest, rent, fees, indemnification or
reimbursement obligations or other amount due on any Designated Senior
Indebtedness (as hereinafter defined) occurs and is continuing, whether as
originally scheduled, following acceleration, or otherwise, unless and until
such default shall have been cured or waived or shall have ceased to exist.
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The Company may and shall resume payments on and distributions in respect of the
Notes on the date upon which the default is cured or waived.
Notwithstanding anything in this Note to the contrary, no optional or
mandatory prepayment, redemption or accelerated payment on account of this Note
shall be made by the Company or collected or received by the Holder of this Note
while First Union remains the holder of any Senior Indebtedness, or while any
other person is the holder of Senior Indebtedness if the Company has agreed with
such holder of Senior Indebtedness not to make such payments. The foregoing
shall not restrict payment by the Company of scheduled installments of principal
and interest in accordance with the original terms of this Note (including
without limitation the provisions of the immediately preceding paragraph).
Should any payment, distribution or other amount be received by the
Holder of this Note (directly or indirectly, by way of setoff, by reason of any
other obligation, indebtedness or liabilities of the Company being subordinated
to this Note, or in any other manner) upon or with respect to any of the Senior
Indebtedness in contravention of the provisions of this Note, the Holder of this
Note shall promptly pay over and deliver the same to First Union, with respect
to the Senior Indebtedness of which it is the holder, and to the other holders
of Senior Indebtedness as their interests may appear, for application on account
of the respective Senior Indebtedness held by First Union or (if applicable)
such other persons, and, until so delivered, the same shall be held in trust by
such Holder of this Note for the benefit of First Union or such other persons.
Notwithstanding any partial or entire payment of all or any of the Senior
Indebtedness, the subordination provisions of this Note shall remain in effect
or be reinstated, as the case may be, as though such payment had never been
made, with respect to any such payment which is rescinded or recovered from or
restored or returned by the holder of any Senior Indebtedness under authority of
any law, rule, regulation, order of court or governmental agency, or in
connection with any compromise or settlement relating thereto or relating to any
action, suit or proceeding relating thereto, whether arising out of any
proceedings of the United States Bankruptcy Code or otherwise.
For purposes hereof, "Designated Senior Indebtedness" means (a) the
Senior Indebtedness described in clauses (a)(i), (b), (c) and (d) of the
definition of Senior Indebtedness, and (b) any other Senior Indebtedness the
principal amount of which is $1.0 million or more and that has been or may
hereafter be designated by the Company as "Designated Senior Indebtedness".
The Company shall not incur any indebtedness for money borrowed if such
indebtedness for money borrowed is subordinated or junior in ranking to any
Senior Indebtedness, unless such indebtedness for money borrowed is Senior
Subordinated Debt or is expressly subordinated in right of payment to Senior
Subordinated Debt. For these purposes, "Senior Subordinated Debt" means the
Notes and any other indebtedness for money borrowed of the Company that
specifically provides that such indebtedness for money borrowed is to rank pari
passu with the Notes in right of payment and is not subordinated by its terms in
right of payment to any
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indebtedness for money borrowed or other obligation of the Company which is not
Senior Indebtedness.
Notwithstanding anything in this Note to the contrary, the provisions
of this Note under this Section entitled "Subordination; Restrictions Concerning
Subordinated Indebtedness" may not be modified without the express prior written
consent of the holders of all Designated Senior Indebtedness outstanding at the
time of any such modification. No waiver of the provisions of this Note under
this Section by a holder of Designated Senior Indebtedness shall be effective
unless the same shall be in writing and signed by the holder of such Designated
Senior Indebtedness.
Events of Default; Acceleration
"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be occasioned by the subordination or other provisions hereof or be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body): (1) default in the payment of the
principal of the Notes at the maturity date of any installment of principal or
upon the mandatory redemption of the Notes in accordance with their terms and,
except with respect to the final installment of principal hereunder or upon
mandatory redemption, such default continues for a period of 5 days; (2) default
in the payment of any interest upon the Notes when it becomes due and payable,
and such default continues for a period of 15 days; or (3) default under one or
more bonds, debentures, notes or other evidences of indebtedness for money
borrowed by the Company or any Subsidiary or under one or more mortgages,
indentures or instruments under which there may be issued or by which there may
be secured or evidenced any indebtedness for money borrowed by the Company or
any Subsidiary, whether such indebtedness now exists or shall hereafter be
created, which default shall have resulted in such indebtedness in excess of
$5,000,000 becoming or being declared due and payable prior to the date on which
it would otherwise have become due and payable, without such indebtedness having
been discharged, or such acceleration having been rescinded or annulled, within
a period of 30 days after there shall have been given, by registered or
certified mail, to the Company by the Agent or to the Company and the Agent by
the Holders of at least 51% in principal amount of the Outstanding Notes a
written notice specifying such default and requiring the Company to cause such
indebtedness to be discharged or cause such acceleration to be rescinded or
annulled; or (4) default in Sections 5.2, 5.3(a), 5.3(d), 5.5(a), 5.5(f), 5.6,
5.14(b) or 5.15 of the Agreement, and such default continues for a period of 30
days; or (5) the entry by a court having jurisdiction in the premises of (A) a
decree or order for relief in respect of the Company or any Subsidiary in an
involuntary case or proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or (B) a decree or order
adjudging the Company or any Subsidiary as bankrupt or insolvent, or approving
as properly filed a petition seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company or any Subsidiary under any
applicable Federal or State law, or appointing a custodian, receiver,
liquidator, assignee,
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trustee, sequestrator or other similar official of the Company or any Subsidiary
or of any substantial part of its property, or ordering the winding up or
liquidation of its affairs, and the continuance of any such decree or order for
relief or any such other decree or order unstayed and in effect for a period of
90 consecutive days; or (6) the commencement by the Company or any Subsidiary of
a voluntary case or proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to
the entry of a decree or order for relief in respect of the Company or any
Subsidiary in an involuntary case or proceeding under any applicable Federal or
State bankruptcy, insolvency, reorganization or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against it, or
the filing by it of a petition or answer or consent seeking reorganization or
relief under any applicable Federal or State law, or the consent by it to the
filing of such petition or to the appointment of or taking possession by a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or any Subsidiary or of any substantial part of
its property, or the making by it of a general assignment for the benefit of
creditors, or the admission by it in writing of its inability to pay its debts
generally as they become due, or the taking of corporate action by the Company
or any Subsidiary in furtherance of any such action.
Upon receipt by the Company of any Notice of Default pursuant hereto
and if requested by the party delivering the Notice of Default, a record date
shall automatically and without any other action by any Person be set for the
purpose of determining the Holders of outstanding Notes entitled to join in such
Notice of Default, which record date shall be the close of business on the day
the Company receives such Notice of Default. The Holders of outstanding Notes on
such record date (or their duly appointed agents), and only such Persons, shall
be entitled to join in such Notice of Default, whether or not such Holders
remain Holders after such record date; provided, that unless such Notice of
Default shall have become effective by virtue of the Holders of the requisite
principal amount of Outstanding Notes on such record date (or their duly
appointed agents) having joined therein on or prior to the 30th day after such
record date, such Notice of Default shall automatically and without any action
by any Person be canceled and of no further force or effect. If the Holders of
at least 25% in principal amount of outstanding Notes shall join in a Notice of
Default, such Notice of Default shall automatically be effective and shall be
deemed to join all Holders.
If an Event of Default (other than as specified in subparagraph (5) or
(6) of the foregoing definition) occurs and is continuing, then and in every
such case the Agent or the Holders of not less than 51% in principal amount of
the Outstanding Notes may declare the principal of all the Notes to be due and
payable immediately, by a notice in writing to the Company, and upon any such
declaration such principal plus any interest accrued on the Notes to the date of
declaration shall become immediately due and payable. If an Event of Default
specified in subparagraph (5) or (6) of the foregoing definition occurs and is
continuing, then the principal of, and accrued and unpaid interest, if any, on
all of the Notes shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Agent or any Holder of
Notes.
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At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Agent as hereinafter in this Note provided, the Holders of not less than 51%
in principal amount of the Outstanding Notes, by written notice to the Company
and the Agent, may rescind and annul such declaration and its consequences if
(1) the Company has paid or deposited in trust a sum sufficient to pay (A) all
overdue interest on all Notes, (B) the principal of any Notes which have become
due (otherwise than by such declaration of acceleration) and interest thereon at
the rate borne by the Notes, (C) all sums paid or advanced by the Agent and its
agents and counsel hereunder; and (2) all Events of Default, other than the
nonpayment of the principal of and interest on the Notes that has become due
solely by such declaration of acceleration, have been cured or waived. No such
rescission and waiver shall affect any subsequent default or impair any right
consequent thereon.
If an Event of Default occurs and is continuing, the Agent may, subject
to the subordination provisions herein contained, pursue any available remedy to
collect the payment of principal and interest on the Notes or to enforce the
performance of any provision of the Notes. The Agent may maintain a proceeding
even if it does not possess any of the Notes or does not produce any such Notes
in the proceeding. A delay or omission by the Agent or any Holder of a Note in
exercising any right or remedy accruing upon any Event of Default shall not
impair the right or remedy or constitute a waiver of or acquiescence in such
Event of Default. No remedy shall be exclusive of any other remedy. All remedies
shall be cumulative to the extent permitted by law. Holders of a majority in
principal amount of the Notes then Outstanding may direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Agent or exercising any trust or power conferred on the Agent. However, the
Agent may refuse to follow any direction that conflicts with law or the terms of
the Notes or the Agreement if the Agent reasonably determines that such action,
if taken, would be unduly prejudicial to the rights of other Holders of Notes or
may subject the Agent to personal liability.
The Company shall reimburse the Agent for all reasonable out-of-pocket
expenses incurred or made by it in the course of its services hereunder. Such
expenses shall include the reasonable compensation and expenses, disbursements
and advances of the Agent's agents, counsel, accountants and experts.
Amendments and Modifications
With the consent of the Holders of not less than 25% in principal
amount of the Outstanding Notes, by written instrument in form and content
reasonably satisfactory to the Company and its counsel, the Holders, the Agent,
and the Company may enter into a supplemental agreement or instrument for the
purposes of adding any provisions to or changing in any manner or eliminating
any of the provisions of this Note or the continuing covenants in the Agreement
or of modifying in any manner the rights of the Holders under this Note;
provided, however, that (a) no such supplemental agreement or instrument shall,
without the consent of the Holder of each Outstanding Note affected thereby: (1)
change the stated maturity
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of the principal of, or any installment of interest on, any Note, or reduce the
principal amount thereof or the rate of interest thereon, or change the place of
payment where, or the coin or currency in which, any Note or any interest
thereon is payable, or impair the right to institute suit for the enforcement of
any such payment on or after the stated maturity thereof, or any provisions with
respect to the subordination of the Notes, in a manner adverse to the Holders,
or (2) reduce the percentage in principal amount of the outstanding Notes, the
consent of whose Holders is required for any such supplemental instrument or
agreement, or the consent of whose Holders is required for any waiver of
compliance with certain provisions hereof or certain defaults hereunder and
their consequences provided for herein, or (3) modify any of the provisions of
this paragraph or any ability of the Holders of Notes to waive past defaults,
except to increase any such percentage. It shall not be necessary for any action
of Holders under this paragraph to approve the particular form of any proposed
supplemental instrument or agreement, but it shall be sufficient if such action
shall approve the substance thereof and (b) the provisions of this Note under
the Section entitled "Subordination; Restrictions Concerning Subordinated
Indebtedness" may not be modified except in accordance with the provisions of
the final paragraph of such Section.
No provision of this Note or of the Agreement shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of and interest on this Note at the times, place and rate, and in the
coin or currency, herein prescribed (but subject to the subordination provisions
herein contained).
Maryland law shall govern the Notes and the Agreement without giving
effect to Maryland's conflicts of law principles.
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[ASSIGNMENT FORM]
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note to
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax ID number)
----------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code) and irrevocably appoint
- --------------------------------------------------------------------------------
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for him.
- --------------------------------------------------------------------------------
Date: Your signature:
----------------------------- -----------------------
(Sign exactly as your name appears on the
face of this Note)
Signature Guarantee:
------------------------------------------------------------
The signature to this assignment should be guaranteed by an eligible
guarantor institution (banks, stockbrokers, savings and loan associations and
credit unions with membership in an approved signature guarantee medallion
program) pursuant to S.E.C. Rule 17Ad-15.
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THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY FERRIS, BAKER
WATTS INCORPORATED (THE "AGENT") TO ITS NOMINEE OR TO ANOTHER NOMINEE OF THE
AGENT OR TO A SUCCESSOR AGENT WHICH HAS BEEN APPROVED BY THE COMPANY, OR ANY
NOMINEE OF SUCH SUCCESSOR AGENT. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF FERRIS, BAKER WATTS INCORPORATED (100 LIGHT STREET, 8TH FLOOR,
BALTIMORE, MARYLAND 21202) TO THE COMPANY OR ITS DESIGNEE FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF
THE AGENT, OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
THE AGENT, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR
TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, FERRIS, BAKER
WATTS INCORPORATED, HAS AN INTEREST HEREIN.
THE NOTE EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS, AND, ACCORDINGLY, NEITHER THIS NOTE NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR
UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS NOTE, BY ITS ACQUISITION HEREOF, AGREES THAT IT WILL
NOT, PRIOR TO THE DATE WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE
DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE
COMPANY WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE), RESELL OR
OTHERWISE TRANSFER ITS INTEREST IN THIS NOTE EXCEPT (A) TO THE COMPANY, OR ANY
SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL
BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE
UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH
TRANSFER, FURNISHES TO THE COMPANY AND ITS COUNSEL A SIGNED LETTER CONTAINING
CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER
OF THE NOTE AND ANY INTEREST THEREIN (THE FORM OF WHICH LETTER CAN BE OBTAINED
FROM THE COMPANY), (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY
RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (E) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES
ACT AND WHICH CONTINUES TO BE EFFECTIVE AT THE TIME OF SUCH TRANSFER (THE
COMPANY BEING UNDER NO OBLIGATION TO PREPARE AND FILE ANY SUCH REGISTRATION
STATEMENT); AND AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN
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CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN TWO YEARS AFTER THE ORIGINAL
ISSUANCE OF SUCH NOTE, THE HOLDER MUST FURNISH INFORMATION SATISFACTORY TO THE
COMPANY AND ITS COUNSEL IN THEIR SOLE DISCRETION TO EVIDENCE COMPLIANCE WITH
APPLICABLE SECURITIES LAWS AND/OR EXEMPTIONS THEREFROM. IF THE PROPOSED
TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO
SUCH TRANSFER, FURNISH TO THE COMPANY AND ITS COUNSEL, SUCH CERTIFICATIONS,
LEGAL OPINIONS OR OTHER INFORMATION AS MAY BE REASONABLY REQUIRED TO CONFIRM
THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
THIS LEGEND WILL BE REMOVED UPON ANY TRANSFER OF THE NOTE EVIDENCED HEREBY,
AFTER THE EXPIRATION OF TWO YEARS FROM THE ORIGINAL ISSUANCE OF THE NOTE
EVIDENCED HEREBY.
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THESE SECURITIES HAVE BEEN ISSUED PURSUANT TO EXEMPTIONS FOR NONPUBLIC OFFERINGS
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, THESE SECURITIES MAY NOT
BE RESOLD OR OTHERWISE DISPOSED OF UNLESS, IN THE OPINION OF COUNSEL FOR OR
SATISFACTORY TO THE ISSUER, REGISTRATION UNDER THE APPLICABLE FEDERAL OR STATE
SECURITIES LAWS IS NOT REQUIRED OR COMPLIANCE IS MADE WITH SUCH REGISTRATION
REQUIREMENTS. THIS LEGEND SHALL BE ENDORSED UPON ANY WARRANT ISSUED IN EXCHANGE
FOR THIS WARRANT.
Void after 5:00 p.m. Baltimore Time, on April 1, 2003
Warrant to Purchase Shares of Common Stock.
WARRANT TO PURCHASE
SHARES OF
COMMON STOCK
OF
CREDITRUST CORPORATION
This is to certify that, FOR VALUE RECEIVED, , or its registered
assigns pursuant to Section (d) hereof ("Holder"), is entitled to purchase,
subject to the provisions of this Warrant, from CREDITRUST CORPORATION, a
Maryland corporation (the "Company"), fully paid, validly issued and
nonassessable shares of Common Stock, par value $0.01 per share, of the Company
("Common Stock") until April 1, 2003 at the exercise price (the "Exercise
Price") initially of $12.00 per share, subject to adjustment as herein provided;
provided, however, that upon an initial public offering of the Company's Common
Stock or a "change-in-control," as hereinafter defined,, the Exercise Price
shall be automatically reduced to 85% of such initial public offering price or
change-in-control transaction price (as hereinafter contemplated), provided said
price is lower than the existing Exercise Price, subject to further adjustment
as herein provided; and, provided further, in the case of a "change-in-control"
this warrant shall be automatically exercised as contemplated by paragraph (a)
(3) hereof. The number of shares of Common Stock to be received upon the
exercise of this Warrant and the price to be paid for each share of Common Stock
may be adjusted from time to time as hereinafter set forth. The shares of Common
Stock deliverable upon such exercise, and as adjusted from time to time, are
hereinafter sometimes referred to as "Warrant Shares," and the exercise price of
a share of Common Stock as adjusted from time to time is hereinafter sometimes
referred to as the "Exercise Price."
(a) EXERCISE OF WARRANT; NOTIFICATION OF EXPIRATION DATE OF WARRANT. (1) General
Provisions. The Warrant may be exercised in full or in part as to a
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<PAGE>
minimum of Warrant Shares at any time or from time to time, until
5:00 P.M. Baltimore time on April 1, 2003 (the "Expiration Date"), provided,
however, that if such day is a day on which banking institutions in the State of
New York are authorized by law to close, then on the next succeeding day which
shall not be such a day. The Warrant may be exercised by presentation and
surrender hereof to the Company at its principal office, with the Purchase Form
annexed hereto duly executed (with signature guaranteed if required by the
Company or any stock transfer agent) and accompanied by payment of the Exercise
Price for the number of Warrant Shares specified in such form and any applicable
taxes. As soon as practicable after each such exercise of the Warrants, but not
later than seven (7) business days from the date of such exercise, the Company
shall issue and deliver to the Holder a certificate or certificates for the
Warrant Shares issuable upon such exercise, registered in the name of the Holder
or the Holder's designee. If the Warrant shall be exercised in part only, the
Company shall, upon surrender of the Warrant for cancellation, execute and
deliver a new Warrant, in the same form containing the same terms, evidencing
the rights of the Holder thereof to purchase the balance of the Warrant Shares
purchasable thereunder. Upon receipt by the Company of the Warrant at its
office, or by the stock transfer agent of the Company at its office, in proper
form for exercise, together with the exercise price thereof and taxes as
aforesaid in cash or certified or bank check and the investment letter described
below, the Holder or its designee shall be deemed to be the holder of record of
the shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock shall not then be physically delivered
to the Holder or its designee. It shall be a condition of the exercise of the
Warrant that the Holder or its designee shall deliver to the Company an
investment letter in the form as customarily used by the Company from time to
time in connection with the exercise of non-registered options and warrants
which are issued by the Company. It is further understood that certificates for
the Warrant Shares to be issued upon exercise of the Warrant shall contain a
restrictive legend in accordance with Section (j) hereof.
(2) Net Exercise. In addition to and without limiting the rights
of the Holder under the terms of this Warrant, the Holder shall be entitled to
convert this Warrant into shares of Common Stock without payment of any cash
exercise price under the provisions of this sub-paragraph (2) at any time up to
and including the expiration date of this Warrant (the "Net Exercise Right"). In
the event that the Holder wishes to exercise the Net Exercise Right, the Holder
shall so note on the Purchase Form. If the Net Exercise Right is exercised, the
date that the Holder delivers to the Company or the transfer agent the Purchase
Form so indicated shall be for all purposes hereunder the "Net Exercise Date."
Upon exercise of the Net Exercise Right, the Company shall deliver to the
Holder, without payment by the Holder of any exercise price or any cash or other
consideration, that number of shares of Common Stock equal to the quotient
obtained by dividing the Net Value (as hereinafter defined) of the number of
shares as to which the Warrant is then exercised (the "Net Exercise Shares") by
the Fair Market Value (as hereinafter defined) of a single share of Common
Stock, determined in each case as of the close of business on the Net Exercise
Date. The "Net Value" of the Net Exercise Shares shall be determined by
subtracting the aggregate Exercise Price of the Net Exercise Shares from the
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<PAGE>
aggregate Fair Market Value of the Net Exercise Shares, determined in each case
as of the close of business on the Net Exercise Date. No fractional shares shall
be issuable upon an exercise of the Net Exercise Right, and if the number of
shares issuable in accordance with the foregoing formula is other than a whole
number of Common Shares, the Company shall pay to the Holder an amount in cash
equal to the fraction of the share multiplied by the Fair Market Value of one
full share of Common Stock (less the fractional exercise price with respect to
such share).
For purposes of this sub-paragraph (2), the "Fair Market Value" of a share
of Common Stock shall mean:
(i) if the Company's Common Stock is then traded on any
nationally-recognized exchange or quoted on the NASDAQ National Market System,
the closing sale price on such date, as reported by such exchange or system;
(ii) if the Company's Common Stock is then traded on the over-the-counter
market, the average of the closing bid and ask prices on such dates, as reported
by the National Quotation Bureau;
(iii) if the Company's Common Stock is not then quoted as set forth in
items (i) or (ii), then as reasonably determined in good faith by the Company's
Board of Directors but in no event less than the Exercise Price.
(3) Change-in-Control. Upon a "change-in-control," without any
further action on the part of the Holder, this Warrant shall be deemed to have
been exercised at the lower of the then-applicable Exercise Price or 85% of the
Control Consideration (defined below) and upon such deemed exercise the Holder
shall receive with respect to each share of Common Stock that the Holder
otherwise would receive, the Control Consideration.
For purposes hereof, a change-in-control shall occur when:(i) all or
substantially all of the Company's assets are sold, other than in the ordinary
course of business ( the term ordinary course including, without limitation, any
financing or securitization of, and/or master servicing or seller servicing
arrangement covering, any or all of the Company's assets), as an entirety to any
person or related group of persons other than Joseph K. Rensin or a corporation,
partnership, limited liability company or other business entity in which Joseph
K. Rensin, individually or in concert with others, has a controlling interest;
(ii) there shall be consummated any consolidation or merger of the Company (A)
in which the Company is not the continuing or surviving corporation (other than
a consolidation or merger with a wholly owned subsidiary of the Company in which
all shares of Common Stock outstanding immediately prior to the effectiveness
thereof are changed into or exchanged for the same consideration) or (B)
pursuant to which the Company's common stock would be converted into cash,
securities or other property, in each case, other than a consolidation or merger
of the Company in which the holders of the Company's common stock immediately
prior to the consolidation or merger have, directly or indirectly, at least a
majority of the total voting power of all classes of capital stock entitled to
3
<PAGE>
vote generally in the election of directors of the continuing or surviving
corporation immediately after such consolidation or merger in substantially the
same proportion as their ownership of common stock immediately before such
transaction; or (iii) any person, or any persons acting together which would
constitute a -group- for purposes of Section 13(d) of the Securities Exchange
Act of 1934, as amended (a -Group-), together with any Affiliates thereof, shall
beneficially own (as defined in Rule 13d-3 under the Securities Exchange Act of
1934, as amended) at least 50% of the total voting power of all classes of
capital stock of the Company entitled to vote generally in the election of
directors of the Company, except for a person or ^ Group in which Joseph K.
Rensin, individually or in connection with others, has a controlling interest.
This paragraph contains illustrations of the automatic exercise provisions
contemplated by this section (a). Upon a "change-in-control" and the
simultaneous automatic exercise of the Warrant as the result of such
change-in-control, tender of the Exercise Price (if adjusted downward in respect
of the "change-in-control", the "Control Adjusted Exercise Price") for one share
of Common Stock shall entitle the Warrant holder deemed to exercise the Warrant
to receive 100% of the consideration in cash, stock or other securities or
property or any combination thereof, on substantially the same terms and
conditions, which shares of Common Stock held by Joseph K. Rensin or his
assignee is converted into in the transaction or, if at a higher transaction
price, other shares of Common Stock issued by the Company prior to or in the
transaction (the "Control Consideration"). Exercise of the Net Exercise Right
with respect to a single share of Common Stock shall entitle to exercising
holder to receive the difference between the Control Consideration and the
applicable Exercise Price. In the event the Control Adjusted Exercise Price has
become the Exercise Price, the effect of this adjustment would cause the Net
Exercise Right applicable to a single share of Common Stock to become
exercisable for 15% of the Control Consideration applicable to a single share of
Common Stock.
(b) RESERVATION OF SHARES. The Company shall at all times reserve for
issuance and/or delivery upon exercise of this Warrant such number of shares of
its Common Stock as shall be required for issuance and delivery upon exercise of
the Warrants. If the Common Stock is listed on any national securities exchange
or the NASDAQ system, the Company shall also list such shares on such exchange
subject to notice of issuance or maintain the listing of its Common Stock on the
NASDAQ system, as the case may be.
(c) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of the Warrant. With respect
to any fraction of a share called for upon any exercise hereof, the Company
shall pay to the Holder an amount in cash equal to such fraction multiplied by
the current market value of a share, determined as follows:
(1) If the Common Stock is listed on a national securities exchange
or admitted to unlisted trading privileges on such exchange or
listed for trading on the NASDAQ system, the current market value
shall be the last reported sale price of the Common Stock on such
exchange or
4
<PAGE>
system on the last business day prior to the date of exercise of
this Warrant or if no such sale is made on such day, the average
closing bid and asked prices for such day on such exchange or
system; or
(2) If the Common Stock is not so listed or admitted to unlisted
trading privileges, the current market value shall be the mean of
the last reported bid and asked prices reported by the National
Quotation Bureau, Inc., on the last business day prior to the date
of the exercise of this Warrant; or
(3) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported,
the current market value shall be an amount, not less than the book
value thereof as at the end of the most recent fiscal year of the
Company ending prior to the date of the exercise of the Warrant,
determined in such reasonable manner as may be prescribed by the
Board of Directors of the Company.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. The Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations entitling the
Holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. Subject to Section (j) hereof, the Holder may
transfer or assign the Warrant, in whole or in part and from time to time. Upon
surrender of this Warrant to the Company at its principal office or at the
office of its stock transfer agent, if any, with the Assignment Form annexed
hereto duly executed (with signature guaranteed, if required by the Company or
its stock transfer agent) and funds sufficient to pay any transfer tax, the
Company shall, without charge, execute and deliver a new Warrant in the name of
the assignee or assignees named in such instrument of assignment and this
Warrant shall promptly be canceled. This Warrant may be divided by or combined
with other Warrants which carry the same rights upon presentation hereof at the
principal office of the Company or at the office of its stock transfer agent, if
any, together with a written notice specifying the names and denominations in
which new Warrants are to be issued and signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged. Upon receipt by the Company of evidence satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and in the case
of loss, theft or destruction, of reasonable satisfactory indemnification, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor, date and amount. Any such new
Warrant executed and delivered shall constitute an additional contractual
obligation on the part of the Company, whether or not the original Warrant shall
be at any time enforceable by anyone.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the
5
<PAGE>
Holder are limited to those expressed in the Warrant and are not enforceable
against the Company except to the extent set forth herein.
(f) ANTI-DILUTION PROVISIONS. So long as this Warrant shall be
outstanding, the Exercise Price in effect at any time and the number and kind of
securities purchasable upon the exercise of the Warrants shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(A) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of
Common Stock, (ii) subdivide or reclassify its outstanding shares of
Common Stock into a greater number of shares, or (iii) combine or
reclassify its outstanding shares of Common Stock into a smaller number
of shares, the Exercise Price in effect at the time of the record date
for such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be proportionately
adjusted as of the effective date of such event by multiplying such
Exercise Price by a fraction, the denominator of which shall be the
number of shares of Common Stock outstanding immediately following such
event and the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior thereto. For example, if the
Company declares a 2 for 1 stock distribution and the Exercise Price
immediately prior to such event was $1.00 per share, the adjusted
Exercise Price immediately after such event would be $.50 per share.
Such adjustment shall be made successively whenever any event listed
above shall occur.
(1) Whenever the Exercise Price payable upon exercise
of each Warrant is adjusted pursuant to subsection (A) above,
the number of Warrant Shares purchasable upon exercise of the
Warrant shall simultaneously be adjusted by multiplying the
number of Warrant Shares issuable upon exercise of this
Warrant by the Exercise Price in effect on the date hereof and
dividing the product so obtained by the Exercise Price, as
adjusted.
(2) No adjustment in the Exercise Price shall be
required unless such adjustment would require an increase or
decrease of at least $.05 in such price; provided, however,
that any adjustments which by reason of this subsection (A)(2)
are not required to be made shall be carried forward and taken
into account in any subsequent adjustment required to be made
hereunder.
(B) If, at any time prior to an initial public offering, the
Company shall issue Common Stock, or another form of stock, note,
warrant, option, or the like exercisable for or convertible into Common
Stock, at an
6
<PAGE>
issuance, exercise, or conversion price (the "Applicable Price") less
than the Exercise Price currently in effect, then, automatically and
without any action on behalf of the Company or any Holder, the Exercise
Price shall be adjusted to the Applicable Price. In any case where the
determination of the Applicable Price cannot be determined from the
face of the documents, the Board of Directors, acting in good faith on
the advice of Ferris, Baker Watts, Incorporated and Boenning &
Scattergood, Inc., or if such firms are not available, such other
recognized financial advisors as may be selected by the Board, shall
determine the Applicable Price, which shall be conclusive and binding
on the Holders.
(C) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly cause a notice setting forth the
adjusted Exercise Price and adjusted number of Warrant Shares issuable
upon exercise of each Warrant to be mailed to the Holder, at its
address appearing in the Warrant Register, and shall cause a certified
copy thereof to be mailed to its transfer agent, if any.
(D) All calculations under this Section (f) shall be made to
the nearest cent or to the nearest Warrant Share, as the case may be.
(E) In the event that at any time, as a result of an
adjustment made pursuant to subsection (A) above, the Holder of this
Warrant thereafter shall become entitled to receive any shares of the
Company, other than Common Stock, thereafter the number of such other
shares so receivable upon exercise of this Warrant shall be subject to
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common
Stock contained in subsection (A) above.
(F) Irrespective of any adjustments in the Exercise Price or
the number or kind of Warrant Shares purchasable upon exercise of this
Warrant, Warrants theretofore or thereafter issued may continue to
express the same price and number and kind of shares as are stated in
the similar Warrants initially issuable pursuant to this Agreement.
(G) Notwithstanding anything contained in this Section (f), no
adjustment shall be made upon the issuance of options to purchase, or
subsequent issuance upon exercise of options, of up to 800,000 shares
of Common Stock under the Company's employee stock option plan.
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be
adjusted as required by the provisions of the foregoing Section, the Company
shall forthwith file in the custody of its Secretary or an Assistant Secretary
at its principal office and with its stock transfer agent, if any, an officer's
certificate showing the adjusted Exercise Price determined as herein
7
<PAGE>
provided, setting forth in reasonable detail the facts requiring such
adjustment, including a statement of the number of additional shares of Common
Stock, if any, and such other facts as shall be necessary to show the reason for
and the manner of computing such adjustment. Each such officer's certificate
shall be made available at all reasonable times for inspection by the Holder or
any holder of a Warrant executed and/or delivered pursuant to Section (a) or
Section (d), and the Company shall, forthwith after each such adjustment, mail,
by certified mail, a copy of such certificate to the Holder or any such holder.
(h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any distribution
upon the Common Stock, or (ii) if the Company shall offer to the holders of
Common Stock for subscription or purchase by them any shares of any class or any
other rights, or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another entity,
or voluntary or involuntary dissolution, liquidation or winding up of the
Company shall be effected, then in any such case, the Company shall cause to be
mailed by certified mail to the Holder or any holder of a Warrant executed
and/or delivered pursuant to Section (a) or Section (d), at least 30 days prior
to the date specified in (x) or (y) below, as the case may be, a notice
containing a brief description of the proposed action and stating the date on
which (x) a record is to be taken for the purpose of such dividend, distribution
or rights, or (y) such reclassification, reorganization, consolidation, merger,
conveyance, lease, dissolution, liquidation or winding up is to take place and
the date, if any is to be fixed, as of which the holders of Common Stock or
other securities shall receive cash or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
(i) RECLASSIFICATION, REORGANIZATION OR MERGER. Except for transactions
governed by paragraph (a)(3) regarding "change-in-control," in case of any
reclassification or capital reorganization of outstanding shares of Common Stock
of the Company, or in case of any consolidation or merger of the Company with or
into another entity (other than a merger with a subsidiary in which merger the
Company is the continuing corporation and which does not result in any
reclassification or capital reorganization of outstanding shares of Common Stock
of the class issuable upon exercise of this Warrant) or in case of any sale,
lease or conveyance to another entity of all or substantially all of the
Company, the Company shall, as a condition precedent to such transaction, cause
effective provisions to be made so that the Holder or any holder of a Warrant
executed and/or delivered pursuant to Section (a) or Section (d) shall have the
right thereafter by exercising the Warrant at any time prior to the expiration
of the Warrant, to purchase the kind and amount of shares of stock and other
securities and property receivable by the holders of Common Stock of the Company
upon such reclassification or capital reorganization and consolidation, merger,
sale or conveyance. Any such provision shall include provision for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in the Warrant. The foregoing provisions of this
8
<PAGE>
Section (i) shall similarly apply to successive reclassifications or capital
reorganizations of shares of Common Stock and to successive consolidations,
mergers, sales or conveyances.
(j) SECURITIES LAW COMPLIANCE
(1) The Holder of the Warrant, by acceptance hereof,
acknowledges that the Warrant and the shares of Common Stock to be
issued upon exercise or conversion hereof are being acquired solely for
the Holder's own account and not as a nominee for any other party, and
for investment, and that the Holder will not offer, sell, transfer,
assign or otherwise dispose of this Warrant or any shares of Common
Stock to be issued upon exercise or conversion hereof except under
circumstances that will not result in a violation of the Act or any
state securities laws. Upon exercise of the Warrant, the Holder shall,
if requested by the Company, confirm in writing, in a form satisfactory
to the Company, that the shares of Common Stock so purchased are being
acquired solely for the Holder's own account and not as a nominee for
any other party, for investment, and not with a view toward
distribution or resale.
(2) The Warrant and any Warrants issued upon exercise or
substitution or upon assignment or transfer pursuant to Section (a) or
Section (d), as the case may be, and all shares of Common Stock issued
upon exercise or conversion hereof shall be stamped or imprinted with a
legend in substantially the following form (in addition to any legend
required by state securities laws):
THESE SECURITIES HAVE BEEN ISSUED PURSUANT TO EXEMPTIONS FOR
NONPUBLIC OFFERINGS FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES
LAWS, AND, ACCORDINGLY, THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED
OR OTHERWISE DISPOSED OF UNLESS, IN THE OPINION OF COUNSEL FOR OR
SATISFACTORY TO THE ISSUER, REGISTRATION UNDER THE APPLICABLE FEDERAL
OR STATE SECURITIES LAWS IS NOT REQUIRED OR COMPLIANCE IS MADE WITH
SUCH REGISTRATION REQUIREMENTS. COPIES OF THE AGREEMENT COVERING THE
PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR SALE OR TRANSFER MAY
BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD
HEREOF TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE
OFFICES OF THE COMPANY.
9
<PAGE>
(k) AMENDMENTS. Neither the Warrant nor any term hereof may be changed,
waived, discharged or terminated without the prior written consent of the
Holder.
(l) NO IMPAIRMENT. The Company will not avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith assist in the
carrying out of all the provisions of this Warrant and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of any
Holder.
(m) GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Maryland.
(n) NOTICES. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by first class mail, postage
prepaid, addressed (a) if to the Holder, to Ferris, Baker Watts, Incorporated,
100 Light Street, 8th Floor, Baltimore, Maryland 21202 and Boenning &
Scattergood, Inc., 500 North Gulph Road, Suite 110, King of Prussia,
Pennsylvania 19406, or (b) if to the Company, to Creditrust Corporation, 7000
Security Boulevard, Baltimore, Maryland 21244-2543, or at such other address as
the Company shall have furnished to the Holder in writing.
10
<PAGE>
IN WITNESS WHEREOF, Creditrust Corporation has caused this Warrant to
be executed by its officer thereunto duly authorized.
Dated: April 2, 1998
CREDITRUST CORPORATION
By:
----------------------------
Name:
Title:
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<PAGE>
PURCHASE FORM
Dated ,
--------------- ----
The undersigned hereby irrevocably elects to exercise its rights
pursuant to this Warrant to the extent of purchasing ______ shares of Common
Stock of Creditrust Corporation, and hereby makes payment of $_________ in
payment of the exercise price thereof, or hereby elects to exercise such portion
of the warrant through the use of the Net Exercise Right contemplated by
paragraph (a).
(Please fill in all required blanks and check appropriate box.)
---------------------------------------
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name
----------------------------------------------------------------------------
(Please typewrite or print in block letters)
Address
-------------------------------------------------------------------------
Signature
-----------------------------------------------------------------------
12
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, hereby sells, assigns
and transfers unto
Name
---------------------------------------------------------------------------
(Please typewrite or print in block letters)
Address
-------------------------------------------------------------------------
the right to purchase Common Stock of _____________________________, represented
by this Warrant to the extent of __________ shares as to which such right is
exercisable and does hereby irrevocably constitute and appoint
____________________________ as Attorney, to transfer the same on the books of
the Company with full power of substitution in the premises.
Date ,
------------------- ----
Signature
-----------------------
13
<PAGE>
SENIOR SUBORDINATED NOTE, 1998 SERIES
AND COMMON STOCK WARRANT PURCHASE AGREEMENT
between
CREDITRUST CORPORATION
and
THE PURCHASERS LISTED ON EXHIBIT A
Dated as of April 2, 1998
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
SECTION 1. SALE AND PURCHASE OF THE UNITS..............................................................1
SECTION 2. THE CLOSING.................................................................................2
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............................................2
3.1 Corporate Existence, Power and Authority....................................................2
3.2 Capitalization..............................................................................3
3.3 Subsidiary..................................................................................3
3.4 No Defaults or Conflicts....................................................................3
3.5 Authorization of Securities.................................................................4
3.6 Securities Exemptions.......................................................................4
3.7. Disclosure Materials; Other Information.....................................................5
3.8 Certain Events..............................................................................5
3.9 Contracts, Agreements.......................................................................6
3.10 Title to Properties; Leasehold Interests....................................................6
3.11 Litigation..................................................................................7
3.12 Licenses, Permits and Approvals.............................................................7
3.13 Taxes 7
3.14 Employees; ERISA............................................................................8
3.15. Disaster....................................................................................8
3.16 Books and Records...........................................................................9
3.17 Material Changes............................................................................9
3.18 Registration Rights.........................................................................9
3.19 Indebtedness................................................................................9
3.20 Insurance...................................................................................9
3.21 Brokers....................................................................................10
3.22 Proprietary Rights.........................................................................10
3.23 Related Party Transactions.................................................................11
SECTION 3A. Representations of Joseph K. Rensin........................................................11
3A.1 Authorization; Non-Contravention...........................................................11
SECTION 4. REPRESENTATIONS AND WARRANTIES OF
THE PURCHASERS.....................................................................11
4.1 Purchaser Authority; Accredited Investor Status............................................11
4.2 Reliance on Representations and Warranties by the Company and the Agent....................13
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 5. COVENANTS OF THE COMPANY...................................................................13
5.1 Use of Proceeds............................................................................13
5.2 Financial Information......................................................................13
5.3 Notice of Events of Default and Certain Other Events; Litigation; Provision for
Unitholders..............................................................................14
5.4 Access to Information......................................................................15
5.5 Maintenance of Existence; Properties and Franchises; Compliance with Law; Taxes; Insurance.15
5.6 Restrictive Agreements Prohibited..........................................................16
5.7 Transactions with Affiliates...............................................................16
5.8 Reservation of Shares......................................................................16
5.9 Private Placement Status...................................................................17
5.10 Regulation D Filing........................................................................17
5.11 Access to Information and Documents........................................................17
5.12 Further Assurances.........................................................................17
5.13 Fees .....................................................................................17
5.14 Board Representation.......................................................................18
5.16 Life Insurance.............................................................................18
SECTION 6. CONDITIONS TO PURCHASERS' OBLIGATIONS......................................................18
6.1 Delivery of Note...........................................................................18
6.2 Certificates for Warrants..................................................................19
6.3 Accuracy of Representations and Warranties.................................................19
6.4 Compliance with Agreements.................................................................19
6.5 Officers' Certificates.....................................................................19
6.6 Proceedings................................................................................19
6.7 Legality; Governmental and Other Authorization.............................................19
6.8 Time of Purchase...........................................................................20
6.9 No Change in Law, etc......................................................................20
6.10 Opinion of Counsel.........................................................................20
6.11 Other Documents and Opinions...............................................................20
SECTION 7. CONDITIONS TO COMPANY'S OBLIGATIONS........................................................20
7.1 Payment....................................................................................20
7.2 Representations and Warranties Correct.....................................................21
SECTION 8. BROKERS....................................................................................21
SECTION 9. BREACH OF REPRESENTATIONS, WARRANTIES
AND COVENANTS..............................................................................21
SECTION 10. SPECIFIC PERFORMANCE.......................................................................22
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 11. EXPENSES...................................................................................22
SECTION 12. AMENDMENTS AND WAIVERS.....................................................................22
SECTION 13. EXCHANGE OF SHARES; CANCELLATION OF SURRENDERED
SHARES; REPLACEMENT................................................................23
SECTION 14. NOTICES....................................................................................23
SECTION 15. MISCELLANEOUS..............................................................................24
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT A PURCHASER'S SIGNATURE PAGE
EXHIBIT B FORM OF SENIOR SUBORDINATED NOTE, 1998 SERIES
EXHIBIT C FORM OF COMMON STOCK WARRANT
EXHIBIT D REGISTRATION RIGHTS AGREEMENT
Schedule 3.2(a) Registered Owners of the Company's Capital Stock
Schedule 3.8 Certain Events
Schedule 3.9 Material Contracts
Schedule 3.10 Real Property: Title to Properties
Schedule 3.14 Employee Benefits
Schedule 3.17 Material Changes
Schedule 3.19 Indebtedness
Schedule 3.20 Insurance
Schedule 3.22 Proprietary Rights
Schedule 3.23 Related Party Transactions
</TABLE>
iv
<PAGE>
SENIOR SUBORDINATED NOTE, SERIES 1998 AND
COMMON STOCK WARRANT PURCHASE AGREEMENT
SENIOR SECURED NOTE, SERIES 1998 AND COMMON STOCK WARRANT PURCHASE
AGREEMENT (the "Agreement") dated as of April 2, 1998 by and between Creditrust
Corporation, a Maryland corporation (the "Company"), and those persons and
entities listed on Exhibit A hereto (collectively, the "Purchasers" and each,
individually, a "Purchaser").
W I T N E S S E T H :
WHEREAS, the Company desires to sell to the Purchasers and the
Purchasers desire to purchase from the Company $5,000,000 in units (the
"Units"), each Unit consisting of $100,000 principal amount of the Company's
Senior Subordinated Notes, Series 1998 (the "Notes") and warrants to purchase
9,000 shares of Common Stock of the Company at the exercise prices or prices set
forth therein (the "Warrants"), upon the terms and provisions hereinafter set
forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
SECTION 1. SALE AND PURCHASE OF THE UNITS
(a) Subject to the terms and conditions hereof and in reliance upon the
representations and warranties contained herein, the Company agrees to sell to
the Purchasers, and each Purchaser agrees to purchase from the Company on the
Closing Date specified in Section 2 hereof, the number of Units set forth
opposite the Purchaser's name on Exhibit A hereto at a price of $100,000 per
Unit for a maximum aggregate purchase price of Five Million Dollars and No Cents
($5,000,000). The sales of the Units to the Purchasers as aforesaid are several
and separate sales and none of the Purchasers shall be responsible for, or
obligated with respect to, any act or default by any other Purchaser. The terms
of the securities comprising the Units are as more fully set forth in the Form
of Senior Subordinated Note attached hereto as Exhibit B and the Form of Warrant
attached hereto as Exhibit C.
(b) The aggregate purchase price to be paid to the Company by each
Purchaser for the Units to be purchased by such Purchaser pursuant to this
Agreement shall be the amount set forth opposite that Purchaser's name on
Exhibit A hereto. No further payment shall be required from the Purchaser for
the Units.
1
<PAGE>
SECTION 2. THE CLOSING
Subject to the terms and conditions hereof, the initial closing
hereunder with respect to the purchase and sale of the Units shall take place at
the offices of counsel to the Company, Piper & Marbury L.L.P., 36 South Charles
Street, Baltimore, Maryland 21201 at 10:00 a.m. Baltimore time, on April 2,
1998, or such other location, time and date as the parties hereto shall mutually
agree upon (the "Initial Closing"). The Company and Ferris, Baker Watts,
Incorporated and Boenning & Scattergood, Inc. (individually or collectively, the
"Agent") may, in one or more additional closings under this Agreement (the
"Additional Closings," each of the Additional Closings and the Initial Closing
being sometimes referred to herein individually as a "Closing" and collectively
as the "Closings" and the date of each such Closing shall be referred to herein
as the "Closing Date") sell additional Units (up to a total of 50 Units at the
Initial and Additional Closings) at a purchase price of not less than $100,000
per Unit, so long as Units sold at any Additional Closing are sold on the same
terms and conditions as the Units sold at the Initial Closing. Any Additional
Closings shall be held at such time and place as the Company and the Agent shall
mutually agree upon.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each of the Purchasers as
follows as of the date hereof and as of the Closing as follows:
3.1 Corporate Existence, Power and Authority
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Maryland. The Company is duly
qualified, licensed and authorized to do business and is in good standing in
each jurisdiction in which it owns or leases any material property or in which
the conduct of its business requires it to so qualify or be so licensed, except
where the failure to so qualify or be licensed would not have a material adverse
effect on the Company. The Company has all requisite corporate power, authority
and legal right to own or to hold under lease and to operate the properties it
owns or holds and to conduct its business as it is now being conducted and as it
is proposed to be conducted except where the failure to have such requisite
power, authority and legal right would not have a material adverse effect on the
Company.
(b) The Company has all requisite power and authority to enter into
this Agreement and the Registration Rights Agreement, to sell the securities
constituting the Units (collectively, the "Transaction Documents"), and to carry
out and perform its obligations under the terms thereof. Each of the Transaction
Documents has been duly executed and delivered by the Company and constitutes
the valid and binding obligation of the Company, enforceable against the Company
in accordance with its terms.
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3.2 Capitalization
(a) As of the date hereof, the authorized capital stock of the Company
consists of 5,000,000 shares of preferred stock and 20,000,000 shares of common
stock (the "Common Stock"), of which 6,000,000 shares are issued and
outstanding. As of the Initial Closing, all outstanding shares of Common Stock
will have been duly authorized and validly issued, will be fully paid and
non-assessable, and will have been issued in compliance with all applicable
state and federal laws concerning the issuance of securities. At the Closing
Date, there will be reserved for issuance 450,000 shares of Common Stock which
may be issued upon exercise of the Warrants and 800,000 shares of Common Stock
issuable upon the exercise of employee stock options. Joseph K. Rensin is the
record and beneficial holder of all of the issued and outstanding Common Stock.
Except for the Warrants, there are no outstanding rights, options, calls,
warrants, conversion rights, anti-dilution protections or other adjustment
provisions, agreements or preemptive rights to purchase or otherwise acquire
shares of capital stock of the Company and/or obligations of the Company to
grant, extend or enter into any such right, option, call, warrant, conversion
right or agreement. There is no agreement, restriction or encumbrance
(including, without limitation, any right of first refusal, right of first offer
or voting trust agreement) with respect to the sale or voting of any shares of
the Company's capital stock (whether outstanding or issuable upon conversion or
exercise of outstanding securities).
3.3 Subsidiary
Except for Creditrust Mortgage Corporation, which is an inactive
subsidiary, the Company (i) does not control or own, directly or indirectly, any
shares or proprietary interest in any corporation or business entity, or (ii) is
not under common control with, or controlled by, any other corporation or other
business entity.
3.4 No Defaults or Conflicts
(a) The Company is not in violation or default under any indenture,
agreement or instrument to which it is a party or by which it or its properties
may be bound, which violation or default would have a material adverse effect on
the Company. The Company is not in violation of or default under any law, rule,
regulation, order, writ, injunction, judgment, decree, award or other action of
any court or governmental authority or arbitrator(s), including, without
limitation, the federal Fair Debt Collection Practices Act, which violation or
default would have a material adverse effect on the Company. The Company is not
restricted from carrying out its business anywhere in the continental United
States by any agreement or administrative or judicial order, decree or process
in any action or proceeding in which the Company or any of its predecessors is a
party. The Company is not in violation of its Charter or By-Laws.
(b) The execution, delivery and performance by the Company of the
Transaction Documents and any of the transactions contemplated hereby or thereby
does not and will not (i) violate or conflict with any provision of (A) the
Charter or By-Laws of the Company, or (B) any law, rule, regulation or order of
any federal, state, county, municipal or other
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governmental authority, or any judgment, writ, injunction, decree, award or
other action of any court or governmental authority or arbitrator(s), or any
agreement, indenture or other instrument applicable to any of the properties or
assets of the Company, (ii) result in the creation of any lien, charge, security
interest or encumbrance upon any of the Company's properties, assets or
revenues, or (iii) require the consent, waiver, approval, order or authorization
of, or declaration, registration, qualification or filing with, any person or
entity (whether or not a governmental authority and including, without
limitation, any shareholder approval) except for required securities law
filings, and board of director and stockholder approvals and certain consents
which approvals, consents and waivers have been obtained.
3.5 Authorization of Securities
(a) All corporate action on the part of the Company, its officers,
directors and stockholders necessary for the sale and issuance of the securities
constituting the Units and the performance by the Company of its obligations
under the Transaction Documents has been taken or will be taken prior to the
Initial Closing. The Company has or will have prior to the Initial Closing duly
reserved an aggregate of not less than 450,000 shares of Common Stock for
issuance upon exercise of the Warrants included in the Initial Closing.
(b) The Notes and Warrants constituting the Units have been duly
authorized by all necessary corporate action on behalf of the Company and are
valid and binding obligations of the Company enforceable in accordance with
their terms. The Company has duly reserved for issuance upon exercise of the
Warrants 450,000 shares of Common Stock. The issuance of the Warrants and the
issuance of the Common Stock upon exercise thereof is not subject to preemptive
or other similar rights to subscribe for the shares of Common Stock. Upon
exercise of the Warrants in accordance with their terms, the Common Stock
deliverable pursuant thereto will be validly issued, fully paid, and
non-assessable. The issuance and delivery of shares of Common Stock initially to
be issued pursuant to the exercise of the Warrant will have been duly authorized
by all requisite corporate action on the part of the Company, and, when so
issued, such shares of Common Stock will be duly authorized, validly issued and
outstanding, fully paid and non-assessable and will not be subject to any
preemptive or other preferential rights or similar statutory or contractual
rights of others arising pursuant to any statute, rule or regulation or
agreement or instrument to which the Company is a party or otherwise.
3.6 Securities Exemptions
Assuming the accuracy of the representations and warranties of the
Purchasers, the Units will be issued in transactions exempt from registration
under Regulation D under the Securities Act of 1933, as amended (the "Securities
Act"), and will not require registration or qualification or filings under the
Securities Act, the Trust Indenture Act of 1939, as amended, or any state
securities or "Blue Sky" law or any regulation thereunder, except for such
registration or qualification or filings under any such state securities or
"Blue Sky" laws or regulations thereunder which shall have been obtained or made
on or prior to the Initial Closing or which the Company shall obtain or make
within the requisite time period following each Closing.
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3.7. Disclosure Materials; Other Information
(a) The Company has previously furnished the Memorandum to the
Purchasers. The financial statements included in the Memorandum present fairly
the consolidated financial position of the Company and its subsidiary as of and
at the dates indicated and the results of their operations and cash flows for
the periods specified. Such financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis throughout the periods involved, except as may be expressly stated in
the related notes thereto.
(b) Except as otherwise described in the Memorandum, since December
31, 1997 (i) the business of the Company has been conducted in the ordinary
course, and (ii) there has been no material adverse change in the assets,
properties, liabilities, business, affairs, results of operations, condition
(financial or otherwise) or prospects of the Company. As of each Closing and
as of the date hereof, there are no liabilities of the Company which would be
required to be provided for in a balance sheet of the Company as of either
such date prepared in accordance with generally accepted accounting
principles consistently applied, other than liabilities provided for in the
financial statements referred to in Section 3.7(a) above and other than
liabilities incurred in the ordinary course of business consistent with prior
operations.
(c) The Company is not aware of any liabilities, contingent or
otherwise, of the Company that would be required to be provided for in a balance
sheet of the Company as of either such date prepared in accordance with
generally accepted accounting principles consistently applied, other than
liabilities provided for in the financial statements (including the footnotes
thereto) referred to in Section 3.7(a) above or otherwise disclosed in the
Memorandum, except for liabilities incurred in the ordinary course of business
consistent with prior operations.
(d) The Memorandum, including the financial statements contained
therein, does not contain, and will not contain as of any Closing Date, any
untrue statement of a material fact and does not omit nor will it omit to state,
as the case may be, any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
3.8 Certain Events
Except as disclosed in Schedule 3.8 hereto or the Memorandum, since
December 31, 1997, to the best of the Company's knowledge, there has been no
material adverse legislative or regulatory change relating to the Company's
business. Since that date and except as disclosed in Schedule 3.8, the Company
has not: (a) borrowed any funds or incurred or become subject to any obligations
or liabilities (absolute or contingent), except as incurred in the ordinary
course of business (in amounts consistent with prior operations); (b) discharged
or satisfied any lien or encumbrance or paid any obligation or liability
(absolute or contingent) other than current liabilities reflected in or shown on
the financial statements contained in the Memorandum or in the ordinary course
of business (in amounts consistent with prior operations); (c) declared or paid
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any dividends or distributions to its shareholders of any kind whatsoever; (d)
entered into any agreements or arrangements granting any preferential rights to
purchase any of the assets, properties or rights of the Company, or requiring
the consent of any party to a transfer or assignment of such assets, properties
or rights, or providing for the merger or consolidation of the Company into or
with another corporation or other business entity; (e) except in the ordinary
course of business consistent with prior operations, made or permitted any
amendment or termination of any material contract, agreement or license to which
it is a party; (f) changed any accounting methods or practice, including,
without limitation, any change in depreciation or amortization policies or
rates; (g) made any loan to any person or entity, including, without limitation,
to any officer or director of the Company or any employee of the Company in an
amount exceeding $25,000 per employee or $100,000 in the aggregate, or increased
the compensation or benefits payable, or to become payable, to any of the
officers, directors or employees of the Company, including, without limitation,
in respect of any bonus payment or deferred compensation; (h) entered into any
material transaction other than in the ordinary course of business; or (i)
entered into an agreement to do any of the foregoing described in clauses (a)
through (h) above.
3.9 Contracts, Agreements
Except as disclosed in Schedule 3.9 hereto, the Company is not a party
to any material written or oral (a) contract for employment which may not be
terminated by the Company, as the case may be, on not more than ninety (90)
days' notice without liability to the Company; (b) pension or profit-sharing
plans, retirement plans, bonus plans, stock purchase or stock option plans or
any similar plans, formal or informal, whether covering one or more directors,
officers or present or former employees; (c) contracts involving payment by or
to the Company of more than $100,000 in the aggregate or in any one year or the
performance of which may extend more than ninety (90) days from the date hereof;
or (d) other contracts, agreements or understandings material to the Company.
All such material contracts, agreements and understandings are in full force and
effect, and the Company or any other party thereto has not received any notice
of default or is in default, and no condition now exists which, with notice or
the lapse of time or both, would render the Company or, to the knowledge of the
Company, any other party, in default under any material contracts,
understandings or agreements to which the Company is or may be a party. Except
as disclosed in Schedule 3.9 hereto, there are no disputes or proceedings
relating to any such material contract, understanding or agreement and the
Company has not received any notice or indication that any party to any such
material contract, understanding or agreement intends to cancel or terminate
such contract, understanding or agreement or intends to exercise or not exercise
any options under such material contract, understanding or agreement.
3.10 Title to Properties; Leasehold Interests
The Company has good and marketable title to each of the properties and
assets owned by it. The Company does not own any real property. Certain real
property used by the
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Company in the conduct of its business is held under lease, and the Company is
not aware of any pending or threatened claim or action by any lessor of any such
property to terminate or materially alter any such lease. Except as set forth on
Schedule 3.10, none of the properties owned or leased by the Company is subject
to any security interest, mortgage, lien, encumbrance or charge which could
reasonably be expected to materially and adversely affect the assets,
properties, liabilities, business, affairs, results of operations, condition
(financial or otherwise) or prospects of the Company. Each lease or agreement to
which the Company is a party and pursuant to which the Company holds properties
and assets is a valid and subsisting agreement without any material default of
the Company thereunder and, to the best of the Company's knowledge, without any
material default thereunder of any other party thereto. No event has occurred
and is continuing which, with due notice or lapse of time or both, would
constitute a default or event of default by the Company under any such lease or,
to the best of the Company's knowledge, by any party thereto, except for such
defaults that would not individually or in the aggregate have a material adverse
effect on the Company. The Company's possession of such property has not been
disturbed and, to the best of the Company's knowledge, no claim adverse to its
rights in such leasehold interests has been asserted against it.
3.11 Litigation
Except as disclosed in the Memorandum, there is no action, suit,
proceeding, investigation or claim pending against the Company or, to the
knowledge of the Company, threatened against the Company in law, equity or
otherwise before any federal, state, municipal or local court, administrative
agency, commission, board, bureau, instrumentality or arbitrator which (i)
questions the validity of any of the Transaction Documents or any action taken
or to be taken pursuant hereto or thereto, (ii) might reasonably be expected to
materially and adversely affect the right, title or interest of any Purchaser to
the Units, or (iii) might reasonably be expected to result in a material adverse
change in the assets, properties, liabilities, business, affairs, results of
operations, condition (financial or otherwise) or prospects of the Company.
3.12 Licenses, Permits and Approvals
The Company owns or possesses and holds free from restrictions or
conflicts with the rights of others all franchises, licenses, permits, consents,
approvals and other authority (governmental or otherwise), and all rights and
privileges with respect to the foregoing, as are necessary for the conduct of
its business as it is now being conducted, and as proposed to be conducted,
except where the failure to own or possess and hold such franchises, licenses,
permits, consents, approvals and other authority (governmental or otherwise)
would not have a material adverse effect upon the Company. The Company is not in
default in any material respects under any of such franchises, licenses,
permits, consents, approvals or other authority.
3.13 Taxes
Except as disclosed in the Memorandum, (a) the Company has filed all
federal, state, local and other tax returns and reports, and any other material
returns and reports with any
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governmental authorities (federal, state or local), required to be filed by it,
(b) the Company has paid or caused to be paid all taxes (including interest and
penalties) that are due and payable, except those which are being contested by
it in good faith by appropriate proceedings and in respect of which adequate
reserves are being maintained on its books in accordance with generally accepted
accounting principles consistently applied, and (c) the Company does not have
any material liabilities for taxes other than those incurred in the ordinary
course of business and in respect of which adequate reserves are being
maintained by it in accordance with generally accepted accounting principles
consistently applied. Federal and state income tax returns for the Company have
not been audited by the Internal Revenue Service or state authorities. No
deficiency assessment with respect to, or proposed adjustment of, the Company's
federal, state, local or other tax returns is pending or, to the best of the
Company's knowledge, threatened. There is no tax lien, whether imposed by any
federal, state, local or other tax authority outstanding against the assets,
properties or business of the Company. There are no applicable taxes, fees or
other governmental charges payable by the Company in connection with the
execution and delivery of this Agreement, except for governmental fees paid in
connection with state and federal securities law filings.
3.14 Employees; ERISA
The Company has no knowledge of any pending or threatened work
stoppage, or union organizing effort involving the employees of the Company. The
Company has no knowledge as to any intention of any key employee or any group of
employees to leave the employ of the Company. Other than as disclosed in
Schedule 3.14 hereto or in the Memorandum, the Company has not established,
sponsored, maintained, made any contributions to or been obligated by law to
establish, maintain, sponsor or make any contributions to any "employee pension
benefit plan" or "employee welfare benefit plan" (as such terms are defined in
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
including, without limitation, any "multiemployer plan." Any such plans have
been established and, to the knowledge of the Company, are being operated in
compliance with applicable laws, and there exist no unfunded obligations of the
Company with respect to any such plan, except as could not reasonably be
expected to have a material adverse effect on the Company. The Company has
complied with all applicable laws relating to the employment of labor, including
provisions relating to wages, hours, equal opportunity, collective bargaining
and the payment of Social Security and other taxes, and with ERISA except to the
extent that noncompliance would not reasonably be expected to have a material
adverse effect on the Company. There are no pending, and the Company is not
aware of any threatened, claims against the Company with respect to the
foregoing.
3.15. Disaster
Neither the business nor the properties of the Company are currently
affected (or has been affected at any time since December 31, 1997) by any fire,
explosion, accident, strike, lockout or other dispute, drought, storm, hail,
earthquake, embargo, act of God or of the public
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enemy or other casualty (whether or not covered by insurance), of a kind which
(individually or in the aggregate) has materially adversely affected, or could
reasonably be expected to materially adversely affect, the assets, properties,
liabilities, business, affairs, results of operations, condition (financial or
otherwise) or prospects of the Company.
3.16 Books and Records
The books and records of the Company, including, without limitation,
all stock ledgers and minute books containing minutes of Board of Directors and
stockholders meetings and the Company's financial books of account, are complete
and correct in all material respects. No action has been taken which requires
the approval of the Board of Directors or the stockholders of the Company which
has not been so approved and is not accurately reflected in the Company's minute
books.
3.17 Material Changes
Since the date of the Memorandum, there has been no material change in
the information set forth therein, except to the extent expressly described in
this Agreement or as disclosed in the Exhibits and the Schedules hereto, and
there have been no changes in the employment of executive personnel or in the
condition (financial or otherwise), operations or prospects of the Company,
except changes occurring in the ordinary course of business consistent with
prior operations which have not had (and are not reasonably anticipated to have)
a material adverse effect on the Company.
3.18 Registration Rights
No person, other than the holders of the Warrant has the right to cause
the Company to effect the registration under the Securities Act of any shares of
capital stock or any other securities (including debt
securities) of the Company.
3.19 Indebtedness
Schedule 3.19 hereto sets forth (i) the amount of all indebtedness of
the Company outstanding as of the Closing (excluding indebtedness in individual
amounts of less than $10,000 or $25,000 in the aggregate, but including debts
owed to participants as shown on the Company's balance sheet), (ii) any lien,
charge, security interest or encumbrance with respect to such indebtedness and
(iii) a brief description of each instrument or agreement governing such
indebtedness. No default exists with respect to or under any such indebtedness
or any instrument or agreement relating thereto which default would reasonably
be expected to have a material adverse effect on the Company.
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3.20 Insurance
The Company holds valid policies with reputable insurers covering
insurance in the amounts and type that the Company reasonably believes is
appropriate and customary for entities in the same or similar businesses to that
of the Company or that are otherwise required to be maintained by it and with
such deductibles or coinsurance as is customary, and such policies are in full
force and effect. Schedule 3.20 lists all insurance policies presently in effect
for which the Company is a named beneficiary. The Company has timely filed
claims with its insurers with respect to all material matters and occurrences
for which it believes it has coverage.
3.21 Brokers
Except for the Agent, the Company has no contract, arrangement or
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
3.22 Intellectual Property Rights
The Company owns or possesses, or has adequate and enforceable licenses
or other rights to use all intellectual property rights necessary for the
operation of its business (as now conducted and as proposed to be conducted),
including, without limitation, all computer software in use by the Company,
without any known conflict with or infringement of the rights of others.
Schedule 3.22 attached hereto contains an accurate and complete list of all
intellectual property rights which the Company owns or is licensed or authorized
to use by others. Except as set forth on such Schedule 3.22, (i) with respect to
intellectual property rights which the Company owns, no other person has been
granted by the Company any rights, or has any interest, in such intellectual
property rights and (ii) to the knowledge of the Company, with respect to any
intellectual property rights which have been assigned to the Company, the
assigning party is fully authorized to assign such rights to the Company without
thereby creating an obligation of the Company to any person. To the knowledge of
the Company, all intellectual property rights held by the Company under licenses
have been duly licensed to the Company, and, except as set forth in such
Schedule 3.22, the Company has rights to the intellectual property it owns and
to any existing licenses for intellectual property rights free and clear of any
liens or other encumbrances. No claim has been asserted or, to the knowledge of
the Company, threatened, by any Person regarding the use or licensing of any of
the Company's intellectual property rights by the Company or challenging or
questioning the validity, enforceability or effectiveness of any licenses or
agreements (including, without limitation, assignments) relating to intellectual
property rights or asserting any rights in such proprietary rights. To the
knowledge of the Company, the use of its intellectual property rights by the
Company does not violate or infringe, and has not in the past violated or
infringed, the proprietary rights of any person. No claims have been asserted by
the Company against any other person claiming infringement of the Company's
intellectual property rights. The Company has not granted any licenses to the
Company's intellectual property rights which remain in effect, and is not aware
of any third parties who are infringing or violating any of such intellectual
property rights. Neither
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the Company nor, to the knowledge of the Company, any other person is in default
under any license or other agreement relating to the Company's intellectual
property rights (including without limitation, assignments), and all such
licenses and agreements are, to the knowledge of the Company, valid, enforceable
and in full force and effect.
3.23 Related Party Transactions
(a)No holder of the Company's Common Stock (an "Existing Investor"),
employee, officer or director of the Company, no affiliate of any Existing
Investor, employee, officer or director of the Company, and no member of the
immediate family of any Existing Investor, employee, officer or director of the
Company (any of the foregoing, a "Related Party") is indebted to the Company,
except as set forth in Schedule 3.23 hereto.,
(b)No Related Party is interested, directly or indirectly, in any
contract with the Company except by reason of their ownership interest in the
Company and/or their membership on the Company's Board of Directors.
(c)No Existing Investor or party to this Agreement is presently,
directly or indirectly through such party's affiliation with any other person, a
party to any transaction with the Company providing for the furnishing of
services by, or rental of real or personal property from, or otherwise requiring
cash payments to, any such person pursuant to an agreement that is material.
SECTION 3A. REPRESENTATIONS OF JOSEPH K. RENSIN
Joseph K. Rensin severally represents as follows:
3A.1 Authorization; Non-Contravention.
This Agreement and the Rensin Guaranty are valid and binding
obligations of Rensin, enforceable in accordance with their respective terms;
the execution and delivery of this Agreement and the Rensin Guaranty and the
performance of the respective obligations of Rensin thereunder, does not
conflict with or violate any provision of any agreement, law, regulation,
judgment or order binding on Rensin.
SECTION 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser hereby severally represents and warrants to the Company
as follows as of the date hereof and as of the Closing:
4.1 Purchaser Authority; Accredited Investor Status
(a) The Purchaser has all requisite power, authority and legal right to
execute, deliver, enter into, consummate and perform this Agreement. The
execution, delivery and performance of this Agreement by the Purchaser have been
duly authorized by all required
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corporate, partnership or other actions on the part of the Purchaser. The
Purchaser has duly executed and delivered this Agreement, and this Agreement
constitutes the legal, valid and binding obligation of the Purchaser enforceable
against the Purchaser in accordance with its terms.
(b) The Purchaser hereby represents to the Company that it has
substantial knowledge, skill and experience in making investment decisions of
this type, it is capable of evaluating the risk of its investment in the Units
being purchased by it and is able to bear the economic risk of such investment,
including the risk of losing the entire investment, that (except as the
Purchaser has otherwise advised the Company and the Purchaser's counsel in
writing) it is purchasing the Units to be purchased by it for its own account,
and that the Units are being purchased by it for investment and not with a
present view to any distribution thereof in violation of applicable securities
laws. It is understood that the disposition of the Purchaser's property shall at
all times be within the Purchaser's control. If the Purchaser should in the
future decide to dispose of any of its Units, it is understood that it may do so
only in compliance with the Securities Act, applicable state securities laws and
this Agreement. The Purchaser represents that it is an "accredited investor" as
defined in Rule 501(a) under the Securities Act and that its investment in the
Units does not represent more than 5% of such Purchaser's net worth. For
purposes hereof, "net worth" means total assets in excess of total liabilities,
exclusive of home, home furnishings and automobiles.
(c) The Purchaser has received (i) audited financial statements for the
twelve month period ending December 31, 1997 and (ii) the Memorandum, and has
had an opportunity to discuss the Company's business, management and financial
affairs with the Company's management.
