<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1998
REGISTRATION NO. 333-50103
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
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
CHAIRMAN 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.............. $34,500,000.00(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>
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>
[LOGO]
SUBJECT TO COMPLETION DATED JUNE 24, 1998
2,000,000 SHARES
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, Chairman
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 8 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 (i) a non-accountable expense allowance payable to the
Representatives of the Underwriters equal to 1% of the gross proceeds of the
Offering and (ii) Common Stock Purchase Warrants to purchase up to 54,000
shares of Common Stock at a price per share equal to the Price to Public,
which Warrants were purchased by an affiliate of Boenning & Scattergood,
Inc. in April 1998. 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. ON JUNE
19, 1998, CREDITRUST SPV2, LLC, A SPECIAL-PURPOSE FINANCE SUBSIDIARY OF THE
COMPANY, COMPLETED A SECURITIZATION CONSISTING OF MOST OF THE RECEIVABLES OWNED
BY CREDITRUST AND CERTAIN RECEIVABLES OBTAINED FOR MANAGEMENT IN 1997 AND
SERVICED BY THE COMPANY (THE "SERVICED RECEIVABLES") (THE "SECURITIZATION"). SEE
"PROSPECTUS SUMMARY--RECENT DEVELOPMENTS" AND "RECENT
DEVELOPMENTS--SECURITIZATION." PRO FORMA STATEMENT OF EARNINGS DATA FOR THE YEAR
ENDED DECEMBER 31, 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998 ASSUME THE
SECURITIZATION CLOSED ON JANUARY 1, 1997 AND JANUARY 1, 1998, RESPECTIVELY, AND
PRO FORMA BALANCE SHEET DATA GIVE EFFECT TO THE SECURITIZATION AS OF MARCH 31,
1998.
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 $1.4 billion in Receivables, as
measured by the balance charged-off by the Originating Institutions. Since its
inception, the Company has collected in excess of $35 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 two 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 ("customers") 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;
3
<PAGE>
- Creditrust is able to tailor repayment 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 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 a greater
probability of contacting customers and ultimately collecting on the Receivable.
The Company offers a full complement of support services to its associates,
including ongoing training, quality improvement, computer automated account
management and predictive dialing capacity (a computerized telephony system
which utilizes predictive algorithms to maximize the number of customer contacts
and which passes live calls to account officers while filtering out unproductive
calls such as busy signals and no answers), skiptrace (a process wherein the
Company appends additional location information to its customer records through
a combination of computerized database evaluations and manual investigative
efforts in order to maximize the number of verified customer phone numbers
available for account officer contacts) and legal (the function that coordinates
recovery efforts on accounts that have been referred to attorneys for
collection), 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 Receivables.
Creditrust strives to maintain and enhance on an ongoing basis 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; and (v) leverage its
current platform to service substantially larger Receivables volumes without
proportional cost increases. 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 distressed consumer Receivables.
The Company recognizes that a key element of its future success is ready
access to capital resources. The Company expects to meet its capital
requirements through operating cash flows and the application of the proceeds of
this Offering, the Securitization, future similar securitizations and borrowings
from financial institutions that may be available in the future.
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.
4
<PAGE>
RECENT DEVELOPMENTS
In June 1998, the Company completed a securitization of most of the
Receivables owned by the Company at March 31, 1998 and the Serviced Receivables
by issuing, through a special-purpose finance vehicle, $14.5 million principal
amount of 6.43% Creditrust Receivables-Backed Notes Series 1998-1 (the
"Securitization Notes"). These notes received a "AA" rating from Standard &
Poor's Corporation and are insured by a financial guaranty insurance policy. The
Company recognized a gain on sale in the amount of $6.1 million and will receive
a 20% servicing fee on future recoveries. The Company also received cash of $5.6
million and recorded a residual investment in securitization of $4.2 million.
See "Recent Developments--Securitization."
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 pay
principal plus accrued interest on the Company's $5.0
million of 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 common stock purchase 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 Capital Stock."
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."
5
<PAGE>
SUMMARY FINANCIAL DATA
(dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 31,
-------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1997 1998
----------- ----------- --------- --------- -------------------- ----------- -----------
<CAPTION>
PRO
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (AUDITED) FORMA(1) (UNAUDITED) (UNAUDITED)
--------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Total Revenue................ $ 2,182 $ 3,639 $ 4,560 $ 5,521 $ 9,826 $ 12,629 $ 1,940 $ 3,403
Total Expenses from
Operations................. 1,681 2,984 3,114 4,518 8,782 8,981 1,543 2,673
Net Earnings................. 110 265 734 474 456 1,823 174 415
Earnings per Common Share.... $ .02 $ .04 $ .12 $ .08 $ .08 $ .30 $ .03 $ .07
Weighted Average Number of
Shares Outstanding......... 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000
OTHER DATA:
Weighted Average Investment
in Finance
Receivables(2)............. 1,152 1,470 1,731 3,187 5,919 6,624 4,831
Collections on Finance
Receivables(3)............. 2,385 3,971 4,914 6,252 12,420 2,353 3,766
EBITDA(4).................... 514 726 1,538 1,162 1,268 421 823
Cash Flows provided by
(used in):
Operating Activities....... (83) 191 982 1,207 1,237 543 711
Investing Activities....... (428) (738) (585) (4,188) 1,431 (163) 155
Financing Activities....... 623 1,015 (138) 2,909 (2,374) (307) (723)
Adjusted EBITDA(4)........... 741 1,054 2,208 1,994 3,379 838 1,230
Charged-off Balance
(at end of period)(3)...... $ 71,252 $ 119,256 $ 175,512 $ 434,563 $1,104,647 $ 452,013 $1,104,647
Number of Accounts........... 27,366 55,524 84,528 213,899 580,353 221,587 520,353
Number of Employees.......... 44 44 61 125 245 161 218
<CAPTION>
<S> <C>
PRO
FORMA(1)
---------
<S> <C>
STATEMENT OF EARNINGS DATA:
Total Revenue................ $ 9,067
Total Expenses from
Operations................. 2,701
Net Earnings................. 3,781
Earnings per Common Share.... $ .63
Weighted Average Number of
Shares Outstanding......... 6,000,000
OTHER DATA:
Weighted Average Investment
in Finance
Receivables(2).............
Collections on Finance
Receivables(3).............
EBITDA(4)....................
Cash Flows provided by
(used in):
Operating Activities.......
Investing Activities.......
Financing Activities.......
Adjusted EBITDA(4)...........
Charged-off Balance
(at end of period)(3)......
Number of Accounts...........
Number of Employees..........
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
------------------------------------------
<S> <C> <C> <C>
PRO FORMA
(UNAUDITED) PRO FORMA(5) AS ADJUSTED(6)
----------- ------------- --------------
BALANCE SHEET DATA:
Cash............................................................ $ 913 $ 11,636 $ 31,846
Total Debt...................................................... 1,558 4,505 --
Total Stockholder's Equity...................................... 2,479 8,005 32,556
</TABLE>
- ------------------------
(l) Assumes the Securitization closed on January l, l997 and January l, l998,
respectively. The principal amount of the Securitization Note issuance is
assumed to be $21.1 million at January 1, 1997 and $16.7 million at January
1, 1998. Gives effect to, among other things, (i) elimination of income on
finance Receivables contributed to the Securitization; (ii) an increase in
servicing income related to the assumed receipt of servicing income on the
Receivables included in the Securitization and a decrease in servicing
income related to the Serviced Receivables; (iii) gain on the sale of
finance Receivables recognized on the sale of the Company's finance
Receivables in the Securitization; (iv) expensing of certain deferred costs
related to the securitized Receivables; (v) elimination of related interest
expense; and (vi) adjustment of the deferred tax liability to give effect to
the Securitization being treated as a sale for financial statement purposes
and a financing for income tax purposes. Further assumes that the
Subordinated Notes were issued on January 1, 1997 and January 1, 1998,
respectively, and gives effect to interest expense and amortization of
original issue discount for the periods in which this debt is assumed to be
outstanding. See Notes to Pro Forma Financial Statements.
(2) Does not include the Serviced Receivables.
(3) Includes the Serviced Receivables as of December 31, 1997.
(4) EBIDTA is defined as 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 because management believes these
indicators relied upon by the Company in the management of its business as a
key measure of the Company's ability to derive cash from its investing and
financing activities 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.
For instance, an increase in EBITDA and Adjusted EBITDA would generally
indicate to the Company that increases in income on finance
6
<PAGE>
Receivables and servicing fees and, in the case of Adjusted EBITDA only,
collections applied to principal, would indicate increased capacity to fund
purchases of additional portfolios without reliance on external funding
sources. Conversely, a reduction in these indicators would mean that there
was less internally generated cash available for new portfolio investments.
Additionally, the manner in which the Company computes EBITDA and Adjusted
EBITDA may not be the same way in which other companies compute similarly
described data. Therefore, this data may not be comparable to similarly
titled measures of other companies.
(5) Gives effect to (i) the assumed closing of the Securitization on March 31,
1998, including the assumed repayment of debt incurred to carry finance
Receivables, (ii) the issuance of the Subordinated Notes and the Warrants in
April 1998, and (iii) the 2,000,000 shares of Common Stock offered hereby
and the application of the net proceeds therefrom to repay the Subordinated
Notes. As the result of the assumed repayment of the Subordinated Notes and
the write-off of related debt issuance costs, the Company will recognize an
extraordinary charge for early extinguishment of indebtedness of
approximately $659,000 (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
repayment).
(6) Gives effect to the issuance of 2.0 million shares of Common Stock at an
assumed public offering price of $14.00 per share and the application of the
net proceeds therefrom. See "Use of Proceeds."
7
<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 generated by 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 increased its consumer accounts by
160% when it began servicing approximately 400,000 additional consumer accounts
(the "Serviced Receivables"). 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 personnel turnover rate of approximately 15% for 1995,
approximately 12% for 1996 and approximately 15% for 1997. The annual personnel
turnover is computed by dividing the number of employees who left the Company
during a particular month by the number of employees who were employed at the
beginning of the month, averaged over 12 months. 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
8
<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."
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 of Receivables and capital expenditures and other costs relating to
the expansion of its operations. The Company recognizes revenue based on
estimates of future collections with respect to the portfolios of Receivables it
owns and are accounted for as static pools. Once included in such pools, the
compositions of the portfolios are not adjusted if particular Receivables do not
perform as anticipated. Although the Company's estimates are based on extensive
statistical databases covering multiple years of operating history, there can be
no assurance that the actual recovery experience on one or more of such pools
will correlate to the Company's historical statistical experience. No assurance
can be given that the Company will not be required to record impairment
provisions in amounts that materially adversely affect results of operations. In
the third quarter of 1997, the Company made refinements in its collection models
to reflect the performance of individual portfolios 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. No assurance can be given that
unanticipated future events, including further refinements to the Company's
collection models, will not result in changes in estimates in future periods. 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 the Common Stock could be
materially adversely affected. The Company's net earnings for the quarter in
which this Offering is concluded will also be adversely affected by a non-cash
extraordinary charge for early extinguishment of indebtedness.
RISKS ASSOCIATED WITH SECURITIZATION
In June 1998, the Company completed its initial securitization comprising
most of the finance Receivables owned by the Company at March 31, 1998 and the
Serviced Receivables. Securitizations expose the Company to various risks. Under
the indenture and servicing agreement providing for the issuance of the
Securitization Notes, the Company, as servicer, could lose the right to service
the Receivables included in the Securitization for a variety of reasons
constituting servicer defaults, including defaults in servicing obligations,
breaches of representations and warranties related to the Securitization,
bankruptcy or other insolvency of the Company, and other matters affecting the
Company. The loss of the right to service the Receivables included in the
Securitization would have a material adverse effect on the Company. The
Securitization resulted in recognition of a gain on sale and the realization of
the residual investment in securitization for financial reporting purposes.
Future income will be reduced due to the elimination of income on finance
Receivables and the receipt of servicing income, and interest income on residual
investment in securitization. In addition, if the Company were required to
record an impairment with respect to the residual investment in finance
receivables, the results of operations could be adversely
9
<PAGE>
affected. The Company intends to pursue additional securitizations in the
future. Additionally, the timing of future securitizations, if any, could affect
period-to-period comparisons. There also can be no assurance that the Company
will be able to complete future securitizations at all or on terms favorable to
it.
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. The Company does not have an employment
agreement with Joseph K. Rensin, Chairman and Chief Executive Officer of the
Company, but does maintain "key man" life insurance coverage in the amount of
$4,000,000 on Mr. Rensin. 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 other executive
officers or 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 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, the Company has not yet received a
lending commitment from any financial institution and there can be no assurance
that financing will be available on favorable terms, or at all. To the extent
the Company is unable to secure and maintain financing, there may be 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 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
10
<PAGE>
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
would be materially adversely affected.
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 the Underwriters' over-allotment option in full). 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 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 databases. 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. The
Company believes its major competitors include Commercial Financial Services,
Tulsa, Oklahoma, West Capital Corporation, 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."
11
<PAGE>
SUBSTANTIAL DISCRETION OF MANAGEMENT CONCERNING USE OF PROCEEDS
The Company expects to use a substantial portion of the net proceeds of this
Offering to pay principal and accrued interest on $5.0 million of Subordinated
Notes, and to purchase additional portfolios of Receivables, with the remaining
proceeds being used for working capital requirements and other general corporate
purposes. However, the Company does not have any specific commitments to
purchase any particular portfolios. Accordingly, management will have
substantial discretion in the allocation of the net proceeds of this Offering.
See "Use of Proceeds."
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 or in which
Originating Institutions are located. If certain of these laws apply to the
Company, failure to comply could have a material adverse effect on the Company.
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 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. Any credit facility which the Company may enter into may
contain dividend restrictions.
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."
12
<PAGE>
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 Board of Directors to establish the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of, and issue up to,
5,000,000 shares of Preferred Stock without additional stockholder approval.
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 $9.93 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 expenses. In connection with the issuance of the Subordinated
Notes, the Company issued the Warrants, 396,000 of which are exercisable 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 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 396,000 shares of Common
Stock (at a purchase price of $11.90 per
13
<PAGE>
share assuming an initial public offering price of $14.00 per share) 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 (and an affiliate of Boenning & Scattergood, Inc. which purchased
54,000 Warrants will purchase shares at a purchase price equal to the initial
public offering price per share and has agreed, subject to certain exceptions,
for a period of one year from the effective date of this Offering, not to sell
or otherwise dispose, directly or indirectly, of any shares of Common Stock).
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.
NEED FOR QUALIFIED INDEPENDENT UNDERWRITER
Under Rule 2720 of the Rules of Conduct of the NASD, when more than 10% of
the subordinated debt securities of the Company are held by a member of the NASD
or an affiliate of a member, the Price to Public of the Shares must be no higher
than that recommended by a "qualified independent underwriter" as that term is
defined in Rule 2720. Boenning & Scattergood, Inc., one of the Representatives,
is a member of the NASD, and an affiliate of Boenning & Scattergood holds 12% of
the Company's Subordinated Notes. In accordance with Rule 2720, Ferris, Baker
Watts, Incorporated has agreed to act as qualified independent underwriter in
connection with pricing the Offering and conducting due diligence. The price to
the public of the Shares, when sold to the public at the Price to Public set
forth on the cover page of this Prospectus, will be no higher than that
recommended by Ferris, Baker Watts, Incorporated. Ferris, Baker Watts,
Incorporated will receive no additional compensation for its services as
qualified independent underwriter. See "Underwriting."
FORWARD LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements. 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.
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<PAGE>
RECENT DEVELOPMENTS--SECURITIZATION
In June 1998, the Company completed its first securitization of finance
Receivables. The Company intends to pursue similar securitization transactions
in the future. In the Securitization, the Company transferred most of the
Receivables owned by the Company at March 31, 1998 and also purchased and
simultaneously transferred the Serviced Receivables, at a transaction price
negotiated at the time that the
servicing arrangement was initiated, to Creditrust SPV2, LLC ("SPV2"), a
special-purpose finance company created and owned by the Company. SPV2 issued
$14.5 million of 6.43% Creditrust Receivables-Backed Notes, Series 1998-1 (the
"Securitization Notes"), secured by Receivables transferred to SPV2 and a
financial guaranty insurance policy. The Securitization Notes received a "AA"
rating from Standard & Poor's Corporation.
The Securitization Notes were sold to institutional investors in a private
placement transaction. The Company received the proceeds of the sale. The
projected recovery value of the transferred Receivables exceeded the principal
balance of the Securitization Notes. The Company retains a residual interest in
SPV2 representing this interest. The Company acts as servicer with respect to
the Receivables included in the Securitization, and receives a servicing fee
equal to 20% of collections. As servicer, the Company continues its collection
activities with its customers as it otherwise would with owned Receivables.
Accordingly, customer relationships are not affected by the Securitization.
The Securitization was treated as a sale under generally accepted accounting
principles. For securitized pools of finance Receivables, future income is
reduced due to the elimination of income on finance Receivables and partially
offset by the receipt of servicing income and interest income on the residual
investment in securitization. After payment of all principal and interest on the
Securitization Notes, the Company will receive all collections, subject to an
obligation to pay the seller of the Serviced Receivables 10% of collections with
respect to the previously Serviced Receivables after aggregate collections on
this portfolio exceed a specified amount with respect to the Serviced
Receivables.
The proceeds from the Securitization were used by the Company to pay the
purchase price of the Serviced Receivables, to retire debt associated with the
owned Receivables, and to pay transaction costs. The Company recognized sales
income on the sale of the owned Receivables in the Securitization of $6.1
million and received cash of $5.6 million. The Company also recorded a residual
investment in securitization of $4.2 million. The investment in securitization
is accounted for under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") as debt securities held to maturity and is estimated to
accrue income at the rate of 12% per annum. Once the Securitization Notes are
retired, recoveries will be applied to reduce the carrying amount of the
investment in securitization and accrued income.
15
<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 the $5.0 million of
Subordinated Notes plus accrued interest. 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 are being used for general working capital
purposes, including the purchase of additional portfolios of consumer
Receivables aggregating $3.2 million through June 23, 1998. In connection with
the issuance of the Subordinated Notes, the Company issued the Warrants. The
remaining net proceeds of the Offering will be used primarily to acquire
Receivables. Net proceeds may also be used for working capital requirements and
for other general corporate purposes. Pending such use, it is anticipated that
the Company will invest the net proceeds in short-term, investment grade
marketable securities.
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, any future credit facility may restrict the Company from
paying dividends. 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."
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<PAGE>
DILUTION
At March 31, 1998, the pro forma net tangible book value of the Company was
$8.0 million or $1.33 per share. Pro forma net tangible book value represents
the total assets less total liabilities of the Company adjusted for the assumed
completion of the Securitization and issuance of the Warrants as of March 31,
1998. 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
$659,000, the pro forma net tangible book value of the Company would have been
$32.6 million or $4.07 per share. This represents an immediate increase in pro
forma net tangible book value of $2.74 per share to the Company's existing
stockholder and an immediate dilution in net book value of $9.93 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........... 1.33
Increase attributable to new investors................... 2.74
-----------
Pro forma net book value after the Offering.............. 4.07
-----------
Dilution in net book value to new investors................ $ 9.93
-----------
-----------
</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
396,000 shares at $11.90 per share and employee stock options or Warrants to
purchase 429,000 shares of Common Stock at the initial public offering price. To
the extent that any of the outstanding Warrants exercisable at a price less than
the initial public offering price are exercised, there will be further dilution
to new investors. See "Shares Eligible for Future Sale."
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 on an actual, pro forma and pro forma as adjusted basis to give effect:
(i) on a pro forma basis to the Securitization and elimination of indebtedness
under the Company's bank credit facility of $1.5 million and 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 pay principal and
interest on the Subordinated Notes (which will result in a $659,000 non-cash
extraordinary charge for early extinguishment of indebtedness, after taxes, upon
the retirement of the Subordinated Notes). 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 actual and pro forma financial
statements, including the notes thereto, and the other financial information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA (1) AS ADJUSTED
--------- ------------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Notes Payable............................................................ $ 1,558 $ 0 $ 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.......................................................... 53 547 25,737
Retained Earnings........................................................ 2,367 7,398 6,739
--------- ------------- -----------
Total Stockholder's Equity............................................... 2,479 8,005 32,556
--------- ------------- -----------
Total Capitalization..................................................... $ 4,037 $ 12,510 $ 32,556
--------- ------------- -----------
--------- ------------- -----------
</TABLE>
- ------------------------
(1) Reflects the issuance of 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
($494,000) 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.
Also reflects the completion of the Securitization, resulting in the
repayment of Notes Payable and an increase in stockholder's equity of $3.5
million resulting, among other things, from a gain on sale and an increase
in deferred tax liability.
(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
396,000 shares at $11.90 per share and employee stock options or Warrants to
purchase 429,000 shares of Common Stock at the initial public offering
price.
18
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The following table sets forth selected balance sheet, income statement and
cash flow data of the Company as of the end 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.
The selected financial data presented for the periods ended March 31, 1997 and
1998 are unaudited and are included in the financial statements contained
elsewhere in this Prospectus. The pro forma financial information is derived
from the Pro Forma Financial Statements contained elsewhere herein and does not
purport to represent what the Company's actual results of operations or
financial condition would have been had the Securitization occurred as of such
dates, or to project the Company's results of operations or financial condition
for any period or date, nor does it give effect to any matters other than those
described in the notes thereto. 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 actual and pro forma financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" included in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 31
-------------------------------------------------------------------- ------------------------
1993 1994 1995 1996 1997 1997 1998
----------- ----------- --------- --------- -------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRO
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (AUDITED) FORMA(1) (UNAUDITED) (UNAUDITED)
--------- --------- ----------- -----------
STATEMENT OF EARNINGS DATA:
Total Revenue................. $ 2,182 $ 3,639 $ 4,560 $ 5,521 $ 9,826 $ 12,629 $ 1,940 $ 3,403
Expenses from Operations:
Personnel................... 900 1,390 1,847 2,618 5,922 5,922 938 1,712
Communications.............. 246 361 404 573 912 912 144 278
Rent........................ 123 216 240 382 853 853 123 303
Portfolio Repurchase
Costs....................... -- -- -- 384 -- -- -- --
Other Expenses.............. 412 1,016 624 562 1,095 1,294 338 380
----------- ----------- --------- --------- --------- --------- ----------- -----------
Total Expenses from
Operations.................. 1,681 2,984 3,114 4,518 8,782 8,981 1,543 2,673
Earnings from Operations...... 502 656 1,445 1,003 1,044 3,648 398 730
Other Income (Expense)........ (344) (252) (249) (213) (363) (726) (112) (65)
Earnings Before Income Tax.... 157 404 1,196 790 682 2,922 285 665
Net Earnings.................. 110 265 734 474 456 1,823 174 415
Earnings per Common Share..... $ .02 $ .04 $ .12 $ .08 $ .08 $ .30 $ .03 $ .07
Weighted Average Shares
Outstanding................. 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000
OTHER DATA:
Weighted Average Investment in
finance Receivables(2)...... $ 1,152 $ 1,470 $ 1,731 $ 3,187 $ 5,919 $ 6,624 $ 4,831
Collections on finance
Receivables(3).............. 2,385 3,971 4,914 6,252 12,420 2,353 3,766
EBITDA(4)..................... 514 726 1,538 1,162 1,268 421 823
Cash Flows provided by (used
in):
Operating Activities........ (83) 191 982 1,207 1,237 543 711
Investing Activities........ (428) (738) (585) (4,188) 1,431 (163) 155
Financing Activities........ 623 1,015 (138) 2,909 (2,374) (307) (723)
Adjusted EBITDA(4)............ 741 1,054 2,208 1,994 3,379 838 1,230
----------- ----------- --------- --------- --------- ----------- -----------
----------- ----------- --------- --------- --------- ----------- -----------
Charged-off Balance(3)........ $ 71,252 $ 119,256 $ 175,512 $ 434,563 $1,104,647 $ 452,013 $1,104,647
Number of Accounts............ 27,366 55,524 84,528 213,899 580,353 221,587 580,353
Number of Employees........... 44 44 61 125 245 161 218
BALANCE SHEET DATA:
Cash.......................... $ 594 $ 289 $ 548 $ 476 $ 770 $ 549 $ 913
Total Debt.................... -- -- -- 3,793 2,106 3,749 1,558
Stockholder's Equity.......... $ 135 $ 400 $ 1,134 $ 1,608 $ 2,064 $ 1,782 $ 2,479
<CAPTION>
<S> <C>
PRO
FORMA(1)
---------
STATEMENT OF EARNINGS DATA:
Total Revenue................. $ 9,067
Expenses from Operations:
Personnel................... 1,712
Communications.............. 278
Rent........................ 303
Portfolio Repurchase
Costs....................... --
Other Expenses.............. 408
---------
Total Expenses from
Operations.................. 2,701
Earnings from Operations...... 6,366
Other Income (Expense)........ (183)
Earnings Before Income Tax.... 6,183
Net Earnings.................. 3,781
Earnings per Common Share..... $ .63
Weighted Average Shares
Outstanding................. 6,000,000
OTHER DATA:
Weighted Average Investment in
finance Receivables(2)......
Collections on finance
Receivables(3)..............
EBITDA(4).....................
Cash Flows provided by (used
in):
Operating Activities........
Investing Activities........
Financing Activities........
Adjusted EBITDA(4)............
Charged-off Balance(3)........
Number of Accounts............
Number of Employees...........
BALANCE SHEET DATA:
Cash.......................... $ 11,636
Total Debt.................... 4,505
Stockholder's Equity.......... $ 8,005
</TABLE>
- ------------------------
(l) Assumes the Securitization closed on January l, l997 and January l, l998,
respectively. The principal amount of the Securitization Note issuance is
assumed to be $21.1 million at January 1, 1997 and $16.7 million at January
1, 1998. Gives effect to, among other things, (i) elimination of income on
finance Receivables contributed to the Securitization; (ii) an increase in
servicing income related to the assumed receipt of servicing
19
<PAGE>
income on the Receivables included in the Securitization and a decrease in
servicing income related to the Serviced Receivables; (iii) gain on the sale
of finance Receivables recognized on the sale of the Company's finance
Receivables in the Securitization; (iv) expensing of certain deferred costs
related to the securitized Receivables; (v) elimination of related interest
expense; and (vi) adjustment of the deferred tax liability to give effect to
the Securitization being treated as a sale for financial statement purposes
and a financing for income tax purposes. Further assumes that the
Subordinated Notes were issued on January 1, 1997 and January 1, 1998,
respectively, and gives effect to interest expense and amortization of
original issue discount for the periods in which this debt is assumbed to be
outstanding. See Notes to Pro Forma Financial Statements.
(2) Does not include the Serviced Receivables.
(3) Includes the Serviced Receivables as of December 31, 1997.
(4) EBIDTA is defined as 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 because management believes these
indicators relied upon by the Company in the management of its business as a
key measure of the Company's ability to derive cash from its investing and
financing activities 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.
For instance, an increase in EBITDA and Adjusted EBITDA would generally
indicate to the Company that increases in income on finance Receivables and
servicing fees and, in the case of Adjusted EBITDA only, collections applied
to principal, would indicate increased capacity to fund purchases of
additional portfolios without reliance on external funding sources.
Conversely, a reduction in these indicators would mean that there was less
internally generated cash available for new portfolio investments.
Additionally, the manner in which the Company computes EBITDA and Adjusted
EBITDA may not be the same way in which other companies compute similarly
described data. Therefore, this data may not be comparable to similarly
titled measures of other companies.
20
<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 Serviced Receivables, for a
total balance of acquired or Serviced Receivables exceeding approximately $1.4
billion as of June 20, 1998. The following table illustrates this growth:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PURCHASE AMOUNT ($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>
21
<PAGE>
The following table illustrates the Company's collection experience for the
periods indicated:
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED DECEMBER QUARTER ENDED
31, MARCH 31,
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
------------------------------------ ------------------------
1995 1996 1997 1997 1998
---------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Collections(1)................................... $ 4,814 $ 6,252 $ 12,420 $ 2,353 $ 3,766
Income on receivables............................ $ 4,560 $ 5,521 $ 7,246 $ 1,940 $ 1,503
Servicing income................................. $ -- $ -- $ 2,580 $ -- $ 1,242
Sales income..................................... $ -- $ -- $ -- $ -- 658
Total receivables and servicing income........... $ 4,560 $ 5,521 $ 9,826 $ 1,940 $ 3,403
Weighted average investment in finance
Receivables(2)................................. $ 1,731 $ 3,187 $ 5,842 $ 6,624 $ 4,831
Weighted average charged-off balance(1)(3)....... $ 146,669 $ 248,990 $ 689,924 $ 434,563 $ 1,104,647
Charged-off balance at end of period(1)(4)....... $ 178,512 $ 434,563 $ 1,104,647 $ 452,013 $ 1,104,647
</TABLE>
- ------------------------
(1) Includes the Serviced Receivables during the year ended December 31, 1997
and the quarter ended March 31, 1998.
(2) Does not include the Serviced Receivables and represents the average
investment balance during the period measured by the financial statement
carrying value of portfolio of Receivables owned by the Company determined
by dividing the total value 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 period measured by balances charged-off by the Originating
Institutions, without regard to collections or Receivables settled.
The Company accounts for its investment in finance Receivables on an accrual
basis using unique and exclusive static pools. Static pools are established
using similar accounts with similar attributes, usually based on acquisition
timing and/or by seller. Once a static pool is established the Receivables in
the pool are not changed. The difference between the contractual receivable
balance of the accounts in the static pools and the cost of each static pool
(the discount), is not recorded since the Company expects to collect a
relatively small percentage of each static pool's contractual receivable
balance. Each static pool is initially recorded at cost.
Accrual accounting for each static pool is measured as a unit for the
economic life of the static pool (similar to one loan) for recognition of income
on finance Receivables, or collections applied to principal on finance
Receivables, and for provision for loss or impairment. The effective interest
rate for each static pool is estimated based on the estimated monthly
collections over the estimated economic life of each pool, currently five years
based on the Company's collection experience. Income on finance Receivables is
accrued monthly based on each static pool's effective interest rate applied to
each static pool's monthly opening carrying value. Monthly collections received
for each static pool reduce each static pool's carrying value. To the extent
collections exceed the interest accrual, the carrying value is reduced and the
reduction is recorded as collections applied to principal. If the accrual is
greater than collections, then the carrying value accretes. Accretion arises as
a result of collection rates being lower in the early months of ownership than
the estimated effective yield which reflects collections for the entire economic
life of the static pool.
22
<PAGE>
Measurement of impairment and any provision for loss is based on each static
pool. 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 that the carrying amount of a particular static pool exceeds its fair
value, a valuation allowance would be recognized in the amount of such an
impairment. The estimated yield for each static pool is based on estimates of
future cash flows from collections, and actual cash flows may vary from current
estimates.