(d) The Purchaser understands that (i) the Units have not been
registered under the Securities Act by reason of their issuance in a transaction
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) and/or Rule 506 promulgated under the Securities Act, (ii) the
Units must be held indefinitely unless a subsequent disposition thereof is
registered under the Securities Act and any applicable state securities laws or
is exempt from such registration or registrations (and evidence satisfactory to
the Company is provided by such Purchaser of the availability of such
exemptions, including the delivery, upon request, to the Company of an opinion
of counsel to such Purchaser, which opinion and counsel are satisfactory to the
Company), and (iii) the Units will bear a legend to such effect.
(e) The Purchaser represents that at no time was the Purchaser
presented with or solicited by or through any leaflet, public promotional
meeting, advertisement or any other form of general or public advertising or
solicitation. In addition, the Purchaser acknowledges that there has never been
any representation, guaranty or warranty made by the Company or any agent or
representative of the Company as to the amount of or type of consideration or
profit, if any, to be realized as a result of any investment by the Purchaser in
the Units or the Common Stock issuable on conversion thereof.
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(f) In the case of a Purchaser that is a natural person, the Purchaser
has discussed with his legal, tax and financial advisors the suitability of an
investment in the Company for his particular tax and financial situation. All
information which he has provided to the Company concerning him and his
financial position is correct and complete as of the date of this Agreement, and
if there should be any material change in such information prior to the Closing
Date, the Purchaser agrees immediately to provide such information to the
Company and the Agent.
4.2 Reliance on Representations and Warranties by the Company and the
Agent
Each Purchaser hereby acknowledges that the Company and the Agent are
relying on the foregoing representations and warranties in connection with the
sale to such Purchaser of the Units, and thereby agrees to indemnify and hold
harmless the Company and the Agent and their respective officers, directors,
control persons, agents, partners and affiliates harmless from and against any
and all liabilities, losses, claims, costs, damages, judgments, settlements and
expenses (including reasonable attorneys' fees and all expenses reasonably
incurred in investigating, preparing or defending against any litigation
commenced or threatened or any claim whatsoever) suffered or incurred by any of
them as a result of the breach of any of such representation and warranty. In no
event, however, shall the liability of any Purchaser for indemnification under
this Section 4.2 exceed the purchase price paid by the Purchaser to the Company
in connection with such Purchaser's purchase of the Units.
SECTION 5. COVENANTS OF THE COMPANY
The Company covenants and agrees, so long as 25% or more in principal
amount of the Notes have not been redeemed or repurchased by the Company, unless
some other period is expressly provided in any subsections of this Section 5, in
which case such specific period will govern, as follows:
5.1 Use of Proceeds
The Company will use the proceeds from the sale of the Units as
described in the Memorandum.
5.2 Financial Information
The Company will maintain a system of accounting established and
administered in accordance with sound business practices to permit preparation
of financial statements in accordance with generally accepted accounting
principles consistently applied. The Company will deliver the following to each
Purchaser thereof:
(i) as soon as practicable but in any event within 90 days after the
close of each fiscal year of the Company, (A) a balance sheet of the Company as
of the end of such fiscal year and (B) statements of operations and cash flows
of the Company for such fiscal
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year, in each case setting forth in comparative form the corresponding financial
information for the immediately preceding fiscal year, all such balance sheets
and statements to be audited by an independent public accounting firm of
recognized standing selected by the Company. All financial statements provided
under this Section 5.2(i) shall be prepared in accordance with GAAP,
consistently applied, and shall be certified as to accuracy and completeness by
the Vice President - Finance or the President of the Company.
(ii) as soon as reasonably practicable, and in any event within 45 days
after the close of each of the Company's fiscal quarters, (A) an unaudited
balance sheet of the Company as of the end of such fiscal quarter and (B)
unaudited statements of operations and cash flows of the Company for the three
months then ended, in each case in reasonable detail, certified as to accuracy
and completeness by the Vice President Finance or the President and Chief
Executive Officer of the Company and setting forth in comparative form the
corresponding amounts for the comparable period one year prior thereto (subject
to normal year-end adjustments); and
(iii) as soon as reasonably practicable, such other information as may
reasonably be requested by a holder of Units (unless reasonably objected to by
the Company), regarding the assets, properties, liabilities, business, affairs,
results of operations or conditions (financial or otherwise) of the Company. As
a condition to receiving such information from the Company, each holder (other
than any parties that are (i) agencies, instrumentalities or entities affiliated
with any state government or (ii) a government sponsored retirement system) of
Units requesting such information shall, if requested by the Company, execute an
appropriate confidentiality agreement.
The obligation of the Company to furnish such financial information
shall terminate when the Company becomes subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended.
5.3 Notice of Events of Default and Certain Other Events; Litigation;
Provision for Unitholders
(a) Promptly, but in any event within thirty (30) days after notice
thereof is received by the Company , the Company will deliver to each holder of
Units any notice of (i) a default by the Company in the observance or
performance of any material contract or agreement to which the Company is a
party, including, without limitation, any Transaction Document, and (ii) the
commencement of any investigation, action or proceeding at law or in equity or
before any federal or state court or governmental agency to which the Company is
a party an adverse result of which would, either individually or in the
aggregate, reasonably be expected to have a material adverse effect on the
business or financial condition of the Company.
(b) The Company will use reasonable efforts to notify each holder of
Units that it has become aware of the existence of a default not otherwise
covered by Section 5.3(a) within 30 days of it becoming so aware.
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(c) Subject to execution of confidentiality agreements in form and
content satisfactory to the Company's counsel, at least 24 hours prior to the
filing of a registration statement providing for an initial public offering
(which shall provide that the Notes shall be paid at the closing of the offering
in accordance with their terms) or the execution by the Company of an agreement
(which shall provide that the Notes shall be paid upon the Change-in-Control in
accordance with their terms) that the Warrants are exercisable for substantially
the same form and amount of consideration upon the change-of-control as provided
for in the Warrant) the consummation of which would result in a
Change-in-Control the Company shall provide notice thereof to all of the holders
of the Units.
(d) At least 24 hours prior to the consummation of a Change-In-Control
pursuant to an agreement to which the Company is a party or within 24 hours
after the Company becomes aware that any other change of control has occurred,
the Company shall provide notice thereof to all of the holders of the Units.
5.4 Access to Information
At the request of holders of 25% or more of the outstanding Units, the
Company will permit such Purchasers and any authorized representative of such
Purchasers, subject to (if requested by the Company) execution by such
Purchasers of a reasonable confidentiality agreement, full and complete access
at the Company during normal business hours and in a manner that will not
unreasonably interfere with the conduct of the Company's business, to the
properties and books and records of the Company. The Purchasers requesting such
access shall bear all costs and expenses they or their representatives incur in
connection with such request and such access.
5.5 Maintenance of Existence; Properties and Franchises; Compliance
with Law; Taxes; Insurance
The Company will:
(a) maintain its corporate existence, rights and other franchises in
full force and effect; provided, that the Company may terminate or permit the
termination or abandonment of rights or other franchises, if in the opinion of
the Company it is no longer in the Company's best interests to maintain such
rights or other franchises and such termination or abandonment will not be
prejudicial in any material respect to the holders of the Units;
(b) maintain its tangible assets in good repair, working order and
condition, ordinary wear and tear excepted, so far as necessary to the proper
carrying on of its business;
(c) comply with each provision of all leases to which it occupies real
or personal property if the breach of such provision would reasonably be
expected to have a material adverse effect on the condition, financial or
otherwise, or operations of the Company;
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(d) comply with all applicable laws and with all applicable orders,
rules, rulings, certificates, licenses, regulations, demands, judgments, writs,
injunctions and decrees, the violation of which would reasonably be expected to
have a material adverse effect on the Company, provided, that such compliance
shall not be necessary so long as the applicability or validity of any such law,
order, rule, ruling, certificate, license, regulation, demand, judgment, writ,
injunction or decree shall be contested in good faith by appropriate
proceedings;
(e) pay when due all taxes, fees, assessments and other government
charges imposed upon its properties, assets or income and all claims or
indebtedness (including, without limitation, materialmen's, vendor's, workmen's
and like claims) prior to such claims becoming a lien upon such properties or
assets; provided, that payment of any such tax, fee, assessment, charge, claim
or indebtedness shall not be necessary so long as (i) the applicability or
validity thereof shall be contested in good faith by appropriate proceedings and
a reserve, if appropriate, shall have been established with respect thereto and
(ii) failure to make such payment will not have a material adverse effect on the
business or financial condition of the Company; and
(f) keep adequately insured all of its respective properties of a
character customarily insured by entities in the same or similar business as
that of the Company, against loss or damage of the kinds and in amounts
customarily insured against by such entities and with such deductibles or
coinsurance as is customary.
5.6 Restrictive Agreements Prohibited
Except for senior indebtedness (as defined in the Notes) incurred in
accordance with the terms of the Notes and actions taken with respect to such
senior indebtedness, the Company shall not become a party to any agreement which
by its terms restricts the Company's ability to comply with and perform its
obligations under the Transaction Documents and the Notes and Warrants and the
By-Laws of the Company.
5.7 Transactions with Affiliates
The Company will not, directly or indirectly, enter into any
transaction, series of transactions or agreement (including, without limitation,
the purchase, sale, distribution, lease or exchange of any property or the
rendering of any service) with any affiliate of the Company, other than a
wholly-owned subsidiary of the Company, unless such transaction, series of
transactions or agreement: (a) involves less than $250,000 per year in the
aggregate and is on terms that are no less favorable to the Company, as the case
may be, than those which might be obtained at the time of such transaction from
a person who is not such an affiliate; (b) the transaction is approved by a
majority of the Company's board of directors pursuant to deliberations in which
all of the directors have received notice in accordance with the Company's
by-laws or the observer appointed pursuant to Section 5.14 received comparable
notice; (c) the transaction involves short term funding of consumer receivables
accounts at below-market interest cost to the Company provided, however, that
this Section 5.7 shall not limit, or be applicable to, (i) contractual
commitments of the Company that were entered into prior to the
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date hereof; (ii) employment arrangements with any individual who is an employee
of the Company if such arrangements are approved by the Board of Directors of
the Company; and (iii) the payment of reasonable and customary regular fees to
directors who are not employees of the Company.
5.8 Reservation of Shares
There have been reserved, and the Company shall at all times keep
reserved, free from preemptive rights, out of its authorized Common Stock, a
number of shares of Common Stock sufficient to provide for the exercise of the
Warrants. If at any time the number of authorized but unissued shares of Common
Stock of the Company shall not be sufficient to effect the exercise of the
Warrants or otherwise to comply with the terms of this Agreement, the Company
will forthwith take such corporate and stockholder action as may be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose. The Company will obtain any
authorization, consent, approval or other action by or make any filing with any
court or administrative body that may be required under applicable federal or
state securities laws in connection with the issuance of shares of Common Stock
upon exercise of the Warrants.
5.9 Private Placement Status
Neither the Company nor any agent nor other person acting on the
Company's behalf will do or cause to be done (or will omit to do or to cause to
be done) any act which act (or which omission) would result in bringing the
issuance or sale of the Notes and the Warrants, and the issuance of Common Stock
upon exercise of the Warrants, within the provisions of Section 5 of the
Securities Act or the filing, notification or reporting requirements of any
state securities law, except for filings, notices or reports pursuant to state
securities laws which have already been made or which are contemplated in
connection with the private offering and sale of the Units.
5.10 Regulation D Filing
The Company will file on a timely basis a Form D "Notice of Sale of
Securities Pursuant to Regulation D" and any amendments thereto required to
be filed with the Securities and Exchange Commission pursuant to Regulation D
under the Securities Act, and all notices, filings and registrations, and
amendments to any thereof as shall be required under any state securities or
"Blue Sky" law or any regulation thereunder, and will simultaneously furnish
copies of such Form D or amendment thereto and each such notice, filing
registration or amendment thereof to the Agent and counsel to the Purchasers
on behalf of Purchasers.
5.11 Access to Information and Documents
Prior to each Closing, the Company shall give the Purchasers and their
respective counsel, accountants and other representatives, reasonable access,
during normal business hours
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and upon reasonable notice, to all the properties, documents, contracts, records
and appropriate personnel of the Company. Prior to each Closing, the Company
shall furnish the Purchasers with copies of such documents and with such
information with respect to the affairs of the Company as the Purchasers may
from time to time reasonably request.
5.12 Further Assurances
Subject to the terms and conditions of this Agreement, the parties
hereto shall use best efforts to take, or cause to be taken, all action, and to
do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the sale of the
Units pursuant to this Agreement.
5.13 Fees
The Company and each of the Purchasers shall bear their own legal and
other expenses with respect to this transaction, except that upon each Closing,
the Company shall pay (i) the reasonable fees, expenses and disbursements of
Venable, Baetjer & Howard L.L.P., counsel to the Agent and the Purchasers, and
the out-of-pocket expenses of the Agent in an aggregate amount not to exceed
$45,000 and (ii) the Agent's commission, each as provided in the engagement
letter dated February 19, 1998, between the Company and the Agent (the
"Engagement Letter").
5.14 Board Representation
(a) The Agent has the right to nominate, on behalf of holders of the
Notes, an individual to serve on the Board of Directors of the Company for a
term commencing upon the last Additional Closing (the "Final Closing") and
continuing for so long as any amount of the Notes remains outstanding.
(b) The Company and Mr. Rensin shall use their best efforts to cause
the election of such nominee.
(c) Unless and until such individual is nominated, the Agent shall have
the right to designate, on behalf of the holders of the Notes, an individual to
attend meetings of the Board of Directors of the Company, who shall receive such
notice as is received by directors prior to all meetings.
5.15 Issuance of Convertible Debt or Debt with Warrants
Without the consent of the holders of 25% of the outstanding principal
amount of the Notes, the Company shall not issue Senior Indebtedness (as such
term is defined in the Note) convertible into, or issued with warrants entitling
the holder to subscribe for, Common Stock of the Company ("Equity-Related Senior
Indebtedness") if either (i) the aggregate amount of Equity-Related Senior
Indebtedness issued subsequent to issuance of the Notes and outstanding
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<PAGE>
exceeds $25,000,000 or (ii) the aggregate amount of Common Stock potentially
issuable in respect of outstanding Equity-Related Senior Indebtedness exceeds 5%
of the Company's fully-diluted Common Stock. The foregoing shall not restrict
the Company's issuance of debt convertible into Common Stock or issued with
warrants to subscribe for Common Stock in either case on a parity with or junior
to the Notes.
5.16 Life Insurance
As soon as practical following the Closing, the Company shall obtain
key-man term insurance on the life of Joseph K. Rensin in the amount of
$4,000,000 and shall maintain key-man life insurance of $4,000,000 as long as
any portion of the Note is outstanding.
SECTION 6. CONDITIONS TO PURCHASERS' OBLIGATIONS
The Purchasers' obligation to purchase Units hereunder is subject to
satisfaction of the following conditions (any of which may be waived by the
Purchasers) as of the Closing:
6.1 Delivery of Note
The Company shall deliver to the Agent the Note, registered in the name
of the Agent or their respective nominees, in the principal amount of $5,000,000
or such lesser principal amount of the Note as shall
be subscribed for at the Initial Closing.
6.2 Certificates for Warrants
Each Purchaser shall concurrently receive the certificate(s) for the
Warrants.
6.3 Accuracy of Representations and Warranties
The representations and warranties of the Company and Mr. Rensin in
this Agreement or in any certificate or document delivered pursuant hereto or
thereto shall be true and correct on and as of the Closing with the same effect
as though made on and as of the Closing (after giving effect to transactions
contemplated by this Agreement).
6.4 Compliance with Agreements
The Company shall have performed under, obtained all necessary consents
and/or waivers with respect to and complied with all agreements, covenants and
conditions contained in the Transaction Documents and any other document
contemplated hereby or thereby which are required to be performed or complied
with by the Company on or before the Closing.
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6.5 Officers' Certificates
The Purchasers shall have received a certificate dated the Closing Date
and signed by the President and Chief Executive Officer and by the Vice
President - Finance of the Company, to the effect that the conditions of this
Section 6 have been satisfied.
6.6 Proceedings
All corporate and other proceedings in connection with the transactions
contemplated by the Transaction Documents, and all documents incident thereto,
shall be in form and substance satisfactory to the Purchasers and their counsel,
and the Purchasers shall have received all such originals or certified or other
copies of such documents as the Purchasers or their counsel may reasonably
request.
6.7 Legality; Governmental and Other Authorization
The purchase of and payment for the Units shall not be prohibited by
any law or governmental order, rule, ruling, regulation, release, interpretation
or opinion applicable to the Purchasers and shall not subject the Purchasers to
any penalty, tax, liability or other onerous condition. Any necessary consents,
approvals, licenses, permits, orders and authorizations of, and any filings,
registrations or qualifications with, any governmental or administrative agency
or other person with respect to the transactions contemplated by this Agreement
shall have been obtained or made and shall be in full force and effect. The
Company shall have delivered to the Purchasers upon their reasonable request
factual certificates or other evidence, in form and substance satisfactory to
the Purchasers and their counsel, setting forth what is required to enable the
Purchasers to establish compliance with this condition.
6.8 Time of Purchase
Unless extended in writing by the Company and the Agent, the Initial
Closing shall not be later than 5:00 p.m., Baltimore, Maryland time, on April 2,
1998 and the final closing shall not be later than 5:00 p.m., Baltimore,
Maryland time, on April 7, 1998.
6.9 No Change in Law, etc.
No legislation, order, rule, ruling or regulation shall have been
proposed, enacted or made by or on behalf of any governmental body, department
or agency, and no legislation shall have been introduced in either House of
Congress, and no investigation by any governmental authority shall have been
commenced or threatened, and no action, suit or proceeding shall have been
commenced before, and no decision shall have been rendered by, any court, other
governmental body or arbitrator, which, in any such case, in the reasonable
judgment of the Purchasers or their counsel could adversely affect, restrain,
prevent or change the transactions contemplated by this Agreement (including
without limitation the issuance of the Units hereunder and thereunder) or
materially and adversely affect the assets, properties,
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liabilities, business, affairs, results of operations, condition (financial or
otherwise) or prospects of the Company.
6.10 Opinion of Counsel
The Purchasers and the Agents shall have received an opinion of Piper &
Marbury LLP, counsel for the Company, dated the Closing Date and addressed to
the Purchasers and the Agents, which opinion shall be in form and substance
reasonably satisfactory to the Agent and its counsel and in the form attached
hereto as Exhibit ___.
6.11 Other Documents and Opinions
The Purchasers shall have received such other documents and opinions,
in form and substance satisfactory to the Purchasers and their counsel, relating
to matters incident to the transactions contemplated hereby as the Purchasers
may reasonably request.
SECTION 7. CONDITIONS TO COMPANY'S OBLIGATIONS
The Company's obligation to sell and issue the Units at the Closing is,
at the option of the Company, subject to the fulfillment or waiver of the
following conditions:
7.1 Payment
Simultaneously with each Closing and as described in Section 2 hereof,
the Company shall receive payment of $100,000 per Unit being purchased at such
Closing by certified or official bank check(s) or wire transfer(s).
7.2 Representations and Warranties Correct
The representations and warranties made by the Purchasers in Section 4
hereof shall be true and correct in all material respects when made, and shall
be true and correct in all material respects on the Closing Date with the same
force and effect as if they had been made on and as of said date.
SECTION 8. BROKERS
Except for certain fees payable to the Agent (all of which fees will be
paid by the Company subject to the terms of the Engagement Letter), the Company
represents and warrants to the Purchasers that there is no liability for (and
the Company will pay and indemnify the Purchasers against) any fees or expenses
(or claims therefor) of any investment banker, finder or broker retained by the
Company or its affiliates (or that claims it was retained by the Company or its
affiliates) in connection with this Agreement or sale of the Units. The Company
will indemnify the Purchasers against all such fees or expenses payable to the
enumerated persons in the preceding sentence and against any other such fees,
expenses or claims of any person, unless
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such person was engaged by the Purchasers in connection with this Agreement or
any of the transactions contemplated hereby.
SECTION 9. BREACH OF REPRESENTATIONS, WARRANTIES AND COVENANTS
(a) The representations and warranties (as of the date hereof and as of
the Closing), covenants and agreements of the Company and Joseph K. Rensin and
of the Purchasers contained in this Agreement or in any document or certificate
delivered pursuant hereto or in connection herewith shall survive, and shall
continue in effect following (i) the execution and delivery of this Agreement,
(ii) the closings hereunder and thereunder, (iii) any investigation at any time
made by the Purchasers or on their behalf or by any other person, and (iv) the
issuance, sale and delivery of the Units, any disposition thereof and any
payment, conversion or cancellation of the Units except, that Sections 3 and 5
shall terminate upon the earlier of an initial public offering of the Company or
a Change-In-Control of the Company, provided the Notes are repaid at the time of
such transactions, or three years from the initial closing hereunder. All
statements contained in any certificate delivered to the Purchasers by or on
behalf of the Company pursuant hereto shall constitute representations and
warranties by the Company hereunder.
(b) The Company agrees to indemnify and hold the Purchasers harmless
from and against, and will pay to the Purchasers the full amount of, any loss,
damage, liability or expense (including amounts paid in settlement and
reasonable attorneys' fees and expenses) incurred by the Purchaser resulting
directly or indirectly from any material breach of the representations,
warranties, covenants or agreements of the Company contained in this Agreement
or any certificate delivered to the Purchasers pursuant hereto or in connection
herewith; provided that the Company shall only be required to indemnify the
Purchasers for attorneys' fees of one counsel to the Purchasers and provided,
further, that in no event shall the Company be liable for any amount in excess
of the proceeds received by the Company from the sale of the Units.
SECTION 10.SPECIFIC PERFORMANCE
The parties (other than any parties that are (i) agencies,
instrumentalities or entities affiliated with any state government or (ii) a
government sponsored retirement system) agree that irreparable damage will
result in the event that this Agreement is not specifically enforced, and the
parties agree that any damages available at law for a breach of this Agreement
would not be an adequate remedy. Therefore, the provisions hereof and the
obligations of the parties hereunder shall be enforceable in a court of equity,
or other tribunal with jurisdiction, by a decree of specific performance, and
appropriate injunctive relief may be applied for and granted in connection
therewith. Such remedies and all other remedies provided for in this Agreement
shall, however, be cumulative and not exclusive and shall be in addition to any
other remedies which a party may have under this Agreement or otherwise.
SECTION 11. EXPENSES
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a) Whether or not the transactions herein contemplated are consummated,
the Company will pay (i) the costs and expenses of the preparation and
production of the Memorandum, the issuance of the Units and the furnishing of
all opinions by counsel for the Company, (ii) upon the Initial Closing, the fees
and expenses of Venable Baetjer & Howard L.L.P. in connection with this
Agreement and the transactions contemplated hereby, as provided in the
Engagement Letter and, when combined with the out-of-pocket expenses of the
Agent referred to in subsection (iii) below, not to exceed an aggregate amount
of $45,000 without the Company's prior consent, and (iii) subject to the
Engagement Letter, the fees and out-of-pocket expenses of the Agent.
(b) The obligations of the Company under this Section 11 shall survive
the Closing hereunder and any termination of this Agreement.
SECTION 12. AMENDMENTS AND WAIVERS
(a) The terms and provisions of this Agreement may be amended, waived,
modified or terminated only with the written consent of the holders of a
majority of the outstanding Units. Each Purchaser acknowledges that by operation
hereof, the holders of a majority of the outstanding Units (which may not
include such Purchaser) will have the right and power to diminish or eliminate
certain rights of such Purchaser under this Agreement.
(b) The Company agrees that it will make reasonable efforts to notify
all holders of Units in advance of any proposed amendment, waiver, modification
or termination, but failure to give such notice shall not in any way affect the
validity of any such amendment, waiver, modification or termination. In
addition, promptly after obtaining the written consent of the holders as herein
provided, the Company shall transmit a copy of any amendment, waiver,
modification or termination which has been adopted to all holders of Units then
outstanding, but failure to transmit copies shall not in any way affect the
validity of any such amendment, waiver, modification or termination.
SECTION 13. EXCHANGE OF SHARES; CANCELLATION OF SURRENDERED
SHARES; REPLACEMENT
(a) At any time at the request of any holder of Warrants to the Company
at its address provided under Section 14 hereof, the Company at its expense
(except for any transfer tax arising out of the exchange) will issue and deliver
to or upon the order of the holder in exchange therefor a new certificate or
certificates therefor in such amount or amounts as such holder may request in
the aggregate representing the number of Warrants represented by such
surrendered certificates, and registered in the name of such holder or otherwise
as such holder may direct.
(b) Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of any Warrant certificate and, in the case of
any such loss, theft or destruction, upon delivery of an indemnity agreement
reasonably satisfactory to the Company, or
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in the case of any such mutilation, upon surrender of such Warrant certificate
(which surrendered Share certificate shall be canceled by the Company), the
Company will issue a new Warrant certificate of like tenor in lieu of such lost,
stolen, destroyed or mutilated Share certificate as if the lost, stolen,
destroyed or mutilated Share certificate were then surrendered for exchange.
SECTION 14. NOTICES
All notices, requests, demands, consents and other communications
hereunder shall be in writing and shall be delivered by hand or shall be sent by
telex or telecopy (confirmed by registered, certified or overnight mail or
courier, postage and delivery charges prepaid), if to the Company at the address
indicated below, or if to a Purchaser at the address indicated on Exhibit A
hereto, or at such other address as a party may from time to time designate as
its address in writing to the other party to this Agreement. Whenever any notice
is required to be given hereunder, such notice shall be deemed given and such
requirement satisfied only when such notice is delivered or, if sent by telex or
telecopier, when received.
(a) If to the Company:
Creditrust Corporation
7000 Security Boulevard
Baltimore, Maryland 21244
Attention: Mr. Joseph K. Rensin, President and
Chief Executive Officer
FAX: 410-594-9621
with a copy to:
Henry D. Kahn, Esquire
Piper & Marbury LLP
36 South Charles Street
Baltimore, Maryland 21201
FAX: 410-576-5051
(b) If to the Purchaser, at the address
of the Purchaser set forth on Exhibit A.
Mr. Steven L. Shea
Ferris, Baker Watts, Incorporated
100 Light Street
8th Floor
Baltimore, MD 21202
Fax: 410 659-4632
Mr. Gregory Berlacher
Boenning & Scattergood, Inc.
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500 North Gulph Road,
Suite 110
King of Prussia, Pennsylvania 19406
FAX: 610-783-4780
with a copy to:
Ariel Vannier, Esq.
Venable, Baetjer & Howard L.L.P.
2 Hopkins Plaza
Baltimore, Maryland 21201
FAX: 410-244-7742
SECTION 15. MISCELLANEOUS
(a) This Agreement (including all schedules and exhibits hereto) and
the Transaction Documents, together with any further agreements entered into by
the Purchasers and the Company at the Closing hereunder, contain the entire
agreement between the Purchasers and the Company, and supersede any prior oral
or written agreements, commitments, terms or understandings regarding the
subject matter hereof.
(b) Any provision of this Agreement which 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 hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. To the extent permitted by applicable law, the parties
(other than any parties that are (i) agencies, instrumentalities or entities
affiliated with any state government or (ii) a government sponsored retirement
system) hereby waive any provision of law which may render any provision hereof
prohibited or unenforceable in any respect.
(c) Unless otherwise expressly provided herein, any provision of this
Agreement relating to the consent, determination, decision or waiver of a holder
or holders of Units means such holder's consent, determination, decision or
waiver in such holder's sole discretion.
(d) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns, whether so
expressed or not.
(e) In addition to any assignment by operation of law, a Purchaser may
assign, in whole or in part, any or all of its rights (and/or obligations) under
this Agreement to any permitted transferee of any or all of its Units, except as
provided under the terms of the Registration Rights Agreement, and (unless such
assignment expressly provides otherwise) any such assignment shall not diminish
the rights the Purchaser would otherwise have under this Agreement or with
respect to any remaining Units held by such Purchaser.
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(f) No course of dealing and no delay on the part of any party hereto
in exercising any right, power, or remedy conferred by this Agreement shall
operate as a waiver thereof or otherwise prejudice such party's rights, powers
and remedies. No single or partial exercise of any rights, powers or remedies
conferred by this Agreement shall preclude any other or further exercise thereof
or the exercise of any other right, power or remedy.
(g) The headings and captions in this Agreement are for convenience of
reference only and shall not define, limit or otherwise affect any of the terms
or provisions hereof.
(h) The Company hereby agrees that the Agent may rely upon the
Company's representations and warranties made to the Purchasers in Section 3
hereof as if such representations and warranties were made directly to the
Agent.
(i) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Maryland (other than any conflict of laws rule
which might result in the application of the laws of any other jurisdiction).
Each of the parties (other than any parties that are (i) agencies,
instrumentalities or entities affiliated with any state government or (ii) a
government sponsored retirement system) hereby irrevocably submits to the
jurisdiction of the state courts of the State of Maryland or any Federal court
sitting in the State of Maryland for purposes of any controversy, claim or
dispute arising out of or related to this Agreement.
(j) This Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute one and the same instrument,
and all signatures need not appear on any one counterpart. The authentic
signature of any party received by facsimile transmission shall constitute a
valid and binding signature of such party.
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IN WITNESS WHEREOF, the parties have executed this Senior Subordinated
Note and Common Stock Warrant Purchase Agreement as of the date first written
above.
CREDITRUST CORPORATION
By: /s/ Joseph K. Rensin
------------------------------------
Name: Joseph K. Rensin
Title:
BOENNING & SCATTERGOOD, INC.
By: /s/ Gregory J. Berlacher
------------------------------------
Name: Gregory J. Berlacher
Title:
FERRIS, BAKER WATTS,
INCORPORATED
By: /s/ Steven L. Shea
------------------------------------
Name: Steven L. Shea
Title:
INVESTOR:
Name:
----------------------------------
By:
------------------------------------
Title:
---------------------------------
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EXHIBIT A
to
Purchase Agreement
with
Creditrust Corporation
Dated April __, 1998
<TABLE>
<CAPTION>
Number of Units Purchase
Name of Purchaser Purchased Price
<S> <C> <C>
</TABLE>
28
<PAGE>
REGISTRATION RIGHTS AGREEMENT
Dated as of April 2, 1998
relating to
450,000 Common Stock Purchase Warrants
by and between
Creditrust Corporation
and
Ferris, Baker Watts, Incorporated
Boenning & Scattergood, Inc.,
as Placement Agent
and the Initial Holders of the Company's
Senior Subordinated Notes, 1998 Series
<PAGE>
This Registration Rights Agreement (the "Agreement") is made
and entered into as of April 2, 1998, by and between Creditrust Corporation, a
Maryland corporation (the "Company"), Ferris, Baker, Watts Incorporated, and
Boenning & Scattergood, Inc. (collectively, the "Placement Agent"), who will act
as the Company's exclusive placement agent in connection with the private
placement (the "Private Placement") by the Company pursuant to Regulation D
under the Securities Act of 1933, as amended, of $5,000,000 in Units, each Unit
consisting of $100,000 in principal amount of Senior Subordinated Notes, 1998
Series (the "Notes") and 9,000 common stock purchase warrants (the "Warrants"),
and the initial Holders of the Units. In order to induce the Placement Agent and
the Holders to enter into the Senior Secured Note Series 1998 and Common Stock
Warrant Purchase Agreement (the "Purchase Agreement"), the Company has agreed to
provide the registration rights set forth in this Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have
the following meanings:
Act: The Securities Act of 1933, as amended.
Commission: The Securities and Exchange Commission.
Common Stock: The Common Stock, $0.01 par value per share, of the
Company.
Effectiveness Target Date: As defined in Section 4.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Holder: As defined in Section 2(b) hereof.
NASD: National Association of Securities Dealers, Inc.
Offering Memorandum: The Offering Memorandum, dated March 30, 1998, and
all amendments and supplements thereto, relating to the Units.
Person: An individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
Preliminary Prospectus: As defined in Section 3(e).
2
<PAGE>
Prospectus: The prospectus included in the Shelf Registration
Statement, as amended or supplemented by any Prospectus Supplement with respect
to the terms of the offering of any portion of the Transfer Restricted
Securities (as defined herein) covered by the Shelf Registration Statement and
by all other amendments and supplements to the prospectus, including
post-effective amendments, and all material which may be incorporated by
reference into such prospectus.
Prospectus Supplement: As defined in Section 4(b).
Registration Expenses: As defined in Section 5(a).
Shelf Registration Statement: As defined in Section 3(a) hereof.
Transfer Restricted Securities: Each share of Common Stock of the
Company issuable upon exercise of a Warrant held by a Holder who has agreed
(provided that the Company's controlling stockholder and chief executive officer
has similarly agreed) with the underwriter for the Company's initial public
offering to a lock-up following such initial public offering of up to 180 days,
as determined by such underwriter in consultation with the Company, until each
such share (i) has been effectively registered under the Securities Act and
disposed of in accordance with the effective Shelf Registration Statement
covering it, (ii) is distributed to the public pursuant to Rule 144 or (iii) may
be sold or transferred pursuant to Rule 144(k) (or any similar provisions then
in force) under the Securities Act or otherwise.
Underwriter: Any underwriter, placement agent, selling broker, dealer
manager, qualified independent underwriter or similar securities industry
professional.
Underwritten Registration or Underwritten Offering: An offering in
which securities of the Company are sold to an Underwriter or with the
assistance of such Underwriter for reoffering to the public on a firm commitment
or best efforts basis.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT
(a) Transfer Restricted Securities. The securities entitled to the
benefits of this Agreement are the Transfer Restricted Securities.
(b) Holders of Transfer Restricted Securities. A Person is deemed to be
a holder of Transfer Restricted Securities (each, a "Holder") whenever such
Person owns Transfer Restricted Securities.
3
<PAGE>
SECTION 3. SHELF REGISTRATION
(a) Filing of Registration Statement. The Company shall use its best
efforts to file or cause to be filed with the Commission concurrently with or
promptly after completion of an initial public offering of the Company's Common
Stock, a shelf registration statement pursuant to Rule 415 (as may then be
amended) under the Act (the "Shelf Registration Statement") on Form S-1 or Form
S-3, if the use of such form is then available and as determined by the Company,
to cover resale of Transfer Restricted Securities by the Holders thereof who
shall have timely provided the information required pursuant to Section 3(e)
hereof. The Company shall use its reasonable best efforts to cause such Shelf
Registration Statement to be declared effective by the Commission on or prior to
120 days after the closing of such initial public offering. The Company shall
use its reasonable best efforts to keep such Shelf Registration Statement
continuously effective, supplemented and amended to the extent necessary to
ensure that it is available for resales of Transfer Restricted Securities until
the second anniversary of the initial public offering (or such later time as the
Transfer Restricted Shares would become freely tradeable, assuming net exercise,
under Rule 144(k) of the Act, or any successor provision thereto (as further
described in Section 4 below)); provided that the Company shall not be obligated
to keep the Shelf Registration Statement effective as to any period with respect
to which the Company has received a written opinion, which has been furnished to
and is reasonably acceptable to the Placement Agent, from the Company's counsel,
Piper & Marbury L.L.P., or other counsel designated by the Company and
reasonably acceptable to the Placement Agent ("Company Counsel"), to the effect
that the Transfer Restricted Securities can be freely offered and sold in the
public markets without the continued effectiveness of the Shelf Registration
Statement. The Company further agrees to use its reasonable best efforts to
prevent the happening of any event that would cause the Shelf Registration
Statement to contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading or to be not effective and usable for resale of the
Transfer Restricted Securities during the period that such Shelf Registration
Statement is required to be effective and usable.
Upon the occurrence of any event that would cause the Shelf
Registration Statement (i) to contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading or (ii) to be not effective and usable for
resale of Transfer Restricted Securities during the period that such Shelf
Registration Statement is required to be effective and usable, the Company upon
knowledge of such an event, shall as promptly as practicable file an amendment
to the Shelf Registration Statement, in the case of clause (i), correcting any
such misstatement or omission, and in the case of either clause (i) or (ii), use
its best efforts to cause such amendment to be declared effective and such Shelf
Registration Statement to become usable as soon as practicable thereafter.
Notwithstanding anything to the contrary in this Section 3, subject to
compliance with Sections 4 and 5(b), if applicable, the Company may prohibit
offers and sales of Transfer Restricted Securities pursuant to the Shelf
Registration Statement at any time if (A), in the judgment of the
4
<PAGE>
Company's Board of Directors, acting with the advice of counsel experienced in
securities laws matters, the Board of Directors determine that (i) the Company
is in possession of material non-public information, (ii) such prohibition is
necessary in order to avoid a requirement to disclose such material non-public
information and (iii) disclosure of such material non-public information would
be materially adverse to the best interests of the Company and its stockholders
or (B) the Company has made a public announcement relating to an acquisition or
business combination transaction including the Company and/or one or more of its
subsidiaries (i) that is material to the Company and its subsidiaries taken as a
whole and (ii) the Board of Directors of the Company determines in good faith
that offers and sales of Transfer Restricted Securities pursuant to the Shelf
Registration Statement prior to the consummation of such transaction (or such
earlier date as the Board of Directors shall determine) would be materially
adverse to the best interests of the Company and its stockholders or (C) (i) the
Company has received any request by the Commission or any other federal or state
governmental authority for amendments or supplements to a Shelf Registration
Statement or related Prospectus or for additional information, (ii) the
Commission or any other federal or state governmental authority has issued any
stop order suspending the effectiveness of a Registration Statement or the
initiation or threatening of any proceedings for that purpose, (iii) the Company
has received any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Transfer Restricted
Securities for sale in any jurisdiction or the initiation or threatening of any
proceedings for such purpose, (iv) advised by counsel to the Company experienced
in securities laws matters, upon the existence of any fact or happening of any
event which makes any statement of a material fact in such Registration
Statement or related Prospectus untrue or which would require the making of any
changes in the Registration Statement or Prospectus in order that, in the case
of the Registration Statement, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and that in the case
of the Prospectus, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, and (v) upon advice of counsel to the Company
experienced in securities laws matters, the Company has determined that a
post-effective amendment to a Registration Statement would be appropriate (the
period during which any such prohibition of offers and sales of Transfer
Restricted Securities pursuant to the Shelf Registration Statement is in effect
pursuant to clause (A), (B) or (C) of this subparagraph (a) is referred to
herein as a "Suspension Period"). A Suspension Period shall commence on and
include the date on which the Company provides written notice to Holders of
Transfer Restricted Securities covered by the Shelf Registration Statement that
offers and sales of Transfer Restricted Securities cannot be made thereunder in
accordance with this Section 3 and shall end three business days after the
earlier to occur of (x) the date on which such material information is disclosed
to the public or ceases to be material or the Company is able to so comply with
its disclosure obligations and Commission requirements or (y) 25 days after
written notice is provided by the Company to the Holders of such Suspension
Period. Each notice shall state to the extent, if any, as is practicable, an
estimate of the expected duration of the Suspension Period.
5
<PAGE>
(b) Underwritten Offering. If the Holders of a majority of the
outstanding Transfer Restricted Securities so elect (with holders of Common
Stock constituting Transfer Restricted Securities being deemed to be Holders of
the aggregate amount of Warrants exercised for purposes of such calculation), an
offering of Transfer Restricted Securities pursuant to the Shelf Registration
Statement may be effected in the form of an Underwritten Offering. Such election
shall be evidenced by a written notice (the "Underwriting Notice") delivered to
the Company. The Holders of the Transfer Restricted Securities to be registered
shall pay all underwriting discounts and commissions of such Underwriters, and
the Company shall be obligated to pay all expenses described in Section 5 below.
(c) Selection of Underwriters. If any of the Transfer Restricted
Securities covered by the Shelf Registration Statement are to be sold in an
Underwritten Offering, the Underwriter(s) that will administer the offering will
be selected by the Holders of a majority of the outstanding Transfer Restricted
Securities (with holders of Common Stock constituting Transfer Restricted
Securities being deemed to be Holders of the aggregate amount of Warrants
exercised for purposes of such calculation); provided, however, that such
Underwriter(s) shall be reasonably satisfactory to the Company.
(d) Lock-up by Holder. Each Holder of Transfer Restricted Securities
agrees, upon the request of the Underwriter(s) in any Underwritten Offering, not
to effect any sale or distribution of securities of the Company of the same
class as the securities included in such Shelf Registration Statement, for a
period of up to 180 days beginning on the date any such Underwritten Offering
made pursuant to such Shelf Registration Statement commences, to the extent
timely notified in writing by such Underwriter(s).
(e) Selling Holder Information. No Holder of Transfer Restricted
Securities may include any of its Transfer Restricted Securities in any Shelf
Registration Statement pursuant to this Agreement unless such Holder (a "Selling
Holder" or collectively, the "Selling Holders") furnishes to the Company in
writing, within 10 business days after receipt of a request therefor, such
information as the Company may reasonably request for use in connection with any
Shelf Registration Statement or Prospectus or preliminary Prospectus (a
"Preliminary Prospectus") included therein. All information provided to the
Company by any Holder shall be accurate and complete in all material respects.
After the first such request for information by the Company, it shall be the
sole responsibility of each Holder to notify the Company of any change of
address or change of ownership of the Transfer Restricted Securities of such
Holder.
SECTION 4. REGISTRATION PROCEDURES
6
<PAGE>
(a) Filing of Registration Statement. Concurrently with or promptly
(i.e., within 60 days) after completion of an initial public offering, the
Company shall prepare and file with the Commission a Shelf Registration
Statement relating to the registration on Form S-1 or Form S-3, if the use of
such form is then available and as determined by the Company, for the sale of
the Transfer Restricted Securities in accordance with the intended method or
methods of distribution thereof and shall include all financial statements
required to be included or incorporated by reference therein. The Company shall
take such action as may be reasonably necessary so that (i) the Shelf
Registration Statement and any amendment thereto and any Prospectus forming a
part thereof and any supplement or amendment thereto complies in all material
respects with the Act and the rules and regulations thereunder, (ii) the
Registration and any amendment thereto (in either case, other than with respect
to written information furnished to the Company by or on behalf of any Holder
specifically for inclusion therein) does not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make any statement therein not misleading and (iii) the Prospectus
and any supplement thereto (in either case, other than with respect to such
information from Holders), does not include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
The Company agrees to make any filings required to be made with the
NASD and use its reasonable best efforts to cause such Shelf Registration
Statement to become effective and approved by such governmental agencies or
authorities as may be necessary to enable the Selling Holders to consummate the
disposition of such Transfer Restricted Securities; provided, however, that
before filing a Shelf Registration Statement or any Prospectus, or any
amendments or supplements thereto, the Company will furnish to the Placement
Agent, each Selling Holder who may have requested the same in writing and the
Underwriter(s), if any, copies of all such documents proposed to be filed
(except that the Company shall not be required to furnish any exhibits to such
documents, including those incorporated by reference, unless so requested by the
Placement Agent, Selling Holder or Underwriter in writing), and the Company will
not file any Shelf Registration Statement or amendment thereto or any Prospectus
or any supplement thereto to which (i) the Placement Agent or the
Underwriter(s), if any, shall reasonably object or (ii) if there are no
Underwriters, the Placement Agent or the Holders of a majority of the
outstanding Transfer Restricted Securities shall reasonably object (with holders
of Common Stock constituting Transfer Restricted Securities being deemed to be
Holders of the aggregate amount of Warrants exercised for purposes of such
calculation), in each such case within ten business days after the receipt
thereof. The Placement Agent, Holder or Underwriter, if any, shall be deemed to
have reasonably objected to such filing if the Shelf Registration Statement,
amendment, Prospectus or supplement, as applicable, as proposed to be filed
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading which misstatement or omission is specifically identified to the
Company in writing within such ten business days.
7
<PAGE>
(b) Amendments and Supplements. The Company agrees to prepare and file
with the Commission such amendments and post-effective amendments to the Shelf
Registration Statement as may be necessary to keep the Shelf Registration
Statement effective for the applicable period set forth in Section 3(a) hereof;
cause the Prospectus to be supplemented by any required supplement thereto (a
"Prospectus Supplement"), and as so supplemented to be filed pursuant to Rule
424 under the Act, and to comply with the applicable provisions of Rules 424 and
430A under the Act in a timely manner; and comply with the provisions of the Act
with respect to the disposition of all securities covered by such Shelf
Registration Statement during the applicable period in accordance with the
intended method or methods of distribution by the sellers thereof set forth in
such Shelf Registration Statement, Prospectus or Prospectus Supplement.
(c) Filings of Amendments or Supplements in Connection with
Underwritten Offerings. The Company agrees, if requested in writing by the
Selling Holders of Transfer Restricted Securities, or if the Transfer Restricted
Securities are being sold in an Underwritten Offering, the Underwriter(s) of
such Underwritten Offering, promptly incorporate in the Prospectus, any
Prospectus Supplement or post-effective amendment to the Shelf Registration
Statement such information as the Underwriters and/or the Selling Holders of
Transfer Restricted Securities agree should be included therein relating to the
plan of distribution of the Transfer Restricted Securities, including, without
limitation, information with respect to the amount of Warrants and/or the number
of shares of Common Stock being sold to such Underwriter(s), the purchase price
being paid therefor and any other terms with respect to the offering of the
Transfer Restricted Securities to be sold in such offering; and make all
required filings of such Prospectus, Prospectus Supplement or post-effective
amendment as soon as practicable after the Company is notified of the matters to
be incorporated in such Prospectus, Prospectus Supplement or post-effective
amendment.
(d) Communication with Securities Exchange Commission; Notice of
Requirement to Amend or Supplement. The Company agrees to advise the Placement
Agent, the Underwriter(s), if any, and Selling Holders promptly and, if
requested by such Persons, to confirm such advice in writing, (i) when the
Prospectus or any Prospectus Supplement or post-effective amendment to the Shelf
Registration Statement has been filed, and, with respect to the Shelf
Registration Statement or any post-effective amendment thereto, when the same
has become effective, (ii) of any request by the Commission for amendments to
the Shelf Registration Statement or amendments or supplements to the Prospectus
or for additional information relating thereto, (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of the Shelf
Registration Statement under the Act or of the suspension by any state
securities commission of the qualification of the Transfer Restricted Securities
for offering or sale in any jurisdiction, or the initiation of any proceeding
for any of the preceding purposes, (iv) if at any time the representations and
warranties of the Company contemplated by paragraph (m)(i) below cease to be
true and correct, and (v) of the existence of any fact and the happening of any
event that makes any statement of a material fact made in the Shelf Registration
Statement, the Prospectus, any amendment or supplement thereto, or any document
incorporated by reference therein untrue, or that requires the
8
<PAGE>
making of any additions to or changes in the Shelf Registration Statement or the
Prospectus in order to make the statements therein not misleading. If at any
time the Commission shall issue any stop order suspending the effectiveness of
the Shelf Registration Statement, or any state securities commission or other
regulatory authority shall issue an order suspending the qualification or
exemption from qualification of the Transfer Restricted Securities under state
securities or Blue Sky laws, the Company shall use its reasonable best efforts
to obtain the withdrawal or lifting of such order at the earliest possible time.
(e) Copies of Documents Incorporated by Reference in Registration
Statement. The Company agrees promptly following the filing of any document that
is to be incorporated by reference into the Shelf Registration Statement or the
Prospectus subsequent to the initial filing of the Shelf Registration Statement,
provide copies of such document (excluding exhibits, unless specifically
requested by the Placement Agent or a Selling Holder in writing) to the
Placement Agent and each Selling Holder who may have requested the same in
writing.
(f) Copies of Registration Statement and Amendments. The Company agrees
to furnish to the Placement Agent, each Selling Holder and each of the
Underwriter(s), if any, without charge, at least one copy of the Shelf
Registration Statement, as first filed with the Commission, and of each
amendment thereto, including all documents incorporated by reference therein and
all exhibits (excluding exhibits to documents incorporated by reference therein
unless requested by such Placement Agent, Selling Holder or Underwriter).
(g) Copies of Preliminary Prospectus and Prospectus. The Company agrees
to deliver to the Placement Agent, each Selling Holder and each of the
Underwriter(s), if any, without charge, as many copies of any Preliminary
Prospectus and the Prospectus and any amendments or supplements thereto as such
Persons may reasonably request; the Company consents to the use of any
Preliminary Prospectus and the Prospectus and any amendments or supplements
thereto by each of the Selling Holders and each of the Underwriter(s), if any,
in connection with the public offering and the sale of the Transfer Restricted
Securities covered by any Preliminary Prospectus and the Prospectus or any
amendments or supplements thereto; provided that such use of the Preliminary
Prospectus or Prospectus, and such offering and sale, conform to the Plan of
Distribution set forth in the Prospectus and comply with all applicable laws.
(h) Blue Sky. The Company agrees, prior to any public offering of
Transfer Restricted Securities, to cooperate with the Selling Holders, the
Underwriter(s), if any, and their respective counsel in general by effecting the
registration and qualification of the Transfer Restricted Securities under the
securities or Blue Sky laws of such jurisdictions as the Selling Holders or
Underwriter(s) may request and do any and all other acts or things necessary or
advisable to enable the disposition in such jurisdiction of the Transfer
Restricted Securities covered by the Shelf Registration Statement; provided,
however, that the Company shall not be required (i) to register or qualify as a
foreign corporation where it is not now so qualified or (ii) to take any action
that would subject it to the
9
<PAGE>
service of process in suits, other than as to matters and transactions relating
to the Shelf Registration Statement, in any jurisdiction where it is not now so
subject.
(i) Certificates. The Company agrees to cooperate with the Selling
Holders and the Underwriter(s), if any, to facilitate the timely preparation and
delivery of certificates representing Transfer Restricted Securities to be sold
and not bearing any restrictive legends; and enable such Transfer Restricted
Securities to be in such denominations and registered in such names as the
Selling Holders or the Underwriter(s), if any, may request at least two business
days prior to any sale of Transfer Restricted Securities.
(j) Other Government Agencies. The Company agrees to use its best
efforts to cause the Transfer Restricted Securities covered by the Shelf
Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the seller or
sellers thereof or the Underwriter(s), if any, to consummate the disposition of
such Transfer Restricted Securities, subject to the proviso contained in clause
(h) above.
(k) Post-Effective Amendments or Supplements to Update. The Company
agrees to, if any fact or event contemplated by clause (d)(ii) through (v) above
shall exist or have occurred, prepare a post-effective amendment or supplement
to the Shelf Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of Transfer Restricted Securities, the
Prospectus will not contain an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading.
(l) Undertakings in Connection with Underwritten Offerings. The Company
agrees to, in connection with an Underwritten Registration, enter into such
agreements (including an underwriting agreement) and take all such other actions
in connection therewith as may reasonably be required in order to expedite or
facilitate the disposition of the Transfer Restricted Securities pursuant to the
Registration Agreement (including without limitation, providing in a supplement
or post-effective amendment, such information relating to the plan of
distribution as is necessary, information concerning the purchase price being
paid and such other information with respect to the offering as may be
reasonably requested), and (i) make such representations and warranties to the
Selling Holders and the Underwriter(s), in form, substance and scope as they may
reasonably request and as are customarily made by issuers to Underwriters in
Underwritten Offerings and covering matters, including, but not limited to,
those set forth in the Purchase Agreement; (ii) obtain opinions of counsel for
the Company and updates thereof in customary form and covering matters
reasonably requested by the Underwriter(s) of the type customarily covered in
legal opinions to Underwriters in connection with Underwritten Offerings
addressed to each Selling Holder and the Underwriter requesting the same and
covering the matters as may be reasonably requested by such Selling Holders and
Underwriters; (iii) obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the Selling
Holders of Transfer
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<PAGE>
Restricted Securities and the Underwriters requesting the same, such letters to
be in customary form and covering matters of the type customarily covered in
"cold comfort" letters to Underwriters in connection with Underwritten
Offerings; (iv) set forth in full or incorporate by reference in the
underwriting agreement the indemnification provisions and procedures of Section
6 hereof with respect to all parties to be indemnified pursuant to said Section;
and (v) deliver such documents and certificates as may be reasonably requested
by the Selling Holders of the Transfer Restricted Securities being sold or the
Underwriter(s) of such Underwritten Offering to evidence compliance with clause
(i) above and with any customary conditions contained in the underwriting
agreement entered into by the Company pursuant to this clause (m). The above
shall be done at or prior to each closing under such underwriting agreement, as
and to the extent required thereunder.
(m) Due Diligence. The Company agrees to make available at reasonable
times and in a reasonable manner to a representative of the Holders of the
Transfer Restricted Securities, any Underwriter participating in any disposition
pursuant to such Shelf Registration Statement and any attorney or accountant
retained by such Selling Holders or any of the Underwriters, representatives of
the Company for discussion of customary due diligence matters, and furnish such
documents and financial and other information as may be reasonably requested by
such persons in connection with such due diligence; provided, however, that such
representatives, attorneys or accountants shall agree to keep confidential
(which agreement shall be confirmed in writing in advance to the Company if the
Company shall so request) all information, records or documents made available
to such persons which are not otherwise available to the general public unless
disclosure of such records, information or documents is required by court or
administrative order (of which the Company shall have been given prior notice
and an opportunity to defend) after the exhaustion of all appeals therefrom, and
to use such information obtained pursuant to this provision only in connection
with the transaction for which such information was obtained, and not for any
other purpose.
(n) Compliance with Rules and Regulations. The Company agrees to
otherwise use its reasonable best efforts to comply with all applicable rules
and regulations of the Commission, and make generally available to its security
holders, as soon as practicable, in a regular filing on Form 10-Q or Form 10-K,
a consolidated earnings statement, which consolidated earnings statement shall
satisfy the provisions of Section 11(a) of the Act, for the twelve-month period
(i) commencing at the end of any fiscal quarter in which Transfer Restricted
Securities are sold to Underwriters in a firm commitment or best efforts
Underwritten Offering or (ii) if not sold to Underwriters in such an offering,
beginning with the first month of the Company's first fiscal quarter commencing
after the effective date of the Shelf Registration Statement.
(o) Listing, Etc. The Company agrees to cause all Transfer Restricted
Securities covered by the Shelf Registration Statement to be listed on each
securities exchange or quotation system on which similar securities issued by
the Company are then listed if requested by the Holders of a majority of the
outstanding Transfer Restricted Securities (with holders of Common Stock
constituting Transfer Restricted Securities being deemed to be Holders of the
aggregate amount of
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<PAGE>
Warrants exercised for purposes of such calculation) or the Underwriters, if
any; cause the securities covered by the Shelf Registration Statement to be
rated with the appropriate rating agencies, if so requested by the Holders of a
majority in aggregate amount of such securities then outstanding or the
Underwriters.
(p) NASD. The Company agrees to cooperate and assist in any filings
required to be made with the NASD and in the performance of any due diligence
investigation by any Underwriter (including any "qualified independent
Underwriter" that is required to be retained in accordance with the rules and
regulations of the NASD).
(q) Agreements of Holders. Each Holder as to which any Shelf
Registration Statement is being effected agrees to furnish promptly to the
Company all information required to be disclosed in order to make the
information previously furnished to the Company by such Holder not materially
misleading or necessary to cause such Shelf Registration Statement not to omit a
material fact with respect to such Holder necessary in order to make the
statements therein not misleading.
Each Holder agrees by acquisition of such Transfer Restricted
Securities that, upon receipt of any notice from the Company of the existence of
any fact of the kind described in Section 4(d)(v) hereof (an "Amendment
Notice"), such Holder will forthwith discontinue disposition of Transfer
Restricted Securities until such Holder's receipt of (i) copies of the
supplemented or amended Prospectus contemplated by Section 4(k) hereof, or until
counsel for the Company shall have determined that such disclosure is not
required due to subsequent events, (ii) notice in writing from the Company that
the use of the Prospectus may be resumed, and (iii) copies of any additional or
supplemental filings with respect to the Prospectus. If so directed by the
Company, each Holder will deliver to the Company (at the Company's expense) all
copies, other than permanent file copies then in such Holder's possession, of
the Prospectus covering such Transfer Restricted Securities current at the time
of receipt of such notice. In the event Company shall give any such notice, the
time period regarding the effectiveness of the Shelf Registration Statement set
forth in Section 3(a) hereof shall be extended by the number of days during the
period from and including the date of the giving of such notice pursuant to
Section 4(d)(v) hereof to and including the date when each Selling Holder
covered by such Shelf Registration Statement shall have received the copies of
the supplemented or amended Prospectus contemplated by Section 4(k) hereof or
shall have received the Advice and any additional or supplemental filings with
respect to the Prospectus.
SECTION 5. REGISTRATION EXPENSES
(a) Expenses of Company. All expenses incident to the Company's
performance of or compliance with this Agreement (the "Registration Expenses")
will be borne by the Company, regardless of whether a Shelf Registration
Statement becomes effective, including without limitation:
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<PAGE>
(i) all registration and filing fees and expenses (including
filings made with the NASD);
(ii) fees and expenses of compliance with federal securities
or state blue sky laws;
(iii) expenses of printing (including, without limitation,
expenses of printing or engraving certificates for the Transfer Restricted
Securities in a form eligible for deposit with Depository Trust Company and of
printing the Prospectus and any Preliminary Prospectus), messenger and delivery
services and telephone;
(iv) fees and disbursements of counsel for the Company and for
the Holders of the Transfer Restricted Securities (subject to the provisions of
Section 5(b) hereof);
(v) fees and disbursements of all independent certified public
accountants of the Company (including the expenses of any special audit and
"cold comfort" letters required by or incidental to the preparation and filing
of a Shelf Registration Statement and Prospectus and the disposition of Transfer
Restricted Securities); and
(vi) fees and expenses of listing the Transfer Restricted
Securities on any securities exchange or quotation system in accordance with
Section 4(o) hereof.
The Company will, in any event, bear its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, rating
agency fees and the fees and expenses of any Person, including special experts,
retained by the Company. The Company shall not be responsible for commissions,
fees and discounts of brokers, dealers and agents. The Holders of Transfer
Restricted Securities shall bear the expense of any broker's commission or
Underwriter's discount or commission.
(b) Counsel to Holders. In connection with the Shelf Registration
Statement, the Company will reimburse the Holders of Transfer Restricted
Securities being registered pursuant to such Shelf Registration Statement for
the reasonable fees and disbursements of not more than one counsel chosen by the
Holders of a majority of the outstanding Transfer Restricted Securities (with
holders of Common Stock constituting Transfer Restricted Securities being deemed
to be Holders of the aggregate amount of Warrants exercisable for purposes of
such calculation) which fees and disbursements shall not exceed $10,000 in the
aggregate.
Notwithstanding the provisions of this Section 5(b), each Holder of
Transfer Restricted Securities shall pay all Registration Expenses to the extent
required by applicable law, and if the Shelf Registration Statement is to be
effected in the form of an Underwritten Offering, the discounts and commissions
of the Underwriters.
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SECTION 6. INDEMNIFICATION
(a) Company Indemnification. The Company agrees to indemnify and hold
harmless (i) the Placement Agent, (ii) each Holder, (iii) each person, if any,
who controls (within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act) the Placement Agent or any Holder (any of the persons referred to
in this clause (iii) being hereinafter referred to as a "controlling person")
and (iv) the respective officers, directors, partners, employees,
representatives and agents of the Placement Agent or any Holder or any
controlling person (any person referred to in clause (i), (ii), (iii) or (iv)
may hereinafter be referred to as a "Non-Company Indemnitee"), to the fullest
extent lawful, from and against any and all losses, claims, damages,
liabilities, reasonable expenses and judgments arising out of or based on any
untrue statement or alleged untrue statement of a material fact contained in the
Shelf Registration Statement, Prospectus or Preliminary Prospectus (or any
amendments or supplements thereto), including any document incorporated by
reference therein, or arising out of or based on any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except, with respect to
any Non-Company Indemnitee, insofar as such losses, claims, damages,
liabilities, expenses or judgments (1) are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
furnished in writing to the Company by such Non-Company Indemnitee expressly for
use therein (which shall include written information provided by such
Non-Company Indemnitee pursuant to Section 3(e) herein expressly for use
therein), or (2) with respect to any Preliminary Prospectus, result from the
fact that such Non-Company Indemnitee sold Transfer Restricted Securities to a
person to whom there was not sent or given, at or prior to the written
confirmation of such sale, a copy of the final Prospectus, as amended or
supplemented, if the Company shall have previously furnished copies thereof to
such Non-Company Indemnitee in accordance with this Agreement and the final
Prospectus, as amended or supplemented, would have corrected such untrue
statement or omission. The indemnification in this subsection (a) shall be in
addition to any liability which the Company may have at common law or otherwise.
The Company also agrees to indemnify or contribute to losses of, as
provided in Section 6(d), any underwriters of Transfer Restricted Securities
registered under the Shelf Registration Statement, their officers and directors
and each Person, if any, who controls any such underwriter (within the meaning
of the Act) on substantially the same basis as that of the indemnification of
the Holders provided in this Section 6(a) and shall, if requested by any Holder,
enter into an underwriting agreement reflecting such agreement, as provided in
Section 4(l) hereof.
(b) Indemnification Procedures. In case any action shall be brought
against any Non-Company Indemnitee, based upon the Shelf Registration Statement,
Prospectus, or Preliminary Prospectus (or any amendments or supplements
thereto), and with respect to which indemnity may be sought against the Company,
such Non-Company Indemnitee shall promptly notify the Company
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<PAGE>
in writing and the Company shall assume the defense thereof, including the
employment of counsel and payment of all fees and expenses; provided, however,
that the omission so to notify the Company shall not relieve the Company from
any liability that it may have to any Non-Company Indemnitee (except to the
extent that the Company is materially prejudiced or otherwise forfeits
substantive rights or defenses by reason of such failure). Such Non-Company
Indemnitee shall have the right to employ separate counsel in any such action
and participate in the defense thereof, but the fees and expenses of counsel
shall be paid by such Non-Company Indemnitee, unless (i) the employment of such
counsel shall have been specifically authorized in writing by the Company, (ii)
the Company shall have failed to assume the defense and employ counsel or (iii)
the named parties to any such action (including any impleaded parties) include
both such Non-Company Indemnitee and the Company and it would be inappropriate
for the same counsel to represent such Non-Company Indemnitee and the Company
(in which case the Company shall not have the right to assume the defense of
such action on behalf of such Non-Company Indemnitee, it being understood,
however, that the Company shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (in addition to
any local counsel) for the Non-Company Indemnitees, which firm shall be
designated in writing by the Non-Company Indemnitees and shall be subject to the
Company's approval, not to be unreasonably withheld, and whose fees and expenses
reasonably incurred shall be reimbursed as they are incurred). The Company shall
not be liable for any settlement of any such action effected without the written
consent of the Company, which consent shall not be unreasonably withheld or
delayed, and if settled with the written consent of the Company, the Company
agrees to indemnify and hold harmless any Non-Company Indemnitee from and
against any amounts payable pursuant to such written consent in connection with
such settlement. The Company shall not, without the prior written consent of
such Non-Company Indemnitee, effect any settlement of any pending or threatened
proceeding in respect of which such Non-Company Indemnitee is or could have been
a party and indemnity could have been sought hereunder by such Non-Company
Indemnitee, unless such settlement includes an unconditional release of such
Non-Company Indemnitee from all liability on claims that are the subject matter
of such proceeding.
(c) Indemnification by Holder. Each Holder of Transfer Restricted
Securities agrees to indemnify and hold harmless (i) the Company, (ii) the
Placement Agent, (iii) each other Holder, (iv) any person controlling (within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the
Company, the Placement Agent and each other Holder and (v) the respective
officers, directors, partners, employees, representatives and agents of each of
the parties referred to in clauses (i), (ii), (iii) and (iv), to the same extent
as the foregoing indemnity from the Company to each of the Non-Company
Indemnitees, but only with respect to claims and actions based on information
relating to such Holder that was furnished in writing by such Holder expressly
for use in the Shelf Registration Statement or Prospectus (or any amendment or
supplement thereto) (including without limitation the information provided in
writing by a Holder pursuant to Section 3(e) expressly for use therein). In no
event shall the liability of any Holder hereunder be greater in amount than the
dollar
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<PAGE>
amount of the net proceeds received by such Holder upon the sale of the Transfer
Restricted Securities giving rise to such indemnification obligation.
(d) Contribution. If the indemnification provided for in this Section 6
is unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or judgments referred to herein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities and judgments in such proportion as is appropriate
to reflect the relative fault of the indemnifying party, on the one hand, and
the indemnified party, on the other hand, in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The relative
fault of the indemnifying party, on the one hand, and the indemnified party, on
the other hand, shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
indemnifying party, on the one hand, or the indemnified party, on the other
hand, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The indemnity and
contribution obligations of each indemnifying party set forth herein shall be in
addition to any liability or obligation such indemnifying party may otherwise
have to any Indemnified Party, including under this Agreement.
The Company, the Placement Agent and each Holder of Transfer Restricted
Securities agree that it would not be just and equitable if contribution
pursuant to this Section 6(d) were determined by pro rata allocation or by any
other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The losses,
claims, damages, liabilities or judgments of an indemnified party referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim prior to the indemnifying party's assumption of the defense
thereof or subsequent thereto to the extent permitted by the second sentence of
Section 6(b) hereof. Notwithstanding the provisions of this Section 6, none of
the Holders shall be required to contribute, in the aggregate, any amount in
excess of the amount by which the total amount of net process received by such
Holder with respect to the sale of Transfer Restricted Securities exceeds the
amount of any damages which such Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Holders'
obligations to contribute pursuant to this Section 6(d) are several in
proportion to the respective principal amount of Units held by each of the
Holders hereunder and not joint.
16
<PAGE>
SECTION 7. RULE 144
Rule 144. The Company shall use commercially reasonable efforts to file
the reports required to be filed by it under the Act and the Exchange Act in a
timely manner and covenants that it will take such further action as any Holder
of Transfer Restricted Securities may reasonably request, all to the extent
required from time to time, to enable such Holder to sell securities without
registration under the Act within the limitation of the exemptions provided by
Rule 144.
SECTION 8. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
No Holder may participate in any Underwritten Offering hereunder unless
such Holder (a) agrees to sell such Holder's Transfer Restricted Securities on
the basis provided in any underwriting arrangements approved by the Persons
entitled hereunder to approve such arrangements, (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements,
lock-up letters and other documents required under the terms of such
underwriting arrangements and (c) furnishes the Company in writing information
in accordance with Section 3(e) and agrees to indemnify and hold harmless the
Company, its directors, its officers who sign the Registration Statement and any
person controlling the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act to the extent contemplated by Section 6(c).
SECTION 9. SELECTION OF UNDERWRITERS
The Holders of Transfer Restricted Securities covered by the Shelf
Registration Statement who desire to do so may sell such Transfer Restricted
Securities in an Underwritten Offering in accordance with Section 3(b) herein.
In any such Underwritten Offering, the Underwriter(s) that will administer the
offering will be selected by the Holders of the Transfer Restricted Securities
included in such offering in the manner specified in Section 3(b); provided,
however, that such Underwriters must be reasonably satisfactory to the Company.
SECTION 10. MISCELLANEOUS
(a) Remedies. Each party agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of the
provisions of this Agreement and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company will not on or after the
date of this Agreement enter into any agreement with respect to its securities
that is inconsistent with the rights
17
<PAGE>
granted to the Holders of Transfer Restricted Securities in this Agreement or
otherwise conflicts with the provisions hereof. The rights granted to the
Holders of Transfer Restricted Securities hereunder do not in any way conflict
with and are not inconsistent with the rights granted to the holders of the
Company's securities under any other agreements in effect on the date hereof.
(c) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given unless the Company has obtained the written consent of Holders of a
majority of the outstanding Transfer Restricted Securities (with holders of
Common Stock constituting Transfer Restricted Securities being deemed to be
Holders of the aggregate amount of Warrants exercised for purposes of such
calculation). Notwithstanding the foregoing, a waiver or consent to departure
from the provisions hereof that relates exclusively to the rights of Holders of
Transfer Restricted Securities whose securities are being sold pursuant to such
Shelf Registration Statement and that does not directly or indirectly affect the
rights of other Holders of Transfer Restricted Securities shall be valid only
with the written consent of Holders of at least 66-2/3% of the Transfer
Restricted Securities being sold, in each case calculated in accordance with the
provisions of Section 3(b).
(d) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
(i) if to a Holder of Transfer Restricted Securities, at the
address for such Holder set forth in the records of the Company or the Company's
transfer agent; and
(ii) if to the Company or the Placement Agent, initially at
its address set forth in the Purchase Agreement and thereafter at such other
address, notice of which is given in accordance with the provisions of this
Section.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on the
next business day, if timely delivered to an air courier guaranteeing overnight
delivery.
(e) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of each of the parties,
including without limitation and without the need for an express assignment,
subsequent Holders of Transfer Restricted Securities; provided, however, that
this Agreement shall not inure to the benefit of or be binding upon a successor
or assign of a Holder of Transfer Restricted Securities unless and to the extent
such successor or assign acquired Transfer Restricted Securities from such
Holder; and provided further that nothing herein
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<PAGE>
shall be deemed to permit any assignment, transfer or any disposition of
Transfer Restricted Securities in violation of the terms of the Purchase
Agreement. If any transferee of any Holder shall acquire Transfer Restricted
Securities, in any manner, whether by operation of law or otherwise, such
Transfer Restricted Securities shall be held subject to all of the terms of this
Agreement and by taking and holding such Transfer Restricted Securities such
person shall be conclusively deemed to have agreed to be bound by and to perform
all of the terms and provisions of this Agreement and such Person shall be
entitled to receive the benefits hereof.
(f) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO THE
CONFLICTS OF LAW RULES THEREOF.
(i) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(j) Entire Agreement. This Agreement together with all documents and
agreements referred to herein is intended by the parties as a final expression
of their agreement and intended to be a complete and exclusive statement of the
agreement and understanding of the parties hereto in respect of the subject
matter contained herein. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein with respect to
the registration rights granted by the Company with respect to the securities
sold pursuant to the Purchase Agreement. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
CREDITRUST CORPORATION
By: /s/ Joseph K. Rensin
---------------------------------
Name: Joseph K. Rensin
Title: President
BOENNING & SCATTERGOOD, INC.
By: /s/ Gregory Berlacher
---------------------------------
Name: Gregory Berlacher
Title:
FERRIS, BAKER WATTS,
INCORPORATED
By: /s/ Steven Shea
---------------------------------
Name: Steven Shea
Title:
INVESTOR:
Name:
---------------------------------
By:
---------------------------------
Title:
---------------------------------
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<PAGE>
-------------------------
SERVICING AGREEMENT
-------------------------
HEARTLAND BANK,
as Owner
and
CREDITRUST CORPORATION,
as Servicer
-------------------------
Dated August 6, 1997
-------------------------
<PAGE>
SERVICING AGREEMENT
THIS SERVICING AGREEMENT, dated as of August 6, 1997 (this "Agreement")
is made by and between Creditrust Corporation, as servicer (the "Servicer"), and
Heartland Bank, a federally chartered savings association (the "Owner").
Preliminary Statements:
Pursuant to the terms of a letter agreement dated June 18, 1997 (the
"Letter Agreement"), the Owner has appointed the Servicer as its agent for the
purpose of bidding for and completing the purchase of a portfolio of Receivables
(as such term is defined below). The parties have further agreed, that Servicer
shall act as the sole and exclusive servicing agent for Owner with respect to
the Receivables. The parties now desire to enter into this Agreement to set
forth the terms and conditions on which Creditrust Corporation will act as
servicing agent with respect to the Receivables.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, each party agrees as follows:
ARTICLE 1.
DEFINITIONS
SECTION 1.1. Definitions.
Except as otherwise provided in this Agreement, whenever used herein,
the following words and phrases, unless the context otherwise requires, shall
have the following meanings:
Affiliate: with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control," when used with respect to any
specified Person, means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the term "controlling" and
"controlled" have meanings correlative to the foregoing.
Agreement: this Servicing Agreement, as the same may be amended or
supplemented from time to time.
Business Day: any day other than a Saturday, a Sunday or a day on which
banking institutions in the State of Maryland or the State of Missouri are
required or authorized by law, regulation, executive order or governmental
decree to be closed.
Closing Date: the date on which the Owner closes on the purchase of the
Receivables pursuant to the Purchase Agreement.
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Collections Account: the segregated account or accounts, each of which
shall be an Eligible Account, established and maintained pursuant to Section
3.1.
Crossover Date: the last day of the month prior to the Payment Date on
which Owner has received, in aggregate, $8,556,450.20 from Net Collections.
Eligible Account: any segregated account or accounts maintained with an
institution, the deposits of which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), and that is (i) a federal savings and loan association duly organized,
validly existing and in good standing under the federal banking laws, (ii) a
banking or savings and loan association duly organized, validly existing and in
good standing under the applicable laws of any state, (iii) a national banking
association duly organized, validly existing and in good standing under the
federal banking laws. Any Eligible Account maintained with Owner shall be deemed
to be in conformity with the requirements of this paragraph.
Gross Collections: with respect to a Receivable and a calendar month,
all monies collected, received or otherwise recovered from or for the account of
the related Obligor on such Receivable during such calendar month.
Lien: any security interest, lien, charge, pledge, equity, encumbrance
or interests of others of any kind.
Minimum Collections: with respect to any calendar month, (i) $101,358
per month for the Minimum Period, (ii) $441,633 for each month after such
Minimum Period until the Crossover Date and (iii) $0 per month, after the
Crossover Date.
Minimum Period: the period from the Closing Date until the earlier of
(i) February 28, 1998 or (ii) the last day of the month in which Net Collections
equals $4,054,320 in the aggregate.
Net Collections: with respect to the Receivables and a calendar month,
the Gross Collections from the Receivables during such calendar month less any
Third Party Expenses actually paid in such calendar month.
Obligor: with respect to any Receivable means any Person who owes or
may be liable for payments under such Receivable.
Officer's Certificate: a certificate signed by the president, or the
chief financial officer of the Servicer, as the case may be, and delivered to
the Owner.
Payment Date: the seventh day of each calendar month or, if such day is
not a Business Day, the next succeeding Business Day, commencing October 7,
1997.
Permitted Investments: at any time, any one or more of the following
obligations and securities:
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(i) obligations of, and obligations fully guaranteed as to
timely payment of principal and interest by, the United States or any
agency thereof, provided such obligations are backed by the full faith
and credit of the United States;
(ii) general obligations of, or obligations guaranteed by,
FNMA or any state of the United States, the District of Columbia or the
Commonwealth of Puerto Rico, which are then rated in one of the two
highest available credit ratings of any nationally recognized rating
agency for such obligations;
(iii) certificates of deposit issued by any FDIC-insured
depository institution (including the Owner) incorporated under the
laws of the United States or of any state thereof, the District of
Columbia or the Commonwealth of Puerto Rico and subject to supervision
and examination by banking authorities of one or more of such
jurisdictions; and
(iv) money market funds, so long as such funds are rated "BBB"
or better by Standard & Poor's (or an equivalent rating by any other
nationally recognized rating agency);
provided that each of the foregoing investments shall mature no later than the
Business Day prior to the Payment Date immediately following the date of
purchase thereof (other than in the case of the investment of monies in
instruments of which the entity at which the Collections Account is located is
the obligor, which may mature on the related Payment Date), and shall be
required to be held to such maturity.
Person: any legal person, including any individual, corporation,
partnership, limited liability company, joint venture, association, joint stock
company, trust, unincorporated organization or government or any agency or
political subdivision thereof.
Proprietary Information: the meaning specified in Section 10.1.
Purchase Agreement: that certain Asset Purchase Agreement by and
between the Owner and Citibank pursuant to which Owner will purchase the
Receivables, a copy of which is attached hereto as Exhibit A.
Receivable: any receivable generated on a credit card account,
revolving account or installment account purchased by the Owner pursuant to the
terms of the Purchase Agreement.
Receivable File: with respect to a particular Receivable, means the
following documents:
(i) any documents received from or made available by the
banking institutions and merchants that originated any of the
Receivables and their assignees in respect of such Receivable;
(ii) a copy of marked computer records indicating the
ownership of the Receivable by the Owner; and
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<PAGE>
(iii) any and all other documents that the Servicer shall keep
on file, in accordance with its customary procedures, relating to such
Receivable or the related Obligor.
Schedule of Receivables: the true and complete list of all Receivables
purchased by Owner in such form as delivered by Citibank to the Servicer under
the Purchase Agreement, which is incorporated by reference herein, as the same
may be amended from time to time.
Servicer's Certificate: a Certificate of the Servicer completed and
executed pursuant to Section 2.8.
Servicer Default: the meaning specified in Section 7.1.
Servicing Fee: means the fee payable to the Servicer on each Payment
Date, determined in accordance with Section 3.3(b), for its services rendered
under this Agreement.
Third-Party Expenses: with respect to a Receivable and any calendar
month, the amount of any fees and compensation paid during such calendar month
to unrelated third-party attorneys retained or otherwise engaged by the Servicer
under fee or compensation arrangements that are contingent upon, and determined
by reference to, amounts recovered in respect of the related Receivable.
SECTION 1.2. Other Definitional Provisions.
(a) All terms in this Agreement shall have the defined meanings when
used in any certificate or other document made or delivered pursuant hereto
unless otherwise defined therein.
(b) As used in this Agreement and in any certificate or other document
made or delivered pursuant hereto and thereto, accounting terms not defined in
this Agreement or in any such certificate or other document, and accounting
terms partly defined in this Agreement or in any such certificate or other
document to the extent not defined, shall have the respective meanings given to
them under generally accepted accounting principles or regulatory accounting
principles, as applicable. To the extent that the definitions of accounting
terms in this Agreement or in any such certificate or other document are
inconsistent with the meanings of such terms under generally accepted accounting
principles or regulatory accounting principles, as applicable, the definitions
contained in this Agreement or in any such certificate or other document shall
control.
(d) Unless otherwise specified, references to any amount on deposit or
outstanding on any particular date shall mean such amount at the close of
business on such day.
(e) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement; and references to any
Section, Schedule or Exhibit are references to Sections, Schedules and Exhibits
in or to this Agreement unless otherwise specified.
4
<PAGE>
(f) With respect to all terms in this Agreement, the singular includes
the plural and the plural the singular; words importing any gender include the
other gender; references to "writing" include printing, typing, lithography and
other means of reproducing words in a visible form; references to agreements and
other contractual instruments include all subsequent amendments thereto or
changes therein entered into in accordance with their respective terms and not
prohibited by this Agreement, and references to Persons include their permitted
successors and assigns; and the term "including" means "including without
limitation."
(g) The term "month" or "calendar month" refers to a full calendar
month, except that the first month shall include August and September, 1997, and
the last month shall end on the date that all Receivables have been collected or
sold.
ARTICLE 2.
CUSTODY OF RECEIVABLE FILES
ADMINISTRATION AND SERVICING OF RECEIVABLES
SECTION 2.1. Duties as Custodian.
(a) Safekeeping. The Servicer, in its capacity as custodian, shall hold
the Receivable Files on behalf of the Owner and maintain such accurate and
complete accounts, records and computer systems pertaining to each Receivable
File as shall enable the Servicer to comply with this Agreement. In performing
its duties as custodian, the Servicer shall act with reasonable care, using that
degree of skill and attention that it exercises with respect to the receivable
files of comparable defaulted receivables that the Servicer services for itself.
The Servicer shall conduct, or cause to be conducted, periodic examinations of
the files of receivables owned or serviced by it, which shall include Receivable
Files held by it under this Agreement, and of the related accounts, records and
computer systems, in such a manner as shall enable the Owner to verify the
accuracy of the Servicer's record keeping. The Servicer shall promptly report to
the Owner any failure on its part to hold the Receivable Files and maintain its
accounts, records and computer systems as herein provided and promptly take
appropriate action to remedy any such failure.
(b) Maintenance of and Access to Records. The Servicer shall maintain
each Receivable File at its office specified in the Schedule of Receivables or
at such other office as shall be specified to the Owner. The Servicer shall make
available to the Owner or its duly authorized representatives, attorneys or
auditors the Receivable Files and the accounts, records and computer systems
maintained by the Servicer with respect thereto upon not less than three
Business Days' prior written notice for examination during normal business
hours.
SECTION 2.2. Effective Period and Termination.
The Servicer's appointment as custodian of the Receivable Files shall
become effective as of the Closing Date and shall continue in full force and
effect so long as it is the Servicer under this Agreement. If all of the rights
and obligations of the Servicer have been terminated pursuant to Article 7, the
appointment of the Servicer as custodian of the Receivable Files shall
immediately terminate. As soon as practicable, but not more than five Business
days, after any
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termination of such appointment, the Servicer shall deliver the Receivable Files
to the Owner or its agent at such place or places as the Owner may reasonably
designate.
SECTION 2.3. Duties as Servicer.
The Servicer, as agent for the Owner, shall manage, service, administer
and make collections on and in respect of the Receivables using that degree of
skill and attention that the Servicer exercises with respect to all comparable
defaulted consumer receivables that it services for itself. The Servicer's
duties shall include collecting and posting all payments, responding to
inquiries of Obligors or by federal, state or local government authorities with
respect to the Receivables, investigating delinquencies, implementing of payment
plans, sending payment information to Obligors, reporting tax information to
Obligors in accordance with its customary practices, accounting for collections,
furnishing monthly and annual statements to the Owner with respect to payments,
generating federal income tax information and performing the other duties
specified herein. The Servicer shall follow its customary standards, policies
and procedures and applicable federal and state laws and regulations and shall
have full power and authority, acting alone, to do any and all things in
connection with such managing, servicing, administration and collection that it
may deem necessary or desirable, including the enforcement of the rights of the
Owner against the seller of the Receivables.
Without limiting the generality of the foregoing, the Servicer shall be
authorized and empowered by the Owner to execute and deliver, on behalf of
itself or the Owner, any and all instruments of satisfaction or cancellation, or
of partial or full release or discharge and all other comparable instruments,
with respect to the Receivables. The Servicer is hereby authorized to commence,
in its own name or in the name of the Owner, a legal proceeding to enforce a
Receivable or to commence or participate in a legal proceeding (including,
without limitation, a bankruptcy proceeding) relating to or involving a
Receivable. If the Servicer commences or participates in such a legal proceeding
in its own name, the Owner shall thereupon be deemed to have automatically
assigned, solely for the purpose of collection on behalf of the party retaining
an interest in such Receivable, such Receivable to the Servicer for purposes of
commencing or participating in any such proceeding as a party or claimant, and
the Servicer is authorized and empowered by the Owner to execute and deliver in
the Servicer's name any notices, demands, claims, complaints, responses,
affidavits or other documents or instruments in connection with any such
proceeding. If, in any enforcement suit or legal proceeding, it shall be held
that the Servicer may not enforce a Receivable on the grounds that it shall not
be a real party in interest or a holder entitled to enforce such Receivable, the
Owner shall, at the Servicer's expense and written direction, take reasonable
steps to enforce such Receivable, including bringing suit in the name of the
Owner. The Servicer shall deposit or cause to be deposited into the Collections
Account all proceeds realized in connection with any such action pursuant to
Section 3.1. The Owner shall furnish the Servicer with any powers of attorney
and other documents and take any other steps which the Servicer may deem
reasonably necessary or appropriate to enable the Servicer to carry out its
servicing and administrative duties under this Agreement.
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SECTION 2.4. Collection of Receivable Payments.
The Servicer shall make reasonable efforts to collect all payments due
and payable in connection with the Receivables, and shall follow such customary
collection procedures as it follows with respect to comparable defaulted
consumer receivables that it services for itself. The Servicer shall be
authorized to write down the balance of any Receivable in accordance with
customary servicing practices and standards without the prior consent of the
Owner. The Servicer may, in accordance with its customary servicing procedures,
waive any charges or fees that otherwise might be collected in the ordinary
course of servicing the Receivables.
SECTION 2.5. Covenants of Servicer.
The Servicer hereby makes the following covenants with respect to the
Receivables:
(a) Fulfillment of Obligations. The Servicer shall duly fulfill all
obligations on its part to be fulfilled by it or the Owner under or in
connection with the Receivables, shall perform its collection activities using
the methods and standards currently used by Servicer in collecting accounts such
as the Accounts. Servicer shall perform its obligations in accordance with such
standards as are currently utilized by the Servicer, which include backup
servicing files and disaster recovery plans, and such other servicing standards
as are currently deemed appropriate or may in the future be deemed appropriate
by the Servicer. Servicer shall maintain in effect all qualifications required
in order to service the Receivables and shall comply in all respects with all
other requirements of law and regulation in connection with servicing the
Receivables, including the Federal Fair Debt Collection Practices Act, if
applicable, the failure to comply with which would have a material adverse
effect on the Owner, provided that Servicer shall not be considered to be in
violation of this provision as a result of any alleged violation of any
applicable law or regulation unless and until such violation has been determined
to exist by a final and non-appealable (whether by decree or lapse of time)
court order.
(b) No Rescission or Cancellation. The Servicer shall not permit any
rescission or cancellation of the Receivables except as ordered by a court of
competent jurisdiction or other governmental authority; provided, however, that
the writing down of any Receivable balance in accordance with customary
servicing procedures shall not be deemed a rescission or cancellation of such
Receivable.
(c) No Impairment. The Servicer shall do nothing to impair the rights
of the Owner with respect to the Receivables; provided, however, that the
writing down of the Receivable balance in accordance with customary servicing
procedures shall not be deemed an impairment of the rights of the Owner.
(d) No Sub-Servicing. The Servicer shall not delegate its servicing
obligations under this Agreement; provided, however, that the delegation of
recovery obligations to third-party attorneys engaged by the Servicer shall not
be deemed a breach of this clause (d).
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SECTION 2.6. Maintenance of Records.
(a) The Servicer shall maintain accounts and records as to each
Receivable accurately and in sufficient detail to permit (i) the reader thereof
to know at any time the status of such Receivable, including payments and
recoveries made and payments owing (and the nature of each, if applicable) and
(ii) reconciliation between payments or recoveries on (or with respect to) each
Receivable and the amounts from time to time deposited in the Collection Account
in respect of such Receivable.
(b) The Servicer shall maintain its computer records so that the
Servicer's master computer records (including any back-up archives) that refer
to any Receivable indicate clearly the interest of the Owner in such Receivable
and that the Receivable is owned by the Owner. Indication of the Owner's
interest in a Receivable shall be deleted from or modified on the Servicer's
computer records when, and only when, the Receivable has been paid in full,
acquired or assigned pursuant to this Agreement.
(c) Upon request, the Servicer shall furnish to the Owner, within five
Business Days of such request, a list of all Receivables (by account number and
name of Obligor) then outstanding, together with a reconciliation of such list
to the Schedule of Receivables and to each of the Servicer's Certificates
furnished before such request indicating removal of Receivables.
SECTION 2.7. Servicing Fee; Payment of Certain Expenses by Servicer.
(a) As compensation for the performance of its servicing obligations
hereunder, the Servicer shall be entitled to receive on each Payment Date (i)
the Servicing Fee, as determined under Section 2.7(b), plus (ii) reimbursement
of all Third Party Expenses incurred by it in servicing the Receivables. Except
to the extent otherwise provided herein, the Servicer shall be required to pay
from its servicing compensation all expenses incurred by Servicer in connection
with servicing the Receivables including, without limitation, recovery and
collection expenses related to the enforcement of the Receivables (other than
those specified in the following sentence), and all other fees and expenses that
are not expressly stated in this Agreement to be payable by the Owner; provided,
however, that the Servicer shall not be liable for any liabilities, costs or
expenses of the Owner arising under any tax law, including without limitation
any federal, state or local income or franchise taxes or any other tax imposed
on or measured by income (or any interest or penalties with respect thereto or
arising from a failure to comply therewith).
(b) The Servicing Fee shall be determined as follows:
(i) for the Minimum Period, 85% of Net Collections, provided
that such Servicing Fee will be deferred in any such month to the
extent necessary to permit Owner to receive at least its Minimum
Collections for such month;
(ii) after such Minimum Period and until the Crossover Date,
60% of Net Collections, provided that such Servicing Fee will be
deferred in any such month to the
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extent necessary to permit Owner to receive at least its Minimum
Collections for such month; and
(iii) from and after the Crossover Date, 90% of all Net
Collections.
SECTION 2.8. Servicer's Certificate; Monthly Servicer Report.
On or before each Payment Date, the Servicer shall deliver to the Owner
a Servicer's Certificate and Monthly Servicer Report executed by the President
or chief financial officer of the Servicer containing all information necessary
to support the payments required by Section 3.3(b) in respect of the calendar
month immediately preceding the date of such Servicer's Certificate. Servicer
will provide such additional information as may be requested by the Owner in
writing from time to time provided that Servicer generates similar information
for receivables which it holds for its sole benefit.
SECTION 2.9. Annual Statement as to Compliance.
The Servicer shall deliver to the Owner, on or before March 31 of each
calendar year, beginning in March 1998, an Officer's Certificate, stating that
(i) a review of the activities of the Servicer during the preceding 12-month
period ended December 31 (or, in the case of the first such statement, from the
date of this Agreement through December 31, 1997) and of its performance under
this Agreement has been made under the supervision of the officer executing the
Officer's Certificate, and (ii) to such officer's knowledge, based on such
review, the Servicer has fulfilled all its obligations under this Agreement in
all material respects throughout such period or, if there has been a default in
the fulfillment of any such obligation, specifying each such default known to
such officer and the nature and status thereof.
SECTION 2.10. Annual Accountants' Report.
The Servicer, at its own expense, shall cause a firm of independent
certified public accountants to deliver to the Owner on or before March 31 of
each year, beginning in March 1998, a report concerning the internal financial
and accounting controls of the Servicer with respect to the processing of
consumer receivables during the preceding 12-month period ended December 31 (or,
in the case of the first such report, from the Closing Date through December 31,
1997). Such report shall also indicate that the firm is independent with respect
to the Servicer within the meaning of the Code of Professional Ethics of the
American Institute of Certified Public Accountants.
SECTION 2.11. Financial Statements. Servicer shall furnish to Owner:
(a) as soon as available and in any event within 60 days after the end
of each of the first three quarterly fiscal periods in each fiscal year of the
Servicer: (i) a consolidated balance sheet of the Servicer as at the end of such
fiscal period, and (ii) consolidated statements of income and statements of cash
flow of the Servicer for such fiscal period and for the period from the
beginning of such fiscal year to the end of such fiscal period, prepared in
accordance with generally accepted accounting principles and certified by the
chief financial officer of the Servicer; and
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(b) as soon as available and in any event within 120 days after the end
of each fiscal year of Servicer: (i) a consolidated balance sheet of the
Servicer as at the end of such fiscal year, and (ii) consolidated statements of
income and statements of cash flow of the Servicer for such fiscal year,
accompanied by a report of independent certified public accountants of
recognized standing selected by the Servicer, which report shall be unqualified
as to scope of audit and shall state that said financial statements fairly
present the financial condition and results of operations and changes in
financial position for such fiscal year of the Servicer as at the end of and for
such fiscal year, all in accordance with generally accepted accounting
principles consistently applied.
ARTICLE 3.
COLLECTIONS ACCOUNT; PAYMENTS
SECTION 3.1. Collections Account.
The Servicer shall establish and maintain the Collections Account for
the benefit of the Owner, with withdrawal authority in the Servicer. All amounts
held in the Collections Account shall, to the extent permitted by applicable
laws, rules and regulations, be invested in Permitted Investments by the
FDIC-insured depository institution then maintaining such account only upon
written direction of the Owner; provided, however, in the event the Owner fails
to provide such written direction to the Servicer, and until the Owner provides
such written direction, the Servicer shall invest in Permitted Investments
satisfying the requirements of clause (iv) of the definition thereof. Any losses
and investment expenses relating to any investment of funds in the Collections
Account shall be for the account of the Owner, which shall deposit or cause to
be deposited the amount of such loss (to the extent not offset by income from
other investments of funds in the related Account) in the related account
immediately upon the realization of such loss.
SECTION 3.2. Collections.
The Servicer shall remit to the Collections Account all Gross
Collections it receives by or on behalf of the Obligors on or in respect of the
Receivables no later than the fifth Business Day after receipt thereof.
SECTION 3.3. Application of Funds from Collections Account.
(a) On each Payment Date, the Servicer shall calculate, as applicable,
the amount to be paid over to the Owner and the Servicing Fee to be retained by
it, which amounts shall be set forth in the Servicer's Certificate for the
related Payment Date.
(b) On each Payment Date, the Servicer shall apply all funds then held
in the Collections Account as follows and as reflected in the Servicer's
Certificate for such Payment Date; provided, however, that such payments shall
be made only to the extent of funds then on deposit in the Collections Account:
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(i) throughout the term of this Agreement, to the Servicer in
reimbursement of all Third Party Expenses actually paid by the Servicer
and not previously reimbursed hereunder;
(ii) for the Minimum Period, 85% of Net Collections shall be
paid to the Servicer as its Servicing Fee, provided that such Servicing
Fee will be deferred in any such month to the extent necessary to
permit Owner to receive at least its Minimum Collections for such
month;
(iii) after such Minimum Period and until the Crossover Date,
60% of Net Collections shall be paid to the Servicer as its Servicing
Fee, provided that such Servicing Fee will be deferred in any such
month to the extent necessary to permit Owner to receive at least its
Minimum Collections for such month; and
(iv) from and after the Crossover Date, 90% of Net Collections
shall be paid to the Servicer as its Servicing Fee; and
(v) as an additional Servicing Fee, in each month, Servicer
shall be paid an amount equal to (A) the difference between interest
earned on the Collections Account, minus bank fees charged on the
Collection Account, times (B) a percentage which is the same percentage
stated above relating to Net Collections for such month; and
(vi) the balance in the Collections Account shall be paid to
the Owner.
ARTICLE 4.
THE SERVICER
SECTION 4.1. Representations of Servicer.
The Servicer hereby makes the following representations on which the
Owner is relying in entering into this Agreement.
(a) Organization and Good Standing. The Servicer is duly organized and
validly existing as a corporation in good standing under the laws of the State
of Maryland, with corporate power and authority to own its properties and to
conduct its business as such properties are currently owned and such business is
presently conducted, and had at all relevant times, and now has, corporate
power, authority and legal right to acquire, own, hold, transfer, convey and.
service the Receivables and to hold the Receivable Files as custodian.
(b) Power and Authority. The Servicer has the corporate power and
authority to execute and deliver this Agreement and to carry out its terms; and
the execution, delivery and performance of this Agreement has been duly
authorized by the Servicer by all necessary corporate action.
(c) Binding Obligations. This Agreement constitutes a legal, valid and
binding obligation of the Servicer enforceable in accordance with its terms,
except as enforceability may
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be limited by bankruptcy, insolvency, reorganization, moratorium and other
similar laws affecting creditors' rights generally or by general principles of
equity.
(d) No Violation. The consummation of the transactions contemplated by
this Agreement and the fulfillment of the terms of this Agreement do not
conflict with, result in any breach of any of the terms and provisions of, nor
constitute (with or without notice or lapse of time) a default under, the
articles of incorporation or bylaws of the Servicer, or conflict with or breach
any of the material terms or provisions of, or constitute (with or without
notice or lapse of time) a default under, any indenture, agreement or other
instrument to which the Servicer is a party or by which it shall be bound; nor
result in the creation or imposition of any Lien upon any of its properties
pursuant to the terms of any such indenture, agreement or other instrument
(other than this Agreement); nor violate, any law, order, rule or regulation
applicable to the Servicer of any court or of any federal or state regulatory
body, administrative agency or other governmental instrumentality having
jurisdiction over the Servicer or its properties; which breach, default,
conflict, Lien or violation would have a material adverse effect on the
Receivables or the Owner's interests therein.
(e) No Proceedings. There is no action, suit or proceeding before or by
any court or governmental agency or body, domestic or foreign, now pending, or
to the Servicer's knowledge, threatened, against or affecting the Servicer: (i)
asserting the invalidity of this Agreement, (ii) seeking to prevent the
consummation of any of the transactions contemplated by this Agreement or (iii)
seeking any determination or ruling that might materially and adversely affect
the performance by the Servicer of its obligations under, or the validity or
enforceability of, this Agreement.
SECTION 4.2. Liability of Servicer; Indemnification Obligations.
(a) The Servicer shall be liable in accordance herewith only to the
extent of the obligations specifically undertaken by the Servicer under this
Agreement, including the indemnity obligations of Section 4.2(b), and shall have
no other obligations or liabilities under this Agreement.
(b) The Servicer shall indemnify, defend and hold harmless the Owner,
its officers, directors, employees and agents and their respective successors
and assigns from and against any and all costs, expenses, losses, claims,
damages and liabilities to the extent that any such cost, expense, loss, claim,
damage or liability is found by a court of competent jurisdiction (or other body
with jurisdiction over the matter) to have arisen out of, and was imposed upon
the Owner, its officers, directors, employees and agents and their respective
successors and assigns through the negligence, misfeasance or bad faith of the
Servicer in the performance of its duties under this Agreement or by reason of
reckless disregard of its obligations and duties under this Agreement.
Indemnification under this Section 4.2(b) shall include, without limitation,
reasonable fees and expenses of counsel and expenses of litigation. If the
Servicer has made any indemnity payments pursuant to this Section and the
recipient thereafter collects any of such amounts from others, the recipient
shall promptly repay such amounts collected to the Servicer, without interest,
so long as no amounts are outstanding to the Owner.
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The indemnification obligations of the Servicer under this Section 4.2(b) shall
survive the resignation or removal of the Servicer and the termination of this
Agreement.
SECTION 4.3. Limitation on Liability of Servicer and Others.
(a) Neither the Servicer nor any of its directors, officers, employees
or agents shall be under any liability to the Owner, except as provided in this
Agreement, for any action taken or for refraining from the taking of any action
pursuant to this Agreement, or for errors in judgment; provided, however, that
this provision shall not protect the Servicer or any such person against any
liability that would otherwise be imposed by reason of misfeasance, bad faith or
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties under this Agreement.
(b) Except as provided in this Agreement, the Servicer shall not be
under any obligation to appear in, prosecute, or defend any legal action that
shall not be incidental to its duties to service the Receivables in accordance
with this Agreement, and that in its opinion may involve it in any expense or
liability; provided, however, that the Servicer may undertake any reasonable
action that it may deem necessary or desirable in respect of this Agreement and
the rights and duties of the parties to this Agreement and the interests of the
Owner under this Agreement.
(c) The Servicer and any director, officer, employee or agent of the
Servicer may rely in good faith on the advice of counsel or on any document of
any kind, prima facie properly executed and submitted by any Person respecting
any matters arising under this Agreement.
SECTION 4.4. Servicer Not to Resign.
Creditrust Corporation shall not resign from the obligations and duties
hereby imposed on it as Servicer under this Agreement except upon determination
that the performance of its duties under this Agreement shall no longer be
permissible under applicable law. Notice of any such determination permitting
the resignation of Servicer shall be communicated to the Owner at the earliest
practicable time and any such determination shall be evidenced by an opinion of
counsel to such effect delivered to the Owner concurrently with or promptly
after such notice. No such resignation shall become effective until a successor
servicer shall have assumed the responsibilities and obligations of Servicer
with respect to the Receivables.
ARTICLE 5.
THE OWNER
SECTION 5.1. Representations of Owner.
The Owner hereby makes the following representations as of the date of
this Agreement, on which the Servicer is relying in accepting the obligation to
service the Receivables hereunder.
(a) Organization and Good Standing. The Owner is duly organized and
validly existing as a corporation in good standing under the laws of the United
States, with power and
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authority to own its properties and to conduct its business as such properties
are currently owned and such business is presently conducted, and had at all
relevant times, and now has, power, authority and legal right to acquire, own,
hold, transfer, assign and convey the Receivables.
(b) Power and Authority. The Owner has the power and authority to
execute and deliver this Agreement and to carry out its terms; and the
execution, delivery and performance of this Agreement has been duly authorized
by the Owner by all necessary action.
(c) Binding Obligations. This Agreement constitutes a legal, valid and
binding obligation of the Owner enforceable in accordance with its terms, except
as enforceability may be limited by bankruptcy, insolvency, reorganization or
other similar laws affecting creditors' rights generally or by general equity
principles.
(d) No Violation. The consummation of the transactions contemplated by
this Agreement and the fulfillment of the terms of this Agreement do not
conflict with, result in any breach of any of the terms or provisions of, nor
constitute (with or without notice or lapse of time) a default under, the
articles of organization or bylaws of the Owner or any indenture, agreement or
other instrument to which the Owner is a party or by which it shall be bound,
nor result in the creation or imposition of any Lien upon any of its properties
pursuant to the terms of any such indenture, agreement or other instrument
(other than this Agreement), nor violate any law, order, rule or regulation
applicable to the Owner of any court or of any federal or state regulatory body,
administrative agency or other governmental instrumentality having jurisdiction
over the Owner or its properties.
(e) No Proceedings. There is no action, suit or proceeding before or by
any court or governmental agency or body, domestic or foreign, now pending, or
to the Owner's knowledge, threatened, against or affecting the Owner: (i)
asserting the invalidity of this Agreement, (ii) seeking to prevent the
consummation of any of the transactions contemplated by this Agreement, (iii)
seeking any determination or ruling that might materially and adversely affect
the performance by the Owner of its obligations under, or the validity or
enforceability of,-this Agreement.
SECTION 5.2. Indemnification Obligations of Owner.
The Owner shall indemnify, defend and hold harmless the Servicer, its
officers, directors, employees and agents and their respective successors and
assigns from and against any and all costs, expenses, losses, claims, damages
and liabilities arising or growing out of or in any way connected with the
performance of services by the Servicer hereunder, except to the extent that any
such costs, expenses, losses, claims, damages and liabilities are found by a
court of competent jurisdiction (or other body with jurisdiction over the
matter) to be due to the negligence, misfeasance or bad faith of the Servicer,
its officers, directors, employees or agents in the performance of the
Servicer's duties under this Agreement or by reason of reckless disregard of its
obligations and duties under this Agreement. Indemnification under this Section
5.2 shall include, without limitation, reasonable fees and expenses of counsel
and
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expenses of litigation. The indemnification obligations of the Owner under this
Section 5.2 shall survive the resignation or removal of the Servicer and the
termination of this Agreement.
ARTICLE 6.
TERM
SECTION 6.1. Term.
The term of this Agreement shall commence as of the Closing Date and,
unless modified by separate agreement signed by all parties hereto or terminated
as otherwise provided herein, shall terminate on the date that is one hundred
twenty (120) full calendar months from the Closing Date. Except as provided in
Article 7 or Article 8, this Agreement may not be terminated by any party prior
to the end of such 120-month period.
ARTICLE 7.
SERVICER DEFAULT, OWNER DEFAULT AND RELATED REMEDIES
SECTION 7.1. Servicer Default.
For purposes of this Agreement, each of the following shall constitute
a "Servicer Default":
(a) any failure by the Servicer to make any payment to the
Owner required to be made under Section 3.3(b) that continues
unremedied for a period of three Business Days after discovery by an
officer of the Servicer or the date on which written notice has been
given to the Servicer by the Owner; or
(b) the failure of both the following conditions: (i) the
Servicer to collect and the Owner to receive in any three-month period
average Net Collections equal to the average Minimum Collections for
such three-month period and (ii) the Servicer to collect and the Owner
to receive, as of any date, cumulative Net Collections in an amount at
least equal to the cumulative Minimum Collections as of such date; or
(c) any failure on the part of the Servicer duly to observe or
perform any other covenants or agreements of the Servicer set forth in
this Agreement, which failure shall (i) materially and adversely affect
the rights and interests of the Owner in the Receivables and (ii)
continue unremedied for a period of 30 days after discovery by an
officer of the Servicer or the date on which written notice of such
failure, requiring the same to be remedied, shall have been given to
the Servicer by the Owner; or
(d) any representation, warranty or certification made by the
Servicer in this Agreement proves to have been incorrect when made,
which (i) has a material adverse effect on the rights and interests of
the Owner in the Receivables and (ii) continues unremedied for a period
of 30 days after discovery by an officer of the Servicer or the date on
which written notice, requiring the same to be remedied, shall have
been given to the Servicer by the Owner; or
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(e) the entry of a decree or order by a court or agency or
supervisory authority having jurisdiction in the premises for the
appointment of a trustee in bankruptcy, conservator, receiver or
liquidator for the Servicer in any bankruptcy, insolvency, readjustment
of debt, marshaling of assets and liabilities or similar proceedings,
or for the winding up or liquidation of their respective affairs, and
the continuance of any such decree or order unstayed and in effect for
a period of 30 consecutive days; or
(f) the consent by the Servicer to the appointment of a
trustee in bankruptcy, conservator or receiver or liquidator in any
bankruptcy, insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings of or relating to the Servicer, or
relating to substantially all of its property, or the Servicer shall
admit in writing its inability to pay its debts generally as they
become due, file a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its
obligations.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (a) above for a period of three Business Days or
referred to under clause (c), (d) or (e) above for a period of 30 days shall not
constitute a Servicer Default until the expiration of an additional five
Business Days or 30 days, respectively, if such delay or failure could not be
prevented by the exercise of reasonable diligence by the Servicer and such delay
or failure was caused by an act of God or other similar occurrence.
SECTION 7.2. Remedies With Respect To Servicer Default.
If a Servicer Default shall occur and be continuing prior to but not
after the Crossover Date, so long as such Servicer Default has not been cured or
waived, Owner may exercise any one or more of its rights and remedies under
common or statutory law and in addition the Owner by notice then given in
writing to the Servicer may terminate all of the rights and obligations of the
Servicer, as Servicer under this Agreement, and in and to the Receivables and
proceeds thereof, except for Servicer's rights under Article 8. The Servicer
shall cooperate with any successor servicer in effecting the termination of the
responsibilities and rights of the Servicer under this Agreement, including,
without limitation, the transfer to the successor servicer for administration by
it of all cash amounts that shall at the time be held by the Servicer for
deposit with respect to the Receivables, or have been deposited by the Servicer
in the Collections Account with respect to the Receivables or thereafter
received by the Servicer with respect to the Receivables. After the Crossover
Date, Owner may exercise any one or more of its rights and remedies under common
or statutory law, other than the right to terminate this Agreement.
(b) No failure or delay on the part of Owner in exercising any
right, power or privilege hereunder and no course of dealing between Owner and
Servicer shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder or thereunder. The rights and remedies provided herein are cumulative
and not exclusive of any rights or remedies which Owner would otherwise have.
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SECTION 7.3. Owner Default.
Each of the following events or circumstances shall be an Owner Default
under this Agreement:
(a) if Owner shall breach or otherwise fail to fulfill any
covenant or agreement of Owner in this Agreement which is not cured
within thirty (30) days after Servicer gives Owner written notice
thereof; or
(b) the entry of a decree or order by a court or agency or
supervisory authority having jurisdiction in the premises for the
appointment of a conservator or receiver for the Owner in any
bankruptcy, insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings, or for the winding up or
liquidation of its respective affairs, and the continuance of any such
decree or order unstayed and in effect for a period of 30 consecutive
days; or
(c) the consent by the Owner to the appointment of a
conservator or receiver in any bankruptcy, insolvency, readjustment of
debt, marshaling of assets and liabilities or similar proceedings of or
relating to the Owner of or relating to substantially all of its
property.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (a) or (b) above for a period of 30 days shall not
constitute a Owner Default until the expiration of an additional 30 days if such
delay or failure could not be prevented by the exercise of reasonable diligence
by the Owner and such delay or failure was caused by an act of God or other
similar occurrence.
SECTION 7.4. Remedies With Respect to Owner Default.
Upon the occurrence of any Owner Default, and in addition to such other
rights and remedies as Servicer may have under other provisions of this
Agreement, Servicer may exercise any one or more of its rights and remedies
under common or statutory law and in addition, may elect to require the sale of
the Receivables by the Owner in connection with a securitization by Servicer
pursuant to the terms set forth in Article 8. No failure or delay on the part of
Servicer in exercising any right, power or privilege hereunder and no course of
dealing between Owner and Servicer shall operate as a waiver thereof; nor shall
any single or partial exercise of any right, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege hereunder or thereunder. The rights and remedies
provided herein are cumulative and not exclusive of any rights or remedies which
Servicer would otherwise have.
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ARTICLE 8.
ENGAGEMENT OF CREDITRUST AS MARKETING AGENT
SECTION 8.1. Engagement of Creditrust as Marketing Agent.
(a) Subject to the further terms and conditions of this Agreement,
Owner hereby engages Servicer, and Servicer hereby accepts such engagement, to
act as the exclusive marketing and sales agent of Owner with respect to the
sale, securitization, exchange or other disposition of all or part of the
Receivables. The services to be performed by Servicer on behalf of Owner
pursuant to this Agreement are as follows:
(i) marketing the Receivables or any portion thereof and
soliciting offers for the sale, securitization, exchange or other
disposition to potential purchasers who are not Affiliates of the
Servicer (except that the purchaser may be an Affiliate of the Servicer
in the case of a securitization of the Receivables initiated by
Servicer);
(ii) negotiating (including the execution of non-binding
letters of intent) with potential purchasers in the name and on behalf
of the Owner the terms and conditions, including the amount and form of
consideration, for any sale, securitization, exchange or other
disposition;
(iii) if the Owner approves a sale, securitization, exchange
or other disposition of all or part of the Receivables or such sale,
securitization, exchange or other disposition is authorized hereunder,
executing and delivering in the name and on behalf of the Owner such
documents, agreements and certificates in form approved by Owner (which
approval shall not be unreasonably withheld) and doing and performing
all such acts and things and taking all such other steps as Servicer
reasonably may deem to be necessary, proper or convenient in order to
consummate the sale, securitization, exchange or other disposition of
the Receivables on terms consistent with provisions hereof.
(b) By entering into this Agreement, Owner hereby irrevocably approves
and commits to promptly accept and consummate any offer for the securitization,
sale, exchange or other disposition of all or any portion of the Receivables
negotiated by the Servicer; provided that the net cash proceeds (the "Base
Price") immediately due to the Owner upon the consummation of securitization,
sale, exchange or other disposition shall be sufficient, when added to all other
amounts previously received by Owner with respect to the Receivables, to provide
aggregate net cash proceeds to the Owner of $8,556,450.20. In the case of a
sale, exchange or other disposition which is not a securitization, Servicer
shall be entitled to receive as a disposition and servicing fee, after receipt
by Owner of the Base Price, an amount equal to ninety percent (90%) of the
amount by which the net cash proceeds from such sale, exchange, or other
disposition exceed the Base Price. In the case of a securitization of the
Receivables initiated by Servicer, the Servicer shall be entitled to receive, as
a disposition and servicing fee, an amount equal to (i) 90% of the amount by
which net cash proceeds from the securitization of the Receivables exceed the
Base Price plus (ii) all of the amounts subsequently distributed by the trustee
under the securitization documents for the account of the transferor of the
Receivables in
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the securitization until such distributions plus the amount of the disposition
and servicing fee received by the Servicer pursuant to Clause (i) aggregate an
amount equal to the excess of $15,371,354.50 over the amount of servicing fees
received by Servicer prior to the securitization, plus (iii) 90% of all such
distributions thereafter for the account of the transferor of the Receivables in
the securitization, (with the balance of 10% of such distributions to be paid to
the Owner). In making the foregoing calculations of the amounts payable under
clauses (i), (ii) and (iii), any servicing fees collected by Servicer pursuant
to the securitization documents shall be credited against amounts to which
Servicer is entitled. The disposition of funds provided for in clauses (ii) and
(iii) above will be provided for in the securitization documents and the trustee
shall make such distributions to the parties in accordance therewith. Owner
further commits and agrees to execute all such documents, agreements and
certificates, to perform all such acts and things and to take all such other
steps as Servicer may reasonably request in order to consummate any such sale,
securitization, exchange or other disposition containing such representations,
warranties, terms and other conditions as are customary to transactions of
similar nature.
ARTICLE 9
(RESERVED)
ARTICLE 10
MISCELLANEOUS PROVISIONS
SECTION 10.1. Confidential Information.
The Owner and Seller acknowledge that, in the course of meeting their
respective duties and obligations under this Agreement, either Owner or Servicer
may obtain information relating to the other party that is of a confidential and
proprietary nature ("Proprietary Information"). Such Proprietary Information may
include, but is not limited to, non-public trade secrets, invention techniques,
processes, programs, schematics, software source documents, data, and financial
information. The Owner and Servicer shall at all times, both during the term of
this Agreement and for a period of three (3) years after its termination, keep
in trust and confidence all such Proprietary Information, and shall not use such
Proprietary Information other than in the course of their respective duties
under this Agreement, nor shall either party disclose any such Proprietary
Information of the other party without the written consent of the other party
unless legally required to disclose such information. Each of the parties
further agrees to immediately return all Proprietary Information of the other
party (including copies thereof) in its possession, custody, or control to the
other party upon termination of this Agreement for any reason.
Neither party shall disclose, advertise or publish the existence or the
terms or conditions of this Agreement without prior written consent of the other
party. Notwithstanding the
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foregoing, this Section 10.1 shall not prohibit disclosure of information that
is required to be disclosed pursuant to federal or state laws or regulation. In
particular, each party agrees that it shall not, without the prior consent of
the other party, disclose the existence of this Agreement or any of the terms
herein to any Person other than counsel or an employee or director with a need
to know in order to implement this Agreement and only if such employee or
director or counsel agrees to maintain the confidentiality of this Agreement.
The parties hereto agree that each of them shall have the right to enforce these
nondisclosure provisions by an action for specific performance filed in any
court of competent jurisdiction in the State of Maryland.
SECTION 10.2. Amendment.
Neither this Agreement nor any term hereof may be amended, released,
changed or modified in any manner except by an instrument in writing which
refers to this Agreement and is executed by each of the parties hereto.
SECTION 10.3. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Maryland and the obligations, rights and remedies of
the parties under this Agreement shall be determined in accordance with such
laws.
SECTION 10.4 Notices.
(a) Written Notices. All notices, demands or requests that are required
or permitted to be given pursuant to this Agreement, to be effective, must be in
writing and delivered personally, or by commercial carrier, or by registered or
certified mail, postage prepaid, addressed to a party as stated below.
(b) Owner's Address for Notices:
Heartland Bank
212 South Central, Suite 200
Clayton, Missouri 63105
Attention: Mr. Andrew Love
Telephone: (314) 512-8606
Facsimile: (314) 512-8687
Copy to:
Kathleen Topelius, Esquire
Bryan Cave LLP
700 13th Street, N.W.
Washington, D.C. 20005
Telephone: (202) 508-6140
Facsimile: (202) 508-6200
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(c) Servicer's Address for Notices:
Creditrust Corporation
7000 Security Boulevard
Baltimore, Maryland 21244
Attention: Mr. Joseph K. Rensin
Telephone: (410) 594-7000
Facsimile: (410) 594-9620
Copy to:
Steven D. Shattuck, Esquire
Piper & Marbury L.L.P.
36 South Charles Street
Baltimore, Maryland 21201
Telephone: (410) 539-2530
Facsimile: (410) 539-0489
(d) Effective Date. Notice given personally or by commercial carrier
shall be effective upon delivery. Notice given by United States mail shall be
effective the third United States Post Office delivery day after the date of
mailing.
(e) Change of Address. Any party may change its address for notices by
notice given pursuant to this section.
SECTION 10.5 Integration and Nature of Agreement.
The making, execution and delivery of this Agreement by the parties has
not been induced by any representations, statements, warranties or agreements
other than those expressed in this Agreement. This Agreement and the Letter
Agreement embody the entire understanding of the parties. Other than the Letter
Agreement, there are no other agreements or undertakings, written or oral, in
effect between the parties relating to the subject matter of this Agreement,
unless expressly referenced in this Agreement. Neither party has made any
representation to the other regarding the manner in which this Agreement may be
treated by other persons. No provision of this Agreement shall be construed as
creating a joint venture between the parties or authorizing any party to this
Agreement to bind the other party unless expressly authorized by this Agreement.
SECTION 10.6 Severability of Provisions.
If any one or more of the covenants, agreements, provisions or terms of
this Agreement shall be for any reason whatsoever held invalid or unenforceable
in any jurisdiction, then such covenants, agreements, provisions or terms shall
be deemed severable from the remaining covenants, agreements, provisions or
terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement.
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SECTION 10.7 No Assignment.
Notwithstanding anything to the contrary contained in this Agreement,
except as provided in the provisions of this Agreement concerning the
resignation of the Servicer, this Agreement may not be assigned by the Owner or
the Servicer without the prior written consent of the other such party. Except
as otherwise expressly provided in this Agreement, Owner shall not sell, assign,
exchange or otherwise transfer all or any portion of the Receivables or permit
any such event to occur, other than a sale or assignment in connection with a
sale or exchange of all or substantially all of its assets; provided, however,
that any such transferee shall acquire and hold the transferred Receivables
subject to the terms of this Agreement.
SECTION 10.8 Execution in Counterparts.
This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed to be an original, and all of which
shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties have caused this Servicing Agreement to
be duly executed by their respective officers as of August 6, 1997.
CREDITRUST CORPORATION,
as Servicer
By: /s/ Joseph K. Rensin
----------------------------------
Name: Joseph K. Rensin
Title: President
HEARTLAND BANK,
as Owner
By: /s/ Laurence A. Schiffer
----------------------------------
Name: Laurence A. Schiffer
Title: Chairman of the Board
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EXHIBIT A
PURCHASE AGREEMENT
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LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("Agreement") is made this
_____ day of September, 1996, by and between OXFORD CAPITAL CORPORATION, a
Maryland corporation ("Borrower"), and SIGNET BANK ("Bank").
RECITALS
WHEREAS, Borrower has requested Bank to extend credit to
Borrower in the aggregate principal amount of Four Million Dollars
($4,000,000.00); and
WHEREAS, Bank is willing to extend such credit to Borrower
upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, Borrower and Bank do hereby agree as follows:
1. CONSTRUCTION AND DEFINITION OF TERMS
All terms used herein without definition which are defined by
the Maryland Uniform Commercial Code shall have the meanings assigned to them by
the Maryland Uniform Commercial Code unless and to the extent varied by this
Agreement. Unless the context otherwise requires, all of the accounting terms
used herein without definition shall have the meanings assigned to them as
determined by GAAP except to the extent varied by this Agreement. Whenever the
phrase "satisfactory to Bank" is used in this Agreement such phrase shall mean
"satisfactory to Bank in its sole discretion." The use of any gender or the
neuter herein shall also refer to the other gender or the neuter and the use of
the plural shall also refer to the singular, and vice versa. In addition to the
terms defined elsewhere in this Agreement, unless the context otherwise
requires, when used herein, the following terms shall have the following
meanings:
"Acceptable Portfolio" shall mean a Portfolio to be purchased
by Borrower which is acceptable to Bank, from time to time, in its discretion
exercised in good faith, as a basis for making a Loan to Borrower hereunder.
"Affiliate" shall mean: (a) any person in which Borrower
legally or beneficially owns or holds, directly or indirectly, any capital
stock, member interest, partnership interest or other equity interest; (b) any
person that is a partner in or of Borrower, a partnership in which Borrower is a
partner, a joint venture in which Borrower is a joint venturer, or a joint
venturer in or of Borrower; (c) any person that is a director, officer,
employee, stockholder, member, partner (legally or beneficially) or other
affiliate of any of the foregoing or of Borrower; and (d) any person that
directly or indirectly controls, is under the control of, or is under common
control with, Borrower, including, without limitation, any person that directly
or indirectly has the right
<PAGE>
or power to direct the management or policies of Borrower and any person whose
management or policies Borrower directly or indirectly has the right or power to
direct.
"Banking Day" shall mean any day that banks in the State of
Maryland are not required or permitted to be closed.
"Business Premises" shall mean 7000 Security Boulevard,
Baltimore, Maryland 21244.
"Certified" shall mean that the information, statement,
schedule, report or other document required to be "Certified" contains a
representation by Borrower, that to Borrower's knowledge and belief after
diligent inquiry, such information, statement, schedule, report or other
document is true and complete in all material respects.
"Closing" shall mean the first date on which funds are
advanced to Borrower hereunder.
"Code" shall mean the Internal Revenue Code of 1986, as the
same may be amended from time to time.
"Collateral" shall mean: (a) all Receivables, Inventory and
Equipment and, in addition, all other property of Borrower in which Bank has, or
may in the future acquire or be granted, a Lien hereunder or under any of the
Other Agreements; (b) all amounts now or in the future owed by Bank to Borrower
and all property and funds of Borrower (including deposit accounts, certificates
of deposit, and investments made or managed by Bank on behalf of Borrower), now
owned or hereafter acquired by Borrower and now or hereafter in Bank's
possession or control; (c) all present and future substitutions, replacements,
appurtenances, accessories, accessions and materials and supplies relating to
any of the foregoing; (d) all of Borrower's present and future books and records
in any form, in or on any media, including data processing materials in any form
(including software, tapes, discs and the like), whether in the possession of
Borrower or any other person; and (e) all present and future proceeds and
products of all of the foregoing in any form whatsoever and all rights,
including rights to the payment of money for any reason, arising on account of
any sale, assignment, lease, rental, license, exchange, liquidation,
condemnation, taking, theft or any disposition of any nature of, or any damage
or casualty to, or any loss with respect to, any of the foregoing or any rights
or interests of Borrower in any of the foregoing, including, without limitation,
cash proceeds (including all payments under any indemnities, warranties or
guaranties payable with respect to any of the foregoing), noncash proceeds and
proceeds acquired with cash proceeds, whether any such proceeds constitute
consumer goods, farm products, equipment, inventory, documents of title, chattel
paper, accounts, instruments or general intangibles, and all proceeds of
insurance policies insuring any of the foregoing or any risks to Borrower
associated with any of the foregoing.
"Default" shall mean any event which, with the giving of
notice or passage of time (or both), would constitute an Event of Default.
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"Default Rate of Interest" shall mean a fluctuating rate of
interest equal to the Prime Rate in effect from time to time plus three percent
(3.0%) per annum.
"Deposit Loan" shall mean each Loan made pursuant to Section
2.01 hereof for the purpose of financing the payment of Borrower's required
deposit in connection with a Portfolio purchase bid.
"Deposit Loan Notes" shall mean each promissory note of
Borrower in the form attached hereto as Exhibit B, and all renewals,
replacements and extensions thereof.
"Environmental Laws" shall mean all federal, state, local and
foreign laws relating to pollution or protection of the environment, including
laws relating to emissions, discharges, releases or threatened releases of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes into the environment (including, without limitation,
ambient air, surface water, ground water, or land), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants, chemicals, or industrial,
toxic or hazardous substances or wastes, and any and all regulations, codes,
plans, orders, decrees, judgments, injunctions, notices or demand letters
issued, entered, promulgated or approved thereunder.
"Equipment" shall mean: (a) all equipment of Borrower of every
type and description, now owned and hereafter acquired and wherever located,
including, without limitation, all machinery, vehicles and other rolling stock,
furniture, furnishings, tools, dies, leasehold improvements, fixtures, and
materials and supplies relating to any of the foregoing; (b) all present and
future documents of title and trust receipts relating to any of the foregoing;
(c) all present and future rights, claims and causes of action of Borrower in
connection with purchases by Borrower of (or contracts for the purchase by
Borrower of), or warranties relating to, or damages to, goods held or to be held
by Borrower as equipment; (d) all present and future warranties, manuals and
other written materials (and packaging thereof or relating thereto) relating to
any of the foregoing; (e) all present and future rights, claims and causes of
action of Borrower in connection with any agreements pursuant to which any
suppliers, manufacturers or other persons have agreed or may agree,
conditionally or otherwise, to purchase or repurchase from Borrower, in bulk or
otherwise, any goods held or to be held by Borrower as equipment; and (f) all
present and future general intangibles of Borrower in any way relating to any of
the foregoing.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time, and any successor legislation, and all
regulations, codes, plans, orders, decrees, judgments, injunctions, notices or
demand letters issued, entered, promulgated or approved thereunder.
"Event of Default" shall mean any of the events described in
Section 8 hereof.
"GAAP" shall mean generally accepted accounting principles in
the United States of America in effect from time to time. In the event of a
change in GAAP affecting the
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covenants contained in Subsections 6.15 and 6.16 of this Agreement or
definitions contained in Section 1 of this Agreement relating to such covenants,
such covenants and definitions shall continue to be applied as though such
change in GAAP had not occurred unless and until Bank and Borrower shall agree
in writing to amend or adjust such covenants or definitions as deemed necessary
as a result of such change in GAAP.
"good faith" shall mean, with respect to a determination to be
made by Bank "in good faith," that Bank shall make such determination honestly
and not maliciously.
"Hazardous Substance" shall mean any flammable explosives,
radon, radioactive materials, asbestos, urea formaldehyde foam insulation,
polychlorinated biphenyls, petroleum and petroleum-based products, methane and
all other pollutants, contaminates, chemicals, industrial substances, industrial
wastes, toxic substances, toxic wastes, toxic materials, hazardous substances,
hazardous wastes and hazardous materials. The meaning of each term used in this
definition shall include, without limitation, the meaning or meanings assigned
to such term by any Environmental Laws.
"Indebtedness" shall include all items which would properly be
included in the liability section of a balance sheet or in a footnote to a
financial statement in accordance with GAAP, and shall also include all
contingent liabilities which could have a material adverse affect on the
Collateral, or on the financial condition, business or prospects of Borrower.
"Inventory" shall mean: (a) all inventory of Borrower of every
type and description, now owned and hereafter acquired and wherever located,
including, without limitation, raw materials, work in process, finished goods,
goods returned or repossessed, and goods held for demonstration, marketing or
similar purposes; (b) all present and future materials and supplies of Borrower
used, usable or consumed in the course of Borrower's business, whether relating
to the manufacture, assembly, installation, repair, packaging, packing or
shipment of goods by Borrower, or relating to advertising or any other aspect of
Borrower's business; (c) all present and future property of Borrower in or on
which any of the foregoing is stored or maintained; (d) all present and future
warranties, manuals and other written materials (and packaging thereof or
relating thereto) relating to any of the foregoing; (e) all present and future
documents of title and trust receipts relating to any of the foregoing; (f) all
present and future customer lists of Borrower; (g) all present and future rights
of Borrower in connection with goods consigned to or by Borrower; (h) all
present and future rights of Borrower as an unpaid seller of goods, including
rights of stoppage in transit, detinue and reclamation; (i) all present and
future rights, claims and causes of action of Borrower in connection with
purchases by Borrower of (or contracts for the purchase by Borrower of), or
warranties relating to, or damages to, goods held or to be held by Borrower as
inventory; (j) all present and future rights, claims and causes of action of
Borrower in connection with any agreements pursuant to which any suppliers,
manufacturers or other persons have agreed or may agree, conditionally or
otherwise, to purchase or repurchase from Borrower, in bulk or otherwise, any
goods held or to be held by Borrower as inventory; and (k) all present and
future general intangibles of Borrower in any way relating to any of the
foregoing.
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"Lien" shall mean any statutory or common law consensual or
nonconsensual mortgage, pledge, security interest, encumbrance, lien, right of
setoff, claim or charge of any kind, including, without limitation, any
conditional sale or other title retention transaction, any lease transaction in
the nature thereof and any secured transaction under the Uniform Commercial Code
of any jurisdiction.
"Loans" shall mean each of the Portfolio Purchase Loans and
each of the Deposit Loans.
"Maximum Loan Amount" shall mean $4,000,000.00.
"Non-Default Rate of Interest" shall mean a fluctuating rate
of interest equal to the Prime Rate in effect from time to time plus one percent
(1.0%) per annum.
"Notes" shall mean each of the Portfolio Purchase Notes and
each of the Deposit Loan Notes.
"Obligations" shall mean, as the same may be amended,
modified, extended, renewed, supplemented, increased, refinanced, consolidated
or replaced from time to time, all present and future obligations, indebtedness
and liabilities of Borrower to Bank of every kind and nature, whether arising
under this Agreement, the Other Agreements or otherwise (including, without
limitation, all principal amounts, including future advances, interest charges,
service charges, late charges, fees and all other charges and sums, as well as
all costs and expenses, including attorneys' fees and expenses, payable or
reimbursable by Borrower under or pursuant to this Agreement, the Other
Agreements and otherwise), whether direct or indirect, joint or several,
contingent or non-contingent, matured or unmatured, accrued or not accrued,
liquidated or unliquidated, secured or unsecured, related or unrelated to this
Agreement, whether or not now contemplated, whether arising in contract, tort or
otherwise, whether or not any instrument or agreement relating thereto
specifically refers to this Agreement, and whether or not of the same character
or class as Borrower's obligations under this Agreement, including, without
limitation, reimbursement obligations of Borrower in connection with letters of
credit issued by Bank, obligations of Borrower in connection with overdrafts in
any checking or other account of Borrower at Bank, all claims against Borrower
acquired by assignment to Bank, and all claims of Bank against Borrower arising
or re-arising on account of or as a result of any payment made by Borrower or
any Other Obligor with respect to any obligations included in this definition
which is rescinded or recovered from or restored or returned by Bank under
authority of any law, rule, regulation, order of court or governmental agency,
or in connection with any compromise or settlement relating thereto or relating
to any pending or threatened action, suit or proceeding relating thereto,
whether arising out of any proceedings under the United States Bankruptcy Code
or otherwise.
"Other Agreements" shall mean, as the same may be amended,
modified, extended, renewed, supplemented or replaced from time to time, any and
all agreements, contracts, promissory notes and other instruments (including the
Notes), drafts, checks, bankers acceptances, security agreements, assignments,
pledge agreements, hypothecation agreements,
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<PAGE>
indemnification agreements, letters of credit and applications and agreements
relating thereto, subordination agreements, mortgages, deeds of trust, leases,
guaranties and other documents (a) now and hereafter existing between Bank and
Borrower, (b) executed and/or delivered in connection with this Agreement or any
of the Obligations, or (c) evidencing, guaranteeing, securing (directly or
indirectly), subordinating other obligations of Borrower or any Other Obligor
to, containing any warranties, covenants, agreements or representations of any
person relating to, or in any other manner relating to, any of the Obligations
or any obligation of any Other Obligor in connection with any of the
Obligations. The Other Agreements shall include, without limitation, the
instruments and documents referred to in Subsection 5.01 hereof.
"Other Obligor" shall mean any person that is now or hereafter
primarily or secondarily, or contingently or non-contingently, liable for or
obligated upon or in connection with any of the Obligations, or, whether or not
so liable, that has granted any Lien to or for the benefit of Bank as security
for any of the Obligations or any obligations of any Other Obligor in connection
with any of the Obligations.
"Permitted Liens" shall mean: (a) Liens of Bank; (b) Liens for
taxes not delinquent or for taxes being diligently contested in good faith by
Borrower by appropriate proceedings, subject to the conditions set forth in
Subsection 6.02 hereof and provided such Lien is subordinate to any security
interest of Bank in the property encumbered by such Lien; (c) mechanic's,
artisan's, materialman's, landlord's, carrier's or other like Liens arising in
the ordinary course of business with respect to obligations which are not due;
(d) Liens arising out of a judgment, order or award with respect to which
Borrower shall in good faith be prosecuting diligently an appeal or proceeding
for review and with respect to which there shall be in effect a subsisting stay
of execution pending such appeal or proceeding for review, provided appropriate
reserves therefor are established by Borrower in accordance with GAAP and
provided such Liens are subordinate to Bank's security interest in the property
encumbered by such Lien; (e) any deposit of funds made in the ordinary course of
business to secure obligations of Borrower under worker's compensation laws,
unemployment insurance laws or similar legislation, to secure public or
statutory obligations of Borrower, to secure surety, appeal or customs bonds in
proceedings to which Borrower is a party, or to secure Borrower's performance in
connection with bids, tenders, contracts (other than contracts for the payment
of money), leases or subleases made by Borrower in the ordinary course of
business; (f) Purchase Money Liens; provided that (i) any such Purchase Money
Lien is created simultaneously with the acquisition of the Equipment encumbered
thereby, (ii) the obligation secured by any Purchase Money Lien shall not exceed
100% of the lesser of the cost or the fair market value of the Equipment
encumbered thereby as of the time of acquisition, (iii) each such Lien shall
attach only to the Equipment being financed, and (iv) the obligations secured by
such Liens are permitted under Subsection 7.01 hereof; and (g) Liens
specifically consented to by Bank in writing (including, without limitation,
those Liens described in the Permitted Liens Exhibit attached hereto and
incorporated herein).
"person" shall mean any individual, corporation, partnership,
joint venture, association, trust, government (or subdivision, agency or
department thereof) or any other entity of any kind.
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"Portfolio" shall mean a portfolio of delinquent consumer
receivables.
"Portfolio Loan Percentage" shall mean that percentage of the
purchase price of any Acceptable Portfolio which Bank shall determine, in its
sole discretion, to represent the amount of the Portfolio Purchase Loan Bank is
willing to make to Borrower to finance the purchase thereof.
"Portfolio Purchase Loans" shall mean, individually and
collectively, each of the Loans made by Bank to Borrower pursuant to Subsection
2.01 hereof to finance the purchase of a Portfolio.
"Portfolio Purchase Notes" shall mean each promissory note of
Borrower in the form attached hereto as Exhibit A, and all renewals,
replacements and extensions thereof.
"Prime Rate" shall mean the annual percentage rate
periodically chosen and recorded by Bank as an index (called the prime rate),
at, above or below which interest rates are established for certain nonconsumer
loans.
"Purchase Money Lien" shall mean a Lien on any Equipment
acquired by Borrower in order to finance the acquisition thereof, or a Lien
incurred in connection with any conditional sale or other title retention
agreement in connection with the acquisition of Equipment.
"Receivables" shall mean: (a) all of Borrower's present and
future accounts, contract rights, receivables, promissory notes and other
instruments, chattel paper and general intangibles; (b) all present and future
tax refunds of Borrower and all present and future rights of Borrower to refunds
or returns of prepaid expenses, including unearned insurance premiums; (c) all
present and future cash of Borrower; (d) all deposit accounts now or hereafter
maintained or established by, for or on behalf of Borrower with any bank or
other institution, and all balances of funds now or hereafter on deposit in all
such accounts, including, without limitation, all checking accounts, collection
accounts, lockbox accounts, disbursement accounts, concentration accounts and
all other deposit accounts of every kind and nature; (e) all present and future
judgments, orders, awards and decrees in favor of Borrower and causes of action
in favor of Borrower; (f) all present and future claims, rights of
indemnification and other rights of Borrower under or in connection with any
contracts or agreements to which Borrower is or becomes a party or third party
beneficiary; (g) all rights and claims of Borrower with respect to any deposits
of money or other property made with any lessors of any property, insurers,
bonding agents or any other persons; (h) all present and future rights and
claims which Borrower may now or hereafter have under any insurance policies,
contracts or coverages now or hereafter in effect; (i) all goods previously or
hereafter returned, repossessed or stopped in transit, the sale, lease or other
disposition of which contributed to the creation of any account, instrument or
chattel paper of Borrower; (j) all present and future rights of Borrower as an
unpaid seller of goods, including rights of stoppage in transit, detinue and
reclamation; (k) all rights which Borrower may now or at any time hereafter
have, by
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law or agreement, against any account debtor or other obligor of Borrower, and
all rights and Liens which Borrower may now or at any time hereafter have, by
law or agreement, against any property of any account debtor or other obligor of
Borrower; (l) all present and future interests and rights of Borrower, including
rights to the payment of money, under or in connection with all present and
future leases and subleases of real or personal property to which Borrower is a
party, as lessor, sublessor, lessee or sublessee; (m) all present and future
customer lists of Borrower; (n) all present and future contingent and
non-contingent rights of Borrower to the payment of money for any reason
whatsoever, whether arising in contract, tort or otherwise, whether or not such
rights are otherwise included in this definition; and (o) all present and future
rights of Borrower with respect to licenses, patents, copyrights, franchises,
trade names and trademarks.
"State" shall mean any State of the United States and the
District of Columbia.
"Subsidiary" shall include any person at least a majority of
the outstanding Voting Stock of which, now or in the future, is owned or
controlled by Borrower, directly or indirectly through one or more Subsidiaries.
"Voting Stock" shall mean (a) the shares of any class of
capital stock of a corporation having ordinary voting power to elect the
directors, officers or trustees thereof, including such shares that shall or
might have voting power by reason of the occurrence of one or more conditions or
contingencies, (b) any limited liability company interests, membership interests
or other equivalent interests or participations (however designated) of any
limited liability company, and (c) any general or limited partnership interests
or other interests or participations in any partnership, joint venture, trust or
similar entity, in each case whether or not evidenced by stock certificates or
similar instruments.