The Company 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 static pool-wide past
performance characteristics. After extensive statistical analysis of static pool
performance specifics during the year ended December 31, 1997, the Company
implemented a further refinement in its collection models. The refinement
included static pool specific estimates and had the effect of reducing total
future projected cash flows on a portfolio-wide basis. The total effect on the
individual static pools of this change in estimates 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 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. Under the terms of the
servicing agreement, the financial institution had 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 exceeded a
minimum amount. See "Liquidity and Capital Resources." The Serviced Receivables
were included in the Securitization described below.
In the quarter ended March 31, 1998, the Company realized $658,000 in sales
income (See Note L of Notes to Financial Statements). In June 1998, the Company
completed its first securitization of finance Receivables. In the
Securitization, the Company transferred most of the Receivables owned by the
Company at March 31, 1998 and also purchased and simultaneously transferred the
Serviced Receivables, at a transaction price negotiated at the time that the
servicing arrangement was initiated, to SPV2. SPV2 issued $14.5 million of 6.43%
Securitization Notes, secured by the Receivables transferred to SPV2 and a
financial guaranty insurance policy.
The projected recovery value of the transferred Receivables exceeded the
principal balance of the Securitization Notes. The Company retains a residual
interest in SPV2 representing this interest. The Company acts as servicer with
respect to the Receivables included in the Securitization, and receives a
servicing fee equal to 20% of collections. As servicer, the Company continues
its collection activities with its customers as it otherwise would with owned
Receivables. Accordingly, customer relationships are not affected by the
Securitization.
The Securitization was treated as a sale under generally accepted accounting
principles. For securitized pools of finance Receivables, future income is
reduced due to the elimination of income on finance Receivables and partially
offset by the receipt of servicing income and interest income on the residual
investment in securitization. After payment of all principal and interest on the
Securitization Notes, the Company will receive all collections, subject to an
obligation to pay the seller of the Serviced Receivables 10% of collections with
respect to the Serviced Receivables after aggregate collections on this
portfolio exceed a specified amount with respect to the Serviced Receivables.
23
<PAGE>
The proceeds from the Securitization were used by the Company to pay the
purchase price of the Serviced Receivables, to retire debt associated with the
owned Receivables, and to pay transaction costs. The Company recognized sales
income on the sale of the owned Receivables in the Securitization of $6.1
million and received cash of $5.6 million. The Company also recorded a residual
investment in securitization of $4.2 million. The investment in securitization
is accounted for under the provisions of SFAS 115 as debt securities held to
maturity and is estimated to accrue income at the rate of 12% per annum. Once
the Securitization Notes are retired, recoveries will be applied to reduce the
carrying amount of the investment in securitization and accrued 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
396,000 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) and Warrants to purchase 54,000 shares of Common Stock at an
exercise price equal to the initial public offering price. 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 $494,000 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 $659,000 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.
24
<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>
YEAR ENDED QUARTER ENDED
DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue
Income on finance receivables........................................ 100.0% 100.0% 73.7% 100.0% 44.2%
Servicing fees....................................................... -- -- 26.3 -- 36.5
Sales income......................................................... -- -- -- -- 19.3
--------- --------- --------- --------- ---------
100.0 100.0 100.0 100.0 100.0
Expenses
Personnel............................................................ 40.5 47.4 60.3 48.3 50.3
Contingency legal and court costs.................................... 8.2 3.8 3.3 5.2 3.1
Communications....................................................... 8.9 10.4 9.3 7.4 8.2
Rent and other occupancy............................................. 5.3 6.9 8.7 6.3 8.9
Professional fees.................................................... 2.6 2.8 5.1 5.4 5.6
General and administrative........................................... 2.9 3.5 2.8 6.8 2.5
Portfolio repurchase costs........................................... -- 7.0 -- -- --
--------- --------- --------- --------- ---------
68.3 81.8 89.4 79.5 78.5
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings from Operations............................................... 31.7 18.2 10.6 20.5 21.5
Other Income (Expense)
Interest and other................................................... 0.5 1.3 0.2 0.0 0.3
Interest expense..................................................... (5.9) (5.2) (3.8) (5.8) (2.2)
--------- --------- --------- --------- ---------
Earnings Before Income Taxes........................................... 26.2 14.3 6.9 14.7 19.5
Provision for Income Taxes............................................. 10.1 5.7 2.3 5.7 7.3
--------- --------- --------- --------- ---------
Net Earnings........................................................... 16.1% 8.6% 4.6% 9.0% 12.2%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EBITDA................................................................. 33.7% 21.0% 12.9% 21.7% 24.2%
Collections applied to principal on receivables........................ 14.7 15.1 21.5 21.5 12.0
--------- --------- --------- --------- ---------
Adjusted EBITDA........................................................ 48.4% 36.1% 34.4% 43.2% 36.1%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
REVENUES. Total revenues for the quarter ended March 31, 1998 were $3.4
million compared to total revenues of $1.9 million for the quarter ended March
31, 1997, an increase of 75.4%. This increase in revenues was principally the
result of the receipt of $1.2 million in servicing income in the quarter ended
March 31, 1998 and $658,000 of sales income; there was no servicing or sales
income in the first quarter of 1997. Offsetting these increases, income on
finance Receivables declined $437,000 in the quarter ended March 31, 1998
compared to the quarter ended March 31, 1997 as a result of the higher
investment level of Receivables owned in 1997 over 1998 due to the levels of
portfolio acquisitions in 1996 and 1997. As a result, the weighted average
investment in Receivables declined to $4.8 million in the first quarter of 1998
from $6.6 million in the first quarter of 1997. Collections increased $1.4
million or 60.0%. The weighted
25
<PAGE>
average charged-off balances owned or serviced by the Company increased from
$435 million at March 31, 1997 to $1.105 billion at March 31, 1998, an increase
of 144.4%.
Revenues in the quarter ended March 31, 1998 were favorably affected by
$658,000 in sales income resulting from the resale of a portfolio repurchased
under a settlement agreement (see Note L of Notes to the Financial Statements).
Previously deferred income of $895,000 was recognized against a $237,000 cost of
the resale. See "Financial Condition--Deferred Income."
TOTAL EXPENSES FROM OPERATIONS. Total expenses from operations increased by
$1.1 million to $2.7 million in the quarter ended March 31, 1998 from $1.5
million in the quarter ended March 31, 1997. Total expenses from operations as a
percent of revenue were 79.5% and 78.5% in 1997 and 1998, respectively.
Operating expenses for the quarter ended March 31, 1998 increased over the
quarter ended March 31, 1997 by 73.2% due to (a) a 82.6% increase in personnel
costs as a result of growing total staff from 161 to 218 as of March 31, 1997
and 1998, respectively; (b) a 146.3% increase in rent and occupancy due to the
start up of the approximately 36, 000 square foot operations center in March
1997 compared to the full quarter of occupancy for the quarter ended March 31,
1998; and (c) increases in communications and professional fees as a result of
usage increases in long distance, credit reporting, legal and accounting
services.
Expenses increased in the quarter ended March 31, 1998 primarily as a result
of costs associated with recovery efforts on the Serviced Receivables, and in
anticipation of additional acquisitions in the 1998 fiscal year. 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 $938,000 or 48.3% of revenue in the quarter ended
March 31, 1997 and $1.7 million or 50.3% of revenue for the quarter ended March
31, 1998. Major categories of personnel expense increases included: (a)
additional compensation costs for development, installation and training
associated with the expanded information technology systems; (b) a significant
investment in senior management infrastructure, including senior management
staff in information technology and legal; and (c) an increase in the number of
account officers to service a larger volume of Receivables.
Rent and other occupancy costs were $123,000 or 6.3% of revenue and $303,000
or 8.9% of revenue in the quarters ended March 31, 1997 and 1998, respectively.
This increase is attributable to the addition of approximately 36,000 square
feet of space for the new operations center started up in March 1997 and
depreciation expense increases due to equipment and furniture additions of
approximately $1 million for headquarters and the new operations center opened
after the first quarter of 1997.
Professional fees were $104,000 or 5.4% of revenue and $192,000 or 5.6% of
revenue in the quarters ended March 31, 1997 and 1998, respectively. The
increases were attributable to increased annual audit fee and various legal
expenses.
EARNINGS FROM OPERATIONS. Earnings from operations were $398,000 or 20.5%
of revenues in the quarter ended March 31, 1997 and $730,000 or 21.5% of
revenues in the quarter ended March 31, 1998. This increase resulted from
several factors, particularly the positive effect on revenues from servicing
income and sales income, which largely offset the substantial growth in
corporate infrastructure to support a substantially larger base of operations.
OTHER INCOME (EXPENSE). Interest expense decreased from $112,000 in the
quarter ended March 31, 1997 to $76,000 in the quarter ended March 31, 1998.
Interest attributable to amounts due to participants decreased from $7,000 in
the quarter ended March 31, 1997 to $4,000 in the quarter ended March 31, 1998
as a result of a decrease in the average annual amount outstanding due to
participants from $96,000 in the quarter ended March 31, 1997 to $34,000 in the
quarter ended March 31, 1998. The interest expense on the Company's bank credit
facility decreased from $87,000 in the quarter ended March 31, 1997 to $42,000
in
26
<PAGE>
the quarter ended March 31, 1998 as a result of the outstanding balance
declining from a weighted average of $3.8 million to $1.8 million for the
quarters ended March 31, 1997 and 1998, respectively.
EARNINGS BEFORE INCOME TAXES. As the result of the foregoing, earnings
before income taxes were $285,000 in the quarter ended March 31, 1997 and
$665,000 in the quarter ended March 31, 1998.
PROVISION FOR INCOME TAXES. Income taxes for the quarters ended March 31,
1997 and 1998 were at effective tax rates of 39.0% and 37.6%, respectively. The
effective tax rate fluctuates as a result of changes in pre-tax income and
nondeductible expenses. Deferred tax liabilities increased from $1,094,000 at
December 31, 1997 to $1,344,000 at March 31, 1998, principally due to the
reversal of a deferred tax benefit of $345,000 since the deferred sales income
was previously taxed.
NET EARNINGS. Net earnings for the quarter ended March 31, 1997 were
$174,000 versus $415,000 for the quarter ended March 31, 1998. The 138.5%
increase was attributable principally to higher revenues in the quarter ended
March 31, 1998 over the quarter ended March 31, 1997 of $1.5 million offset by
higher costs of $1.1 million and further decreased by a $139,000 increase in tax
expenses.
EBITDA. EBITDA increased $402,000 or 95.6% from $421,000 to $823,000 at
March 31, 1997 to March 31, 1998, 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 EBITDA as a percentage increased 2.5%
from 21.7% to 24.2%.
ADJUSTED EBITDA. Adjusted EBITDA increased $392,000 or 46.8% from $838,000
in the quarter ended March 31, 1997 to $1.2 million in the quarter ended March
31, 1998 principally as a result of the growth in EBITDA.
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 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 services; 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
27
<PAGE>
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) an
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 bank credit facility
increased from $60,000 in 1996 to $296,000 in 1997 as a result of the
establishment of the bank 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 foregoing 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 years ended
December 31, 1996 and 1997 were at effective tax rates 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
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 were
$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.
28
<PAGE>
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 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.
29
<PAGE>
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 foregoing, 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 years ended
December 31, 1995 and 1996 were at effective tax rates 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
were $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 was 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.
30
<PAGE>
QUARTERLY RESULTS
The following table sets forth selected historical financial data for
calendar quarters of 1997 and the first quarter of 1998. 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>
QUARTERS ENDED,
-------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1997 1998
----------- ----------- ------------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue........................................... $ 1,940 $ 1,953 $ 2,560 $ 3,373 $ 3,403
Earnings from operations.......................... 398 178 149 319 730
Net earnings...................................... 174 42 37 204 415
<CAPTION>
(AS A PERCENTAGE OF REVENUES)
<S> <C> <C> <C> <C> <C>
Revenue........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Earnings from operations.......................... 20.5 9.1 5.8 9.5 21.5
Net earnings...................................... 9.0 2.1 1.4 6.1 12.2
</TABLE>
Quarterly fluctuations in revenues and net earnings have been the result of
a variety of factors, including in the quarter ended March 31, 1997, the effect
of portfolio acquisitions which occurred in late 1996, in the quarters ended
June 30, 1997 and September 30, 1997, start-up costs with respect to the
Serviced Receivables and for the quarter ended March 31, 1998, sales income of
$658,000. The Company recognized sale income of $6.1 million in the second
quarter of 1998 upon completion of the Securitization. The Company 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 $659,000
(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 18.6% from $770,000 as of December 31, 1997 to
$913,000 as of March 31, 1998, primarily as a result of an increase in cash flow
provided by operating activities and by principal collections on finance
Receivables offset by net cash used in financing activities. See "Recent
Developments--Securitization."
FINANCE RECEIVABLES. Finance Receivables decreased 8.1% to $4.6 million, as
of March 31, 1998 from $5.0 million as of December 31, 1997 due to $407,000 of
collections applied to principal. No finance Receivables were purchased in the
quarter ended March 31, 1998. As of June 23, 1998, the Company purchased $3.2
million of finance Receivables with a portion of the net proceeds of the
issuance of the Subordinated Notes. In addition, in June 1998, the Company
completed the Securitization. See "Recent Developments--Securitization."
PROPERTY AND EQUIPMENT. Property and equipment, net, increased an estimated
3.1% to $1.5 million as of March 31, 1998 from $1.4 million as of December 31,
1997 due to $126,000 in purchases (principally through capital leases) of
computer equipment, furniture and fixtures and leasehold improvements related to
facility expansion net of $82,000 of depreciation.
DEFERRED COSTS. Deferred costs were $661,000 as of March 31, 1998 and
$535,000 as of December 31, 1997. Deferred costs consist of $352,000 in
capitalized securitization development costs, $217,000 in capitalized initial
public offering development costs and $93,000 in subordinated debt issuance
costs. All capitalized securitization costs were expensed in connection with the
completion of the Securitization.
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<PAGE>
Initial public offering costs are principally legal and accounting fees incurred
in 1997 that management believes have a future benefit to the Company in its
efforts to raise additional equity capital in this Offering. In the event that
this Offering is abandoned or delayed significantly, the deferred costs
categories would be charged to earnings in the period in which such abandonment
or delay occurred. Management expects to incur additional costs in the initial
public offering, which costs could be significant. The Company also capitalized
$93,000 in the first quarter of 1998 and will capitalize in the second quarter
of 1998 approximately $540,000 total 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 $2.1 million as of December 31, 1997 to $1.6 million as of March 31, 1998.
Capitalized lease obligations increased from $972,000 to $1,021,000 for the same
period. The decrease on the notes payable was attributable to net repayments on
the Company's bank credit facility of $548,000. Interest expense associated with
the notes was $42,000 as of March 31, 1998. As of March 31, 1998, the amount
available to the Company under the notes was limited to the amount outstanding.
Following the Offering, the Company will seek 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. As of March 31, 1998, the deferred income was recognized.
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 financial
institution for $800,000. The Company recognized approximately $658,000 in sales
income in the first quarter of 1998, approximately $404,000 after tax.
DEFERRED TAX LIABILITY. Deferred tax liability at March 31, 1998 is $1.3
million compared to $1.1 million as of December 31, 1997. This increase of
$200,000 was primarily attributable to a decrease in deferred tax benefit on
previously deferred sales income reported in the first quarter of 1998 for book
purposes.
TOTAL STOCKHOLDER'S EQUITY. Total stockholder's equity increased 20.1% to
$2.5 million at March 31, 1998 from $2.1 million at December 31, 1997 as a
result of net income of $415,000 during the quarter ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has derived substantially all of its cash flow from collections
on finance Receivables and servicing income. In addition, the Company receives
cash upon the sale of Receivables in connection with securitizations. In the
past, the primary sources of funds to acquire Receivables were cash flow, the
sale of participations to third parties, and borrowings under a bank credit
facility. In September 1996, the Company entered into a 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 Company's bank credit facility was being acquired. At the
time of the Securitization, the Company's existing bank debt was repaid and no
further borrowings are permitted under that facility. At December 31, 1997, and
March 31, 1998, there was no availability under the Company's bank credit
facility. The Company is in current discussions with several financial
institutions for a new credit facility of approximately $15 to $20 million;
however, as of the date hereof the Company has received no commitments.
32
<PAGE>
In April 1998, the Company issued $5.0 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 396,000 shares of Common Stock exercisable
at the lower of $12.00 per share or 85% of the initial public offering price and
Warrants to purchase 54,000 shares at the initial public offering price.
On June 19, 1998, the Company completed a securitization of most portfolios
owned as of March 31, 1998. Gross proceeds of the Securitization were $14.5
million. After Securitization expenses and the purchase of the Serviced
Receivables, the Company retired its Notes Payable to its existing senior lender
of $1 million resulting in net cash proceeds available for working capital and
Receivables purchases of $5.6 million.
As of March 31, 1998, the Company had cash of $913,000. Capital expenditures
from operations were $75,000, $332,000 and $123,000 for the years ended December
31, 1995, 1996 and 1997, respectively and $14,000 for the quarter ended March
31, 1998. Capital additions made pursuant to capital leases were $64,000 in
1995, $0 in 1996, $1.1 million in 1997 and $112,000 in the first quarter of
1998. Portfolio purchases were $1.2 million, $5.6 million, $557,000 and none for
the years ended December 31, 1995, 1996, and 1997, and for the quarter ended
March 31, 1998, 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 serviced
approximately 400,000 additional accounts representing approximately $737
million of charged-off balances of Serviced Receivables. The Serviced
Receivables were included in the Securitization.
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 facilities. In January
1998, the Company entered into two additional equipment leases aggregating
approximately $112,000.
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 may
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. To
date, no commitment for a new credit facility has been extended. In addition,
the Company expects to secure additional funding through additional
securitizations similar to the Securitization. See "Prospectus Summary--Recent
Developments."
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,
33
<PAGE>
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, which the Company expects will become
Year 2000 compliant due to the nature of their businesses and the financial
strength of these businesses. Additionally, the Company does not generally
communicate on-line with Originating Institutions on a continuing basis, but
rather receives discrete date files for analysis and to support recovery
activities. The Company has to date been able to convert data received from
Originating Institutions and other third parties to be Year 2000 compliant and
expects that it will continue to be able to do so in the future.
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 and the
quarter ended March 31, 1998.
34
<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. 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 $1.3 billion in Receivables, as measured by the balance charged-off by
the Originating Institutions. Since its inception, the Company has collected in
excess of $35 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 ("customers") 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 repayment 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 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, 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
ongoing 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
35
<PAGE>
1996. 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 two
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
36
<PAGE>
delinquent for more than 180 days. More recently, 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 fees of traditional
third-party collection agencies. As an early entrant, Creditrust pioneered the
purchase of charged-off receivables and 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 enhance on an ongoing basis 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 upgrading on an ongoing basis 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 apply the most
appropriate collection process to an individual account.
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
37
<PAGE>
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 recently concluded its first securitization and plans
to pursue additional securizations in the future. As the result of the capital
raised in a recent private placement, the Securitization 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 coordinates buy-backs and returns with sellers after
the acquisition of Receivables. The Post-Purchase Liaison Group also coordinates
the import of acquired portfolios into the Company's proprietary collection
system and routinely supports the efforts of both the Legal and Recovery
Departments by facilitating the receipt of additional information from the
seller which is pertinent to an account or group of accounts such as account
statements or loan files.
38
<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
39
<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>
41
<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 square feet, houses the executive
offices and servicing facilities for approximately 225 associates. The second
facility, approximately 36,000 square feet 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 350 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 the ongoing enhancement of
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 open
desks 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 unreachable
customers. 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.
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
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
45 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 monitors account officer activity on
an ongoing basis 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
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 enable 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, Tulsa, Oklahoma, West Capital Corporation, San
Diego, California and Outsourcing Solutions, Inc., Chesterfield, Missouri.
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.
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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 acquires 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 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
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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 June 23, 1998, the Company had 337 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..................... 50 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 co-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
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
customers 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 45 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, Maryland. 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. During his tenure
with Koll-Dove, he was instrumental in the Resolution Trust Corporation and
Federal Deposit Insurance Corporation 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 incentive
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 March 31, 1998, 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 annual 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 annually 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 incentive stock 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 incentive stock 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. Incentive stock 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 five years. The Board of Directors has the
authority to amend or terminate the Stock Plan, however 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>
52
<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
determined by the Compensation Committee but in no event will it be lower than
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 will be determined by the Compensation Committee prior to the
commencement of each offering period. The Stock Purchase 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.
SMILE PROGRAM. Promptly following the Offering, the Company will implement
as an additional incentive for all employees a Shareholders Make Involved Loyal
Employees ("SMILE") Program. All employees of the Company will participate in
the Plan. Under the Smile Program, subject to the discretion of the Board of
Directors, the Company will make a cash contribution once in each six month
period in an amount equal to the open market purchase price of 40 shares of
Common Stock per employee to a trust for the benefit of the employees who were
employed at the purchase date. The program trustee will use all contributions to
purchase shares of Company Common Stock in the open market. Thereafter, the
trustee will sell the shares in the open market in four equal installments at
six month intervals and distribute the sale proceeds equally among those
employees participating in the program who remain employed by the Company at
such sale date. It is currently contemplated that all such distributions will be
made in cash.
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."
53
<PAGE>
CERTAIN TRANSACTIONS
Mr. Rensin had unconditionally and personally guaranteed (the "Guaranty")
the Company's bank credit facility, including attorneys fees and expenses,
incurred by First Union in enforcing its rights under the Guaranty. A portion of
the proceeds of the Securitization was used to pay off and terminate this
facility, and, consequently the Guaranty has terminated.
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. See "Use of Proceeds."
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 which was repaid in June 1998.
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 remaining amounts due to
participants will be repaid.
The Company also remitted a payment of $66,000 to a corporation prior to the
Offering, of which Mr. Glassberg is an executive officer, as a finder's fee in
connection with the contract for the Serviced Receivables.
Any future related-party 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.
54
<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 or within 60 days thereafter. 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. Exercise
in full of the Underwriters' over-allotment option would reduce Mr. Rensin's
ownership percentage following the offering to 71.3% and would reduce the
ownership percentage of all directors and executive officers as a group to
71.5%.
(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
396,000 shares at $11.90 per share and employee stock options or Warrants to
purchase 429,000 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."
55
<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 Prefer red Stock.
WARRANTS
The Company has issued and outstanding Warrants to purchase 396,000 shares
of Common Stock at an exercise price of $11.90 per share (assuming an initial
public offering price of $14.00 per share) and Warrants to purchase 54,000
shares of Common Stock at the initial public offering price. The Warrants expire
on April 1, 2003 and are subject to customary anti-dilution provisions.
56
<PAGE>
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 and
officers 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 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 and officers.
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
57
<PAGE>
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 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 American
Stock Transfer & Trust Company.
58
<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 one year, 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. An affiliate of Boenning & Scattergood, Inc. which purchased Warrants
has agreed for a period of one year from the effective date of the Offering, not
to sell or otherwise dispose, directly or indirectly, of any shares of Common
Stock in the public market.
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."
59
<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 (except that an
affiliate of Boenning & Scattergood, Inc. will purchase shares at the initial
public offering price per share). 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 Placement Agents 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 Boenning & Scattergood,
Inc., one of the Placement Agents, purchased $600,000 in principal amount of the
Subordinated Notes and Warrants to purchase up to 54,000 shares of Common Stock.
Such Warrants are exercisable at a price per share equal to the Price to Public
and cannot be transferred for a
60
<PAGE>
period of one year from the effective date of the Registration Statement of
which this Prospectus is a part, except to Underwriters, selling group members
and their officers and partners. Under Rule 2720 of the Rules of Conduct of the
NASD, when more than 10% of the subordinated debt securities of the Company are
held by a member of the NASD or an affiliate of a member, the Price to Public of
the Shares must be no higher than that recommended by a "qualified independent
underwriter" as that term is defined in Rule 2720. Boenning & Scattergood, Inc.
is a member of the NASD, and an affiliate of Boenning & Scattergood holds 12% of
the Company's Subordinated Notes. In accordance with Rule 2720, Ferris Baker
Watts, Incorporated has agreed to act as qualified independent underwriter in
connection with pricing the Offering and conducting due diligence. The price to
the public of the shares, when sold to the public at the Price to Public set
forth on the cover page of this Prospectus, will be no higher than that
recommended by Ferris, Baker Watts, Incorporated. Ferris, Baker Watts,
Incorporated will receive no additional compensation for its services as
qualified independent underwriter.
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, the
Representatives and Ferris, Baker Watts, Incorporated, as qualified independent
underwriter. 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
61
<PAGE>
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 and determined not to engage
Arthur Andersen L.L.P. ("Andersen") as the Company's auditors for the year ended
December 31, 1997. The Board had previously appointed Andersen as auditors 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 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.
62
<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, and Unaudited Balance
Sheet as of March 31, 1998.................................................. F-3
Statements of Earnings for the years ended December 31, 1995, 1996 and 1997,
and Unaudited Statements of Earnings for the quarters ending March 31, 1997
and 1998.................................................................... F-4
Statements of Stockholder's Equity for the years ended December 31, 1995,
1996, and 1997, and Unaudited Statement of Stockholder's Equity for the
quarter ended March 31, 1998................................................ F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997,
and
Unaudited Statements of Cash Flows for the quarters ended March 31, 1997 and
1998........................................................................ F-6
Notes to Financial Statements................................................. F-7-F-20
PRO FORMA FINANCIAL STATEMENTS.................................................. F-21
Notes to Pro Forma Financial Statements....................................... F-25-F-26
</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, MARCH 31,
---------------------------------------- ------------
<S> <C> <C> <C> <C>
1995 1996 1997 1998
------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash..................................................... $ 548,234 $ 475,635 $ 769,576 $ 912,787
Accounts Receivable...................................... 90,000 13,250 55,766 57,641
Income Taxes Receivable.................................. -- 6,414 200,163 200,163
Finance Receivables...................................... 1,852,110 6,603,735 5,049,839 4,642,561
Prepaid Expenses......................................... 17,215 2,813 59,122 45,240
Property and Equipment................................... 221,312 469,001 1,434,218 1,478,476
Deferred Costs........................................... -- -- 534,700 661,332
Other Assets............................................. 9,380 2,700 100,852 81,470
------------ ------------ ------------ ------------
Total Assets............................................. $ 2,738,251 $ 7,573,548 $ 8,204,236 $ 8,079,670
------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Due to Participants...................................... $ 947,454 $ 84,131 $ 51,181 $ 55,293
Servicing Remittances Due................................ -- -- 101,358 441,633
Income Taxes Payable..................................... 109,038 -- -- --
Accounts Payable and Accrued Expenses.................... 112,176 457,186 653,065 879,825
Notes Payable............................................ -- 3,792,842 2,105,972 1,558,151
Capitalized Lease Obligations............................ 61,749 40,744 972,342 1,021,419
Deferred Income.......................................... -- 895,449 895,449 --
Lease Incentives......................................... -- 72,000 266,630 300,300
Deferred Tax Liability................................... 373,715 623,177 1,093,846 1,343,556
------------ ------------ ------------ ------------
Total Liabilities........................................ 1,604,132 5,965,529 6,139,843 5,600,177
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 60,000
Paid-in capital........................................ 52,824 52,824 52,824 52,824
Retained earnings...................................... 1,021,295 1,495,195 1,951,569 2,366,669
------------ ------------ ------------ ------------
Total Stockholder's Equity............................... 1,134,119 1,608,019 2,064,393 2,479,493
------------ ------------ ------------ ------------
Total Liabilities and Stockholder's Equity............... $ 2,738,251 $ 7,573,548 $ 8,204,236 $ 8,079,670
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</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, QUARTER ENDED MARCH 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUE
Income on finance receivables............ $ 4,559,542 $ 5,521,063 $ 7,245,744 $ 1,940,475 $ 1,502,985
Servicing fees........................... -- -- 2,580,200 -- 1,242,347
Sales income............................. -- -- -- -- 657,630
------------ ------------ ------------ ------------ ------------
4,559,542 5,521,063 9,825,944 1,940,475 3,402,962
EXPENSES
Personnel................................ 1,846,605 2,617,862 5,922,172 938,065 1,712,444
Contingency legal and court costs........ 374,492 212,530 320,104 101,586 104,445
Communications........................... 404,021 573,118 911,508 143,841 277,793
Rent and other occupancy................. 239,603 382,020 853,344 122,828 302,511
Professional fees........................ 117,094 155,754 504,003 104,483 191,686
General and administrative............... 132,244 193,221 270,509 132,052 83,818
Portfolio repurchase costs............... -- 383,736 -- -- --
------------ ------------ ------------ ------------ ------------
3,114,059 4,518,241 8,781,640 1,542,855 2,672,697
------------ ------------ ------------ ------------ ------------
EARNINGS FROM OPERATIONS................... 1,445,483 1,002,822 1,044,304 397,620 730,265
OTHER INCOME (EXPENSE)
Interest and other....................... 20,533 74,307 14,755 152 10,815
Interest expense......................... (269,634) (287,530) (377,410) (112,435) (75,970)
------------ ------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES............... 1,196,382 789,599 681,649 285,337 665,110
PROVISION FOR INCOME TAXES................. 462,759 315,699 225,275 111,282 250,010
------------ ------------ ------------ ------------ ------------
NET EARNINGS............................... $ 733,623 $ 473,900 $ 456,374 $ 174,055 $ 415,100
------------ ------------ ------------ ------------ ------------
EARNINGS PER COMMON SHARE.................. $ 0.12 $ 0.08 $ 0.08 $ 0.03 $ 0.07
------------ ------------ ------------ ------------ ------------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DURING THE PERIOD............ 6,000,000 6,000,000 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>
--------------------------------------------------------------------------------------------
<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 -- -- -- -- -- 733,623 733,623
--
---------- --------- ----------- --- ------------ ------------
Balance at December 31,
1995 6,000,000 60,000 52,824 -- -- 1,021,295 1,134,119
Net Earnings 473,900 473,900
--
---------- --------- ----------- --- ------------ ------------
Balance at December 31,
1996 6,000,000 60,000 52,824 -- -- 1,495,195 1,608,019
Net Earnings 456,374 456,374
--
---------- --------- ----------- --- ------------ ------------
Balance at December 31,
1997 6,000,000 60,000 52,824 -- -- 1,951,569 2,064,393
Net Earnings (unaudited) 415,100 415,100
--
---------- --------- ----------- --- ------------ ------------
Balance at March 31, 1998
(unaudited) 6,000,000 $ 60,000 $ 52,824 -- $ -- $ 2,366,669 $ 2,479,493
--
--
---------- --------- ----------- --- ------------ ------------
---------- --------- ----------- --- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CREDITRUST CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- --------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings........................................ $ 733,623 $ 473,900 $ 456,374 $ 174,055 $ 415,100
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation.................................... 72,189 84,463 208,643 22,800 81,622
Deferred tax expense............................ 321,247 249,462 470,670 98,541 249,710
Loss on abandoned property...................... 28,880 -- -- -- --
Sales income.................................... -- -- -- -- (657,630)
Changes in assets and liabilities
(Increase) decrease in accounts receivable.... (90,000) 76,750 (42,516) (78,000) (1,875)
(Increase) decrease in other assets........... (9,380) 6,680 (98,152) (78,393) 9,575
(Increase) decrease in prepaid expenses....... (12,895) 14,402 (56,309) (7,011) 13,882
(Decrease) increase in accounts payable and
accrued expenses............................ (109,319) 345,010 195,879 405,652 226,760
Increase in servicing remittances due......... -- -- 101,358 -- 340,275
Increase in lease incentives.................. -- 72,000 194,630 -- 33,670
Increase (decrease) in current income taxes
payable/receivable.......................... 47,512 (115,452) (193,749) 5,443 --
---------- ---------- ---------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 981,857 1,207,215 1,236,828 543,087 711,089
---------- ---------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Collections applied to principal on finance
receivables....................................... 669,770 831,505 2,111,394 417,427 407,278
Purchases of property and equipment................. (75,051) (332,151) (122,668) (120,750) (14,151)
Acquisitions of finance receivables................. (1,179,430) (5,583,130) (557,498) (459,447) --
Deferred gain on sale of finance receivables........ -- 895,449 -- -- --
Net cost of portfolios sold......................... -- -- -- -- (237,819)
---------- ---------- ---------- --------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES... (584,711) (4,188,328) 1,431,228 (162,770) 155,308
---------- ---------- ---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings from participants.......... 956,563 -- -- -- --
(Principal payments) accrued interest on borrowings
from participants, net............................ (1,086,865) (863,323) (32,950) 11,527 4,112
(Payments on) proceeds from notes payable, net...... (7,705) 3,771,837 (1,806,465) (48,660) (610,473)
Deferred costs...................................... -- -- (534,700) (269,800) (116,824)
---------- ---------- ---------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES... (138,007) 2,908,514 (2,374,115) (306,933) (723,185)
---------- ---------- ---------- --------- ---------
NET INCREASE (DECREASE) IN CASH....................... 259,139 (72,599) 293,941 73,384 143,212
---------- ---------- ---------- --------- ---------
CASH AT BEGINNING OF PERIOD........................... 289,095 548,234 475,635 475,635 769,576
---------- ---------- ---------- --------- ---------
CASH AT END OF PERIOD................................. $ 548,234 $ 475,635 $ 769,576 $ 549,019 $ 912,787
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS
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.