2. THE LOANS
2.01 Loans. (a) Bank agrees, in its sole discretion, to make
advances ("Loans") to Borrower from time to time until May 31, 1997 (the "Review
Date"), subject to all of the terms and conditions of this Agreement. All
requests by Borrower for Loans shall be made in such manner and form and with
such prior notice to Bank as Bank may reasonably require from time to time, and
shall contain or be accompanied by such information and documents (which shall
be Certified if required by Bank) concerning the Collateral, Borrower's
financial condition, use of the proceeds of such Loan and of Loans previously
made and/or any other matters as Bank may from time to time require. Without
limitation of the foregoing, not less than three (3) Banking Days prior to the
date of the making of any requested Deposit Loan, Borrower shall provide Bank
with the following documents and information with respect to the Portfolio to be
purchased: (i) a copy of the notice of the request for bids received by Borrower
with respect to the sale of the Portfolio (if any), (ii) Borrower's analysis of
such Portfolio (which shall include, without limitation, Borrower's projected
recoveries over a 36-month period), (iii) the proposed purchase agreement
between Borrower and the Portfolio seller, if available (if such agreement is
not available at such time, the same shall be provided to Bank as soon as it
becomes available), (iv) the amount of the requested Deposit Loan and the
purchase price of the Portfolio to be financed with the proceeds of the related
Portfolio Purchase Loan, and (v) wire instructions with respect to the
disbursement of the Deposit Loan and related Portfolio Purchase Loan proceeds
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(which shall be made directly to the Portfolio seller). In no event shall Bank
be obligated to make any Deposit Loan or Portfolio Purchase Loan (w) if a
Default or an Event of Default shall have occurred, (x) in an amount in excess
of the Portfolio Loan Percentage of the purchase price to Borrower of the
Portfolio as determined by Bank, (y) if such Loan would cause the total
principal amount of Loans made and outstanding hereunder to exceed the Maximum
Loan Amount, or (z) if any aspect of the proposed Portfolio purchase shall not
be satisfactory to Bank (including, without limitation, the identity or
creditworthiness of the Portfolio seller, the purchase agreement or any term of
such transaction). Even if the total principal amount of Loans outstanding shall
at any time and for any reason exceed the Maximum Loan Amount, Borrower and all
guarantors shall nonetheless be liable for the entire principal amount
outstanding, with interest thereon at the rate and calculated in the manner
provided herein and in the Notes, in accordance with and subject to this
Agreement, the Notes and the guaranties of such guarantors. If the total
principal amount of Loans outstanding under the Loans shall at any time exceed
the Maximum Loan Amount, Borrower shall immediately pay to Bank upon demand the
amount of such excess, with interest thereon at the rate and calculated in the
manner provided herein and in the Notes. Borrower agrees that Borrower shall be
liable for, and the Collateral shall secure, the repayment of each Loan made by
Bank to or for Borrower hereunder, with interest at the rate and calculated in
the manner provided herein and in the Notes, whether or not such Loan was duly
requested or authorized by Borrower and whether or not any person requesting
such Loan was duly authorized to make such request. Subject to all of the terms
and conditions of this Agreement and the Other Agreements, Borrower may borrow,
repay and reborrow hereunder until the Review Date. The term of each Deposit
Loan shall be five (5) Banking Days. The term of each Portfolio Purchase Loan
shall be twenty-four (24) months, and the principal of each Portfolio Purchase
Loan shall be payable in equal monthly installments commencing on the fifth
(5th) day of the month following the month in which such Loan was made;
provided, however, that if such date of such first installment would be less
than twenty (20) days after the date such Loan is made, the initial principal
installment shall be due on the fifth (5th) day of the next succeeding month.
Bank may, in its sole discretion, agree, but only in writing, to extend the
Review Date for such time and upon such terms as Bank shall determine in its
sole discretion.
(b) Borrower's obligation to repay the Deposit Loans
with interest shall be evidenced by, and the Deposit Loans shall be repaid with
interest in accordance with, the Deposit Loan Notes. Borrower's obligation to
repay the Portfolio Purchase Loans with interest shall be evidenced by, and the
Portfolio Purchase Loans shall be repaid with interest in accordance with, the
Portfolio Purchase Notes.
(c) Borrower agrees to pay to Bank monthly, on or
before the fifth (5th) day of each month commencing with the first calendar
month following the month in which this Agreement is executed by Borrower, an
accounts receivable servicing fee in the amount of $500.00.
(d) Borrower agrees to pay to Bank, in consideration
of Bank's making credit available to Borrower hereunder, a quarterly facility
fee calculated at the rate of one-half of one percent (0.50%) per annum (based
on a year of 360 days for the actual number of days elapsed) on the average
daily unborrowed amount of the Maximum Loan Amount during each
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calendar quarter or portion thereof, payable, for the prior calendar quarter or
portion thereof, on the fifth (5th) of each October, January, April and July
after the date hereof.
2.02 Interest. Until the occurrence of an Event of Default,
all principal sums outstanding under the Loans and/or the Notes shall bear
interest at the Non-Default Rate of Interest. After the occurrence of an Event
of Default, all principal sums outstanding under the Loans and/or the Notes
shall bear interest until paid at the Default Rate of Interest. Interest shall
be payable monthly as provided in the Notes and shall be calculated on a year of
360 days based upon the actual number of days elapsed. As the rates of interest
charged on the principal sums outstanding under the Loans and/or the Notes are
based upon the Prime Rate, such rates of interest may fluctuate and vary from
time to time. If the Prime Rate shall increase or decrease, then such rates of
interest shall automatically and contemporaneously increase or decrease (as the
case may be) so as to reflect such increase or decrease in the Prime Rate.
2.03 Prepayment. Borrower may at its option prepay any or all
of the Loans in whole at any time or in part from time to time without penalty
or premium. All prepayments shall be accompanied by the payment of accrued and
unpaid interest on the Loan(s) being prepaid to the date of payment. All
payments may, in Bank's discretion, be applied first to the payment of
outstanding late charges (if any), then to accrued and unpaid interest and then
to the unpaid principal balance. All prepayments of principal may, in Bank's
discretion, be applied to the principal installment payments (if any) under the
Loan(s) being prepaid (which shall include any balloon payment) in the inverse
order of their maturity.
2.04 Late Charge. If any payment required to be made by
Borrower hereunder or under the Notes is not paid within 10 days after the date
on which such payment is due, Borrower shall pay to Bank on demand a late charge
equal to 5% of the amount of such payment.
3. SECURITY
3.01 Security Interest. As security for the payment and
performance of all of the Obligations, whether or not any instrument or
agreement relating to any Obligation specifically refers to this Agreement or
the security interest created hereunder, Borrower hereby grants to Bank a lien
and continuing security interest in, and pledges and assigns to Bank, the
Collateral. Bank's security interest shall continually exist until (a) all
Obligations have been paid in full, and (b) there exists no commitment by Bank
which could give rise to any Obligations, whether or not all Obligations shall
at any time or from time to time be reduced to zero. Borrower shall make
notations, satisfactory to Bank, on its books and records disclosing the
existence of Bank's security interest in the Collateral. Bank shall have no
liability or duty, either before or after the occurrence of an Event of Default
hereunder, on account of loss of or damage to, or to collect or enforce any of
its rights against, the Collateral, or to preserve any rights against account
debtors or other parties with prior interests in the Collateral, the sole duty
of Bank in this regard being to exercise reasonable care with respect to
tangible Collateral in its actual possession.
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3.02 Covenants and Representations Concerning Collateral. With
respect to all of the Collateral, Borrower covenants, warrants and represents
that:
(a) No financing statement covering any of the
Collateral is on file in any public office or land or financing records except
for financing statements in favor of Bank and financing statements with respect
to any Permitted Liens described in the Permitted Liens Exhibit and Borrower is
the legal and beneficial owner of all of the Collateral, free and clear of all
Liens, except for Permitted Liens.
(b) The security interest granted Bank hereunder
shall constitute a first priority Lien upon the Collateral, except for any
existing Liens described in the Permitted Liens Exhibit. Borrower will not,
except in the ordinary course of business, transfer, discount, sell, grant or
assign any interest in the Collateral nor, without Bank's prior written consent,
permit any other Lien to be created or remain thereon except for Permitted
Liens. Without limitation of the foregoing, Borrower covenants and agrees that
it will not offer to Bank as an Acceptable Portfolio, or otherwise request that
Bank finance all or any part of the purchase price of, any Portfolio which,
following the purchase thereof, (i) will not be lawfully owned by Borrower, (ii)
will be subject to any Lien except for Permitted Liens, or (iii) will not be
subject to a first priority security interest in favor of Bank. Notwithstanding
the foregoing, Bank agrees that its consent to the sale by Borrower of any
account in any Portfolio (a "Sold Account") shall not unreasonably be withheld
provided that the proceeds of such sale shall be not less than the Purchase
Percentage thereof. For purposes of this Agreement, the "Purchase Percentage of
any account in any Portfolio shall mean that percentage of the outstanding
balance of such account which the purchase price paid by Borrower with respect
thereto represents. For each Sold Account which was a part of Portfolio financed
in whole or in part by a Portfolio Purchase Loan, the entire amount received by
Borrower upon the sale thereof shall be applied first to the outstanding
principal balance of such Portfolio Purchase Loan, and then to such of the other
Obligations as Bank shall determine. For each Sold Account which was not part of
a Portfolio financed in whole or in part by a Portfolio Purchase Loan, an amount
equal to the applicable Purchase Percentage of the outstanding balance of such
Sold Account shall be applied to such of the Obligations as Bank shall
determine, and the balance retained by Borrower.
(c) Borrower will maintain the Collateral in good
order and condition, ordinary wear and tear excepted, and will use, operate and
maintain the Collateral in compliance with all laws, regulations and ordinances
and in compliance with all applicable insurance requirements and regulations.
Borrower will promptly notify Bank in writing of any material litigation
involving or affecting the Collateral which Borrower knows or has reason to
believe is pending or threatened. Borrower will promptly pay when due all taxes
and all transportation, storage, warehousing and other such charges and fees
affecting or arising out of or relating to the Collateral and shall defend the
Collateral, at Borrower's expense, against all claims and demands of any persons
claiming any interest in the Collateral adverse to Borrower or Bank.
(d) At all reasonable times, upon twenty-four (24)
hours prior notice (which may be given orally), Bank and its agents and
designees may enter the Business Premises
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and any other premises of Borrower and inspect the Collateral and all books and
records of Borrower (in whatever form).
(e) Borrower will maintain comprehensive casualty
insurance on the Collateral against such risks, in such amounts, with such loss
deductible amounts and with such companies as may be satisfactory to Bank, and
each such policy shall contain a clause or endorsement satisfactory to Bank
naming Bank as mortgagee and a clause or endorsement satisfactory to Bank that
such policy may not be cancelled or altered and Bank may not be removed as
mortgagee without at least 30 days prior written notice to Bank. In all events,
the amounts of such insurance coverages shall conform to prudent business
practices and shall be in such minimum amounts that Borrower will not be deemed
a coinsurer under applicable insurance laws, regulations, policies or practices.
Borrower hereby assigns to Bank and grants to Bank a security interest in any
and all proceeds of such policies and authorizes and empowers Bank to adjust or
compromise any loss under such policies and to collect and receive all such
proceeds. Borrower hereby authorizes and directs each insurance company to pay
all such proceeds directly and solely to Bank and not to Borrower and Bank
jointly. Borrower authorizes and empowers Bank to execute and endorse in
Borrower's name all proofs of loss, drafts, checks and any other documents or
instruments necessary to accomplish such collection, and any persons making
payments to Bank under the terms of this paragraph are hereby relieved
absolutely from any obligation or responsibility to see to the application of
any sums so paid. After deduction from any such proceeds of all costs and
expenses (including attorney's fees) incurred by Bank in the collection and
handling of such proceeds, the net proceeds may be applied, at Bank's option,
either toward replacing or restoring the Collateral, in a manner and on terms
satisfactory to Bank, or as a credit against such of the Obligations, whether
matured or unmatured, as Bank shall determine in Bank's sole discretion.
(f) All books and records pertaining to the
Collateral are located at the Business Premises and Borrower will not change the
location of such books and records without the prior written consent of Bank.
(g) Except for (i) any vehicles of Borrower, (ii)
Collateral in transit to Borrower or to customers of Borrower, and (iii) mobile
goods of a type normally used in more than one jurisdiction, all of the
Collateral is, and, unless Bank shall consent otherwise in writing, shall remain
located at the Business Premises.
(h) Borrower shall do, make, execute and deliver all
such additional and further acts, things, deeds, assurances, instruments and
documents as Bank may request to vest in and assure to Bank its rights hereunder
or in any of the Collateral, including, without limitation, the execution and
delivery of financing statements, financing statement amendments and/or
continuation statements, assignments of trademarks and powers of attorney in
connection therewith, and Borrower agrees to pay all taxes, fees and costs
(including attorney's fees) paid or incurred by Bank in connection with the
preparation and filing or recordation thereof.
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(i) A carbon, photographic or other reproduction of
this Agreement or any financing statement signed by Borrower in connection with
this Agreement shall be sufficient as a financing statement.
(j) Whenever required by Bank, Borrower shall
promptly deliver to Bank, with all endorsements and/or assignments required by
Bank (but without recourse except as to title), all instruments, chattel paper,
guaranties and the like received by Borrower constituting, evidencing or
relating to any of the Collateral or proceeds of any of the Collateral.
(k) If any Receivable arises out of a contract with
the United States of America or any State, county, municipality or any
department, agency or instrumentality thereof, Borrower shall immediately notify
Bank thereof and, if required by Bank, execute and deliver any agreements,
notices and/or assignments and do such other things as may be satisfactory to
Bank in order that all sums due and to become due to Borrower under such
contract shall be duly assigned to Bank in accordance with the Federal
Assignment of Claims Act (31 United States Code ss. 1203; 41 United States Code
ss. 15) and/or any other applicable federal, State and local laws and
regulations relating to the assignment of governmental obligations.
(l) Borrower agrees that until the Obligations shall
have been satisfied in full and this Agreement shall have been terminated,
Borrower will not, without Bank's prior written consent, (i) consign any
Collateral to any consignee, (ii) store or place any Collateral with any
warehouseman, artisan, processor, contractor or bailee, or (iii) enter into any
agreement (for example, a license agreement) which is inconsistent with
Borrower's obligations under this Agreement. Borrower further agrees that it
will not take any action, or permit any action to be taken by others subject to
its control, including licensees, or fail to take any action, which would
materially adversely affect the validity or enforcement of the rights
transferred to Bank under this Agreement.
3.03 Collateral Collections. At any time following the
occurrence of an Event of Default, Bank shall have the right at any and all
times to: (a) notify and/or require Borrower to notify any or all account
debtors and other obligors on Receivables to make payments thereon directly to
Bank or in care of a post office lock box under the sole control of Bank
established at Borrower's expense subject to Bank's customary arrangements and
charges therefor, and to take any or all action with respect to Receivables as
Bank shall determine in its sole discretion, including, without limitation, the
right to demand, collect, sue for and receive any money or property at any time
due, payable or receivable on account thereof, compromise and settle with any
person liable thereon, and extend the time of payment or otherwise change the
terms thereof, without incurring liability or responsibility to Borrower or any
guarantor therefor; (b) require Borrower to segregate and hold in trust for Bank
and, on the day of Borrower's receipt thereof, transmit to Bank in the exact
form received by Borrower (except for such assignments and endorsements as may
be required by Bank), all cash, checks, drafts, money orders and other items of
payment constituting Collateral or proceeds of Collateral for application, upon
collection when applicable, against such of the Obligations, whether matured or
unmatured, as Bank shall determine in its sole discretion; and/or (c) establish
and maintain at Bank a "Repayment Account," which shall be under the exclusive
control of and subject to the sole order of Bank and
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which shall be subject to the imposition of such customary charges as are
imposed by Bank from time to time upon such accounts, for the deposit, as a
tender of payment of the Obligations, of cash, checks, drafts, money orders and
other items of payment constituting Collateral or proceeds of Collateral coming
into Bank's possession pursuant to the terms of this Agreement and from which
Bank may, in its sole discretion, at any time and from time to time, withdraw
all or any part of the balance for application against such of the Obligations,
whether matured or unmatured, as Bank shall determine in its sole discretion.
4. REPRESENTATIONS AND WARRANTIES
To induce Bank to enter into this Agreement, Borrower
represents and warrants to Bank that:
4.01 Good Standing. Borrower and each Subsidiary is a
corporation duly organized, legally existing and in good standing under the laws
of the State of its incorporation, has the power to own its property and to
carry on its business and is duly qualified to do business and is in good
standing in each jurisdiction in which the character of the properties owned by
it therein or in which the transaction of its business makes such qualification
necessary.
4.02 Authority. Borrower has, and each Other Obligor which has
executed any Other Agreements in connection with this Agreement has, full power
and authority to enter into this Agreement and all Other Agreements executed by
it in connection with this Agreement, to execute and deliver all documents and
instruments required hereunder and thereunder, and to incur and perform the
obligations provided for herein and therein, all of which have been duly
authorized by all necessary corporate, limited liability company, partnership
and other action, and no consent or approval of any person, including, without
limitation, its stockholders, members, member representatives or partners, and
any governmental authority, which has not been obtained, is required as a
condition to the validity or enforceability hereof or thereof.
4.03 Binding Agreements. This Agreement and all Other
Agreements executed by Borrower and/or Other Obligors in connection with this
Agreement have been duly executed and delivered by Borrower and each such Other
Obligor, and constitute, and will continue to constitute, the valid and legally
binding obligations of Borrower and each such Other Obligor, and are, and will
continue to be, fully enforceable against Borrower and each such Other Obligor
in accordance with their terms, subject to bankruptcy and other laws affecting
the rights of creditors generally.
4.04 No Conflicting Agreements. The execution, delivery and
performance by Borrower, and by each Other Obligor which has executed any Other
Agreements in connection with this Agreement, of this Agreement and all Other
Agreements executed by Borrower and/or Other Obligors in connection with this
Agreement, and the borrowings hereunder, will not violate (i) any provision of
law or any order, rule or regulation of any court or governmental authority,
(ii) the corporate charter or bylaws of Borrower, any Subsidiary or any Other
Obligor that is a corporation, the certificate of formation or limited liability
company agreement of any Subsidiary or any Other Obligor that is a limited
liability company, or the partnership agreement
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of any Subsidiary or Other Obligor that is a partnership, or (iii) any
instrument, contract, agreement, indenture, mortgage, deed of trust or other
document or obligation to which Borrower, any Subsidiary or any Other Obligor is
a party or by which any one or more of them, or any of their property, is bound.
4.05 Litigation. Except as heretofore disclosed to Bank in
writing, there are no judgments, injunctions or similar orders or decrees,
claims, actions, suits or proceedings pending or, to the knowledge of Borrower,
threatened against or affecting Borrower, any Subsidiary or any Other Obligor,
or any property of Borrower, any Subsidiary or any Other Obligor, at law or in
equity, by or before any court or any federal, State, county, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which could result in any material adverse change in the
business, operations, prospects, properties or in the condition, financial or
otherwise, of Borrower, and neither Borrower nor any Subsidiary is, to
Borrower's knowledge, in default with respect to any judgment, order, writ,
injunction, decree, rule or regulation of any court or any federal, State,
county, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, which could have a material
adverse effect on Borrower.
4.06 Financial Condition. (a) None of Borrower, Subsidiaries
and Other Obligors is insolvent (as defined in Section 101 of the United States
Bankruptcy Code), unable to pay its debts as they mature or engaged in business
for which its property is an unreasonably small capital.
(b) None of Borrower, Subsidiaries and Other Obligors
is or has been the subject of any bankruptcy, reorganization, insolvency,
readjustment of debt, trusteeship, receivership, dissolution or liquidation law,
statute or proceeding.
(c) The financial statements and tax returns of
Borrower for the fiscal years ending December 31, 1993, December 31, 1994 and
December 31, 1995, and the financial statements of Borrower for the six-month
period ending June 30, 1996, and heretofore delivered to Bank are true and
complete, fairly present the financial condition of Borrower as at such dates
and the results of its operations for the periods then ended and were prepared
in accordance with GAAP applied on a consistent basis for prior periods. There
is no Indebtedness of Borrower as of the date of such statements which is not
reflected therein and no material adverse change in the operations or financial
condition of Borrower has occurred since the date of such statements. The
36-month projected Portfolio recoveries, heretofore delivered by Borrower to
Bank, are complete and fairly present Borrower's projections for such periods.
4.07 Taxes. Borrower, each Subsidiary and each Other Obligor
has paid or caused to be paid all federal, State, local and foreign taxes to the
extent that such taxes have become due and has filed or caused to be filed all
federal, State, local and foreign tax returns which are required to be filed by
Borrower, each Subsidiary and each Other Obligor.
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4.08 Title to Properties. Borrower has good and marketable
title to all of its properties and assets (including the Collateral) and all of
the properties and assets of Borrower are free and clear of Liens, except for
Permitted Liens.
4.09 Place of Business. Borrower's only place of business and
chief executive office is located at the Business Premises. Borrower will not
change such location(s) or have or maintain any other place of business without
Bank's prior written consent.
4.10 Financial Information. All financial statements,
schedules, reports and other information supplied to Bank by or on behalf of
Borrower heretofore and hereafter are and will be true and complete.
4.11 Subsidiaries. Except for Subsidiaries hereafter formed or
acquired with Bank's prior written consent, there are and will be no
Subsidiaries.
4.12 Licenses and Permits. Borrower, each Subsidiary and each
Other Obligor that is not an individual has duly obtained and now holds all
licenses, permits, certifications, approvals and the like required by federal,
State and local laws of the jurisdictions in which Borrower, each Subsidiary and
each such Other Obligor conducts its business and each remains valid and in full
force and effect.
4.13 Certain Indebtedness. There is no Indebtedness of
Borrower owing to any employee, officer, stockholder or director of Borrower
other than accrued salaries, commissions and the like.
4.14 Broker's or Finder's Commissions. Except for a fee
payable to Richard Palmer (the "Palmer Fee"), no broker's or finder's fee or
commission is or will be payable in connection with this Agreement or the
transactions contemplated hereby. Borrower agrees to save harmless and indemnify
Bank from and against any claim, demand, action, suit, proceeding or liability
for any such fee or commission (including, without limitation, the Palmer Fee),
including any costs and expenses (including attorney's fees) incurred by Bank in
connection therewith. The provisions of this Subsection shall survive the
termination of this Agreement and Bank's security interest hereunder and the
payment of all other Obligations.
4.15 Outstanding Indebtedness; Defaults. Borrower has no
outstanding Indebtedness except as permitted by Subsection 7.01 hereof. None of
Borrower, Subsidiaries and Other Obligors is in default under any instrument,
contract, agreement, indenture, mortgage, deed of trust or other document or
obligation to which Borrower, any Subsidiary or any Other Obligor is a party or
by which any one or more of them, or any of their property, is bound.
4.16 Capital Stock. All of the issued and outstanding capital
stock of Borrower is owned by Joseph K. Rensin.
4.17 Regulation U. Neither Borrower nor any Subsidiary owns or
presently intends to acquire any "margin stock" as defined in Regulation U (12
CFR Part 221) of the Board
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of Governors of the Federal Reserve System. None of the proceeds of any advances
hereunder will be used, directly or indirectly, for the purpose of purchasing or
carrying any margin stock or for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase or carry a margin stock
or for any other purpose which might constitute this transaction a "purpose
credit" within the meaning of Regulation U. Neither Borrower nor any agent
acting on its behalf has taken or will take any action which might cause this
Agreement to violate Regulation U or any other regulation of the Board of
Governors of the Federal Reserve System or to violate the Securities Exchange
Act of 1934, in each case as in effect now or as the same may hereafter be in
effect.
4.18 Employee Matters. (a) With respect to each employee
pension benefit plan, as defined in Section 3(2) of the ERISA (a "Retirement
Plan"), established or maintained or to which contributions have been made by or
for Borrower, or any Subsidiary (including, for purposes of this Section, any
other entity, whether or not incorporated, which is part of a controlled group
including Borrower or which is under common control with Borrower, as defined in
Sections 414(b) and (c) of the Code): (i) the Retirement Plan, including all
amendments, is the subject of a favorable determination letter from the Internal
Revenue Service (or an application for such a letter is presently pending); (ii)
the Retirement Plan is and has at all times been qualified, in form and
operation, under Section 401(a) of the Code; (iii) the Retirement Plan is and
has at all times been administered, maintained and operated in compliance with
its terms and with all applicable provisions of the Code, ERISA and all other
applicable federal, state and local laws (and all rules and regulations
promulgated thereunder); (iv) neither Borrower nor any Subsidiary, nor, to the
knowledge of any director or officer of Borrower or any Subsidiary, any other
person or entity who or which is a party in interest as defined in Section 3(14)
of ERISA, or a disqualified person as defined in Section 4975(e)(2) of the Code,
has acted or failed to act with respect to the Retirement Plan in any manner
which constitutes a breach of fiduciary responsibility within the meaning of
Title I, Part 4 of ERISA, a prohibited transaction within the meaning of Section
4975 of the Code or Sections 406 through 408 of ERISA, or any other violation of
ERISA; (v) no contributions to the Retirement Plan are past due; (vi) no
proceedings, investigations, filings or other matters are pending before the
Internal Revenue Service, the Department of Labor or any court with respect to
the Retirement Plan or the operation thereof; (vii) if the Retirement Plan is a
multiemployer plan, as defined in Sections 3(37) or 4001(a)(3) of ERISA, neither
Borrower nor any Subsidiary has incurred, and neither Borrower nor any
Subsidiary expects to incur, any withdrawal liability which has not been
satisfied in connection with any complete or partial withdrawal from the
Retirement Plan occurring on or before the date hereof; and (viii) if subject
thereto, the Retirement Plan has been funded in accordance with the minimum
funding standards described in Section 412 of the Code and Title I, Subtitle B,
Part 3 of ERISA (for which purpose there is no "accumulated funding
deficiency"), and in accordance with principles that are actuarially sound for
such Retirement Plan.
(b) With respect to each Retirement Plan which is a
defined benefit plan, as defined in Section 3(35) of ERISA: (i) no event has
occurred within the l2 month period preceding the date hereof, or, to the
knowledge of any director or officer of Borrower or any Subsidiary is threatened
or about to occur, which would materially adversely affect the actuarial
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status of the Retirement Plan; (ii) no fact exists in connection with the
Retirement Plan (or with respect to any other defined benefit plan maintained by
Borrower or any Subsidiary at any time after September 2, 1974) which
constitutes a reportable event (other than those for which notice has been
waived by the Pension Benefit Guaranty Corporation (the "PBGC")) under Section
4043(b) of ERISA or which constitutes grounds for termination by, or other
liability to, the PBGC pursuant to Title IV of ERISA; (iii) all premiums due the
PBGC have been timely paid; and (iv) if the Retirement Plan were terminated, the
termination would qualify under the standard termination procedure, as described
in Section 4041(b) of ERISA (and Part 2617 of the PBGC regulations), without
payment of any additional contributions by Borrower or any Subsidiary.
(c) With respect to each employee welfare benefit
plan, as defined in Section 3(1) of ERISA (a "Welfare Plan"), established or
maintained or to which contributions have been made by or for Borrower or any
Subsidiary: (i) the Welfare Plan is and has at all times been administered,
maintained and operated in compliance with its terms and with all applicable
provisions of ERISA and the Code (including the continuation coverage
requirements for group health plans, commonly known as "COBRA requirements,"
under Sections 106(b), 162(i)(2) & (3), and 162(k) of the Code and Sections
601-607 of ERISA) and all other applicable federal, state and local laws (and
all rules and regulations promulgated thereunder); (ii) neither Borrower nor any
Subsidiary nor to the knowledge of any director or officer of Borrower or any
Subsidiary, any other person or entity who or which is a party in interest as
defined in Section 3(14) of ERISA, has acted or failed to act with respect to
the Welfare Plan in any manner which constitutes a breach of fiduciary
responsibility within the meaning of Title I, Part 4 of ERISA, a prohibited
transaction within the meaning of Sections 406 through 408 of ERISA, or any
other violation of ERISA; (iii) no contributions to the Welfare Plan are past
due; (iv) no proceedings, investigations, filings or other matters are pending
before the Department of Labor or any court, with respect to the Welfare Plan or
the operation thereof; and (v) the Welfare Plan is either unfunded or is funded
solely through insurance contracts.
(d) All Retirement Plans and Welfare Plans (jointly
"Benefit Plans") are in substantial compliance with all applicable reporting,
disclosure and other requirements of the Code and ERISA.
(e) There are no actions, suits or claims pending or,
to the best knowledge of Borrower or any Subsidiary, threatened with respect to
any Benefit Plan, or any administrator or fiduciary thereof.
(f) There are no strikes, work stoppages, material
grievance proceedings or other material controversies pending, imminent or, to
Borrower's knowledge and belief, threatened between Borrower and any employees
of Borrower or between Borrower and any union or other collective bargaining
unit representing employees of Borrower.
4.19 Compliance With Laws. None of Borrower, Subsidiaries and
Other Obligors is in violation of, or under investigation with respect to or
threatened to be charged or given notice of a violation of, any applicable law,
rule, regulation, order or judgment relating to
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any of its businesses, properties or operations, including, without limitation,
ERISA, any law, rule, regulation or order regarding the collection, payment and
deposit of employees' income, unemployment and social security taxes or of
sales, use or excise taxes, any Environmental Laws, any laws pertaining to
occupational safety and health or any laws relating to public health.
4.20 Representations. All representations and information
heretofore made or supplied to Bank by or on behalf of Borrower, any Subsidiary
or any Other Obligor, including, without limitation, all representations and
information heretofore made or supplied to Bank pursuant to or in connection
with this Agreement or any of the Other Agreements or any transaction involving
or affecting Borrower, any Subsidiary or any Other Obligor, were, at the time
made or supplied to Bank, true and complete in all material respects, and all
representations and information hereafter made or supplied to Bank by or on
behalf of Borrower, any Subsidiary or any Other Obligor, including, without
limitation, all representations and information hereafter made or supplied to
Bank pursuant to or in connection with this Agreement or any of the Other
Agreements or any transaction involving or affecting Borrower, any Subsidiary or
any Other Obligor, will be, at the time made or supplied to Bank, true and
complete in all material respects.
5. CONDITIONS OF LENDING
Unless Bank shall otherwise agree, Bank shall have no
obligation to advance any funds to Borrower hereunder unless each of the
following conditions precedent shall be satisfied as provided below:
5.01 Documents. There shall have been delivered to Bank,
appropriately completed and duly executed (when applicable), the following, each
in form and substance satisfactory to Bank: (a) a certificate of the Secretary
of Borrower to the effect that resolutions in form and content satisfactory to
Bank authorizing the transactions contemplated hereby have been duly adopted and
remain in full force and effect; (b) evidence satisfactory to Bank that all
insurance coverages and all insurance clauses or endorsements required pursuant
to this Agreement and the Other Agreements are in effect, together with copies
of all insurance policies and endorsements; (c) a written opinion of counsel to
Borrower, dated as of Closing and addressed to Bank, relating to such matters in
connection with the transactions contemplated hereby as may be required by Bank;
and (e) such financing statements as may be required by Bank; (d) a written
guaranty of the Obligations by Joseph K. Rensin; and (e) the written agreement
of Richard Palmer releasing Bank from any obligation or liability in connection
with the payment of the Palmer Fee.
5.02 No Default. At Closing and at the time of every
subsequent advance under this Agreement, Bank shall be fully satisfied that (a)
all of the covenants, conditions, warranties and representations set forth
herein and in the Other Agreements have been complied with and are true and
complete on and as of such time with the same effect as though such covenants,
conditions, warranties and representations had been made on and as of such time,
(b) no Default and no Event of Default shall have occurred, and (c) the
documents and matters
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required to be executed, delivered, opined and/or Certified pursuant to
Subsection 5.01 hereof shall be in full force and effect and/or true and
complete, as the case may be.
5.03 Legal Matters. At Closing, all legal matters in
connection therewith or incidental thereto shall be fully satisfactory to Bank's
counsel.
5.04 Deemed Representations. Each Loan request hereunder and
acceptance by Borrower of the proceeds thereof shall constitute a representation
and warranty by Borrower that the statements contained in clauses (a), (b) and
(c) of Subsection 5.02 above are true and correct both on the date of such
request and, unless Borrower otherwise notifies Bank prior to the making of such
Loan, on the date of the making of such Loan.
5.05 Financial Condition at Closing. The financial condition
of Borrower shall be satisfactory to Bank and there shall have been delivered to
Bank such written statements, schedules or reports in such form, containing such
information and accompanied by such documents as may be satisfactory to Bank
concerning the financial condition of Borrower, any of the Collateral or any
other matter or matters as Bank may require.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees with Bank that, until (a) all
Obligations have been paid in full and (b) there exists no commitment by Bank
which could give rise to any Obligations, Borrower will:
6.01 Financial Statements. Furnish to Bank in writing: (a) as
soon as available but in no event more than 15 days after the end of each
monthly accounting period of Borrower, a report in form and substance
satisfactory to Bank for the immediately preceding month with respect to
recoveries of each Portfolio funded with the proceeds of a Portfolio Purchase
Loan and the aggregate recoveries for all other Portfolios; (b) as soon as
available but in no event more than 30 days after the end of each monthly
accounting period of Borrower, a consolidated and consolidating statement of
income and retained earnings of Borrower and any Subsidiaries for such period
and for the period from the beginning of the current fiscal year of Borrower to
the end of each period, and a consolidated and consolidating statement of cash
flows of Borrower and any Subsidiaries for such period and for the period from
the beginning of the current fiscal year of Borrower to the end of each period,
and a consolidated and consolidating balance sheet of Borrower and any
Subsidiaries as at the end of such period, all in detail and scope satisfactory
to Bank, prepared in accordance with GAAP consistently applied, certified by the
chief financial officer of Borrower as true and complete to the best of his
knowledge and belief and accompanied by a certificate of that officer stating
whether any Default or Event of Default has occurred and, if so, stating the
facts with respect thereto; (c) as soon as available but in no event more than
45 days after the end of each quarterly accounting period of Borrower, a
statement in form and substance satisfactory to Bank, comparing (i) on a
Portfolio-by-Portfolio basis for Portfolios purchased with Portfolio Purchase
Loan proceeds, and (ii) on an aggregate basis for all other Portfolios, actual
versus projected Portfolio collections; (d) as soon as available but in no event
more than 120 days after the end of each fiscal year of Borrower, a
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consolidated and consolidating statement of income and retained earnings of
Borrower and any Subsidiaries for such year, and a consolidated and
consolidating statement of cash flows of Borrower and any Subsidiaries for such
year, and a consolidated and consolidating balance sheet of Borrower and any
Subsidiaries as at the end of such year, setting forth in each case in
comparative form corresponding figures for the preceding fiscal year of
Borrower, all in detail and scope satisfactory to Bank, prepared in accordance
with GAAP consistently applied and examined and audited by independent certified
public accountants satisfactory to Bank, accompanied by a report of such
independent certified public accountants with respect to such financial
statements which is satisfactory to Bank, and accompanied by a certificate of
the chief financial officer of Borrower stating whether any Default or Event of
Default has occurred and, if so, stating the facts with respect thereto;
provided, however, that nothing in this clause (d) shall require Borrower to
prepare or cause to be prepared audited financial statements for the fiscal year
ending December 31, 1995; and (e) promptly upon transmission thereof, copies of
any financial statements, proxy statements, reports and the like which Borrower
or any Subsidiary sends to its shareholders, members or partners and copies of
all registration statements (with exhibits) and all regular, special or periodic
reports which Borrower or any Subsidiary files with the United States Securities
and Exchange Commission (or any governmental body or agency succeeding to the
functions of the United States Securities and Exchange Commission) or with any
national stock exchange on which any of Borrower's or any Subsidiary's
securities are listed and copies of all press releases and other statements made
available by Borrower or any Subsidiary to the public concerning material
developments in the business of Borrower and/or any Subsidiary.
6.02 Taxes. Pay and discharge, and cause each Subsidiary to
pay and discharge, all taxes, assessments and governmental charges upon Borrower
and each Subsidiary, its income and properties, prior to the date on which
penalties attach thereto unless and to the extent only that the same are being
diligently contested by Borrower or a Subsidiary, as the case may be, in good
faith by appropriate proceedings, provided, however, that (a) Bank shall have
been given reasonable prior written notice of intention to contest, (b)
nonpayment of the same will not, in Bank's sole discretion, materially impair
any of the Collateral or Bank's rights or remedies with respect thereto or the
prospect for full and punctual payment of all of the Obligations, (c) no notice
of lien with respect thereto is filed in any recording office, (d) Borrower or
such Subsidiary at all times effectively stays or prevents any official or
judicial sale of or action against any of the Collateral by reason of nonpayment
of the same, and (e) Borrower or such Subsidiary establishes reasonable reserves
for any liabilities being contested and for expenses arising out of such contest
in accordance with GAAP.
6.03 Corporate Existence, Continuation of Business and
Compliance with Laws. Maintain, and cause each Subsidiary to maintain, its
corporate existence in good standing; maintain, and cause each Subsidiary to
maintain, in good standing its qualification to do business in each jurisdiction
in which such qualification is required by law; continue, and cause each
Subsidiary to continue, its business operations as now being conducted; and
comply with, and cause each Subsidiary to comply with, all applicable federal,
State and local laws,
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rules, ordinances, regulations and orders (including, without limitation, ERISA
and all Environmental Laws).
6.04 Litigation. Promptly notify Bank in writing of any
action, suit or proceeding at law or in equity by or before any court,
governmental agency or instrumentality which could result in any material
adverse change in the business, operations, prospects, properties or assets or
in the condition, financial or otherwise, of Borrower or any Subsidiary.
6.05 Extraordinary Loss; Change in Condition. Promptly notify
Bank in writing of (a) any event causing extraordinary loss or depreciation of
the value of Borrower's or any Subsidiary's assets (whether or not insured) and
the facts with respect thereto, and (b) the occurrence of any material adverse
change in Borrower's, any Subsidiary's or any Other Obligor's business, assets,
operations, business prospects or financial condition.
6.06 Books and Records. Keep and maintain, and cause each
Subsidiary to keep and maintain, proper and current books and records in
accordance with GAAP consistently applied and permit access by Bank to,
reproduction by Bank of, copying by Bank from, and verification (by such means,
including audits, as Bank may determine) by Bank of any information contained
in, such books and records.
6.07 Maintenance of Properties. Maintain, and cause each
Subsidiary to maintain, all properties and improvements necessary to the conduct
of its business in good working order and condition, ordinary wear and tear
excepted, and cause replacements and repairs to be made when necessary for the
proper conduct of its business.
6.08 Patents, Franchises, etc. Maintain, preserve and protect
all licenses, patents, franchises, trademarks and trade names of Borrower and
each Subsidiary or licensed by Borrower or any Subsidiary which are necessary to
the conduct of the business of Borrower or any Subsidiary as now conducted, free
of any conflict with the rights of any other person.
6.09 Insurance. (a) Maintain or cause to be maintained (i)
comprehensive casualty insurance policies insuring the Collateral, all other
property of Borrower and all property of each Subsidiary against loss by fire,
theft, explosion, collision and such other risks, in such amounts, subject to
such loss deductible amounts and with such responsible insurance companies as
may be satisfactory to Bank, in Bank's discretion exercised in good faith, and,
in all events, against such risks, in such amounts and subject to such loss
deductible amounts as are customary in Borrower's or such Subsidiary's industry,
as applicable, and in such minimum amounts that neither Borrower nor any
Subsidiary will be deemed a coinsurer under applicable insurance laws,
regulations, policies or practices, and (ii) endorsements to such
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insurance policies satisfactory to Bank, in Bank's discretion exercised in good
faith, naming Bank as loss payee with respect to all Collateral insured
thereunder; (b) maintain or cause to be maintained (i) in the maximum amount
available, flood insurance policies insuring all property of Borrower or any
Subsidiary which is located in an area that has been, or subsequently is,
identified as having special flood or mudslide hazards and in which the sale of
flood insurance has been made available under the National Flood Insurance Act
of 1968, as amended from time to time, and (ii) endorsements to such insurance
policies satisfactory to Bank, in Bank's discretion exercised in good faith,
naming Bank as loss payee with respect to all Collateral insured thereunder; (c)
maintain, and cause each Subsidiary to maintain, in amounts and with responsible
insurance companies satisfactory to Bank, in Bank's discretion exercised in good
faith, such additional insurance against such risks and subject to such loss
deductible amounts as may be satisfactory to Bank, in Bank's discretion
exercised in good faith, including, without limitation, personal injury and
property damage liability insurance, automobile liability insurance, product
liability insurance, worker's compensation insurance, business interruption
insurance, employee dishonesty insurance, and directors' and officers' liability
insurance, all such insurance in all events to insure against such risks, in
such amounts and subject to such loss deductible amounts as are customary in
Borrower's or such Subsidiary's industry, as applicable; (d) maintain
endorsements to all insurance policies of Borrower and Subsidiaries naming Bank
as additional insured, which endorsements shall be satisfactory to Bank, in
Bank's discretion exercised in good faith, and endorsements to such policies
satisfactory to Bank, in Bank's discretion exercised in good faith, providing
that such policies may not be cancelled or materially altered, and that Bank may
not be removed as loss payee or additional insured, without at least 30 days
prior written notice to Bank; (e) maintain (or cause to be maintained) the life
insurance policy described in Subsection 6.19 hereof, free of any Liens, loans
against such policy or assignments; and (f) deliver to Bank from time to time,
and periodically if Bank shall so require, evidence satisfactory to Bank that
all insurance and policy endorsements required pursuant to this Agreement and
the Other Agreements are in effect. Notwithstanding the foregoing, nothing in
this Subsection 6.09 shall require that Borrower insure the collectibility of
any account in any Portfolio.
6.10 Information. (a) Deliver to Bank promptly upon Bank's
request, and periodically if Bank shall so require, such written statements,
schedules or reports (which shall be Certified if required by Bank) in such
form, containing such information and accompanied by such documents as may be
satisfactory to Bank from time to time concerning the Collateral, Borrower's or
any Subsidiary's business, assets, operations, business prospects or financial
condition or any other matter or matters, including, without limitation, copies
of federal, State and local tax returns of Borrower and Subsidiaries, and permit
Bank, its agents and designees, to discuss Borrower's or any Subsidiary's
business, assets, operations, business prospects or financial condition with
Borrower's President and Chief Financial Officer; and (b) promptly notify Bank
in writing if any financial statement, schedule, report, certificate or
information previously or hereafter supplied to Bank by or on behalf of
Borrower, any Subsidiary or any Other Obligor, including, without limitation,
any of the same previously or hereafter supplied to Bank pursuant to or in
connection with this Agreement or any of the Other Agreements or any transaction
involving or affecting Borrower, any Subsidiary or any Other Obligor, shall, to
Borrower's knowledge or belief, subsequently become inaccurate or misleading in
any material respect.
6.11 Use of Proceeds. Use the proceeds of each Deposit Loan
only for the payment of the required deposit in connection with an Acceptable
Portfolio purchase bid; and use the proceeds of each Portfolio Purchase Loan
only for the payment of the related Deposit Loan and for the balance of the
purchase price of an Acceptable Portfolio.
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6.12 Notice of Event of Default. Immediately notify Bank of
the occurrence of any Default or Event of Default and the facts with respect
thereto.
6.13 Employee Benefit Plans. (a) At all times administer,
maintain and operate, and cause each Subsidiary at all times to administer,
maintain and operate, each of its Benefit Plans in conformity with all
applicable provisions of ERISA and other federal and state statutes relating to
employee benefit plans (including the continuation coverage requirements of
ERISA and the Code for group health plans under Sections 106(b), 162(i)(2) &
(3), and 162(k) of the Code and Sections 601-607 of ERISA); (b) at all times
make, and cause each Subsidiary at all times to make, all required contributions
and premium payments under each Benefit Plan for all periods after the date
hereof; (c) comply with, and cause each Subsidiary to comply with, all
applicable reporting, disclosure and other requirements of ERISA and the Code as
they relate to Benefit Plans, and furnish Bank with copies of all reports filed
in connection therewith promptly after the filing thereof; (d) notify Bank
immediately of any fact, including, without limitation, any reportable event
under Section 4043(b) of ERISA, arising in connection with any Retirement Plan
which might constitute grounds for the termination thereof by the PBGC; and (e)
furnish to Bank, promptly upon its request therefor, such additional information
concerning any Benefit Plan as Bank may request.
6.14 Environmental Laws. (a) At all reasonable times, permit
Bank, and its agents and designees, to enter upon and inspect all business
premises owned, leased, subleased, occupied, operated or used by Borrower or any
Subsidiary, and to conduct thereon, at Borrower's expense, such audit tests and
examinations, including subsurface exploration and testing, as Bank may deem
necessary to determine whether Borrower's or such Subsidiary's ownership,
tenancy, occupation, operation and/or use of the premises, as the case may be,
and the conduct of the activities engaged in thereon, are in compliance with
Environmental Laws; (b) maintain, and cause all operators, tenants, subtenants,
licensees and occupants of all property owned, leased, subleased, occupied, used
or operated by Borrower or any Subsidiary to maintain, all such property free of
all Hazardous Substances, and prevent all such property from being used for the
manufacture, generation, production, processing, distribution, use, treatment,
storage, disposal, transport or handling of any Hazardous Substances; (c)
promptly upon its receipt thereof, provide Bank with copies of all reports
prepared by governmental and regulatory agencies, and all environmental
auditors, engineers and others relating to or in connection with Borrower's
compliance with Environmental Laws; and (d) notify Bank in writing, promptly
upon learning thereof, of (i) any notice that Borrower is not in compliance in
any material respect with all terms and conditions of all permits, licenses and
authorizations which are required under Environmental Laws, or that Borrower is
not in compliance in any material respect with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in the Environmental Laws, and (ii) any
notice or claim of any civil, criminal or administrative action, suit, demand,
claim, hearing, notice or demand letter, notice of violation, investigation, or
proceeding pending or threatened against Borrower relating in any way to
Environmental Laws.
6.15 Net Worth. Maintain at all times Consolidated Net Worth
of not less than, and a ratio of Consolidated Liabilities to Consolidated Net
Worth of not greater than (a)
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$1,500,000.00 and 3.5 to 1, respectively, as of December 31, 1996, and (b)
$2,000,000.00 and 3.5 to 1, respectively, as of March 31, 1997, and as of the
end of each fiscal quarter of Borrower thereafter. For purposes of this
Agreement, "Consolidated Net Worth" shall mean the consolidated net worth of
Borrower and any Subsidiaries as determined in accordance with GAAP. For
purposes of this Agreement, "Consolidated Liabilities" shall mean the aggregate
liabilities of Borrower and any Subsidiaries; provided, however, that
Indebtedness of Borrower which has been subordinated to the Obligations pursuant
to a written agreement in form and substance satisfactory to Bank shall not be
considered to be a liability of Borrower.
6.16 Cash Flow/Current Funded Debt. Maintain a ratio of Cash
Flow to Current Funded Debt of not less than (a) .75 to 1 for the fiscal year of
Borrower ending December 31, 1996, (b) 1.5 to 1.0 for the fiscal quarter of
Borrower ending March 31, 1997, and (c) 2.0 to 1 for the fiscal quarter of
Borrower ending June 30, 1997, and for each fiscal quarter thereafter. For
purposes of this Agreement, "Cash Flow" shall mean the consolidated net income
of Borrower and Subsidiaries after tax plus noncash expenses less dividends paid
on account of capital stock of Borrower and Subsidiaries. For purposes of this
Agreement, "Current Funded Debt" shall mean current maturities of Funded Debt,
as hereinafter defined.
6.17 Notes. (a) Prior to or contemporaneously with the making
by Bank of each Deposit Loan, (i) execute and deliver to Bank a Deposit Loan
Note in form and content satisfactory to Bank, and (ii) deliver to Bank such
information concerning the composition of the applicable Acceptable Portfolio
and the individual consumer account debtors as Bank may require.
(b) (a) Prior to or contemporaneously with the making
by Bank of each Portfolio Purchase Loan, (i) execute and deliver to Bank a
Portfolio Purchase Loan Note in form and content satisfactory to Bank, and (ii)
deliver to Bank such additional information concerning the composition of the
applicable Acceptable Portfolio and the individual consumer account debtors as
Bank may require.
6.18 Post-Closing Conditions. On or before October 23, 1996,
provide to Bank (a) a life insurance policy upon the life of Joseph K. Rensin
with an insurer satisfactory to Bank and in an amount not less than
$1,000,000.00, (b) a written agreement in form and substance satisfactory to
Bank of the owner and landlord of each Business Premises and each storage
location maintained by Borrower which is not owned by Borrower consenting to
Bank's security interest and enforcement of Bank's rights in connection
therewith, and (c) a written agreement in form and substance satisfactory to
Bank between Borrower and a person satisfactory to Bank pursuant to which such
person shall maintain for safekeeping copies of Borrower's data files. Borrower
shall at all times maintain the agreement described in Subsection 6.19(c)
hereof, or such substitute or replacement agreement as shall be approved by
Bank.
6.19 Deposit Relationships. Maintain all material deposit
accounts and relationships with Bank.
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7. NEGATIVE COVENANTS
Borrower covenants and agrees with Bank that, until (a) all
Obligations have been paid in full, and (b) there exists no commitment by Bank
which could give rise to any Obligations, Borrower will not, directly or
indirectly, without Bank's prior written consent:
7.01 Indebtedness. Create, incur, assume or permit to exist
any Indebtedness except (a) Indebtedness to Bank, (b) current Indebtedness
incurred in the ordinary course of business, (c) existing Indebtedness disclosed
herein or previously disclosed by Borrower to Bank in writing, (d) Indebtedness
secured by Purchase Money Liens so long as the aggregate principal amount of all
such Indebtedness does not exceed at any time $350,000.00, and (e) Indebtedness
which shall be consented to by Bank in writing in advance, in Bank's sole
discretion and, if required by Bank, subordinated to the Obligations by a
written agreement satisfactory to Bank in form and substance; provided, however,
that Borrower may without Bank's written consent incur Indebtedness to
shareholders of Borrower provided such Indebtedness shall have been subordinated
to the Obligations by a written agreement satisfactory to Bank in form and
substance.
7.02 Liens. Create, incur, assume or permit to exist, directly
or indirectly, any Lien upon any of Borrower's properties or assets, now owned
or hereafter acquired by Borrower, other than Permitted Liens.
7.03 Merger, Sale of Assets, etc. Enter into or be a party to
any merger, consolidation or share exchange, or suffer or permit to occur any
merger, consolidation or member interest or share exchange to which any
Subsidiary or any Other Obligor is a party, or suffer or permit any of
Borrower's or any Subsidiary's business, assets, operations or books and records
to be merged, consolidated or commingled with any business, assets, operations
or books and records of any other person; sell, assign, transfer, convey or
lease any interest in all or any substantial part of its property except in the
ordinary course of Borrower's business as now being conducted; purchase or
otherwise acquire, or suffer or permit the purchase or acquisition by any
Subsidiary or any Other Obligor of, all or substantially all of the assets of
any other person, any assets of any other person in a transaction which is
subject to the Bulk Transfers Title of the Uniform Commercial Code of any
jurisdiction, or any shares of stock, member interests or partnership interests
of, or similar interest in, any other person; or enter into any transaction with
any Affiliate except for transactions with Affiliates entered into in the
ordinary course of Borrower's business on terms no less favorable to Borrower
than would apply in a comparable arm's length transaction with a person that is
not an Affiliate.
7.04 Guaranties. Guarantee or otherwise in any way become or
be responsible for obligations or Indebtedness of any other person, whether by
agreement to purchase the Indebtedness of any other person, by agreement for the
furnishing of funds to any other person for the purchase of goods, supplies or
services, or by way of stock purchase, capital contribution, advance or loan for
the purpose of paying or discharging Indebtedness of any other person, or
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otherwise, except that Borrower may endorse negotiable drafts for collection in
the ordinary course of business.
7.05 Investments. Make any capital contribution to any other
person or purchase or acquire a beneficial interest in any stock, securities or
evidences of Indebtedness of, or make any investment or acquire any interest in,
any other person, except (a) direct obligations of the United States of America
or any agency thereof with maturities of one year or less from the date of
acquisition, (b) commercial paper of a domestic issuer rated at least "A-1" by
Standard & Poor's Corporation or "P-1" by Moody's Investors Service, Inc., (c)
certificates of deposit, time deposits, repurchase agreements, reverse
repurchase agreements and bankers' acceptances with maturities of one year or
less from the date of acquisition issued by a commercial bank operating within
the United States of America having capital and surplus in excess of
$500,000,000.00, or (d) money market or mutual funds whose sole investments are
comprised of investments permitted under the foregoing clauses (a) through (c).
Nothing herein shall prevent Borrower from purchasing Portfolios with Portfolio
Purchase Loan proceeds or internally-generated funds in the ordinary course of
its business.
7.06 Fiscal Year. Change Borrower's fiscal year.
7.07 Loans. Make or permit to exist any loan to any person,
not including advances for travel and the like made to officers and employees in
the ordinary course of business.
7.08 Subsidiaries. Form or acquire any Subsidiary.
7.09 Change of Name. Change the name of Borrower or permit any
Subsidiary to change such Subsidiary's name.
7.10 Trade Names. Use any trade name other than Borrower's
true corporate name or permit any Subsidiary to use any trade name other than
such Subsidiary's true corporate name.
7.11 Issuances. Issue any shares of capital stock of Borrower
or permit any Subsidiary to issue any shares of capital stock, member interests
or partnership interests of such Subsidiary.
7.12 Employee Pension Plans. With respect to any Retirement
Plan: (a) engage, or knowingly permit any party in interest (as defined in
Section 3(l4) of ERISA) or any disqualified person (as defined in Section
4975(e)(2) of the Code) to engage, in any prohibited transaction; (b) knowingly
incur, or permit any Subsidiary to knowingly incur, any accumulated funding
deficiency under Section 302 of ERISA or Section 412 of the Code, whether or not
waived; (c) terminate, or permit any Subsidiary to terminate, any Retirement
Plan in a manner which could result in the imposition of a Lien on any property
of Borrower or any
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Subsidiary pursuant to Section 4068 of ERISA; or (d) take, or permit any
Subsidiary to take, any action which would adversely affect the qualification of
any Retirement Plan.
7.13 Sale-Leaseback. Except for leases in existence on the
date hereof and previously disclosed to Bank in writing, and renewals or
extensions thereof, become or be, or suffer or permit any Subsidiary or any
Other Obligor to become or be, liable as lessee with respect to any lease of any
property (real, personal or mixed) which has been or is to be sold or
transferred by Borrower, such Subsidiary or such Other Obligor to any person or
which Borrower, such Subsidiary or such Other Obligor intends to use for
substantially the same purpose as any other property which has been or is to be
sold or transferred by Borrower to any person in connection with such lease.
7.14 Stock Redemptions. Purchase, redeem, retire or otherwise
acquire for value any shares of Borrower's capital stock or any other equity
interest in Borrower, or suffer or permit any Subsidiary to purchase, redeem or
otherwise acquire or retire for value any shares of such Subsidiary's capital
stock, or any member interests, partnership interests or any other equity
interest in such Subsidiary.
7.15 Leases. Become or be liable as lessee with respect to any
lease of any property, real, personal or mixed, except for leases in existence
on the date hereof and previously disclosed to Bank in writing and renewals or
extensions thereof.
7.16 Dividends. Directly or indirectly declare or pay any
dividend on, or make any other distribution with respect to (whether by
reduction of capital or otherwise), any shares of its capital stock.
7.17 Asset Investments. Make any investment(s) in noncurrent
assets (which shall include fixed assets and capitalized value of leased
equipment and leased real property) during any twelve-month period which exceeds
$350,000.00.
7.18 Funded Debt. Redeem, call for redemption, purchase or
otherwise acquire or retire, directly or indirectly, or make any optional
prepayment of principal on, any Funded Debt (other than Funded Debt payable to
Bank), or amend, alter or otherwise modify the provisions relating to any Funded
Debt, if the effect of such amendment, alteration or other modification would or
might be to accelerate such Funded Debt. For purposes of this Subsection,
"Funded Debt" shall include any obligation of Borrower to any person payable
more than one year from the date of its creation which, under GAAP, is shown on
the balance sheet as a liability (excluding reserves for deferred income taxes
and other reserves to the extent that such reserves do not constitute an
obligation).
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8. EVENTS OF DEFAULT
The occurrence of any one or more of the following events
shall constitute an "Event of Default":
(a) Any representation or information previously or hereafter
made or supplied to Bank by or on behalf of Borrower, any Subsidiary or any
Other Obligor, including, without limitation, any representation or information
previously or hereafter made or supplied to Bank pursuant to or in connection
with this Agreement or any of the Other Agreements or any transaction involving
or affecting Borrower, any Subsidiary or any Other Obligor, shall prove to have
been, when made or supplied, false or misleading in any respect deemed material
by Bank in good faith.
(b) Failure of Borrower to pay any of the Obligations,
including, without limitation, any sum due Bank under this Agreement or any of
the Other Agreements, when and as the same shall become due, whether at the due
date thereof, by demand, by acceleration or otherwise, and such failure shall
remain uncured for a period of five days.
(c) Occurrence of a default or event of default by Borrower,
any Subsidiary or any Other Obligor with respect to, or acceleration or demand
for payment prior to maturity of, any Indebtedness of Borrower, any Subsidiary
or any Other Obligor to any person which is deemed material by Bank in good
faith, or with respect to any Lien securing any Indebtedness of Borrower, any
Subsidiary or any Other Obligor to any person which is deemed material by Bank
in good faith.
(d) Failure of Borrower, any Subsidiary or any Other Obligor
to observe or perform any warranty, covenant, condition or agreement to be
observed or performed by Borrower or such other person under this Agreement or
any of the Other Agreements.
(e) Borrower, any Subsidiary or any Other Obligor shall (i)
admit in writing its insolvency or its inability to pay its debts as they
mature, (ii) make a general assignment for the benefit of creditors, whether
conditional or unconditional and whether or not such assignment is filed in
court and whether or not any court assumes jurisdiction thereof, (iii) commence
a case under or otherwise seek to take advantage of any bankruptcy,
reorganization, insolvency, readjustment of debt, dissolution or liquidation
law, statute or proceeding, or (iv) by any act indicate its consent to, approval
of or acquiescence in any such proceeding or the appointment of any receiver of
or trustee for Borrower, any Subsidiary or any such Other Obligor or a
substantial part of its property, or suffer any such receivership, trusteeship
or proceeding to continue undismissed for a period of 30 days.
(f) Borrower, any Subsidiary or any Other Obligor shall become
a debtor in any case under any chapter of the United States Bankruptcy Code.
(g) Dissolution of, or entry of any order, judgment, award or
decree for the dissolution of, Borrower, any Subsidiary or any Other Obligor
that is not a natural person.
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(h) Entry of any unstayed judgment, order, award or decree
against Borrower, any Subsidiary or any Other Obligor which is uninsured to an
extent deemed material by Bank in good faith, or which Bank determines in good
faith, when aggregated with all other judgments, orders, awards and decrees
outstanding against Borrower, Subsidiaries and Other Obligors, could have a
material adverse effect on the business, assets, operations, business prospects
or financial condition of Borrower, any Subsidiary or any Other Obligor, or on
any rights of Bank with respect to any of the Collateral or any of the
Obligations, or on the prospect for full and punctual payment and performance of
all of the Obligations.
(i) Injunction or restraint of Borrower, any Subsidiary or any
Other Obligor in any manner from conducting its business in whole or in part
deemed material by Bank in good faith.
(j) Any assets of Borrower, any Subsidiary or any Other
Obligor shall be attached, levied upon, seized or repossessed or come into the
possession of a trustee, receiver or other custodian.
(k) An adverse change deemed material by Bank in good faith
shall occur with respect to the business, assets, operations, business prospects
or financial condition of Borrower, any Subsidiary or any Other Obligor, or
otherwise with respect to the risks to Bank attending the Collateral, any
commitments of Bank which could give rise to any Obligations or the prospect for
payment in full of the Obligations, whether or not such adverse change otherwise
constitutes an Event of Default.
(l) The death of any Other Obligor that is an individual.
(m) Borrower, any Subsidiary or any Other Obligor shall be or
become insolvent (as defined in Section 101(31) of the United States Bankruptcy
Code) or unable to pay its debts as they mature.
(n) Termination or cancellation, without Bank's prior written
consent, of any lease or sublease of Borrower, any Subsidiary or any Other
Obligor of any business premises of Borrower, any Subsidiary or any Other
Obligor which Bank in good faith deems material to the conduct of the business
of Borrower, any Subsidiary or any Other Obligor, including expiration of any
such lease or sublease without renewal or extension, or the occurrence of any
event or condition which could result in the termination or cancellation of any
such lease or sublease unless such event or condition is waived by all parties
to the lease or sublease and all other appropriate parties, or cured by
Borrower, such Subsidiary or such Other Obligor, as the case may be, in
accordance with the provisions of such lease or sublease.
(o) Termination of any contract, franchise, license, permit,
authorization, certificate or right of Borrower, any Subsidiary or any Other
Obligor which Bank in good faith deems material to its business, assets,
operations, business prospects or financial condition.
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(p) Suspension or revocation of any license, permit,
certification, approval or the like required to be held by Borrower, any
Subsidiary or any Other Obligor that is not an individual by federal, State,
local or foreign laws.
(q) Joseph K. Rensin shall for any reason (including death)
cease to be the President of Borrower, unless, within 60 days thereafter,
Borrower shall have engaged a replacement President who is satisfactory to Bank.
(r) Without Bank's prior written consent, Joseph K. Rensin
shall for any reason, including death, not own capital stock of Borrower
sufficient to elect all Directors of Borrower and approve any action of
Borrower, including extraordinary actions, required to be approved by
stockholders of Borrower under applicable law or under the Charter or Bylaws of
Borrower.
(s) Failure of Borrower to promptly notify Bank of any
transfer of any interest in any of the capital stock of Borrower, whether or not
such transfer would also represent an Event of Default under clause (s) above.
(t) Occurrence of any default or event of default under or as
defined in any of the Other Agreements.
(u) Borrower, any Other Obligor or any other person shall
revoke or terminate, or attempt to revoke or terminate, or notify Bank of
revocation or termination of, any continuing obligations or agreements of
Borrower, such Other Obligor or such other person relating in any way to any of
the Obligations, including, without limitation, any continuing obligations or
agreements of Borrower, such Other Obligor or such other person under any
guaranty or subordination agreement.
(v) Borrower or any Other Obligor shall be convicted of an
offense punishable under any domestic or foreign criminal statute or law, or
Borrower or any Other Obligor shall be subjected to charges under any domestic
or foreign law for which forfeiture of property is a potential penalty.
9. RIGHTS AND REMEDIES
9.01 Rights and Remedies of Bank. Upon the occurrence of an
Event of Default described in Subsections 8(e), 8(f) or 8(g) of this Agreement,
all of the Obligations shall automatically and immediately be due and payable.
Upon and after the occurrence of an Event of Default, Bank may, without notice
or demand, exercise in any jurisdiction in which enforcement hereof is sought,
the following rights and remedies, in addition to the rights and remedies
available to Bank under the Other Agreements, the rights and remedies of a
secured party under the Uniform Commercial Code and all other rights and
remedies available to Bank under applicable law, all such rights and remedies
being cumulative and enforceable alternatively, successively or concurrently:
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(a) Declare the Notes, all interest accrued and
unpaid thereon and all other Obligations to be immediately due and payable and
the same shall thereupon become immediately due and payable without presentment,
demand for payment, protest or notice of any kind, all of which are hereby
expressly waived.
(b) Enforce the Liens granted to Bank hereunder and
under the Other Agreements by collecting or liquidating all or any part of the
Collateral or selling, assigning, leasing, renting, licensing or otherwise
disposing of all or any part of the Collateral or any interest therein, in one
or more parcels, at the same or different times, at public or private sale or
disposition, or otherwise.
(c) Establish and maintain at Bank, subject to
Bank's customary arrangements and charges therefor as established by Bank from
time to time, a repayment account, which shall be under the exclusive control of
and subject to the sole order of Bank, and require Borrower to deposit in the
repayment account, not later than the first Banking Day following the day on
which the same are received by Borrower, as a tender of payment of the
Obligations or as security for any contingent or future Obligations, all cash,
checks, drafts, money orders and other items of payment constituting Collateral,
or collections or other proceeds of Collateral.
(d) Institute any proceeding or proceedings to
enforce the Obligations and any Liens of Bank.
(e) Notify postal authorities to change the address
for delivery of mail addressed to Borrower to such address as Bank may designate
and receive, open and dispose of all mail addressed to Borrower.
(f) Indorse Borrower's name on any promissory notes
or other instruments, acceptances, checks, drafts, money orders or other items
of payment constituting Collateral, or collections or other proceeds of
Collateral, that may come into Bank's possession or control from time to time.
(g) Sign Borrower's name on any invoices to, drafts
against and other notices and documents to account debtors or other obligors of
Borrower and requests for verification of accounts and other amounts which may
be due to Borrower.
(h) Execute proofs of claim and loss on behalf of
Borrower.
(i) Apply all Collateral and proceeds of Collateral
delivered to Bank or coming into Bank's possession or control from time to time
to any of the Obligations, or hold the same as security for any contingent or
future Obligations.
(j) At Borrower's expense, continue or complete, or
cause to be continued or completed, performance of Borrower's obligations under
any contracts of Borrower.
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(k) Use, operate, manage, control and exercise all
rights of Borrower relating to, the Collateral and any other assets of Borrower,
and collect all income and revenues therefrom.
(l) Terminate, or cease extending credit under, any
or all outstanding commitments or credit accommodations of Bank to Borrower, any
Subsidiary or any Other Obligor.
(m) At any time and from time to time reduce the
Maximum Loan Amount.
(n) Take exclusive possession of any or all of the
Collateral from time to time and/or place a custodian in exclusive possession of
any or all of the Collateral from time to time and, so far as Borrower may give
authority therefor, enter upon any premises on which any of the Collateral may
be situated and remove the same therefrom, Borrower hereby waiving any and all
rights to prior notice and to judicial hearing with respect to repossession of
Collateral, and/or require Borrower, at Borrower's expense, to assemble and
deliver any or all of the Collateral to such place or places as Bank may
reasonably request.
(o) With respect to any accounts, notes, instruments,
chattel paper, tax refunds, contract rights, general intangibles or other debts
or liabilities payable to Borrower securing the Obligations, notify any account
debtors and other obligors thereon to make payments thereon directly to Bank,
take control of the cash and noncash proceeds thereof, demand, collect, sue for
and receive any money or property at any time due, payable or receivable on
account thereof, compromise and settle with any person liable thereon, and
extend the time of payment or otherwise change the terms thereof, without
incurring liability or responsibility therefor to Borrower or any Other Obligor.
9.02 Limitation on Exercise of Default Remedies.
Notwithstanding the provisions of Subsection 9.01 of this Agreement, and
notwithstanding any provision of the Agreement or the Other Agreements to the
contrary, Borrower shall have a period of fifteen (15) days (the "Cure Period")
from the giving of notice to Borrower by Bank of the occurrence of a Curable
Default to cure such Default prior to the exercise by Bank of any of the default
remedies described in clauses (a) - (k) of Subsection 9.01 hereof. For purposes
hereof "Curable Default" shall mean any failure by Borrower to observe, perform
or comply with any Affirmative Covenant contained in Section 6 of this Agreement
(other than a failure to perform any covenant relating to the payment of
principal, interest or late charges hereunder, under the Notes or under any of
the Other Agreements or any covenant contained in Subsections 6.09 or 6.12 of
this Agreement) which, in Bank's good faith judgment, is curable within such
period. Notwithstanding the foregoing, (a) Bank shall have no obligation to
provide Borrower with written notice of the occurrence of any Curable Default of
which Borrower has (or in the exercise of reasonable business practices should
have) knowledge, in which case the applicable Cure Period shall commence on the
occurrence of such Default, and (b) no default under this Agreement or the Other
Agreements shall be a Curable Default if, in Bank's good faith judgment, giving
effect to the Cure Period would materially impair or further impair the prospect
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for payment in full of the Obligations or any rights of Bank with respect to any
of the Collateral, or would increase Bank's risk under the Agreement and/or the
Other Agreements.
9.03 Disposition of Collateral. Borrower agrees that
commercial reasonableness and good faith require Bank to give Borrower no more
than ten days prior written notice of the time and place of any public
disposition of Collateral or of the time after which any private disposition or
any other intended disposition is to be made. All sales or other dispositions of
Collateral may be made for cash, upon credit or for future delivery. In no event
shall Borrower be credited with any part of the proceeds of liquidation, sale or
other disposition of any Collateral until final payment thereon has been
received by Bank in immediately available funds, and Bank shall have no
obligation to delay any liquidation, sale or other disposition because the same
may result in the imposition of any forfeiture, premium or penalty.
9.04 Costs and Expenses. Borrower agrees to pay to Bank, upon
written demand by Bank from time to time, the amount of all expenses, including
attorneys' fees and expenses, paid or incurred by Bank (a) in exercising or
enforcing or consulting with counsel concerning any of its rights hereunder,
under the Other Agreements or under law, or (b) in defending any and all
non-meritorious or previously waived demands, claims, counterclaims,
cross-claims, causes of action, litigation and proceedings of every kind and
nature asserted, commenced or instituted against Bank, or any of Bank's
officers, directors or employees, by Borrower, any Subsidiary or any Other
Obligor on account of, as a result of or relating to, any action taken or not
taken by Bank in connection with the Loans, any other of the Obligations, the
Collateral or enforcement or exercise by Bank of any rights or remedies of Bank
under this Agreement, under any of the Other Agreements or under law. Borrower
also agrees to pay to Bank, upon written demand by Bank from time to time,
interest on the outstanding amount of such expenses paid by Bank, from the date
of Bank's demand for payment of such expenses until the same are paid in full,
at the highest rate and calculated in the manner provided in the Notes.