INTERIM REPORTING
The accompanying condensed financial information as of March 31, 1998, and
for the quarters ended March 31, 1997 and 1998, including such information
included in the notes to the financial statements and disclosures regarding
matters occurring after December 31, 1997, is unaudited. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation have been included. Operating
results for any interim period are not necessarily indicative of the results for
any other interim period or for an entire year.
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
The Company accounts for its investment in finance Receivables on an accrual
basis under the guidance of Practice Bulletin 6 "Amortization of Discounts on
Certain Acquired Loans" using unique and exclusive static pools. Static pools
are established with accounts having similar attributes, usually based on
acquisition timing and/or by seller. Once a static pool is established the
receivables in the pool are not changed. The discount between the cost of each
static pool and the contractual receivable of the accounts
F-7
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in the static pools is not recorded since the Company expects to collect a
relatively small percentage of each static pool's contractual receivable
balance. Each static pool is initially recorded at cost.
Accrual accounting for each static pool is measured as a unit for the
economic life of the static pool (similar to one loan) for recognition of income
on finance receivables, or collections applied to principal on finance
receivables, and for provision for loss or impairment. The effective interest
rate for each static pool is estimated based on the estimated monthly
collections over the estimated economic life of each pool, currently five years
based on the Company's collection experience. Income on finance receivables is
accrued monthly based on each static pool's effective interest rate applied to
each static pool's monthly opening carrying value. Monthly collections received
for each static pool reduce each static pool's carrying value. To the extent
collections exceed the interest accrual, the carrying value is reduced and the
reduction is recorded as collections applied to principal. If the accrual is
greater than collections, then the carrying value accretes. Accretion arises as
a result of collection rates lower in the early months of ownership than the
estimated effective yield which reflects collections for the entire economic
life of the static pool. Measurement of impairment and any provision for loss is
based on each static pool. 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 that the carrying amount of a particular
static pool exceeds its fair value, a valuation allowance would be recognized in
the amount of such an impairment. The estimated yield for each static pool is
based on estimates of future cash flows from collections, and actual cash flows
may vary from current estimates.
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 and are recorded as servicing
remittances due. The Company does not service accounts for third parties except
in connection with one significant portfolio.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". As such investments are recorded as
either trading, available-for-sale, or held-to-maturity. The Company will record
its debt securities related to securitizations (see Note R) as held-to-maturity
based on the Company's positive intent and ability to hold these securities to
maturity. Such held-to-maturity investments are recorded at amortized cost. Net
unrealized gains or losses from held-to-maturity securities are not included in
the determination of net earnings.
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.
F-8
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company capitalized legal and accounting costs incurred in connection
with its placement of senior subordinated notes. These costs will be allocated
between the financing costs of the notes and the paid in capital of the
warrants. The debt financing costs will be amortized over the note period.
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.
ACCOUNTING FOR TRANSFERS OF FINANCIAL ASSETS
In 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. These
standards are based on consistent application of a financial-components approach
that focuses on control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. This Statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. The Company adopted
SFAS No. 125 for the year ended December 31, 1997. The adoption of SFAS No. 125
did not have a material effect on the 1997 financial statements.
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
F-9
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 periods provided for comparative purposes is
required. The Company will comply with the disclosure requirements of SFAS No.
130 in fiscal year 1998. For the quarters ended March 31, 1997 and 1998, the
Company had no sources of other comprehensive income.
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 and March 31, 1998 the Company
had no common stock equivalents.
NOTE C--FINANCE RECEIVABLES
The Company acquires charged off consumer receivables at a discount from the
actual contractual receivable balance. The following summarizes the change in
finance receivables as of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------------- --------------
1995 1996 1997 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, at beginning of period................ $ 1,342,450 $ 1,852,110 $ 6,603,735 $ 5,049,839
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) (407,278)
-------------- -------------- -------------- --------------
Balance, at end of period...................... $ 1,852,110 $ 6,603,735 $ 5,049,839 $ 4,642,561
-------------- -------------- -------------- --------------
<CAPTION>
(unaudited)
<S> <C> <C> <C> <C>
Unrecorded discount............................ $ 175,511,601 $ 426,121,742 $ 403,307,742 $ 403,308,925
-------------- -------------- -------------- --------------
</TABLE>
To the extent that the carrying amount of a static pool exceeds its fair
value, a valuation allowance would be recognized in the amount of such
impairment. As of December 31, 1995, 1996 and 1997 and March 31, 1997 and 1998,
no provision for loss has been recorded.
F-10
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C--FINANCE RECEIVABLES (CONTINUED)
CHANGE IN ESTIMATE
The Company 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 the past performance characteristics of the aggregate static
pools. After extensive statistical analysis of individual static pool
performances in 1997, the Company implemented a refinement in its analysis of
projected collections used to compute the effective interest rate for income
recognition. The refinement included individual static pool estimates and had
the effect of reducing total static pools future projected cash flows.
Management believes the change reflects a more predictable and conservative
estimate. The total aggregate effect on the specific static pools 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, and as of March 31, 1998 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 at December 31, 1996 and 1997 and the quarter ended
March 31, 1998 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 and March 31, 1998.
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,
F-11
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
imputing the interest rate using the amounts financed and the projected future
payments on the debt. At December 31, 1995, 1996, and 1997 and March 31, 1998,
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 and March 31, 1998, the carrying amount of the notes payable approximates
fair value.
NOTE E--PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------- MARCH 31,
1995 1996 1997 1998
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Computer equipment.......................................... $ 142,552 $ 198,710 $ 845,215 $ 947,577
Furniture and fixtures...................................... 152,565 410,240 855,631 879,149
Leasehold improvements...................................... -- 13,145 95,109 95,109
---------- ----------- ------------ ------------
295,117 622,095 1,795,955 1,921,835
Less accumulated depreciation and amortization.............. (73,805) (153,094) (361,737) (443,359)
---------- ----------- ------------ ------------
$ 221,312 $ 469,001 $ 1,434,218 $ 1,478,476
---------- ----------- ------------ ------------
</TABLE>
NOTE F--DEFERRED COSTS
The Company has deferred certain costs related to ongoing securitization,
initial public offering and senior subordinated notes placement efforts.
Deferred costs consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ----------
<S> <C> <C>
1997 1998
------------ ----------
Securitization......................................................................... $ 331,595 $ 351,785
Initial public offering................................................................ 203,105 216,748
Senior subordinated notes.............................................................. -- 92,799
------------ ----------
$ 534,700 $ 661,332
------------ ----------
</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 and March 31, 1998, the balance of due to
participants was $947,454, $84,131, $51,181 and $55,293, respectively, which
represents the fair value of estimated future payments to participants. Interest
expense due to participants was $269,634, $204,448, $20,574, $7,469 and $4,112
for
F-12
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G--DUE TO PARTICIPANTS (CONTINUED)
the years ended December 31, 1995, 1996 and 1997 and the quarters ended March
31, 1997 and 1998, respectively.
Payments to participants are allocated between interest and principal. The
interest portion was imputed based upon the initial contributed amount and the
portion of the projected future collections on the participant portfolios based
upon their participation percentages over a five year term. The difference
between the total payment and the imputed interest amount is recorded as a
reduction against principal.
NOTE H--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- MARCH 31,
1995 1996 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Accounts payable................................................. $ 43,504 $ 216,215 $ 238,684 $ 190,020
Accrued other liabilities........................................ 22,908 68,425 105,350 333,381
Accrued salaries, taxes and fringe benefits...................... 45,764 172,546 309,031 356,424
---------- ---------- ---------- ----------
$ 112,176 $ 457,186 $ 653,065 $ 879,825
---------- ---------- ---------- ----------
</TABLE>
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 and March 31, 1998, the Company had borrowed
$3,792,842, $2,105,972 and $1,558,151, 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% at December 31, 1996 and 9.5% at December 31, 1997 and March 31,
1998. 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 and March 31, 1998. As of December 31, 1996, 1997 and
March 31, 1997 and 1998, interest expense associated with this facility totaled
$59,827, $296,189, $87,250 and $42,477, 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 and March 31, 1998.
F-13
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE I--NOTES PAYABLE (CONTINUED)
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,
$972,342 and $1,021,419 as of December 31, 1995, 1996 and 1997 and March 31,
1998, respectively. Interest rates range from 7% to 12.7%; and interest expense
was $739, $3,629, $60,647, $684 and $26,728 in 1995, 1996 and 1997 and the first
quarter of 1997 and 1998, 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>
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.
F-14
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K--INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------
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>
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 7,366
Other adjustments...................................... -- -- (45,344)
------------ ---------- ----------
Income tax expense..................................... $ 462,759 $ 315,699 $ 225,275
------------ ---------- ----------
</TABLE>
F-15
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K--INCOME TAXES (CONTINUED)
The permanent differences are primarily due to contributions, penalties, and
meals and entertainment expenses that are not deductible for income tax
purposes. Other adjustments include the adjustment to the deferred tax
liability. 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 recorded sales income
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)
----------
Sales income.................................................... 657,630
Deferred taxes.................................................. (253,976)
----------
Sales income 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.
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 and the quarters ended March 31, 1997
and 1998, net of the offset amortized, was $140,027, $210,040, $52,510 and
$54,175, 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
F-16
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE M--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. Rent expense for this lease for the quarter ended March
31, 1997 and 1998 was $29,955 and $99,292, respectively, including $10,522 of
additional accrued lease incentive in 1998.
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 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, $58,000, $26,000 and $11,000 to related
parties during the years ended December 31, 1995, 1996 and 1997 and the quarters
ended March 31, 1997 and 1998, respectively.
Additionally, included in accounts receivable are amounts due from
non-stockholder employees of $13,250, $55,766 and $59,641 as of December 31,
1996, 1997 and March 31, 1998, respectively.
F-17
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE O--RELATED PARTY TRANSACTIONS (CONTINUED)
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 during the
year ended December 31, 1997.
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 and for the quarters ended
March 31, 1997 and 1998, the Company's contribution was $5,203, $4,379, $3,168,
$252 and $4,169, 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 period ended:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest......................... $ 269,634 $ 287,530 $ 377,410 $ 112,435 $ 75,970
---------- ---------- ---------- ---------- ----------
Income taxes..................... $ 94,000 $ 181,681 $ 8,000 $ 8,000 $ 300
---------- ---------- ---------- ---------- ----------
</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 periods ended:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Equipment and furniture
purchases...................... $ 64,081 $ -- $ 1,051,193 $ -- $ 111,728
--------- --------- ------------ ---------- ----------
</TABLE>
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
F-18
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE R--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
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.
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 $494,000 before expenses attributable to the fair value of the warrants. Upon
the conclusion of the initial public 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 $659,000 after-tax,
ignoring any amortization of financing costs and original issue discount that
will have been expensed between April 2, 1998 and the date of pay-off.
SECURITIZATION
In June 1998, a special-purpose finance company formed by the Company issued
$14.5 million principal amount of 6.43% Creditrust Receivables-Backed Notes,
Series 1998-1 (the "Securitization Notes"). The Securitization Notes are secured
by, among other things, consumer Receivables owned by the Company with a
carrying value as of March 31, 1998 of approximately $4.6 million and all of the
serviced receivables. After payment of the purchase price of the serviced
receivables, retirement of the Company's credit facility (see Note I), and
payment of transaction costs, the Company recognized cash of $5.6 million, gain
on sale of $6.1 million, and a residual investment in securitization of $4.2
million, all of which will be recognized in the second quarter of 1998. The
residual investment in securitization will be treated as a debt security
classified as held-to-maturity in accordance with SFAS 115. The Company will
receive a servicing fee of 20% of the collections of the receivables in the
securitization, and will be entitled to all future recoveries on these
receivables above the debt service on the securitization notes and trustee and
other fees. To the extent that the Company determines in the future that
collections will be less than the carrying value of the residual, the Company
would be required to record an impairment charge. Payment of principal and
interest on the Securitization Notes is insured by a financial guaranty insurer
with a "AA" rating from Standard & Poor's Corporation. The Company expects to
pursue similar securitizations in the future. The Company adopted SFAS No. 125
for the year ended December 31, 1997 and has accounted for the securitization in
accordance with this accounting standard (see Note B).
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 15% discount to the fair market value subject to certain annual
limitations. As permitted by Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation", the Company will account for
stock-based compensation on the intrinsic value-based method of Accounting
Principles Board Opinion No. 25 (APB 25). As the plan is non-compensatory in
nature, no compensation expense will be recorded for stock purchased pursuant to
the plan.
F-19
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE R--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
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.
F-20
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The Pro Forma Balance Sheet as of March 31, 1998 and the Pro Forma
Statements of Earnings for the year ended December 31, 1997 and the three months
ended March 31, 1998 are based on the historical financial statements of the
Company. The Pro Forma Balance Sheet has been prepared assuming the
securitization and issuance of subordinated debt occurred on March 31, 1998. The
Pro Forma Statements of Earnings for the three months ended March 31, 1998 and
for the year ended December 31, 1997 have been prepared assuming the
securitization and issuance of subordinated notes occurred on January 1, 1998
and January 1, 1997, respectively. Due to the fact that the Company securitized
most of its finance receivables and all of the serviced receivables, the Company
has included pro forma financial information to aid investors' understanding of
the effect the securitization will have on the Company's statements of earnings
and balance sheets for future periods.
The Pro Forma Statements of Earnings assume that the Company issued
securitization notes of $21.1 million at January 1, 1997 and $16.7 million at
January 1, 1998, as compared to the $14.5 million of securitization notes
actually issued on June 19, 1998. The assumed amounts of securitization notes at
January 1, 1997 and 1998 have been computed by applying (A) the ratio of (i) the
actual amount of the securitization notes issued on June 19, 1998 to (ii) the
projected recovery value of the receivables securitized at that date to (B) the
sum of (i) the projected recovery value at June 19, 1998 and (ii) total
collections during the periods covered by the respective Pro Forma Statements of
Earnings. The Company believes that the assumed principal amounts of
securitization notes approximate the amounts that would have been supported by
the securitized portfolios at January 1, 1997 and 1998.
Prior to June 19, 1998, the Company had not completed a securitization, and
these pro forma financial statements assume that various factors relevant to
structuring securitizations and computing projected recovery values, including
historical collection rates, interest rates used in computing projected recovery
values and in determining the size of note issuances, securitization advance
rates, and a variety of market conditions outside of the Company's control are
constant. As a result of this methodology, the pro forma financial statements
reflect pro forma sales income and pro forma cash, among other items, in amounts
in excess of the gains recognized and the cash realized in the actual
securitization (which amounts will be reflected in the Company's historical
financial statements covering the period in which the Securitization was
completed).
Additionally, the Company had not assumed that any proceeds of the
securitization or the subordinated note issuance were invested in additional
portfolios of receivables or in other earning assets. The Company intends to use
proceeds to purchase additional portfolios of receivables, which is expected to
result in additional amounts of income on finance receivables in future periods.
The Pro Forma Financial Statements do not purport to represent what the
Company's actual results of operations or financial position would have been had
the securitization and issuance of subordinated notes occurred as of such dates,
or to project Creditrust's results of operations or financial position for any
period or date, nor does it give effect to any matters other than those
described in the notes thereto. The unaudited Pro Forma Financial Statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this prospectus.
F-21
<PAGE>
CREDITRUST CORPORATION
PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
SUBORDINATED PRO FORMA
SECURITIZATION DEBT MARCH 31,
MARCH 31, 1998 ADJUSTMENTS ADJUSTMENTS 1998
-------------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
ASSETS
Cash............................................... $ 912,787 $ 6,317,336 (11 $4,406,009 (20 $ 11,636,132
Accounts Receivable................................ 57,641 57,641
Income Taxes Receivable............................ 200,163 200,163
Finance Receivables................................ 4,642,561 (4,642,561) 12)
Investment in Securitization....................... -- 4,656,863 (13 4,656,863
Prepaid Expenses................................... 45,240 45,240
Property and Equipment............................. 1,478,476 1,478,476
Deferred Costs..................................... 661,332 (351,785) 14) 593,991 (21 903,538
Other Assets....................................... 81,470 (71,925) 15) 9,545
-------------- ------------- ----------- --------------
Total Assets....................................... $8,079,670 $ 5,907,828 $5,000,000 $ 18,987,598
-------------- ------------- ----------- --------------
-------------- ------------- ----------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Due to Participants................................ $ 55,293 $ (55,293) 16) $ $ --
Servicing Remittances Due.......................... 441,633 (441,633) 17) --
Income Taxes Payable............................... -- --
Accounts Payable and Accrued Expenses.............. 879,825 879,825
Notes Payable...................................... 1,558,151 (1,558,151) 18) --
Subordinated Debt.................................. -- 4,505,769 (22 4,505,769
Capitalized Lease Obligations...................... 1,021,419 1,021,419
Deferred Income.................................... -- --
Lease Incentives................................... 300,300 300,300
Deferred Tax Liability............................. 1,343,556 2,931,271 (19 4,274,827
-------------- ------------- ----------- --------------
Total Liabilities.................................. 5,600,177 876,194 4,505,769 10,982,140
-------------- ------------- ----------- --------------
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
Paid-in capital.................................... 52,824 52,824
Paid-in capital (warrants)......................... -- 494,231 (20 494,231
Retained earnings.................................. 2,366,669 5,031,734 7,398,403
-------------- ------------- ----------- --------------
Total stockholder's equity......................... 2,479,493 5,031,734 494,231 8,005,458
-------------- ------------- ----------- --------------
Total Liabilities and Stockholder's Equity......... $8,079,670 $ 5,907,928 $5,000,000 $ 18,987,598
-------------- ------------- ----------- --------------
-------------- ------------- ----------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
CREDITRUST CORPORATION
PRO FORMA
STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SECURITIZATION SUBORDINATED DEBT DECEMBER 31,
1997 ADJUSTMENTS ADJUSTMENTS 1997
------------ ------------- ----------------- -------------
<S> <C> <C> <C> <C>
(AUDITED) (UNAUDITED)
REVENUE
Income on finance Receivables................ $7,245,744 $(7,245,744)(1) $ $ 597,967
597,967(5)
Servicing fees............................... 2,580,200 (2,580,200)(2) 2,486,144
2,486,144(2)
Sales income................................. 9,545,242(3) 9,545,242
------------ ------------- ----------------- -------------
9,825,944 2,803,409 -- 12,629,353
EXPENSES
Personnel.................................... 5,922,172 5,922,172
Contingency legal and court costs............ 320,104 320,104
Communications............................... 911,508 911,508
Rent and other occupancy..................... 853,344 853,344
Professional fees............................ 504,003 (16,347)(4) 215,997(8) 703,653
General and administrative................... 270,509 270,509
------------ ------------- ----------------- -------------
8,781,640 (16,347) 215,997 8,981,290
------------ ------------- ----------------- -------------
Earnings from Operations....................... 1,044,304 2,819,756 (215,997) 3,648,063
Other Income (Expense)
Interest and other........................... 14,755 14,755
Interest expense............................. (377,410) 316,736(6) (679,720)(9) (740,394)
------------ ------------- ----------------- -------------
Earnings Before Income Taxes................... 681,649 3,136,492 (895,717) 2,922,424
Provision for Income Taxes..................... 225,275 1,223,232(7) (349,330)(10) 1,099,177
------------ ------------- ----------------- -------------
Net Earnings................................... $ 456,374 $ 1,913,260 $ (546,387) $ 1,823,247
------------ ------------- ----------------- -------------
Earnings Per Common Share...................... $ 0.08 $ 0.32 $ (0.09) $ 0.30
------------ ------------- ----------------- -------------
Weighted-Average Number of Common Shares
Outstanding During the Year.................. 6,000,000 6,000,000 6,000,000 6,000,000
------------ ------------- ----------------- -------------
------------ ------------- ----------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
CREDITRUST CORPORATION
PRO FORMA
STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
PRO FORMA
MARCH 31, SECURITIZATION SUBORDINATED-DEBT MARCH 31,
1998 ADJUSTMENTS ADJUSTMENTS 1998
------------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenue
Income on finance Receivables............. $ 1,502,985 $ (1,502,985 (1) $ $ 139,706
139,706(5)
Servicing fees............................ 1,242,347 (1,242,347 (2) 753,392
753,392(2)
Sales income.............................. 657,630 7,516,079(3) 8,173,709
------------ ------------- ----------------- ------------
3,402,962 5,663,845 9,066,807
Expenses
Personnel................................. 1,712,444 1,712,444
Contingency legal and court costs......... 104,445 104,445
Communications............................ 277,793 277,793
Rent and other occupancy.................. 302,511 302,511
Professional fees......................... 191,686 (26,154 (4) 53,999(8) 219,531
General and administrative................ 83,818 83,818
------------ ------------- ----------------- ------------
2,672,697 (26,154) 53,999 2,700,542
------------ ------------- ----------------- ------------
Earnings from Operations.................... 730,265 5,689,999 (53,999) 6,366,265
Other Income (Expense)
Interest and other........................ 10,815 10,815
Interest expense.......................... (75,970) 51,882(6) (169,930)(9) (194,018)
------------ ------------- ----------------- ------------
Earnings Before Income Taxes................ 665,110 5,741,881 (223,929) 6,183,062
Provision for Income Taxes.................. 250,010 2,239,334(7) (87,332)(10) 2,402,012
------------ ------------- ----------------- ------------
Net Earnings................................ $ 415,100 $ 3,502,547 $ (136,597) $ 3,781,050
------------ ------------- ----------------- ------------
Earnings Per Common Share................... $ 0.07 $ 0.58 $ (0.02) $ 0.63
------------ ------------- ----------------- ------------
Weighted-Average Number of Common Shares
Outstanding During the Period............. 6,000,000 6,000,000 6,000,000 6,000,000
------------ ------------- ----------------- ------------
------------ ------------- ----------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
CREDITRUST CORPORATION
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(1) Reflects the reversal of the income on finance receivables recognized by
the Company during the period and assumed to have been included in the
securitization.
(2) Reflects the reversal of the servicing fees on the serviced receivables
recognized by the Company during the period and assumed to have been included in
the securitization. Also assumes that the Company received a servicing fee equal
to 20% of the collections on the securitized receivables.
(3) Assumes that the Company issued securitization notes of $21.1 million at
January 1, 1997 and $16.7 million at January 1, 1998. The assumed amounts of the
securitization notes at January 1, 1997 and 1998 have been computed by applying
(A) the ratio of (i) the $14.5 million of the securitization notes actually
issued on June 19, 1998 to (ii) the projected recovery value of the receivables
securitized at that date to (B) the sum of (i) the projected recovery value at
June 19, 1998 and (ii) total collections during the periods covered by the
respective Pro Forma Statements of Earnings. The Company believes that the
assumed principal amounts of securitization notes approximate the amounts that
would have been supported by the securitized portfolios at January 1, 1997 and
1998. In determining costs of sales for purpose of computing sales income, the
Company took into account the total investment in owned receivables as of
January 1, 1997 and January 1, 1998 plus the cost of the serviced receivables
and allocated these amounts to cost of sales and residual investment in
securitization. Securitization expenses were also included in cost of sales.
(4) Reflects the reversal of amortization of certain costs capitalized in
connection with the Company's arrangements to service the serviced receivables.
(5) Assumes that the Company earns 12% per annum on its residual investment
in securitization as a debt security held to maturity in accordance with SFAS
115.
(6) Reflects the elimination of interest expense of $296,000 and $42,000 on
bank debt incurred to carry a portion of the securitized receivables for the
year ended December 31, 1997 and the three months ended March 31, 1998,
respectively. Also reflects the elimination of interest expense of $21,000 and
$9,000 on participations used to carry certain of the receivables. The debt and
amounts due to participants are assumed to have been repaid with a portion of
the proceeds of the securitization.
(7) Reflects the adjustment of the deferred tax liability to give effect to
the securitization being treated as a sale for financial statement purposes and
as financing for income tax purposes.
(8) Reflects amortization of deferred issuance costs over the term of the
subordinated notes assuming the debt was issued on January 1, 1997 and January
1, 1998, respectively.
(9) Reflects interest expense on the subordinated notes at 10% per annum
from January 1, 1997 ($500,000) and January 1, 1998 ($125,000), respectively.
Also reflects assumed amortization of original issue discount of $180,000 and
$45,000 for the year ended December 31, 1997 and the three months ended March
31, 1998, respectively.
(10) Reflects the tax benefit resulting from the additional interest
expense.
(11) Reflects the net amount of cash assumed to have been received upon the
securitization after repayment of all debt and related transaction costs.
(12) Reflects the elimination of the finance receivables that were included
in the securitization.
(13) Investment in securitizations reflects the allocation of cost of the
owned receivables plus the cost of the serviced receivables to this residual
investment based on the relative fair values of the securitization notes and the
residual investment. The fair value of the residual investment used in this
computation is the
F-25
<PAGE>
CREDITRUST CORPORATION
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
estimated fair valued of recoveries on all securitized receivables after
repayment of debt service on the securitization notes and estimated cost of
servicing and discounted at 12% per annum. In the event that the Company
determines in the future that the residual is impaired, the Company would be
required to record a provision for loss.
(14) Assumes that deferred costs were applied against the proceeds of the
securitization.
(15) Assumes that contract acquisition costs created in connection with
obtaining the servicing of the secured receivables were eliminated in connection
with the securitization.
(16) Assumes that a portion of the proceeds of the securitization were used
to eliminate the remaining amounts payable to participants.
(17) Reflects the elimination of certain servicing remittances due to the
owner of the serviced receivables as of the balance sheet date due to the result
of inclusion of these assets in the securitization.
(18) Assumes that a portion of the proceeds of the securitization were used
to repay the bank indebtedness incurred to carry a portion of the finance
receivables included in the securitization.
(19) Reflects the adjustment to the deferred tax account as the result of
treatment of the securitization as a sale for financial statement purposes and
as a financing for income tax purposes.
(20) Reflects the net amount of cash assumed to have been received and
allocated to the issuance of the subordinated notes, with the remaining cash of
$494,000 allocated to issuance of the warrants at their estimated fair value and
reflected as an increase in paid-in capital.
(21) Reflects the capitalization of the issuance costs allocated to the
issuance of the subordinated Notes.
(22) Reflects the assumed fair value of the subordinated notes as a
liability.
F-26
<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.................................... 8
Recent Developments--Securitization............. 15
Use of Proceeds................................. 16
Dividend Policy................................. 16
Dilution........................................ 17
Capitalization.................................. 18
Selected Financial Data......................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 21
Business........................................ 35
Management...................................... 48
Certain Transactions............................ 54
Principal Stockholders.......................... 55
Description of Capital Stock.................... 56
Shares Eligible for Future Sale................. 59
Underwriting.................................... 60
Legal Matters................................... 61
Experts......................................... 61
Change in Independent Public Accountants........ 62
Available Information........................... 62
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*........................................... 4,153
---------
Total*........................................................ $ 550,000
---------
---------
</TABLE>
- ------------------------
+ Previously paid
* 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
II-1
<PAGE>
amended. The Placement Agents were Ferris, Baker Watts, Incorporated and
Boenning & Scattergood, Inc. The net proceeds were added to working capital and
may be used to accrue additional 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 Creditrust SMILE Bonus Program.
10.4 Employment Agreement between the Company and Jefferson Moore.
10.5 Employment Agreement between the Company and Richard Palmer.
10.6 Employment Agreement between the Company and Rick Chandler.
10.7 Employment Agreement between the Company and John Davis.
10.8 Agreement dated March 13, 1997 by and between Crystal Hill Advisors and the Company.
10.9 Servicing Agreement, dated August 6, 1997, by and between Creditrust Corporation and Heartland Bank.**
10.10 Loan and Security Agreement, dated September 23, 1996, by and between Oxford Capital Corporation and
Signet Bank.**
10.11 Lease Agreement, dated January 24, 1996, by and between BRIT Limited Partnership and Oxford Capital
Corporation.**
10.12 Lease Agreement, dated January 22, 1997, by and between A&E Partners and Creditrust Corporation.**
10.13 First Amendment to Lease, dated February 27, 1997, by and between A&E Partners and Creditrust
Corporation.**
10.14 Indenture and Servicing Agreement, dated as of June 1, 1998, by and among Creditrust SPV2, LLC, Norwest
Bank Minnesota, National Association, Creditrust Corporation and Asset Guaranty Insurance Company.
10.15 Operating Agreement of Creditrust SPV2, LLC, dated June 19, 1998.
16 Letter from Arthur Andersen LLP.
21.1 List of Subsidiaries.
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.
** Previously filed.
(b) Financial Statement Schedules:
None.
II-2
<PAGE>
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 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 amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Baltimore,
State of Maryland, on June 24, 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 amendment
to the registration statement has been signed by the following persons in the
capacities indicated on this 24th day of June, 1998.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ JOSEPH K. RENSIN Chairman of the Board,
- ------------------------------ President and Chief June 24, 1998
Joseph K. Rensin Executive Officer
Vice President, Chief
/s/ RICHARD J. PALMER Financial Officer and
- ------------------------------ Treasurer (Principal June 24, 1998
Richard J. Palmer Financial and Accounting
Officer)
*
- ------------------------------ Director June 24, 1998
Frederick W. Glassberg
*
- ------------------------------ Director June 24, 1998
John G. Moran
*
- ------------------------------ Director June 24, 1998
Harry G. Pappas, Jr.
*
- ------------------------------ Director June 24, 1998
Michael S. Witlin
* By: /s/ JOSEPH K. RENSIN
Joseph K. Rensin June 24, 1998
ATTORNEY-IN-FACT
II-4
<PAGE>
Exhibit 3.1
CREDITRUST CORPORATION
ARTICLES OF AMENDMENT AND RESTATEMENT
CREDITRUST CORPORATION, a Maryland corporation, having its principal office in
Baltimore County, Maryland (the "Corporation"), desires to amend and restate its
Charter as currently in effect and hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended by:
Changing and reclassifying each of the shares of Common Stock
(without par value) of the Corporation which is issued and outstanding as of the
close of business on the effective date of this amendment into one share of
Common Stock (par value $0.01 per share) and by transferring from the account
designated "Common Stock" to an account designated "Capital Surplus" $.99 for
each share of Common Stock outstanding immediately after the change and
reclassification.
SECOND: The Charter of the Corporation is hereby further amended and
restated in its entirety to read as follows:
FIRST: The name of the corporation (the "Corporation") is:
Creditrust Corporation
SECOND: (a) The purposes for which the Corporation is formed
and the business and objects to be carried on and promoted by it are:
(1) To purchase or otherwise acquire, own, hold,
sell, transfer, assign, pledge, finance, refinance, service and
otherwise deal with account receivables (including, but not limited to
consumer receivables generated on credit card accounts and installment
accounts and medical receivables) ; and
(2) To engage in any one or more businesses or
transactions, or to acquire all or any portion of any entity engaged in
any one or more businesses or transactions which the Board of Directors
(or a committee of the Board of Directors duly appointed by the Board
of Directors for such purpose) may from time to time authorize or
approve, whether or not related to the business described elsewhere in
this Article or to any other business at the time or theretofore
engaged in by the Corporation.
-1-
<PAGE>
(b) The foregoing enumerated purposes and objects shall be in
no way limited or restricted by reference to, or inference from, the terms of
any other clause of this or any other Article of the Charter of the Corporation,
and each shall be regarded as independent and they are intended to be and shall
be construed as powers as well as purposes and objects of the Corporation and
shall be in addition to and not in limitation of the general powers of
corporations under the general laws of the State of Maryland.
THIRD: The address of the principal office of the Corporation
in this State is 7000 Security Boulevard, Baltimore, Maryland 21244.
FOURTH: The name and address of the resident agent of the
Corporation in this State are Joseph K. Rensin, 7000 Security Boulevard,
Baltimore, Maryland 21244. Said resident agent is a citizen of the State of
Maryland who resides therein.
FIFTH: (a) The total number of shares of stock of all classes
which the Corporation has authority to issue is 25,000,000 shares of capital
stock, divided into 5,000,000 shares of Series Preferred Stock, par value $0.01
per share, and 20,000,000 shares of Common Stock, par value $0.01 per share. The
aggregate par value of all shares of capital stock is $250,000.00.
(b) The following is a description of the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of the Common
Stock of the Corporation:
(1) Each share of Common Stock shall have one vote,
and, except as otherwise provided in respect of any class of Series
Preferred Stock hereafter classified or reclassified, the exclusive
voting power for all purposes shall be vested in the holders of the
Common Stock.
(2) Subject to the provisions of law and any
preferences of any class of Series Preferred Stock hereafter classified
or reclassified, dividends, including dividends payable in shares of
another class of the Corporation's stock, may be paid on the Common
Stock of the Corporation at such time and in such amounts as the Board
of Directors may deem advisable, but subject to availability of funds
and provisions for reasonable reserves as determined by the Board of
Directors in any calendar year in which the Board of Directors
determines to pay dividends on the Common Stock of the Corporation.
(3) In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the
holders of the Common
-2-
<PAGE>
Stock shall be entitled, after payment or provision for payment of the
debts and other liabilities of the Corporation and the amount to
which the holders of any class of Series Preferred Stock hereafter
classified or reclassified having a preference on distributions in the
liquidation, dissolution or winding up of the Corporation shall be
entitled together with the holders of any other class of stock
hereafter classified or reclassified not leaving a preference on
distributions in the liquidation, dissolution or winding up of the
Corporation, to share ratably in the remaining net assets of the
Corporation.
(c) The Board of Directors shall have the power from time to
time (a) to classify or reclassify, in one or more series, any unissued shares
of Series Preferred Stock and (b) to reclassify any unissued shares of Series
Preferred Stock, in the case of either (a) or (b) by determining, fixing, or
altering one or more of the following:
(1) The distinctive designation of such class or
series and the number of shares to constitute such class or series;
provided that, unless otherwise prohibited by the terms of such or any
other class or series, the number of shares of any class or series may
be decreased by the Board of Directors in connection with any
classification or reclassification of unissued shares and the number of
shares of such class or series may be increased by the Board of
Directors in connection with any such classification or
reclassification, and any shares of any class or series which have been
redeemed, purchased, otherwise acquired or converted into shares of
Common Stock or any other class or series shall become part of the
authorized capital stock of the Corporation and be subject to
classification and reclassification as provided in this sub-paragraph.
(2) Whether or not and, if so, the rates, amounts and
times at which, and the conditions under which, dividends shall be
payable on shares of such class or series, whether any such dividends
shall rank senior or junior to or on a parity with the dividends
payable on any other class or series of stock, and the status of any
such dividends as cumulative, cumulative to a limited extent or
noncumulative and as participating or nonparticipating.
(3) Whether or not shares of such class or series
shall have voting rights, in addition to any voting rights provided by
law and, if so, the terms of such voting rights.
(4) Whether or not shares of such class or series
shall have conversion or exchange privileges and, if so, the terms and
conditions thereof, including provision for adjustment of the
conversion or exchange rate in such events or at such times as the
Board of Directors shall determine.
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(5) Whether or not shares of such class or series
shall be subject to redemption and, if so, the terms and conditions of
such redemption, including the date or dates upon or after which shares
shall be redeemable and the amount per share payable in case of
redemption, which amount may vary under different conditions and at
different redemption dates; and whether or not there shall be any
sinking fund or purchase account in respect thereof, and if so, the
terms thereof.
(6) The rights of the holders of shares of such class or
series upon the liquidation, dissolution or winding up of the affairs
of, or upon any distribution of the assets of, the Corporation, which
rights may vary depending upon whether such liquidation, dissolution or
winding up is voluntary or involuntary and, if voluntary, may vary at
different dates, and whether such rights shall rank senior or junior to
or on a parity with such rights of any other class or series of stock.
(7) Whether or not there shall be any limitations applicable,
while shares of such class or series are outstanding, upon the payment
of dividends or making of distributions on, or the acquisition of, or
the use of monies for purchase or redemption of, any stock of the
Corporation, or upon any other action of the Corporation, including
action under this subparagraph, and, if so, the terms and conditions
thereof.
(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such
class or series, not inconsistent with law and the Charter of the
Corporation.
(d) For the purposes hereof and of any articles supplementary to the
Charter providing for the classification or reclassification of any shares of
Series Preferred Stock or of any other Charter document of the Corporation
(unless otherwise provided in any such articles or document), any class or
series of stock of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to
dividends or upon liquidation, if the holders of such class or series
shall be entitled to the receipt of dividends or of amounts
distributable on liquidation, dissolution or winding up, as the case
may be, in preference or priority to holders of such other class or
series;
(2) on a parity with another class or series either
as to dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation price per share
thereof be different
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from those of such others, if the holders of such class or series
of stock shall be entitled to receipt of dividends or amounts
distributable upon liquidation, dissolution or winding up, as the case
may be, in proportion to their respective dividend rates or
redemption or liquidation prices, without preference or priority over
the holders of such other class of series; and
(3) junior to another class or series either as to
dividends or upon liquidation, if the rights of the holders of such
class or series shall be subject or subordinate to the rights of the
holders of such other class or series in respect of the receipt of
dividends or the amounts distributable upon liquidation, dissolution or
winding up, as the case may be.
SIXTH: (a) The number of directors of the Corporation shall be
five, which number may be increased or decreased pursuant to the Bylaws of the
Corporation, but shall never be less than the minimum number permitted by the
General Laws of the State of Maryland now or hereafter in force.
(b) Subject to the rights of the holders of any class of
Series Preferred Stock then outstanding, newly created directorships resulting
from any increase in the authorized number of directors or any vacancies on the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office, or other cause may be filled by a
majority vote of the remaining members of the Board of Directors. A director so
chosen by the Board of Directors shall hold office for the balance of the term
then remaining. No decrease in the number of directors constituting, the Board
of Directors shall affect the tenure of office of any director.
(c) Subject to the rights of the holders of any class
separately entitled to elect one or more directors, any director, or the entire
Board of Directors, may be removed from office at any time, with or without
cause, by the affirmative vote of the holders of at least a majority of the
combined voting power of all classes of shares of capital stock entitled to vote
in the election for directors voting together as a single class at any duly
called meeting of stockholders at which a quorum is present (in person or by
proxy).
SEVENTH: (a) The following provisions are hereby adopted for
the purpose of defining, limiting and regulating the powers of the Corporation
and of the directors and stockholders:
(1) The Board of Directors is hereby empowered to
approve the issuance from time to time of shares of any class of the
Corporation' s stock, whether now or hereafter authorized, or
securities convertible into shares of its stock of any class or
classes, whether now or hereafter authorized, for such
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consideration as may be deemed advisable by the Board of Directors and
without any action by the stockholders.
(2) No holder of any stock or any other securities of
the Corporation, whether now or hereafter authorized, shall have any
preemptive right to subscribe for or purchase any stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or
prices and upon such other terms as the Board of Directors, in its sole
discretion, may fix; and any stock or other securities which the Board
of Directors may determine to offer for subscription may, as the Board
of Directors in its sole discretion shall determine, be offered to the
holders of any class, series or type of stock or other securities at
the time outstanding to the exclusion of the holders of any or all
other classes, series or types of stock or other securities at the time
outstanding.
(3) To the extent permitted by applicable law, the
Board of Directors of the Corporation shall have power, in its sole
discretion, (i) to determine from time to time in accordance with sound
accounting practice or other reasonable valuation methods what
constitutes annual or other net profits, earnings, surplus, or net
assets in excess of capital; (ii) to fix and vary from time to time the
amount to be reserved as working capital, or determine that retained
earnings or surplus shall remain in the Corporation; (iii) to set apart
out of any funds of the Corporation such reserve or reserves in such
amount or amounts and for such proper purpose or purposes as it shall
determine and to abolish any such reserve or any part thereof, to
distribute and pay distributions or dividends in stock, cash or other
securities or property, out of surplus or any other kinds or amounts
legally available therefor, at such times and to the stockholders of
record on such dates as it may, from time to time, determine; and (iv)
to determine whether and to what extent and at what times and places
and under what conditions and regulations the books, accounts and
documents of the Corporation, or any of them, shall be open to the
inspection of stockholders, except as otherwise provided by statute or
by the Bylaws, and, except as so provided, no stockholder shall have
any right to inspect any book, account or document of the Corporation
unless authorized so to do by resolution of the Board of Directors.
(4) Notwithstanding any provision of law requiring
the authorization of any action by a greater proportion than a majority
of the total number of shares of
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all classes of capital stock or of the total number of shares of any
class of capital stock, such action shall be valid and effective if
authorized by the affirmative vote of the holders of a majority of the
total number of shares of all classes outstanding and entitled to vote
thereon, except as otherwise provided in the Charter.
(5) The Corporation shall indemnify (A) its directors
and officers, whether serving the Corporation or at its request any
other entity, to the full extent required or permitted by the Maryland
General Corporation Law, now or hereafter in force, including the
advance of expenses under the procedures and to the full extent
permitted by law and (B) other employees and agents to such extent as
shall be authorized by the Board of Directors or the Corporation's
Bylaws and as shall be indemnification shall not be exclusive of any
other rights to which those seeking indemnification may be entitled.
The Board of Directors may take such action as is necessary to carry
out these indemnification provisions and is expressly empowered to
adopt, approve and amend from time to time such bylaws, resolutions or
contracts implementing such provisions or such further indemnification
arrangements as may be permitted by law. No amendment of the Charter of
the Corporation or repeal of any of its provisions shall limit or
eliminate the right to indemnification provided hereunder with respect
to acts or omissions occurring prior to such amendment or repeal.
(6) To the fullest extent permitted by Maryland law,
as amended or interpreted, no director or officer of the Corporation
shall be personally liable to the Corporation or its stockholders for
money damages. No amendment of the Charter of the Corporation or repeal
of any of its provisions shall limit or eliminate the limitation on
liability provided to directors and officers hereunder with respect to
any act or omission occurring prior to such amendment or repeal.
(7) (A) Nominations for the election of directors and
proposals for any new business to be considered at any annual or
special meeting of stockholders may be made by the Board of Directors
of the Corporation or by any stockholder of the Corporation entitled to
vote generally in the election of directors. In order for a stockholder
of the Corporation to make any such nominations and/or proposals, he or
she shall give notice thereof in writing, delivered or mailed by first
class United States Certified mail, postage prepaid, to the Secretary
of the Corporation not less than 30 days nor more than 60 days prior to
any such meeting; provided, however, that if less than 31 days notice
of the meeting is given to stockholders, such written notice; shall be
delivered or mailed, as prescribed, to the Secretary of the Corporation
not later than the close of the tenth day following the day on which
notice of the meeting was mailed to stockholders. Each such notice
given by a stockholder with respect to nominations for the election of
directors shall set forth (i) the name, age, business
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address and, if known, residence address of each nominee proposed in
such notice, (ii) the principal occupation or employment of each such
nominee, (iii) the number of shares of stock of the Corporation which
are beneficially owned by each such nominee, (iv) such other
information as would be required to be included in a proxy statement
soliciting proxies for the election of the proposed nominee pursuant
to Regulation 14A of the Securities Exchange Act of 1934, as amended,
including, without limitation, such person's written consent to being
named in the proxy statement as a nominee and to serving as a
director, if elected, and (v) as to the stockholder giving such
notice, his name and address as they appear on the Corporation's books
and the class and number of shares of the Corporation which are
beneficially owned by such stockholder. In addition, the stockholder
making such nomination shall promptly provide any other information
reasonably requested by the Corporation.
(B) Each notice given by a stockholder to
the Secretary with respect to business proposals to be brought before a meeting
of stockholders shall set forth in writing as to each matter: (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting; (ii) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
business; (iii) the class and number of shares of the Corporation which are
beneficially owned by the stockholder; and (iv) any material interest of the
stockholder in such business. Notwithstanding anything in this Charter to the
contrary, no business shall be conducted at the meeting except in accordance
with the procedures set forth in this sub-paragraph (7).
(C) The Chairman of the annual or special
meeting of stockholders may, if the facts warrant, determine and declare to such
meeting that a nomination or proposal was not made in accordance with the
foregoing procedure, and, if so determined, shall so declare to the meeting and
the defective nomination or proposal shall be disregarded.
(8) The Board of Directors may, in connection with
the exercise of its business judgment involving a Business Combination (as
defined in Section 3601 of the Corporations and Associations Article of the
Annotated Code of Maryland) or any actual or proposed transaction which would or
may involve a change in control of the Corporation (whether by purchases of
shares of stock or any other securities of the Corporation in the open market,
or otherwise, tender offer, merger, consolidation, dissolution, liquidation,
sale of all or substantially all of the assets of the Corporation, proxy
solicitation or otherwise), in determining what is in the best interests of the
Corporation and its stockholders and in making any recommendation to its
stockholders, give due consideration to all relevant factors, including, but not
limited to (A) the economic effect, both immediate and long-term, upon the
Corporation's stockholders, including stockholders, if any, not to participate
in the transaction; (B) the social and economic effect on the employees of, and
others dealing with, the Corporation and its
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subsidiaries and on the communities in which the Corporation and its
subsidiaries operate or are located; (C) whether the proposal is acceptable
based on the historical and current operating results or financial condition of
the Corporation; (D) whether a more favorable price could be obtained for the
Corporation's stock or other securities in the future; (E) the reputation and
business practices of the offeror and its management and affiliates as they
would affect the employees of the Corporation and its subsidiaries; (F) the
future value of the stock or any other securities of the Corporation; (G) any
antitrust or other legal and regulatory issues that are raised by the proposal;
and (H) the business and financial condition and earnings prospects of the
acquiring person or entity, including, but not limited to, debts service and
other existing financial obligations, financial obligations to be incurred in
connection with the acquisition, and other likely financial obligations of the
acquiring person or entity. If the Board of Directors determines that any
proposed Business, Combination (as defined in Section 3-601 of the Corporations
and Associations Article of the Annotated Code of Maryland) or actual or
proposed transaction which would or may involve a change in control of the
Corporation should be rejected, it may take any lawful action to defeat such
transaction, including, but not limited to, any or all of the following:
advising stockholders not to accept the proposal; instituting litigation against
the party making the proposal; filing complaints with governmental and
regulatory authorities; acquiring the stock or any of the securities of the
Corporation; selling or otherwise issuing authorized but unissued stock, other
securities or treasury stock or granting options with respect thereto; acquiring
a company to create an antitrust or other regulatory problem for the party
making the proposal; and obtaining a more favorable offer from another
individual or entity.
(9) In furtherance and not in limitation of the
powers conferred by statute, the Board of Directors of the Corporation is
expressly authorized to make, repeal, alter, amend and rescind the Bylaws of the
Corporation. Notwithstanding any other provision of this Charter or the Bylaws
of the Corporation (and notwithstanding the fact that some lesser percentage may
be specified by law), the Bylaws shall not be made, repealed, altered, amended
or rescinded by the stockholders of the Corporation except by the vote of the
holders of not less than a majority of the outstanding shares of capital stock
of the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of the stockholders
called for that purpose (provided that notice of such proposed adoption, repeal,
alteration, amendment or rescission is included in the notice of such meeting),
or, as set forth above, by the Board of Directors.
(b) The Corporation reserves the right from time to time to
make any amendments of its Charter which may now or hereafter be authorized by
law, including any amendments changing the terms or contract rights, as
expressly set forth in its Charter, of any of its outstanding stock by
classification, reclassification or otherwise, but no such amendment which
changes such terms or contract rights of any of its outstanding stock shall be
valid unless such amendment shall have been authorized by not less than a
majority of the aggregate number
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of the votes entitled to be cast thereon, by a vote at a meeting or in writing
with or without a meeting; provided, however, that any amendment to, repeal of
or adoption of any provision inconsistent with Article SIXTH or Article SEVENTH
shall have been authorized by not less than 80% of the aggregate votes entitled
to be cast thereon (considered for this purpose as a single class) by vote at a
meeting or in writing with or without a meeting.
(c) The enumeration and definition of particular powers of the
Board of Directors included in the foregoing shall in no way be limited or
restricted by reference to or inference from the terms of any other clause of
this or any other Article of the Charter of the Corporation, or construed as or
deemed by inference or otherwise in any manner to exclude or limit any powers
conferred upon the Board of Directors under the Maryland General Corporation Law
now or hereafter in force.
EIGHTH: The duration of the Corporation shall be perpetual.
THIRD: The foregoing amendment and restatement to the Charter of the
Corporation has been advised by the Board of Directors and approved by the sole
stockholder of the Corporation.
FOURTH: Immediately prior to the foregoing amendment and restatement of
the Charter of the Corporation, the Corporation had authority to issue 1,000
shares of Common Stock, without par value. Following the amendment and
restatement of the Charter of the Corporation, the Corporation has authority to
issue 25,000,000 shares of capital stock, 5,000,000 shares of which is
classified as Series Preferred Stock, par value $0.01 per share, and 20,000,000
shares of which is classified as Common Stock, par value $0.01 per share. The
aggregate par value immediately following this amendment and restatement of the
Charter is $250,000.00.
FIFTH: The provisions set forth in the foregoing amendment and
restatement of the Charter are all the provisions of the Charter currently in
effect.
IN WITNESS WHEREOF, Creditrust Corporation has caused these presents to
be signed in its name and on its behalf by its President and witnessed by its
Secretary on February 19, 1998.
WITNESS: CREDITRUST CORPORATION
/s/ John L. Davis By: /s/ Joseph K. Rensin
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John L. Davis, Secretary Joseph K. Rensin, President
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THE UNDERSIGNED, President of Creditrust Corporation who executed on
behalf of the Corporation the foregoing Articles of Amendment and Restatement of
which this certificate is made a part, hereby acknowledges in the name and on
behalf of said Corporation the foregoing Articles of Amendment and Restatement
to be the corporate act of said Corporation and hereby certifies that to the
best of his knowledge, information, and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in all
material respects under the penalties of perjury.
/s/ Joseph K. Rensin
--------------------------------
Joseph K. Rensin, President
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Exhibit 3.2
CREDITRUST CORPORATION
AMENDED AND RESTATED BYLAWS
ARTICLE I
STOCKHOLDERS
SECTION 1.1 ANNUAL MEETING. The Corporation shall hold an annual
meeting of its stockholders to elect directors and transact any other business
within its powers, either at 10:00 a.m. on the last Thursday of May in each year
if not a legal holiday, or at such other time on such other day as shall be set
by the Board of Directors. Except as the Charter or statute provides otherwise,
any business may be considered at an annual meeting without the purpose of the
meeting having been specified in the notice. Failure to hold an annual meeting
does not invalidate the Corporation's existence or affect any otherwise valid
corporate acts.
SECTION 1.2 SPECIAL MEETING. At any time in the interval between annual
meetings, a special meeting of the stockholders may be called by the Chairman of
the Board or the President or by a majority of the Board of Directors by vote at
a meeting or in writing (addressed to the Secretary of the Corporation) with or
without a meeting. Special meetings of the stockholders shall be called by the
Secretary at the request of stockholders only on the written request of
stockholders entitled to cast at least a majority of all the votes entitled to
be cast at the meeting. A request for a special meeting shall state the purpose
of the meeting and the matters proposed to be acted on at it. The Secretary
shall inform the stockholders who make the request of the reasonably estimated
costs of preparing and mailing a notice of the meeting and, on payment of these
costs to the Corporation, notify each stockholder entitled to notice of the
meeting. Unless requested by stockholders entitled to cast a majority of all the
votes entitled to be cast at the meeting, a special meeting need not be called
to consider any matter which is substantially the same as a matter voted on at
any meeting of stockholders held in the preceding 12 months.
SECTION 1.3 PLACE OF MEETINGS. Meetings of stockholders shall be held
at such place in the United States as is set from time to time by the Board of
Directors.
SECTION 1.4 NOTICE OF MEETINGS, WAIVER OF NOTICE. Not less than ten or
more than 90 days before each stockholders' meeting, the Secretary shall give
written notice of the meeting to each stockholder entitled to vote at the
meeting and each other stockholder entitled to notice of the meeting. The notice
shall state the time and place of the meeting and, if the meeting is a special
meeting or notice of the purpose is required by statute, the purpose of the
meeting. Notice is given to a stockholder when it is personally delivered to him
or her, left at his or her residence or usual place of business, or mailed to
him or her at his or her address as it appears on the records of the
Corporation. Notwithstanding the foregoing provisions, each
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person who is entitled to notice waives notice if he or she before or after the
meeting signs a waiver of the notice which is filed with the records of
stockholders' meetings, or is present at the meeting in person or by proxy.
SECTION 1.5 QUORUM; VOTING. Unless statute or the Charter provides
otherwise, at a meeting of stockholders the presence in person or by proxy of
stockholders entitled to be cast at the meeting constitutes a quorum, and a
majority of all the votes cast at a meeting at which a quorum is present is
sufficient to approve any matter which properly comes before the meeting, except
that a plurality of all the votes cast at a meeting at which a quorum is present
is sufficient to elect a director.
SECTION 1.6 ADJOURNMENTS. Whether or not a quorum is present, a meeting
of stockholders convened on the date for which it was called may be adjourned
from time to time without further notice by a majority vote of the stockholders
present in person or by proxy to a date not more than 120 days after the
original record date. Any business which might have been transacted at the
meeting as originally notified may be deferred and transacted at any such
adjourned meeting at which a quorum shall be present.
SECTION 1.7 GENERAL RIGHT TO VOTE; PROXIES. Unless the Charter provides
for a greater or lesser number of votes per share or limits or denies voting
rights, each outstanding share of stock, regardless of class, is entitled to one
vote on each matter submitted to a vote at a meeting or stockholders. In all
elections for directors, each share of stock may be voted for as many
individuals as there are directors to be elected and for whose election the
share is entitled to be voted. A stockholder may vote the stock the stockholder
owns of record either in person or by proxy. A stockholder may sign a writing
authorizing another person to act as proxy. Signing may be accomplished by the
stockholder or the stockholder's authorized agent signing the writing or causing
the stockholder's signature to be affixed to the writing by any reasonable
means, including facsimile signature. A stockholder may authorize another person
to act as proxy by transmitting, or authorizing the transmission of, a telegram,
cablegram, datagram, or other means of electronic transmission to the person
authorized to act as proxy or to a proxy solicitation firm, proxy support
service organization, or other person authorized by the person who will act as
proxy to receive the transmission. Unless a proxy provides otherwise, it is not
valid more than 11 months after its date. A proxy is revocable by a stockholder
at any time without condition or qualification unless the proxy states that it
is irrevocable and the proxy is coupled with an interest. A proxy may be made
irrevocable for so long as it is coupled with an interest.
SECTION 1.8 LIST OF STOCKHOLDERS. At each meeting of stockholders, a
full, true and complete list of all stockholders entitled to vote at such
meeting, showing the number and class of shares held by each and certified by
the transfer agent for such class or by the Secretary, shall be furnished by the
Secretary.
SECTION 1.9 CONDUCT OF BUSINESS AND VOTING. At all meetings of
stockholders, unless the voting is conducted by inspectors, the proxies and
ballots shall be
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received, and all questions regarding the qualification of voters and the
validity of proxies, the acceptance or rejection of votes and procedures for the
conduct of business not otherwise specified by these Bylaws, the Charter or
applicable law, shall be decided or determined by the chairman of the meeting.
If demanded by stockholders, present in person or by proxy, entitled to cast 10%
in number of votes entitled to be cast or if ordered by the chairman, the vote
upon any election or question shall be taken by ballot and, upon like demand or
order, the voting shall be conducted by two inspectors, in which event the
proxies and ballots shall be received, and all questions regarding the
qualification of voters and the validity of proxies and the acceptance or
rejection of votes shall be decided, by such inspectors. Unless so demanded or
ordered, no vote need be taken by ballot and voting need not be conducted by
inspectors. The stockholders at any meeting may elect an inspector or inspectors
to act at such meeting, and in default of such election the chairman of the
meeting may appoint an inspector or inspectors. No candidate for election as a
director at a meeting shall serve as an inspector thereat.
SECTION 1.10 INFORMATION ACTION BY STOCKHOLDERS. Any action required or
permitted to be taken at a meeting of stockholders may be taken without a
meeting if there is filed with the records of stockholders meetings an unanimous
written consent which sets forth the action and is signed by each stockholder
entitled to vote on the matter and a written waiver of any right to dissent
signed by each stockholder entitled to notice of the meeting but not entitled to
vote at it.
SECTION 1.11 STOCKHOLDER PROPOSALS. For any stockholder proposal to be
presented in connection with an annual meeting of stockholders of the
Corporation, including any proposal relating to the nomination of a director to
be elected to the Board of Directors of the Corporation, the stockholders must
have given timely notice thereof in writing the Secretary of the Corporation. To
be timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not less than 60 days nor more
than 90 days prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than 30 days or delayed by more than 60 days from
such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the later of the 60th day
prior to such annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934 (the "Exchange Act") (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); (b) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and of the beneficial owner, if any, on whose behalf proposal is
made, and (c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made, (i) the name and
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address of such stockholders as they appear on the Corporation's books, and of
such beneficial owner and (ii) the class and number of shares of stock of the
Corporation which are owned beneficially and of record by such stockholders and
such beneficial owner.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1 FUNCTION OF DIRECTORS. The business and affairs of the
Corporation shall be managed under the direction of its Board of Directors. All
powers of the Corporation may be exercised by or under authority of the Board of
Directors, except as conferred on or reserved to the stockholders by statute or
by the Charter or Bylaws.
SECTION 2.2 NUMBER OF DIRECTORS. The Corporation shall have at least
three directors; provided that, if there is no stock outstanding, the number of
Directors may be less than three but not less than one, and, if there is stock
outstanding and so long as there are less than three stockholders, the number of
Directors may be less than three but not less than the number of stockholders.
The Corporation shall have the number of directors provided in the Charter until
changed as herein provided. A majority of the entire Board of Directors may
alter the number of directors set by the Charter to not exceeding 25 nor less
than the minimum number then permitted herein, but the action may not affect the
tenure of office of any director.
SECTION 2.3 ELECTION AND TENURE OF DIRECTORS. Subject to the rights of
the holders of any class of stock separately entitled to elect one or more
directors, at each annual meeting, the stockholders shall elect directors to
hold office until the next annual meeting and until their successors are elected
and qualify.
SECTION 2.4 REMOVAL OF DIRECTOR. Subject to the rights of the holders
of any class separately entitled to elect one or more directors, any director,
or the entire Board of Directors, may be removed from office at any time, only
by the affirmative vote of the holders of at least a majority of the combined
voting power of all classes of shares of capital stock entitled to vote in the
election for directors.
SECTION 2.5 VACANCY OF BOARD. Subject to the rights of the holders
of any class of stock separately entitled to elect one or more directors, the
stockholders may elect a successor to fill a vacancy on the Board of
Directors which results from the removal of a director. A director elected by
the stockholders to fill a vacancy which results from the removal of a
director serves for the balance of the term of the removed director. Subject
to the rights of the holders of any class of stock separately entitled to
elect one or more directors, a majority of the remaining directors,whether or
not sufficient to constitute a quorum, may fill a vacancy on the Board of
Directors which results from any cause except an increase in the number of
directors, and a majority of the entire Board of Directors may fill a vacancy
which results from
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an increase in the number of directors. A director elected by the Board of
Directors to fill a vacancy serves until the next annual meeting of
stockholders and until his or her successor is elected and qualifies.