10. MISCELLANEOUS
10.01 Performance for Borrower. Borrower agrees and hereby
authorizes that Bank may, in Bank's sole discretion, but Bank shall not be
obligated to, whether or not an Event of Default shall have occurred, and
regardless of the Maximum Loan Amount, advance funds on behalf of Borrower,
without prior notice to Borrower, in order to insure Borrower's compliance with
any covenant, warranty, representation or agreement of Borrower made in or
pursuant to this Agreement or any of the Other Agreements, to continue or
complete, or cause to be continued or completed, performance of Borrower's
obligations under any contracts of Borrower, to cover overdrafts in any checking
or other accounts of Borrower at Bank or to preserve or protect any right or
interest of Bank in the Collateral or under or pursuant to this Agreement or any
of the Other Agreements, including, without limitation, the payment of any
insurance premiums or taxes and the satisfaction or discharge of any judgment or
any Lien upon the Collateral or other property or assets of Borrower and
compliance by Borrower with Environmental Laws; provided, however, that (a)
unless a Default or Event of Default shall have occurred, or Bank in good faith
believes that immediate action is required to be taken to protect or preserve
any of the Collateral or any right or remedy of Bank hereunder or under any of
the Other Agreements, Bank agrees to
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give Borrower five (5) days written notice prior to taking any action otherwise
authorized under this Subsection 10.01, and (b) the making of any such advance
by Bank shall not constitute a waiver by Bank of any Event of Default with
respect to which such advance is made nor relieve Borrower of any such Event of
Default. Any cost, expense or liability incurred by Bank or imposed upon Bank
arising out of or in connection with the noncompliance by Borrower with the
provisions of any Environmental Laws shall be treated as an advance of funds on
behalf of Borrower under this Subsection 10.01, and Borrower shall indemnify,
defend and save harmless Bank from and against any such cost, expense or
liability. Borrower shall pay to Bank upon demand all advances made by Bank
under this Subsection 10.01 with interest thereon at the highest rate and
calculated in the manner provided in the Notes. All such advances shall be
deemed to be included in the Obligations and secured by the security interest
granted Bank hereunder; provided, however, that the provisions of this
Subsection shall survive the termination of this Agreement and Bank's security
interest hereunder and the payment of all other Obligations.
10.02 Expenses. Whether or not any of the transactions
contemplated hereby shall be consummated, Borrower agrees to pay to Bank, upon
written demand by Bank from time to time, the amount of all expenses, including
attorneys' fees and expenses, paid or incurred by Bank in connection with the
preparation, or the amendment, modification, extension, renewal, refinancing,
supplementation, replacement, waiver, release or termination, of this Agreement
or any of the Other Agreements or any terms or conditions hereof or thereof or
any rights or interests of Bank, Borrower or any other person relating to any of
the foregoing, or otherwise in connection with the extension of credit hereunder
and preparing for the extension of credit hereunder. Borrower agrees to pay all
expenses in connection with the filing or recordation of all financing
statements and other documents as may be required by Bank at the time of, or
subsequent to, the execution of this Agreement, including, without limitation,
all documentary stamps, recordation and transfer taxes, filing fees and other
costs and taxes incident to recordation of any document in connection herewith,
and, if any such expenses shall be paid or incurred by Bank, to pay to Bank upon
written demand the amount of such expenses. Borrower also agrees to pay to Bank,
upon written demand by Bank from time to time, interest on the outstanding
amount of all expenses paid by Bank referred to in this Subsection, from the
date of Bank's demand for payment of such expenses until the same are paid in
full, at the highest rate and calculated in the manner provided in the Notes.
Borrower also agrees to indemnify, protect and defend Bank, and save Bank
harmless, from and against any and all claims, demands, damages, losses,
liabilities, obligations, penalties, litigation, defenses, judgments, suits,
actions, proceedings, costs and expenses (including, without limitation,
attorneys' fees and expenses and experts' fees and expenses) of any kind or
nature whatsoever which may at any time be imposed upon, paid or incurred by or
asserted or awarded against Bank relating to, resulting from or arising out of
(a) the use of any property owned, leased, subleased, occupied, used or operated
by Borrower or any Subsidiary for the manufacture, generation, production,
processing, distribution, use, treatment, storage, disposal, transport or
handling of any Hazardous Substances, (b) the presence of any Hazardous
Substances in or upon any such property, or (c) any violation of any
Environmental Law.
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10.03 Applications of Collateral. Except as may be otherwise
specifically provided in this Agreement, all Collateral and proceeds of
Collateral coming into Bank's possession may be applied by Bank to any of the
Obligations, whether matured or unmatured, as Bank shall determine in its sole
discretion.
10.04 Further Assurances, Power of Attorney. Borrower agrees
promptly to do, make, execute and deliver all such additional and further acts,
things, deeds, assurances, instruments and documents as Bank may request in good
faith to vest in and assure to Bank its rights hereunder or under any of the
Other Agreements or in any of the Collateral. Borrower hereby appoints Bank and
its designees as attorney-in-fact of Borrower, irrevocably and with power of
substitution, with authority to execute and deliver from time to time, in the
name and stead of Borrower, all documents which Borrower is required to, but has
failed or refused to, execute and deliver to Bank pursuant to this Agreement or
any of the Other Agreements, and with authority to take all of the actions from
time to time on behalf of Borrower, and in the name and stead of Borrower, which
Bank is authorized to take under this Agreement and the Other Agreements or
which Bank in its good faith discretion deems necessary or advisable in order to
cause Borrower to be in compliance with any of the terms of this Agreement or
any of the Other Agreements or in order to carry out and enforce this Agreement
and the Other Agreements. Said attorney or designee shall not be liable for any
acts of commission or omission nor for any error of judgment or mistake of fact
or law which does not arise from its gross negligence or willful misconduct.
This power of attorney is coupled with an interest and is irrevocable so long as
any of the Obligations remain unpaid or unperformed or there exists any
commitment by Bank which could give rise to any Obligations.
10.05 Waiver of Trial by Jury. Borrower and Bank each agrees
that any action, suit or proceeding involving any claim, counterclaim or
cross-claim arising out of or in any way relating, directly or indirectly, to
this Agreement or the Other Agreements, or any liabilities, rights or interests
of Borrower, Bank or any other person arising out of or in any way relating,
directly or indirectly, to any of the foregoing, shall be tried by a court and
not by a jury. Borrower and Bank each hereby waives any right to trial by jury
in any such action, suit or proceeding, with the understanding and agreement
that this waiver constitutes a waiver of trial by jury of all claims,
counterclaims and cross-claims against all parties to such actions, suits or
proceedings, including claims, counterclaims and cross-claims against parties
who are not parties to this Agreement or the Other Agreements. This waiver is
knowingly, willingly and voluntarily made by Borrower and Bank, and Borrower and
Bank each acknowledges and agrees that this waiver of trial by jury is a
material aspect of the agreements between Borrower and Bank and that no
representations of fact or opinion have been made by any person to induce this
waiver of trial by jury or to modify, limit or nullify its effect.
10.06 Additional Waivers by Borrower. Borrower hereby waives,
to the extent the same may be waived under applicable law: (a) notice of
acceptance by Bank of this Agreement; (b) all claims, causes of action and
rights of Borrower against Bank on account of actions taken or not taken by Bank
in the exercise of Bank's rights or remedies hereunder or under any of the Other
Agreements, or under law, provided that the same did not arise from Bank's gross
negligence or willful misconduct; (c) all claims and causes of action of
Borrower
36
<PAGE>
against Bank for punitive, exemplary or other non-compensatory damages; (d) all
rights of redemption of Borrower with respect to any of the Collateral; (e) in
the event Bank seeks to repossess any or all of the Collateral by judicial
proceedings, any bonds or demands for possession which otherwise may be
required; (f) all rights of Borrower to have marshalled the Collateral or any
other security for any of the Obligations; (g) presentment, protest, notice of
protest and notice of nonpayment with respect to all of the Obligations; (h)
settlement, compromise or release of the obligations of any Other Obligor or any
other person primarily or secondarily liable upon or obligated with respect to
any of the Obligations; (i) substitution, impairment, exchange or release of any
direct or indirect security for any of the Obligations; and (j) any duty or
obligation of Bank to disclose to Borrower any information concerning any other
customer or client, or prospective customer or client, of Bank. Borrower agrees
that Bank may exercise any or all of its rights and/or remedies hereunder, under
the Other Agreements and under law without resorting to, without regard to, and
regardless of the adequacy of, any security or other sources of liability with
respect to any of the Obligations.
10.07 Waivers by Bank. Neither any failure nor any delay on
the part of Bank in exercising any right, power or remedy hereunder, under any
of the Other Agreements or under applicable law shall operate as a waiver
thereof, nor shall a single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
Without limitation of the foregoing, the failure or delay of Bank to accrue
interest on the Loans at the Default Rate of Interest following the occurrence
of an Event of Default shall not operate as a waiver of such Event of Default or
of Bank's right at any time thereafter to accrue interest on the Loans at the
Default Rate of Interest.
10.08 Payments, Setoff. All payments required to be made by
Borrower hereunder shall be made by Borrower without setoff, counterclaim or
deduction and shall be made to Bank in lawful money of the United States of
America at Bank's principal office (or at such other address as Bank may specify
to Borrower in writing from time to time). If any payment required to be made by
Borrower hereunder shall be due on any day that is not a Banking Day, such
payment may be made by Borrower without default on the next succeeding Banking
Day but any interest-bearing portions of such payment shall continue to accrue
interest during such extension of time. Bank shall have the right from time to
time to charge and deduct from any deposit accounts of Borrower at Bank any
amounts credited to such accounts and apply the same in order to pay principal
amounts, interest charges, service charges, fees, expenses or any other sums or
charges due and unpaid under this Agreement or any of the Other Agreements. Bank
shall have the right, in addition to all other rights and remedies available to
it, to set off against any Obligations due and unpaid any sums or property owing
to Borrower by Bank or held or controlled by Bank for Borrower. Borrower hereby
confirms Bank's right to banker's lien and setoff, and nothing in this Agreement
or any of the Other Agreements shall be deemed to replace, supersede, limit,
waive or prohibit Bank's right of banker's lien and setoff.
10.09 Confession of Judgment. Borrower hereby authorizes any
clerk of court or any attorney-at-law to appear for Borrower before any court,
having jurisdiction, within the United States or elsewhere, and, after one or
more complaints filed, confess judgment against Borrower as of any time after
any of the Obligations are due (whether by demand, stated
37
<PAGE>
maturity, acceleration or otherwise) for the unpaid balance of the Obligations,
including principal, interest, fees, court costs, late charges and expenses,
together with attorneys' fees equal to fifteen percent (15%) of the amount of
such Obligations, for collection and release of all errors, and without stay of
execution, and inquisition and extension upon any levy on real estate is hereby
waived and condemnation agreed to, and the exemption of personal property from
levy and sale is also hereby expressly waived, and no benefit of exemption shall
be claimed under any exemption law now in force or which may be hereafter
adopted. The foregoing authorities and powers to confess judgment shall not be
exhausted by one or more exercises of any of them or by any imperfect exercise
of any of them, shall not be extinguished by any judgment entered because of any
of them and may be exercised before, during or after sale, liquidation or other
disposition by Bank of any property directly or indirectly securing any of the
Obligations or exercise or enforcement by Bank of any other right or remedy of
Bank with respect to the Obligations. Borrower agrees that any agreements of
Borrower contained in this Agreement or any of the Other Agreements to pay any
costs or expenses, including attorneys' fees and expenses, paid or incurred by
Bank shall not be merged into, or otherwise impaired by, any such judgment by
confession, but Bank shall not be entitled to recover on account of such costs
or expenses any amount in excess of the greater of (a) such costs or expenses
included in any judgments by confession (without duplication), or (b) such costs
or expenses actually paid or incurred by Bank. Notwithstanding the foregoing,
Bank agrees that to the extent Bank recovers an amount under this Subsection (or
under the confession of judgment provisions of the Notes) for application to the
fees of its counsel which exceeds the actual attorney's fees incurred in
connection therewith, following the satisfaction of all other Obligations such
excess amount shall be refunded to Borrower.
10.10 Modifications. No modification or waiver of any
provision of this Agreement or any of the Other Agreements, and no consent by
Bank to any failure of Borrower or any other person to comply with any provision
of this Agreement or any of the Other Agreements, shall in any event be
effective unless the same shall be in writing signed by the person against whom
enforcement is sought, and then such waiver or consent shall be effective only
in the specific instance and for the purpose for which given. No notice to or
demand upon Borrower in any case shall entitle Borrower to any other or further
notice or demand in the same, similar or other circumstances.
10.11 Notices. Any notice or other communication in connection
with this Agreement, including demands for payment by Bank, shall be deemed to
have been given when hand delivered to the party to whom directed, or, if
transmitted by telex, facsimile transmission or by mail (whether or not
registered or certified), when telexed, transmitted by facsimile transmission or
72 hours after having been deposited in the mail postage prepaid, respectively,
provided that any such notice or communication shall be hand delivered or
transmitted to a party hereto as provided below (or at such other address as
such party shall specify in writing to the other parties hereto):
(a) if to Borrower, at 7000 Security Boulevard,
Baltimore, Maryland 21244; and
38
<PAGE>
(b) if to Bank, at Post Office Box 1077, Baltimore,
Maryland 21203 (hand delivery address: 7 St. Paul Street, 4th Floor, Baltimore,
Maryland 21202).
10.12 Disclosure of Information. Borrower hereby authorizes
Bank to disclose to any subsidiary or affiliate of Bank, to any fiduciary
institution (as "fiduciary institution" is defined in Subtitle 3 of Title 1 of
the Financial Institutions Article of the Annotated Code of Maryland, or any
successor legislation) or to any banking institution, credit union or savings
and loan association organized under the laws of any State, and hereby
authorizes all subsidiaries and affiliates of Bank, all fiduciary institutions
(as defined as above provided) and all banking institutions, credit unions and
savings and loan associations organized under the laws of any State to disclose
to Bank, the financial record of Borrower (as "financial record" is defined in
Subtitle 3 of Title 1 of the Financial Institutions Article of the Annotated
Code of Maryland, or any successor legislation).
10.13 Law, Jurisdiction, Transfers of Interests and
Unenforceability. The performance and construction of this Agreement and the
Other Agreements shall be governed by the internal laws of the State of Maryland
(exclusive of principles of conflicts of laws). Borrower agrees that any suit,
action or proceeding instituted by Bank with respect to any of the Obligations,
the Collateral, this Agreement or any of the Other Agreements may be brought in
any State or federal court located in the State of Maryland (in addition to such
other courts in which jurisdiction and venue may be appropriate), and Borrower
consents to the in personam jurisdiction of such courts. Borrower irrevocably
waives any objection to, and any right of immunity from, the jurisdiction of
such courts or the execution of judgments resulting therefrom, on the grounds of
venue or the convenience of the forum. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, and each reference in this Agreement to any of the parties hereto shall
be deemed to include the successors and assigns of such party, including, in the
case of Borrower, the debtor in possession or trustee in any case under any
chapter of the United States Bankruptcy Code in which Borrower is debtor.
Borrower may not assign this Agreement or any of its rights hereunder without
Bank's prior written consent. Bank may at any time, in its discretion, assign,
transfer or pledge to any person, or grant to any person a Lien in, this
Agreement, any of the Other Agreements or any of its rights hereunder or
thereunder. In addition, Bank may sell, in such amounts, upon such terms and to
such persons as Bank may determine, participations in its interests under this
Agreement and/or any of the Other Agreements. In the case of each such
assignment, transfer, pledge, grant or sale (or offer to assign, transfer,
pledge, grant or sell), Bank may from time to time provide to the assignee,
transferee, pledgee, secured party or participant (or to any potential or
prospective assignee, transferee, pledgee, secured party or participant), any
information and documents (or copies thereof) relating to this Agreement and the
Other Agreements and related transactions, and relating to the business, assets,
operations, business prospects or financial condition of Borrower, Subsidiaries
and Other Obligors. If any term, provision or condition, or any part thereof, of
this Agreement or any of the Other Agreements shall for any reason be found or
held invalid or unenforceable by any court or governmental agency, such
invalidity or unenforceability shall not affect the remainder of such term,
provision or condition, nor any other term, provision or condition, and this
Agreement and the Other Agreements shall survive and be construed as if such
invalid or unenforceable term, provision or condition had not been contained
herein or
39
<PAGE>
therein; provided, however, that if any rate of interest provided under this
Agreement does or shall exceed the maximum interest rate which Borrower is
permitted by law to contract or agree to pay, then such rate of interest shall
immediately be deemed to be reduced to such maximum rate and all previous
payments of interest in excess of the maximum rate shall be deemed to have been
payments in reduction of principal and not of interest. All books and records of
Bank and statements of account rendered by Bank to Borrower relating to the
Obligations shall be presumed to be accurate, absent manifest error.
10.14 Changes in Laws. In the event that, at any time or from
time to time after the date of this Agreement, the implementation of, or any
change in, any law or regulation, or any guideline or directive (whether or not
having the force of law), or the interpretation or administration thereof by any
central bank or other authority charged with the administration thereof,
imposes, modifies or deems applicable any capital adequacy, reserve or similar
requirement (including, without limitation, a request or requirement which
affects the manner in which Bank allocates capital resources to its commitments
and extensions of credit, including, without limitation, its extensions of
credit hereunder), and, as a result thereof, in the sole opinion of Bank, the
rate of return on Bank's capital as a consequence of its extensions of credit
hereunder, is reduced to a level below that which Bank could have achieved but
for such circumstances, then, in each such case, within 10 days after written
demand by Bank from time to time, Borrower shall pay to Bank such additional
amount or amounts as shall compensate Bank for such reduction in rate of return.
A certificate of Bank as to any such additional amount or amounts, in the
absence of manifest error, shall be final and conclusive. In determining such
amount or amounts, Bank may use any reasonable averaging and attribution
methods.
10.15 Survival. All covenants, conditions, agreements,
representations and warranties made herein and in the Other Agreements shall
survive the execution and delivery hereof and thereof, shall survive Closing and
shall continue in full force and effect until all Obligations have been paid in
full and there exists no commitment by Bank which could give rise to any
Obligations.
10.17 Merger and Integration. This Agreement and the attached
Schedule(s) and Exhibits contain the entire agreement of the parties hereto with
respect to the matters covered and the transactions contemplated hereby, and no
other agreement, statement or promise made by any party hereto, or by any
employee, officer, agent or attorney of any party hereto, which is not contained
herein, shall be valid or binding.
10.18 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which, when so executed and delivered, shall be an original, but all
such counterparts shall together constitute one and the same instrument.
10.19 Headings. The headings and subheadings contained in the
titling of this Agreement are intended to be used for convenience only and shall
not be used or deemed to limit or diminish any of the provisions hereof.
40
<PAGE>
10.20 Recitals. The Recitals hereto are hereby incorporated
into and made a part of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed or caused
to be executed this Agreement under seal as of the date first above written.
ATTEST/WITNESS: OXFORD CAPITAL CORPORATION
/s/ illegible By: /s/ Joseph K. Rensin (SEAL)
- ------------------------ ----------------------------
Joseph K. Rensin
President
BORROWER
SIGNET BANK
/s/ illegible By: /s/ Mark A. Cunningham (SEAL)
- ------------------------ ------------------------------
Mark A. Cunningham
Vice President
BANK
41
<PAGE>
STATE OF MARYLAND, TO WIT:
I HEREBY CERTIFY that on this 23rd day of September, 1996,
before me, the subscriber, a Notary Public of the State of Maryland, personally
appeared Joseph K. Rensin, who acknowledged himself to be the President of
Oxford Capital Corporation, and that he, as such President, being authorized so
to do, executed the foregoing instrument for the purposes therein contained, by
signing in my presence the name of the corporation by himself as President.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Donna Jean Benges
------------------------
Notary Public
My Commission expires:
10/1/99
- ------------------------
STATE OF MARYLAND, TO WIT:
I HEREBY CERTIFY that on this 23rd day of September, 199_,
before me, the subscriber, a Notary Public of the State of Maryland, personally
appeared Mark A. Cunningham, who acknowledged himself to be the Vice President
of Signet Bank, and that he, as such, being authorized so to do, executed the
foregoing instrument for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Donna Jean Benges
------------------------
Notary Public
My Commission expires:
10/1/99
- ------------------------
42
<PAGE>
<TABLE>
<CAPTION>
PERMITTED LIENS EXHIBIT
JURISDICTION RECORDING REFERENCES SECURED PARTY
- ------------ -------------------- -------------
<S> <C> <C>
MD. SDAT ID#15333837 Canon Financial
Services, Inc.
</TABLE>
<PAGE>
NOTE
$250,000.00 Baltimore, Maryland
September 24, 1996
FOR VALUE RECEIVED, OXFORD CAPITAL CORPORATION, a Maryland
corporation ("Maker"), promises to pay to the order of SIGNET BANK ("Bank") the
principal sum of $250,000.00, together with interest on the unpaid principal
balance outstanding from time to time, all as hereinafter set forth. Capitalized
terms used in this Note without definition and which are defined in that certain
Loan and Security Agreement between Maker and Bank dated September 23, 1996 (the
"Agreement"), shall have the meanings assigned to them in the Agreement.
Interest from the date hereof on the principal amount
outstanding from time to time until the occurrence of an Event of Default shall
be payable at a fluctuating rate of interest equal to the Non-Default Rate of
Interest. After the occurrence of an Event of Default until this Note is paid in
full, interest on the principal amount outstanding from time to time shall be
payable at the Default Rate of Interest. Interest accrued shall be paid by Maker
to Bank on the maturity hereof.
Principal shall be payable in full October 1, 1996.
Payments of both principal and interest shall be paid in
lawful money of the United States of America in immediately available funds at
the principal office of Bank or at such other place as Bank may from time to
time designate. If any payment of principal and/or interest due hereunder is not
paid within 10 days after its due date, Maker shall pay to Bank on demand a late
charge equal to 5% of the amount of such payment.
This Note may be prepaid in whole at any time or in part from
time to time without premium or penalty, provided, however, that each such
prepayment shall be accompanied by payment of accrued and unpaid interest on the
principal balance hereof to the date of prepayment. All partial prepayments of
principal shall be applied to the principal installment payments (which shall
include any balloon payment) in the inverse order of their maturity.
If any payment of principal or interest shall be due on a
Saturday, Sunday or any other day on which banking institutions in the State of
Maryland are required or permitted to be closed, such payment shall be made on
the next succeeding business day and such extension of time shall be included in
computing interest hereunder. All payments hereunder may, in Bank's sole
discretion, be applied first to late fees (if any), then to the payment of
accrued and unpaid interest and then to the payment of principal.
If any payment of principal and/or interest due hereunder is
not paid on or before the fifth (5th) day following its due date then, and at
any time thereafter, Bank may declare the
<PAGE>
entire unpaid principal balance hereof, together with all accrued and unpaid
interest thereon, to be immediately due and payable. This Note is given pursuant
to the Agreement, and is one of the Notes. The Agreement contains, among others,
provisions for securing this Note and for accelerating the maturity hereof upon
the happening of certain specified events.
Maker agrees to pay to Bank and reimburse Bank for any and all
costs and expenses, including attorney's fees and court costs, if any, incurred
by Bank in connection with the enforcement or collection hereof, both before and
after the commencement of any action to enforce or collect this Note, but
whether or not any such action is commenced by Bank. Maker waives presentment,
protest and demand, notice of protest, notice of dishonor and nonpayment of this
Note and expressly agrees that this Note or any payment hereunder may be
extended from time to time without in any way affecting the liability of Maker
hereunder.
Maker acknowledges and warrants that the debt evidenced hereby
is a "commercial loan" within the meaning of Title 12 of the Commercial Law
Article of the Annotated Code of Maryland (1990 ed.). Maker warrants that all
loan proceeds will be used solely to carry on a business or commercial
enterprise.
The rights and remedies of Bank hereunder and under the
Agreement shall be cumulative and concurrent and may be pursued singularly,
successively or together at the sole discretion of Bank, and may be exercised as
often as occasion therefor shall occur, and the failure to exercise any such
right or remedy shall in no event be construed as a waiver or release of the
same or any other right or remedy.
Maker hereby authorizes any clerk of court or any
attorney-at-law to appear for Maker before any court, having jurisdiction,
within the United States or elsewhere, and, after one or more complaints filed,
confess judgment against Maker as of any time after any sum is due hereunder
(whether by demand, stated maturity, acceleration or otherwise) for the unpaid
balance of this Note and all sums due in connection herewith, including
principal, interest, fees, court costs, late charges and expenses, together with
attorneys' fees equal to fifteen percent (15%) of the total amount then due, for
collection and release of all errors, and without stay of execution, and
inquisition and extension upon any levy on real estate is hereby waived and
condemnation agreed to, and the exemption of personal property from levy and
sale is also hereby expressly waived, and no benefit of exemption shall be
claimed under any exemption law now in force or which may be hereafter adopted.
The foregoing authorities and powers to confess judgment shall not be exhausted
by one or more exercises of any of them or by any imperfect exercise of any of
them, shall not be extinguished by any judgment entered because of any of them
and may be exercised before, during or after sale, liquidation or other
disposition by Bank of any property directly or indirectly securing this Note or
exercise or enforcement by Bank of any other right or remedy of Bank with
respect hereto. Maker agrees that any agreement of Maker contained in this Note
to pay any costs or expenses, including attorneys' fees and expenses, paid or
incurred by Bank shall not be merged into, or otherwise impaired by, any such
judgment by confession, but Bank shall not be entitled to recover on account of
such costs or expenses any amount in excess of the greater of (a) such costs or
expenses included in any judgments by confession (without duplication), or (b)
such costs or expenses actually paid or incurred by Bank. Notwithstanding
2
<PAGE>
the foregoing, Bank agrees that to the extent Bank recovers an amount under this
paragraph for application to the fees of its counsel which exceeds the actual
attorney's fees incurred in connection therewith, following the satisfaction of
all other Obligations such excess amount shall be refunded to Maker.
This Note, having been executed and delivered under seal in
the State of Maryland, is to be governed by, construed under and enforced in all
respects according to the internal laws of the State of Maryland.
ATTEST/WITNESS: OXFORD CAPITAL CORPORATION
By: (SEAL)
- ----------------------- -----------------------
Joseph K. Rensin
President
3
<PAGE>
SECURITY OFFICE PARK
LEASE AGREEMENT
between
BRIT LIMITED PARTNERSHIP,
as Landlord
and
OXFORD CAPITAL CORPORATION,
as Tenant
Dated: January ___, 1996
1
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
1. PREMISES..................................................... 1
2. TERM......................................................... 1
3. RENT......................................................... 1
4. ANNUAL EXPENSE INCREASES..................................... 2
5. ADDITIONAL RENT.............................................. 4
6. TENANT IMPROVEMENTS.......................................... 4
7. LANDLORD ACCESS.............................................. 5
8. QUIET ENJOYMENT.............................................. 5
9. SERVICES..................................................... 5
10. USE OF PREMISES.............................................. 6
11. SIGNS........................................................ 6
12. FIXTURES; ELECTRICAL EQUIPMENT............................... 7
13. ALTERATIONS; MECHANICS LIENS................................. 7
14. REPAIRS BY LANDLORD.......................................... 8
15. REPAIRS AND MAINTENANCE BY TENANT............................ 8
16. INSURANCE; INDEMNITY......................................... 9
17. PROPERTY AT TENANT'S RISK.................................... 10
18. DAMAGE....................................................... 10
19. CONDEMNATION................................................. 10
20. LAWS AND ORDINANCES.......................................... 11
21. RULES AND REGULATIONS........................................ 11
22. SURRENDER; HOLDOVER.......................................... 11
23. EVENTS OF DEFAULT............................................ 12
24. LANDLORD'S REMEDIES UPON DEFAULT............................. 13
25. REMEDIES CUMULATIVE; NO WAIVER............................... 14
26. SECURITY DEPOSIT............................................. 14
27. LIEN ON PERSONAL PROPERTY.................................... 15
28. ASSIGNMENT; SUBLETTING....................................... 15
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
29. SUBORDINATION................................................ 16
30. MORTGAGEE PROTECTION......................................... 17
31. MODIFICATIONS DUE TO FINANCING............................... 17
32. ESTOPPEL CERTIFICATES........................................ 17
33. FINANCIAL STATEMENTS......................................... 17
34. UNAVOIDABLE DELAY............................................ 17
35. NOTICES...................................................... 17
36. BROKERS...................................................... 18
37. ATTORNEYS' FEES.............................................. 18
38. WAIVER OF JURY TRIAL; COUNTERCLAIMS.......................... 18
39. ASSIGNS AND SUCCESSORS; LIMITATION ON LIABILITY.............. 18
40. SUBSTITUTED PREMISES......................................... 19
41. LANDLORD'S CONSENT OR APPROVAL............................... 19
42. HEADINGS; INTERPRETATION..................................... 19
43. SEVERABILITY................................................. 19
44. APPLICABLE LAW............................................... 19
45. RECORDING.................................................... 19
46. TIME IS OF THE ESSENCE....................................... 20
47. SURVIVAL OF OBLIGATIONS...................................... 20
48. EXECUTION OF DOCUMENTS....................................... 20
49. PARKING...................................................... 20
50. ENTIRE AGREEMENT............................................. 20
51. EXISTING LEASE REIMBURSEMENT................................. 20
52. OPTION TO RENEW.............................................. 21
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
EXHIBIT A -- PREMISES
EXHIBIT B -- COMMENCEMENT AGREEMENT
EXHIBIT C -- SPACE PLAN
EXHIBIT C-1 -- INITIAL TENANT IMPROVEMENTS
EXHIBIT D -- WORK AGREEMENT
EXHIBIT E -- RULES AND REGULATIONS
EXHIBIT F -- SIGNAGE
</TABLE>
iii
<PAGE>
LEASE AGREEMENT
---------------
THIS LEASE AGREEMENT (this "Lease") is made as of the ____ day of
January, 1996 by and between BRIT LIMITED PARTNERSHIP, a Maryland limited
partnership ("Landlord"), and OXFORD CAPITAL CORPORATION, a Maryland corporation
("Tenant").
W I T N E S S E T H:
1. PREMISES. For and in consideration of the rent hereinafter reserved
and the mutual covenants hereinafter contained, Landlord hereby leases to
Tenant, and Tenant does hereby rents from Landlord, the premises (the
"Premises") identified as Suite 200 and consisting of approximately 16,840
rentable square feet of office space on the second (2nd) floor of the building
(the "Building") known as 7000 Security Boulevard, Baltimore, Maryland, in the
Security Office Park (the "Complex"), upon the terms and conditions set forth
herein. The Premises are more particularly described on Exhibit A attached
hereto. The land upon which the Building is located and the Building are
hereinafter referred to herein as the "Property." The roof, exterior faces of
all perimeter walls and the use of the air space above the Building shall be
reserved for Landlord's exclusive use and Tenant shall have no right of access
thereto, except as expressly provided herein. This Lease conveys to Tenant no
license, easement or parking privileges except as expressly provided herein.
2. TERM.
(a) The term of this Lease (the "Term") shall commence on
(the "Lease Commencement Date") the earlier to occur of (i) the date of
Substantial Completion of the Premises, or (ii) the date on which Tenant
commences beneficial use of the Premises, and shall continue until December 31,
2001 (the "Lease Expiration Date"), unless the Lease Term is terminated earlier
in accordance with the provisions of this Lease. As used herein, the term
"Substantial Completion" shall have the meaning set forth in Exhibit D.
Notwithstanding the foregoing, if Landlord is delayed in completing construction
of the Premises as a result of any of the reasons described in clauses (i)
through (v) of Paragraph 4(b) of Exhibit D, then for purposes of determining the
Lease Commencement Date, the Premises shall be deemed to have been substantially
complete on the date determined in accordance with Paragraph 4(b) of Exhibit D.
(b) Promptly after the Lease Commencement Date is
ascertained, Landlord and Tenant shall execute a certificate, in the form
attached hereto as Exhibit B, setting forth the Lease Commencement Date and the
date upon which the term of this Lease will expire.
(c) It is presently anticipated that the Premises will be
ready for occupancy by Tenant on or about April 1, 1996; provided, however, that
if Landlord does not deliver possession of the Premises by such date, Landlord
shall not have any liability whatsoever to Tenant on account of such failure to
deliver possession of the Premises to Tenant and this Lease shall not be
rendered void or voidable as a result of such delay, except as otherwise
expressly provided herein.
3. RENT.
(a) Tenant shall pay initially an annual base rent
("Annual Base Rent") of Two Hundred Twenty-Two Thousand Forty Dollars
($222,040.00) in equal monthly installments ("Monthly Base Rent") of Eighteen
Thousand Five Hundred Three and 33/100 Dollars ($18,503.33). Annual Base Rent
shall be increased in accordance with the terms of Section 3(b) below.
(b) Commencing on January 1, 1998, and on the first day
of January in each year thereafter, Annual Base Rent shall be adjusted and
increased by an amount equal to three percent (3%) of the Annual Base Rent then
in effect.
1
<PAGE>
(c) Concurrently with the execution of this Lease, Tenant
shall pay to Landlord an amount equal to one (1) monthly installment of the
Annual Base Rent payable during the first (1st) Lease Year, which amount shall
be credited by Landlord toward the monthly installment of Annual Base Rent
payable for the first (1st) full calendar month of the Lease Term. This amount
shall be a non-refundable payment to Landlord in the event Tenant does not
occupy the Premises pursuant to this Lease. If the Lease Commencement Date is a
day other than the first (1st) day of a month, then Annual Base Rent from the
Commencement Date until the first (1st) day of the following month shall be
prorated on a per diem basis at the rate of one-thirtieth (1/30th) of the
monthly installment of Annual Base Rent payable during the first (1st) lease
year, and Tenant shall pay such prorated installment of Annual Base Rent in
advance on the Lease Commencement Date.
(d) Rent shall be payable in lawful money of the United States
of America to the Landlord or to such other person and at such place as the
Landlord may from time to time direct by notice to the Tenant, in advance,
without previous notice or demand therefor and without deduction or setoff.
Monthly Base Rent shall be due and payable on the first day of each and every
month during the Term hereof, except as otherwise provided herein. No payment by
Tenant or receipt by Landlord of a lesser amount than the amounts herein
stipulated shall be deemed to be other than on account of the earliest
stipulated rent, nor shall any endorsement or statement on any check or letter
accompanying a check for payment of rent be deemed an accord and satisfaction
and Landlord may accept such check or payment without prejudice to Landlord's
right to recover the balance of such rent or to pursue any other remedy provided
in this Lease. Tenant shall pay Landlord upon demand the sum of Fifty Dollars
($50.00) for each of Tenant's checks returned to Landlord not paid for
insufficient funds or other reasons not the fault of Landlord, to cover
Landlord's costs in handling such returned items. The foregoing returned check
charge represents the parties' reasonable estimate as of the date hereof of the
extra expenses that Landlord will incur in processing returned checks, the exact
amount of such charges being difficult to ascertain, and such charge shall not
be considered interest.
(e) For purposes of this Lease, the term "Lease Year" shall
mean a period of twelve (12) consecutive months, commencing on the Lease
Commencement Date, and each successive twelve (12) month period thereafter;
except that if the Lease Commencement Date is a day other than the first day of
a month, then the first Lease Year shall commence on the Lease Commencement Date
and shall continue for the balance of the month in which the Lease Commencement
Date occurs and for a period of twelve (12) calendar months thereafter.
4. ANNUAL EXPENSE INCREASES.
(a) Tenant agrees to pay as additional rent to Landlord,
Tenant's Pro Rata Share (as hereinafter defined) of the sum (said sum being
hereinafter referred to as the "Increase") of (i) the amount, if any, by which
the Annual Operating Costs (as hereinafter defined) exceed the Annual Operating
Costs incurred by Landlord for calendar year 1996 (the "Base Operating Costs")
and (ii) the amount, if any, by which the Real Estate Taxes (as hereinafter
defined) for the Property exceed the Real Estate Taxes incurred by Landlord for
the 1996/1997 tax year (the "Base Taxes"). The payments called for in this
Section 4(a) are hereinafter sometimes called the "Adjustment Rent". The term
"Tenant's Pro Rata Share," as used herein, shall mean the number, expressed as a
percentage, equal to the rentable square footage of the Premises divided by the
total rentable square footage contained in the Building. Notwithstanding any
other provision of the Lease, but taking into account any "Gross-Up" required
under the provisions of this Lease; in calculating Tenant's Pro Rata Share of
the Increase in Annual Operating Costs for the 1997 calendar year, "Controllable
Costs" shall be capped at one hundred ten percent (110%) of the Controllable
Costs for calendar year 1996 (as determined on a per rentable square foot basis.
As used herein, "Controllable Costs" are defined as follows: All Annual
Operating Costs except real estate taxes, insurance, snow removal, utilities,
char, and security.
(b) After the conclusion of each fiscal year of the Building,
Landlord shall furnish to Tenant a statement (each an "Annual Statement") in
reasonable detail showing the actual Annual Operating Costs and the Real Estate
Taxes for such fiscal year. Tenant shall, with
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the next installment of rent, pay to Landlord the excess of Tenant's Pro Rata
Share of the Increase for the Adjustment Year covered by such Annual Statement
above the total monthly payments towards such Increase made by Tenant pursuant
to Section 4(c); provided that, if Tenant's monthly payments on account thereof
exceed Tenant's Pro Rata Share of the Increase for the fiscal year covered by
such Annual Statement, Landlord hereby agrees to credit the excess against
Monthly Base Rent accruing thereafter (except where the Term has expired, in
which case Landlord agrees, after deducting any sums due Landlord hereunder, to
pay Tenant the excess within thirty (30) days after preparation of the Annual
Statement for such fiscal year).
(c) The Landlord may from time to time during the term hereof
deliver to Tenant a written estimate by Landlord of the amount of annual
Adjustment Rent which Landlord may estimate and determine will be payable by
Tenant during an ensuing Building fiscal year (or portions of a fiscal year)
(the "Estimated Adjustment Rent"). Commencing on the first day of the calendar
month immediately following the month in which the statement of Estimated
Adjustment Rent is tendered, and on the first day of each and every calendar
month thereafter until the next such statement, Tenant shall pay to Landlord (in
addition to the Monthly Base Rent, and as Additional Rent) a sum as specified by
Landlord which is equal to one-twelfth (1/12th) of said Estimated Adjustment
Rent, such payments to continue to be due and payable until further notice from
Landlord.
(d) Any Additional Rent on account of increases due and
payable for a partial Lease Year at the commencement or end of the term shall be
equitably pro-rated, based upon the number of months and/or days remaining until
expiration of the term of this Lease, and the amount or amounts found to be
owing by the Tenant shall be paid within ten (10) days after Landlord's demand.
(e) Tenant may not claim a readjustment of Tenant's Pro Rata
Share or the Increase based on any error of estimation, determination or
calculation thereof except by written notice given within sixty (60) days after
receipt of the Estimation Statement or Annual Statement (as the case may be) for
the fiscal year to which such estimate or calculation relates.
(f) "Annual Operating Costs," as used herein, shall include
all expenses incurred by Landlord in connection with owning, operating,
managing, insuring, repairing, maintaining and protecting the Building and/or
its appurtenances (including, without limitation, any parking areas servicing
the Building) and/or the Property. By way of example, but without limitation,
Annual Operating Costs shall include the following: charges and expenses,
salaries, wages and employee benefits for agents or employees of Landlord
engaged in the operation, maintenance, servicing or repair of the Building
and/or the Property and/or its appurtenances, license, permit and inspection
fees and/or charges, repairs and maintenance, utility and utility distribution
charges, water and sewer charges, charges for gas, oil and other fuels, charges
for steam, premiums for any casualty, liability, rent and/or other insurance
obtained by Landlord or on Landlord's behalf with respect to the Building and/or
the Property, security services, char and cleaning services, building and
cleaning supplies, uniforms and dry cleaning and laundering, window cleaning,
snow removal, repair and maintenance of the sidewalks, driveways, roadways
(public and private) and grounds, including plantings and ground cover and other
improvements and replacements thereto, accounting and legal fees, fees and
expenses incurred by Landlord under any service (including, without limitation,
garbage and waste disposal (including recycling costs), elevator service, and
plumbing service) or management contracts, the cost for telephone, telegraph,
stationery, postage and other materials and supplies used in the operation of
the Building and/or the Property, personal property taxes, chillers, air
conditioning and ventilation, advertising and promotion expenses, all sales
and/or excise taxes imposed on any of the services provided by Landlord, a
management fee equal to five percent (5%) of the gross revenue from the
Building, the cost of any capital improvements intended to decrease Annual
Operating Costs or required by Federal, state or local statutes, regulations,
rules or orders (the cost of such capital improvements shall be amortized over a
reasonable period of time as determined by Landlord and to this extent shall be
included in Annual Operating Costs), and any other expenses or charges of any
nature whatsoever, whether or not herein mentioned, which shall be included in
Annual Operating Costs in accordance with generally accepted accounting and
management
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principles with respect to operation of similar office buildings in the
Baltimore metropolitan area.
(g) The term "Real Estate Taxes" mean all taxes, rates and
assessments, general and special, levied or imposed with respect to the
Property, including all taxes, rates and assessments, general and special,
levied or imposed for schools, public betterment, general or local improvements
and operations (including vault rentals) and taxes imposed in connection with
any special taxing district and any assessments made by the United States of
America, the State of Maryland, Baltimore County, or any public corporation,
district or other public entity. If the system of real estate taxation shall be
altered or varied and any new tax or levy shall be levied or imposed on said
Property and/or Landlord in substitution for real estate taxes presently levied
or imposed on land, improvements or fixtures in Baltimore County, then any such
new tax or levy shall be included within the term "Real Estate Taxes." Should
any governmental taxing authority acting under any law or regulation, levy,
assess, or impose a tax, excise and/or assessment however described (other than
an income or franchise tax) upon, against, or account of, or measured by, in
whole or in part, the rent expressly reserved hereunder, or upon the rent
expressly reserved under the other leases or leasehold interests in the
Premises, the Building and/or the Property , as a substitute (in whole or in
part) or in addition to any existing real estate taxes on land and buildings or
otherwise, such tax or excise on rents shall be included within the term "Real
Estate Taxes." Expenses, including, but not limited to, reasonable attorneys'
fees and consulting fees, incurred by Landlord in protesting, contesting or
disputing, or obtaining or attempting to obtain a reduction of any Real Estate
Taxes (or the assessment upon which the Real Estate Taxes are based) shall be
added to and included in Real Estate Taxes, expressly excluding any penalty or
late charges incurred by Landlord for failure to pay such taxes promptly.
(h) If during all or part of any fiscal year of the Building
(such fiscal year to be as determined and designated by Landlord, and which may
be on a Calendar Year or other fiscal year basis as Landlord may determine from
time to time) (or partial fiscal year) of the term, Landlord shall not furnish
any particular item of work or service (which would constitute an item of Annual
Operating Costs hereunder) to at least ninety-five percent (95%) of the rentable
area of the Building, because (i) less than all of the Building is occupied or
(ii) such item of work or service is not desired or required by any tenant, or
(iii) any tenant is itself obtaining and providing such item of work or service,
then an adjustment shall be made in computing the Annual Operating Costs for
such fiscal year (or partial fiscal year) so that the Annual Operating Costs
shall be increased for such fiscal year (or partial fiscal year) to the amount
that would have been reasonably incurred had Landlord provided such item of work
or service to ninety-five percent (95%) of the rentable area of the Building for
the entire fiscal year (or partial fiscal year).
(i) Tenant shall pay all electricity, telephone and power
bills separately metered to the Premises, and any other service or material used
by, or provided to, Tenant in connection therewith, when due. The Annual Base
Rent provided in this Lease is net of all costs of electricity consumed within
the Premises, all such costs being Tenant's responsibility. If Tenant does not
pay the same when due, Landlord may pay the same and the amount of such payment
shall be deemed Additional Rent which shall be due upon receipt of Landlord's
invoice therefor. In determining Tenant's Pro Rate Share of Annual Operating
Costs, Landlord shall make reasonable adjustments to reflect Tenant's direct
payment of all electric charges for the Premises.
(j) Tenant shall pay all rental, sales, use, business and
other taxes levied or imposed by the State of Maryland, Baltimore County or
other governmental authority on Tenant or Tenant's real or personal property, or
the Rent (as hereinafter defined) and the services provided by Landlord
hereunder, such payments to be in addition to all other payments required under
the terms of this Lease.
(k) As used herein, the term "Rent" shall mean the Annual Base
Rent and all additional rent, as the same may be adjusted from time to time.
5. ADDITIONAL RENT. Any and all amounts required to be paid by Tenant
hereunder and any and all charges or expenses incurred by Landlord on behalf of
Tenant under
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the terms of this Lease shall be considered Additional Rent payable (except as
otherwise expressly set forth herein) in the same manner and upon the same terms
and conditions as the Monthly Base Rent reserved hereunder. Any failure on the
part of Tenant to pay such Additional Rent when and as the same shall become due
shall entitle Landlord to the remedies available to it for nonpayment of Rent.
6. TENANT IMPROVEMENTS.
(a) Landlord shall, at Landlord's expense, construct the
initial tenant improvements to the Premises according to the space plan attached
hereto as Exhibit C (the "Space Plan"), which shall include the work set forth
on Exhibit C-1, and in accordance with the Work Agreement attached hereto as
Exhibit D (the "Initial Tenant Improvements"), using building standard materials
and specifications, except as otherwise shown on Tenant's Plans. The specific
items of work set forth on Exhibit C-1 are in addition to, and not in limitation
of the work set forth in Tenant's Plans. Landlord is under no obligation to make
any alterations, decorations, additions or improvements in or to the Premises
except as set forth in the Space Plan or Tenant's Plans (as hereafter defined).
Any modifications to the Space Plan or Tenant's Plans shall be subject to
Landlord's prior written consent. The cost of any additional work performed by
Landlord and any modifications or changes to Tenant's Plans shall be paid for by
Tenant as follows: (i) fifty percent (50%) upon ordering the additional work
and/or modifications and (ii) fifty percent (50%) on the Lease Commencement
Date.
(b) Attached hereto as Exhibit C is Tenant's final space plan
for partition, plumbing, mechanical, electrical, telephone and other
requirements for the improvements to be made to the Premises. Such requirements
include the categories of work and all other items necessary to complete
construction of the Initial Tenant Improvements. Tenant will cause to be
prepared from the Space Plan, working drawings for the Initial Tenant
Improvements. The working drawings shall be consistent with the scope of work
and level of finishes set forth on the Space Plan. Said working drawings shall
be approved by both Landlord and Tenant and after such approval shall be defined
as "Tenant's Plans". Tenant shall submit Tenant's Plans to Landlord no later
than January 25, 1996. Within five (5) days after Tenant's submission of the
Tenant's Plans, the Landlord shall notify Tenant of any objections. Tenant shall
address all of Landlord's objections and submit revised plans to Landlord within
five (5) business days. A copy of the approved working drawings will be attached
hereto as Exhibit C and shall be referred to as Tenant's Plans.
(c) Tenant shall be responsible for all space planning,
architectural and design costs, including the cost of preparing the Space Plan
and Tenant's Plans. Upon presentation by Tenant to Landlord of reasonable proof
thereof, Landlord shall promptly reimburse Tenant for costs Tenant has paid or
incurred as of the date of the Lease, or pays or incurs after such date, in
connection with the preparation of the Space Plan and Tenant's Plans, up to a
maximum of Sixteen Thousand Eight Hundred Forty Dollars ($16,840.00) [i.e. $1.00
per rentable square foot].
(d) The Tenant covenants and agrees that it will fully and
faithfully comply with all reasonable response requirements to assure timely
completion of the Premises, time being of the essence.
7. LANDLORD ACCESS. Landlord and its agents may enter the Premises at
all reasonable hours to exhibit the same to prospective purchasers, mortgagees
or tenants, to inspect the Premises, to see that Tenant is complying with all
its obligations hereunder or to make repairs to the Premises or the Property.
Landlord shall (except in the event of any emergency) give Tenant prior notice
of such access and, during access, use commercially reasonable efforts to
minimize any interference with Tenant's business operations.
8. QUIET ENJOYMENT. Subject to the terms hereof, Landlord covenants
that, if Tenant pays the Rent and all other charges provided for herein,
performs all of its obligations provided for hereunder and observes all of the
other provisions hereof, Tenant shall at all times during the Term peaceably and
quietly have, hold and enjoy the Premises, without any interruption or
disturbance from Landlord.
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9. SERVICES.
(a) Except as set forth in this Section 9, Landlord shall be
under no obligation to furnish any services or supplies to the Premises or to
repair or maintain the Premises. Landlord shall furnish elevator service, water
and lavatory supplies during normal business hours, and normal and usual
cleaning and janitorial service, Mondays through Fridays (exclusive of Federal,
State or local legal holidays), except during periods of repair and maintenance.
Landlord further agrees to furnish (i) reasonably adequate electric current for
normal office uses and (ii) heat and air conditioning appropriate to the seasons
of the year from 8:00 a.m. to 9:30 p.m. (with the system fan to remain on until
10:00 p.m.), Mondays through Fridays, (exclusive of holidays) and from 9:00 a.m.
to 1:00 p.m., Saturdays (exclusive of holidays), except during periods of repair
and maintenance, all in accordance with the standards of comparable office
buildings in the Baltimore metropolitan area as reasonably determined by
Landlord. Landlord shall provide heat and air conditioning at times in addition
to those specified above, at Tenant's expense, upon not less than forty-eight
(48) hours written notice from Tenant. Tenant shall pay Landlord for said after
hours service based upon Landlord's then current schedule of costs and
assessments therefor. Landlord shall install, at Landlord's cost, a separate
unit or split system to provide ventilation and air conditioning to one office
within the Premises, as shown on Tenant's Plans. The unit will operate only for
after-hours usage. Tenant shall be responsible for all costs of operating,
maintaining, repairing and replacing the unit or system.
(b) No claim for compensation or abatement of Rent shall be
made by the Tenant by reason of inconvenience, nuisance, loss of business or
discomfort arising from the interruption or cessation of or failure in the
supply of any utilities, services or systems serving the Premises or from the
repair, renovation or rebuilding of any portion of the Property or basic systems
thereof nor shall the same give rise to a claim in Tenant's favor that such
interruption, cessation, failure, repair, renovation or rebuilding constitutes
actual or constructive, total or partial eviction from the Premises.
10. USE OF PREMISES. The Premises shall be used and occupied by Tenant
solely for general office purposes in accordance with applicable zoning laws and
for no other purpose whatsoever. Tenant shall not use the Premises, nor suffer
the Premises to be used, for any unlawful purpose or in any unlawful manner or
in violation of any valid regulation of any governmental body, or in any manner
to (i) create any nuisance or trespass; (ii) annoy or embarrass Landlord; (iii)
vitiate any insurance carried by Landlord or on Landlord's behalf; or (iv) alter
the classification or increase the rate of any insurance on the Building. Tenant
shall not commit waste, overload the floors or structure of the Building, or
take any action that would impair or alter parking spaces on the Property.
Tenant shall not keep within or about the Premises any dangerous, inflammable,
toxic or explosive material, nor shall Tenant use the Premises or the Property,
nor suffer the Premises to be used, for the manufacture, storage, treatment or
disposal of any hazardous or toxic substance, material or waste as such terms
may be defined from time to time under Federal, state or local law. In the event
of any such waste, damage or manner of use by Tenant, immediately upon verbal
notice to Tenant at the Premises, Tenant shall take such steps as are reasonably
necessary to cease and repair the same, failing which the Landlord shall be
entitled to take such steps and the Tenant shall pay to the Landlord, upon
demand, the Landlord's cost thereof. In addition, if the use or occupancy of the
Premises, the conduct of business in the Premises or any act or omission of the
Tenant in the Premised or the Property, causes or results in any increase in
premiums for the insurance carried from time to time by the Landlord with
respect to the Property, the Tenant shall pay to the Landlord on demand the
Landlord's cost of any increase in premiums.
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11. SIGNS.
(a) Except as provided herein, no sign, advertisement or
notice shall be inscribed, painted, affixed or displayed on the windows or
exterior walls of the Premises or any public area of the Building without the
prior written consent of Landlord (which consent may be withheld in Landlord's
sole and absolute subjective discretion), and then in such places, numbers,
sizes, color and style as are approved in writing in advance by Landlord and
which conform to all applicable laws, regulations, rules and ordinances. If any
such sign, advertisement or notice is exhibited without Landlord's prior written
approval, Landlord shall have the right to remove the same and Tenant shall be
liable for any and all expenses incurred by Landlord by said removal. Tenant
will maintain its permitted signs (if any), decorations, lettering, advertising
matter and such other things as may be approved in good condition and repair,
and in compliance with all applicable statutes, regulations and rules, at all
times. Landlord may prohibit any advertisement of Tenant which in Landlord's
opinion tends to impair the reputation of the Building or the Property; upon
written notice from Landlord, Tenant shall refrain from and discontinue such
advertisement.
(b) Provided Tenant is not in default under the Lease and
is occupying at least 15,000 rentable square feet of space in the Building,
Tenant shall have the right, at Tenant's sole cost and expense and subject to
the terms of this Section 11(b), to (i) signage (the "Facade Sign") on the
exterior of the Building, using Building standard signage, depicting Tenant's
corporate name or logo, as shown on Exhibit F attached hereto, and (ii) a bronze
sign in the Building lobby, approximately two (2) feet wide and four (4) feet
long (the "Lobby Sign"), as shown on Exhibit F attached hereto. The design,
size, engineering, location, materials and manner in which the Facade Sign and
the Lobby Sign are attached must be acceptable in all respects to Landlord and
all appropriate governmental authorities. The Facade Sign and Lobby Sign shall
be designed, constructed and installed in accordance with Landlord's
specifications. Tenant shall, at its sole cost and expense, cause the Facade
Sign to be maintained in good working order and condition. Tenant's contractors
and workmen responsible for maintaining the Facade Sign must be reasonably
acceptable in all respects to Landlord and shall perform their work in a manner
which does not cause any damage to the Building or interfere with Landlord's
maintenance of the Building. Any damage to the Building caused by such
installation shall be promptly repaired by Tenant. Tenant shall, at Tenant's
expense, obtain all permits and governmental consents relating to the Facade
Sign. The rights granted to Tenant in this Section are further subject to all
applicable governmental restrictions and regulations. At the expiration or
earlier termination of this Lease, Tenant shall pay for the cost of (i) removing
the Facade Sign and the Lobby Sign, (ii) repairing any damage to the Building
caused by the installation, placement or removal of the Facade Sign and the
Lobby Sign, and (iii) restoring the affected portion of the Building to its
condition prior to the installation of the Facade Sign and the Lobby Sign,
normal wear and tear excepted.
12. FIXTURES; ELECTRICAL EQUIPMENT.
(a) Tenant shall not place a load upon the floor of the
Premises which exceeds the floor load per square foot which such floor was
designed to carry or which is allowed by applicable building code. Business
machines, mechanical equipment and materials belonging to Tenant which cause
vibration, noise, cold, heat or fumes that may be transmitted to the Building or
to any other leased space therein to such a degree as to be objectionable to
Landlord or to any other tenant in the Building shall be placed, maintained,
isolated, stored and/or vented by Tenant at its sole expense so as to absorb and
prevent such vibration, noise, cold, heat or fumes. No freight, furniture or
other building matter or any description may be received into the Building or
carried in the elevators, except at such times and dates in such manner as are
specifically approved by Landlord in writing in advance. Tenant shall be
responsible for any and all damage, injury, or claims resulting from moving of
Tenant's equipment, furnishings and/or materials into or out of the Premises or
from the storage or operation of the same. Any and all damage or injury to the
Premises or the Property (or any part thereof) caused by such moving, storage or
operation shall be repaired by Tenant, at Tenant's sole cost, to Landlord's
reasonable satisfaction.
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(b) Tenant shall have the right to install or operate in
the Premises any small electrically operated standard office equipment as is
typically used in modern offices. Except as otherwise shown on Tenant's Plans,
Tenant shall not install or operate in the Premises any "non-standard" equipment
without first obtaining the prior consent in writing of Landlord, which consent
may, in Landlord's sole discretion, be conditioned on, among other matters, the
payment by Tenant of additional rent in compensation for such excess consumption
of water and/or electricity as may be occasioned by the operation of said
equipment or machinery; nor shall Tenant install any other equipment whatsoever
which will or may necessitate any changes, replacements or additions to the
water system, plumbing system, heating system, air conditioning system or the
electrical system of the Premises or the Building without the prior written
consent of Landlord, which consent may be withheld or conditioned in Landlord's
sole discretion; provided that, if Landlord shall consent to such installations,
all additional utility facilities, changes, replacements or additions necessary
to handle facilities, changes, replacements or additions necessary to handle
such equipment shall be performed by Landlord or by contractors approved by
Landlord at Tenant's expense in accordance with plans and specifications to be
approved in writing, in advance, by Landlord.
13. ALTERATIONS; MECHANICS LIENS.
(a) Tenant shall not make or permit anyone to make any
alterations, improvements, installations or modifications in or to any part of
the Premises without first obtaining Landlord's prior written consent (which
consent may be withheld in Landlord's sole and absolute subjective discretion).
Landlord's consent to non-structural alterations not visible from the exterior
of the Premises shall not be unreasonably withheld. When granting its consent,
Landlord may impose any conditions it reasonably deems appropriate, including,
without limitation, the approval of plans and specifications, approval of the
contractor or other persons who will perform the work, and the obtaining of
specified insurance. If Landlord shall consent to any alterations or changes in
or to the Premises, Tenant shall have all such work performed at Tenant's sole
expense and shall comply with the requirements to be established by the
Landlord. Any additions, improvements, alterations and installations made by
Tenant (excepting only office furniture and business equipment) shall become and
remain a part of the Building and be and remain Landlord's property at the Lease
Expiration Date; provided, however, that Landlord may require Tenant to remove
such additions, improvements, alterations or installation and to restore the
Premises to their original condition at Tenant's sole cost and expense and if
Tenant fails to restore the Premises as required, Landlord may do so at Tenant's
expense. If any alteration is made without the prior written consent of
Landlord, Landlord may correct or remove the same, and Tenant shall be liable
for any and all expenses incurred by Landlord in the performance of this work.
(b) Any alterations shall be conducted on behalf of
Tenant and not on behalf of Landlord and Tenant shall be deemed to be the
"owner" and not the "agent" of Landlord. If Landlord shall give its written
consent to Tenant's making any alterations, such written consent shall not be
deemed to be an agreement or consent by Landlord to subject Landlord's interest
in the Premises or the Property to any mechanic's liens which may be filed in
respect of any alterations made by or on behalf of Tenant. If any mechanic's or
other lien or any notice of intention to file a lien is filed against the
Property, or any part thereof, or the Premises, for any work, labor, services or
materials claimed to have been performed or furnished for or on behalf of
Tenant, Tenant shall initiate appropriate legal proceedings or otherwise cause
the same to be canceled and discharged of record by payment, bond or order of a
court of competent jurisdiction within five (5) business days after the filing
thereof. If Tenant shall fail to discharge any such lien, Landlord may, at its
option discharge the same, without inquiring into the validity thereof, and
treat the cost thereof as Additional Rent payable upon Landlord's demand
therefor.
14. REPAIRS BY LANDLORD. Landlord shall maintain and make such repairs
to the structural components of the Premises, and the roof, exterior walls,
structural floor slabs, columns, elevators, public stairways, and other common
areas and facilities of the Building (including the parking areas), as may be
necessary to keep them in clean, safe, sanitary and serviceable condition
(except if such work is to repair damage or conditions caused by Tenant). In
addition, Landlord shall repair all machinery and equipment (including plumbing)
necessary
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to provide the services of Landlord described in Section 9, including the HVAC
system servicing the Premises (provided that Tenant shall pay the costs of any
repair to such systems or any part thereof damaged by Tenant or Tenant's
employees, agents or contractors). Landlord shall not be responsible for the
maintenance and repair of the Leibert unit in the Premises, which shall be
Tenant's sole responsibility. Tenant agrees to report immediately in writing to
Landlord any defective condition in or about the Premises known to Tenant which
Landlord is required to repair hereunder. Landlord shall provide and install
replacement tubes for Building standard light fixtures; all other bulbs, tubes
and lighting fixtures for the Premises shall be provided and installed by
Landlord at Tenant's cost and expense.
15. REPAIRS AND MAINTENANCE BY TENANT. Except as expressly provided in
Section 14, Tenant shall maintain the Premises and the fixtures therein in good
order and repair during the Term at Tenant's sole cost and expense. All injury
to the Premises or the Building and all breakage done by Tenant, or Tenant's
agents, contractors, directors, employees, invitees, licensees or officers shall
be repaired immediately by the Tenant at Tenant's sole expense. In the event
that the Tenant shall fail to make any repairs required pursuant to this Section
15, Landlord shall have the right to make such repairs and any charge or cost so
incurred by the Landlord shall be paid by Tenant upon demand. Tenant will
indemnify and hold Landlord harmless from and against any and all expenses,
liens, claims or damages to person or property which may or might arise by
reason of the making of any such alterations, installations, changes,
replacements, additions or improvements. This provision shall be construed as an
additional remedy granted to the Landlord and not in limitation of any other
rights and remedies which the Landlord has or may have in said circumstances.
16. INSURANCE; INDEMNITY.
(a) Tenant shall carry and keep in full force and effect
at all times during the Term of this Lease for the protection of Landlord and
Tenant herein, comprehensive general liability insurance for bodily injury,
death and damage to property of others, including tenants legal liability for
damage to the Premises and blanket contractual liability, with respect to all
business conducted from the Premises and the use and occupancy thereof and the
use of the common areas including the activities, operations and work conducted
or performed by the Tenant, by any other person on behalf of the Tenant, by
those for whom the Tenant is in law responsible and by any other person on the
Premises, with minimum limits of coverage of at least One Million Dollars
($1,000,000.00) for each occurrence for property damage and bodily injury with
an aggregate of Three Million Dollars ($3,000,000.00) and liability insurance
for fire damage to the Premises with minimum limits of coverage of at least Two
Hundred Fifty Thousand Dollars ($250,000.00). Notwithstanding the foregoing,
Landlord shall have the right to require Tenant to increase the minimum limits
of coverage set forth above, from time to time, to the standard limits of
coverage required in comparable buildings in the Baltimore metropolitan area.
(b) In addition, Tenant, at Tenant's sole cost and
expense, shall obtain and maintain in full force and effect throughout the Term
of this Lease, insurance policies providing for the following coverage: (i) all
risk and property insurance against fire, theft, vandalism, malicious mischief,
leakage and such additional perils as now are or hereafter may be included in a
standard extended coverage endorsement from time to time in general use in the
Baltimore metropolitan area, insuring Tenant's improvements in the Premises,
trade fixtures, furnishings, equipment and all other items of personal property
of Tenant located on or in the Premises, in an amount equal to not less than the
full replacement value thereof, and (ii) such other insurance as the Landlord
may reasonably require having regard to the risks which are customarily insured
against by prudent landlords and tenants of similarly leased premises.
(c) All insurance policies carried by Tenant pursuant to
this Section 16, and any other insurance policies carried by Tenant with respect
to the Premises, shall (i) be issued in form acceptable to Landlord by insurance
companies licensed to do business in the State of Maryland and reasonably
satisfactory to Landlord; (ii) name Landlord and its management agent as
additional named insured; (iii) be written as primary policy coverage and not
contributing with or in excess of any coverage which Landlord may carry; (iv)
provide for at least thirty (30) days
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prior written notice to Landlord of any cancellation or material alteration of
such policy; (v) contain an express waiver of any right of subrogation by the
insurance company against Landlord and Landlord's agents; and (vi) have such
other form and content as Landlord may reasonably require.
(d) Upon execution of this Lease and thereafter not less
than thirty (30) days prior to the expiration dates of each policy providing all
or part of the insurance required pursuant to this Section 16, Tenant shall
deliver to Landlord a certified copy of the policy or policies, and renewals
thereof, evidencing Tenant's insurance coverage as required hereunder and
evidencing the payment of premiums or accompanied by other evidence satisfactory
to Landlord of such payment. In the event that Tenant shall, either upon
execution of this Lease or prior to the thirtieth (30th) day before any such
insurance coverage herein required to be obtained and maintained by Tenant, fail
to do so, then Landlord may (but shall not be obligated to) obtain such
insurance coverage and pay the premiums therefor, and the premiums so paid by
Landlord shall be payable by Tenant to Landlord, on presentation of Landlord's
invoice therefor, as Additional Rent.
(e) Tenant hereby releases Landlord and its agents and
employees from any and all liability or responsibility to Tenant or any person
claiming by, through or under Tenant, by way of subrogation or otherwise, except
to the extent of Landlord's obligation to repair pursuant to Section 14 hereof,
for the death of or injury to the Tenant or others, or for the loss of or damage
to property (including books, records, files, money, securities, negotiable
instruments, papers or other valuables) of the Tenant or others, except as a
result of Landlord's willful misconduct or gross negligence, or for any indirect
or consequential or economic loss, injury or damage of the Tenant or others
arising from or out of any occurrence or situation in, upon, at or relating to
the Property and, without limiting the generality of the foregoing, the Landlord
shall not be liable or in any way responsible for any death, injury, loss or
damage to persons or property resulting from fire, explosion, falling plaster,
escaping steam or gas, electricity, water, rain, floor, snow, ice or leaks from
any part of the Property or from the pipes, sprinklers, appliances, plumbing
works, roof, windows or subsurface of any floor or ceiling of the Property; or
caused by other tenants occupants or persons in the Premises or other premises
in the Property or the public; or caused by operations in the construction of
any private, public or quasi-public work; or against which the Tenant is
required to insure pursuant to this Lease. Tenant agrees to look to its own fire
and hazard insurance policies in the event of damage to Tenant's personal
property.
(f) Tenant agrees to defend, indemnify and save Landlord
harmless from any and all liabilities, damages, causes of action, suits, claims,
judgments, costs and expenses of any kind (including reasonable attorney's fees)
(i) relating to or arising from or in connection with any act or omission of
Tenant or Tenant's agents, contractors, employees, invitees, licensees or others
for whom Tenant is legally responsible, or (ii) relating to or arising from or
in connection with any breach of any condition, covenant or obligation of this
Lease imposed on Tenant.
17a PROPERTY AT TENANT'S RISK. All personal property in the Premises,
of whatever nature, whether owned by Tenant or any other person, shall be and
remain at Tenant's sole risk and Landlord shall not assume any liability or be
liable for any damage to or loss of such personal property, arising from the
bursting, overflowing, or leaking of the roof or of water, sewer, or steam
pipes, or from heating or plumbing fixtures or from the handling of electric
wires or fixtures or from any other cause whatsoever.
18a DAMAGE. If the Premises shall be damaged by fire or other cause,
without the fault or neglect of Tenant, its servants, employees, agents,
contractors, invitees or licensees, or other persons for whom Tenant is legally
responsible, the damage shall be repaired within a reasonable time by and at the
expense of Landlord, and the Annual Base Rent shall abate pro rata until such
repairs shall have been made, according to the part of the Premises which is
thereby rendered unusable by Tenant; provided, however, that (i) Landlord shall
have no obligation to repair, replace or restore Tenant's furniture, fixtures,
furnishings or other personal property and (ii) Tenant shall, with all
reasonable diligence and at Tenant's sole expense, make all other repairs and do
all other items of work which are necessary to return the Premises to the
condition
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existing immediately prior to such damage or destruction and promptly to
complete the Premises for use and occupancy by the Tenant. Due allowance shall
be made in Landlord's repair obligation for reasonable delay which may arise by
reason of any adjustment or settlement of insurance claims by Landlord, and for
delay on account of "labor troubles" or any other cause beyond Landlord's
control. Notwithstanding the foregoing, if (i) the Premises are rendered wholly
untenantable by fire or other cause and the Landlord decides not to rebuild the
Premises, or (ii) if the Premises are damaged by fire or other casualty and such
damage cannot reasonably be repaired within ninety (90) days following such fire
or other casualty, or (iii) if the entire Building be so damaged that Landlord
shall decide to demolish it or not to rebuild it, and (iv) Landlord notifies the
Tenant in writing of the extent of such damage and such decision, in any of such
events, the Term shall terminate upon the thirtieth (30th) day after such notice
is given as if such date were the Lease Expiration Date set forth herein, and
Tenant shall vacate the Premises and surrender the same to Landlord on such
date. Landlord shall have no liability, and shall not be responsible for
consequential damages, lost profits or any damage to Tenant's personal property,
arising from any such fire or other damage or Landlord's decision to terminate
this Lease. No compensation or claim or reduction of rent will be allowed or
paid by Landlord by reason of inconvenience, annoyance, or injury to business
arising from the necessity of repairing the Premises or any portion of the
Building of which they are a part however the necessity may occur.
19a CONDEMNATION.
(a) If all of the Premises is condemned or taken in any
manner for public or quasi-public use (including for all purposes of this
Section 19, but not limited to, a conveyance or assignment in lieu of a
condemnation or taking), this Lease shall automatically terminate as of the date
that Tenant is required to surrender possession of the Premises as a result of
such condemnation or other taking. If a part of the Premises so condemned or
taken renders the remaining portion untenantable and unusable by Tenant, as
determined by Landlord in Landlord's reasonable discretion, this Lease may be
terminated by Tenant as of the date Tenant is required to surrender possession
of such portion of the Premises, by written notice to Landlord within sixty (60)
days following notice to Tenant of the date on which Tenant is required to
surrender possession of such portion of the Premises. If a portion of the
Building is condemned or taken so as to require, in the opinion of Landlord, a
substantial alteration or reconstruction of the remaining portions thereof, this
Lease may be terminated by Landlord, as of the date Landlord is required to
surrender possession as a result of such condemnation or taking, by written
notice to Tenant within sixty (60) days following notice to Landlord as of the
date on which possession of the Building (or such part thereof) must be
surrendered.
(b) Landlord shall be entitled to the entire award in any
condemnation proceeding or other proceeding for taking for public or
quasi-public use, including, without limitation, any award made for the value of
the leasehold estate created by this Lease. No award for any partial or entire
taking shall be apportioned, and Tenant hereby assigns to Landlord any award
that may be made in such condemnation or other taking, together with any and all
rights of Tenant now or hereafter arising in or to same or any part thereof;
provided, however, that nothing contained herein shall be deemed to give
Landlord any interest in or to require Tenant to assign to Landlord any separate
award made to Tenant specifically for its relocation expenses, the taking of
personal property and fixtures belonging to Tenant, or the interruption of or
damage to Tenant's business, provided that such award shall not diminish the
award to which Landlord is otherwise entitled.
(c) In the event of a partial condemnation or other
taking that does not result in a termination of this Lease as to the entire
Premises, the Annual Base Rent shall be reduced in the proportion that the
square footage of the portion of the Premises taken by such condemnation or
other taking bears to the square footage contained in the Premises immediately
prior to such condemnation or other taking. In the event that this Lease shall
be terminated pursuant to this Section 19, the Annual Base Rent shall be
adjusted through the date that Tenant is required to surrender possession of the
Premises.
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(d) If all or any portion of the Premises is condemned or
otherwise taken for public or quasi-public use for a limited period of time,
this Lease shall remain in full force and effect and Tenant shall continue to
perform all of the terms, conditions and covenants of this Lease; provided,
however, that (i) during such limited period, the Annual Base Rent shall be
reduced in the proportion that the square footage contained in the Premises
immediately prior to such condemnation or other talking, and (ii) Landlord shall
be entitled to whatever compensation may be payable from the requisitioning
authority for the use and occupation of the Premises for the period involved.
20a LAWS AND ORDINANCES. The Tenant shall, at its sole expense,
promptly observe and comply with all statutes, laws, ordinances, rules,
regulations, orders and requirements of all governmental, quasi-governmental or
regulatory authorities including, without limitation, police, fire, health or
environmental authorities or agencies, applicable Insurance Rating Bureau, and
of any liability or fire insurance company by which the Landlord or the Tenant
may be insured at any time during the Term, which are applicable to the Tenant,
the condition, maintenance or operation of the Premises or the leasehold
improvements therein or any part thereof, the occupation or use of the Premises
or the conduct of any business in, at, upon or from the Premises, or which are
applicable to or require the making of repairs, replacements, installations,
alterations, additions, changes or improvements to the Premises or the leasehold
improvements therein; subject, however, to the other provisions of this Lease
requiring the Landlord's prior approval of leasehold improvements.
21a RULES AND REGULATIONS. Tenant shall at all times, and shall cause
everyone for whom the Tenant is in law responsible or over whom the Tenant might
reasonably be expected to have control (including, but not limited to, Tenant's
employees) to, comply with the rules and regulations promulgated by Landlord.
Landlord's current rules and regulations are set forth on the attached Exhibit
E. Tenant shall also comply with any measures the Landlord may from time to time
introduce to conserve or to reduce consumption of energy.
22a SURRENDER; HOLDOVER.
(a) Upon the expiration or sooner termination of the Term
of this Lease, Tenant shall quit and surrender to Landlord the Premises and all
keys, locks and other fixtures connected therewith (except only office furniture
and business equipment) in good order and condition, as the same is now or shall
be on the Lease Commencement Date, ordinary wear and tear excepted, and shall
inform Landlord of all combinations of locks, safes and vaults, if any, in the
Premises. Subject to the provisions of Sections 13 and 27 hereof, Tenant, at
Tenant's sole expense, shall promptly remove all personal property of Tenant,
repair all damage to the Premises caused by such removal and restore the
Premises to the condition which existed prior to the installation of the
property so removed. Any personal property of Tenant not removed within ten (10)
days following the expiration or earlier termination of the Lease shall be
deemed to have been abandoned by Tenant and to have become the property of
Landlord, and may be retained or disposed of by Landlord, as Landlord shall
desire, in accordance with applicable law.
(b) If Tenant shall not immediately surrender the
Premises on the Lease Expiration Date, then Tenant shall, by virtue of this
Lease, become a month-to-month tenant at twice the Rent in effect prior to the
expiration of the Term, commencing said monthly tenancy with the first day after
the Lease Expiration Date; and Tenant, as a monthly Tenant, shall be subject to
all of the other terms, conditions and covenants of this Lease as though the
same had originally been a monthly tenancy. In such event, each party hereto
shall give to the other at least thirty (30) days' written notice to quit the
Premises, except in the event of non-payment of Rent when due, or of the breach
of any other covenant by the said Tenant, in which event TENANT SHALL NOT BE
ENTITLED TO ANY NOTICE TO QUIT, THE USUAL THIRTY (30) DAYS' NOTICE TO QUIT BEING
HEREBY EXPRESSLY WAIVED. In the event that Tenant shall hold over after the
Lease Expiration Date and Landlord shall desire to regain possession of the
Premises promptly following the Lease Expiration Date, then Landlord may, at
Landlord's election, re-enter and take possession of the Premises forthwith, by
any legal action or process in force in the State of Maryland, TENANT HEREBY
WAIVING ANY NOTICE TO QUIT; provided, however, that (i) Tenant shall pay
Landlord a fair rental value (but not as rent)
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equal to two (2) times the Monthly Base Rent plus all Additional Rent payable
for the last month of the Term, for each month or portion thereof that Tenant
remains in possession following the Lease Expiration Date, and (ii) Tenant shall
indemnify Landlord against any and all claims, losses and liabilities for
damages resulting from failure to surrender possession, including, without
limitation, any claims made by any succeeding tenant.
23a EVENTS OF DEFAULT. The occurrence of any of the following shall be
deemed to be an "Event of Default" under this Lease:
(a) if Tenant shall default in the payment, when due, of
any installment of Rent to be paid by Tenant hereunder (all of which monetary
obligations of Tenant shall bear interest at the rate of fifteen percent (15%)
per annum (but in no event greater than the highest non-usurious rate permitted
under the laws of the State of Maryland) from the due date until paid in full,
and such interest shall constitute Additional Rent hereunder due and payable
with the installment of Monthly Base Rent next due);
(b) if Tenant shall default in performing any of the
covenants, terms or provisions of this Lease (other than the payment, when due,
of any of Tenant's monetary obligations hereunder, or the surrender of the
Premises upon the expiration of the Term), or any of the Rules and Regulations
now or hereafter established by Landlord to govern the operation of the
Building, and Tenant fails to cure such default within fifteen (15) days after
written notice thereof from Landlord;
(c) if Tenant shall abandon the Premises or vacate the
Premises for more than ten (10) days;
(d) if any steps are taken or any action or proceedings
are instituted by the Tenant or by any other party including, without
limitation, any court or governmental body of competent jurisdiction for the
dissolution, winding up or liquidation of the Tenant or the assets thereof;
(e) if Tenant shall become insolvent, make an assignment
for the benefit of creditors, or file, be the subject of, or acquiesce in a
petition filed in any court in the nature of a bankruptcy, reorganization,
composition, extension, arrangement or insolvency proceeding (unless, in the
case of a petition filed against Tenant, the same is dismissed within sixty (60)
days);
(f) if any seizure, execution, attachment or similar
process is issued against Tenant or Tenant's assets or any encumbrancer takes
any action or proceeding whereby any of the improvements, fixtures, furniture,
equipment or inventory in or relating to the Premises or any portion thereof or
the interest of the Tenant therein or in this Lease or any business conducted in
or from the Premises shall be taken or attempted to be taken;
(g) if a receiver, manager, custodian or any party having
similar powers is appointed for all or a portion of the property or business of
the Tenant, or any assignee, subtenant, concessionaire, licensee or occupant of
the Premises;
(h) if Tenant makes a sale of all or substantially all of its
assets;
(i) if any insurance policy on the Property or any part
thereof is canceled or is threatened by the insurer to be canceled, or the
coverage thereunder reduced in any way by the insurer and the Tenant has failed
to remedy the condition giving rise to such cancellation, threatened
cancellation or reduction of coverage within five (5) days after notice thereof
from the Landlord;
(j) if the Tenant purports to make a Transfer other than in
compliance with the provisions of this Lease; or
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(k) the occurrence of any event which, pursuant to the other
terms of this Lease entitles Landlord to re-enter the Premises of terminate this
Lease.
24a LANDLORD'S REMEDIES UPON DEFAULT. Upon the occurrence of any Event
of Default, Landlord, at its option may pursue any one or more of the following
remedies without any notice or demand whatsoever:
(a) Landlord, at its option, may at once, or any time
thereafter terminate this Lease by written notice to Tenant, whereupon this
Lease shall end concurrently with the receipt by Tenant of such notice, TENANT
HEREBY EXPRESSLY WAIVING ANY NOTICE TO QUIT PROVIDED BY CURRENT OR FUTURE LAW.
Upon such termination by Landlord, Tenant will at once surrender possession of
the Premises to Landlord and remove all of Tenant's effects therefrom, and
Landlord may re-enter the Premises and repossess it, and remove all persons and
effects therefrom, without being guilty of trespass, forcible entry, detainer or
other tort. Notwithstanding any termination of this Lease pursuant to this
Section 24(a), Tenant shall remain liable for the Rent as hereinafter provided.
(b) Landlord may, without terminating this Lease, enter
upon and take possession of the Premises and expel or remove Tenant and any
other person who may be occupying the Premises or any part thereof, without
being liable for prosecution or any claim for damages therefor, and, if Landlord
so elects, make such alterations and repairs, as, in Landlord's sole judgment,
may be necessary to relet the Premises, and relet such space or any part
thereof, on Tenant's behalf, for such rent and for such period of time and
subject to such terms and conditions as Landlord may deem advisable and receive
the rent therefor. Upon each such reletting, all rent received by Landlord from
such reletting shall be applied first to the payment of any loss or expense of
such reletting, including brokerage fees, reasonable attorneys' fees and the
cost of such alterations and repairs; second, to the payment of any indebtedness
other than Rent due hereunder from Tenant to Landlord, including interest
thereon; third, to the payment of Rent due and unpaid hereunder, together with
interest thereon as herein provided; and the residue, if any, shall be held by
Landlord and applied in payment of future Rent as the same may become due and
payable hereunder. Tenant agrees to pay to Landlord, on demand, any deficiency
that may arise by reason of such reletting. Notwithstanding any such reletting
without termination, Landlord may at any time thereafter elect to terminate this
Lease for such prior default. Landlord shall in no event be liable in any way
whatsoever for its failure or refusal to relet the Premises or any part thereof,
or, in the event that the Premises are relet, for its failure to collect the
rent under such reletting, and no such refusal or failure to relet or failure to
collect rent shall release or affect Tenant's liability for damages or otherwise
under this Lease. No re-entry by Landlord, and no acceptance by Landlord of keys
from Tenant, shall be considered an acceptance of a surrender of this Lease.
(c) In the event Landlord terminates this Lease in
accordance with the provisions of this Section 24, Landlord may, in addition to
any other remedy it may have, recover from Tenant all damages and reasonable
expenses Landlord may suffer or incur by reason of Tenant's default hereunder,
including, without limitation, the cost of recovering the Premises, reasonable
attorneys' fees and either (i) the worth at the time of such termination of the
excess if any, of the amount of Rent and charges equivalent to the Rent reserved
in this Lease for the remainder of the stated term over the then reasonable
rental value of the Premises for the remainder of the stated term, or (ii) the
excess of the Rent reserved hereunder above the amount of rent collected upon
reletting the Premises, all of which sums shall become immediately due and
payable by Tenant to Landlord upon demand.
(d) Landlord may, but shall not be obligated to, cure,
without notice (unless expressly provided herein to the contrary), any
default(s) by Tenant under this Lease, and Tenant shall pay to Landlord, as
Additional Rent, upon presentation of Landlord's invoice therefor, all costs and
expenses incurred by Landlord in curing such default(s), including, without
limitation, court costs and attorneys' fees and disbursements in connection
therewith, together with interest on the amount of costs and expenses so
incurred at the rate specified in Section 24(a) hereof; provided, that Landlord
shall not be liable to Tenant for any loss, injury or damage caused by acts of
the Landlord in remedying or attempting to remedy any such default. Tenant
shall, in
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addition, pay to Landlord upon presentation of Landlord's invoice therefor, such
expenses (regardless of whether or not suit is filed) as Landlord may incur
(including, without limitation, court costs and attorneys' fees and
disbursements) in enforcing the performance of any obligation of Tenant under
this Lease.
(e) For each payment of Rent (or portion thereof) which
is not paid within five (5) business days after the due date thereof, Tenant
shall pay a late charge equal to the greater of (i) $100.00 or (ii) five percent
(5%) of such installment of Rent (or portion thereof). It is hereby acknowledged
by Landlord and Tenant that this charge represents the parties' reasonable
estimate as of the date hereof of the extra expenses that Landlord will incur in
processing delinquent payments of Rent, the exact amount of such charges being
difficult to ascertain, and such late charge shall not be considered interest.
Payment of the foregoing late charge shall not be deemed to excuse the untimely
payment of Rent by Tenant.
(f) Tenant hereby appoints the person in charge of the
Premises at the time as its agent to receive service of all dispossessory or
restraint proceedings and notices thereunder and under this Lease, and if no
person is then in charge of the Premises, such service or notice may be made by
attaching the same to the main entrance of the Premises, provided that a copy of
any such proceedings or notices shall be mailed to Tenant in the manner set
forth in Section 35 hereof.
(g) Any suit brought to collect the amount of any
deficiency in Rent for any month shall not prejudice in any way the rights of
Landlord to collect the deficiency for any subsequent month by a similar
proceeding. Landlord may, in Landlord's sole discretion, choose to defer
collection of such amounts until the date upon which the Term expires or would
have expired but for such sooner termination, and Tenant hereby agrees that in
such event Landlord's cause of action shall be deemed to have accrued as of the
date upon which the Term expires or would have expired but for such sooner
termination, as the case may be.
25a REMEDIES CUMULATIVE; NO WAIVER. All rights and remedies given
herein and/or by law or in equity to Landlord are separate, distinct and
cumulative, and no one of them, whether exercised by Landlord or not, shall be
deemed to be in exclusion of any others. In the event of any breach or
threatened breach by Tenant or any of the covenants or provisions of this Lease,
Landlord shall, without limitation, have the right of injunction. No pursuit of
any remedy by Landlord shall constitute a forfeiture or waiver of any Rent due
to Landlord hereunder or of any damages accruing to Landlord by reason of
Tenant's violation of any of the covenants and provisions of this Lease. No
failure of Landlord to exercise any power given Landlord hereunder, or to insist
upon strict compliance by Tenant with its obligations hereunder, and no custom
of practice of the parties at variance with the terms hereof shall constitute a
waiver of Landlord's right to demand exact compliance with the terms hereof,
unless such waiver shall be given in writing and signed by Landlord.
26a SECURITY DEPOSIT. [Intentionally Omitted.]
27a LIEN ON PERSONAL PROPERTY. In consideration of the mutual benefits
arising under this Lease, Tenant hereby grants to Landlord a security interest,
to secure payment of all sums due under this Lease, upon all goods, wares,
equipment, fixtures, furniture and other personal property of Tenant (exclusive
of accounts receivable and personal property of Tenant's employees) situate in
or upon the Premises, together with the proceeds from the sale or lease thereof.
Such property shall not be removed without the prior written consent of Landlord
(which consent may be withheld or conditioned in Landlord's sole discretion)
until all arrearages in sums payable to Landlord hereunder have been paid and
discharged. Upon the occurrence of any Event of Default, Landlord may, in
addition to any other remedies provided herein or by law, enter the Premises and
take possession of any and all goods, wares, equipment, fixtures, furniture and
other personal property of Tenant situated on the Premises without liability for
trespass or conversion, and sell the same at public or private sale, with or
without having such property at the sale, after giving Tenant reasonable notice
of the time and place of any such sale. Unless otherwise required by law, notice
to Tenant of such sale shall be deemed sufficient if given in the manner
prescribed in this Lease at least ten (10) days before the time of sale. Any
public sale made under this Section 27 shall be deemed to have been conducted in
a commercially
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reasonable manner if held in the Premises or the Building, after the time, place
and method of sale and a general description of the type or types of property to
be sold have been advertised in a daily newspaper published in Baltimore County
for five (5) consecutive days before the date of sale. Landlord or its assigns
may purchase such personal property at a public sale and, unless prohibited by
law, at a private sale. The proceeds from any disposition pursuant to this
Section 27, less any and all expenses connected with the taking of possession,
holding and selling of the property (including reasonable attorneys' fees and
legal expenses), shall be applied as a credit against the indebtedness secured
by the security interest granted herein. Any surplus shall be paid to Tenant or
as otherwise required by law. Tenant shall pay any deficiencies upon demand. Any
statutory lien for rent provided by the laws of the State of Maryland is
expressly reserved, with the security interest granted herein being in addition
and supplementary thereto.
28a ASSIGNMENT; SUBLETTING.
(a) Tenant will not assign, transfer, mortgage, pledge or
otherwise encumber this Lease, or sublet or permit the occupancy or use by any
third party (including, without limitation, any licensee, concessionaire or
franchisee), of the Premises or any part thereof, whether effectuated by
operation of law or by transfer of any interest in Tenant or otherwise, (each of
the foregoing hereinafter referred to as a "Transfer"), without the prior
written consent of Landlord, which consent may be withheld in Landlord's sole
and absolute subjective discretion. Any request for consent of the Landlord to
any Transfer shall be in writing accompanied by full particulars of the proposed
Transfer with copies of all documents relating thereto, full particulars of the
identity, responsibility, reputation, financial standing and business of the
Transferee (as hereinafter defined) together with all further information
relating to the proposed Transfer which is relevant. In addition, the Tenant
shall promptly furnish such further information which the Landlord may request.
(b) If Tenant is a corporation, any dissolution, merger,
consolidation or other reorganization of Tenant, or the sale, the issuance or
transfer of any voting capital stock of Tenant or of any corporate entity which
directly or indirectly controls Tenant which shall result in a change in the
voting control of Tenant or the corporate entity which controls Tenant shall be
deemed to be a Transfer of this Lease within the meaning of this Section 28. If
Tenant is a partnership or an unincorporated association, the withdrawal or
change, whether voluntary, involuntary or by operation of law, of partners
owning a controlling interest in the Tenant, or the sale, issuance or transfer
of a majority interest therein, or the transfer of a majority interest in or a
change in the voting control of any partnership or unincorporated association or
corporation which directly or indirectly controls Tenant, or the transfer of any
portion or all of any general partnership or managing partnership interest,
shall be deemed to be a Transfer of this Lease within the meaning of this
Section 28. The Tenant shall make available to the Landlord, or its
representatives, all books and records of the Tenant for inspection at all
reasonable times to ascertain to the extent possible whether there has been any
such change of control.
(c) Any attempted Transfer without Landlord's consent
shall be null and void and shall confer no rights upon the purported assignee,
transferee, mortgagee or sublessee (each of the foregoing hereinafter referred
to as a "Transferee"). Neither the consent by Landlord to any Transfer, nor the
collection or acceptance of rent from any Transferee, shall constitute a waiver
or release of Tenant from any covenant or obligation contained in this Lease or
Tenant's liability under any such covenant or obligation, nor shall any such
Transfer be construed to relieve Tenant from obtaining the consent in writing of
Landlord to any further Transfer. In the event Landlord consents to a Transfer,
(i) Tenant shall enter into and effect such Transfer only upon terms consistent
with the request for consent, the information furnished in connection with such
request, and any conditions to its consent imposed by the Landlord, (ii) the
Tenant shall enter into and cause the Transferee to enter into, at least five
(5) business days prior to the proposed effective date of such Transfer, all
agreements prepared by the Landlord or its attorneys as may be appropriate to
implement any change to this Lease required by such Transfer and to satisfy any
of the conditions to its consent imposed by the Landlord, (iii) Tenant shall pay
to Landlord a fee to cover accounting costs, plus any reasonable legal fees
incurred by Landlord as a result of the Transfer, and (iv) Tenant shall pay to
Landlord any profits derived from the
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Transfer. Tenant hereby assigns to Landlord the rent due from each Transferee
and hereby authorizes each such Transferee to pay said rent directly to
Landlord.
(d) Tenant shall have the right, without the consent of
Landlord, to assign this Lease to any "Affiliate" of Tenant, provided the
financial condition, net worth and credit worthiness of the proposed assignee is
equal to or better than Tenant's financial condition, reputation and net worth,
as it exists on the date of this Lease and such Affiliate is of comparable
quality with comparable use of Premises as other tenants of the Building, does
not adversely affect the Building, and expressly assumes in writing, prior to
the effective date of such assignment, all obligations of Tenant hereunder. The
term "Affiliate" shall mean (i) any entity which controls Tenant or is
controlled by Tenant or is under common control with Tenant, (ii) any person or
entity to whom all or substantially all of the assets of Tenant are conveyed, or
(iii) any successor to Tenant by merger, consolidation or other operation of
law. Tenant shall give Landlord written notice of any such proposed assignment
or subletting at least thirty (30) days prior to the proposed effective date of
such assignment.
29a SUBORDINATION.
(a) This Lease shall be subject and subordinated at all
times to all ground or underlying leases which may hereafter be executed
affecting the Property, and the lien of all mortgages and deeds of trust now or
hereafter placed on or against the Property, on or against Landlord's interest
or estate therein, and on or against all such ground or underlying leases, all
without the necessity of having further instruments executed on the part of
Tenant to effectuate such subordination; provided, however, Tenant shall, within
five (5) business days of Landlord's request therefor, execute and deliver any
documents or instruments that may be required by any lender or ground lessor to
effectuate any subordination.
(b) Notwithstanding the foregoing, any beneficiary under
any mortgage or deed of trust may at any time subordinate its deed of trust to
this Lease in whole or in part, without any need to obtain Tenant's consent, by
execution of a written document subordinating such deed of trust to the Lease to
the extent set forth in such document and thereupon the Lease shall be deemed
prior to such deed of trust to the extent set forth in such document without
regard to their respective dates of execution, delivery and/or recording. In
that event, to the extent set forth in such document, such deed of trust shall
have the same rights with respect to this Lease as would have existed if this
Lease had been executed, and a memorandum thereof, recorded prior to the
execution, delivery and recording of the deed of trust.
(c) Landlord shall, upon receipt of a written request
therefor from Tenant, use commercially reasonable diligence to obtain an
agreement from Landlord's first mortgagee to the effect that so long as this
Lease is fully executed and in full force and effect, Tenant shall have paid the
Rent when due, shall have complied with all the other terms, conditions,
obligations and covenants contained in this Lease, and attorns to the first
mortgagee, Tenant shall be permitted by the first mortgagee to remain in quiet
possession of the Premises without interruption or disturbance from the first
mortgagee, or, at the option of the mortgagee, the Tenant shall enter into a new
lease for the unexpired portion of the Term on the same terms and conditions as
contained in this Lease. The Tenant shall promptly execute such documents as may
be required by the Landlord or the first mortgagee to give effect to the
foregoing and shall pay on demand the Landlord's reasonable legal fees and
expenses relating thereto.
30a MORTGAGEE PROTECTION. Tenant agrees to give any mortgagees or trust
deed holders, by registered mail, a copy of any notice of default served upon
Landlord, provided that prior to such notice Tenant has been notified, in
writing of the address of such mortgagees or trust deed holders. Tenant further
agrees that if Landlord shall have failed to cure such default within the time
provided for in this Lease, then the mortgagees or trust deed holders shall have
an additional ninety (90) days within which to cure such default or if such
default cannot be cured within that ninety (90) days, any such mortgagee or
trust deed holder has commenced and is diligently pursuing the remedies
necessary to cure such default (including but not limited to commencement of
foreclosure proceedings, if necessary to effect such cure), in which event this
Lease shall not be terminated so long as such remedies are being so diligently
pursued.
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31a MODIFICATIONS DUE TO FINANCING. If, in connection with obtaining
temporary or permanent financing for the Building or the Property, any lender
shall request reasonable modification(s) to this Lease as a condition to such
financing, Tenant agrees that Tenant will not unreasonably withhold, delay or
defer the execution of an amendment to this Lease to effect such
modification(s), provided such modification(s) do not increase the financial
obligations of Tenant hereunder or materially and adversely affect (i) the
interest hereby created or (ii) Tenant's reasonable use and enjoyment of the
Premises.
32a ESTOPPEL CERTIFICATES. Tenant agrees, at any time and from time to
time upon written request from Landlord, to execute, acknowledge and deliver to
Landlord or to such person(s) as may be designated by Landlord, within five (5)
business days' following demand therefor, a statement in writing (i) certifying
that Tenant is in possession of the Premises, has unconditionally accepted the
same and is currently paying the rents reserved hereunder (or, if Tenant has
conditionally accepted possession of the Premises, or is not currently paying
rent, stating the reasons therefor), (ii) certifying that this Lease is
unmodified and in full force and effect (or if there have been modifications,
that the Lease is in full force and effect as modified and stating the
modifications), (iii) stating the dates to which the Rent and other charges
hereunder have been paid by Tenant, (iv) stating whether or not, to the best of
Tenant's knowledge, Landlord is in default in the performance of any covenant,
agreement or condition contained in this Lease (or of any event which will, upon
the passage of time, constitute a default), and, if so, specifying each such
default in detail, (v) that Tenant has no knowledge of any event having occurred
that authorized (or which, but for the passage of time will allow) the
termination of this Lease by Tenant (or if Tenant has such knowledge, specifying
the same in detail), and (vi) such other information as Landlord or such other
person may reasonably request. Any such statement, delivered pursuant hereto may
be relied upon by any owner, prospective purchaser, mortgagee or prospective
mortgagee of the Building or the Property or Landlord's interest therein.
33a FINANCIAL STATEMENTS. Tenant, upon written request by Landlord,
will provide Landlord (not Landlord's management agent) with a copy of its
current financial statements, consisting of a balance sheet, an earnings
statement, statement of changes in financial position, statement of changes in
Tenant's equity, and related footnotes, prepared in accordance with generally
accepted accounting principles. Such financial statements must be either
certified by a certified public accountant or sworn to as to their accuracy by
Tenant's most senior official and its chief financial officer. The financial
statements provided must be as of a date not more than twelve (12) months prior
to the date of request. The terms of the confidentiality agreement entered into
by Landlord prior to entering into negotiations for this Lease shall apply to
any financial statements delivered pursuant to this Section 33.
34a UNAVOIDABLE DELAY. In the event Landlord is in any way delayed,
interrupted or prevented from performing any of its obligations under this
Lease, and such delay, interruption or prevention is due to fire, act of God,
governmental act or failure to act, strike, labor dispute, inability to procure
materials, or any other cause beyond Landlord's reasonable control (whether
similar or dissimilar), then the time for performance of the affected
obligation(s) shall be excused for the period of the delay and extended for a
period equivalent to the period of such delay, interruption or prevention.
35a NOTICES. Each notice given pursuant to this Lease shall be given in
writing and shall be (i) delivered in person, (ii) sent by nationally recognized
overnight courier service, or (iii) sent by certified mail, return receipt
requested, first class postage prepaid, to Landlord or Tenant, as the case may
be, at their respective notice addresses as set forth below, or at any such
other address that may be given by one party to the other by notice pursuant to
this Section 35. Such notices, if given as prescribed in this Section 35, shall
be deemed to have been given (a) at the time of delivery if delivery is made in
person, (b) on the next business day if deposited with a nationally recognized
overnight courier service in time for next day delivery, or (c) on the third
business day following the date of mailing if mailed. During any interruption or
threatened interruption of substantial delay in postal services, all notices
shall be delivered personally or by nationally recognized overnight courier
service.
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If to Landlord:
BRIT LIMITED PARTNERSHIP
c/o Jeffrey Lee Cohen
Suite 300
11140 Rockville Pike
Rockville, MD 20852
If to Tenant:
Prior to the Commencement Date
OXFORD CAPITAL CORPORATION
Suite L-260
10005 Old Columbia Road
Columbia, MD 21046
After the Commencement Date, at the Premises.
36a BROKERS. Landlord and Tenant each represent and warrant one to
another that neither of them has employed any broker, agent or finder in
carrying on the negotiations relating to this Lease other than Miller
Corporate Real Estate Services and Crystal Hill, which shall be paid in
accordance with a separate agreement. Landlord shall indemnify and hold
Tenant harmless, and Tenant shall indemnify and hold Landlord harmless, from
and against any claim or claims for broker or other commission arising from
or out of any breach of the foregoing representation and warranty by the
respective indemnitors.
37a ATTORNEYS' FEES. In the event Tenant defaults in the performance
of any of the terms, covenants, agreements or conditions contained in this
Lease, and Landlord places the enforcement of all or any part of this Lease,
the collection of any rent due or to become due, or recovery of the
possession of the Premises, in the hands of an attorney, Tenant agrees to pay
Landlord's reasonable attorneys' fees whether suit is actually filed or not.
38a WAIVER OF JURY TRIAL; COUNTERCLAIMS. LANDLORD AND TENANT EACH
HEREBY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY CLAIM, ACTION, PROCEEDING OR
COUNTERCLAIM BY EITHER PARTY AGAINST THE OTHER ON ANY MATTERS ARISING OUT OF
OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND
TENANT AND/OR TENANT'S USE OR OCCUPANCY OF THE PREMISES. TENANT SHALL NOT
IMPOSE ANY COUNTERCLAIM OR COUNTERCLAIMS IN A SUMMARY PROCEEDING OR OTHER
ACTION BASED ON TERMINATION OR HOLDOVER. THIS WAIVER IS KNOWINGLY,
INTENTIONALLY AND VOLUNTARILY MADE BY TENANT AND TENANT ACKNOWLEDGES THAT
NEITHER LANDLORD NOR ANY PERSON ACTING ON BEHALF OF LANDLORD HAS MADE ANY
REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY
TO MODIFY OR NULLIFY ITS EFFECT. TENANT FURTHER ACKNOWLEDGES THAT IT HAS
BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE
SIGNING OF THIS LEASE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL
COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY
AND ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND
RAMIFICATIONS OF THIS WAIVER PROVISION AND AS EVIDENCE OF THE SAME HAS
EXECUTED THIS LEASE.
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39a ASSIGNS AND SUCCESSORS; LIMITATION ON LIABILITY.
(a) This Lease shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, except that the
original Landlord named herein and each successive owner of the Premises shall
be liable only for obligations accruing during the period of its ownership;
provided that nothing in this Section 39 shall be deemed to permit any Transfer
in violation of Section 28 hereof. Whenever Landlord conveys its interest in
the Building, Landlord shall be automatically released from the further
performance of covenants on the part of Landlord herein contained, and from any
and all further liability, obligations, costs and expenses, demands, causes of
action, claims or judgments arising from or growing out of, or connected with
this Lease after the effective date of said release. The effective date of said
release shall be the date the assignee of Landlord executes an assumption to
such an assignment whereby the assignee expressly agrees to assume all of
Landlord's obligations, duties, responsibilities and liabilities with respect to
this Lease. If requested, Tenant shall execute a form release and such other
documentation as may be required to further effect the foregoing provision.
(b) The liability of Landlord for Landlord's obligations under this Lease
shall not exceed and shall be limited to Landlord's interest in the Building and
Tenant shall not look to any other property or asset of Landlord, its partners
or its agents or representatives in seeking either to enforce Landlord's
obligations under this Lease or to satisfy a judgment for Landlord's failure to
perform such obligations. No other properties or assets of Landlord, and no
properties or assets of Landlord's agents or representatives shall be subject to
levy, execution or other enforcement procedures for the satisfaction of any
judgment (or other judicial process) or for the satisfaction of any other remedy
of Tenant arising out of or in connection with this Lease, the relationship of
Landlord and Tenant or Tenant's use of the Premises, and if Tenant shall acquire
a lien on or interest in any other properties or assets by judgment or
otherwise, Tenant shall promptly release such lien on or interest in such other
properties and assets by executing, acknowledging and delivering to Landlord an
instrument to that effect prepared by Landlord's attorneys.
(c) The liability to pay Rent and perform all other obligations under this
Lease of each individual, corporation, partnership or business association
signing this Lease as Tenant, and of each member of any such partnership or
business association, the members of which are subject to personal liability,
shall be deemed to be joint and several.
40a SUBSTITUTED PREMISES. [Intentionally Omitted.]
41a LANDLORD'S CONSENT OR APPROVAL. With respect to any provision of
this Lease which provides that Tenant shall obtain Landlord's consent or
approval, Landlord may withhold or condition such consent or approval for any
reason in its sole and absolute discretion, unless the provision specifically
states otherwise.
42a HEADINGS; INTERPRETATION.
(a) The captions and section numbers appearing in this Lease are inserted
only as a matter of convenience and reference, and in no way shall be held to
explain, modify, amplify, define, limit, construe, or describe the scope or
intent of such Sections of this Lease nor in any way add to the interpretation,
construction or meaning of any provision or otherwise affect this Lease.
(b) Each obligation of any party hereto expressed in this Lease, even
though not expressed as a covenant, is considered to be a covenant for all
purposes.
43a SEVERABILITY. If any term, covenant or condition of this Lease or
the application thereof to any person or circumstance shall to any extent be
held invalid or unenforceable, the remainder of this Lease or the application
of such term, covenant or condition to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall
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not be affected thereby and each term, covenant and condition of this Lease
shall be valid and enforced to the fullest extent permitted by law.
44a APPLICABLE LAW. This Lease shall be construed under the laws of
the State of Maryland, without regard to the conflict of laws principles
thereof.
45a RECORDING. Neither this Lease nor any memorandum nor short form
hereof shall be recorded in the land or other records of Baltimore County
without the prior written consent of Landlord (which may be withheld in
Landlord's sole discretion). Tenant shall bear all taxes and fees in
connection with any permitted recordation.
46a TIME IS OF THE ESSENCE. Time is of the essence in this Lease and
of all provisions hereof, except as expressly set forth to the contrary
herein.
47a SURVIVAL OF OBLIGATIONS. All of Tenant's duties and obligations
provided for herein, including any and all indemnifications of Landlord and
the Property, to the extent that the same shall not be fulfilled during the
Term hereof, and Landlord's rights and remedies in respect of such
unfulfilled duties and obligations, shall survive and remain in full force
and effect notwithstanding the expiration or sooner termination of the Term
of this Lease.
48a EXECUTION OF DOCUMENTS. The Tenant irrevocably constitutes the
Landlord, the agent and attorney of the Tenant for the purpose of executing
any agreement, certificate, attornment or subordination required by this
Lease if Tenant fails to execute any such document within five (5) business
days after the receipt of a request in respect thereof.
49a PARKING.
(a) Provided that Tenant shall not be in default hereunder, Landlord shall
make available to Tenant, its employees and guests, at no charge to Tenant,
fifty-four (54) unassigned parking spaces (i.e. based on a ratio of 3.2 spaces
per thousand rentable square feet of the Premises). Parking will be in those
areas (the "Parking Areas") as Landlord or its operator may from time to time
designate. Tenant shall not use, or permit its invitees to use, any number of
parking spaces in excess of the number allocated as provided above. Tenant and
its invitees shall comply with the regulations promulgated by Landlord from time
to time relating to parking. Landlord shall not be required to reserve or
police the use of the parking areas; provided that Landlord may, at its option,
limit access to the parking areas, by mechanical gates or otherwise, to ensure
that only authorized users are admitted to the parking areas. Tenant and its
employees shall not park in any spaces designated for use by the handicapped, by
visitors only or as reserved. As part of and not in addition to Tenant's
parking rights, Landlord shall provide Tenant with one (1) reserved parking
space in a location designated by Landlord towards the entrance of the Building.
(b) The use of the Parking Areas shall be at the sole risk of Tenant and
the users of the parking permits provided hereunder, and Tenant hereby releases
Landlord and its agents and employees from any and all liability or
responsibility to Tenant or any user of a parking permit provided hereunder for
any death, injury, loss or damage to persons or property occurring during the
use of the Parking Areas.
50a ENTIRE AGREEMENT. This Lease consists of this writing and is
intended by the parties as the final expression of their agreement and as a
complete and exclusive statement of the terms thereof, all prior
negotiations, discussions, representations, warranties, agreements and
inducements between the parties having been incorporated herein. No course
of prior dealing between the parties or their affiliates shall be relevant or
admissible to supplement, explain or vary any of the terms of this Lease.
This Lease can only be modified by a writing signed by all of the parties
hereto or their duly authorized agents.
51a EXISTING LEASE REIMBURSEMENT. Provided Tenant is not in default
under this Lease, Landlord shall reimburse Tenant for a portion of Tenant's
monthly base rental expense payable under Tenant's current lease dated August
3, 1992 between Crystal Hill/Rivers
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Limited Partnership, as landlord, and Tenant, as tenant, for the premises
located at Suite L-260, 10005 Old Columbia Road, Columbia, Maryland 21046 (the
"Existing Lease"), for the period commencing on the Lease Commencement through
December 31, 1996 (the "Reimbursement Period"), in accordance with the following
terms:
(a) Landlord's reimbursement obligation shall not exceed $10,000 for any
month, prorated for any partial month (the "Maximum Reimbursement Amount").
(b) Each request for reimbursement shall be accompanied by evidence
satisfactory to Landlord that the amount requested has been paid by Tenant for
Tenant's monthly base rental payment under the Existing Lease. Landlord's
payment shall be due within ten (10) days of Tenant's request.
(c) Tenant shall use its best efforts to mitigate its obligations under
the Existing Lease through either a sublease, assignment or other means. In
connection therewith, Tenant shall use its best efforts to market Tenant's
existing space.
(d) The Maximum Reimbursement Amount for any month shall be reduced by any
sublease rental or other consideration received by Tenant for its existing
premises for such month.
52a OPTION TO RENEW. Tenant shall have one (1) option to renew this
Lease for one additional five (5) year period (the "Renewal Term") provided
that (i) written notice (an "Exercise Notice") of the exercise of Tenant's
option to renew is given by Tenant to Landlord not less than nine (9) months
prior to the end of the Term, (ii) Tenant is not, as of the date of its
Exercise Notice or thereafter, in default hereunder, (iii) Tenant is
occupying the Premises, and (iv) Tenant has not sublet or assigned its
interest in the Premises. The Renewal Term, if the option is properly
exercised, shall extend the Term on the same terms and conditions contained
herein except (i) the Annual Base Rent for the Renewal Term shall be at of
the prevailing market rate for comparable space in comparable buildings in
the Woodlawn/Rutherford Westside area, (ii) the Increase shall be determined
under the provision of Section 4, and (iii) following the Renewal Term there
shall be no further Renewal Terms. If Landlord and Tenant are unable to agree
on the prevailing market rate at least six (6) months prior to the Lease
Expiration Date then the renewal option shall be deemed rescinded and the
Lease shall terminate on the scheduled Lease Expiration Date. If Tenant
shall fail to exercise its renewal option in a timely manner, Tenant shall
have no further option to renew this Lease.
IN WITNESS WHEREOF, the parties hereto have executed this Lease under seal
on the day and year first above written.
WITNESS: LANDLORD:
BRIT LIMITED PARTNERSHIP
By: BECO-BRIT, Inc.,
Authorized General Partner
By:
--------------------(SEAL)
Name:
Title:
WITNESS/ATTEST: TENANT:
OXFORD CAPITAL CORPORATION
By:
--------------------(SEAL)
Name:
Title:
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SECURITY OFFICE PARK
EXHIBIT A
PREMISES
[To Be Attached.]
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SECURITY OFFICE PARK
EXHIBIT B
COMMENCEMENT AGREEMENT
Landlord and Tenant hereby declare that:
1. The Lease is in full force and effect.
2. The Lease Commencement Date is hereby established to be _________ 1,
1996.
3. The Lease Expiration Date is hereby established to be December 31,
2001.
WITNESS: LANDLORD:
BRIT LIMITED PARTNERSHIP
By: BECO-BRIT, Inc.,
Authorized General Partner
By:
--------------------------(SEAL)
Name:
Title:
WITNESS/ATTEST: TENANT:
OXFORD CAPITAL CORPORATION
By:
--------------------------(SEAL)
Name:
Title:
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SECURITY OFFICE PARK
EXHIBIT C
SPACE PLAN
[To Be Attached.]
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SECURITY OFFICE PARK
EXHIBIT C-1
INITIAL TENANT IMPROVEMENTS
1. Install new, energy efficient lights in the Premises.
2. Install new ceiling tiles.
3. Install conduits for cabling to work stations.
4. Install glass doors in executive suite area.
5. Install electronic entry system at four (4) locations on the floor, as
shown on Tenant's Plans. The electronic entry system shall also
permit access to the main Building entrance.
6. Install built-in items in rest area, as shown on Tenant's Plans.
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SECURITY OFFICE PARK
EXHIBIT D
WORK AGREEMENT
This Exhibit is attached to and made a part of that certain Lease Agreement
dated as of the ___ day of January, 1996 (the "Lease"), by and between BRIT
LIMITED PARTNERSHIP ("Landlord"), and OXFORD CAPITAL CORPORATION ("Tenant").
The terms used in this Exhibit that are defined in the Lease shall have the same
meanings as provided in the Lease.
1. Tenant's Authorized Representative. Tenant hereby designates Joseph
Rensin ("Tenant's Authorized Representative") as the person authorized to
initial all plans, drawings, change orders and approvals pursuant to this
Exhibit. Landlord shall not be obligated to respond to or act upon any such
plan, drawing, change order or approval unless and until it has been initialled
by Tenant's Authorized Representative.
2. Landlord's Work. Landlord shall perform all work and provide all
materials necessary to improve the Premises in accordance with the plans and
specifications mutually agreed to by Landlord and Tenant ("Tenant's Plans").
Landlord shall not be obligated to provide any improvements other than the
improvements specified in Tenant's Plans. Tenant shall be responsible for
paying the cost of any improvement requested by Tenant and approved and/or
installed by Landlord which is not specified in Tenant's Plans.
3. Change Orders. All additional costs attributable to change orders
requested by Tenant and approved by Landlord shall be payable by Tenant prior to
the performance of the work contemplated by such change order.
4. Substantial Completion.
(ai Except as provided in Paragraph 4(b) hereof, the Premises shall be
deemed to be substantially complete when the work to be performed by Landlord
pursuant to this Exhibit has been completed, as certified by Landlord's
architect, except for long lead time items and items of work and adjustment of
equipment and fixtures that can be completed after the Premises are occupied
without causing substantial interference with Tenant's use of the Premises
(i.e., the "punch list" items)
(bi If Landlord shall be delayed in completing the Premises as a result
of:
(iA Tenant's failure to comply with any of the deadlines specified in
the Lease; or
(iiA Tenant's request for modifications to plans or working drawings;
or
(iiiA Tenant's failure to pay when due the amounts required
pursuant to this Exhibit; or
(ivA the performance of any work by any person, or firm employed or
retained by Tenant; or
(vA Any other delay caused by Tenant,
then for purposes of determining the Lease Commencement Date, the Premises shall
be deemed to have been substantially complete on the date that Landlord's
architect determines that the Premises would have been substantially complete if
such delay or delays had not occurred.
5. Possession by Tenant. The taking of possession of the Premises by
Tenant shall constitute an acknowledgment by Tenant that the Premises are in
good condition and that all work and materials provided by Landlord are
satisfactory, except as to any defects or incomplete work that are described in
a written notice given by Tenant to Landlord not later than the day Tenant
accepts occupancy of the Premises. Tenant and its agents shall have no right to
make any alterations in the Premises until Tenant submits such written notice.
Landlord agrees to correct and complete those
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defects and incomplete items described in such notice which Landlord's architect
or engineer confirms are, in fact, defects or incomplete items.
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SECURITY OFFICE PARK
EXHIBIT E
RULES AND REGULATIONS
1. All waste paper, refuse and garbage shall be kept in containers in the
Premises or at such other location acceptable to Landlord and removed at
Tenant's expense, except insofar as building standard char service may be
furnished at Landlord's expense under the terms of the Lease to which these
Rules and Regulations are attached (hereinafter referred to as the Lease).
2. No flammable or combustible fluid, chemical, or explosives shall be
kept or permitted to be kept on the Premises except such as may be kept in
proper small containers and may be required for the day-to-day functioning of
office equipment permitted to be used on the Premises, subject, further, however
to such reasonable restrictions and/or preclusions as Landlord's insurance
carrier may require.
3. Landlord shall have the right to prohibit any advertisement or other
marketing activity of Tenant which in Landlord's opinion tends to impair the
reputation of the Complex or its desirability for Landlord's intended purposes
and upon written notice from the Landlord, Tenant shall refrain from and
discontinue such activity.
4. Landlord may prescribe and limit the weight, method of installation
and positioning of all safes, file cabinets and shelving, or other furniture,
fixtures, equipment and vehicles in or about the Premises. Tenant will not use
or install any of the foregoing objects in or about the Premises that might
place a load upon any surface exceeding the load per square foot which such
surface was designated to carry or that is of a bulk exceeding the dimensional
clearances of, e.g., entranceways to the Premises, without prior approval of
Landlord on reasonable notice to Landlord by Tenant.
5. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows, nor shall any changes be made in existing locks or the
mechanism thereof. Upon the termination of the Lease, Tenant shall return to
Landlord all keys to storage, office and toilet rooms, either furnished to or
otherwise procured by Tenant, and in the event of the loss of any keys so
furnished, Tenant shall pay to Landlord the cost thereof as well as the cost of,
replacing the lock(s) to which such key(s) relate(s), if, in the opinion of
Landlord, the replacement thereof is necessary.
6. No bicycles, vehicles, animals, birds or pets of any kind shall be
brought into or kept in or about the Premises. No cooking shall be done or
permitted by Tenant in the Premises other than microwave cooking approved by
Landlord, which approval shall not be unreasonably withheld. Tenant shall not
cause or permit any unusual or objectionable odors to originate from the
Premises.
7. Absent the specific prior written approval of Landlord, no space in
the Complex shall be used for manufacturing or for the sale of merchandise,
goods, or property of any kind.
8. No person shall be employed by Tenant to do janitorial work within the
Premises without the Landlord's consent to commence such work, and such persons
shall, while in the Complex inside or outside of the Premises, comply with all
instructions issued by Landlord or its representatives. Tenant shall not
engage, for hire or otherwise, any employee of Landlord or any Landlord agent to
perform any work or services for Tenant or related to Tenant's use of the
Premises, not previously authorized and directed to be performed on behalf of
Tenant by Landlord directly.
9. Landlord reserves the right to take all reasonable measures as
Landlord may deem advisable for the security and protection of the Complex
including the establishment of separate rules and regulations applicable to
person and/or vehicle ingress, egress, security equipment, access cards, etc.
To this end, Landlord may also, e.g., exclude from the Complex at all times any
person who is not known or does not properly identify himself to the Complex
management or watchman on duty and establish to the satisfaction of management
or such watchman that such person has the right to enter or leave the Complex,
and disclose to the reasonable satisfaction of such management or watchman that
such person is not in possession of any material or substance that may cause
harm to or damage the Complex or any occupants within it. Landlord may, at its
option, require all persons admitted to or leaving the Complex to register with
the Complex security guards. Landlord may, further, direct the evacuation of
the Complex for cause, suspected cause, or for drill purposes, and to this end,
temporarily deny access to the
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Complex. Tenant shall be responsible for all persons for whom Tenant authorizes
entry into the Complex and shall be liable to Landlord for all acts of such
persons.
10. No portion of the Complex may be used for lodging or sleeping or for
any immoral or illegal purpose.
11. Canvassing, soliciting and peddling in the Complex is prohibited, and
Tenant shall cooperate to prevent the same.
12. The number of employees or other persons that shall work in or
otherwise have access to the Premises, the number and nature of all vehicular
traffic that shall be associated with the occupancy of the Premises and use of
the Complex and the fixtures, equipment and materials used by Tenant in or about
the Premises shall not be other than for routine and normal office use, which
term is understood to mean in the Lease such as has been initially represented
by Tenant to Landlord at the time of the execution of the Lease and as may be
subsequently agreed to by Landlord. Landlord reserves the right to preclude any
use of the Premises or the Complex by Tenant in the event the manner or extent
of such use is not as previously represented by Tenant and agreed to by Landlord
notwithstanding the fact that such use may generically fall within the purview
of the use(s) comprehended by Section 10 of the Lease. Tenant shall not use or
permit the Premises or any other portion of the Complex to be used in any
disorderly manner or for any unlawful purpose, or do or permit any act therein
or thereabout which is unlawful, or constitute a nuisance or otherwise be
violative of any applicable restriction, restrictive covenant, law, rule,
regulation, ordinance, or requirement or any governing authority, be such local,
State or Federal, or which would place Landlord in default of any underlying
ground lease or security instrument to which the Lease may be subordinate.
Tenant shall not commit, or suffer to be committed, any waste upon the Premises
or the Complex, neither will Tenant do or suffer anything to be done thereupon
or thereabout which would cause or be likely to cause injury thereto or that
would deface or otherwise damage, injure or alter the structural integrity of
any surface, including parking areas, as well as the walls, ceilings, floors,
windows, woodwork, fixtures, equipment or other property included in the
Premises or the Complex. Neither the Complex, the Premises nor any part thereof
including any utility service available thereto will be used or loaded by Tenant
beyond the present capacity thereof or, if appropriate, the present allocation
of such capacity to the Premises. No sound or electronic system shall be
utilized in any manner to affect the persons or property of others outside the
Premises.
13. Subject to the provisions of these Rules and Regulations, all
non-allocated common areas or facilities in the Complex shall be available for
the nonexclusive use of Tenant in common with others. Landlord reserves the
right, however, to license, on such terms as Landlord in its sole discretion may
deem appropriate from time to time, for the specific account of any particular
tenant(s) of the Complex, specific areas or facilities in the Complex that may
be designated for use in common with other tenants and authorized users as of
the effective date of the license or at any time subsequent thereto, e.g.,
specific parking areas. In the absence of such a designation on behalf of
Tenant, Tenant shall not exercise any exclusive dominion or control over any
common area or facility. All parking area facilities which may be furnished by
Landlord in or near the Complex, all employee parking areas, truck way or ways,
loading docks, package pick-up stations, bathroom and related facilities,
pedestrian sidewalks and ramps, landscaped areas, exterior stairways, and other
areas and improvements which may be provided by Landlord for the general use in
common of, e.g., Complex tenants, shall at all times be subject to the exclusive
control and management of Landlord. Landlord shall have the right to police all
common areas and facilities; from time to time to change the area, location,
size and arrangement of any common area or facilities or to eliminate other than
specifically allocated or normally acquired common areas entirely; to change
vehicular routes to such extent as Landlord may desire, to restrict parking by
tenants to employee parking areas; to construct surface, subterranean, or
elevated parking areas and facilities; to establish and from time to time change
the level of parking surfaces; to establish a stacking parking system; to close
all or any portion of said common areas or facilities to such extent as may, in
the opinion of Landlord's counsel, be legally sufficient to prevent a dedication
thereof or the accrual of any rights to any person or to the public therein; to
close access to the Complex or any portion thereof in case of riot, public
excitement or other commotion; to discourage non-tenant parking; to do and
perform such other acts in and to said common areas and improvements as, in the
use of good business judgement, Landlord shall determine to be advisable with a
view to the improvement or the convenience and use thereof by Complex tenants.
All Tenant automobiles shall be parked only in such areas as Landlord may from
time to time designate as employee parking areas. All sidewalks, curbs, parking
areas, service areas, roadways, and other common areas and facilities in the
Complex of which the above-designated premises is a part, shall be used solely
for their intended purposes and Tenant shall not misuse, obstruct, encumber, or
permit the misuse, obstruction or encumbrance of any such areas or facilities
nor of any light, skylight, or any part of any sprinkler, heating, air
conditioning, plumbing, or utility system. All parking areas, whether common or
exclusively allocated to any Complex tenant shall
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be used solely for temporary vehicular parking subject to such rules and
regulations, as Landlord may, from time to time, make applicable to such
parking. Tenant agrees promptly to remove from any common area any of Tenant's
merchandise there delivered or deposited.
14. To the extent that any improvements exhibit or any other exhibit
attached to the Lease or any other writing specifically designated in any such
exhibit or in the Lease does not specify, in detail, the specifications of any
Landlord work to be performed, either at the expense of Landlord or at the
expense of Tenant, Landlord's discretionary determination of the sufficiency,
quality, manner of installation, location, nature and extent of the work to be
performed and of the materials necessary to complete such work shall control.
15. Upon notice given to Tenant, which need not be in writing, of any
violation of these Rules and Regulations, Landlord may, should Tenant fail to
correct such violation within the period required in the notice, either take
such action as Landlord may consider appropriate to correct such violation or
mitigate the effects thereof, all at the expense of Tenant, or declare such
violation a breach of the Lease of which these Rules and Regulations are a part
and proceed accordingly. Especially because of fire, traffic and safety hazards
created by the presence of unauthorized vehicles and merchandise in common
areas, Tenant acknowledges that Landlord shall have the right to remove such
vehicles or merchandise and that upon such removal, Landlord's sole
responsibility shall be to notify Tenant of such removal in fact and the
location of the removed property; provided, however, Landlord shall use
reasonable efforts to notify Tenant (which notice may be verbal) prior to towing
any vehicles belonging to Tenant or Tenant's employees, agents or invitees.
Tenant's failure to claim such property within five (5) working days of such
notice shall authorize Landlord to have such property disposed of in such
manner, in its sole discretion, shall consider appropriate.
16. Truck parking, loading and unloading will be prohibited in both the
front and rear parking areas. Tenant will require any deliveries to be made to
the premises by truck, van or otherwise, to be made at such time or times
(including advance notice where considered appropriate by Landlord), in such
manner and subject to such Rules and Regulations as Landlord may consider
appropriate from time to time, for deliveries to the Complex. As between Tenant
and Landlord, Tenant shall be responsible for any damage or injury to person or
property caused by or related to any such delivery. All delivery assistance
equipment, e.g., hand trucks, dollies, etc. must be of such form and capable of
such operation as Landlord in its sole discretion may consider appropriate.
17. Landlord shall have the sole and exclusive right, exercisable without
notice and without liability to Tenant for damage or injury to property,
persons, or business and without effecting any eviction, constructive or actual,
or disturbance of Tenant's use or possession or giving rise to any claim for
setoff or abatement of rent:
(ai To change the name of the Complex or its street signs.
(bi To install, affix and maintain any and all signs on the exterior and
interior of the Complex.
(ci To designate and approve, prior to installation, all types of
windowshades, blinds, drapes, awnings, ventilators, and similar
equipment, and to control and modify all building lighting and air
conditioning.
(di To designate, restrict and control all sources within the Complex from
which Tenant may obtain drinking water, towels, toilet supplies,
catering, food and beverages, or like or other services on or about
the premises, and in general to reserve to Landlord the exclusive
right to designate, limit, restrict, and control any business and any
service in or to the Complex and its tenants; provided, however,
Tenant shall have the right to select a vending machine provider for
the Premises and specify the contents of such machines, subject to
Landlord's prior written consent, which consent shall not be
unreasonably withheld. Landlord's consent to Tenant's pricing is not
required.
(ei To decorate and to make repairs, alterations, additions, changes, or
improvements, whether structural or otherwise, in and about the
development, or any part thereof, and for such purposes to enter upon
the premises, and during the continuance of any such work, to
temporarily close doors, entryways, public space, and corridors in the
Complex, to interrupt or temporarily suspend Complex services and
facilities and to change the arrangement and location of entrances or
passageways, doors, doorways, corridors, elevators, stairs, toilets,
or other public parts of the Complex, so long as the Premises are
reasonably accessible.
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(fi To have and retain a paramount title to the Premises free and clear of
any act of Tenant purporting to burden or encumber the Premises or any
part of the Complex.
18. Tenant shall further abide by those additional rules, regulations, and
restrictions as Landlord may make generally applicable from time to time to the
Complex. Landlord reserves the right to waive any rule or regulation on behalf
of Tenant or any other tenant of the Complex and the exercise of such right
shall not affect the applicability to Tenant of any rule or regulation not
waived specifically on behalf of Tenant.
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SECURITY OFFICE PARK
EXHIBIT F
SIGNAGE
[To Be Attached.]
1
<PAGE>
Exhibit 10.11
L E A S E
between
A&E PARTNERS, L.P.,
as Landlord
and
Creditrust Corporation
as Tenant
* * * * *
1705 Whitehead Road
Baltimore, Maryland 21207
<PAGE>
11/94
INDEX TO STANDARD COMMERCIAL BASE YEAR LEASE
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS AND CERTAIN BASIC PROVISIONS.................1
ARTICLE II GRANTING CLAUSE..........................................4
ARTICLE III CONSTRUCTION AND ACCEPTANCE OF PREMISES..................4
ARTICLE IV RENT.....................................................5
ARTICLE V FINANCIAL DISCLOSURES....................................6
ARTICLE VI COMMON AREA..............................................6
ARTICLE VII USE AND CARE OF PREMISES.................................9
ARTICLE VIII MAINTENANCE AND REPAIR OF PREMISES......................12
ARTICLE IX ALTERATIONS.............................................13
ARTICLE X LANDLORD'S RIGHT OF ACCESS; USE OF ROOF.................14
ARTICLE XI SIGNS; EXTERIOR OF PREMISES.............................14
ARTICLE XII UTILITIES...............................................15
ARTICLE XIII INSURANCE...............................................15
ARTICLE XIV NON-LIABILITY FOR CERTAIN DAMAGES.......................17
ARTICLE XV DAMAGE BY CASUALTY......................................18
ARTICLE XVI EMINENT DOMAIN..........................................19
ARTICLE XVII ASSIGNMENT AND SUBLETTING...............................20
ARTICLE XVIII TAXES...................................................22
ARTICLE XIX EVENTS OF DEFAULT AND REMEDIES..........................23
ARTICLE XX MECHANICS' LIENS........................................28
ARTICLE XXI SURRENDER; HOLDING OVER.................................28
ARTICLE XXII SUBORDINATION AND ATTORNMENT............................29
ARTICLE XXIII [INTENTIONALLY DELETED].................................29
ARTICLE XXIV NOTICES.................................................29
ARTICLE XXVI [INTENTIONALLY DELETED].................................30
ARTICLE XXVII [INTENTIONALLY DELETED].................................30
ARTICLE XXVIII BANKRUPTCY..............................................30
ARTICLE XXIX MISCELLANEOUS...........................................30
</TABLE>
<PAGE>
11/94
<TABLE>
<S> <C>
EXHIBIT A ........... Property Site Plan Showing Premises
EXHIBIT B ........... Legal Description of Property
EXHIBIT C ........... Description of Landlord's and Tenant's Work
EXHIBIT C-1 ........ Approved Plans
EXHIBIT C-2 ........ Jaid Group Elevation Drawings re Landscaping
EXHIBIT D .......... Intentionally Deleted
EXHIBIT E ........... Rules and Regulations
</TABLE>
<PAGE>
11/94
STANDARD COMMERCIAL
BASE YEAR LEASE
THE STATE OF MARYLAND
COUNTY OF BALTIMORE
This lease (this "Lease"), entered into this __________ day of
_________________________, 1997, by and between the Landlord and the Tenant
hereinafter named.
ARTICLE I. DEFINITIONS AND CERTAIN BASIC PROVISIONS
1.1 (a) "Landlord":
A & E Partners, L.P.
(b) Landlord's Address:
c/o Emmes Realty Services, Inc.
6666 Security Boulevard
Baltimore, Maryland 21207
Attention: General Manager
with a copy to:
Emmes Asset Management Corp.
420 Lexington Avenue
Suite 2707
New York, New York 10170
Attention: Andrew Davidoff
(c) "Tenant":
Creditrust Corporation, a Maryland corporation
(d) Tenant's Mailing Address:
7000 Security Boulevard
Baltimore, Maryland 21244-2543
(e) Tenant's Trade Name:
Creditrust Corporation
(f) Premises Address:
1705 Whitehead Road
Baltimore, Maryland 21207
(g) "Premises": Approximately 35,471 square feet, which comprise the
entire building (the "Building") located at 1705 Whitehead Road,
Baltimore, Maryland, 21207 (computed from measurements to the
exterior of outside walls of the Building and to the center of
any interior walls), such Premises being shown and outlined on
the plan attached hereto as Exhibit A, and being part of the
property described in Exhibit B attached hereto. "Property"
shall refer to the property described in Exhibit B and any
adjacent property acquired and affirmatively integrated into the
Property by Landlord and any and all improvements constructed
thereupon. Exhibit A sets forth the general layout of the
Property, but shall not be deemed to be a warranty,
representation or agreement on the part of the Landlord that the
Property will always be exactly as indicated. Landlord reserves
the right to relocate the Premises within the Property at any
time prior to the delivery of possession thereof to Tenant. If
Landlord or Tenant so requests, at any time prior to, or during
the first year of, the Term (as such term is defined herein),
the actual "as built" total square footage of the Premises shall
be measured by Landlord's architect or engineer in the presence
of Tenant or Tenant's authorized representative. In the event
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the Premises shall contain an amount of square footage different
than the amount of square feet referenced above, the Base Rent
and all other charges calculated on the basis of "Tenant's
Proportionate Share" payable by Tenant hereunder shall be
proportionately adjusted based on actual square footage
multiplied by the applicable square foot rental rate (and such
adjustment shall relate back to the Commencement Date if there
is a variance). The cost of such measurement shall be borne by
the party requesting same.
(h) "Lease Term" or "Term": Commencing on the "Commencement Date" as
defined in Section 1.1(i) and ending December 31, 2002.
(i) "Commencement Date": February 1, 1997.
(j) "Permitted Use": Operation of offices for the administration and
collection of consumer debt and any other use which is ancillary to
Tenant's primary business, and no other purpose.
(k) Base Rent: See Section 4.2, below.
(l) "Rent": Collectively, Base Rent and "Additional Rent," as defined
in Section 4.4 hereof.
(m) "Security Deposit":
(A) On or before the date of Tenant's execution
hereof, Tenant shall post Tenant's Security Deposit in the
form of an irrevocable, unconditional letter of credit issued
by Signet Bank or a different financial institution having
branches within the State of Maryland, and which institution
shall be otherwise satisfactory to Landlord. Such letter of
credit is hereinafter referred to as the "Letter of Credit".
The following provisions shall apply with respect to the
Letter of Credit.
(i) The Letter of Credit shall name Landlord as
the sole beneficiary, but shall be fully assignable by
Landlord. The initial amount of the Letter of Credit shall
be Two Hundred Fifty Thousand Dollars ($250,000.00). The
Letter of Credit shall initially have a term of not less
than one (1) year, and shall be renewed annually by Tenant
(with Tenant to deliver evidence of such renewal to
Landlord no later than twenty (20) business days prior to
the scheduled expiration date thereof). If Tenant fails to
deliver evidence of such renewal to Landlord at least
twenty (20) days prior to such expiration date, Landlord
shall give Tenant notice of such failure, and if Tenant
fails to deliver evidence of such renewal within ten (10)
days prior to such expiration date, then Landlord shall
have the right to draw upon the Letter of Credit in full,
and to hold the proceeds of such draw as a cash security
deposit pursuant to Section 19.8 of this Lease.
(ii) The Letter of Credit shall be unconditional
and irrevocable, and shall provide that the same may be
drawn upon by the presentation of a draft executed by
Landlord and presented to the issuer, accompanied by a
certificate of the Landlord which certifies (a) that the
Landlord is entitled to draw upon the Letter of Credit
pursuant to the terms of this Lease, and (b) that the
amount demanded does not exceed the amount available under
the Letter of Credit on the date upon which such draw is
made.
(iii) The Letter of Credit shall provide that it
may be drawn partially or in full, as Landlord may elect.
(B) Landlord shall have the right to draw upon the
Letter of Credit, in full, either (i) immediately upon the
occurrence of an Event of Default under
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this Lease which is not cured within any applicable cure
period provided for herein, or (ii) in the event Tenant fails
to renew the Letter of Credit in accordance with subparagraph
(A) of this Section 1.1(m). In the event the Letter of Credit
is drawn upon by Landlord, the proceeds thereof may be held by
Landlord as a cash security deposit, and may be applied by
Landlord (and shall be accounted for by Landlord) in
accordance with the terms of Section 19.8 of this Lease.
(C) Notwithstanding anything to the contrary in this
Section 1.1(m), above, Tenant's obligation to maintain the
Letter of Credit shall cease upon the earlier of: (a)
Landlord's receipt of Tenant's payment in full of all Rent due
hereunder for twelve (12) full months after the "Free Rent
Period" (as defined in Section 4.2, below), or (b) the date
upon which Tenant presents Landlord with proof that Tenant's
net worth has reached at least Ten Million Dollars
($10,000,000.00), which proof shall include financial
statements prepared in accordance with generally accepted
accounting principles, and Tenant shall provide Landlord with
any additional proof as to Tenant's net worth which Landlord
reasonably requests prior to being released from Tenant's
obligation to maintain the Letter of Credit. Alternatively, if
at any time after the last day of the twelfth (12th) month
after the expiration of the Free Rent Period, Tenant is unable
to meet the net worth criteria specified in clause (b) above,
then provided Tenant is not currently and has not been in
Default hereunder, Tenant shall have the option to deposit a
cash security deposit with Landlord in the amount of
Ninety-Five Thousand Three Hundred Twenty Eight and 31/100
Dollars ($95,328.31), in which event Tenant's obligation to
maintain the Letter of Credit shall cease upon Landlord's
receipt of such cash security deposit. Any such cash security
deposit shall be held by Landlord pursuant to the terms of
Section 19.8 of the Lease. Landlord shall promptly return the
Letter of Credit to Tenant when Tenant's obligation to
maintain the Letter of Credit ceases.
(n) [Intentionally Deleted.]
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<PAGE>
(o) "Tenant's Proportionate Share" or "Proportionate Share": Subject to
Section 6.4, below, a fraction, the numerator of which shall be the
number of rentable square feet of floor space in the Premises and
the denominator of which shall be the number of rentable square
feet of floor space in all premises within the Property that are
leased or leasable as of January 1 of the applicable year and which
contribute on a Proportionate Share basis to the pass-through item
in question. Because the Premises consists of the entire leasable
area of the Building, Tenant's Proportionate Share shall be one
hundred percent (100%). For purposes of further clarifying the
foregoing definition and in calculating Tenant's Proportionate
Share of certain items (or components thereof), the following
additional provisions shall apply: (1) In the case of Common Area
Costs, the denominator of the fraction shall exclude (i) the
rentable square feet of premises occupied by lessees or owners
within the Property who do not contribute on a Proportionate Share
basis to all or part of the Common Area Costs because they are
obligated to maintain separately certain common areas appurtenant
to their leased or owned premises, and (ii) with regard to specific
Common Area Cost items, the rentable square feet of all other
tenants in the Property who do not include such items within the
calculation of such other tenant's share of Common Area Costs
because such other tenants are individually responsible for the
item in question (i.e., if a tenant provides for its own trash
removal and the cost of trash removal is not part of such tenant's
Common Area Cost obligation, that tenant's rentable square feet
shall be excluded from the denominator in determining Tenant's
Proportionate Share of trash removal costs); (2) In the case of
Insurance, Tenant's Proportionate Share of Landlord's cost of
casualty insurance shall exclude from the denominator of the
fraction the rentable square feet of any building in the Property
which is separately insured by the tenant of such building, and
which tenant as a result does not contribute to Landlord's cost of
casualty insurance; and (3) in the case of Taxes, Tenant's
Proportionate Share of Taxes shall exclude from the denominator of
the fraction the rentable square feet of any leased building in the
Property which is separately assessed and whose tenant pays such
separately assessed tax amount pursuant to its lease in lieu of
paying a Proportionate Share of Taxes assessed for the Property as
a whole.
(p) "Lease Year": Each twelve (12) month period within the Lease Term
shall be referred to herein as a "Lease Year." The first Lease Year
shall commence on the Lease Commencement Date and terminate 365
days after such Lease Commencement Date. Each subsequent Lease Year
shall commence on the date immediately following the last day of
the preceding Lease Year and shall continue for a period of twelve
(12) full months, except that the last Lease Year of the Lease Term
shall terminate on the date this Lease expires or is otherwise
terminated.
(q) "Calendar Year" shall mean the twelve-month period commencing
January 1 and ending December 31.
(r) "Base Year" shall mean Calendar Year 1997.
(s) "Base Tax Year" shall mean the fiscal tax year 1997-1998.
1.2 General. Each of the foregoing definitions and basic provisions shall
be construed in conjunction with and limited by references thereto in other
provisions of this Lease.