SECTION 2.6 REGULAR MEETINGS. After each meeting of stockholders at
which directors shall have been elected, the Board of Directors shall meet as
soon as practicable for the purpose of organization and the transaction of other
business. In the event that no other time and place are specified by resolution
of the Board, the President or the Chairman, with notice in accordance with
Section 2.08, the Board of Directors shall meet immediately following the close
of and at the place of, such stockholders' meeting. Any other regular meeting of
the Board of Directors shall be held on such date and at any place as may be
designated from time to time by the Board of Directors.
SECTION 2.7 SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board or the
President or by a majority of the Board of Directors by vote at a meeting, or in
writing or without a meeting. A special meeting of the Board of Directors shall
be held on such date and at any place as may be designated from time to time by
the Chairman of the Board, the President or a majority of the Board of
Directors.
SECTION 2.8 NOTICE OF MEETING. Except as provided in Section 2.6, the
Secretary, shall give notice to each director of each regular and special
meeting of the Board of Directors. The notice shall state the time and place of
the meeting. Notice is given to a director when it is delivered personally, left
at the residence or usual place of business of the director, or sent by
telegraph, facsimile transmission or telephone, at least 24 hours before the
time of the meeting or, in the alternative by mail to the address of the
director as it shall appear on the records of the Corporation, at least 72 hours
before the time of the meeting. Unless these Bylaws or a resolution of the Board
of Directors provides otherwise, the notice need not state the business to be
transacted at or the purposes of any regular or special meeting of the Board of
Directors. No notice of any meeting of the Board of Directors need be given to
any director who attends except where a director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened, or to any director who, in writing
executed and filed with the records of the meeting either before or after the
holding thereof, waives such notice. Any meeting of the Board of Directors,
regular or special, may adjourn from time to time to reconvene at the same or
some other place, and no notice need be given of any such adjourned meeting
other than by announcement.
SECTION 2.9 QUORUM; ACTION OF DIRECTORS. A majority of the entire Board
of Directors shall constitute a quorum for the transaction of business. In the
absence of a quorum, the directors present, by majority vote and without notice
other than by announcement, may adjourn the meeting from time to time until a
quorum shall attend, At any such adjourned meeting at which a quorum shall be
present, any business may be transacted which might have been transacted at the
meeting, as originally notified. Unless statute or the Charter or Bylaws
requires a greater proportion, the action of a majority of the directors present
at a meeting at which a quorum is present is action of the Board of Directors.
Any action required or permitted
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to be taken at a meeting of the Board of Directors may be taken without a
meeting, if an unanimous written consent which sets forth the action is signed
by each member of the Board of Directors and filed with the minutes of
proceedings of the Board of Directors.
SECTION 2.10 MEETING BY CONFERENCE TELEPHONE. Members of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
constitutes presence in person at a meeting.
SECTION 2.11 COMPENSATION. By resolution of the Board of Directors a
fixed sum and expenses, if any, for attendance (in person or as otherwise
permitted by Section 2.10) at each regular or special meeting of the Board of
Directors or of committees thereof and other compensation for their services as
such or on committees of the Board of Directors, may be paid to directors.
Directors who are full-time employees of the Corporation shall not be paid for
attendance at meetings of the board or committees thereof for which fees are
paid to other directors. A director who serves the Corporation, in any other
capacity also may receive compensation for such other services, pursuant to a
resolution of the directors.
SECTION 2.12 RESIGNATION. Any director may resign at any time by
sending a written notice of such resignation to the home office of the
Corporation addressed to the Chairman of the Board or the President. Unless
otherwise specified herein such resignation shall take effect upon receipt
thereof by the Chairman of the Board or the President.
SECTION 2.13 PRESUMPTION OF ASSENT. A director of the Corporation who
is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action taken
unless his dissent or abstention shall be entered in the minutes of the meeting
or unless he shall file his written dissent to such action with the person
acting as the secretary of the meeting before the adjournment thereof or shall
forward such dissent by registered mail to the Secretary of the Corporation
immediately after adjournment of the meeting. Such right to dissent shall not
apply to a director who votes in favor of such action.
SECTION 2.14 ADVISORY DIRECTORS. The Board of Directors may by
resolution appoint advisory directors to the Board, who may also serve as
directors emeriti, and shall have such authority and receive such compensation
and reimbursement as the Board of Directors shall provide. Advisory directors or
directors emeriti shall not have the authority to participate by vote in the
transaction of business.
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ARTICLE III
COMMITTEES
SECTION 3.1 COMMITTEES. The Board of Directors may appoint from among
its members an Executive Committee and other committees composed of one or more
directors and delegate to these committees any of the powers of the Board of
Directors, except the power to authorize dividends on stock, elect directors,
issue stock other than as provided in the next sentence, recommend to the
stockholders any action which requires stockholder approval, amend these Bylaws,
or approve any merger or share exchange which does not require stockholder
approval. If the Board of Directors has given general authorization for the
issuance of stock providing for or establishing a method or procedure for
determining the maximum number of shares to be issued, a committee of the Board,
in accordance with that general authorization or any stock option or other plan
or program adopted by the Board of Directors, may authorize or fix the terms of
stock subject to classification or reclassification and the terms on which any
stock may be issued, including all terms and conditions required or permitted to
be established or authorized by the Board of Directors.
SECTION 3.2 COMMITTEE PROCEDURE. Each committee may fix rules of
procedure for its business. A majority of the members of a committee shall
constitute a quorum for the transaction of business and the act of a majority of
those present at a meeting at which a quorum is present shall be the act of the
committee. The members of a committee present at any meeting whether or not they
constitute a quorum, may appoint a director to act in the place of an absent
member. Any action required or permitted to be taken at a meeting of a committee
may be taken without a meeting, if an unanimous written consent which sets forth
the action is signed by each member of the committee and filed with the minutes
of the committee. The members of a committee may conduct any meeting thereof by
conference telephone in accordance with the provisions of Section 2.10.
SECTION 3.3 EMERGENCY. In the event of a state of disaster of
sufficient severity to prevent the conduct and management of the affairs and
business of the Corporation by its directors and officers as contemplated by the
Charter and these Bylaws, any two or more available members of the then
incumbent Executive Committee shall constitute a quorum of that Committee for
the full conduct and management of the affairs and business of the Corporation
in accordance with the provisions of Section 3.1. In the event of the
unavailability, at such time, of a minimum of two members of the then incumbent
Executive Committee, the available directors shall elect an Executive Committee
consisting of any two members of the Board of Directors, whether or not they be
officers of the Corporation, which two members shall constitute the Executive
Committee for the full conduct and management of the affairs of the Corporation
in accordance with the foregoing provisions of this Section. This Section shall
be subject to implementation by resolution of the Board of Directors passed from
time to time for that purpose, and any provisions of these Bylaws (other than
this Section) and any resolutions which are contrary to the provisions of this
Section or to the provisions of any such implementary resolutions shall be
suspended until it shall be determined by any interim Executive Committee
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acting under this Section that it shall be to the advantage of the Corporation
to resume the conduct and management of its affairs and business under all the
other provisions of these Bylaws.
ARTICLE IV
OFFICERS
SECTION 4.1 EXECUTIVE AND OTHER OFFICERS. The Corporation shall have a
President, a Secretary, and a Treasurer. It may also have a Chairman of the
Board. The Board of Directors shall designate who shall serve as chief executive
officer, who shall have general supervision of the business and affairs of the
Corporation, and may designate a chief operating officer, who shall have
supervision of the operations of the Corporation. In the absence of any
designation the Chairman of the Board, if there be one, shall serve as chief
executive officer and the President shall serve as chief operating officer. In
the absence of the Chairman of the Board, or if there be none, the President
shall be the chief executive officer. The same person may hold both offices. The
Corporation may also have one or more Vice Presidents, assistant officers, and
subordinate officers as may be established by the Board of Directors. A person
may hold more than one office in the Corporation except that no person may serve
concurrently as both President and Vice President of the Corporation. The
Chairman of the Board shall be a director, and the other officers may be
directors.
SECTION 4.2. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one
be elected, shall preside at all meetings of the Board of Directors and of the
stockholders at which he or she shall be present. Unless otherwise specified by
the Board of Directors, the Chairman of the Board shall be the chief executive
officer of the Corporation. In general, the Chairman of the Board shall perform
such duties as are customarily performed by the chief executive officer of a
corporation and may perform any duties of the President and shall perform such
other duties and have such other powers as are from time to time assigned the
Chairman of the Board by the Board of Directors.
SECTION 4.3 PRESIDENT. Unless otherwise provided by resolution of the
Board of Directors, the President, in the absence of the Chairman of the Board,
shall preside at all meetings of the Board of Directors and of the stockholders
at which he or she shall be present. Unless otherwise specified by the Board of
Directors, the President shall be the chief operating officer of the Corporation
and perform the duties customarily performed by chief operating officers. The
President may execute, in the name of the Corporation, all authorized deeds,
mortgages, bonds, contracts or other instruments, except in cases in which the
signing and execution thereof shall have been expressly delegated (in a
delegation of authority writing) to some other officer or agent of the
Corporation. In general, the President shall perform such other duties
customarily performed by a president of a corporation and shall perform such
other duties and have such other powers as are from time to time assigned (if
other than the President) by the Board of Directors or the chief executive
officer of the Corporation.
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SECTION 4.4 VICE PRESIDENTS. The Vice President or Vice Presidents, at
the request of the Chairman of the Board or the President, or in the President's
absence or inability to act, shall perform the duties and exercise the functions
of the President, and when so acting shall have the powers of the President. If
there be more than one Vice President, the Board of Directors may determine
which one or more of the Vice Presidents shall perform any of such duties or
exercise any of such functions, or if such determination is not made by the
Board of Directors, the Chairman of the Board or the President may make such
determination otherwise any of the Vice Presidents may perform any of such
duties or exercise any of such functions. Each Vice President shall perform such
other duties and have such other powers, and have such additional descriptive
designations in their titles (if any), as are from time to time assigned to them
by the Board of Directors, the Chairman of the Board, or the President.
SECTION 4.5 SECRETARY. The Secretary shall keep the minutes of the
meetings of the stockholders, of the Board of Directors and of any committees,
in books provided for the purpose; he or she shall see that all notices are duly
given in accordance with the provisions of these Bylaws or as required by law;
he or she shall be custodian of the records of the Corporation; he or she may
witness any document on behalf of the Corporation, the execution of which is
duly authorized, affix the corporate seal where required or desired to be under
its seal, and, when so affixed, may attest the same. In general, the Secretary
shall perform such other duties customarily performed by a secretary of a
corporation, and shall perform such other duties and have such other powers as
are from time to time assigned by the Board of Directors, the Chairman of the
Board, or the President.
SECTION 4.6 TREASURER. The Treasurer shall have charge of and be
responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit, or cause to be deposited, in the name of the
Corporation, all moneys or other valuable effects in such banks, trust companies
or other depositories as shall, from time to time, be selected by the Board of
Directors; he or she shall render to the Chairman of the Board, the President
and to the Board of Directors, whenever requested, an account of the financial
condition of the Corporation. In general, he or she shall perform such other
duties customarily performed by a treasurer of a corporation, and shall perform
such other duties and have such other powers as are from time to time assigned
to him or her by the Board of Directors, the Chairman of the Board, or the
President.
SECTION 4.7. ASSISTANT AND SUBORDINATE OFFICERS. The assistant and
subordinate officers of the Corporation are all officers below the office of
Vice President, Secretary, or Treasurer. The assistant or subordinate officers
shall have such duties as are from time to time assigned to them by the Board of
Directors, the Chairman of the Board, or the President.
SECTION 4.8 ELECTION, TENURE AND REMOVAL OF OFFICERS. The Board of
Directors shall elect the officers of the Corporation. The Board of Directors
may from time to time authorize any committee or officer to appoint assistant
and subordinate officers. Election or appointment of an officer, employee or
agent shall not of itself create contract rights. All officers
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shall be appointed to hold their offices, respectively, at the pleasure of the
Board. The Board of Directors (or, as to any assistant or subordinate officer,
any committee or officer authorized by the Board) may remove an officer at any
time. The removal of an officer does not prejudice any of that officers'
contract rights. The Board of Directors (or, as to any assistant or subordinate
officer, any committee or officer authorized by the Board) may fill a vacancy
which occurs in any Office for the unexpired portion of the term.
SECTION 4.9. COMPENSATION. The Board of Directors shall have power to
fix the salaries and other compensation and remuneration, of whatever kind, of
all officers of the Corporation. No officer shall be prevented from receiving
such salary by reason of the fact that he or she is also a director of the
Corporation. The Board of Directors may authorize any committee or officer, upon
whom the power of appointing assistant and subordinate officers may have been
conferred, to fix the salaries, compensation and remuneration of such assistant
and subordinate officers.
ARTICLE V
DIVISIONAL OF DEPARTMENTAL TITLES
SECTION 5.01. CONFERRING DIVISIONAL OR DEPARTMENTAL TITLES. The Board
of Directors may from time to time confer upon any employee of a division or
department of the Corporation the title of President, Vice President, Treasurer
or Controller of such division or any other title or titles deemed appropriate,
or may authorize the Chairman of the Board or the President to do so. Any such
titles so conferred may be discontinued and withdrawn at any time by the Board
of Directors, or by the Chairman of the Board or the President. Any employee of
a division or department designated by such a divisional title shall have the
powers and duties with respect to such division or department as shall be
prescribed by the Board of Directors, the Chairman of the Board or the
President.
SECTION 5.2. EFFECT OF DIVISIONAL OR DEPARTMENTAL TITLES. The
divisional or departmental titles shall not create an office of the Corporation
under Article IV unless specifically designated as such by the Board of
Directors; but any person who is an officer of the Corporation may also have a
divisional or departmental title.
ARTICLE VI
STOCK
SECTION 6.01. CERTIFICATES OF STOCK. The Board of Directors may
determine to issue certificated or uncertificated shares of capital stock and
other securities of the Corporation. For certificated stock, each stock
certificate shall include on its face the name of the Corporation, the name of
the stockholder or other person to whom it is issued, and the class of stock and
number of shares it represents. It shall also include on its face or back a
statement which provides in substance that the Corporation will furnish to any
stockholder on request and
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without charge a full statement of the designations
and any preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption of the stock of each class which the Corporation is authorized to
issue, of the differences in the relative rights and preferences between the
shares of each series of a preferred or special class in series which the
Corporation is authorized to issue, to the extent they have been set, and of the
authority of the Board of Directors to set the relative rights and preferences
of subsequent series of a preferred or special class of stock and any
restrictions on transferability. Such request may be made to the Secretary or to
its transfer agent. Upon the issuance of uncertificated shares of capital stock,
the Corporation shall send the stockholder a written statement of the same
information which would be required on the certificate and by the Maryland
Uniform Commercial Code - Investment Securities. It shall be in such form, not
inconsistent with law or with the Charter, as shall be approved by the Board of
Directors or any officer or officers designated for such purpose by resolution
of the Board of Directors. Each stock certificate shall be signed by the
Chairman of the Board, the President, or a Vice President and countersigned by
the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer.
Each certificate may be sealed with the actual corporate seal or a facsimile of
it or in any other form and the signatures may be either manual or facsimile
signatures. A certificate is valid and may be issued whether or not an officer
who signed it is still an officer when it is issued. A certificate may not be
issued until the stock represented by it is fully paid, except in the case of
stock purchased under a plan, agreement, or transaction as provided by law and
with such statement on future payments as required by law.
SECTION 6.2 TRANSFERS. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of stock; and may appoint transfer agents
and registrars thereof. The duties of transfer agent and registrar may be
combined.
SECTION 6.3 RECORD DATES OR CLOSING OF TRANSFER BOOKS. The Board of
Directors may set a record date or direct that the stock transfer books be
closed for a stated period for the purpose of making any proper determination
with respect to stockholders, including which stockholders are entitled to
notice of a meeting, vote at a meeting, receive a dividend, or be allotted other
rights. The record date may not be prior to the close of business on the day the
record date is fixed nor, subject to Section 1.6, more than 90 days before the
date on which the action requiring the determination will be taken; the transfer
books may not be closed for a period longer than 20 days; and, in the case of a
meeting of stockholders, the record date or the closing of the transfer books
shall be at least ten days before the date of the meeting.
SECTION 6.4. STOCK LEDGER. The Corporation shall maintain a stock
ledger which contains the name and address of each stockholder and the number of
shares of stock of each class which the stockholder holds. The stock ledger may
be in written form or in any other form which can be converted within a
reasonable time into written form for visual inspection. The original or a
duplicate of the stock ledger shall be kept at the offices of a transfer agent
for the particular class of stock, or if none, at the principal office in the
State of Maryland or the principal executive offices of the Corporation.
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SECTION 6.5. CERTIFICATION OF BENEFICIAL OWNERS. The Board of Directors
may adopt by resolution a procedure by which a stockholder of the Corporation
may certify in writing to the Corporation that any shares of stock registered in
the name of the stockholder are held for the account of a specified Person other
than the stockholder. The resolution shall set forth the class of stockholders
who may certify; the purpose for which the certification may be made; the form
of certification and the information to be contained in it; if the certification
is with respect to a record date or closing of the stock transfer books, the
time after the record date or closing of the stock transfer books within which
the certification must be received by the Corporation; and any other provisions
with respect to the procedure which the Board considers necessary or desirable.
On receipt of a certification which complies with the procedure adopted by the
Board in accordance with this Section, the person specified in the certification
is, for the purpose set forth in the certification, the holder of record of the
specified stock in place of the stockholder who makes the certification.
SECTION 6.6. LOST STOCK CERTIFICATES. The Board of Directors of the
Corporation may determine the conditions for issuing a new stock certificate in
place of one which is alleged to have been lost, stolen, or destroyed, or the
Board of Directors may delegate such power to any officer or officers of the
Corporation. In their discretion, the Board of Directors or such officer or
officers may require the owner of the certificate to give bond, with sufficient
surety, to indemnify the Corporation against any loss or claim arising as a
result of the issuance of a new certificate. In their discretion, the Board of
Directors or such officer or officers may refuse to issue such new certificate
save upon the order of some court having jurisdiction in the premises.
ARTICLE VII
FINANCE
SECTION 7.1. CHECKS, DRAFTS, ETC. All checks, drafts and orders for the
payment of money, notes and other evidences of indebtedness, issued in the name
of the Corporation, shall, unless otherwise provided by resolution of the Board
of Directors, be signed by the Chairman of the Board, the President, or any
company official permitted by a delegation of authority writing.
SECTION 7.2. ANNUAL STATEMENT OF AFFAIRS. The President or chief
accounting officer shall prepare annually a full and correct statement of the
affairs of the Corporation, to include a balance sheet and a financial statement
of operations for the preceding fiscal year. The statement of affairs shall be
submitted at the annual meeting of the stockholders and, within 20 days after
the meeting, placed on file at the Corporation's principal office.
SECTION 7.3. FISCAL YEAR. The fiscal year of the Corporation begin on
January 1 and end on December 31st each year, unless otherwise provided by the
Board of Directors.
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SECTION 7.4. DIVIDENDS. If declared by the Board of Directors at any
meeting thereof the Corporation may pay dividends on its shares in cash,
property, or in shares of the capital stock of the Corporation, unless such
dividend is contrary to law or to a restriction contained in the Charter.
SECTION 7.5. LOANS. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the Board of Directors. Such authority may be general or confined
to specific instances.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1. PROCEDURE. Any indemnification, or payment of expenses in
advance of the final disposition of any proceeding, shall be made promptly, and
in any event within 60 days, upon the written request of the director or officer
entitled to seek indemnification (the "Indemnified Party"). The right to
indemnification and advances hereunder shall be enforceable by the Indemnified
Party in any court of competent jurisdiction, if (i) the Corporation denies such
request, in whole or in part, or (ii) no disposition thereof is made within 60
days. The Indemnified Party's costs and expenses incurred in connection with
successfully establishing his or her right to indemnification, in whole or in
part. In any such action, shall also be reimbursed by the Corporation. It shall
be a defense to any action for advance for expenses that (a) a determination has
been made that the facts then known to those making the determination would
preclude indemnification or (b) the Corporation has not received both (i) an
undertaking as required by law to repay such advances in the event it shall
ultimately be determined that the standard of conduct has not been met and (ii)
a written affirmation by the Indemnified Party of such Indemnified Party's good
faith belief that the standard of conduct necessary for indemnification by the
Corporation has been met.
SECTION 8.2 EXCLUSIVITY, ETC. The indemnification and advance of
expenses provided by the Charter and these Bylaws (i) shall not be deemed
exclusive of any other rights to which a person seeking indemnification or
advance of expenses may be entitled under any law (common or statutory), or any
agreement not prohibited by law, vote or stockholders or disinterested directors
or other provision that is consistent with law, both as to action in his or her
official capacity and as to action in another capacity while holding office or
while employed by or acting as agent for the Corporation, (ii) shall continue in
respect of all events occurring while a person was a director or officer after
such person has ceased to be a director or officer, and (iii) shall inure to the
benefit of the estate, heirs, executors and administrators of such person. The
Corporation shall not be liable for any payment under this Bylaw in connection
with a claim made by a director or officer to the extent such director or
officer has otherwise actually received payment under insurance policy,
agreement, vote or otherwise, of the amounts otherwise indemnifiable hereunder.
All rights to indemnification and advance of expenses under the Charter of the
Corporation and hereunder shall be deemed to be a contract between the
Corporation and each director or officer of the Corporation who serves or
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served in such capacity at any time while this Bylaw is in effect. Nothing
herein shall prevent the amendment of this Bylaw, provided that no such
amendment shall diminish the rights of any person hereunder with respect to
events occurring or claims made before its adoption. Any repeal or modification
of this Bylaw shall not in any way diminish any rights to indemnification or
advance of expenses of such director or officer or the obligations of the
Corporation arising hereunder with respect to events occurring, or claims made,
while this Bylaw or any provision hereof is in force.
SECTION 8.3. SEVERABILITY; DEFINITIONS. The invalidity or
unenforceability of any provision of this Article VIII shall not affect the
validity or enforceability of any other provision hereof. The phrase "this
Bylaw" in this Article VIII means this Article VIII in its entirety.
ARTICLE IX
SUNDRY PROVISIONS
SECTION 9.1. BOOKS AND RECORDS. The Corporation shall keep correct and
complete books and records of its accounts and transactions and minutes of the
proceedings of its stockholders and Board of Directors and of any executive or
other committee when exercising any of the powers of the Board of Directors. The
books and records of the Corporation may be in written form or in any other form
which can be converted within a reasonable time into written form for visual
inspection. Minutes shall be recorded in written form but may be maintained in
the form of a reproduction. The original or a certified copy of these Bylaws
shall be kept at the principal office of the Corporation.
SECTION 9.2. CORPORATE SEAL. The Board of Directors shall provide a
suitable seal, bearing the name of the Corporation, which shall be in the charge
of the Secretary. The Board of Directors may authorize one or more duplicate
seals and provide for the custody thereof. If the Corporation is required to
place its corporate seal to a document, it is sufficient to meet the requirement
of any law, rule, or regulation relating to a corporate seal to place the word
"SEAL" adjacent to the signature of the person authorized to sign the document
on behalf of the Corporation.
SECTION 9.3 BONDS. The Board of Directors may require any officer,
agent or employee of the Corporation to give a bond to the Corporation,
conditioned upon the faithful discharge of his or her duties, with one or more
sureties and in such amount as may be satisfactory to the Board of Directors.
SECTION 9.4. VOTING STOCK IN OTHER CORPORATIONS. Stock of other
corporations or associations, registered in the name of the Corporation, may be
voted by the Chairman of the Board, the President, a Vice President, or a proxy
appointed by any of them. The Board of Directors, however, may by resolution
appoint some other person to vote such
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shares, in which case such person shall be entitled to vote such shares upon the
production of a certified copy of such resolution.
SECTION 9.5. MAIL. Any notice or other document which is required by
these Bylaws to be mailed shall be deposited in the United States mails, postage
prepaid.
SECTION 9.6. EXECUTION OF DOCUMENTS. A person who holds more than one
office in the Corporation may not act in more than one capacity to execute,
acknowledge, or verify an instrument required by law to be executed,
acknowledged, or verified by more than one officer.
SECTION 9.7. AMENDMENTS. Subject to the provisions of Section 2.2,
these Bylaws may be repealed, altered, amended or rescinded and new by-laws may
be adopted (a) by the stockholders of the Corporation by vote of not less than a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as
one class) cast at any meeting of the stockholders called for that purpose
(provided that notice of such proposal is included in the notice of such
meeting) or (b) by the Board of Directors by a vote of not less than two-thirds
of the Board of Directors at a meeting held in accordance with the provisions of
these Bylaws.
SECTION 9.8. RELIANCE. To the fullest extent permitted by applicable
law, each director, officer, employee and agent of the Corporation shall, in the
performance of his or her duties with respect to the Corporation, be fully
justified and protected with regard to any act or failure to act in reliance in
good faith upon the books of account or other records of the Corporation, upon
an opinion of counsel or upon reports made to the Corporation by any of its
officers or employees or by the adviser, accountants, appraisers or other
experts or consultants selected by the Board of Directors or officers of the
Corporation, regardless of whether such counsel or expert may also be a
director.
As of February 19, 1998 /s/ John L. Davis
-----------------------------
Secretary
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<PAGE>
Exhibit 4.1
CREDITRUST CORPORATION
CRDT
COMMON STOCK COMMON STOCK
$.01 PAR VALUE $.01 PAR VALUE
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
THIS CERTIFIES that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK $.01 PAR VALUE PER
SHARE OF CREDITRUST CORPORATION (the "Corporation") transferable on the books
of the Corporation by the owner hereof in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby, are issued and shall
be held subject to all the provisions of the articles of incorporation of the
Corporation, and any amendments thereto.
Each share of the common stock shall have equal rights, privileges and
preferences and shall be entitled to one vote per share. This Certificate is
not valid until countersigned and registered by the Transfer Agent and
Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
- -------------------------------- -----------------------------------------
Secretary Chairman and CEO
-1-
<PAGE>
COUNTERSIGNED AND REGISTERED:
American Stock Transfer & Trust Company
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED OFFICER
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF GIFT MIN ACT - Under the _______ Uniform Gifts to Minors Act _____________
(State) (Name of Custodian)
as custodian for ________________________.
(Name of Minor)
Additional abbreviations may also be used though not in the above list.
For value received, ____________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
-2-
<PAGE>
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE.
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ____________________________________________
________________________________________ Attorney to transfer the said stock on
the books of the within-named Corporation with full power of substitution in
the premises.
Dated, ________________
_________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
A FULL STATEMENT OR SUMMARY OF THE DESIGNATIONS AND ANY PREFERENCES,
CONVERSION AND OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO
DIVIDENDS, QUALIFICATIONS, AND TERMS AND CONDITIONS OF REDEMPTION OF THE
STOCK OF EACH CLASS WHICH THE CORPORATION IS AUTHORIZED TO ISSUE AND THE
AUTHORITY OF THE BOARD OF DIRECTORS TO SET THE RELATIVE RIGHTS AND PREFERENCES
OF ANY SERIES OF CAPITAL STOCK, WILL BE FURNISHED TO ANY SHAREHOLDER, WITHOUT
CHARGE, UPON REQUEST TO THE SECRETARY OF THE CORPORATION AT THE CORPORATION
AT THE CORPORATION'S PRINCIPAL OFFICE.
-3-
<PAGE>
Exhibit 10.1
CREDITRUST CORPORATION
1998 STOCK INCENTIVE PLAN
1. Establishment, Purpose and Types of Awards
Creditrust Corporation hereby establishes the CREDITRUST CORPORATION
1998 STOCK INCENTIVE PLAN (the "Plan"). The purpose of the Plan is to promote
the long-term growth and profitability of Creditrust Corporation (the
"Corporation") by (i) providing key people with incentives to improve
stockholder value and to contribute to the growth and financial success of the
Corporation, and (ii) enabling the Corporation to attract, retain and reward the
best-available persons for positions of substantial responsibility.
The Plan permits the granting of stock options (including incentive
stock options qualifying under Code section 422 and nonqualified stock options),
stock appreciation rights, restricted or unrestricted stock awards, phantom
stock, performance awards, or any combination of the foregoing.
2. Definitions
Under this Plan, except where the context otherwise indicates, the
following definitions apply:
(a) "Affiliate" shall mean any entity, whether now or hereafter
existing, which controls, is controlled by, or is under common control with, the
Corporation (including, but not limited to, joint ventures, limited liability
companies, and partnerships). For this purpose, "control" shall mean ownership
of 50% or more of the total combined voting power or value of all classes of
stock or interests of the entity.
(b) "Award" shall mean any stock option, stock appreciation right,
stock award, phantom stock award, or performance award.
(c) "Board" shall mean the Board of Directors of the Corporation.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended,
and any regulations promulgated thereunder.
(e) "Common Stock" shall mean shares of common stock of the
Corporation, par value $0.01 per share.
(f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(g) "Fair Market Value" of a share of the Corporation's Common Stock
for any purpose on a particular date shall mean the last reported sale price per
share of Common Stock, regular way, on such date or, in case no such sale takes
place on such date, the average of the closing bid and asked prices, regular
way, in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading on a
national securities exchange or included for quotation on the Nasdaq-National
Market, or if the Common Stock is not so listed or admitted to trading or
included for quotation, the last quoted price, or if the Common Stock is not so
quoted, the average of the high bid and low asked prices, regular way, in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System or, if such system is no longer in use,
the principal other automated quotations system that may then be in use or, if
the Common Stock is not quoted by any such organization, the average of the
closing bid and asked prices, regular way, as furnished by a professional market
maker making a market in the Common Stock as selected in good faith by the
Administrator or by such
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other source or sources as shall be selected in good faith by the Administrator.
If, as the case may be, the relevant date is not a trading day, the
determination shall be made as of the next preceding trading day. As used
herein, the term "trading day" shall mean a day on which public trading of
securities occurs and is reported in the principal consolidated reporting system
referred to above, or if the Common Stock is not listed or admitted to trading
on a national securities exchange or included for quotation on the
Nasdaq-National Market, any business day.
(h) "Grant Agreement" shall mean a written document memorializing the
terms and conditions of an Award granted pursuant to the Plan and shall
incorporate the terms of the Plan.
(i) "Parent" shall mean a corporation, whether now or hereafter
existing, within the meaning of the definition of "parent corporation" provided
in Code section 424(e), or any successor thereto.
(j) "Subsidiary" and "subsidiaries" shall mean only a corporation or
corporations, whether now or hereafter existing, within the meaning of the
definition of "subsidiary corporation" provided in Section 424(f) of the Code,
or any successor thereto.
3. Administration
(a) Administration of the Plan. The Plan shall be administered by the
Board or by such committee or committees as may be appointed by the Board from
time to time (the Board, committee or committees hereinafter referred to as the
"Administrator").
(b) Powers of the Administrator. The Administrator shall have all the
powers vested in it by the terms of the Plan, such powers to include authority,
in its sole and absolute discretion, to grant Awards under the Plan, prescribe
Grant Agreements evidencing such Awards and establish programs for granting
Awards.