ARTICLE II. GRANTING CLAUSE
In consideration of the obligation of Tenant to pay Rent as herein
provided, and the other terms, covenants and conditions hereof, and in
consideration of Ten Dollars ($10.00) cash in hand paid by each party to the
other, the receipt and sufficiency of which are hereby acknowledged, Landlord
hereby demises and leases to Tenant, and Tenant hereby takes from Landlord, the
Premises TO HAVE AND TO HOLD for the Lease Term, all upon the terms and
conditions set forth in this Lease.
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<PAGE>
ARTICLE III. CONSTRUCTION AND ACCEPTANCE OF PREMISES
3.1 Premises Ready for Occupancy. Improvements to the Premises shall be
constructed in compliance with the provisions of Exhibit C attached hereto. The
Premises shall be deemed to be "Ready for Occupancy" when Landlord certifies in
writing to Tenant that Landlord has completed Landlord's Work, as described in
Exhibit C (excepting only minor incomplete or defective items of the type
typically set forth on a punch-list, which incomplete items do not affect
Tenant's ability to lawfully take occupancy of the Premises and which incomplete
items do not materially and adversely affect Tenant's ability to use and enjoy
the Premises) and is ready, willing and able to tender possession thereof to
Tenant. In no event shall the determination of the date upon which the Premises
are deemed "Ready for Occupancy" be predicated upon the construction of any of
"Tenant's Work" as described in Exhibit C. Upon Tenant's request, which request
shall be made within five (5) days following Landlord's delivery to Tenant of
the Ready for Occupancy notice set forth above, Landlord agrees to participate
in a joint walk-through and inspection of the Premises with Tenant, provided
that such inspection shall not delay the "Ready for Occupancy" date nor Tenant's
obligation to commence construction of Tenant's Work. If the Premises are not
Ready for Occupancy on or prior to the Commencement Date, Landlord shall not be
deemed to be in default hereunder or otherwise liable in damages to Tenant, nor
shall the Term of this Lease be affected. When the Premises are Ready for
Occupancy, Tenant agrees to accept possession thereof and to proceed with due
diligence to perform the work described under "Description of Tenant's Work" in
Exhibit C, all of such work to be performed in compliance with Exhibit C, and to
install its fixtures, furniture and equipment.
Any Tenant Work involving venting, opening, sealing, waterproofing or
any altering of the roof shall be performed by Landlord's roofing contractor at
Tenant's sole expense. Upon completion of such work, Tenant shall provide
Landlord with a certificate from Landlord's roofing contractor stating that all
of Tenant's Work involving venting, opening, sealing, waterproofing or in any
way altering the roof has been performed in compliance with Exhibit C. Tenant
hereby indemnifies and holds Landlord harmless from any damage to the Premises
resulting, directly or indirectly, from Tenant's venting, opening, sealing,
waterproofing or other altering of the roof unless such a certificate from
Landlord's roofing contractor has been delivered to Landlord before the date of
any such damage. In the event of any dispute as to work performed or required to
be performed by Landlord or Tenant pursuant to Exhibit C, the certificate of
Landlord's architect or engineer shall be conclusive. By initiating Tenant Work
(but excluding the "Early Work", as defined in Exhibit C), Tenant shall be
deemed to have accepted the Premises and to have acknowledged that the same
fully complies with Landlord's covenants and obligations hereunder (irrespective
of whether Landlord has certified to Tenant that the Premises are Ready for
Occupancy), subject to punch list items. Tenant agrees to furnish to Landlord a
Certificate of Occupancy from applicable local authorities on or before the
Commencement Date; provided, however, Tenant's failure to do so shall not delay
the Commencement Date.
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<PAGE>
3.2 Commencement Date.
(a) Notwithstanding the February 1, 1997 date specified in Section
1.1(i), above, the "Commencement Date" of this Lease shall be the date upon
which Landlord delivers the Completion Notice to Tenant (as set forth in
paragraph 10 of Exhibit C hereto). Notwithstanding anything to the contrary
herein, (i) in the event the Commencement Date has not occurred on or before
February 15, 1997 (other than as a result of any "Tenant Delay", as such term is
defined in Exhibit C hereto), the parties mutually agree that the Term of this
Lease shall expire on February 15, 2003, regardless of when the Commencement
Date occurs (in other words, the Term of the Lease shall be shorter than
seventy-two (72) full months if the Commencement Date occurs after February 15,
1997 other than as a result of any Tenant Delay), (ii) in the event the date
upon which Landlord delivers the Completion Notice to Tenant is delayed more
than fifteen (15) days due to any Tenant Delay, then the Commencement Date of
this Lease shall be February 15, 1997 irrespective of whether construction of
Landlord's Work has been completed by February 15, 1997. The foregoing
notwithstanding, if a combination of Tenant Delay and delay occurring other than
as a result of Tenant Delay causes the date upon which construction of
Landlord's Work is completed to extend past February 15, 1997, then the
Commencement Date shall be adjusted to be that date upon which Landlord's Work
would have been completed but for such Tenant Delay (but only to the extent such
Tenant Delay exceeded fifteen (15) days), and the Lease Term shall expire on the
earlier of (1) that date which is seventy-two (72) full months after the
Commencement Date or (2) that date which is calculated by measuring seventy-two
(72) full months after the date Landlord's Work would have been completed but
for such Tenant Delay (but not later than February 15, 1997), plus the total
number of days of Tenant Delay which occurred. For purposes of illustrating the
foregoing provision only, and not by way of limitation, (A) if there were twenty
(20) days of Tenant Delay and completion of Landlord's Work and delivery of the
Completion Notice was achieved on February 28, 1997, then the Lease Commencement
Date shall be deemed to be February 23, 1997, and the expiration of the Lease
Term shall be February 22, 2003, (B) if there were ten (10) days of Tenant Delay
and completion of Landlord's Work and delivery of the Completion Notice was
achieved on February 28, 1997, then the Lease Commencement Date shall be
February 28, 1997, and the expiration of the Lease Term shall occur on February
24, 2003, (C) if there were ten (10) days of Tenant Delay and completion of
Landlord's Work and delivery of the Completion Notice was achieved on February
20, 1997, then the Lease Commencement Date shall be February 20, 1997, and the
expiration of the Lease Term shall occur on February 19, 2003, and (D) if there
was no Tenant Delay and completion of Landlord's Work and delivery of the
Completion Notice was achieved on February 28, 1997, then the Lease Commencement
Date shall be February 28, 1997, and the expiration of the Lease Term shall
occur on February 15, 2003.
(b) Any entry and/or occupancy of the Premises by Tenant, its agents,
employees or contractors prior to the Commencement Date shall be at Tenant's
sole risk, and deemed pursuant to, and subject to, all of the terms and
provisions of this Lease; provided, however, in no event shall Tenant, its
agents, employees or contractors be entitled to enter the Premises or take
occupancy thereof prior to the date it receives Landlord's notice that the same
are Ready for Occupancy except for the "Early Work", as set forth in Exhibit C
hereto.
(c) Landlord and Tenant each agree that at the request of the other
they will, following the Commencement Date, execute and deliver a certificate or
written statement acknowledging that Tenant has accepted possession of the
Premises, reciting the Commencement Date and expiration date of this Lease,
certifying that Landlord has fully complied with all Landlord's covenants and
obligations hereunder, and confirming the square footage of the Premises.
ARTICLE IV. RENT
4.1 General. Rent shall accrue hereunder from the Commencement Date, and
shall be payable by Tenant to Landlord, in immediately available funds, at the
place designated for the delivery of notices to Landlord at the time for payment
(or at such other place as Landlord designates), without previous demand and
without any set-offs or deductions whatsoever.
4.2 Base Rent. Tenant agrees to pay to Landlord, as and for its basic rent
("Base Rent") for the initial Term of this Lease, an amount equal to the sum of
all Monthly Base Rent payments stated to be due during the initial Term as set
forth below:
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<TABLE>
<CAPTION>
Base Rental Rate Annual Base Monthly
Months Per Square Foot Per Year Rent Base Rent
- ------ ------------------------ ------------- -------------
<S> <C> <C> <C>
1-6 ("Free Rent Period") $ 0.00 $ 0.00 $ 0.00
7-12 $ 10.75 $ 381,313.25 $ 31,776.10
13-24 $ 11.29 $ 400,467.59 $ 33,372.30
25-36 $ 11.85 $ 420,331.35 $ 35,027.61
37-48 $ 12.44 $ 441,259.24 $ 36,771.60
49-60 $ 13.06 $ 463,251.26 $ 38,604.27
61-December 31, 2002* $ 13.72 $ 486,662.12 $ 40,555.18
</TABLE>
- ----------
*The parties acknowledge that the Term may be shortened under certain
circumstances, as set forth in Section 3.2(a), above.
The phrase "Monthly Base Rent" shall refer to the monthly installments of Base
Rent, as set forth above. All Monthly Base Rent payments shall be due and
payable, in advance, on or before the first day of each succeeding calendar
month during the Lease Term. Notwithstanding the foregoing, if the Commencement
Date is a date other than the first day of a calendar month, there shall be due
and payable on or before such date, as Base Rent for the balance of such
calendar month, a sum equal to that proportion of the Base Rent specified for
the first full calendar month herein provided in which a monthly payment of Base
Rent is due, which the number of days from the Commencement Date to the end of
the calendar month during which the Commencement Date shall fall bears to the
total number of days in such month.
4.3 Additional Rent. In addition to Base Rent, Tenant shall pay, as
"Additional Rent" hereunder, (i) Tenant's Proportionate Share of increases in
"Common Area Costs," as set forth in Section 6.3 hereof; (ii) Tenant's
Proportionate Share of increases in premiums for the "Insurance" to be obtained
by Landlord for the Property, as set forth in Section 13.2 hereof, (iii)
Tenant's Proportionate Share of increases in "Taxes," as set forth in Article
XVIII hereof; and (iv) all other sums or charges due or to become due from
Tenant to Landlord hereunder. Any payment of monies called for herein to be made
by Tenant to Landlord is deemed Additional Rent and shall be collectible as
Additional Rent.
ARTICLE V. FINANCIAL DISCLOSURES.
Tenant shall, from time to time and at any time, upon receipt of a written
request from Landlord, provide true, complete and accurate financial information
and documentation about itself and any guarantor of this Lease to Landlord or
Landlord's designee, within ten (10) days after such request. The corporate
officers executing this Lease on Tenant's behalf hereby represent and warrant to
Landlord that the financial statements and other information submitted to
Landlord by Tenant prior to the execution hereof are true, complete and
accurate, were prepared in accordance with generally accepted cash accounting
principles applied on a consistent basis, and accurately reflect Tenant's net
worth as of the date hereof.
ARTICLE VI. COMMON AREA.
6.1 General. The "Common Area" or "Common Areas" is/are that part of the
Property designated by Landlord from time to time for the common use of all
tenants, including among other facilities, equipment, signs, parking areas,
sidewalks, landscaping, curbs, loading areas, private streets and alleys,
lighting facilities, hallways, malls, restrooms, and all other areas and
improvements provided by Landlord for the common use of all tenants, all of
which shall be subject to Landlord's sole management and control and shall be
operated and maintained in such manner as Landlord, in its discretion, shall
determine. Landlord reserves the right to construct, maintain, and operate
lighting and other facilities, temporary and/or permanent improvements and
buildings, equipment and signs on all parts of the Common Area; increase, reduce
or change the number, size, height, layout, or locations of buildings, walks,
parking and/or common areas now or hereafter forming a part of the Property; to
police the Common Area; to restrict parking by tenants and other occupants of
the Property and their employees, agents and invitees or to provide reserved
parking for certain tenants; to close temporarily all or any portion of the
Common Area to make repairs, changes or to avoid public dedication; to
discourage or prohibit noncustomer parking; and to employ and discharge all
personnel with respect to maintenance operations and policing of equipment of
said Common Area. Landlord, in its sole discretion, may delegate its rights
herein with regard to the Common Area to an independent contractor or management
company, which may be an affiliate of Landlord. Upon request by Landlord, Tenant
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shall provide the license plate numbers of all employees of Tenant to Landlord,
and shall advise its employees to park only in designated "Employee Parking"
areas; employee cars that are not parked in the designated "Employee Parking"
areas may be towed and/or fined, and all fines so addressed shall be the
responsibility of, and payable by, Tenant. Subject to Landlord's rights, as
aforesaid, Tenant and its employees, customers, subtenants licensees and
concessionaires shall have the non-exclusive right and license to use the Common
Area as constituted from time to time for ingress, egress and parking and for no
other purpose, such use to be in common with Landlord, other tenants of the
Property and other persons permitted by Landlord to use the same (in such manner
as Landlord may elect or agree with such other tenants and persons). Tenant and
Tenant's agents, employees and invitees will comply fully with all requirements
of the rules and regulations which Landlord may establish for the Property in
the exercise of its sole discretion from time to time including without
limitation the Rules and Regulations which are attached as Exhibit E to this
Lease and made a part hereof by this reference. Landlord shall at all times have
the right to change such rules and regulations or to promulgate other rules and
regulations in such manner as may be deemed advisable for safety, care or
cleanliness of the Property and for preservation of good order therein, all of
which rules and regulations, changes and amendments will be forwarded to Tenant
in writing and shall be carried out and observed by Tenant. Tenant shall further
be responsible for the compliance with such rules and regulations by its
employees, servants, agents, visitors and invitees. Landlord may temporarily
close any part of the Common Area for such periods of time as may be necessary
to prevent the public from obtaining prescriptive rights or to make repairs or
alterations.
6.2 Parking.
(A) In addition to the rights reserved to Landlord in Section 6.1 above
or elsewhere in this Lease, Landlord may from time to time substitute for any
parking area shown on Exhibit A other areas or multi-level parking facilities
reasonably accessible to the tenants of the Property.
(B) Notwithstanding anything to the contrary in this Lease, Tenant, its
agents, employees and invitees shall have the non-exclusive right to use the
free and open non-dedicated surface parking areas in and around 1705, 1713 and
1717 Whitehead Road (for so long as Landlord owns such properties) from the
hours of 8:00 a.m. to 12:00 a.m. Monday through Friday, to the extent any such
parking is available. In addition, Tenant, its agents, employees and invitees
shall have also have the non-exclusive right to use the free and open surface
parking in the rear of 6600 Security Boulevard (Meadows Parking Shopping Center,
for so long as Landlord owns such Property) for its overflow parking.
(C) Landlord and Tenant agree that Landlord shall use commercially
reasonable efforts to secure additional overflow parking located off of the
Property for the use of Tenant, its agents, employees and invitees, provided
that in no event shall Landlord be required to expend more than Twelve Thousand
Dollars ($12,000.00) per year during the Lease Term for such off-Property
parking. In the event Landlord is unable to secure said off-Property overflow
parking on or before August 1, 1997, then Landlord shall have no further
obligation to make efforts to secure off-Property overflow parking, and instead
Landlord shall be obligated to pay Tenant the sum of Ten Thousand Dollars
($10,000.00), which shall be paid to Tenant on or before September 15, 1997. In
the event Landlord secures off-Property overflow parking in the parking lot
located adjacent to Best Products or Sam's Plaza, then Landlord, at Landlord's
expense, shall construct stairs from the Building parking lot to either such
overflow lot(s), at Landlord's expense, provided that in no event shall Landlord
be required to expend more than Ten Thousand Dollars ($10,000.00) in connection
with the construction of such stairs. In the event Landlord constructs such
stairs, Landlord shall have no obligation to pay Tenant the Ten Thousand Dollar
($10,000.00) amount referenced in this Section 6.2(C), above.
6.3 Common Area Costs. Tenant agrees to pay as Additional Rent during each
Lease Year of the Term (except during the Base Year), Tenant's Proportionate
Share of the increases of the "Common Area Costs," (as hereafter defined) above
the Common Area Costs for the Base Year. For purposes of this Lease, the term
"Common Area Costs" shall mean all costs and expenses incurred by Landlord in
operating, maintaining, repairing, lighting, signing, cleaning, painting,
stripping, insuring, equipping, staffing, heating and cooling, securing, and
policing of the Common Area, including, without limitation, all costs and
expenses associated with the following items or services, which may be incurred
by Landlord in its sole discretion: (i) maintaining and replacing any and all
alarm and life safety systems and any fire alarm monitoring or testing service
program or fire suppression system installed within the Premises or otherwise
within the improvements which form a part of the Property, including without
limitation any patrol services; (ii) maintenance of irrigation systems; (iii)
insurance, including, without limitation, liability insurance for personal
injury, death and property damage to the
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extent not reimbursed by Tenant under Section 13.2 below; (iv) surcharges levied
upon or assessed against parking spaces or areas, payments toward mass transit
or car pooling facilities or otherwise as required by federal, state or local
governmental authorities; (v) all landscaping, including, but not limited to,
lawn maintenance, new plantings and replacement of existing landscaping; (vi)
repairing, cleaning, sweeping, painting, striping, replacing and repaving of
paving, curbs, walkways, guardrails, bumpers, fences, screens, flagpoles,
bicycle racks, signs and other markers, landscaping, drainage pipes, ducts,
conduits, lighting facilities and all other Common Area site amenities; (vii)
maintenance, repair and replacement of utility systems serving the Property,
including, but not limited to, water, sanitary sewer and storm water lines and
drainage systems (whether on-site or off-site), electrical, gas, telephone and
lighting systems (including bulbs, poles, and fixtures) and other utility lines,
pipes and conduits, and all payments of utility charges in connection with any
of the foregoing systems; (viii) maintenance, repair, replacement and
substitution of and for all portions of the buildings in the Property to the
extent the same is Landlord's responsibility under this Lease, including, but
not limited to, the Systems (as such term is defined in Section 8.1, below),
walls, roofs and roof flashings, canopies, skylights, signs, planters, benches,
fire exits, doors and hardware, windows, glass and glazing; (ix) inspection,
maintenance, repair and acquisition costs (including depreciation) of any and
all machinery and equipment used in the operation and maintenance of the Common
Area, including personal property taxes and other charges and taxes incurred in
connection with such equipment; (x) cleaning of any exterior glass; (xi) removal
of snow, ice, trash and debris; (xii) maintenance of and compliance with
federal, state or local governmental ambient air and environmental standards;
(xiii) all materials, supplies and services purchased or hired in connection
with the operation of the Common Area; (xiv) compensation and benefits paid to
any and all personnel, including, without limitation, security and maintenance
persons, secretaries, bookkeepers and any other personnel related to the
operation of the Common Area; (xv) management fees charged for management of the
Property; and (xvi) an overhead administrative cost allowance in the amount of
fifteen percent (15%) of the total Common Area Costs. Tenant's Proportionate
Share of the increases in the Common Area Costs shall be paid by Tenant in
monthly installments in such amounts as are estimated and billed by Landlord to
Tenant as of the first day of the Calendar Year immediately following the Base
Year and then at the beginning of each Calendar Year thereafter during the Term,
each such installment being due on the first day of each calendar month. Any
period of less than a full Calendar Year occurring due to the timing of the
Commencement Date shall be proportionately adjusted to reflect such partial
year. If at any time during such twelve (12) month period it shall appear that
Landlord has underestimated Tenant's Proportionate Share of the increases in
Common Area Costs (whether attributable to a change in Tenant's Proportionate
Share, an increase in the projected Common Area Costs for such period,
mathematical error or otherwise), Landlord may re-estimate Tenant's
Proportionate Share of Common Area Costs and may bill Tenant for any deficiency
which may have accrued during such twelve (12) month period and thereafter the
monthly installment payable by Tenant shall also be adjusted. Within one hundred
twenty (120) days after the end of each Calendar Year, Landlord shall deliver to
Tenant a statement setting forth the actual Common Area Costs for such Calendar
Year, Tenant's Proportionate Share of the increases therein, and the total
amount paid by Tenant to Landlord under this Section 6.3 during such period. In
the event the amounts paid by Tenant during such period are greater or lesser
than Tenant's Proportionate Share of the increases in Common Area Costs as set
forth on such statement, Tenant shall pay to Landlord or Landlord shall credit
Tenant's account (or, if such adjustment occurs at the end of the Term, pay to
Tenant), as the case may be, within thirty (30) days of receipt of such
statement, the amount of any excess or deficiency. Failure of Landlord to
provide the statement called for hereunder shall not relieve Tenant from its
obligations under this Section 6.3 or elsewhere in this Lease.
6.4 Special Allocations. Tenant acknowledges that the Premises are located
within a Building which forms a part of a business park consisting of multiple
buildings which is currently owned by landlord (such business park as a whole
being referred to herein as the "Project"). As a result, there are certain
Common Area Costs, Insurance premiums or Taxes which may be obtained by, paid
for by, or assessed to, Landlord with respect solely to the Building, and others
which may be obtained by, paid for by, or assessed to, Landlord with respect to
multiple buildings or properties, or with respect to the Project as a whole (and
which are thus more appropriately allocated between tenants of multiple
buildings or lots, rather than among solely the tenants of the Property).
Accordingly, the following special allocations shall apply and supersede any
contrary provisions of this Lease: Landlord shall have the right to account for
those items which are appropriately allocated solely among the tenants in the
Property using Tenant's Proportionate Share as defined in Section 1.1(o), above,
and to account for those items which are more appropriately allocated among
tenants of multiple buildings or properties, or with respect to the Project as a
whole, by modifying the denominator otherwise set forth in Section 1.1(o) within
the definition of Tenant's Proportionate Share to a denominator which is based
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upon the rentable square feet contained within the building or lot in question
(or if applicable, the Project as a whole).
6.5 Further Adjustments. In the event Landlord shall furnish any utility or
service which is included in the definition of Common Area Costs to less than
ninety-five (95%) of the rentable area of the Building or the Property, as the
case may be, because (i) the average occupancy level of the Building or the
Property, as the case may be, for the Base Year and/or any subsequent Calendar
Year was not ninety-five percent (95%) or more of full occupancy, (ii) any such
utility or service is not required by or provided to one or more of the tenants
or occupants of the Building or the Property, as the case may be, or (iii) any
tenant or occupant is itself obtaining or providing any such utility or
services, then the actual costs for such year shall be increased to equal the
total expenses that Landlord reasonably estimates it would have incurred if
Landlord had provided all such utilities and services to all tenant and
occupants in the Building or the Property, as the case may be, and shall be
allocated among the tenants by the Landlord to reflect those costs which would
have occurred had the Building or the Property, as the case may be, been
ninety-five percent (95%) occupied during the year in question and such
utilities and services provided to all tenants. The intent of this Section 6.5
is to ensure that the reimbursement of all Common Area Costs is fair and
equitably allocated among the tenants receiving the utilities and services in
question.
ARTICLE VII. USE AND CARE OF PREMISES.
7.1 Limitations on Use. The Premises may be used only for the purpose or
purposes specified in Section 1.1(j) above and for no other purpose or purposes
without the prior written consent of Landlord. In transacting business in the
Premises, Tenant shall use the trade name specified in Section 1.1(e) above and
no other trade name without the prior written consent of Landlord, which shall
not be unreasonably withheld. Tenant shall not at any time leave the Premises
vacant, but shall in good faith continuously throughout the Term conduct and
carry on in the entire Premises the type of business for which the Premises are
leased.
7.2 Impact on Insurance. Tenant shall not, without Landlord's prior written
consent, keep anything within the Premises for any purpose or use the Premises
in a manner which causes an increase in the insurance premium cost or
invalidates any insurance policy carried on the Premises or other part of the
Property. Tenant shall pay as Additional Rent, upon demand of Landlord, any such
increased premium cost due to or associated with Tenant's use or occupation of
the Premises or its storage of certain goods. Anything contained herein to the
contrary notwithstanding, all property kept, stored or maintained within the
Premises by Tenant shall be at Tenant's sole risk.
7.3 Limitations on Operations. Tenant shall not (a) permit any
objectionable or unpleasant odors to emanate from the Premises; (b) place or
permit any radio, television, loudspeaker or amplifier on the roof or outside
the Premises or where the same can be seen or heard from outside the Building or
in the Common Area; (c) except as provided in Section 7.5, below, place an
antenna, awning or other projection on the exterior of the Premises; (d) solicit
business or distribute leaflets or other advertising material in the Common
Area; nor (e) take any other action which in the exclusive judgment of Landlord
would constitute a nuisance or would disturb or endanger other tenants of the
Property or unreasonably interfere with their use of their respective premises.
7.4 Care of Premises. Tenant shall take good care of the Premises and shall
keep the Premises clean, safe and free from deterioration and waste at all
times, and shall maintain the Premises, and conduct all business therein, in
accordance with this Lease and all federal, state and local laws, regulations
and ordinances and lawful directions of proper police officials. Tenant shall
keep the Premises and sidewalks, serviceways and loading areas adjacent to the
Premises neat, clean and free from dirt, rubbish, insects and pests at all
times. Tenant will store all trash and garbage within the area designated by
Landlord for trash pickup and removal, in receptacles of the size, design and
color from time to time prescribed by Landlord and shall, at its sole expense,
arrange for the regular pickup of such trash and garbage. Receiving and delivery
of goods and removal of garbage and trash shall be made only in the manner and
areas from time to time prescribed by Landlord. Landlord may, at its sole
option, arrange for collection of all trash and garbage and, should Landlord
exercise such election, the cost thereof will be deemed a "Common Area Cost" as
defined in Section 6.3 hereof. Tenant shall not operate an incinerator or burn
trash or garbage within the Property.
7.5 Roof Antenna.
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(a) Tenant shall have the option to install and maintain, or cause to
be installed and maintained, at the sole cost of Tenant without further charge
from Landlord therefor, and Tenant may, at its own expense, operate on the roof
of the Building, an antenna of reasonable size (an "Antenna") provided that: (i)
Tenant shall have submitted to Landlord (1) plans and specifications for the
Antenna; (2) copies of all required governmental and quasi-governmental permits,
licenses, and special zoning variances, if required, all of which Tenant shall
obtain at its own cost and expense; and (3) a policy or certificate of insurance
evidencing such insurance as Landlord may reasonably require for the
installation, operation, and maintenance, of the Antenna; (ii) Tenant shall have
received the prior written consent of Landlord thereto, such consent not to be
unreasonably withheld, delayed, or conditioned; and (iii) if Landlord requests,
Tenant shall install any approved Antenna in a location reasonably designated by
Landlord. Tenant shall not be entitled to rely upon any such Landlord consent as
being a representation by Landlord that such installation and operation is
permitted by or in accordance with any governmental or quasi-governmental
entity, authority, or regulation. The Antenna shall be deemed to be Tenant's
personal property and its ownership, installation, use, and removal thereof
shall be governed by the terms hereof.
(b) As set forth herein, Tenant shall not be allowed on the roof
without prior written notice to Landlord. Tenant shall indemnify and hold
harmless Landlord from and against any and all damage, cost, liability or loss
which Landlord incurs in connection with (i) any entry onto or use of the roof
by Tenant, its agents, employees and contractors (including without limitation,
any entry or use associated with the Antenna, and any costs incurred by Landlord
if any entry or use invalidates or causes any violation of the requirements of
any roof warranty for the Building), and/or (ii) the installation, use,
operation or maintenance of the Antenna. Tenant shall promptly notify Landlord
in the event any such entry or use results in any damage to the roof or the
Building, and shall repair any damage to the roof or the Building caused by the
presence of the Antenna thereon, any maintenance or repairs thereto, and the
installation and/or removal thereof.
(c) Except as expressly permitted above, Tenant shall not install,
repair or replace any aerial, fan, air conditioner or other device on the roof
of the Premises or the Building without the prior written consent of Landlord.
7.6 Tenant's Environmental Warranties and Covenants. During the Term and
any Renewal Term of the Lease, Tenant warrants, represents and covenants to and
with Landlord as follows:
7.6.1 The Premises will not contain (A) asbestos in any form, (B) urea
formaldehyde foam insulation, (C) transformers or other equipment which contain
dielectric fluid containing levels of polychlorinated biphenyls in excess of
fifty (50) parts per million, or (D) any flammable explosives, radioactive
materials, hazardous materials, hazardous wastes, hazardous, controlled or toxic
substances, or any pollutant or contaminant, or related materials defined in or
controlled pursuant to the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended (42 U.S.C. Sections 9601 et seq.), the
Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801 et
seq.), the Resource Conservation and Recovery Act, as amended (42 U.S.C.
Sections 9601 et seq.), the Federal Water Pollution Control Act (33 U.S.C.
Section 1251 et seq.), the Clean Air Act (42 U.S.C. Section 7401 et seq.), and
in the regulations adopted and publications promulgated pursuant thereto, or any
other Federal, state or local environmental law, ordinance, rule or regulation
(collectively, "Environmental Laws"); or which, even if not so regulated, may or
could pose a hazard to the health or safety of the occupants of the Building
(the substances described in (A), (B), (C) or (D) above being hereinafter
collectively referred to as "Hazardous Materials"); (ii) the Premises will never
be used by Tenant for any activities involving, directly or indirectly, the use,
generation, treatment, transportation, storage or disposal of any Hazardous
Materials or to refine, produce, store, handle, transfer, process or transport
"Hazardous Substances", as such term is defined in any such Environmental Laws.
7.6.2 Tenant (A) shall comply with the Environmental Laws and all other
applicable laws, rules and regulations or orders pertaining to health, the
environment or Hazardous Materials, (B) shall not store, utilize, generate,
treat, transport or dispose of (or permit or acquiesce in the storage,
utilization, generation, transportation, treatment or disposal of) any Hazardous
Materials on or from the Premises, and (C) shall to cause its employees,
licensees and invitees to comply with the representations, warranties and
covenants herein contained.
7.6.3 In the event of any storage, presence, utilization, generation,
transportation, treatment or disposal of Hazardous Materials in, on or about the
Premises, or in the event of any Hazardous Materials Release (as hereinafter
defined), Tenant shall, at the direction of Landlord or any
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federal, state, or local authority or other governmental authority, remove or
cause the removal of any such Hazardous Materials and rectify any such Hazardous
Materials Release, and otherwise comply or cause compliance with the laws,
rules, regulations or orders of such authority, all at the expense of Tenant,
including without limitation, the undertaking an completion of all
investigations, studies, sampling and testing and all remedial, removal and
other actions necessary to clean up and remove all Hazardous Materials, on, from
or affecting the Premises. If Tenant shall fail to proceed with such removal or
otherwise comply with such laws, rules, regulations or orders within the cure
period permitted under the applicable regulation or order, the same shall
constitute a default under Section 19.1 hereof, and Landlord may, but shall not
be obligated to, do whatever is necessary to eliminate such Hazardous Materials
from the Premises or otherwise comply with the applicable law, rule, regulation
or order, acting either in its own name or in the name of Tenant pursuant to
this Section, and the cost thereof shall be borne by Tenant and thereupon become
due and payable as additional rent hereunder. Tenant shall give to Landlord and
its agents and employees access to the Premises for such purposes and hereby
specifically grants to Landlord a license to remove the Hazardous Materials and
otherwise comply with such applicable laws, rules, regulations or orders, acting
either in its own name or in the name of the Tenant pursuant to this Section.
7.6.4 Tenant hereby indemnifies and holds Landlord and each of its
shareholders, subsidiaries, affiliates, officers, directors, partners,
employees, agents and trustees, and any receiver, trustee or other fiduciary
appointed for the Building, harmless from, against, for and in respect of, any
and all damages, losses, settlement payments, obligations, liabilities, claims,
actions or causes of actions, encumbrances, fines, penalties, and costs and
expenses suffered, sustained, incurred or required to be paid by any such
indemnified party (including, without limitation, reasonable fees and
disbursements or attorneys, engineers, laboratories, contractors and
consultants) because of, or arising out of or relating to (A) Tenant's violation
of any of its representations, warranties and covenants under this Section 7.6,
and (B) any Environmental Liabilities (as hereinbelow defined) in connection
with the Premises. For purposes of this indemnification clause, "Environmental
Liabilities" shall include all costs and liabilities with respect to the future
presence, removal, utilization, generation, storage, transportation, disposal or
treatment of any Hazardous Materials or any release, spill, leak, pumping,
pouring, emitting, emptying, discharge, injection, escaping, leaching, dumping
or disposing into the environment (air, land or water) of any Hazardous
Materials (each a "Hazardous Materials Release"), including without limitation,
cleanups, remedial and response actions, remedial investigations and feasibility
studies, permits and licenses required by, or undertaken in order to comply with
the requirements of, any federal, state or local law, regulation, or agency or
court, any damages for injury to person, property or natural resources, claims
of governmental agencies or third parties for cleanup costs and costs of
removal, discharge, and satisfaction of all liens, encumbrances and restrictions
on the Premises relating to the foregoing. The foregoing indemnification and the
responsibilities of Tenant under this Section 7.6 shall survive the termination
or expiration of this Lease.
7.6.5 Tenant shall promptly notify Landlord in writing of the
occurrence of any Hazardous Materials Release or any pending or threatened
regulatory actions, or any claims made by any governmental authority or third
party, relating to any Hazardous Materials or Hazardous Materials Release on or
from, the Premises and shall promptly furnish Landlord with copies of any
correspondence or legal pleadings or documents in connection therewith. Landlord
shall have the right, but shall not be obligated, to notify any governmental
authority of any state of facts which may come to its attention with respect to
any Hazardous Materials or Hazardous Materials Release on or from the Premises.
7.6.6 Upon expiration of the Term or any Renewal Term, as applicable,
Tenant shall deliver the Premises to Landlord free of any and all Hazardous
Materials and any liens, encumbrances and restrictions relating to Environmental
Liabilities, so that the condition of the Premises shall conform with all
applicable federal, state and local laws, rules, regulations and orders
pertaining to health, the environment or Hazardous Materials.
7.6.7 Tenant agrees that Landlord shall have the right to conduct, or
to have conducted by its agents or contractors, such environmental inspections
of the Premises as Landlord shall reasonably deem necessary or advisable from
time to time.
7.6.8 Without limitation of the foregoing, in the event of the failure
of Tenant to comply with any of the material requirements of any Environmental
Laws, and/or any related regulations, Landlord shall have the right, at the sole
option of Landlord, to comply with such statutory or regulatory requirements,
and/or to cure any such default at Tenant's sole expense, and all costs and
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expenses of such compliance and/or cure shall be due and payable from Tenant to
Landlord upon demand as additional rent hereunder.
7.7 Permits and Licenses and Compliance with Applicable Laws. Tenant shall
procure, at its sole expense, all permits and licenses required for its
operations and the transaction of business in the Premises (including without
limitation, to the extent applicable to Tenant's permitted use, special use
permits, business licenses, health department licenses, and other similar
licenses, permits and approvals), and shall otherwise comply with all applicable
laws, ordinances and governmental regulations, as well as all other covenants
and restrictions of record, affecting the Premises, and the conduct of business
therein by Tenant, including without limitation the Americans with Disabilities
Act, as the same may be amended ("ADA").
7.8 [Intentionally Deleted].
7.9 No Solicitations. Tenant shall not engage in, nor permit its employees,
agents, affiliates or customers to engage in, solicitations, demonstrations,
itinerant vending or other activities inconsistent with good Property standards.
ARTICLE VIII. MAINTENANCE AND REPAIR OF PREMISES.
8.1 Maintenance and Repair by Landlord. Landlord shall, at its sole cost
and expense, make any necessary replacements to the foundation and structural
elements of the Premises. The foregoing notwithstanding, any replacements
required to be made by Landlord hereunder which are occasioned by the act or
negligence of Tenant, its agents, employees, subtenants, licensees,
concessionaires and/or invitees, shall be paid for by Tenant upon demand to the
extent not covered by net insurance proceeds paid to Landlord therefor. In
addition, Landlord will maintain and, within a reasonable time after written
notice from Tenant of the existence of a needed repair or replacement, perform
all necessary repairs and replacements to the interior and exterior mechanical,
electrical and plumbing systems ("Systems") provided the cost of shall be
included as a "Common Area Cost" under Section 6.3, above. In the event that the
Premises should become in need of repairs required to be made or performed by
Landlord hereunder, Tenant shall give immediate written notice thereof to
Landlord and Landlord shall not be responsible in any way for failure to make
any such repairs until a reasonable time shall have elapsed after delivery of
such written notice. Landlord's obligation hereunder is limited to performing
the repairs specified in this Section 8.1 only, and Landlord shall have no
liability for any damages, loss, injury or other expense incurred or suffered by
Tenant, its employees and agents, arising out of, or as a consequence of, any
condition or occurrence causing a need for such repairs.
8.2 Janitor Service; Electric Bulbs. Landlord shall provide customary
Building janitorial service and in-suite cleaning service in addition to the
other services provided by Landlord hereunder, and the cost of such janitorial
service shall be included in Common Area Costs. Such in-suite cleaning service
shall be provided five (5) days per week, after normal business hours. Landlord,
at Tenant's request, shall furnish, maintain and replace all electric light
bulbs, tubes and tube casings, and the cost thereof shall be included in Common
Area Costs.
8.3 General Maintenance and Repair by Tenant. Tenant shall keep and
maintain the Premises (including, without limitation, the roof, non-structural
portions of exterior and interior walls, store fronts, plate glass windows,
doors, door closure devices, window and door frames, moulding, locks and
hardware and painting or other treatment of interior and exterior walls) in
good, clean and safe condition and shall, at its sole cost and expense, make all
needed repairs and replacements thereto (including without limitation
replacement of cracked or broken glass) unless such repairs and replacements are
expressly required to be made by Landlord under the provisions of Section 8.1,
Article XV or Article XVI. Tenant shall keep all plumbing units, pipes and
connections free from obstruction and protected against ice and freezing. If any
repairs, replacements or maintenance required on the part of Tenant hereunder
are not accomplished within ten (10) days after written notice to Tenant from
Landlord (or, in the event of emergency, such shorter notice, or no notice, as
is reasonable under the circumstances), Landlord may, at its option, perform
such repairs, replacements or maintenance without liability to Tenant for any
loss or damage which may result to its stock or business by reason thereof, and
Tenant shall pay to Landlord immediately upon demand, as Additional Rent
hereunder, all costs associated with such repairs, replacements or maintenance,
plus an administrative fee equal to fifteen percent (15%) of such cost.
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8.4 HVAC Maintenance and Repair by Tenant. Maintenance of the air
conditioning and heating equipment shall be solely the responsibility of Tenant
throughout the entire Term. Tenant shall, at its own cost and expense, enter
into a regularly scheduled preventive maintenance/service contract with a
maintenance contractor for servicing all hot water, heating and air conditioning
("HVAC") systems and equipment within the Premises. The maintenance contractor
and the contract must be approved by Landlord, which approval shall not be
unreasonably withheld. The service contract must include all services suggested
by the equipment manufacturer within the operation/maintenance manual and must
become effective (and a copy thereof delivered to Landlord) within thirty (30)
days of the date Tenant takes possession of the Premises. Tenant shall from time
to time upon request furnish proof reasonably satisfactory to Landlord that all
such systems and equipment are being serviced in accordance with the
maintenance/service contract. Within the thirty (30) day period preceding
Tenant's vacating the Premises for any reason, whether due to expiration or
earlier termination of the Term, or otherwise, Tenant shall have the systems and
equipment checked and serviced to insure proper functioning and shall furnish
Landlord satisfactory proof thereof upon request.
8.5 Roof and Walls; Excavations. Landlord shall have the exclusive right to
use all or any part of the roof of the Premises for any purpose; to erect
additional stories or other structures over all or any part of the Premises; to
erect in connection therewith temporary scaffolds and other aids to construction
on the exterior of the Premises, provided access to the Premises shall not be
denied; and to install, use, repair and replace within the Premises pipes,
ducts, conduits, wires and all other mechanical equipment serving other parts of
the improvements constructed upon the Property, the same to be in locations
within the Premises as will not unreasonably deny or interfere with Tenant's use
thereof. Landlord shall not place any sign on the Building (except for the "For
Lease" signs pursuant to Section 11.3, below) without Tenant's permission, which
shall not be unreasonably withheld. If an excavation shall be made upon land
adjacent to the Premises, or shall be authorized to be made, Tenant shall afford
to the person causing or authorized to cause such excavation, license to enter
the Premises for the purpose of doing such work as landlord shall deem necessary
to preserve the wall or the Building of which the Premises forms a part from
injury or damage, and to support the same by proper foundation, without any
claim for damages or indemnification against Landlord for diminution or
abatement of Rent, additional rent or otherwise.
ARTICLE IX. ALTERATIONS.
9.1 Landlord Consent. Tenant shall not make any alterations, additions or
improvements to the Premises without the prior written consent of Landlord,
except for the installation of unattached, movable trade fixtures which may be
installed without drilling, cutting or otherwise defacing the Premises. In each
instance where Landlord's consent is required hereunder, Tenant shall (i)
provide Landlord with complete plans and specifications detailing the proposed
alteration, addition or improvement so that Landlord is able to conduct a proper
review of such proposal, and (ii) reimburse Landlord for all reasonable out of
pocket costs and expenses incurred in such review regardless of whether the
request is approved. All alterations, additions, improvements and fixtures
(other than unattached, movable trade fixtures) which may be made or installed
by either party upon the Premises shall remain upon and be surrendered with the
Premises and become the property of Landlord upon the expiration or earlier
termination of this Lease, unless Landlord requests their removal, in which
event Tenant shall remove the same and restore the Premises to its original
condition at Tenant's expense. Any linoleum, carpeting or other floor covering
which may be cemented or otherwise affixed to the floor of the Premises is
hereby deemed a permanent fixture and shall become the property of Landlord
without credit or compensation to Tenant. As further specified in Article XX
below, Tenant is hereby prohibited from creating or placing, or allowing to be
created or placed, any lien or encumbrance upon the Premises or the Property as
a result of any alterations, additions, improvements, equipment and/or fixtures
which may be made or installed upon the Premises.
9.2 Requirements for Construction of Alterations. All construction work
done by Tenant within the Premises, including without limitation Tenant's Work
referred to in Section 3.1 and Exhibit C, shall be performed in a good and
workmanlike manner, in compliance with all governmental requirements, and the
requirements of any contract, deed of trust or other instrument to which the
Landlord may be a party or is otherwise bound, and in such manner as to cause a
minimum of interference with other construction in progress, and with the
transaction of business, in the Property. Tenant agrees to indemnify Landlord
and hold it harmless from and against any and all loss, liability, damage or
expense resulting from such work, and prior to commencement of any such work,
Tenant shall, if requested by Landlord, furnish a bond or other security
satisfactory to Landlord against any such loss, liability, damage or expense.
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9.3 Alterations Impacting the Roof. Tenant agrees that all venting,
opening, sealing, waterproofing or altering of the roof, if any, shall be
performed by a roofing contractor approved by Landlord (which approval shall not
be unreasonably withheld) at Tenant's expense and that when completed, Tenant
shall furnish to Landlord a certificate from such roofing contractor stating
that all such alterations approved by Landlord have been completed in accordance
with the plans and specifications approved by Landlord therefor and in
accordance with any and all applicable local, state and federal ordinances,
regulations or laws. Tenant agrees that all improvements, alterations, repairs
or other work performed upon the Premises under any provision of this Lease
shall be performed under the direction of a general contractor approved by
Landlord (which approval shall not be unreasonably withheld). Tenant further
agrees that plans and drawings for installation or revision of mechanical,
electrical or plumbing systems shall be designed by an engineer selected from an
Approved Engineers List to be furnished by Landlord upon written request of
Tenant, such design work to be done at Tenant's expense.
9.4 No Warranty. Landlord's consent to or approval of any alterations,
additions or improvements (or the plans therefor) shall not constitute a
representation or warranty by Landlord, nor Landlord's acceptance, that the same
comply with sound architectural and/or engineering practices or with all
applicable laws, regulations, ordinances and other governmental requirements,
and Tenant shall be solely responsible for ensuring all such compliance.
ARTICLE X. LANDLORD'S RIGHT OF ACCESS; USE OF ROOF.
10.1 Landlord's Right of Access. Landlord shall have the right to enter
upon the Premises at any reasonable time upon reasonable prior notice (except in
case of emergency, when no notice shall be required) for the purpose of
inspecting the same, or of making repairs to the Premises, or of making repairs,
alterations or additions to adjacent premises, or of showing the Premises to
prospective purchasers, lessees or lenders.
10.2 Use of Roof. Tenant, its agents, employees or contractors shall not be
allowed on the roof without giving Landlord prior written notice.
ARTICLE XI. SIGNS; EXTERIOR OF PREMISES.
11.1 Restrictions on Signs. Tenant shall not, without Landlord's prior
written consent: (a) make any changes to or paint the exterior of the Premises;
(b) install any exterior lighting, decorations or paintings; or (c) erect or
install any signs, banners, canopy, window or door lettering, placards,
decorations or advertising media of any type which can be viewed from the
exterior of the Premises. Tenant shall not place, erect or maintain on the
doors, any exterior surface, or in any vestibule any sign, lettering,
declaration or advertising except as permitted herein. All signs, decorations
and advertising media shall conform in all respects to the sign criteria
established by Landlord for the Property from time to time in the exercise of
its sole discretion and shall be subject (i) to the prior written approval of
Landlord as to construction, method of attachment, size, shape, height,
lighting, color, and general appearance, which approval shall not be
unreasonably withheld, and (ii) to the approval of any applicable governmental
authorities. All signs shall be kept in good condition and in proper operating
order at all times.
11.2 Removal of Signs. Upon Tenant's vacating the Premises, or the removal
or alteration of its sign for any reason, Tenant shall be responsible for the
repair, painting, and/or replacement of the Building fascia surface where signs
are attached.
11.3 Advertising Premises for Rent. During the period that is three (3)
months prior to the end of the Lease Term, and at any time Tenant is in default
hereunder, Landlord shall have the right to erect on the Premises signs
indicating that the Premises are available for lease (to be referred to herein
as the "For Lease" signs).
11.4 Signage Allowance. After the installation of any exterior signage on
the Building by Tenant (which signage must be in compliance with the terms of
this Section 11), Tenant shall provide Landlord with copies of invoices for the
cost of any such signs, and Landlord shall pay Tenant Nine Thousand Dollars
($9,000.00) (the "Signage Allowance") within thirty (30) days after receipt of
such invoices, and Landlord expressly agrees that any signs so installed by
Tenant shall not become a permanent fixture of the Building upon the expiration
or earlier termination of this Lease.
ARTICLE XII. UTILITIES.
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12.1 Landlord's Responsibilities. Landlord agrees to cause to be provided
and maintained the necessary mains, conduits and other facilities necessary to
supply water, electricity, gas (if applicable), telephone service and sewage
service to the Premises, subject to any provisions contained in Exhibit C.
Landlord shall not be responsible for providing any meters or other devices for
the measurement of utilities supplied to the Premises. Tenant shall, at Tenant's
sole cost and expense, make application and arrange for the installation of all
such meters or other devices.
12.2 Tenant's Responsibilities. Tenant shall be solely responsible and
promptly pay all charges for electricity, water, gas, telephone service, sewage
service and other utilities furnished to the Premises (including without
limitation, all tap fees and similar assessments made in connecting the Premises
to such utilities, and all taxes, levies and other charges upon such utilities)
and shall promptly pay any maintenance charges therefor. Landlord may, if it so
elects, furnish one or more utility services to Tenant, by submetering or
otherwise, and in such event Tenant shall purchase such services as are tendered
by Landlord, and shall pay on demand as Additional Rent the rates established
therefor by Landlord which shall not exceed the rates which would be charged for
the same services if furnished directly by the local public utility companies.
Landlord may at any time discontinue furnishing any such service without
obligation to Tenant other than to connect the Premises to the public utility,
if any, furnishing such service.
12.3 Interruption of Service. Landlord reserves the right to cut off and
discontinue, upon notice to Tenant, any utility services furnished by Landlord
at any time when Tenant has failed to pay Rent due under this Lease. Landlord
shall not be liable for damages resulting from or arising out of any such
discontinuance and the same shall not constitute a termination of this Lease nor
an actual or constructive eviction of Tenant. Landlord shall not be liable to
Tenant, or any other person or entity whatsoever, for abatement of rent as a
result of, or for any other loss or damages whatsoever occurring in connection
with, any interruption or failure whatsoever in utility services, whether the
same has become unavailable from any public utility company or other utility
provider, or is due to the making of necessary repairs, improvements or other
causes beyond Landlord's control, and Tenant shall comply with all terms and
provisions of this Lease notwithstanding any such failure or interruption. No
such failure or interruption shall constitute a termination of this Lease or an
actual or constructive eviction of Tenant.
ARTICLE XIII. INSURANCE.
13.1 Tenant's Insurance. Tenant shall procure and maintain throughout the
Term, at its sole cost and expense: (i) a policy of comprehensive general public
liability insurance, including an all-risk legal liability endorsement, and an
assumed contractual liability endorsement, insuring both Tenant and Landlord
(and all persons, firms and corporations designated by Landlord) as an
additional insured, against all claims, demands or actions arising out of or in
connection with occurrences within the Premises, Tenant's use or occupancy of
the Premises, the condition of the Premises, the acts or omissions of Tenant and
its agents, employees and contractors in the Premises and elsewhere in the
Property, and for liabilities assumed under this Lease, the limits of such
policy or policies to be in an amount not less than One Million Dollars
($1,000,000) in respect of bodily injury to, personal injury to or death of any
one person, and in an amount not less than Two Million Dollars ($2,000,000) in
respect of bodily injuries, personal injuries and/or death(s) occurring in any
one occurrence or disaster, and in an amount not less than One Million Dollars
($1,000,000) in respect of property damaged or destroyed; (ii) fire and extended
coverage insurance covering the full replacement value of all alterations,
additions, partitions, improvements, equipment, furniture, fixtures and
inventory made or placed by Tenant in the Premises against "all-risk" of
physical loss and covering loss of income or business interruption losses; (iii)
insurance covering glass breakage in the Premises; and (iv) worker's
compensation insurance with limits no less than that required by law. All such
policies shall be written by insurance companies licensed to do business in the
state in which the Property is located and from a responsible company having a
Best's Guide rating of at least A+ or better and which is otherwise satisfactory
to Landlord. Tenant shall obtain a written obligation on the part of each
insurance company to notify Landlord at least thirty (30) days prior to
cancellation of such insurance, and the liability policy shall contain an
assumed contractual liability endorsement. Tenant's liability policy shall
include, without limitation, coverage for premises and operations, products and
completed operations, blanket contractual, personal injury, operation,
ownership, maintenance and use of owned, non-owned and hired automobiles, bodily
injury and property damage, as aforesaid. All insurance policy(ies) required
under this Section 13.1 shall (i) contain a cross-liability endorsement, (ii)
contain a provision that such policy and the coverage evidenced thereby shall be
primary and non-contributing with respect to any policies carried by Landlord
and that any coverage carried by Landlord shall be
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excess insurance, (iii) be written on an "occurrence" basis and not on a
"claims-made" basis, (iv) contain a waiver by the insurer of any right of
subrogation against Landlord, its agents, employees or representatives, as
contemplated by Section 15.6, below and (v) provide that, at the election of
Landlord's mortgagee, the proceeds of any insurance will be paid to a trustee or
depository designated by Landlord's mortgagee. At Landlord's election, Tenant
shall also name Landlord's mortgagee as loss payee under all fire and extended
coverage policies, and as an additional insured under all general public
liability policies of insurance, as its interest may appear. Such policies or
duly executed certificates of insurance shall promptly be delivered to Landlord,
and in all events, prior to the Commencement Date, and renewals thereof shall be
delivered to Landlord at least thirty (30) days prior to the expiration of the
respective policy terms. Tenant's failure to carry the insurance required under
this Section 13.1 shall constitute an Event of Default under this Lease without
requirement of notice or an opportunity to cure. In addition to the remedies
provided in Article XIX of this Lease, upon such failure by Tenant, Landlord
may, but is not obligated to, obtain such insurance on behalf of the parties
hereto, whereupon Tenant shall pay to Landlord upon demand as Additional Rent
the premium cost thereof plus interest thereon at the Default Rate (as defined
in Section 25.2, below).
13.2 Cost of Landlord's Insurance. Tenant agrees to pay its Proportionate
Share of increases in Landlord's cost of the property and liability insurance
carried by Landlord from time to time with respect to the Property (including,
without limitation, all buildings, other improvements and the Common Areas)
above such insurance costs during the Base Year. Such insurance shall include,
without limitation, fire and extended coverage insurance, (including, without
limitation, extended and broad form coverage risks, mudslide, land subsidence,
volcanic eruption, flood and earthquake) and comprehensive general public
liability insurance and excess liability insurance, including liability
insurance for personal injury, death, auto, and property damage, in such amounts
as Landlord deems necessary or desirable (the foregoing is hereinafter
collectively referred to as "Insurance"). During each month of the Lease Term
(except during the Base Year), Tenant shall make a monthly payment to Landlord
equal to one-twelfth (1/12) of its Proportionate Share of the increases in
Insurance costs on the Property which will be due and payable for that
particular year. Tenant authorizes Landlord to use the funds deposited with
Landlord under this section to pay the cost of Insurance. Each Insurance payment
shall be due and payable at the same time as, and in the same manner as, the
payment of Base Rent as provided herein. The initial monthly Insurance payment
is based upon Landlord's good faith estimate of Tenant's Proportionate Share
increase in Insurance costs for the Property for the Base Year, and the monthly
Insurance payment is subject to increase or decrease as determined by Landlord
to reflect accurately Tenant's estimated Proportionate Share of the increases in
Insurance costs. If, following Landlord's receipt of the actual insurance
premiums for a Calendar Year, Landlord determines that Tenant's total Insurance
payments are less than Tenant's actual Proportionate Share of the increase in
Insurance costs, Tenant shall pay to Landlord upon demand the difference; if the
total Insurance payments of Tenant are more than Tenant's actual Proportionate
Share of the increases in Insurance costs, Landlord shall retain such excess and
credit it to Tenant's future Insurance payments, except in the case of the last
year of the Term, in which event Landlord shall refund such excess to Tenant.
The foregoing notwithstanding, Landlord shall carry fire and casualty insurance
covering the Building for full replacement value (which coverage may contain
deductibles and/or coinsured amounts) throughout the Term of this Lease.
13.3 Increases in Coverage. Landlord shall have the right, from time to
time as Landlord shall determine, but not more often than once annually, to
increase the policy limits for all insurance which Tenant is required to obtain
under this Article XIII, to such amount as Landlord determines is comparable to
the policy limit requirements of other properties of comparable size, location
and character as the Property, or as is otherwise required by the holder or
beneficiary of any first deed of trust or first mortgage interest in the
Property.
ARTICLE XIV. NON-LIABILITY FOR CERTAIN DAMAGES.
14.1 Non-Liability for Certain Conditions. Landlord and Landlord's
partners, agents, employees, officers and directors shall not be liable to
Tenant or any other person or entity whomsoever for any injury to person or
damage to property caused by the Premises or other portions of the Property
becoming out of repair or damaged, or by defect in or failure of equipment,
pipes or wiring, or broken glass, or by the backing up of drains or by gas,
water, steam, electricity or oil leaking, escaping or flowing into the Premises
irrespective of the cause. To the extent Landlord would otherwise be required by
Maryland law or common law to correct any latent or patent defects in the
Premises or in the Building of which they form a part, any obligation on the
part of Landlord to correct such latent or patent defects in the Premises or in
the Building shall not extend beyond one (1) year from the date the Premises are
deemed Ready for Occupancy, whether or not such defects are
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discovered within such one (1) year period; provided that the other terms of
this Lease shall in all events govern Landlord's and Tenant's respective
responsibilities and monetary obligations in connection with the construction of
initial leasehold improvements to the Premises, correction of "punch-list"
items, and any subsequent repairs and maintenance to the Premises and the
Building.
14.2 Non-Liability for Certain Occurrences. Landlord and Landlord's
partners, agents, employees, officers and directors shall not be liable to
Tenant or to Tenant's employees, agents or visitors, or to any person or entity
whomsoever, for injury to person or damage to or loss of property (i) occurring
in, on or about the Premises, regardless of the cause, (ii) occurring within the
Common Area, if caused by the negligence or misconduct of Tenant, its officers,
partners, employees, agents, subtenants, licensees or concessionaires, (iii)
arising out of the use of the Premises by Tenant and the conduct of its business
therein, (iv) arising out of any breach or default by Tenant in the performance
of its obligations hereunder, or (v) occasioned by or through the acts or
omissions of other tenants of the Property or of any other persons or entities
whomsoever, excepting only the negligence or willful misconduct of duly
authorized employees and agents of Landlord to the extent the same is not
covered under insurance Tenant is required to carry pursuant to Section 13.1,
above; and, in any of such events, Tenant hereby agrees to indemnify Landlord
and Landlord's partners, agents, employees, officers and/or directors and hold
each of them harmless from any and all liability, loss, damage, claim, action or
expense (including, without limitation, all court costs and attorneys' fees)
arising out of such damage or injury due to any of the causes described above
(other than those described in clause (v), above). The provisions of this
section shall survive the termination of this Lease with respect to any claims
or liability attributable to acts, omissions, occurrences and/or conditions
existing or occurring prior to such termination.
14.3 Non-Liability for Business Interruption. In no event shall Landlord,
or any of Landlord's partners, agents, employees, officers and directors, be
liable to Tenant or any of its agents, employees, contractors, officers or
directors for any lost profits or other loss suffered by Tenant, due to any
interruption in Tenant's business operation from the Premises (hereinafter,
collectively and/or individually a "Business Interruption Loss"), whether caused
by the acts or omissions of Landlord, or its agents, employees, contractors,
officers and/or directors, or by any other cause (other than Landlord's
intentional misconduct), it being acknowledged that Tenant is capable of
obtaining business interruption insurance covering such Business Interruption
Loss(es) including a waiver of subrogation endorsement.
Notwithstanding the foregoing to the contrary, if, pursuant to a final,
non-appealable judgment in a court of competent jurisdiction, it is determined
that Landlord's negligence or willful misconduct (i) caused Tenant to incur any
Business Interruption Loss, and (ii) prevented Tenant from operating its
business in twenty percent (20%) or more of the leasable area of the Premises
for at least five (5) consecutive business days, then commencing after such
fifth (5th) consecutive business day after Tenant is prevented from operating
its business in such portion of the Premises through the date Tenant is able to
recommence operations from such applicable portion of the Premises, or would
have been able to recommence such operations in the exercise of diligent
efforts, whichever first occurs, and regardless of whether Tenant actually
elects to recommence operations therein, the Base Rent otherwise payable with
respect to the affected part of the Premises shall be abated during such period.
For purposes of this Section 14.3, (i) a Business Interruption Loss which
prevents Tenant from operating the main computer area within the Premises (i.e.,
the area in which Tenant's main computer systems are located and operate) shall
be deemed to be a Business Interruption Loss affecting more than twenty percent
(20%) of the Premises and shall be deemed to affect all portions of the Premises
whose operation is dependent upon such main computer systems and which in fact
cease to be used as a result thereof, and (ii) in calculating the "affected area
of the Premises" for purposes of measuring the Base Rent abatement under this
Section, in addition to those office areas which are rendered unusable and which
are in fact not used by Tenant as a result of a business interruption caused by
Landlord's negligence or willful misconduct, the Base Rent abatement shall also
apply to that percentage of the commonly enjoyed portions of the Premises (such
as, but not limited to, restroom areas, kitchens, cafeterias, etc.) which
corresponds to the percentage of office areas within the Premises which were
rendered unusable due to such interruption in Tenant's business operation from
the Premises. By way of hypothetical example only, if 80% of the Premises is
office area, the remaining 20% of the Premises is a commonly enjoyed area, and a
business interruption caused by Landlord's negligence and which affects the main
computer room renders 60% of the office area (or 48% of the Premises as a whole)
unusable for a period of ten (10) consecutive business days (and the same is in
fact not used by Tenant during such period), Base Rent shall be abated for five
(5) days with respect to 60% of the entire Premises (48% of the Premises being
the affected office area and 12% being 60% of the commonly enjoyed portions).
Tenant acknowledges that it shall have a duty to use diligent efforts to
minimize the
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duration and scope of any such business interruption. Landlord shall have no
liability for any Business Interruption Loss of Tenant except as set forth in
this Section 14.3.
14.4 Saving Clause. In the event (but solely to the extent) the limitations
on Landlord's liability set forth in Article XIV of this Lease would be held to
be unenforceable or void under Maryland law in the absence of a modification
holding the Landlord liable to Tenant or to another person for injury, loss,
damage or liability arising from Landlord's omission, fault, negligence or other
misconduct on or about the Premises, or other areas of the Building appurtenant
thereto or used in connection therewith and not under Tenant's exclusive
control, then such provision shall be deemed modified as and to the extent (but
solely to the extent) necessary to render such provision enforceable under
applicable Maryland law. The foregoing shall not affect the application of 19.9
of this Lease to limit the assets available for execution of any claim against
Landlord, or otherwise.
ARTICLE XV. DAMAGE BY CASUALTY
15.1 Notice to Landlord. Tenant shall give immediate written notice to
Landlord of any damage caused to the Premises by fire or other casualty.
15.2 Landlord's Obligation to Repair and Rebuild. In the event that the
Premises are damaged or destroyed by fire or other casualty insurable under
standard fire and extended coverage insurance and Landlord does not elect to
terminate this Lease as hereinafter provided, Landlord shall proceed with
reasonable diligence to rebuild and repair the Premises, and in such event
Tenant shall pay its Proportionate Share of the deductible applicable under
Landlord's insurance with respect to any such casualty, unless Tenant or another
tenant (or the employees, agents, contractors, concessionaires, licensees or
subtenants of Tenant or any other tenant), or Landlord (or its employees, agents
and/or contractors), is or are responsible for such casualty by way of
negligence or willful misconduct, in which event the responsible party shall pay
the entire amount of the deductible upon demand. If the Building in which the
Premises is located shall (i) be destroyed or substantially damaged by a
casualty not covered by Landlord's insurance, or (ii) be destroyed or rendered
untenantable to an extent in excess of fifty percent (50%) of the floor area by
a casualty covered by Landlord's insurance, or (iii) be damaged to such extent
that the remaining term of this Lease is not sufficient to amortize the cost of
reconstruction, or (iv) be damaged due to the willful misconduct of Tenant or
any party acting by, through or under Tenant, then Landlord may elect to either
terminate this Lease as hereinafter provided or to proceed to rebuild and repair
the Premises. Should Landlord elect to terminate this Lease, it shall give
written notice of such election to Tenant within ninety (90) days after the
occurrence of such casualty. If Landlord should not elect to terminate this
Lease, Landlord shall proceed with reasonable diligence to rebuild and repair
the Premises, utilizing insurance proceeds for such purpose, and Tenant agrees
to make available to Landlord any insurance proceeds it is entitled to for such
purposes. In the event of any damage or destruction to the Premises, Tenant
shall, upon notice from Landlord, forthwith remove, at Tenant's sole cost and
expense, such portion or all of Tenant's shelves, bins, machinery and other
trade fixtures and all other property belonging to Tenant or Tenant's licensees
from such portion or all of the Premises as Landlord shall request.
15.3 Tenant's Obligation to Repair and Rebuild. Landlords' obligation to
rebuild and repair under this Article XV shall in all events be limited to
restoring Landlord's Work as described in Exhibit C to substantially the
condition in which the same existed prior to the casualty, and shall be further
limited to the extent of the insurance proceeds available to Landlord for such
restoration (provided (i) Landlord shall use commercially reasonable and
diligent efforts to maximize its recovery under any such insurance policy, and
(ii) if Landlord receives insufficient insurance proceeds to fully restore
Landlord's Work as described in Exhibit C to substantially the condition in
which the same existed prior to the casualty, and Landlord does not wish to
contribute additional equity in order to achieve such level of restoration,
Landlord shall so notify Tenant, and Tenant shall have the right, for a period
of ten (10) days after receiving such notification from Landlord, to terminate
this Lease by written notice to Landlord, whereupon all rights and obligations
thereafter arising under this Lease shall cease and terminate as of the date of
such notice). If Tenant does not elect to terminate this Lease within such ten
(10) day period, then Landlord's restoration obligation shall be limited to the
amount of such insurance proceeds. If Landlord does not notify Tenant that it
has insufficient insurance proceeds to fully restore Landlord's Work as
described in Exhibit C to substantially the condition in which the same existed
prior to the casualty, then Landlord shall be deemed to have agreed to fully
restore Landlord's Work as described in Exhibit C to substantially the condition
in which the same existed prior to the casualty, without such limitation to the
amount of insurance proceeds being applicable. Tenant agrees that promptly after
completion of such work by Landlord, it will proceed with reasonable diligence
and
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at its sole cost and expense to rebuild, repair and restore its signs, fixtures
and equipment and other items of Tenant's Work as described in Exhibit C.
15.4 Continuance of Tenant's Business. Tenant agrees that during any period
of reconstruction or repair of the Premises it will continue the operation of
its business within the Premises to the extent practicable. During the period
from the occurrence of the casualty until Landlord's repairs are completed, the
Base Rent shall be reduced in proportion to the floor area of the Premises which
is rendered untenantable by virtue of such casualty; however, there shall be no
abatement of the Additional Rent or other charges provided for herein.
15.5 Requirements of Mortgagee. Notwithstanding anything herein to the
contrary, in the event the holder of any indebtedness secured by a mortgage or
deed of trust covering the Premises requires that the insurance proceeds be
applied to such indebtedness, then Landlord shall have the right, at its sole
option, to (i) terminate this Lease by delivering written notice of termination
to Tenant within fifteen (15) days after such requirement is made or first
attempted to be enforced by any such holder, whereupon all rights and
obligations hereunder shall cease and terminate as of the date of such notice
(other than those provisions which are expressly stated to survive termination
of this Lease), or (ii) delay reconstruction until such time as it is able to
procure construction financing therefor, in which event this Lease shall remain
in full force and effect prior to and after completion of such reconstruction.
15.6 Waiver of Subrogation. Landlord and Tenant hereby release the other
from any and all liability or responsibility to the other or anyone claiming
through or under them, by way of subrogation or otherwise, from any loss or
damage to property caused by fire or any other perils insured under policies of
insurance covering such property, even if such loss or damage is attributable to
the fault or negligence of the other party, or anyone for whom such party may be
responsible, including any other tenants or occupants of the Property. The
foregoing notwithstanding, this mutual release shall be applicable and in force
and effect only to the extent lawful at the time any claim is made, and in any
event only with respect to loss or damage occurring during such times as the
releasor's policies shall contain a clause or endorsement providing that any
such release shall not adversely affect or impair said policies or prejudice the
right of the releasor to recover thereunder. Landlord and Tenant shall request
its insurance carriers to include in its policies such a clause or endorsement.
If additional cost shall be charged therefor, the party responsible for
procuring such insurance shall pay such additional costs.
ARTICLE XVI. EMINENT DOMAIN
16.1 Substantial Taking. If more than twenty percent (20%) of the floor
area of the Premises should be taken for any public or quasi-public use under
any governmental law, ordinance or regulation or by right of eminent domain or
by private purchase in lieu thereof, this Lease shall terminate and the Rent
(excluding Rent accruing with respect to the period prior to the date of such
termination) shall be abated during the unexpired portion of this Lease,
effective on the date physical possession is taken by the condemning authority.
16.2 Partial Taking. If less than twenty percent (20%) of the floor area of
the Premises should be taken as aforesaid, this Lease shall not terminate;
however, the Base Rent payable hereunder during the unexpired portion of this
Lease shall be reduced in proportion to the area taken, effective on the date
physical possession is taken by the condemning authority. Following such partial
taking, Landlord shall make all necessary repairs or alterations within the
scope of Landlord's Work as described in Exhibit C necessary to make the
Premises an architectural whole.
16.3 Common Area Condemnation. If any part of the Common Area shall be
taken as aforesaid, this Lease shall not terminate, nor shall the Rent payable
hereunder be reduced; provided, however, either Landlord or Tenant may terminate
this Lease if the area of the Common Area remaining following such taking plus
any additional parking area provided by Landlord in reasonable proximity to the
Property shall be less than fifty percent (50%) of the area of the Common Area
immediately prior to the taking. Any election to terminate this Lease in
accordance with this provision shall be evidenced by written notice of
termination delivered to the other party within thirty (30) days after the date
physical possession is taken by the condemning authority.
16.4 Condemnation Award. All compensation awarded for any taking for public
purposes, whether permanent or temporary (or the proceeds of private sale in
lieu thereof), of the Premises or Common Area shall be the property of Landlord,
and Tenant hereby assigns its interest in any such
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award to Landlord; provided, however, Landlord shall have no interest in any
award made to Tenant for loss of business, relocation expenses and/or for the
taking of Tenant's fixtures and other personal property of Tenant if a separate
award for such items is made to Tenant and does not diminish the award payable
to Landlord. Tenant shall in no event be entitled to any award made for the
value of the unexpired Term of this Lease.