The Administrator shall have full power and authority to take all other
actions necessary to carry out the purpose and intent of the Plan, including,
but not limited to, the authority to: (i) determine the eligible persons to
whom, and the time or times at which Awards shall be granted; (ii) determine the
types of Awards to be granted; (iii) determine the number of shares to be
covered by or used for reference purposes for each Award; (iv) impose such
terms, limitations, restrictions and conditions upon any such Award as the
Administrator shall deem appropriate; (v) without the consent of the holder,
modify, amend, extend or renew outstanding Awards, or accept the surrender of
outstanding Awards and substitute new Awards; (vi) accelerate or otherwise
change the time in which an Award may be exercised or becomes payable and to
waive or accelerate the lapse, in whole or in part, of any restriction or
condition with respect to such Award, including, but not limited to, any
restriction or condition with respect to the vesting or exercisability of an
Award following termination of any grantee's employment; and (vii) establish
objectives and conditions, if any, for earning Awards and determining whether
Awards will be paid after the end of a performance period.
The Administrator shall have full power and authority, in its sole and
absolute discretion, to administer and interpret the Plan and to adopt and
interpret such rules, regulations, agreements, guidelines and instruments for
the administration of the Plan and for the conduct of its business as the
Administrator deems necessary or advisable.
(c) Non-Uniform Determinations. The Administrator's determinations
under the Plan (including without limitation, determinations of the persons to
receive Awards, the form, amount and timing of such Awards, the terms and
provisions of such Awards and the Grant Agreements evidencing such Awards) need
not be uniform and may be made by the Administrator selectively among persons
who receive, or are eligible to receive, Awards under the Plan, whether or not
such persons are similarly situated.
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<PAGE>
(d) Limited Liability. To the maximum extent permitted by law, no
member of the Administrator shall be liable for any action taken or decision
made in good faith relating to the Plan or any Award thereunder.
(e) Indemnification. To the maximum extent permitted by law and by the
Corporation's charter and by-laws, the members of the Administrator shall be
indemnified by the Corporation in respect of all their activities under the
Plan.
(f) Effect of Administrator's Decision. All actions taken and decisions
and determinations made by the Administrator on all matters relating to the Plan
pursuant to the powers vested in it hereunder shall be in the Administrator's
sole and absolute discretion and shall be conclusive and binding on all parties
concerned, including the Corporation, its stockholders, any participants in the
Plan and any other employee of the Corporation, and their respective successors
in interest.
4. Shares Available for the Plan; Maximum Awards
Subject to adjustments as provided in Section 7(d) of the Plan, the
shares of Common Stock that may be issued with respect to Awards granted under
the Plan shall not exceed an aggregate of 800,000 shares of Common Stock. The
Corporation shall reserve such number of shares for Awards under the Plan,
subject to adjustments as provided in Section 7(d) of the Plan. If any Award, or
portion of an Award, under the Plan expires or terminates unexercised, becomes
unexercisable or is forfeited or otherwise terminated, surrendered or canceled
as to any shares, or if any shares of Common Stock are surrendered to the
Corporation in connection with any Award (whether or not such surrendered shares
were acquired pursuant to any Award), the shares subject to such Award and the
surrendered shares shall thereafter be available for further Awards under the
Plan; provided, however, that any such shares that are surrendered to the
Corporation in connection with any Award or that are otherwise forfeited after
issuance shall not be available for purchase pursuant to incentive stock options
intended to qualify under Code section 422.
5. Participation
Participation in the Plan shall be open to all employees, officers, and
directors of the Corporation, or of any Affiliate of the Corporation, as may be
selected by the Administrator from time to time.
6. Awards
The Administrator, in its sole discretion, establishes the terms of all
Awards granted under the Plan. Awards may be granted individually or in tandem
with other types of Awards. All Awards are subject to the terms and conditions
provided in the Grant Agreement.
(a) Stock Options. The Administrator may from time to time grant to
eligible participants Awards of incentive stock options as that term is defined
in Code section 422 or nonqualified stock options; provided, however, that
Awards of incentive stock options shall be limited to employees of the
Corporation or of any Parent or Subsidiary of the Corporation. Options intended
to qualify as incentive stock options under Code section 422 must have an
exercise price at least equal to Fair Market Value on the date of grant, but
nonqualified stock options may be granted with an exercise price less than Fair
Market Value. No stock option shall be an incentive stock option unless so
designated by the Administrator at the time of grant or in the Grant Agreement
evidencing such stock option.
(b) Stock Appreciation Rights. The Administrator may from time to time
grant to eligible participants Awards of Stock Appreciation Rights ("SAR"). An
SAR entitles the grantee to receive, subject to the provisions of the Plan and
the Grant Agreement, a payment having an aggregate value equal to the product of
(i) the excess of (A) the Fair Market Value on the exercise date of one share of
Common Stock over (B) the
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<PAGE>
base price per share specified in the Grant Agreement, times (ii) the number of
shares specified by the SAR, or portion thereof, which is exercised. Payment by
the Corporation of the amount receivable upon any exercise of an SAR may be made
by the delivery of Common Stock or cash, or any combination of Common Stock and
cash, as determined in the sole discretion of the Administrator. If upon
settlement of the exercise of an SAR a grantee is to receive a portion of such
payment in shares of Common Stock, the number of shares shall be determined by
dividing such portion by the Fair Market Value of a share of Common Stock on the
exercise date. No fractional shares shall be used for such payment and the
Administrator shall determine whether cash shall be given in lieu of such
fractional shares or whether such fractional shares shall be eliminated.
(c) Stock Awards. The Administrator may from time to time grant
restricted or unrestricted stock Awards to eligible participants in such
amounts, on such terms and conditions, and for such consideration, including no
consideration or such minimum consideration as may be required by law, as it
shall determine. A stock Award may be paid in Common Stock, in cash, or in a
combination of Common Stock and cash, as determined in the sole discretion of
the Administrator.
(d) Phantom Stock. The Administrator may from time to time grant Awards
to eligible participants denominated in stock-equivalent units ("phantom stock")
in such amounts and on such terms and conditions as it shall determine. Phantom
stock units granted to a participant shall be credited to a bookkeeping reserve
account solely for accounting purposes and shall not require a segregation of
any of the Corporation's assets. An Award of phantom stock may be settled in
Common Stock, in cash, or in a combination of Common Stock and cash, as
determined in the sole discretion of the Administrator. Except as otherwise
provided in the applicable Grant Agreement, the grantee shall not have the
rights of a stockholder with respect to any shares of Common Stock represented
by a phantom stock unit solely as a result of the grant of a phantom stock unit
to the grantee.
(e) Performance Awards. The Administrator may, in its discretion, grant
performance awards which become payable on account of attainment of one or more
performance goals established by the Administrator. Performance awards may be
paid by the delivery of Common Stock or cash, or any combination of Common Stock
and cash, as determined in the sole discretion of the Administrator. Performance
goals established by the Administrator may be based on the Corporation's or an
Affiliate's operating income or one or more other business criteria selected by
the Administrator that apply to an individual or group of individuals, a
business unit, or the Corporation or an Affiliate as a whole, over such
performance period as the Administrator may designate.
7. Miscellaneous
(a) Withholding of Taxes. Grantees and holders of Awards shall pay to
the Corporation, or make provision satisfactory to the Administrator for payment
of, any taxes required to be withheld in respect of Awards under the Plan no
later than the date of the event creating the tax liability. The Corporation
may, to the extent permitted by law, deduct any such tax obligations from any
payment of any kind otherwise due to the grantee or holder of an Award. In the
event that payment to the Corporation of such tax obligations is made in shares
of Common Stock, such shares shall be valued at Fair Market Value on the
applicable date for such purposes.
(b) Loans. The Corporation may make or guarantee loans to grantees to
assist grantees in exercising Awards and satisfying any withholding tax
obligations.
(c) Transferability. Except as otherwise determined by the
Administrator, and in any event in the case of an incentive stock option or a
stock appreciation right granted with respect to an incentive stock option, no
Award granted under the Plan shall be transferable by a grantee otherwise than
by will or the laws of descent and distribution. Unless otherwise determined by
the Administrator in accord with the provisions of the immediately preceding
sentence, an Award may be exercised during the lifetime of the grantee, only by
the
4
<PAGE>
grantee or, during the period the grantee is under a legal disability, by the
grantee's guardian or legal representative.
(d) Adjustments; Business Combinations. In the event of changes in the
Common Stock of the Corporation by reason of any stock dividend, split-up,
recapitalization, merger, consolidation, business combination or exchange of
shares and the like, the Administrator shall, in its discretion, make
appropriate adjustments to the maximum number and kind of shares reserved for
issuance or with respect to which Awards may be granted under the Plan as
provided in Section 4 of the Plan and to the number, kind and price of shares
covered by outstanding Awards, and shall, in its discretion and without the
consent of holders of Awards, make any other adjustments in outstanding Awards,
including but not limited to reducing the number of shares subject to Awards or
providing or mandating alternative settlement methods such as settlement of the
Awards in cash or in shares of Common Stock or other securities of the
Corporation or of any other entity, or in any other matters which relate to
Awards as the Administrator shall, in its sole discretion, determine to be
necessary or appropriate.
Notwithstanding anything in the Plan to the contrary and without the
consent of holders of Awards, the Administrator, in its sole discretion, may
make any modifications to any Awards, including but not limited to cancellation,
forfeiture, surrender or other termination of the Awards in whole or in part
regardless of the vested status of the Award.
The Administrator is authorized to make, in its discretion and without
the consent of holders of Awards, adjustments in the terms and conditions of,
and the criteria included in, Awards in recognition of unusual or nonrecurring
events affecting the Corporation, or the financial statements of the Corporation
or any Affiliate, or of changes in applicable laws, regulations, or accounting
principles, whenever the Administrator determines that such adjustments are
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan.
(e) Substitution of Awards in Mergers and Acquisitions. Awards may be
granted under the Plan from time to time in substitution for Awards held by
employees or directors of entities who become or are about to become employees
or directors of the Corporation or an Affiliate as the result of a merger or
consolidation of the employing entity with the Corporation or an Affiliate, or
the acquisition by the Corporation or an Affiliate of the assets or stock of the
employing entity. The terms and conditions of any substitute Awards so granted
may vary from the terms and conditions set forth herein to the extent that the
Administrator deems appropriate at the time of grant to conform the substitute
Awards to the provisions of the awards for which they are substituted.
(f) Termination, Amendment and Modification of the Plan. The Board may
terminate, amend or modify the Plan or any portion thereof at any time.
(g) Non-Guarantee of Employment or Service. Nothing in the Plan or in
any Grant Agreement thereunder shall confer any right on an individual to
continue in the service of the Corporation or shall interfere in any way with
the right of the Corporation to terminate such service at any time.
(h) No Trust or Fund Created. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Corporation and a grantee or any other
person. To the extent that any grantee or other person acquires a right to
receive payments from the Corporation pursuant to an Award, such right shall be
no greater than the right of any unsecured general creditor of the Corporation.
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<PAGE>
(i) Governing Law. The validity, construction and effect of the Plan,
of Grant Agreements entered into pursuant to the Plan, and of any rules,
regulations, determinations or decisions made by the Administrator relating to
the Plan or such Grant Agreements, and the rights of any and all persons having
or claiming to have any interest therein or thereunder, shall be determined
exclusively in accordance with applicable federal laws and the laws of the State
of Maryland, without regard to its conflict of laws principles.
(j) Effective Date; Termination Date. The Plan is effective as of the
date on which the Plan was adopted by the Board, subject to approval of the
stockholders within twelve months before or after such date. No Award shall be
granted under the Plan after the close of business on the day immediately
preceding the tenth anniversary of the effective date of the Plan. Subject to
other applicable provisions of the Plan, all Awards made under the Plan prior to
such termination of the Plan shall remain in effect until such Awards have been
satisfied or terminated in accordance with the Plan and the terms of such
Awards.
Date Approved by the Board: ________________________
Date Approved by the Stockholders: ___________________
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Exhibit 10.2
CREDITRUST CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
Effective _______________, 1998
The purpose of this Plan is to provide eligible employees of Creditrust
Corporation (the "Company") and certain of its subsidiaries with opportunities
to purchase, through payroll deductions, shares of the Company's Common Stock,
$0.01 par value per share (the "Common Stock"). The Plan is intended to benefit
the Company by increasing the employees' interest in the Company's growth and
success and encouraging employees to remain in the employ of the Company or its
participating subsidiaries. The Plan is intended to constitute an "employee
stock purchase plan" within the meaning of section 423 of the Internal Revenue
Code of 1986, as amended (the "Code"), and shall be so applied and interpreted.
1. Shares Subject to the Plan. Subject to adjustment as provided
herein, the aggregate number of shares of Common Stock that may be made
available for purchase under the Plan is 100,000 shares. The shares issuable
under the Plan may, in the discretion of the Board of Directors of the Company
(the "Board"), be authorized but unissued shares of Common Stock, shares
purchased on the open market, or shares from any other proper source.
2. Administration. The Plan will be administered by the Board or by a
committee appointed by the Board (the "Administrator"). The Administrator has
authority to interpret the Plan, to make, amend and rescind rules and
regulations for the administration of the Plan, and to make all other
determinations necessary or desirable in administering the Plan, all of which
will be final and conclusive. No member of the Administrator shall be liable for
any action or determination made in good faith with respect to the Plan or any
Option granted hereunder.
3. Eligibility. All employees of the Company, including directors who
are employees, and all employees of any subsidiary of the Company (as defined in
section 424(f) of the Code), now or hereafter existing, that is designated by
the Administrator from time to time as a participating employer under the Plan
(a "Designated Subsidiary"), are eligible to participate in any Offering (as
defined below) to purchase Common Stock under the Plan, subject to such further
eligibility requirements as may be specified by the Administrator consistent
with section 423 of the Code.
The Administrator at any time, if it deems it advisable to do so, may
terminate the participation of the employees of a particular Designated
Subsidiary.
4. Participation. An eligible employee may become a participating
employee in the Plan by completing an election to participate in the Plan on a
form provided by the Administrator and submitting that form to the appropriate
payroll location for such employee in accordance with such rules as may be
established by the Administrator from time to time. The form will authorize a
regular payroll deduction from the Compensation (as defined below) received by
the participating employee during the Offering Period (as defined below) and
will authorize the purchase of shares of Common Stock for the participating
employee's account in accordance with the terms of the Plan.
Enrollment will become effective upon the first day of the first
Offering Period that commences after the Company's receipt of the form. Unless
an employee files a new form or withdraws from the Plan, the participating
employee's deductions and purchases will continue at the same percentage rate of
<PAGE>
Compensation for future Offering Periods under the Plan as long as the Plan
remains in effect and the employee remains eligible to participate.
The term "Compensation" means the participant's base salary and
commissions received during an Offering Period, determined without regard to
salary reduction contributions under arrangements pursuant to section 401(k) or
section 125 of the Code.
5. Payroll Deductions; Withdrawals From Accounts.
(a) The Company will maintain payroll deduction accounts for all
participating employees. With respect to any Offering Period under this Plan, an
eligible employee may authorize a payroll deduction to be made on each payday
during the Offering Period in any whole number percentage, up to a maximum of
15%, of such employee's Compensation on each such payday. Payroll deductions
with respect to an Offering Period shall commence on the first payroll paid
within the Offering Period and shall end on the last payroll paid on or prior to
the last Trading Day (as defined below) of such Offering Period, unless sooner
terminated by the employee as provided herein.
(b) An employee may change his or her payroll deduction at any time
during an Offering Period by filing a new election form. If an employee elects
to discontinue payroll deductions during an Offering Period, but does not elect
to withdraw funds pursuant to subsection 5(d) below, funds deducted prior to the
election to discontinue payroll deductions will be applied to the purchase of
Common Stock pursuant to Section 9.
(c) An employee may increase or decrease his or her payroll deduction,
to take effect on the first day of the next Offering Period, by delivering to
the appropriate payroll location a new form regarding election to participate in
the Plan under Section 4 above prior to such date and in accordance with such
rules as may be established by the Administrator from time to time.
(d) Unless determined otherwise by the Administrator, an employee may
on any one occasion during an Offering Period and for any reason withdraw all or
part of the balance accumulated in the employee's payroll deduction account. Any
such withdrawal must be effected prior to the close of business on the day
immediately preceding the last Trading Day of the Offering Period by delivering
a written notice of withdrawal to the appropriate payroll location for such
employee. If the employee withdraws all of such balance, the employee will
thereby withdraw from participation in the Offering and may not begin
participation again during the remainder of the Offering Period. Withdrawal of
all or part of such balance will not affect the employee's right to participate
in any subsequent Offering Period.
6. Interest. Interest will not be paid on any employee payroll
deduction accounts, unless the Administrator determines otherwise.
7. Offering Periods. Options granted pursuant to the Plan ("Offerings")
are made for an offering period which begins on the first day on which the
National Association of Securities Dealers Automated Quotation ("Nasdaq") system
is open for trading ("Trading Day") on or after January 1 of each year or such
other date specified by the Administrator and terminates on the last Trading Day
of a period specified by the Administrator (each such period referred to herein
as an "Offering Period"). The duration of an Offering Period shall be determined
by the Administrator, in its discretion, prior to the deadline for submission of
employee election forms for such Offering Period; provided, however, that no
Offering Period shall have a duration in excess of 27 months. Unless the
Administrator determines
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otherwise, subsequent Offering Periods of equal duration shall follow
consecutively thereafter, each commencing on the first Trading Day occurring
immediately after the expiration of the preceding Offering Period. The first
Offering Period under the Plan shall commence upon the initial public offering
of the Common Stock unless otherwise determined by the Administrator.
An eligible employee must be employed by the Company or a Designated
Subsidiary on the first Trading Day of an Offering Period in order to
participate in that Offering Period. However, in the case of an individual who
becomes an eligible employee after the first Trading Day of an Offering Period,
the Administrator may designate a subsequent Trading Day within the Offering
Period upon which the employee shall be eligible to commence participation for
that Offering Period and such Trading Day shall constitute the first Trading Day
of the Offering Period for all purposes under the Plan with respect to such
employee.
8. Rights to Purchase Common Stock; Purchase Price.
Options to purchase shares of Common Stock will be granted (each, an
"Option") to participating employees as of the first Trading Day of each
Offering Period. Each Option shall represent a right to purchase on the last
Trading Day of such Offering Period, at the Purchase Price hereinafter provided
for, whole shares of Common Stock reserved for purposes of this Plan up to such
maximum number of shares specified by the Administrator prior to the first day
of the Offering Period. Participants granted Options under the Plan shall have
the same rights and privileges with respect to such Options. The purchase price
of each share of Common Stock (the "Purchase Price") during an Offering Period
shall be determined by the Administrator, in its discretion, prior to the
deadline for submission of employee election forms for such Offering Period;
provided, however, that the Purchase Price for an Offering Period shall never be
less than the lesser of 85 percent of the Fair Market Value of the Common Stock
on the (i) first Trading Day of the Offering Period or (ii) last Trading Day of
such Offering Period, and shall never be less than the par value of the Common
Stock.
For purposes of the Plan, "Fair Market Value" on a Trading Day means
the average of the high and low sale prices per share of Common Stock as
reflected on the principal consolidated transaction reporting system for
securities listed on any national securities exchange or other market quotation
system on which the Common Stock may be principally listed or quoted or, if
there are no transactions on a Trading Day, then such average for the preceding
Trading Day upon which transactions occurred. Notwithstanding the foregoing, for
the Trading Day that occurs on the date of the initial public offering of the
Common Stock, "Fair Market Value" shall mean the initial offering price of the
Common Stock to the public as indicated in the Company's final prospectus in
connection with such offering and as such price is negotiated between the
Company and the managing underwriters.
No employee may be granted an Option hereunder if such employee,
immediately after the Option is granted, owns 5% or more of the total combined
voting power or value of the stock of the Company or any subsidiary. For
purposes of the preceding sentence, the attribution rules of section 424(d) of
the Code will apply in determining the stock ownership of an employee, and all
stock which the employee has a contractual right to purchase will be treated as
stock owned by the employee.
No employee may be granted an Option which permits his rights to
purchase Common Stock under this Plan and all other stock purchase plans of the
Company and its subsidiaries to accrue at a rate which exceeds $25,000 of the
fair market value of such Common Stock (determined at the time such
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Option is granted) for each calendar year in which the Option is outstanding at
any time, as required by section 423 of the Code.
9. Timing of Purchase. Unless a participating employee has withdrawn
all funds from his or her account by the close of business on the day preceding
the last Trading Day of the Offering Period, or the employee's participation in
the Plan has otherwise been terminated, such employee will be deemed to have
exercised automatically his or her Option to purchase Common Stock on the last
Trading Day of the Offering Period for that number of whole shares of Common
Stock which the accumulated funds in the employee's account at that time will
purchase at the Purchase Price, subject to applicable adjustments as provided
herein. Any balance remaining in an employee's account at the end of an Offering
Period after such purchase of Common Stock will be carried forward automatically
into the employee's account for the next Offering Period unless the employee has
elected not to participate in the next Offering Period.
10. Issuance of Certificates. As soon as practicable following the end
of each Offering Period, certificates representing shares of Common Stock
purchased under the Plan for such Offering Period shall be issued only in the
name of the employee, in the name of the employee and another person of legal
age as joint tenants with rights of survivorship, or (in the Administrator's
sole discretion) in the street name of a brokerage firm, bank or other nominee
holder designated by the employee.
11. Rights on Retirement, Death or Termination of Employment. In the
event of a participating employee's termination of employment prior to the last
Trading Day of an Offering Period (whether as a result of the employee's
voluntary or involuntary termination, retirement, death or otherwise), no
payroll deduction will be taken from any pay due and owing to the employee and
the balance in the employee's payroll deduction account will be paid to the
employee or, in the event of the employee's death, (a) to a beneficiary
previously designated in a revocable notice signed by the employee (with any
spousal consent required under state law) or (b) in the absence of such a
designated beneficiary, to the executor or administrator of the employee's
estate or (c) if no such executor or administrator has been appointed to the
knowledge of the Company, to such other person(s) as the Company may, in its
discretion, designate. If, prior to the last Trading Day of an Offering Period,
the Designated Subsidiary by which an employee is employed will cease to be a
subsidiary of the Company, or if the employee is transferred to a subsidiary of
the Company that is not a Designated Subsidiary, the employee will be deemed to
have terminated employment for the purposes of this Plan.
12. Termination of Participation. A participating employee will be
refunded all monies in his or her account, and his or her participation in the
Plan will be terminated if either (a) the Board elects to terminate the Plan, or
(b) the employee ceases to be eligible to participate in the Plan. As soon as
practicable following termination of an employee's participation in the Plan,
the Company will deliver to the employee a check representing the amount in the
employee's account. Once terminated, participation may not be reinstated for the
then current Offering Period but, if otherwise eligible, the employee may elect
to participate in any subsequent Offering Period.
13. Optionees Not Stockholders. Neither the granting of an Option to an
employee nor the deductions from his pay will constitute such employee a
stockholder of the shares of Common Stock covered by an Option under this Plan
until such shares have been purchased by and issued to him.
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14. Options Not Transferable. Options under this Plan are not
transferable by a participating employee other than by will or the laws of
descent and distribution, and are exercisable during the employee's lifetime
only by the employee.
15. Withholding of Taxes. To the extent that a participating employee
realizes ordinary income in connection with the purchase, sale or other transfer
of any shares of Common Stock purchased under the Plan or the crediting of
interest to the employee's account, the Company may withhold amounts needed to
cover such taxes from any payments otherwise due and owing to the participating
employee or from shares that would otherwise be issued to the participating
employee hereunder. Any participating employee who sells or otherwise transfers
shares purchased under the Plan within one year after the shares were
transferred to the participating employee or within two years after the
beginning of the Offering Period in which the shares were purchased must within
30 days of such sale or transfer notify the Company in writing of the sale or
transfer.
16. Application of Funds. All funds received or held by the Company
under the Plan may be used for any corporate purpose until applied to the
purchase of Common Stock and/or refunded to participating employees and can be
commingled with other general corporate funds. Participating employees' accounts
will not be segregated.
17. Effect of Changes in Capitalization.
(a) Changes in Stock. If the number of outstanding shares of Common
Stock is increased or decreased or the shares of Common Stock are changed into
or exchanged for a different number or kind of shares or other securities of the
Company by reason of any recapitalization, reclassification, stock split,
reverse split, combination of shares, exchange of shares, stock dividend, or
other distribution payable in capital stock, or other increase or decrease in
such shares effected without receipt of consideration by the Company occurring
after the effective date of the Plan, the number and kind of shares that may be
purchased under the Plan shall be adjusted proportionately and accordingly by
the Company. In addition, the number and kind of shares for which Options are
outstanding shall be similarly adjusted so that the proportionate interest, if
any, of a participating employee immediately following such event shall, to the
extent practicable, be the same as immediately prior to such event. Any such
adjustment in outstanding Options shall not change the aggregate Purchase Price
payable by a participating employee with respect to shares subject to such
Options, but shall include a corresponding proportionate adjustment in the
Purchase Price per share.
(b) Reorganization in Which the Company Is the Surviving Corporation.
Subject to Subsection (c) of this Section 17, if the Company shall be the
surviving corporation in any reorganization, merger or consolidation of the
Company with one or more other corporations, all outstanding Options under the
Plan shall pertain to and apply to the securities to which a holder of the
number of shares of Common Stock subject to such Options would have been
entitled immediately following such reorganization, merger or consolidation,
with a corresponding proportionate adjustment of the Purchase Price per share so
that the aggregate Purchase Price thereafter shall be the same as the aggregate
Purchase Price of the shares subject to such Options immediately prior to such
reorganization, merger or consolidation.
(c) Reorganization in Which the Company Is Not the Surviving
Corporation or Sale of Assets or Stock. Upon any dissolution or liquidation of
the Company, or upon a merger, consolidation or reorganization of the Company
with one or more other corporations in which the Company is not the
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surviving corporation, or upon a sale of all or substantially all of the assets
of the Company to another corporation, or upon any transaction (including,
without limitation, a merger or reorganization in which the Company is the
surviving corporation) approved by the Board that results in any person or
entity (other than Joseph K. Rensin or any trust, charitable organization or
foundation controlled by him, individually or in the aggregate) owning more than
50 percent of the combined voting power of all classes of stock of the Company,
the Plan and all Options outstanding hereunder shall terminate, except to the
extent provision is made in writing in connection with such transaction for the
continuation of the Plan and/or the assumption of the Options theretofore
granted, or for the substitution for such Options of new Options covering the
stock of a successor corporation, or a parent or subsidiary thereof, with
appropriate adjustments as to the number and kinds of shares and exercise
prices, in which event the Plan and Options theretofore granted shall continue
in the manner and under the terms so provided. In the event of any such
termination of the Plan, the Offering Period shall be deemed to have ended on
the last Trading Day prior to such termination, and, unless the Administrator
determines otherwise in its discretion, each participating employee shall have
the ability to choose either to (i) have all monies then credited to such
employee's account (including interest, to the extent any has accrued) returned
to such participating employee or (ii) exercise his or her Options in accordance
with Section 9 on such last Trading Day; provided, however, that if a
participating employee does not exercise his or her right of choice, his or her
Options shall be deemed to have been automatically exercised in accordance with
Section 9 on such last Trading Day. The Administrator shall send written notice
of an event that will result in such a termination to all participating
employees not later than the time at which the Company gives notice thereof to
its stockholders.
(d) Adjustments. Adjustments under this Section 17 related to stock or
securities of the Company shall be made by the Committee, whose determination in
that respect shall be final, binding, and conclusive.
(e) No Limitations on Company. The grant of an Option pursuant to the
Plan shall not affect or limit in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure or to merge, consolidate, dissolve or liquidate, or to
sell or transfer all or any part of its business or assets.
18. Amendment of the Plan. The Board may at any time, and from time to
time, amend this Plan in any respect, except that (a) if the approval of any
such amendment by the stockholders of the Company is required by section 423 of
the Code, such amendment will not be effected without such approval, and (b) in
no event may any amendment be made which would cause the Plan to fail to comply
with section 423 of the Code unless expressly so provided by the Board.
19. Insufficient Shares. In the event that the total number of shares
of Common Stock specified in elections to be purchased under any Offering plus
the number of shares purchased under previous Offerings under this Plan exceeds
the maximum number of shares issuable under this Plan, the Administrator will
allot the shares then available on a pro rata basis.
20. Termination of the Plan. This Plan may be terminated at any time by
the Board. Except as otherwise provided in Section 17(c) hereof, upon
termination of this Plan all amounts in the payroll deduction accounts of
participating employees will be promptly refunded.
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21. Governmental Regulations.
(a) The Company's obligation to sell and deliver Common Stock under
this Plan is subject to listing on a national stock exchange or quotation on
Nasdaq and the approval of all governmental authorities required in connection
with the authorization, issuance or sale of such stock.
(b) The Plan will be governed by the laws of the State of Maryland
except to the extent that such law is preempted by federal law.
(c) The Plan is intended to comply with the provisions of Rule
16b-3(b)(5) promulgated under the Exchange Act as a "Stock Purchase Plan". Any
provision inconsistent with such Rule will to that extent be inoperative and
will not affect the validity of the Plan.
22. Effective Date. The Plan is effective as of the date on which it
was approved by the Board of Directors of the Company.
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EXHIBIT 10.3
CREDITRUST CORPORATION
Shareholders Make Involved Loyal Employees
SMILE Bonus Program
Purpose: The purpose of this SMILE Bonus Program is to promote the success
of Creditrust Corporation by providing bonuses as an incentive for employees
to remain in the Company's employ and thereby reduce the Company's hiring and
training costs.
Administrator: This SMILE Bonus Program shall be administered by (i) a
committee of one or more individuals designated by the Board of Directors or
(ii) the Board itself if no such committee is designated. The
Administrator's construction, interpretation and other actions taken or
determinations made in administering this SMILE Bonus Program shall be final,
conclusive and binding on all persons.
Participants: All employees of the Company are eligible to participate in
this SMILE Bonus Program unless otherwise determined by the Administrator.
An employee must be in the employ of the Company on the date that a SMILE
bonus pool is established to participate in that SMILE bonus pool. The
Administrator, in its discretion, may establish additional conditions,
restrictions and limitations on participation in a SMILE bonus pool,
including conditions regarding vesting and forfeiture.
Establishment of SMILE Bonus Pools: The Company shall establish one or more
irrevocable grantor trusts to which it may make periodic cash contributions.
Such grantor trusts shall be substantially in the form of Exhibit A hereto.
The amount and timing of such periodic cash contributions, if any, will be
determined solely in the Administrator's discretion. Each periodic such cash
contribution shall constitute a separate SMILE bonus pool. All cash
contributions to the grantor trust(s) shall be used by the trustee to
purchase shares of the Company's common stock on the open market as soon as
practicable after receipt.