16.5 Requirements of Mortgagee. Notwithstanding anything herein to the
contrary, in the event the holder of any indebtedness secured by a mortgage or
deed of trust covering the Premises requires that the condemnation proceeds be
applied to such indebtedness in lieu of application for costs of necessary
alterations and reconstruction, then Landlord shall have the right, at its sole
option, to (i) terminate this Lease by delivering written notice of termination
to Tenant within fifteen (15) days after such requirement is made or first
attempted to be enforced by any such holder, whereupon all rights and
obligations hereunder shall cease and terminate as of the date of such notice
(other than those provisions which are expressly stated to survive termination
of this Lease), or (ii) delay alterations and reconstruction until such time as
it is able to procure construction financing therefor, in which event this Lease
shall remain in full force and effect prior to and after completion of such
reconstruction.
ARTICLE XVII. ASSIGNMENT AND SUBLETTING
17.1 Generally.
(a) Tenant shall not assign or transfer all or any portion of its legal
or equitable interest in this Lease or in the Premises, nor sublet all or any
portion of the Premises, nor enter into any management or similar contract which
provides for a direct or indirect transfer of operating control over the
business operated in the Premises, without the prior written consent of
Landlord. Notwithstanding the foregoing, Landlord shall not unreasonably
withhold its consent to any proposed assignment or sublease if the proposed
assignee or subtenant satisfies all of the following criteria: (A) the proposed
assignee or sublessee has a net worth of at least Five Million Dollars
($5,000,000) (as documented by financial statements prepared according to
generally accepted accounting principles consistently applied), and it otherwise
appears that the proposed assignee or subtenant will be able to meet its
financial and other obligations under this Lease after such assignment or
sublease; (B) the proposed assignee's or subtenant's use of the Premises shall
be the Permitted Use hereunder, or a general office use; (C) the proposed
assignee or subtenant shall not have a history of landlord/tenant problems (such
as, but not limited to, defaults, evictions, other disputes) with Landlord or
other landlords; (D) the proposed assignee or subtenant shall have reasonable
prior successful operating experience; (E) the proposed assignment or sublease
shall not involve the payment of Rent for the applicable portion of the Premises
at a rental rate which is less than eighty percent (80%) of the market rate for
comparable space; and (F) the proposed assignee or subtenant shall not be an
existing tenant, or the affiliate of an existing tenant, in the Project.
(b) Any assignment, sublease or other such transfer without Landlord's
prior written consent shall be voidable, and, at Landlord's election, shall
constitute a Default of Tenant hereunder. Consent by Landlord to one or more
assignments or sublettings shall not operate as a waiver of Landlord's rights
with respect to any subsequent assignment or subletting. The term "sublet" shall
be deemed to include the granting of licenses, concessions, and any other rights
of occupancy of any portion of the Premises.
17.2 Proposal Notice and Landlord's Rights. In the event Tenant shall
desire to assign this Lease, or to sublet all or any portion of the Premises, to
any person, firm, corporation or entity, Tenant shall deliver written notice by
registered mail, return receipt requested, to Landlord identifying the proposed
assignee or sublessee (the "Proposal Notice"), which Proposal Notice shall
include, inter alia, current financial and other information with respect to the
financial ability, operating experience and business reputation of the proposed
assignee or sublessee sufficient for Landlord to evaluate the proposal; a form
of assignment and assumption agreement, or sublease agreement, for Landlord's
review and approval; and a certificate from the Tenant's Chief Executive Officer
certifying that the proposed assignee shall continue to use the Premises
strictly in accordance with the uses permitted hereby. It is expressly agreed
that Landlord shall have no obligation to consent to or otherwise respond to any
proposed assignment or sublease in the event of Tenant's failure to deliver a
Proposal Notice to Landlord completed in accordance with this Section 17.2.
Within thirty (30) days after receipt of the Proposal Notice, Landlord shall, in
its sole discretion, elect by written notice to Tenant either to (1) consent to
such proposed assignment or sublease; (2) terminate this Lease; or (3) deny its
consent to such proposed assignment or sublease (which denial shall be at
Landlord's sole exclusive judgment), in which event Tenant shall continue to be
bound by the terms of this Lease. In the event Landlord shall
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elect to terminate this Lease: (i) this Lease and the term hereof shall
terminate as of a date designated by Landlord, which is not less than sixty (60)
nor more than one hundred eighty (180) days after the date of Landlord's notice
of its election to terminate; (ii) Tenant shall be released from all liability
under the lease with respect to the period after the date of termination (other
than indemnities and obligations of Tenant which expressly survive termination
of this Lease, as set forth herein); (iii) all Base Rent, Additional Rent and
other charges shall be prorated to the date of such termination; and (iv) upon
such termination date, Tenant shall surrender the Premises to Landlord in
accordance with Article XXI hereof.
17.3 Proceeds of Assignment. All cash or other proceeds of any assignment,
subletting, or other transfer in excess of the rentals called for hereunder, and
all cash or other proceeds of any other transfer of Tenant's interest in this
Lease, shall be paid to Landlord as received by Tenant, whether such assignment,
subletting or other transfer is consented to by Landlord or not, unless Landlord
agrees to the contrary in writing, and Tenant hereby assigns all rights it might
have or ever acquire in any such proceeds to Landlord. This Section 17.3 shall
not apply to any transaction which is either permitted under, or is not deemed
to be an "assignment" as a result of the application of, Section 17.7 of this
Lease, below.
17.4 Additional Restrictions on Assignment. Consent by Landlord to one or
more assignments or sublettings shall not operate as a waiver of Landlord's
rights as to any subsequent assignments and sublettings. Notwithstanding any
assignment or subletting, Tenant and any guarantor of Tenant's obligations under
this Lease shall at all times remain fully and primarily responsible and liable
for the payment of all Rent and other monetary obligations herein specified and
for the compliance with and performance of all of its other obligations under
this Lease. Upon any subletting or assignment by Tenant in accordance with the
terms hereof, any and all renewal options, expansion options, rights of first
refusal and/or exclusive use provisions herein contained shall immediately
become null and void. Landlord shall be entitled to reimbursement by Tenant for
reasonable fees incurred by Landlord for the processing of any requests for
assignment or subletting by Tenant, including but not limited to attorney's
fees.
17.5 Prohibition on Leasehold Mortgages. Tenant shall not mortgage, pledge
or otherwise encumber its interest in this Lease or in the Premises, and any
such mortgage, pledge or encumbrance shall be void and of no force and effect.
17.6 Assignment by Landlord. In the event of the transfer or assignment by
Landlord of its interest in this Lease and in the Building containing the
Premises to a person or entity assuming Landlord's obligations under this Lease,
Landlord shall thereby be released from any further obligations hereunder, and
Tenant agrees to look solely to such successor in interest of the Landlord for
performance of such obligations. Any security given by Tenant to secure
performance of Tenant's obligations hereunder may be assigned and transferred by
Landlord to such successor in interest, and Landlord shall thereby be discharged
of any further obligation relating thereto.
17.7 Permissive Transfers and Public Offerings. Notwithstanding Sections
17.1 - 17.4 to the contrary, Tenant shall have the right, without Landlord's
consent and free from any requirement that Tenant share any proceeds of such
assignment with Landlord, to assign this Lease to any "Corporate Affiliate" (as
hereinafter defined), provided that (A) the Permitted Use of the Premises
remains the same, (B) such the transfer to any such Permitted Assignee is not
orchestrated by or an behalf of Tenant in order to effectuate a transfer or
assignment of this Lease to a third party which would otherwise be subject to
Landlord's consent and/or recapture rights hereunder, (C) the Permitted Assignee
has a net worth at least equal to Five Million Dollars ($5,000,000), as
documented by financial statements prepared in accordance with generally
accepted accounting principles consistently applied, (D) such assignment shall
not relieve or discharge Tenant of or from any of the obligations or liabilities
of the "Tenant" under or with respect to this Lease, whether arising before or
after such assignment, (E) Tenant shall notify Landlord of any assignment
permitted under this Section 17.7 within a reasonable time prior thereto, and
shall provide Landlord with a copy of the executed assignment instrument in a
prompt fashion, (F) such permitted assignment shall not relieve Tenant of the
obligation to obtain Landlord's consent to any subsequent assignment or
sublease, and (G) the assignment instrument shall provide, and the assignee
shall in all events be deemed to have agreed with Landlord, that the assignee
shall be bound by (and shall be directly liable to Landlord for) all of the
obligations of "Tenant" under this Lease. For purposes of this Section, the
phrase "Corporate Affiliate" shall mean and refer to any parent corporation of,
subsidiary corporation of, or other person or entity which controls, is
controlled by, or is under common control with, Tenant, or any corporation or
entity into which Tenant may be merged or consolidated, or which acquires all or
substantially all of
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the ownership interests or assets of Tenant. If Tenant is a corporation, any
dissolution, merger, consolidation, or other reorganization of Tenant, or the
sale or other transfer of the controlling percentage of the capital stock of
Tenant (collectively and/or individually, a "Corporate Event"), shall be deemed
an assignment of this Lease which shall be permissible as a matter of right only
if it meets the foregoing criteria set forth in this Section 17.7 (and which
shall otherwise be subject to the consent requirements set forth in Section 17.1
and 17.2 hereof). The phrase "controlling percentage" shall mean the ownership
of, and the right to vote, stock possessing at least fifty-one percent (51%) of
the total combined voting power of all classes of Tenant's capital stock issued,
outstanding, and entitled to vote for the election of directors. In addition,
and notwithstanding Section 17.1 of this Lease to the contrary (and without
obligation to share any proceeds thereof, as otherwise contemplated in Section
17.3, above, Landlord agrees that neither (i) the offer and sale by Tenant of
any stock pursuant to an effective registration statement under the Securities
Act of 1933 (whether the same is an initial public offering or subsequent
offering), nor (ii) the offer and sale by Tenant of stock through a private
placement in accordance with applicable securities laws, shall constitute an
assignment of this Lease, and therefore shall not require the consent or
approval of Landlord.
17.8 Sale of Accounts in Ordinary Course of Business. Landlord acknowledges
that Tenant is in the business of selling assets or accounts to securitized
pools as its primary business, and any such sale or sales in the ordinary course
of Tenant's business shall in no event constitute an assignment hereunder.
ARTICLE XVIII. TAXES
18.1 Personal Property and Fixtures. Tenant shall be liable for all taxes
levied against personal property and trade fixtures placed by Tenant in the
Premises. If any such taxes are levied against Landlord or Landlord's property
and if Landlord elects to pay the same or if the assessed value of Landlord's
property is increased by inclusion of personal and trade fixtures placed by
Tenant in the Premises and Landlord elects to pay the taxes based on such
increase, Tenant shall pay to Landlord upon demand that part of such taxes for
which Tenant is primarily liable hereunder.
18.2 Tax Payment. Tenant agrees to pay its Proportionate Share of all
increases in taxes, assessments and governmental charges of any kind and nature
whatsoever levied or assessed against the Property, any other charges, taxes
and/or impositions now in existence or hereafter imposed by any governmental
authority based upon the privilege of renting the Premises or upon the amount of
rent collected therefor, and any tax, fee, levy, assessment or charge which is
imposed as the result of the transfer of the leasehold interest in the Premises
created by this Lease (all of the foregoing being hereinafter referred to
collectively as "Taxes") above the Taxes in the Base Tax Year. Taxes shall also
be deemed to include any special taxing district assessment which is imposed in
order to fund public facilities for the area in which the Property is located.
During each month of the Term (except during the Base Tax Year), Tenant shall
make a monthly payment to Landlord equal to one-twelfth (1/12) of its
Proportionate Share of the increase in Taxes on the Property which will be due
and payable for that particular year (the "Tax Payments"). Tenant authorizes
Landlord to use the funds deposited with Landlord under this Section 18.2 to pay
the Taxes levied or assessed against the Property. Each Tax Payment shall be due
and payable at the same time and in the same manner as the time and manner of
the payment of Base Rent as provided herein. The initial monthly Tax Payment is
based upon Tenant's Proportionate Share of the increases of Taxes on the
Property in the Base Tax Year as estimated by Landlord in good faith, and the
monthly Tax Payment is subject to increase or decrease as determined by Landlord
to reflect accurately Tenant's Proportionate Share of the increases in Taxes. If
following Landlord's receipt of all Tax bills for any fiscal tax year Landlord
determines that Tenant's total Tax Payments for such period are less than
Tenant's actual Proportionate Share of the increases in Taxes on the Property,
Tenant shall pay to Landlord the difference upon demand; if the total Tax
Payments of Tenant exceed Tenant's actual Proportionate Share of the increases
in Taxes on the Property, Landlord shall retain such excess and credit it to
Tenant's future Tax Payments.
18.3 Tax Consultant; Taxes Contested by Landlord. Landlord shall have the
right to employ a tax consulting firm to attempt to assure a fair tax burden on
the Property. Tenant shall pay to Landlord upon demand from time to time, as
Additional Rent, the amount of Tenant's Proportionate Share as of the cost of
such service. Additionally, if Landlord reasonably believes that contesting a
tax assessment will result in a reduction in taxes, Landlord shall have the
right to contest any tax assessment, valuation or levy against the Property, and
to retain legal counsel and expert witnesses to assist in such contest and
otherwise to incur reasonable expenses in such contest, and Tenant shall pay
upon demand Tenant's Proportionate Share of any reasonable fees, expenses and
costs incurred by Landlord in contesting any assessments, levies or tax rate
applicable to the Property or portions thereof
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whether or not such contest is successful. In the event such contest results in
a refund of Taxes in any year, Tenant shall be entitled to receive its
Proportionate Share of such refund, pro-rated for the period with respect to
which Tenant paid its share of the increases in Taxes for such year, after
deducting from the refund all fees, expenses and costs incurred by Landlord in
such contest.
18.4 Payment for Partial Year. Any payment to be made pursuant to this
Article XVIII with respect to the real estate tax year in which this Lease
commences or terminates shall bear the same ratio to the payment which would be
required to be made for the full tax year as that part of such tax year covered
by the Term of this Lease bears to a full tax year.
ARTICLE XIX. EVENTS OF DEFAULT AND REMEDIES
19.1 Events of Default by Tenant and Remedies. Each of the following events
shall be deemed to be an "Event of Default" or a "Default" by Tenant under this
Lease, without notice from Landlord to Tenant or any right to cure the same on
the part of Tenant unless specified below:
(1) If Tenant shall fail (i) to pay any installment of Rent or any
other amount payable to Landlord hereunder as and when herein provided, (ii) to
obtain the insurance coverage required hereunder, or (iii) to comply with the
provisions of Sections 7.5 and 7.6 regarding Hazardous Waste and environmental
covenants.
(2) If Tenant or any guarantor of Tenant's obligations under this Lease
shall become insolvent, or shall make a transfer in fraud of creditors, or shall
make an assignment for the benefit of creditors.
(3) If Tenant, Tenant's guarantor or any permitted sublessee or
assignee, shall (i) make an assignment for the benefit of creditors, (ii) file
or acquiesce in a petition in any court (whether or not pursuant to any statute
of the United States or of any State) in any bankruptcy, reorganization,
composition, extension, arrangement or insolvency proceedings, (iii) make an
application in any such proceedings for or acquiesce in the appointment of a
trustee, receiver or similar officer for it or all or any portion of its
property, or (iv) have been a "debtor" in any voluntary and involuntary
bankruptcy proceeding on the date of execution of this Lease without having
disclosed the same to Landlord in writing prior to such date.
(4) If any petition shall be filed against Tenant, Tenant's guarantor
or any permitted sublessee or assignee (whether or not pursuant to any statute
of the United States or any State) in any bankruptcy, reorganization,
composition, extension, arrangement or insolvency proceedings and such
proceedings shall not be dismissed, discontinued, or vacated within thirty (30)
days after such petition is filed.
(5) If in any proceedings, pursuant to the application of any party
other than Tenant or Tenant's guarantor in which neither of them acquiesce, a
receiver, trustee or other similar officer shall be appointed for Tenant or
Tenant's guarantor or for all or any portion of the property of either and such
receivership or trusteeship shall not be set aside within thirty (30) days after
such appointment.
(6) If a receiver or Trustee shall be appointed for all of the Premises
or for all or substantially all of the assets of Tenant or any guarantor of
Tenant's obligations under this Lease.
(7) If Tenant shall vacate or abandon the Premises, or permit the same
to remain unoccupied and unattended, or shall remove or attempt to remove or
manifest an intent to remove, not in the ordinary course of business, Tenant's
goods or property from or out of the Premises.
(8) If Tenant shall create or suffer the creation of a lien upon the
Premises in violation of Article XX hereof.
(9) If the business operated by Tenant shall be suspended for a period
in excess of fifteen (15) consecutive days, or be closed for failure to pay any
State sales tax as required or for any other reason.
(10) If Tenant shall be a corporation and shall fail to remain in good
standing in the state in which the Property is located or the state of its
incorporation, or shall, if a foreign corporation, fail to qualify to transact
business and/or maintain a duly registered agent in the state in which the
Property is located.
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(11) If any execution, levy, attachment, or other process of law shall
occur upon Tenant's goods, fixtures or interest in the Premises.
(12) If Tenant shall fail to deliver an estoppel certificate to
Landlord within five (5) days after Landlord's request therefor, pursuant to the
requirements of Section 29.9 hereof.
(13) If Tenant shall fail to vacate and surrender the Premises upon
expiration of the Term, or earlier termination thereof pursuant to any of the
provisions of this Lease.
(14) If Tenant shall at any time be in breach or default in the
observance or performance of any of the other covenants and/or agreements
required to be performed and/or observed by Tenant hereunder for a period of ten
(10) days; provided that if such default is curable but shall reasonably require
more than ten (10) days to cure, Tenant shall be afforded an additional time
period to effect such cure, not to exceed thirty (30) days, provided Tenant
commences to cure the default within the initial ten (10) day period and
diligently prosecutes the same to completion.
Upon the occurrence of any such Event of Default, Landlord shall have
the option to pursue any one or more of the following remedies without any
notice or demand whatsoever:
A. Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails to do so Landlord may,
without prejudice to any other remedy which Landlord may have for possession or
arrearages in rental, enter upon and take possession of the Premises and expel
or remove Tenant and any other person who may be occupying the Premises or any
part thereof, by force if necessary, without being liable for prosecution or any
claim of damages therefor.
B. Enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be occupying the Premises or any part
thereof, by force if necessary, without being liable for prosecution or any
claim for damages therefor, with or without having terminated this Lease.
C. Perform any act Tenant is obligated to perform under the terms
of this Lease (and enter upon the Premises in connection therewith if necessary)
in Tenant's name and on Tenant's behalf, without being liable for prosecution or
any claim for damages therefor, and Tenant agrees to reimburse Landlord on
demand for any expenses which Landlord may incur in thus effecting compliance
with Tenant's obligations under this Lease (including, but not limited to,
collection costs and legal expenses), plus a one-time administrative fee equal
to twenty percent (20%) of the amount of such expense, plus interest thereon at
the Default Rate, calculated on a per diem basis from the date due until paid,
and Tenant further agrees that Landlord shall not be liable for any damages
resulting to Tenant from such action.
D. Alter all locks and other security devices at the Premises
without terminating this Lease.
E. Landlord specifically reserves the right to enter upon and
relet the Premises on Tenant's behalf without that action being deemed to have
been a termination of this Lease by Landlord.
F. In addition to the other remedies provided in this Lease, and
anything contained herein to the contrary notwithstanding, Landlord shall be
entitled to restrain any default or violation, or attempted or threatened
default or violation of any of the terms, covenants, conditions or other
provisions of this Lease, by injunction, order of specific performance or other
appropriate equitable relief.
19.2 Exercise of Landlord's Remedies. The remedies provided to Landlord
hereunder are intended to be cumulative, and may be exercised by Landlord in any
order, or simultaneously, without such exercise being deemed or construed as a
waiver by Landlord of its right to exercise any other remedy granted to Landlord
hereunder (or under applicable laws) with respect to the same Default. Exercise
by Landlord of any one or more remedies hereunder granted or otherwise available
shall not be deemed to be an acceptance or surrender of the Premises by Tenant,
whether by agreement or by operation of law, it being understood that such
surrender can be effected only by the written agreement of Landlord and Tenant.
No such alteration of locks or other security devices and no removal or other
exercise of dominion by Landlord over the property of Tenant or others at the
Premises shall be
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deemed unauthorized or constitute a conversion or a tortious interference with
the business, contracts or operations of Tenant, Tenant hereby consenting, after
any Event of Default, to the aforesaid exercise of dominion over Tenant's
property within the Premises. All claims for damages by reason of such re-entry
and/or repossession and/or alteration of locks or other security devices are
hereby waived, as are all claims for damages by reason of any distress warrant,
forcible detainer proceedings, sequestration proceedings or other legal process.
Tenant agrees that any re-entry by Landlord may be pursuant to judgment obtained
in unlawful or forcible detainer proceedings, or other legal proceedings, or
without the necessity for any legal proceedings, as Landlord may elect, and
Landlord shall not be liable in trespass, for tortious interference with
business or contract, or otherwise in connection therewith. To the fullest
extent permitted by applicable law, Landlord shall have the right to bring an
action for unlawful detainer or possession separate from any action brought to
recover damages due from Tenant by virtue of its Default, and the bringing of
such separate action for unlawful detainer or possession shall in no way
prejudice or cut off Landlord's right to seek damages or to exercise any of its
other rights and remedies under this Lease after recovering possession of the
Premises.
19.3 Termination of Lease. In the event Landlord elects to terminate this
Lease by reason of an Event of Default, then notwithstanding such termination
(and in addition to the additional costs and expenses recoverable from Tenant
pursuant to Section 19.5 below), Tenant shall be liable for and shall pay to
Landlord at the address specified for notice to Landlord herein the sum of all
Rent and other amounts payable to Landlord pursuant to the terms of this Lease
which have accrued to the date of such termination, plus, as damages, an amount
equal to the total Rent (Base Rent and Additional Rent, including Tenant's
Proportionate Share of Common Area Costs and Landlord's Insurance payments, the
Promotion Fund Charge, and Tenant's Tax Payments hereunder) for the remaining
portion of the Term (had such Term not been terminated by Landlord prior to the
date of expiration stated in Article I), less the present value of the then fair
rental value of the Premises for such period (taking into account likely
expenses of reletting, existence of other vacancy within the Property and then
current leasing conditions), such present value to be based upon a discount rate
of ten percent (10%) per annum. In lieu of the lump sum recovery of damages for
future rent measured under the formula set forth in the preceding sentence, but
in addition to the additional costs and expenses recoverable from Tenant
pursuant to Section 19.5 below, Landlord may, in the event of termination
pursuant to this Section 19.3, elect to recover "Indemnity Payments," as defined
hereinbelow, from Tenant. For purposes of this Lease "Indemnity Payments" means
an amount equal to the Rent and other payments provided for in this Lease which
would have become due and owing thereunder from time to time during the
unexpired Term less the rent and other payments, if any, actually collected by
Landlord and allocable to the Premises. Tenant shall, on demand, make Indemnity
Payments monthly, and Landlord may sue for all Indemnity Payments at any time
after they accrue, either monthly, or at less frequent intervals. Tenant further
agrees that Landlord may bring suit for Indemnity Payments at or after the end
of the Term as originally contemplated under this Lease, and Tenant agrees that
in such event Landlord's cause of action to recover the Indemnity Payments shall
be deemed to have accrued on the last day of the Term as originally
contemplated. Tenant hereby irrevocably waives any defense based on application
of a statute of limitation with respect to any action on behalf of Landlord to
recover such Indemnity Payments as long as such action is brought within the
applicable limitation period as measured from the last day of the Term.
19.4 No Termination. In the event that Landlord elects to repossess the
Premises without terminating this Lease, then (in addition to the additional
costs and expenses recoverable from Tenant pursuant to Section 19.5 below)
Tenant shall be liable for and shall pay to Landlord at the address specified
for notice to Landlord herein all Rent and other amounts payable to Landlord
pursuant to the terms of this Lease which have accrued to the date of such
repossession, plus total Rent (Base Rent and Additional Rent, including Tenant's
Proportionate Share of Common Area Costs and Landlord's Insurance payments, the
Promotion Fund Charge, and Tenant's Tax Escrow Payments) required to be paid by
Tenant to Landlord during the remainder of the Term until the date of expiration
of the Term as stated in Article I, diminished by any net sums thereafter
received by Landlord through reletting the Premises during said period (after
deducting expenses incurred by Landlord as provided in Section 19.5 hereof). In
reletting the Premises on Tenant's behalf, Landlord shall be entitled to grant
any concessions it deems advisable, including free rent. In no event shall
Tenant be entitled to any excess of any rental obtained by reletting over and
above the rental herein reserved. Actions to collect amounts due by Tenant to
Landlord as provided in this Section 19.4 may be brought from time to time on
one or more occasions, without the necessity of Landlord's waiting until
expiration of the Term, or such action may be brought at or after the end of the
Term, in which event Landlord's cause of action to collect such amounts shall be
deemed (for purposes of applying any applicable statute of limitations) to have
accrued on the last day of such Term, and Tenant hereby waives any defense based
on application of a statute of limitations with respect to an action brought by
Landlord to recover such
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amounts, as long as such action is brought within the applicable limitation
period as measured from the last day of the Term.
19.5 Additional Costs and Expenses of Default. Following the occurrence of
any Event of Default, Tenant shall also be liable for and shall pay to Landlord,
in addition to any sum provided to be paid under Section 19.3 or 19.4, above,
above: (i) costs and expenses incurred by Landlord to obtain and secure
possession of the Premises; (ii) broker's fees incurred by Landlord in
connection with reletting the whole or any part of the Premises; (iii) the costs
of removing, storing and/or disposing of Tenant's or other occupant's property;
(iv) the amount of all damages suffered by Landlord as a result of Tenant's
Default prior to termination or recovery of the Premises, as the case may be;
(v) the cost of making repairs and replacements required to be made by Tenant
hereunder, and of performing all covenants of Tenant relating to the condition
of the Premises; (vi) the cost of reasonable repairs, reasonable alterations,
reasonable remodeling or other reasonable expenses of putting the Premises into
a condition acceptable to a new tenant or tenants; and (vii) all reasonable
expenses incurred by Landlord in enforcing or defending Landlord's rights and/or
remedies at law, equity or hereunder, including reasonable attorneys' fees
(which shall be not less than fifteen percent (15%) of all sums then owing by
Tenant to Landlord), litigation expenses and court costs.
19.6 Reletting the Premises. In the event of termination of this Lease or
repossession of the Premises after an Event of Default, Landlord shall not have
any obligation to relet or attempt to relet the Premises or any portion thereof,
or to collect rental after reletting; Landlord may relet the whole or any
portion of the Premises for any period, to any tenant, and for any use and
purpose, upon such terms as it deems appropriate, and may grant any rental or
other lease concessions as it deems advisable, including free rent.
Notwithstanding the foregoing to the contrary, in the event of a Default by
Tenant hereunder, and provided that (a) Tenant does not contest the Landlord's
claim of Default, or any judgment obtained by Landlord against Tenant in
connection therewith, and (b) upon such Default, Tenant cooperates fully in
vacating and surrendering the Premises to Landlord as required in Article XXI,
including but not limited to delivery of all keys to the Premises, then Landlord
agrees to use the following efforts to mitigate its damages as a result of such
Default (which shall represent the full extent of Landlord's obligation to
mitigate damages hereunder): retaining a leasing agent or broker to market the
Premises at market terms and conditions, provided that (i) Landlord shall not be
obligated to show preference for reletting the Premises over any other vacant
space in the Project, (ii) Landlord shall have the right to divide the Premises,
or to consolidate portions of the Premises with other spaces, in order to
facilitate such reletting, as Landlord deems appropriate, (iii) Landlord shall
not have any obligation to use efforts other than commercially reasonable
efforts under the circumstances to collect rental after any such reletting, and
(iv) Landlord may relet the whole or any portion of the Premises for any period,
to any tenant, and for any use and purpose, upon such terms as Landlord deems
appropriate, and may grant any rental or other lease concessions as it deems
advisable, including free rent. To the extent a lease acceptable to Landlord for
all or any part of the Premises is fully executed and delivered, Tenant's
damages hereunder shall be reduced by any net amounts (i.e., net of operating
expenses and other out-of-pocket expenses associated therewith) received by
Landlord under such lease which are properly allocable to the Premises.
19.7 Joint and Several Liability. In the event Tenant is comprised of more
than one person and/or entity, all such persons and/or entities shall be jointly
and severally liable for all of the obligations and liabilities of Tenant under
this Lease.
19.8 Security Deposit. Upon receipt from Tenant of any cash security
deposit (or cash proceeds of the Letter of Credit) pursuant to the terms of
Section 1.1(m) above, such Security Deposit shall be held by Landlord without
interest as security for the performance by Tenant of Tenant's covenants and
obligations under this Lease, it being expressly understood that such deposit is
not an advance payment of rental or a measure of Landlord's damages in the event
of any default by Tenant. If at any time during the Term any of the Rent herein
reserved shall be overdue and unpaid, or any other sum payable by Tenant to
Landlord hereunder shall be overdue and unpaid, then Landlord may, at its
option, apply any portion of said deposit to the payment of any such overdue
rental or other sum. In the event of the failure of Tenant to keep and perform
any of the other terms, covenants and conditions of this Lease to be kept and
performed by Tenant, then the Landlord at its option may apply the Security
Deposit, or so much thereof as may be necessary, to compensate the Landlord for
loss, cost or damage sustained, incurred or suffered by Landlord due to such
breach on the part of Tenant. Should the Security Deposit or any portion thereof
be applied by Landlord as herein provided, Tenant shall, upon written demand of
Landlord, remit to Landlord a sufficient amount in cash to restore the Security
Deposit to the original sum deposited, and Tenant's failure to do so within five
(5) days after receipt of such demand shall constitute a Default under this
Lease. Any remaining balance of the
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Security Deposit shall be returned by Landlord to Tenant at such time after
termination of this Lease that all of Tenant's obligations under this Lease have
been fulfilled. Landlord hereby reserves the right to commingle Tenant's
Security Deposit with any other accounts that it holds, and Tenant hereby
consents thereto. Should Landlord choose to apply the Security Deposit against
damages suffered by it, such application shall not establish or signify a waiver
of any other rights or remedies of Landlord hereunder, nor shall such
application constitute an accord and satisfaction.
19.9 Landlord's Default. In the event of any default by Landlord, Tenant
will give Landlord written notice specifying such default with particularity,
and Landlord shall thereupon have thirty (30) days (or such longer period as may
be required in the exercise of due diligence) in which to cure any such default.
Unless and until Landlord fails to so cure any default after such notice, Tenant
shall not have any remedy or cause of action by reason thereof. All obligations
of Landlord hereunder will be construed as covenants, not conditions. The term
"Landlord" shall mean only the owner, for the time being, of the Property, and
in the event of the transfer by such owner of its interest in the Property, such
owner shall thereupon be released and discharged from all covenants and
obligations of the Landlord thereafter accruing, but such covenants and
obligations shall be binding during the Lease Term upon each new owner for the
duration of such owner's ownership. Notwithstanding any other provisions of this
Lease to the contrary, Tenant shall look solely to Landlord's interest in the
Property, and not to any other or separate business or non-business assets of
Landlord, or any partner, shareholder, officers or representative of Landlord,
for the satisfaction of any claim brought by Tenant against Landlord, and if
Landlord shall fail to perform any covenant, term or condition of this Lease
upon Landlord's part to be performed, and as a consequence of such default
Tenant shall recover a money judgment against Landlord (which may include
reasonable attorneys fees and court costs), such judgment shall be satisfied
only (i) out of the proceeds of sale received upon levy against the right, title
and interest of Landlord in the Property; and/or (ii) to the extent not
encumbered by a secured creditor, out of the rents or other incomes receivable
by Landlord from the property of which the Premises are a part. Further, in the
event the owner of Landlord's interest in this Lease is at any time a
partnership, joint venture or unincorporated association, Tenant agrees that the
members or partners of such partnership, joint venture or unincorporated
association shall not be personally or individually liable or responsible for
the performance of any of Landlord's obligations hereunder.
19.10 Repossession of the Premises. In the event that Landlord shall have
taken possession of the Premises pursuant to the authority herein granted, then
Landlord shall have the right to keep in place and use all of the furniture,
fixtures and equipment at the Premises, including that which is owned by or
leased to Tenant at all times prior to any foreclosure thereon by Landlord or
repossession thereof by any lessor thereof or third party having a lien thereon.
Landlord shall also have the right to remove from the Premises (without the
necessity of obtaining a distress warrant, writ of sequestration or other legal
process and without being liable for prosecution or any claim for damages
therefor) all or any portion of such furniture, fixtures, equipment and other
property located thereon and place the same in storage at any place within the
county in which the Premises is located or dispose of the same; and in such
event, Tenant shall be liable to Landlord for costs incurred by Landlord in
connection with such removal, storage and/or disposal and shall indemnify and
hold Landlord harmless from all loss, damage, cost, expense and liability in
connection with such removal, storage and/or disposal. Landlord shall also have
the right to relinquish possession of all or any portion of such furniture,
fixtures, equipment and other property to any person ("Claimant") claiming to be
entitled to possession thereof who presents to Landlord a copy of any instrument
purporting to have been executed by Tenant (or any predecessor of Tenant)
granting Claimant the right under various circumstances to take possession of
such furniture, fixtures, equipment or other property, without the necessity on
the part of Landlord to inquire into the authenticity of said instrument and
without the necessity of Landlord's making any investigation or inquiry as to
the validity of the factual or legal basis upon which Claimant purports to act;
and Tenant agrees to indemnify and hold Landlord harmless from all cost,
expense, loss, damage and liability incident to Landlord's relinquishment of
possession of all or any portion of such furniture, fixtures, equipment or other
property to Claimant. Should Tenant abandon the Premises and leave property
therein, Landlord may elect whether or not to accept the property, liquidate
said property and apply the proceeds against any sums due and owing by Tenant,
or to dispose of said property, and Tenant waives any claim to such property
after any such abandonment. For purposes of the foregoing, Tenant shall be
deemed to have abandoned its interest in such property if the same is not
removed from the Premises by Tenant within ten (10) days after Landlord's proper
demand that Tenant remove same, or within ten (10) days after expiration or
earlier termination of this Lease, whichever first occurs.
19.11 [Intentionally Deleted].
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19.12 Additional Remedies. The rights and remedies of Landlord herein
stated shall be in addition to, and not in lieu of, any and all other rights and
remedies which Landlord has or may hereafter have against Tenant or any other
person or entity, at law or in equity; and Tenant stipulates and agrees that the
rights herein granted Landlord are understood and have been expressly agreed to
by Tenant.
ARTICLE XX. MECHANICS' LIENS
Tenant shall have no authority, express or implied, to create, place or
suffer the creation or placement of any lien or encumbrance of any kind or
nature whatsoever upon the Property and/or Premises, or in any manner to bind
the interest of Landlord or Tenant in the Property and/or Premises, or to charge
the Rent payable hereunder, for any claim in favor of persons and/or entities
dealing with Tenant, including those who may furnish materials or perform labor
for any construction or repairs. Tenant covenants and agrees that it will pay or
cause to be paid all sums legally due and payable by it on account of any labor
performed or materials furnished in connection with any work performed on the
Premises with respect to which any lien is or can otherwise be validly and
legally asserted against its leasehold interest in the Premises or the
improvements thereon, and Tenant further covenants that it will indemnify and
hold Landlord harmless from and against any and all loss, liability, cost,
damage and expense based on or arising out of asserted claims or liens against
the leasehold estate or against the right, title and interest of the Landlord in
the Property and/or Premises or under the terms of this Lease. Tenant shall
discharge any such lien by payment or bonding within ten (10) days after the
same has been filed, failing which Landlord shall have the right, but not the
obligation, in addition to all other remedies herein provided, to discharge such
lien at Tenant's expense and in such event Landlord's cost thereof, plus
interest thereon at the lesser of eighteen percent (18%) per annum or the
maximum rate permitted by law, shall be reimbursed by Tenant to Landlord upon
demand as Additional Rent hereunder. Landlord and Tenant further agree that any
repairs or improvements made by Tenant to the Premises shall be deemed
authorized and ordered by the Tenant only, not the Landlord (although Landlord
preserves any right contained herein to approve, consent to, or inspect such
repairs or improvements).
ARTICLE XXI. SURRENDER; HOLDING OVER
Tenant shall deliver up and surrender to the Landlord possession of the
Premises upon the expiration of the lease term, or its earlier termination for
any reason, in as good condition and repair as the same shall be at the
commencement of the Term (ordinary wear and tear excepted), shall deliver the
keys to the Property manager, and shall inform Landlord of all combinations on
locks, safes and vaults, if any, in the Premises. Upon such surrender by Tenant,
should the Premises require any repairs which are the responsibility of the
Tenant hereunder, Landlord shall have the right to make such repairs at Tenant's
sole cost. In the event Tenant or any party claiming under Tenant remain in
possession of the Premises or any part thereof after the expiration of this
Lease without Landlord's consent, no tenancy or interest in the Premises will
result, and such action shall result in unlawful detainer and that party shall
be subject to immediate eviction and removal (provided that, during any such
period of occupancy by Tenant after the date the Lease Term expires or
terminates, Tenant shall be obligated to pay an occupancy charge to Landlord at
a per diem rate equal to two hundred percent (200%) of the per diem Base Rent
and Additional Rent which was in effect during the last month of the Lease
Term). In the event Tenant remains in possession of the Premises after the
expiration of this Lease with Landlord's written consent but without the
execution of a new lease, it shall be deemed to be occupying the Premises as a
tenant from month to month at a rental equal to one hundred percent (100%) of
the Base Rent herein provided and otherwise subject to all the conditions,
provisions and obligations of this Lease, including, but not limited to,
Tenant's obligation to pay its Proportionate Share of increases in Taxes,
Insurance Costs and Common Area Costs, and other obligations constituting
"Additional Rent" as set forth herein, adjusted as necessary or appropriate to
make the same applicable to a month to month tenancy. Tenant hereby agrees that
Tenant shall give to Landlord at least thirty (30) days written notice to quit
the Premises. The foregoing shall not constitute Landlord's consent for Tenant
to holdover. In the event Tenant remains in possession of the Premises after the
expiration of this Lease without Landlord's consent, Tenant shall also pay to
Landlord all damages sustained by Landlord resulting from retention of
possession by Tenant, including without limitation the loss of any proposed
subsequent tenant for any portion of the Premises.
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ARTICLE XXII. SUBORDINATION AND ATTORNMENT
22.1 Subordination. This Lease is and shall be, without further action by
any other party, subject and subordinate to any mortgage, deed of trust or other
lien presently existing or hereafter created upon the Premises or the Property,
and to any renewals and extensions thereof, but Tenant agrees that any such
mortgagee shall have the right at any time to subordinate such mortgage, deed of
trust or other lien to this Lease. Landlord is hereby irrevocably vested with
full power and authority to subordinate this Lease to any mortgage, deed of
trust or other lien hereafter placed upon the Premises or the Property, and
Tenant agrees upon demand to execute such further instruments subordinating this
Lease as Landlord may request, and upon any failure of Tenant to do so, without
limitation of Landlord's remedies, Landlord shall have the right to execute the
same as attorney-in-fact for Tenant.
22.2 Attornment. In the event of any foreclosure sale or sales pursuant to
the terms of any mortgages or deeds of trust or other security instruments now
or hereafter constituting a lien upon or affecting the Property or any part
thereof, by virtue of judicial proceedings or otherwise, this Lease shall, at
the option of the mortgagee or beneficiary under the deed of trust or other
security instrument, continue in full force and effect, and Tenant will, upon
request, attorn to and acknowledge the foreclosure purchaser or purchasers at
such sale, as Landlord hereunder.
ARTICLE XXIII. [INTENTIONALLY DELETED]
ARTICLE XXIV. NOTICES
24.1 Requirements. Unless otherwise specified herein, wherever any notice
is required or permitted hereunder such notice shall be in writing. Any notice
or document required or permitted to be delivered hereunder shall be deemed to
be delivered, whether actually received or not, when deposited in the United
States mail, postage prepaid, Certified or Registered Mail, Return Receipt
Requested, addressed to the parties hereto at the respective addresses set out
in Sections 1.1(b) and 1.1(d) above, or at such other addresses as they may have
hereafter specified by hand or by written notice. Delivery by hand or by
recognized overnight carrier (such as Federal Express) to the addresses set out
in Sections 1.1(b) and 1.1(d), respectively, shall be deemed to satisfy the
notice requirements of this Lease (effective upon the date of receipt or refusal
of delivery). Any notice executed and delivered by Landlord's legal counsel (or
any other authorized agent of Landlord) shall be fully effective as if the same
had been executed and delivered by Landlord.
24.2 Multiple Entities as Landlord and Tenant. If and when included within
the term "Landlord" as used in this instrument there is more than one person,
firm or corporation, all shall jointly arrange among themselves for their joint
execution of such notice specifying some individual at some specific address for
the receipt of notices and payments to Landlord; if and when included within the
term "Tenant" as used in this instrument there is more than one person, firm or
corporation, all shall jointly arrange among themselves for their joint
execution of such a notice specifying some individual at some specific address
for the receipt of notices and payments to Tenant. All parties included within
the terms "Landlord" and "Tenant," respectively, shall be bound by notices and
payments given in accordance with the provisions of this Article to the same
effect as if each had received such notice or payment.
ARTICLE XXV. ADMINISTRATIVE CHARGE; INTEREST ON PAST DUE AMOUNTS.
25.1 Administrative Charge. In the event Tenant fails to pay to Landlord
when due any installment of Rent or any other sum to be paid to Landlord which
may become due hereunder, the parties acknowledge that Landlord will incur
administrative expenses in an amount not readily ascertainable and which has not
been elsewhere provided for herein between Landlord and Tenant. Accordingly, if
Tenant should fail to pay to Landlord when due any installment of Rent or other
sum to be paid hereunder, Tenant will pay Landlord on demand an administrative
charge equal to the greater of (i) $100.00, or (ii) five percent (5%) of the
past due amount. Failure to pay such administrative charge upon demand therefor
shall constitute an Event of Default hereunder. Provision for such
administrative charge shall be in addition to all other rights and remedies
available to Landlord hereunder or at law or in equity and shall not be
construed as liquidated damages or as a limitation on Landlord's remedies in any
manner.
25.2 Interest on Past Due Amounts. In addition to any administrative
charges resulting from Tenant's failure to pay Rent or any other sums due
hereunder in a timely fashion, Tenant agrees to pay interest upon any Rent or
other sums due hereunder which are not paid on or before the due date, at an
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annual interest rate equal to the Prime Rate published from time to time by the
Wall Street Journal, plus five percent (5%), or the maximum rate permitted by
law, whichever is lesser (the "Default Rate"). Such interest shall be paid on a
per diem basis from the date due until the date paid. If publication of the Wall
Street Journal is discontinued, the parties agree that the Prime Rate in effect
at the then largest commercial bank in the United States will be applicable.
ARTICLE XXVI. [INTENTIONALLY DELETED]
ARTICLE XXVII. [INTENTIONALLY DELETED]
ARTICLE XXVIII. BANKRUPTCY
In the event the estate created hereby shall be taken in execution or by
other process of law, or if Tenant shall be adjudicated insolvent or bankrupt
pursuant to the provisions of any state or federal insolvency or bankruptcy act,
or if a receiver or trustee of the property of Tenant shall be appointed by
reason of Tenant's insolvency or inability to pay its debts, or if any
assignment shall be made of Tenant's property for the benefit of creditors, then
and in any of such events, Landlord may, at its option and in addition to any
other remedy available to Landlord, terminate this Lease and all rights of
Tenant hereunder by giving to Tenant written notice of the Landlord's election
to terminate.
In the event the trustee of the Tenant shall make timely affirmance of this
Lease under the Bankruptcy Reform Act of 1978 or similar provisions of future
laws, and continue in possession of the Demised Premises, it shall be the
responsibility of the trustee to cure or make adequate assurance that all
defaults under the provisions of this Lease shall be promptly cured, to fully
compensate or provide adequate assurance of compensation for any and all losses
suffered by Landlord, and to provide adequate assurance that all conditions of
this Lease shall be performed in the future, including but not limited to:
(a) Adequate assurance of the payment of rent and other consideration
due under this Lease.
(b) Assurance that the assumption or assignment will not breach
substantially any provisions in this Lease, such as, but not limited to, the use
provisions hereof, nor any provisions (such as exclusivity provisions) in other
lease, financing, or master agreements affecting the Property.
(c) That the Premises shall be used only in a manner consistent with
the provisions of this Lease.
In no event will Landlord be required to provide additional services or
supplies under this Lease unless fully compensated by the trustee.
In the event that any new insolvency or receivership should occur after the
closing of the bankruptcy case, the Landlord may at its option, and in addition
to any other remedy available to Landlord, terminate this Lease and all rights
of the Tenant hereunder by giving to Tenant written notice of the Landlord's
election to terminate.
ARTICLE XXIX. MISCELLANEOUS
29.1 No Partnership. Nothing herein contained shall be deemed or construed
by the parties hereto, nor by any third party, as creating the relationship of
principal and agent or of partnership or of joint venture between Landlord and
Tenant, it being understood and agreed that neither the method of computation of
Rent, nor any other provisions contained herein, nor any acts of the parties
hereto, shall be deemed to create any relationship between the parties hereto
other than the relationship of landlord and tenant.
29.2 Caption; Construction of Terms. The captions used herein are for
convenience only and do not limit or amplify the provisions hereof. The language
in all parts of this Lease shall in all cases be construed as a whole and
according to its fair meaning, and not strictly for or against either Landlord
or Tenant, and the construction of this Lease and any of its various provisions
shall be unaffected by any argument or claim, whether or not justified, that it
has been prepared, wholly or in substantial part, by or on behalf of Landlord or
Tenant. Whenever herein the singular number is used, the same shall include the
plural, and words of any gender shall include each other gender. If any
provision of this Lease subjects any action, inaction, activity or other right
or obligation of Tenant to
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the prior consent or approval of Landlord, Landlord shall be deemed to have the
right to exercise its sole and unfettered discretion in determining whether to
grant or deny such consent or approval, unless the provision in question states
that Landlord's consent or approval "shall not be unreasonably withheld", in
which event Landlord's consent shall be subject to Landlord's sole, but
reasonable, discretion.
29.3 No Waiver. One or more waivers of any covenant, term or condition of
this Lease by either party shall not be construed as a waiver of a subsequent
breach of the same covenant, term or condition. The consent or approval by
either party shall not be construed as a waiver of a subsequent breach of the
same covenant, term or condition. The consent or approval by either party to or
of any act by the other party requiring such consent or approval shall not be
deemed to waive or render unnecessary consent to or approval of any subsequent
similar act. No act or thing done by Landlord or Landlord's agent during the
term of this Lease will be deemed an acceptance of a surrender of the Demised
Premises, and no agreement to accept such surrender will be valid unless in
writing signed by Landlord. The delivery of Tenant's keys to any employee or
agent of Landlord will not constitute a termination of this Lease unless
Landlord has entered into a written agreement to that effect. No payment by
Tenant, nor receipt from Landlord, of a lesser amount than the rent and all
other charges stipulated in this Lease will be deemed to be anything other than
a payment on account of the earliest stipulated rent. No endorsement or
statement on any check, or any letter accompanying any check or payment as rent,
will be deemed an accord and satisfaction. Landlord will accept such check for
payment without prejudice to Landlord's right to recover the balance of such
rent or to pursue any other remedy available to Landlord.
29.4 Time of the Essence; Force Majeure; Notice to Lender. Time is of the
essence with respect to all provisions of this Lease. The foregoing
notwithstanding, whenever a period of time is herein prescribed for action to be
taken by Landlord, Landlord shall not be liable or responsible for, and there
shall be excluded from the computation of any such period of time, any delays
due to strikes, riots, acts of God, shortages of labor or materials, war,
governmental laws, regulations or restrictions, inclement weather, permitting
delays or any other causes of any kind whatsoever which are beyond the
reasonable control of Landlord. At any time when there is outstanding a
mortgage, deed of trust or similar security instrument covering Landlord's
interest in the Premises, Tenant may not exercise any remedies for default by
Landlord hereunder unless and until the holder of the indebtedness secured by
such mortgage, deed of trust or similar security instrument (such party, a
"Lender") shall have received written notice of such default and a reasonable
time for curing such default shall thereafter have elapsed. Landlord and Tenant
acknowledge that the Lender may change from time to time, and upon Landlord's
execution of this Lease, Landlord will provide Tenant with the name and address
of the current Lender, and notices to any and all Lender(s) shall be governed by
the terms of Section 24.1, above.
29.5 Quiet Enjoyment. Landlord agrees that if Tenant shall perform all of
the covenants and agreements herein required to be performed by Tenant, Tenant
shall, subject to the terms of this Lease, at all times during the continuance
of this Lease have the peaceable and quiet enjoyment and possession of the
Premises, without molestation, hindrance, or ejectment by Landlord or anybody
claiming by, through or under Landlord.
29.6 Amendment. No agreement shall be effective to change or modify this
Lease in whole or in part unless such agreement is in writing and duly signed by
the party against whom enforcement of such change or modification is sought.
29.7 Waiver of Right of Redemption. To the fullest extent permitted by law,
Tenant hereby expressly waives any and all rights of redemption granted by or
under any present or future laws in the event of Tenant being evicted or
dispossessed for any cause, or in the event Landlord obtains possession of the
Premises by reason of the violation by Tenant of any of the covenants and
conditions of this Lease, or otherwise. Additionally, to the fullest extent
permitted by law, Tenant waives all homestead rights and exemptions which Tenant
may have under any law as against any obligations occurring under this Lease.
29.8 Brokers. Tenant warrants that it has had no dealing with any broker or
agent in connection with the negotiation or execution of this Lease except for
Growth Properties, and Tenant agrees to indemnify and hold Landlord harmless
from and against any claims by any other broker, other agent or other person
claiming a commission or other form of compensation by virtue of having dealt
with Tenant with regard to this leasing transaction.
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29.9 Estoppel Certificate. Tenant agrees to furnish from time to time when
requested by Landlord, the holder of any deed of trust or mortgage or the lessor
under any ground Lease covering all or any part of the Property or the
improvements therein or the Premises or any interest of Landlord therein, a
certificate signed by Tenant confirming and containing such factual
certifications and representations deemed appropriate by Landlord, the holder of
any deed of trust or mortgage or the lessor under any ground Lease covering all
or any part of the Property or the improvements therein or the Premises or any
interest of Landlord therein, and Tenant shall, within five (5) days following
receipt of said certificate from Landlord, return a fully executed copy thereof
to Landlord. In the event Tenant shall fail to return a fully executed copy of
such certificate to Landlord within the foregoing five (5) day period, then
Tenant shall be deemed to have approved and confirmed all of the terms,
certifications and representations contained in such certificate. Tenant hereby
irrevocably appoints Landlord as attorney-in-fact for the Tenant with full power
and authority to execute and deliver in the name of Tenant such certificate if
Tenant fails to deliver the same within such five (5) day period and such
certificate as signed by Landlord shall be fully binding on Tenant. In addition
to the foregoing, Tenant's failure to deliver an executed estoppel certificate
within the five (5) day period set forth above shall constitute an Event of
Default hereunder.
29.10 Governing Law. The internal laws of the state in which the Premises
is located shall govern the interpretation, validity, performance and
enforcement of this Lease (without reference to choice of law principles).
29.11 Benefit and Burden. The terms, provisions and covenants contained in
this Lease shall inure to the benefit of and be binding upon the parties hereto
and their respective heirs, successors in interest and legal representatives
except as otherwise herein expressly provided.
29.12 Validity and Severability. Each provision of this Lease shall be
construed in such manner as to give such provision the fullest legal force and
effect possible. To the extent any provision herein (or part of such provision)
is held to be unenforceable or invalid when applied to a particular set of
facts, or otherwise, the unenforceability or invalidity of such provision (or
part thereof) shall not affect the enforceability or validity of the remaining
provisions hereof (or of the remaining parts of such provision), which shall
remain in full force and effect, nor shall such unenforceability or invalidity
render such provision (or part thereof) inapplicable to other facts in the
context of which such provision (or part thereof) would be held legally
enforceable and/or valid.
29.13 Name of Project. Landlord reserves the right at any time to change
any name by which the Property is designated.
29.14 Tenant's Authority. If Tenant is a corporation or partnership, the
officers or partners of Tenant (as the case may be) executing this Lease on
Tenant's behalf hereby make the following warranties and representations upon
which Landlord is relying in agreeing to lease the Premises to Tenant in
accordance with the terms of this Lease:
(i) that Tenant has been duly organized is validly existing and is in
good standing in the State of Maryland;
(ii) that Tenant has been duly qualified and is, as of the date hereof,
in good standing to transact business in the state in which the Premises are
located;
(iii) that the officers or partners executing this Lease on Tenant's
behalf have been duly authorized by all necessary corporate or partnership
action to execute the same, and that upon the execution hereof this Lease shall
be the valid and binding obligation of Tenant; and
(iv) that the financial statements supplied by Tenant to Landlord on or
before the date hereof are true and accurate in all respects, and that Tenant
shall, at all times during the term hereof, maintain a net worth equal or
greater than Tenant's net worth as disclosed in such financial statements.
29.15 Lender Approval. This Lease and the obligations of the parties hereto
are subject to the approval of the institutional lender financing Landlord's
acquisition, construction and/or ownership of the Property, if any. Landlord
shall forward an executed counterpart of this Lease to such institutional lender
for its review and approval at the time of delivery of such lease to Landlord
executed by Tenant, or at the time the initial acquisition and construction loan
with respect to the Property is made, whichever last occurs. Landlord shall
notify Tenant within two (2) business days
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<PAGE>
after its receipt thereof, of whether such approval has been given or denied,
and, if denied, the parties agree to attempt in good faith to negotiate any
modifications hereto in order to make this Lease acceptable to such
institutional lender. In the event the parties are unable to reach such an
agreement, and such institutional lender continues to deny its approval, this
Lease shall be deemed void ab initio.
29.16 Attorneys' Fees. In any litigation between the parties arising out
his Lease, and in connection with any consultants with counsel and other actions
taken or notices delivered, in relation to a default by any party to this Lease,
the prevailing party shall pay to the non-prevailing party all reasonable
expenses and court costs including attorneys' fees incurred by the
non-prevailing party, in preparation for and (if applicable) at trial, and on
appeal. Such attorneys' fees and costs shall be payable upon demand.
29.17 Independent Covenants. If Landlord shall commence any proceeding for
nonpayment of Rent, or any other payment of any other kind to which Landlord may
be entitled, or which it may claim hereunder, Tenant will not interpose any
counterclaim or setoff of whatever nature or description (other than a
compulsory counterclaim) in such proceedings. The parties hereto specifically
agree that Tenant's covenants to pay Rent or any other payments required of it
hereunder are independent of all other covenants and agreements herein
contained. The foregoing shall not be construed as a waiver of Tenant's right to
assert any such claim in a separate action brought by Tenant against Landlord.
29.18 No Election of Remedies. Mention in this Lease of any particular
remedy shall not preclude Landlord from any other remedy at law or in equity to
which it may be entitled, and all remedies herein provided are cumulative.
29.19 Incorporation of Exhibits. All exhibits attached hereto, and any
rider, addendum or special stipulations attached hereto, are incorporated herein
by this reference and made a part of this Lease.
29.20 Full Execution/No Offer. This Lease shall not be effective, and no
leasehold or other agreement shall be deemed or construed to have been created
between Landlord and Tenant, until such time as this Lease has been fully
executed by both Landlord and Tenant, and a fully executed original has been
delivered from Landlord to Tenant. Delivery to Tenant of drafts of this Lease by
Landlord or agents of Landlord shall in no way constitute the making of an offer
to lease, or any other offer, by Landlord to Tenant, and Landlord shall not be
bound by any terms or provisions sets forth in such drafts, even if the draft in
question was prepared by Landlord or its agents and signed by Tenant or bound in
any other way relating to the Premises or otherwise, unless and until the same
has been duly executed and delivered by both Landlord and Tenant.
29.21 Waiver of Jury Trial. Landlord and Tenant hereby expressly waive
trial by jury in any action, proceeding or counterclaim, brought by either of
them against the other, on any claim or matter whatsoever arising out of or in
any way connected with this Lease, their relationship as landlord and tenant,
Tenant's use and occupancy of the Premises and/or any claim of injury or damage.
29.22 Rules Against Perpetuities. If and to the extent that any of the
options, rights and privileges granted to Tenant under the provisions of this
Lease would, in the absence of the limitation imposed by this Section, be
invalid or unenforceable as being in violation of the rule against perpetuity or
any other rule of law relating to the vesting of interests in property or the
suspension of the power of alienation of property, then it is agreed that
notwithstanding any other provision of this Lease, said options, rights and
privileges, subject to the respective conditions governing the exercise of such
options, rights and privileges, shall be exercisable by Tenant only during a
period which shall end no later than twenty (20) years after the date of
execution of this Lease.
29.23 Other Tenants. Landlord reserves the absolute right to enter into
such other leases and tenancies in the Property as Landlord shall determine in
the exercise of its sole discretion. Tenant does not rely on the fact, nor does
Landlord represent, that any specific tenant or occupant or number of tenants or
occupants, or types or mix of tenants or occupants shall during the lease term
occupy any space in the Property or that the Property is maintained, managed or
otherwise operated in any particular style such as by way of example and not in
any way in limitation, as a first-class Property.
29.24 Landlord Action. If at any time during the term hereof, Tenant
requests, or causes any other individual or entity to request, the review,
consent, approval or the performance by Landlord of any other action not
specifically set forth as an obligation of Landlord under this Lease including,
without limitation, the preparation or execution of any legal documentation
(collectively, "Landlord
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Action"), Tenant shall promptly reimburse Landlord for any and all cost and
expenses (including, without limitation, reasonable attorneys' fees) incurred by
Landlord in relation to Landlord Actions. Tenant agrees that Landlord may make
the performance of any Landlord Action conditioned upon the prior reimbursement
by Tenant of such costs and expenses.
29.25 Acceptability of the Premises for Permitted Use. By its entry into
this Lease, Tenant represents and acknowledges to Landlord that Tenant has
satisfied itself as to the use which it is permitted to make of the Premises and
has inspected the Premises, and the streets, sidewalks, curbs, utilities and
access ways contiguous to or adjoining the same, that the same are acceptable to
Tenant for use by Tenant for the Permitted Use pursuant to this Lease, in the
condition or state in which they are now found and that Landlord has made no
express or impled warranty, representation or covenant to or with Tenant with
respect to the same, other than as may be expressly set forth in this Lease. All
of the terms, covenants and conditions of this Lease are in all respects subject
and subordinate to all zoning restrictions affecting the Premises, and the
Building and Property in which they are located, and Tenant agrees to be bound
by all such restrictions. Landlord further does not warrant that any license(s),
permit(s) or other approval(s) which may be required for the business to be
conducted by Tenant upon the Premises will be granted, or, if granted, will be
continued in effect or renewed, and any failure to obtain such license(s),
permit(s) or approval(s), or any revocation thereof or failure to renew the
same, shall not release or discharge Tenant from any or all of its obligations
under this Lease.
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THIS LEASE IS THE COMPLETE AGREEMENT BETWEEN THE PARTIES HERETO. TENANT SHOULD
NOT RELY UPON, AND LANDLORD IS NOT BOUND BY, ANY PROMISES, STATEMENTS OR
REPRESENTATIONS, WHETHER WRITTEN OR ORAL, NOT CONTAINED IN THIS LEASE.
THE PARTY OR PARTIES SIGNING THIS LEASE ON BEHALF OF TENANT ACKNOWLEDGE THAT HE,
SHE OR THEY HAVE READ THIS LEASE, COMPLETELY UNDERSTAND THE RIGHTS AND
LIABILITIES OF TENANT HEREUNDER, HAVE BEEN GIVEN THE OPPORTUNITY TO SEEK THE
ADVICE OF COUNSEL, AND HEREBY KNOWINGLY AND VOLUNTARILY EXECUTE THIS INSTRUMENT.
EXECUTED BY TENANT, this 22 day of January, 1997.
Attest/Witness: TENANT:
CREDITRUST CORPORATION
Name: By: /s/ Joseph K. Rensin
------------------------ -------------------------
Title: Title: President
------------------------ -----------------------
Name:
-------------------------
Title:
------------------------
EXECUTED BY LANDLORD, this 22 day of January, 1997.
Attest/Witness: LANDLORD:
Name: A & E PARTNERS, L.P.
------------------------- By: Emmes Meadows Corp., General Partner
Title:
------------------------
Name: By: /s/ Andrew Davidoff
------------------------ -------------------------
Title: Title: Vice President
------------------------ -----------------------
6854-6
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<PAGE>
11/94
EXHIBIT A
PROPERTY SITE PLAN SHOWING PREMISES
[To Be Attached]
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<PAGE>
11/94
EXHIBIT B
LEGAL DESCRIPTION OF THE PROPERTY
[To Be Attached]
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<PAGE>
11/94
EXHIBIT C-1
APPROVED PLANS
[To Be Attached]
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11/94
EXHIBIT C-2
JAID GROUP ELEVATION DRAWINGS RE LANDSCAPING
[To Be Attached]
6854-6
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Exhibit 10.12
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE (this "Amendment") is dated as of February
27, 1998, by and between A & E PARTNERS, L.P., a Delaware limited partnership
(hereinafter, called "Landlord") and CREDITRUST CORPORATION, a Maryland
corporation (hereinafter, called "Tenant").
WITNESSETH
WHEREAS, Landlord and Tenant entered into a certain Lease dated January 22,
1997 (the "Lease"), pursuant to which Tenant leased from Landlord certain
commercial office premises (the "Premises") consisting of approximately 35,471
square feet of rentable area comprising the entire office building located at
1705 Whitehead Road, Baltimore, MD 21207.
WHEREAS, pursuant to Section 3.2(a) of the Lease, the Lease Term of the
Lease commenced on March 3, 1997, the date that Landlord delivered the
Completion Notice to Tenant, and expires on December 31, 2002; and
WHEREAS, Landlord and Tenant wish to (i) confirm the continued existence of
the Lease, (ii) agree to the installation of new HVAC equipment in the Premises,
(iii) increase the Base Rent amounts, and (iv) further amend and modify the
Lease in the manner set forth in this Amendment.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Landlord and Tenant, intending to be legally
bound, agree as follows:
1. Recitals: The recitals set forth above are true and correct in all
respects and are incorporated herein as a substantive part of this Amendment.
2. Defined Terms. All capitalized terms used and not otherwise defined
herein shall have the meanings given to them in the Lease.
3. New HVAC Equipment. Landlord shall, at its own cost and expense, install
new HVAC equipment (the "HVAC Equipment") in the Premises as Landlord shall
determine, the total cost of which shall not exceed $40,970.00. Installation of
the HVAC Equipment shall commence within a reasonable time period following the
execution of this Amendment by Landlord and Tenant and shall be conducted
diligently by Landlord. Tenant acknowledges that such installation may cause
some disruption to operations within the Premises, and Landlord agrees to use
reasonable efforts to limit such disruption to the extent reasonably
practicable. In connection with such installation, Landlord shall designate John
Graham of Emmes Realty Services, Inc. ("Emmes"), or any other employee of Emmes
reasonably approved by Tenant, to serve as construction manager (the
"Construction Manager") to manage the installation of the
<PAGE>
HVAC Equipment and Tenant shall be, and hereby is, responsible for payment of a
construction management fee equal to five percent (5%) of the cost of such HVAC
Equipment and installation, which fee shall be paid by Tenant to Landlord within
ten (10) business days after Landlord's written demand, but only after
installation satisfactory to Tenant.
The $40,970.00 maximum price for the HVAC Equipment and installation is
based upon an estimate for such work which Landlord has received from R.M.
Schmidt ("Schmidt"). Any and all costs, fees or expenses incurred in connection
with the acquisition and installation of the HVAC Equipment (or any
modifications thereto requested by Tenant) in excess of $40,970.00 ("Excess
Costs") shall be the sole responsibility of Tenant and Tenant shall pay any such
Excess Costs within ten (10) business days after Tenant's receipt of Landlord's
written demand. The foregoing notwithstanding, if Schmidt's final contract
proposal reflects the possibility of any Excess Costs, Landlord shall promptly
(and in all events prior to authorizing commencement of the work) notify Tenant
in writing of the specific details and shall, if Tenant requests at the time of
such notification, schedule a meeting with Tenant and Schmidt to be held within
three (3) business days after such notification at a place and time reasonably
designated by Landlord. If Tenant does not request such a meeting, or fails to
attend such meeting at the designated place and time, Landlord shall have the
right to authorize Schmidt to perform the installation of the HVAC Equipment in
accordance with Schmidt's final contract proposal. If such a meeting is
requested, Tenant, Landlord and Schmidt shall meet to discuss alternative
methods for completing the installation of the HVAC Equipment at a reduced cost,
including value engineering, redesign and/or equipment modifications. Tenant and
Landlord shall work together in good faith to reach agreement on a final design
and contract proposal, and Tenant's proposal(s) shall be given equal
consideration to Landlord's as long as Tenant's proposal(s) would not violate
any federal, state or local law, regulation or code, nor place any additional or
unreasonable burden on Landlord above and beyond Landlord's obligation to
acquire and install the HVAC Equipment into the Premises at a $40,970 maximum
cost to Landlord. Nevertheless, if within five (5) business days following such
meeting, Landlord and Tenant are unable despite their good faith efforts to
agree upon a mutually acceptable alternative to Schmidt's original final
contract proposal, this document shall be null and void and no work shall be
authorized.
4. Base Rent. In consideration of Landlord's installation of the HVAC
Equipment, the Base Rent payable by Tenant for the eleventh (11th) month
through, and including, the seventieth (70th) month of the Term shall be, and
hereby is, modified as set forth in Exhibit A attached hereto and made a part
hereof. Additionally, in consideration of Landlord's installation of the HVAC
Equipment, the parties acknowledge that the Term may not be shortened under any
of the circumstances set forth in Section 3.2(a) of the Lease.
5. Effective Date. This Amendment shall constitute a present and binding
agreement between the parties hereto which shall be effective in all respects
immediately upon the execution and delivery hereof by the parties.
6. Full Force and Effect. Except as modified herein, the Lease shall
continue in full force and effect, unmodified.
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<PAGE>
7. Counterpart Execution. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
8. No Defaults. By the creation hereof, Tenant represents to Landlord that,
to the best of its knowledge, information and belief, neither Landlord nor
Tenant is in default of its respective obligations under the Lease, and no
condition exists which, with the giving of notice or the passage of time would
constitute a default by Landlord under the Lease. Tenant further acknowledges
that, pursuant to Section 6.2 (C) of the Lease, Landlord, on even date herewith,
has delivered the sum of Ten Thousand Dollars ($10,000.00) to Tenant in
satisfaction of Landlord's obligation to secure off-Property overflow parking
for Tenant on or before August 1, 1997 and, as a consequence of such payment to
Tenant, Landlord owes no further or future obligations or duties to Tenant under
Section 6.2(C) of the Lease.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Lease Agreement on the date and year first above written.
Landlord:
A & E PARTNERS, L.P., a Delaware
limited partnership
By: Emmes Meadows Corp., a Delaware
corporation, General Partner
By: /s/ Andrew Davidoff
-----------------------------------
Name: Andrew Davidoff
------------------------------
Title: Vice President
------------------------------
Tenant:
CREDITRUST CORPORATION, a Maryland
corporation
By: /s/ Joseph K. Rensin
-----------------------------------
Name: Joseph K. Rensin
-------------------------------
Title: President
------------------------------
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<PAGE>
Exhibit 23.1
Suite 375
2070 Chain Bridge Road
Vienna, VA 22182-2536
703 847-7500
FAX 703 848-9580
Grant Thornton
Grant Thornton LLP Accountants and
Management Consultants
The U.S. Member Firm of
Grant Thornton International
Consent of Independent Certified Public Accountants
We have issued our report dated February 24, 1998, accompanying the financial
statements of Creditrust Corporation contained in the Registration Statement
and Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it
appears under the captions "Experts."
Grant Thornton LLP
Vienna, Virginia
April 9, 1998
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Joseph K. Rensin as his or her true
and lawful attorney-in-fact and agent, with full power of substitution, for
him or her and in his or her name, place and stead in any and all capacities
to sign any or all amendments or post-effective amendments to this
Registration Statement, including amendments made pursuant to Rule 462 under
the Securities Act of 1933, as amended, and to file the same with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, to sign any and all applications,
registration statements, notices or other document necessary or advisable to
comply with the applicable state securities laws, and to file the same,
together with all other documents in connection therewith, with the
appropriate state securities authorities, granting unto said attorney-in-fact
and agent, or his substitute or substitutes, full power and authority to do
and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might
or could do in person, thereby ratifying and confirming all that said
attorney-in-fact and his agents, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Frederick W. Glassberg
- ------------------------------ Director April 13, 1998
Frederick W. Glassberg
/s/ John G. Moran
- ------------------------------ Director April 12, 1998
John G. Moran
/s/ Harry G. Pappas, Jr.
- ------------------------------ Director April 14, 1998
Harry G. Pappas, Jr.
/s/ Michael S. Witlin
- ------------------------------ Director April 13, 1998
Michael S. Witlin
</TABLE>