Distribution of SMILE Bonus Pools: The trustee shall sell the shares
attributable to each SMILE bonus pool on the open market in four equal
installments at six month intervals commencing six months after the SMILE
bonus pool cash contribution was made. As soon as practicable after each
such sale, the proceeds from the sale shall be distributed equally among
those participants who have been employed by the Company continuously from
the time the SMILE bonus pool cash contribution was made until the date of
distribution. No participant shall have any right to any bonus payment
unless and until such amount has been paid, and no participant shall have
legal or equitable rights, interests or claims in any property or assets
owned or which may be acquired by the Company.
Nontransferability: A participant's interests under the SMILE Bonus Program
may not be assigned, pledged, anticipated, encumbered, transferred or
conveyed in any manner in advance of actual receipt of the applicable bonus
payment.
<PAGE>
Amendment and Termination of the SMILE Bonus Program: The Board of Directors
of the Company may at any time, and from time to time, modify, amend,
supersede, or terminate this SMILE Bonus Program, in whole or in part, with
or without prior notice to or consent of any participant. Upon termination
of the SMILE Bonus Program, amounts held in the grantor trust(s) shall be
allocated among and distributed to participants in such manner and at such
times as the Administrator shall determine in its discretion.
Tax Withholding: Bonus payments shall be reduced by all applicable federal,
state or local taxes required by law to be withheld.
Right to Employment: Nothing contained in this SMILE Bonus Program or any
related grantor trust shall be construed to give any individual any right to
employment or continued employment with Creditrust Corporation, nor to limit
the right of Creditrust Corporation to discharge a participant at any time
with or without cause or notice.
Governing Law: This SMILE Bonus Program shall be governed by and construed
in accordance with the laws of the State of Maryland, other than the conflict
of laws principles thereof.
Headings: The headings in this SMILE Bonus Program are for reference
purposes only and shall not affect the meaning or interpretation of the
Program.
Effective Date: _______________, 1998.
<PAGE>
Exhibit A
TRUST UNDER CREDITRUST CORPORATION
SMILE BONUS PROGRAM
This Agreement made this ______ day of ______________, ____ by and
between CREDITRUST CORPORATION ("Company") and _____________________________
("Trustee").
WHEREAS, Company has adopted the SMILE Bonus Program ("Program"); and
WHEREAS, Company has incurred or expects to incur liability under the
terms of such Program with respect to the individuals participating in such
Program; and
WHEREAS, Company wishes to establish a trust (hereinafter called the
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of Company's creditors in the event of Insolvency, as
herein defined, until paid to Program participants in such manner and at such
times as specified in the Program; and
WHEREAS, it is the intention of Company to make contributions to the
Trust to provide itself with a source of funds to assist it in meeting its
liabilities under the Program; and
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the
Program as an unfunded plan.
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment Of Trust.
(a) Company hereby deposits with Trustee in trust $____________ which
shall become the principal of the Trust to be held, administered and disposed
of by Trustee as provided in this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which Company is
the grantor, within the meaning of subpart E, part I, subchapter J, chapter
1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of Company and shall be used exclusively
for the
<PAGE>
uses and purposes of Program participants as herein set forth. Program
participants and their beneficiaries shall have no preferred claim on, or any
beneficial ownership interest in, any assets of the Trust. Any rights
created under the Program and this Trust Agreement shall be mere unsecured
contractual rights of Program participants and their beneficiaries against
Company. Any assets held by the Trust will be subject to the claims of
Company's general creditors under federal and state law in the event of
Insolvency, as defined in Section 3(a) herein.
(e) Company, in its sole discretion, may at any time, or from time to
time, make additional deposits of cash or other property in trust with
Trustee to augment the principal to be held, administered and disposed of by
Trustee as provided in this Trust Agreement. Neither Trustee nor any Program
participant shall have any right to compel such additional deposits.
Section 2. Payments to Program Participants.
(a) Company or its designee shall deliver to Trustee instructions
acceptable to Trustee for determining the amounts payable in respect of each
Program participant and the time such payment is to be made. All payments to
Program participants shall be made in cash. Company or its designee may
direct Trustee which assets held in trust are to be liquidated to fund such
cash payments. Trustee shall make provision for the reporting and
withholding of any federal, state or local taxes that may be required to be
withheld with respect to the payment of benefits pursuant to the terms of the
Program and shall pay amounts withheld to the appropriate taxing authorities
or determine that such amounts have been reported, withheld and paid by
Company.
(b) The entitlement of a Program participant to benefits under the
Program shall be determined by Company or such party as it shall designate
under the Program.
(c) Company may make payment of benefits directly to Program
participants as they become due under the terms of the Program. Company or
its designee shall notify Trustee of its decision to make payment of benefits
directly prior to the time amounts are payable to participants.
Notwithstanding anything herein to the contrary, if Company makes such
payments directly to Program participants, Trustee shall reimburse Company
from assets held in the Trust if Company so requests.
Section 3. Trustee Responsibility Regarding Payments to Trust
Beneficiary When Company is Insolvent.
(a) Trustee shall cease payment of benefits to Program participants if
the Company is Insolvent. Company shall be considered "Insolvent" for
purposes of this Trust Agreement if (i) Company is unable to pay its debts as
they become due, or (ii) Company is subject to a pending proceeding as a
debtor under the United States Bankruptcy Code.
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(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject
to claims of general creditors of Company under federal and state law as set
forth below.
(1) The Board of Directors and the Chief Executive Officer of
Company (or, if there is no Chief Executive Officer, the
highest ranking officer) shall have the duty to inform trustee
in writing of Company's Insolvency. If a person claiming to
be a creditor of Company alleges in writing to Trustee that
Company has become Insolvent, Trustee shall determine whether
Company is Insolvent and, pending such determination, Trustee
shall discontinue payment of benefits to Program participants.
(2) Unless Trustee has actual knowledge of Company's Insolvency,
or has received notice from Company or a person claiming to be
a creditor alleging that Company is Insolvent, Trustee shall
have no duty to inquire whether Company is Insolvent. Trustee
may in all events rely on such evidence concerning Company's
solvency as may be furnished to Trustee and that provides
Trustee with a reasonable basis for making a determination
concerning Company's solvency.
(3) If at any time Trustee has determined that Company is
Insolvent, Trustee shall discontinue payments to Program
participants and shall hold the assets of the Trust for the
benefit of Company's general creditors. Nothing in this Trust
Agreement shall in any way diminish any rights of Program
participants to pursue their rights as general creditors of
Company with respect to benefits due under the Program or
otherwise.
(4) Trustee shall resume the payment of benefits to Program
participants in accordance with Section 2 of this Trust
Agreement only after Trustee has determined that Company is
not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues
the payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to
Program participants under the terms of the Program for the period of such
discontinuance less the aggregate amount of any payments made to Program
participants by Company in lieu of the payments provided for hereunder during
any such period of discontinuance.
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<PAGE>
Section 4. Payments to Company.
Except as provided in Section 2(c) and Section 3 hereof, Company shall
have no right or power to direct Trustee to return to Company or to divert to
others any of the Trust assets before all payment of benefits have been made
to Program participants pursuant to the terms of the Program.
Section 5. Investment Authority and Additional Powers of Trustee.
(a) Trustee in its discretion may invest the Trust assets in any
tangible or intangible property, real or personal, including without
limitation common stock of the Company.
(b) All rights associated with assets of the Trust shall be exercised
by Trustee or the person designated by Trustee and shall in no event be
exercisable by or rest with Program participants.
(c) Company shall have the right at any time, and from time to time in
its sole discretion, to substitute assets of equal fair market value for any
asset held by the Trust. This right is exercisable by Company in a
non-fiduciary capacity without the approval or consent of any person in a
fiduciary capacity.
(d) Trustee, is authorized and empowered:
(1) To hold in cash, without liability for interest, or in savings
accounts or certificates of deposit or other deposits in a
bank or savings and loan association or other depository
institution, including Trustee or any of its affiliates, such
portion of the Trust as is pending investment in Company
common stock, or payment of expenses, or the distribution of
benefits;
(2) To maintain accounts at, execute transactions through, and
lend on an adequately secured basis Trust assets to, any
brokerage or other firm, including any firm which is an
affiliate of Trustee;
(3) To register Trust assets in its name or in the name of any
nominee, including the name of any affiliate or the nominee
name designated by any affiliate, with or without indication
of the capacity in which Trust assets shall be held, or to
hold securities in bearer form and to deposit any securities
in a depository or clearing corporation;
(4) To make, execute and deliver, as Trustee, any and all
conveyances, waivers, releases or other instruments in writing
necessary or
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appropriate for the accomplishment of any of the powers listed
in this Trust Agreement;
(5) To exercise all of the further rights, powers, options and
privileges granted, provided for, or vested in trustees
generally under the laws of the state in which Trustee is
incorporated as set forth above, so that the powers conferred
upon Trustee herein shall not be in limitation of any
authority conferred by law, but shall be in addition thereto;
and
(6) Generally to do all other acts which Trustee deems necessary
or appropriate for the protection of the Trust.
(e) Notwithstanding any powers granted to Trustee pursuant to this
Trust Agreement or to applicable law, Trustee shall not have any power that
could give this Trust the objective of carrying on a business and dividing
the gains therefrom, within the meaning of section 301.7701-2 of the
Procedure and Administrative Regulations promulgated pursuant to the Internal
Revenue Code.
Section 6. Disposition of Income.
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
Section 7. Accounting by Trustee.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company or its designee and Trustee. Within 90 days following the close of
each calendar year and within 90 days after the removal or resignation of
Trustee, Trustee shall deliver to Company or its designee a written account
of its administration of the Trust during such year or during the period from
the close of the last preceding year to the date of such removal or
resignation, setting forth all investments, receipts, disbursements and other
transactions effected by it, including a description of all securities and
investments purchased and sold with the cost or net proceeds of such
purchases or sales (accrued interest paid or receivable being shown
separately), and showing all cash, securities and other property held in the
Trust at the end of such year or as of the date of such removal or
resignation, as the case may be.
Section 8. Responsibility of Trustee.
(a) Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with
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like aims, provided, however, that Trustee shall incur no liability to any
person for any action taken pursuant to a direction, request or approval
given by Company or its designee which is contemplated by, and in conformity,
the terms of the Program or this Trust and is given in writing by Company or
its designee. In the event of a dispute between Company and a party, Trustee
may apply to a court of competent jurisdiction to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in
connection with this Trust, Company agrees to indemnify Trustee against
Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments. If Company does not pay such costs, expenses and liabilities
in a reasonably timely manner, Trustee may obtain payment from the Trust.
(c) Trustee may consult with legal counsel (who may also be counsel for
Company generally) with respect to any of its duties or obligations hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
Section 9. Compensation and Expenses of Trustee.
Company shall pay all administrative and Trustee's fees and expenses.
If not so paid, the fees and expenses shall be paid from the Trust.
Section 10. Resignation and Removal of Trustee.
(a) Trustee may resign at any time by written notice to Company, which
shall be effective 30 days after receipt of such notice unless Company and
Trustee agree otherwise.
(b) Trustee may be removed by Company on 30 days' notice or upon
shorter notice accepted by Trustee.
(c) Upon resignation or removal of Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the
successor Trustee as soon as practicable thereafter but in no event later
than 30 days after receipt of notice of resignation, removal or transfer,
unless Company extends the time limit.
(d) If Trustee resigns or is removed, a successor shall be appointed,
in accordance with section 11 hereof, by the effective date or resignation or
removal under paragraph(s) (a) or (b) of this section. If no such
appointment has been made, Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for
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instructions. All expenses of Trustee in connection with the proceeding
shall be allowed as administrative expenses of the Trust.
Section 11. Appointment of Successor.
(a) If Trustee resigns or is removed in accordance with Section 10(a)
or (b) hereof, Company may appoint any third party, such as a bank trust
department or other party that may be granted corporate trustee powers under
state law, as a successor to replace Trustee upon resignation or removal.
The appointment shall be effective when accepted in writing by the new
Trustee, who shall have all of the rights and powers of the former trustee,
including ownership rights in the Trust assets. The former Trustee shall
execute any instrument necessary or reasonably requested by Company or the
successor Trustee to evidence the transfer.
(b) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets, subject to
Sections 7 and 8 hereof. The successor Trustee shall not be responsible for
and Company shall indemnify and defend the successor Trustee from any claim
or liability resulting from any action or inaction of any prior Trustee or
from any other past event, or any condition existing at the time it becomes
successor Trustee.
Section 12. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument
executed by Trustee and Company. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Program or shall make the
Trust revocable after it has become irrevocable in accordance with Section
1(b) hereof.
(b) The Trust shall not terminate until the date on which Program
participants are no longer entitled to benefits pursuant to the terms of the
Program. Upon termination of the Trust any assets remaining in the Trust
shall be distributed in accordance with written instructions provided by
Company or its designee to Trustee but shall not be distributed to Company.
Section 13. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Program participants under this Trust Agreement
may not be anticipated, assigned (either at law or in equity), alienated,
pledged, encumbered or subjected to attachment, garnishment, levy, execution
or other legal or equitable process.
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<PAGE>
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of the State of Maryland.
Section 14. Effective Date.
The effective date of this Trust Agreement shall be the date first
written above.
IN WITNESS WHEREOF, Company and the Trustee have executed this
Trust Agreement each by action of a duly authorized person.
CREDITRUST CORPORATION
By: __________________________________
Title: _______________________________
--------------------------------------
(Trustee)
By: __________________________________
Name/Title: __________________________
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<PAGE>
Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 22nd day of
June, 1998 by and between Creditrust Corporation, a Maryland Corporation
(hereinafter referred to as "Creditrust") having its principal office at 7000
Security Boulevard, Second Floor, Baltimore, Maryland 21244 and Jefferson Barnes
Moore (hereinafter referred to as the "Executive"). In consideration of the
mutual covenants and promises contained herein and the Executive's continued
employment, the sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Creditrust desires to continue to employ the Executive on the terms and
conditions herein set forth, and the Executive has agreed to accept employment
with Creditrust on the terms and conditions set forth.
1) EMPLOYMENT AT WILL. Creditrust hereby employs the Executive and the
Executive shall serve Creditrust upon the terms and conditions hereinafter
set forth. Notwithstanding any other provision in this Agreement or in any
other document to the contrary, this Agreement creates an employment
relationship of indefinite duration which may be legally terminated at the
pleasure of either Creditrust or the Executive at any time and without any
liability.
2) CAPACITY AND PERFORMANCE.
a) Capacity. The Executive shall serve as the Vice President, Acquisitions
of Creditrust and shall serve, with no additional compensation, in any
other office or position as determined by Joseph K. Rensin ("Mr.
Rensin") or his successor or designee.
b) Duties. The Executive shall be employed by Creditrust on a full time
basis, and shall perform, on behalf of Creditrust, such duties
customary to his position and additional duties as may be designated by
Mr. Rensin or his successor of designee from time to time.
c) Full Time. The Executive shall devote his full time, attention, skill,
and energy to the performance of his duties under this Agreement. The
Executive shall comply with all reasonable professional requests of the
Company; provided, however, that the Executive will be permitted to
engage in and manage personal investments and to participate in
community and charitable affairs, so long as such activities do not
interfere with his duties under this Agreement.
3) COMPENSATION.
a) Base Compensation. Creditrust shall pay to the Executive an annual base
salary of One Hundred and Fifty Thousand Dollars ($150,000) during the
term of the Agreement. Creditrust shall pay the Executive's annual
salary to him in
<PAGE>
accordance with standard payment practices of Creditrust as adopted or
employed by Creditrust from time to time.
b) Incentive Compensation. The Executive shall receive a bonus of up to
One Hundred Thousand Dollars ($100,000) in any calendar year. The
Compensation Committee of the Board of Directors of Creditrust shall
determine the amount of the bonus in accordance with its standards and
practices. This bonus is discretionary and may be based in whole or in
part upon the Board's assessment of the Executive's job performance.
c) Bonuses; Stock Plans. In addition to his base salary, the Executive
shall be entitled to participate in any stock option plans, programs,
arrangements and practices sponsored by the Company for the benefit of
executive employees serving in similar capacities with the Company
(and/or its affiliates), if any, as may be established from time to
time by the Board of Directors of the Company for the benefit of such
executive employees, in accordance with the terms of such plans, as
amended by the Company from time to time; it being understood that
there is no assurance with respect to the establishment of such plans
or, if established, the continuation of such plans during the term of
this Agreement.
4) BENEFITS. During the term of this Agreement, the Executive shall also be
entitled to participate in or receive benefits under all of the Company's
benefit plans, programs, arrangements and practices, including pension,
disability, and group life, sickness, accident or health insurance
programs, if any, as may be established from time to time by the Board of
Directors of the Company for the benefit of executive employees serving in
similar capacities with the Company (and/or its affiliates), in accordance
with the terms of such plans, as amended by the Company from time to time;
it being understood that there is no assurance with respect to the
establishment of such plans or, if established, the continuation of such
plans during the term of this Agreement.
5) VACATION. The Executive shall be entitled to an annual vacation of duration
equal to the duration of the annual vacation available to management level
employees of Creditrust with the same tenure, to be taken at a time
acceptable to Creditrust, subject to the reasonable business needs of
Creditrust. The Executive shall be paid his salary during such vacation
period.
6) CONFIDENTIALITY AGREEMENT. The parties, by their signatures, adopt and
ratify all of the provisions of the Confidentiality Agreement that is
attached and incorporated by reference into this Agreement as if set forth
at length. In the event that a court of competent jurisdiction finds that
any term or provision in this Agreement conflicts with any term or
provision in the Confidentiality Agreement, then the terms and provisions
in this Agreement shall supersede the conflicting terms or provisions in
the Confidentiality Agreement, but only to the extent of the conflict.
<PAGE>
7) CONFLICTING AGREEMENTS. The Executive hereby represents and warrants to
Creditrust that his execution of this Agreement and the performance of his
obligations hereunder will not breach or be in conflict with any other
agreement to which he may be a party or may be bound and is not subject to
any covenants against competition or similar covenants that would affect
performance of his duties and obligations hereunder.
8) WAIVER. The waiver by either Creditrust or the Executive of a breach of any
provision of this Agreement shall not operate or be construed as a waiver
of any subsequent breach by either Creditrust or the Executive.
9) ASSIGNMENT: BINDING EFFECT. This Agreement shall inure to the benefit
of and be binding upon Creditrust, its successors and assigns. The
Executive may assign his right to payment under this Agreement but not
his obligations hereunder.
10) NOTICE. Any notice, writing or other communication required or permitted to
be given under the terms of this Agreement shall be in writing and sent by
certified or registered mail in the United States mail, postage prepaid,
return receipt requested, or by telegram, and addressed as follows or to
such other address which may from time to time be given by the parties:
a) If to Creditrust:
Joseph K. Rensin, Chairman & CEO
Creditrust Corporation
7000 Security Boulevard, Second Floor
Baltimore, Maryland 21244
b) If to the Executive:
-------------------------
-------------------------
-------------------------
-------------------------
If mailed, the notice period shall be deemed to begin in two (2) days
following the date on which that notice is mailed.
11) MISCELLANDOUS PROVISONS.
a) Captions. The descriptive headings of the several sections of this
Agreement are inserted for convenience only and do not constitute a
part of this Agreement.
b) Severability. In the event that one or more of the provisions of this
Agreement shall be invalid, illegal or unenforceable in any respect,
the remaining provisions contained therein shall not in any way be
affected and shall remain in force to the fullest extent of the law.
<PAGE>
c) Entire Agreement. This Agreement contains the entire agreement between
the parties and supersedes all prior oral or written agreements,
commitments, or understandings with respect to the matters provided for
herein, and no modification shall be finding upon the party affected
unless set forth in writing and duly executed by each party affected.
All covenants and agreements in this Agreement by or on behalf of any
of the parties hereto shall find and inure to the benefit of the
respective successors, assigns and personal representatives.
d) Governing Law. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by,
the laws of the State of Maryland exclusive of its conflicts of law
rules.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day
and year first above written.
CREDITRUST CORPORATION
By: /s/ Joseph K. Rensin
-----------------------------
Joseph K. Rensin, President
THE EXECUTIVE
/s/ Jefferson Barnes Moore
-----------------------------
Jefferson Barnes Moore
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 22nd day of
June, 1998 by and between Creditrust Corporation, a Maryland Corporation
(hereinafter referred to as "Creditrust") having its principal office at 7000
Security Boulevard, Second Floor, Baltimore, Maryland 21244 and Richard J.
Palmer (hereinafter referred to as the "Executive"). In consideration of the
mutual covenants and promises contained herein and the Executive's continued
employment, the sufficiency of which are hereby acknowledged, the parties
hereto agree as follows:
Creditrust desires to continue to employ the Executive on the terms and
conditions herein set forth, and the Executive has agreed to accept
employment with Creditrust on the terms and conditions set forth.
1) EMPLOYMENT AT WILL. Creditrust hereby employs the Executive and the
Executive shall serve Creditrust upon the terms and conditions hereinafter
set forth. Notwithstanding any other provision in this Agreement or in any
other document to the contrary, this Agreement creates an employment
relationship of indefinite duration which may be legally terminated at the
pleasure of either Creditrust or the Executive at any time and without any
liability.
2) CAPACITY AND PERFORMANCE.
a) Capacity. The Executive shall serve as the Vice President, Chief
Financial Officer of Creditrust and shall serve, with no additional
compensation, in any other office or position as determined by Joseph K.
Rensin ("Mr. Rensin") or his successor or designee.
b) Duties. The Executive shall be employed by Creditrust on a full
time basis, and shall perform, on behalf of Creditrust, such duties customary
to his position and additional duties as may be designated by Mr. Rensin or
his successor of designee from time to time.
c) Full Time. The Executive shall devote his full time, attention,
skill, and energy to the performance of his duties under this Agreement. The
Executive shall comply with all reasonable professional requests of the
Company; provided, however, that the Executive will be permitted to engage in
and manage personal investments and to participate in community and
charitable affairs, so long as such activities do not interfere with his
duties under this Agreement.
3) COMPENSATION.
a) Base Compensation. Creditrust shall pay to the Executive an annual
base salary of One Hundred and Fifty Thousand Dollars ($150,000) during the
term of the Agreement. Creditrust shall pay the Executive's annual salary to
him in
<PAGE>
accordance with standard payment practices of Creditrust as adopted or
employed by Creditrust from time to time.
b) Incentive Compensation. The Executive shall receive a bonus of up
to One Hundred Thousand Dollars ($100,000) in any calendar year. The
Compensation Committee of the Board of Directors of Creditrust shall
determine the amount of the bonus in accordance with its standards and
practices. This bonus is discretionary and may be based in whole or in part
upon the Board's assessment of the Executive's job performance.
c) Bonuses; Stock Plans. In addition to his base salary, the
Executive shall be entitled to participate in any stock option plans,
programs, arrangements and practices sponsored by the Company for the benefit
of executive employees serving in similar capacities with the Company (and/or
its affiliates), if any, as may be established from time to time by the Board
of Directors of the Company for the benefit of such executive employees, in
accordance with the terms of such plans, as amended by the Company from time
to time; it being understood that there is no assurance with respect to the
establishment of such plans or, if established, the continuation of such
plans during the term of this Agreement.
4) BENEFITS. During the term of this Agreement, the Executive shall also
be entitled to participate in or receive benefits under all of the Company's
benefit plans, programs, arrangements and practices, including pension,
disability, and group life, sickness, accident or health insurance programs,
if any, as may be established from time to time by the Board of Directors of
the Company for the benefit of executive employees serving in similar
capacities with the Company (and/or its affiliates), in accordance with the
terms of such plans, as amended by the Company from time to time; it being
understood that there is no assurance with respect to the establishment of
such plans or, if established, the continuation of such plans during the term
of this Agreement.
5) VACATION. The Executive shall be entitled to an annual vacation of
duration equal to the duration of the annual vacation available to management
level employees of Creditrust with the same tenure, to be taken at a time
acceptable to Creditrust, subject to the reasonable business needs of
Creditrust. The Executive shall be paid his salary during such vacation
period.
6) CONFIDENTIALITY AGREEMENT. The parties, by their signatures, adopt and
ratify all of the provisions of the Confidentiality Agreement that is
attached and incorporated by reference into this Agreement as if set forth at
length. In the event that a court of competent jurisdiction finds that any
term or provision in this Agreement conflicts with any term or provision in
the Confidentiality Agreement, then the terms and provisions in this
Agreement shall supersede the conflicting terms or provisions in the
Confidentiality Agreement, but only to the extent of the conflict.
<PAGE>
7) CONFLICTING AGREEMENTS. The Executive hereby represents and warrants to
Creditrust that his execution of this Agreement and the performance of his
obligations hereunder will not breach or be in conflict with any other
agreement to which he may be a party or may be bound and is not subject to
any covenants against competition or similar covenants that would affect
performance of his duties and obligations hereunder.
8) WAIVER. The waiver by either Creditrust or the Executive of a breach of
any provision of this Agreement shall not operate or be construed as a waiver
of any subsequent breach by either Creditrust or the Executive.
9) ASSIGNMENT: BINDING EFFECT. This Agreement shall inure to the benefit
of and be binding upon Creditrust, its successors and assigns. The Executive
may assign his right to payment under this Agreement but not his obligations
hereunder.
10) NOTICE. Any notice, writing or other communication required or
permitted to be given under the terms of this Agreement shall be in writing
and sent by certified or registered mail in the United States mail, postage
prepaid, return receipt requested, or by telegram, and addressed as follows
or to such other address which may from time to time be given by the parties:
a) If to Creditrust:
Joseph K. Rensin, Chairman & CEO
Creditrust Corporation
7000 Security Boulevard, Second Floor
Baltimore, Maryland 21244
b) If to the Executive:
Richard J. Palmer
--------------------
7834 Elizabeth Rd
--------------------
Pasadena, MD 21122
--------------------
--------------------
If mailed, the notice period shall be deemed to begin in two (2) days
following the date on which that notice is mailed.
11) MISCELLANDOUS PROVISONS.
a) Captions. The descriptive headings of the several sections of this
Agreement are inserted for convenience only and do not constitute a part of
this Agreement.
b) Severability. In the event that one or more of the provisions of
this Agreement shall be invalid, illegal or unenforceable in any respect, the
remaining provisions contained therein shall not in any way be affected and
shall remain in force to the fullest extent of the law.
<PAGE>
c) Entire Agreement. This Agreement contains the entire agreement
between the parties and supersedes all prior oral or written agreements,
commitments, or understandings with respect to the matters provided for
herein, and no modification shall be finding upon the party affected unless
set forth in writing and duly executed by each party affected. All covenants
and agreements in this Agreement by or on behalf of any of the parties hereto
shall find and inure to the benefit of the respective successors, assigns and
personal representatives.
d) Governing Law. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws
of the State of Maryland exclusive of its conflicts of law rules.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day
and year first above written.
CREDITRUST CORPORATION
By: /s/Joseph K. Rensin
-----------------------------
Joseph K. Rensin, President
THE EXECUTIVE
/s/Richard J. Palmer
-----------------------------
Richard J. Palmer
<PAGE>
Exhibit 10.6
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 10th day of
January, 1996 by and between Creditrust, a Maryland Corporation (hereinafter
referred to as "Creditrust") having its principal office at 7000 Security
Boulevard, Second Floor, Baltimore, Maryland 21244 and Rick Chandler
(hereinafter referred to as "Mr. Chandler"). In consideration of the mutual
covenants and promises contained herein and Mr. Chandler's continued employment,
the sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. DEFINITIONS. Unless the context otherwise requires, when
used in this Agreement, the following terms shall have the following meanings:
(a) "Group" shall mean the recovery teams, each led by a
supervisor, that report directly to a Recovery Manager (or Assistant
Manager). It is anticipated that each Recovery Manager shall have their
own Group, and therefore shall not be entitled to incentive
compensation based upon the production of any other Group.
(b) "Eligible Collectors" are defined as any collectors who
are employed in your Group according to the following schedule:
A collector shall be counted as .25 of an Eligible
Collector for the month in which their 30th day of
employment falls.
A collector shall be counted as .50 of an Eligible
Collector for the month in which their 60th day of
employment falls.
A collector shall be counted as .75 of an Eligible
Collector for the month in which their 90th day of
employment falls.
A collector shall be counted as an Eligible Collector
for the month in which their 120th day of employment
falls and for each month thereafter.
( c) "Good Funds" are defined as any moneys that have been
deposited and have cleared. Any checks returned "NSF" will be charged
back against the total good funds received. Creditrust's management
will wait ten (10) calendar days from the end of each month, to
determine any charge backs, before disbursing any commissions.
(d) "Group Average" is defined as the total amount of Good
Funds collected by the Eligible Collectors, divided by the number of
Eligible Collectors.
1
<PAGE>
2. EMPLOYMENT AT WILL. Creditrust hereby employs Mr. Chandler and Mr.
Chandler shall serve Creditrust upon the terms and conditions hereinafter set
forth. Notwithstanding any other provision in ties Agreement or in any other
document to the contrary, this Agreement creates an employment relationship of
indefinite duration which may be legally terminated at the pleasure of either
Creditrust of Mr. Chandler at any time and without any liability.
3. CAPACITY AND PERFORMANCE.
(a) Capacity. Mr. Chandler shall serve as the Recovery Manager
of Creditrust and shall serve, with no additional compensation, in any
other office or position as determined by Joseph K. Rensin ("Mr.
Rensin") or his successor or designee.
(b) Duties. As Recovery Manager of Creditrust, Mr. Chandler
shall be employed by Creditrust on a full time basis, and shall
perform, on behalf of Creditrust, such duties customary to his position
and additional duties as may be designated by Mr. Rensin or his
successor of designee from time to time.
4. COMPENSATION.
(a) Base Compensation. Creditrust shall pay to Mr. Chandler an
annual base salary of Eighty Five Thousand Dollars ($85,000) during the
term of the Agreement. Creditrust .shall pay Mr. Chandler's annual
salary to him in accordance with standard payment practices of
Creditrust as adopted or employed by Creditrust from time.
(b) Incentive Compensation. Commencing on January 1, 1997 and
ending on the termination of this Agreement, Mr. Chandler shall earn a
commission equal to:
i. 0.05% of the Good Funds collected by the
Eligible Collectors when the Group Average
is less than $7,500.
ii. 0.1% of the Good Funds collected by the
Eligible Collectors when the Group Average
is between $7,501 and $11,999.
iii. 0.15% of the Good Funds collected by the
Eligible Collectors when the Group Average
is between $12,000 and $14,999.
iv. 0.2% of the Good Funds collected by the
Eligible Collectors when the Group Average
is between $15,000 and $17,999.
v. 0.3% of the Good Funds collected by the
Eligible Collectors when the Group Average
is between $18,000 and $21,999.
vi. 0.3% of the Good Funds collected by the
Eligible Collectors when the Group Average
exceeds $22,000.
2
<PAGE>
(c) Management Bonus, The Recovery Manager will also receive a
management bonus of $10.00 for each Eligible Collector.
5. RELOCATION EXPENSES. Creditrust shall reimburse Mr. Chandler up to
$10,000 of his actual moving expenses as well as up to $10,000 of his actual
temporary residence costs for the first several months of his employment.
6. BENEFITS. Mr. Chandler may participate, to the extent he meets
eligibility standards, in any and all benefit plans of Creditrust which may
include group life and disability insurance, hospitalization, medical and dental
coverage's, retirement, profit sharing and/or pension plans and any and all
similar benefits generally provided to employees of Creditrust. Creditrust
reserves the right to terminate or modify all or any of its benefit plans.
7. VACATION. Mr. Chandler shall be entitled to an annual vacation of
duration equal to the duration of the annual vacation available to management
level employees of Creditrust with the same tenure, to be taken at a time
acceptable to Creditrust, subject to the reasonable business needs of
Creditrust. Mr. Chandler shall be paid his salary during such vacation period.
8. CONFIDENTIALITY AGREEMENT. The parties, by their signatures, adopt
and ratify all of the provisions of the Confidentiality Agreement that is
attached and incorporated by reference into this Agreement as if set forth at
length. In the event that a court of competent jurisdiction finds that any term
or provision in this Agreement conflicts with any term or provision in the
Confidentiality Agreement, then the terms and provisions in this Agreement shall
supersede the conflicting terms or provisions in the Confidentiality Agreement,
but only to the extent of the conflict.
9. CONFLICTING AGREEMENTS. Mr. Chandler hereby represents and warrants
to Creditrust that his execution of this Agreement and the performance of his
obligations hereunder will not breach or be in conflict with any other agreement
to which he may be a party or may be bound and is not subject to any covenants
against competition or similar covenants that would affect performance of his
duties and obligations hereunder. Mr. Chandler shall not use for the benefit of
Creditrust any proprietary information of a third party without such third
party's consent.
10. WAIVER. The waiver by either Creditrust or Mr. Chandler of a breach
of any provision of this Agreement shall not operate or be construed as a waiver
of any subsequent breach by either Creditrust or Mr. Chandler.
3
<PAGE>
11. ASSIGNMENT: BINDING EFFECT. This Agreement shall inure to the
benefit of and be finding upon Creditrust, its successors and assigns. Mr.
Chandler may assign his right to payment under this Agreement but not his
obligations hereunder.
12. NOTICE. Any notice, writing or other communication required or
permitted to be given under the terms of this Agreement shall be in writing an
sent by certified or registered mail in the United States mail, postage prepaid,
return receipt requested, or by telegram, and addressed as follows or to such
other address which may from time to time be given by the parties:
If to Creditrust:
Joseph K. Rensin, President
Creditrust Corporation
7000 Security Boulevard, Second Floor
Baltimore, Maryland 21244
If to Mr. Chandler:
If mailed, the notice period shall be deemed to begin in two (2) days following
the date on which that notice is mailed.
13. MISCELLANEOUS PROVISIONS.
(a) Captions. The descriptive headings of the several sections
of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
(b) Severability. In the event that one or more of the
provisions of this Agreement shall be invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability for the
remaining provision contained therein shall not in any way affect to
the fullest extent of the law.
(c) Entire Agreement. This Agreement contains the entire
agreement between the parties and supersedes all prior oral or written
agreements, commitments, or understandings with respect to the matters
provided for herein, and no modification shall be finding upon the
party affected unless set forth in writing and duly executed by each
party affected. All covenants and agreements in these Agreement by or
on behalf of any
4
<PAGE>
of the parties hereto shall find and inure to the benefit of the
respective successors, assigns and personal representatives.
(d) Governing Law. This Agreement shall be construed and
enforced in accordance with, and the rights of the parties shall be
governed by, the laws of the State of Maryland exclusive of its
conflicts of law rules.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day
and year first above written.
CREDITRUST CORPORATION
By: /s/ Joseph K. Rensin
---------------------------------
Joseph K. Rensin, President
RICK CHANDLER
By: /s/ Rick Chandler
----------------------------------
Rick Chandler
5
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 22nd day of June,
1998 by and between Creditrust Corporation, a Maryland Corporation (hereinafter
referred to as "Creditrust") having its principal office at 7000 Security
Boulevard, Second Floor, Baltimore, Maryland 21244 and John L. Davis
(hereinafter referred to as the "Executive"). In consideration of the mutual
covenants and promises contained herein and the Executive's continued
employment, the sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Creditrust desires to continue to employ the Executive on the terms and
conditions herein set forth, and the Executive has agreed to accept employment
with Creditrust on the terms and conditions set forth.
1) EMPLOYMENT AT WILL. Creditrust hereby employs the Executive and the
Executive shall serve Creditrust upon the terms and conditions hereinafter
set forth. Notwithstanding any other provision in this Agreement or in any
other document to the contrary, this Agreement creates an employment
relationship of indefinite duration which may be legally terminated at the
pleasure of either Creditrust or the Executive at any time and without any
liability.
2) CAPACITY AND PERFORMANCE.
a) Capacity. The Executive shall serve as the Vice President, Business
Development of Creditrust and shall serve, with no additional
compensation, in any other office or position as determined by Joseph
K. Rensin ("Mr. Rensin") or his successor or designee.
b) Duties. The Executive shall be employed by Creditrust on a full time
basis, and shall perform, on behalf of Creditrust, such duties
customary to his position and additional duties as may be designated
by Mr. Rensin or his successor of designee from time to time.
c) Full Time. The Executive shall devote his full time, attention,
skill, and energy to the performance of his duties under this
Agreement. The Executive shall comply with all reasonable
professional requests of the Company; provided, however, that the
Executive will be permitted to engage in and manage personal
investments and to participate in community and charitable affairs, so
long as such activities do not interfere with his duties under this
Agreement.
3) COMPENSATION.
a) Base Compensation. Creditrust shall pay to the Executive an annual
base salary of One Hundred and Fifty Thousand Dollars ($150,000)
during the term of the Agreement. Creditrust shall pay the
Executive's annual salary to him in
<PAGE>
accordance with standard payment practices of Creditrust as adopted or
employed by Creditrust from time to time.
b) Bonuses; Stock Plans. In addition to his base salary, the Executive
shall be entitled to participate in any stock option plans, programs,
arrangements and practices sponsored by the Company for the benefit of
executive employees serving in similar capacities with the Company
(and/or its affiliates), if any, as may be established from time to
time by the Board of Directors of the Company for the benefit of such
executive employees, in accordance with the terms of such plans, as
amended by the Company from time to time; it being understood that
there is no assurance with respect to the establishment of such plans
or, if established, the continuation of such plans during the term of
this Agreement.
4) BENEFITS. During the term of this Agreement, the Executive shall also be
entitled to participate in or receive benefits under all of the Company's
benefit plans, programs, arrangements and practices, including pension,
disability, and group life, sickness, accident or health insurance
programs, if any, as may be established from time to time by the Board of
Directors of the Company for the benefit of executive employees serving in
similar capacities with the Company (and/or its affiliates), in accordance
with the terms of such plans, as amended by the Company from time to time;
it being understood that there is no assurance with respect to the
establishment of such plans or, if established, the continuation of such
plans during the term of this Agreement.
5) VACATION. The Executive shall be entitled to an annual vacation of
duration equal to the duration of the annual vacation available to
management level employees of Creditrust with the same tenure, to be taken
at a time acceptable to Creditrust, subject to the reasonable business
needs of Creditrust. The Executive shall be paid his salary during such
vacation period.
6) CONFIDENTIALITY AGREEMENT. The parties, by their signatures, adopt and
ratify all of the provisions of the Confidentiality Agreement that is
attached and incorporated by reference into this Agreement as if set forth
at length. In the event that a court of competent jurisdiction finds that
any term or provision in this Agreement conflicts with any term or
provision in the Confidentiality Agreement, then the terms and provisions
in this Agreement shall supersede the conflicting terms or provisions in
the Confidentiality Agreement, but only to the extent of the conflict.
7) CONFLICTING AGREEMENTS. The Executive hereby represents and warrants to
Creditrust that his execution of this Agreement and the performance of his
obligations hereunder will not breach or be in conflict with any other
agreement to which he may be a party or may be bound and is not subject to
any covenants against competition or similar covenants that would affect
performance of his duties and obligations hereunder.
<PAGE>
8) WAIVER. The waiver by either Creditrust or the Executive of a breach of
any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach by either Creditrust or the Executive.
9) ASSIGNMENT: BINDING EFFECT. This Agreement shall inure to the benefit of
and be binding upon Creditrust, its successors and assigns. The Executive
may assign his right to payment under this Agreement but not his
obligations hereunder.
10) NOTICE. Any notice, writing or other communication required or permitted
to be given under the terms of this Agreement shall be in writing and sent
by certified or registered mail in the United States mail, postage prepaid,
return receipt requested, or by telegram, and addressed as follows or to
such other address which may from time to time be given by the parties:
a) If to Creditrust:
Joseph K. Rensin, Chairman & CEO
Creditrust Corporation
7000 Security Boulevard, Second Floor
Baltimore, Maryland 21244
b) If to the Executive:
______________________________
______________________________
______________________________
______________________________
If mailed, the notice period shall be deemed to begin in two (2) days
following the date on which that notice is mailed.
11) MISCELLANDOUS PROVISONS.
a) Captions. The descriptive headings of the several sections of this
Agreement are inserted for convenience only and do not constitute a
part of this Agreement.
b) Severability. In the event that one or more of the provisions of this
Agreement shall be invalid, illegal or unenforceable in any respect,
the remaining provisions contained therein shall not in any way be
affected and shall remain in force to the fullest extent of the law.
c) Entire Agreement. This Agreement contains the entire agreement
between the parties and supersedes all prior oral or written
agreements, commitments, or understandings with respect to the matters
provided for herein, and no modification shall be finding upon the
party affected unless set forth in writing and duly executed by each
party affected. All covenants and agreements in this Agreement by or
on behalf of any of the parties hereto shall find and inure to the
<PAGE>
benefit of the respective successors, assigns and personal
representatives.
d) Governing Law. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by,
the laws of the State of Maryland exclusive of its conflicts of law
rules.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day
and year first above written.
CREDITRUST CORPORATION
By: /s/ Joseph K Rensin
-----------------------------
Joseph K. Rensin, President
THE EXECUTIVE
/s/ John L. Davis
-----------------------------
<PAGE>
Exhibit 10.8
FINANCING SERVICES AGREEMENT
THIS AGREEMENT, made this 13th day of March, 1997, by and between
Creditrust Corporation ("Creditrust"), 7000 Security Boulevard, Baltimore,
Maryland 21244, and Crystal Hill Advisors ("CHA"), whose principal address is
10015 Old Columbia Road, Suite E-250, Columbia, Maryland 21046.
WHEREAS, Creditrust seeks assistance in placing the financing for the
purchase of credit card receivables; and
WHEREAS, Creditrust desires to retain CHA to provide such assistance; and
WHEREAS, CHA has previously introduced Creditrust to Heartland Bank; and
WHEREAS, Creditrust desires to renew negotiations with Heartland Bank; and
WHEREAS, CHA desires to provide such financial and negotiating assistance
to Creditrust.
NOW, THEREFORE, the following is agreed.
SCOPE OF SERVICES
1. CHA shall provide financial negotiation and services for the financing by
Creditrust of one or more pools of credit card receivables. The services
provided hereunder shall include:
(a) Reopening of negotiations with Heartland Bank and representing
Creditrust in negotiations with Heartland Bank.
(b) Development of other financing sources as deemed appropriate between
Creditrust and CHA.
2. CHA is to act only at the specific direction and request of Creditrust in
any negotiations or introductions of the firm.
TERM
This agreement shall be effective for a nine (9) month term with respect to
the representation of Creditrust for financing purposes.
COMPENSATION
CHA shall be compensated at the rate of $175 per hour for the services of
Frederick W. Glassberg, $70 per hour for the services of accounting and
financial modeling staff, and $35 per hour for support staff for the services
set forth in the Scope of Services.
Additionally, CHA shall be compensated One Thousand Two Hundred Dollars
($1,200) per day for travel outside of the Baltimore Washington region, plus
travel expenses and other reimbursable expenses. CHA shall also be
reimbursed for all direct expenses
<PAGE>
incurred in this assignment at the costs incurred. CHA shall invoice within
twenty (20) days of presentation.
In addition to the above compensation, CHA shall receive a success fee equal
to one percent (1%) of any funds which become available to Creditrust through
the efforts or introductions of CHA. Such fee shall be due and payable upon
advancement of the funds arranged.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of
the day and month first above written.
CREDITRUST CORPORATION
By: /s/ Joseph K. Rensin
-----------------------------
Joseph K. Rensin
CRYSTAL HILL ADVISORS
By: /s/ Frederick W. Glassberg
-----------------------------
Frederick W. Glassberg
<PAGE>
Exhibit 10.14
INDENTURE AND SERVICING AGREEMENT
-------------
CREDITRUST SPV2, LLC,
as Issuer
and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
as Trustee and Backup Servicer of the Receivables
and
CREDITRUST CORPORATION,
as Servicer of the Receivables
and
ASSET GUARANTY INSURANCE COMPANY
as Note Insurer
Dated as of June 1, 1998
-------------
CREDITRUST RECEIVABLES-BACKED NOTES, SERIES 1998-1
-------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
I DEFINITIONS..............................................................................................1
1.01 Definitions............................................................................1
1.02 Interpretation........................................................................14
II CREATION OF TRUST ESTATE; CONVEYANCE OF RECEIVABLES; CUSTODY OF RECEIVABLE FILES........................15
2.01 Creation of Trust Estate; Conveyance of Receivables...................................15
2.02 Custody of Receivable Files...........................................................17
2.03 Acceptance By Trustee.................................................................17
2.04 Representations and Warranties of Issuer as to the Receivables........................17
2.05 Reacquisition of Receivables Upon Breach..............................................19
2.06 Duties of Servicer as Custodian.......................................................20
2.07 Instructions; Authority to Act........................................................21
2.08 Indemnification of Custodian..........................................................21
2.09 Effective Period and Termination......................................................21
2.10 Agent for Service.....................................................................21
2.11 Satisfaction and Discharge of Indenture...............................................22
2.12 Application of Trust Money............................................................22
III ADMINISTRATION AND SERVICING OF RECEIVABLES.............................................................23
3.01 Duties of Servicer....................................................................23
3.02 Collection of Receivable Payments.....................................................24
3.03 Covenants of Servicer.................................................................24
3.04 Purchase of Receivables Upon Breach and Other Events..................................25
3.05 Servicing Fee; Payment of Certain Expenses By Servicer................................26
3.06 Monthly Servicer Report; Servicer's Remittance Date Certificate......................26
3.07 Annual Statement as to Compliance; Notice of Default..................................26
3.08 Periodic Accountants Report...........................................................27
3.09 Quarterly Servicer's Compliance Report................................................28
3.10 Access to Certain Documentation and Information.......................................28
3.11 Reports to Noteholders, the Rating Agency and the Placement Agent.....................28
3.12 Tax Treatment.........................................................................29
IV THE ACCOUNTS; PAYMENTS; STATEMENTS TO NOTEHOLDERS.......................................................29
4.01 Accounts..............................................................................29
4.02 Collections...........................................................................30
4.03 Additional Deposits...................................................................30
4.04 Allocations and Payments..............................................................31
4.05 Reserve Account.......................................................................33
4.05A Note Payment Account..................................................................34
4.06 Statements to Noteholders.............................................................34
IVA THE POLICY..............................................................................................35
4A.01 The Policy............................................................................35
</TABLE>
i
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<TABLE>
<S> <C> <C>
4A.02 Claims Under Policy...................................................................35
4A.03 Surrender of Policy...................................................................36
4A.01 The Policy............................................................................36
V THE NOTES...............................................................................................37
5.01 The Notes.............................................................................37
5.02 Authentication and Delivery of the Notes..............................................37
5.03 Registration of Transfer and Exchange of Notes........................................38
5.04 Mutilated, Destroyed, Lost or Stolen Notes............................................41
5.05 Persons Deemed Owners.................................................................42
5.06 Access to List of Noteholders' Names and Addresses....................................42
5.07 Surrendering of Notes.................................................................42
5.08 Maintenance of Office or Agency.......................................................43
VI THE ISSUER..............................................................................................43
6.01 Representations of Issuer.............................................................43
6.02 Reacquisition of Receivables Upon Breach..............................................45
6.03 Liability of Issuer; Indemnities......................................................46
6.04 Merger or Consolidation of, or Assumption of the Obligations of, the Issuer;
Certain Limitations...................................................................46
6.05 Limitation on Liability of Issuer and Others..........................................47
6.06 Issuer May Own Notes..................................................................47
6.07 Covenants of Issuer...................................................................48
VII THE SERVICER............................................................................................49
7.01 Representations of Servicer...........................................................49
7.02 Liability of Servicer; Indemnities....................................................51
7.03 Merger or Consolidation of, or Assumption of the Obligations of, the Servicer.........52
7.04 Limitation on Liability of Servicer and Others........................................52
7.05 Servicer Not to Resign................................................................53
7.06 Backup Servicing......................................................................53
7.07 General Covenants of Servicer.........................................................54
VIII SERVICER DEFAULT; EVENTS OF DEFAULT SERVICER EVALUATION EVENT; REMEDIES.................................57
8.01 Servicer Default......................................................................57
8.02 Consequences of a Servicer Default....................................................59
8.03 Backup Servicer to Act; Appointment of Successor Servicer.............................60
8.04 Notification to Note Insurer, Noteholders, Rating Agency and Placement Agent..........61
8.05 Waiver of Past Servicer Defaults......................................................62
8.06 [Deleted].............................................................................62
8.07 Subservicers..........................................................................62
8.08 Events of Default.....................................................................63
8.09 Acceleration of Maturity; Rescission and Annulment....................................64
8.10 Collection of Indebtedness and Suits for Enforcement by Trustee.......................65
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
8.11 Remedies..............................................................................65
8.12 Trustee May File Proofs of Claim......................................................66
8.13 Trustee May Enforce Claims without Possession of Notes................................67
8.14 Application of Money Collected........................................................67
8.15 Limitation on Suits...................................................................67
8.16 Unconditional Rights of Noteholders to Receive Principal and Interest.................68
8.17 Restoration of Rights and Remedies....................................................68
8.18 Rights and Remedies Cumulative........................................................69
8.19 Delay or Omission Not Waiver..........................................................69
8.20 Control by Noteholders................................................................69
8.21 Waiver of Past Defaults...............................................................70
8.22 Undertaking for Costs.................................................................70
8.23 Waiver of Stay or Extension Laws......................................................70
8.24 Sale of Trust Estate..................................................................71
8.25 Action on Notes.......................................................................72
8.26 No Recourse to Other Trust Estates or Other Assets of the Issuer......................73
8.27 License...............................................................................73
IX THE TRUSTEE.............................................................................................73
9.01 Duties of Trustee.....................................................................73
9.02 Trustee's Certificate.................................................................75
9.03 Trustee's Assignment of Removed Receivables...........................................75
9.04 Certain Matters Affecting the Trustee.................................................76
9.05 Limitation on Trustee's Liability.....................................................77
9.06 Trustee May Not Own Notes.............................................................78
9.07 Trustee's Fees and Expenses...........................................................78
9.08 Indemnity of Trustee, Backup Servicers and Successor Servicer.........................79
9.09 Eligibility Requirements for Trustee..................................................79
9.10 Resignation or Removal of Trustee.....................................................80
9.11 Successor Trustee.....................................................................81
9.12 Merger or Consolidation of Trustee....................................................81
9.13 Appointment of Co-Trustee or Separate Trustee.........................................81
9.14 Representations and Warranties of Trustee.............................................83
9.15 Tax Returns...........................................................................84
9.16 Trustee May Enforce Claims Without Possession of Notes................................84
9.17 Suit for Enforcement..................................................................84
9.18 Rights of Note Insurer and Noteholders to Direct Trustee..............................85
9.19 Confidential Information..............................................................85
X REDEMPTION..............................................................................................86
10.01 Redemption at the Option of the Issuer; Election to Redeem............................86
10.02 Deposit of Redemption Amount..........................................................86
10.03 Notice of Redemption by the Trustee...................................................86
10.04 Surrendering of Notes.................................................................86
XI MISCELLANEOUS PROVISIONS................................................................................87
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
11.01 Amendment.............................................................................87
11.02 Protection of Title to Trust Estate...................................................88
11.03 Limitation of Rights of Noteholders...................................................90
11.04 Governing Law.........................................................................91
11.05 Notices...............................................................................91
11.06 Severability of Provisions; Counterparts..............................................91
11.07 Assignment............................................................................92
11.08 No Petition...........................................................................92
</TABLE>
iv
<PAGE>
This Indenture and Servicing Agreement, dated as of June 1, 1998 (the
"Agreement") is executed by and among Creditrust SPV2, LLC, as issuer (the
"Issuer"), Norwest Bank Minnesota, National Association, as trustee (in such
capacity, the "Trustee"), and as backup servicer (in such capacity, the "Backup
Servicer"), Creditrust Corporation, as servicer (the "Servicer") and Asset
Guaranty Insurance Company, as note insurer (the "Note Insurer").
In consideration of the mutual agreements herein contained, each party
agrees as follows for the benefit of the other parties and the Noteholders to
the extent provided herein:
ARTICLE I
DEFINITIONS
SECTION 1.01 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:
"Accounts" means the Collection Account, the Reserve Account and the
Note Payment Account.
"Accredited Investor" shall have the meaning assigned to such term in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act.
"Acquisition Payment" means, with respect to any Removed Receivable
acquired by the Issuer or the Servicer under this Agreement and as of the
Remittance Date on which the "Acquisition Payment" must be made, the excess, if
any, of (i) the product of the original Note Balance and a fraction, the
numerator of which is the Charged-Off Balance of such Receivable and the
denominator of which is the Charged-Off Balance of all the Receivables over (ii)
the product of the aggregate amount of all Net Proceeds collected, received or
otherwise recovered on and after the Closing Date with respect to such Removed
Receivable, and a factor equal to .80; in each case determined as of such
Remittance Date.
"Affiliate" means, 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" means this Indenture and Servicing Agreement, relating to
Creditrust Receivables-Backed Notes, Series 1998-1 dated as of June 1, 1998,
among Creditrust SPV2, LLC, as Issuer, Norwest Bank Minnesota, National
Association, as Trustee and Backup Servicer,
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<PAGE>
Creditrust Corporation, as Servicer, and Asset Guaranty Insurance Company, as
Note Insurer, as the same may be amended or supplemented from time to time.
"Applicants" shall have the meaning specified in Section 5.06.
"Asset Sale Agreement" means each asset sale agreement or receivables
purchase agreement entered into between Creditrust Corporation, or its
predecessor, Oxford Capital Corporation, and each Originating Institution in
connection with the purchase of Receivables from such Originating Institution.
"Available Funds" means, with respect to any Payment Date and the next
preceding Determination Date, the sum of (i) the Net Proceeds recovered with
respect to each Receivable and received in the Collection Account during the
Collection Period then most recently concluded, plus (ii) all available funds on
deposit in the Collection Account (other than Net Proceeds of Receivables) as of
the opening of business of the Trustee on such Determination Date.
"Backup Servicer" means Norwest Bank Minnesota, National Association.
"Backup Servicing Fee" means the fee payable to the Backup Servicer on
each Payment Date for services rendered pursuant to this Agreement, which shall
be equal to $3,500 per month; provided, however, that with respect to the
initial Payment Date, the Backup Servicing Fee shall be (i) $3,500 times (ii) a
fraction, the numerator of which is the number of days from and including the
Closing Date through June 30, 1998, and the denominator of which is 30.
"Business Day" means any day other than a Saturday, a Sunday or a day
on which banking institutions in the State of Maryland, the State of Minnesota
or the State of New York are required or authorized by law, regulation,
executive order or governmental decree to be closed.
"Charged-Off Balance" means, with respect to each Receivable, the
original charged-off balance as set forth in the Schedule of Receivables.
"Closing Date" means June 19, 1998.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collection Account" means the segregated account or accounts, each of
which shall be an Eligible Account, established and maintained pursuant to
Section 4.01 and entitled "Norwest Bank Minnesota, National Association, as
Trustee for Creditrust Receivables-Backed Notes, Series 1998 -1 Collection
Account."
2
<PAGE>
"Collection Period" means, with respect to any Remittance Date,
Determination Date or Payment Date, the period beginning on the first day of the
calendar month immediately preceding the month in which such Remittance Date,
Determination Date or Payment Date occurs and ending on the last day of such
calendar month; provided, however, that the initial Collection Period begins on
the Closing Date.
"Controlling Party" means, prior to an Insurer Default, the Note
Insurer, and on and after an Insurer Default, the Noteholders with Voting
Interest in excess of 50% of all outstanding Voting Interests.
"Corporate Trust Office" means the office of the Trustee at which at
any particular time its corporate trust business shall be principally
administered, which office at the date of execution of this Agreement is located
at Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479-0070,
Attention: Corporate Trust Services/Asset-Backed Administration.
"Customary Servicing Procedures" means the customary practices,
policies, standards and procedures of the Servicer relating to the collection of
comparable defaulted consumer receivables that it services for itself or others,
in each case as in effect on the Closing Date (which include backup servicing
files and disaster recovery plans), as the same may be modified by the Servicer
from time to time thereafter) with, in each case, prompt notice to Note Insurer.
"Cut-Off Date" means April 30, 1998.
"Determination Date" means, with respect to any Payment Date, the
second Business Day next preceding such Payment Date.
"Eligible Account" means (A) a 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 FDIC, the
unsecured and uncollateralized debt obligations of which shall be rated "AA" or
better by the Required Rating Agencies then providing a long term debt rating
for such institution and in the highest available short term rating category by
the Required Rating Agencies then providing a short term debt rating for such
institution, 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, or (iv) a principal subsidiary of a bank holding
company, or (B) a segregated trust account (which shall be a "special deposit
account") maintained in the trust department of a federal or state chartered
depository institution or trust company, having capital and surplus of not less
than $50,000,000, acting in its fiduciary capacity. Any Eligible Accounts
maintained with the Trustee shall conform to the preceding clause (B). Any
Account maintained at an institution other than the Trustee must be subject to
an agreement with such institution among Servicer, Issuer and Trustee which must
be satisfactory to Note Insurer in form and substance.
3
<PAGE>
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Event of Default" shall have the meaning specified in Section 8.08.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FDIC" means the Federal Deposit Insurance Corporation, and its
successors.
"Final Payment Date" shall mean the earlier of July 10, 2003 or (ii)
the Payment Date which follows the Payment Date on which all proceeds of a sale
of the Trust Estate pursuant to Section 8.24(f) were distributed.
"Financial Intermediary" shall mean a financial intermediary for the
Trustee as such term is defined in Section 8-313(4) of the UCC.
"FNMA" means the Federal National Mortgage Association, and its
successors.
"GAAP" means generally accepted accounting principles that are (i)
consistent with the principles promulgated or adopted by the Financial
Accounting Standards Board and its predecessors, as in effect from time to time,
and (ii) consistently applied with past financial statements of the Servicer and
its subsidiaries; provided that a certified public accountant would, insofar as
the use of such accounting principles is pertinent, be in a position to deliver
an unqualified opinion (other than a qualification regarding changes in
generally accepted accounting principles) as to financial statements in which
such principles have been properly applied.
"Independent Manager" means a manager of the Issuer (a) who is not (i)
a manager, officer or employee of any Affiliate of its members, (ii) a natural
person related to any manager or officer of any Affiliate of its members, (iii)
a holder (directly or indirectly) of any voting securities of any Affiliate of
the Issuer, or (iv) a natural person related to a holder (directly or
indirectly) of any voting securities of any Affiliate of its members, and (b)
who has (i) prior experience as an independent director for a corporation or
similar entity whose charter documents require the unanimous written consent of
all independent directors or managers thereof before such entity could consent
to the institution of bankruptcy or insolvency proceedings against it or could
file a petition seeking relief under any applicable federal or state law
relating to bankruptcy, and (ii) at least three years of employment experience
with one or more entities that provide, in the ordinary course of their
respective businesses, advisory, management or placement services to issuers of
securitization or structured finance instruments, agreements or securities.
"Insolvency Event" means, with respect to a specified Person, (a) the
filing of a decree or order for relief by a court having jurisdiction in the
premises in respect of such Person or any
4
<PAGE>
substantial part of its property in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or the
filing of a petition against such Person in an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, which case remains unstayed and undismissed within 30 days of such
filing, or the appointing of a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official for such Person or for any substantial
part of its property, or the ordering of the winding-up or liquidation of such
Person's business; or (b) the commencement by such Person of a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or the consent by such Person to the entry of an order for
relief in an involuntary case under any such law, or the consent by such Person
to the appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official for such Person or for any
substantial part of its property, or the making by such Person of any general
assignment for the benefit of creditors, or the failure by such Person generally
to pay its debts as such debts become due or the admission by such Person of its
inability to pay its debts generally as they become due.
"Insolvency Proceeding" means any proceeding of the sort described in
the definition of Insolvency Event.
"Insurance Agreement" means the Insurance and Reimbursement Agreement
between the Servicer, the Issuer and Asset Guaranty Insurance Company, dated as
of the Closing Date.
"Insurer Default" means the occurrence of any of the following:
(a) the Note Insurer shall fail to pay when, as and in
the amounts required, any amount payable under the Policy and such failure
continues unremedied for two Business Days; or
(b) (i) the Superintendent of Insurance of the State of
New York (or any Person succeeding to the duties of such Superintendent) (for
the purpose of this paragraph (b), the "Superintendent") shall apply for an
order (A) pursuant to Section 7402 of the New York Insurance Law (or any
successor provisions thereto), directing him to rehabilitate the Note Insurer,
(B) pursuant to Section 7404 of the New York Insurance Law (or any successor
provision thereto), directing him to liquidate the business of the Note Insurer
or (C) pursuant to Section 7416 of the New York Insurance Law (or any successor
provision thereto), dissolving the corporate existence of the Note Insurer and
such application shall not be dismissed or withdrawn during a period of 60
consecutive days or a court of competent jurisdiction enters an order granting
the relief sought; (ii) the Superintendent shall determine that the Note Insurer
is insolvent within the meaning of Section 1309 of the New York Insurance Law;
(iii) the Note Insurer shall commence a voluntary case or other proceeding
seeking rehabilitation, liquidation, reorganization or other relief with respect
to itself or its debts under any bankruptcy, insolvency or other similar law now
or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, or shall
5
<PAGE>
consent to any such relief or to the appointment of or taking possession by any
such official in an involuntary case or other proceeding commenced against it,
or shall make a general assignment for the benefit of creditors; or (iv) an
involuntary case or other proceeding shall be commenced against the Note Insurer
seeking rehabilitation, liquidation, reorganization or other relief with respect
to it or its debts under a bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property and such case or proceeding is not dismissed or otherwise
terminated within a period of 60 consecutive days or a court of competent
jurisdiction enters an order granting the relief sought in such case or
proceeding.
"Interest Carryover Shortfall" means, with respect to any Payment Date,
the excess, if any, of (i) the Interest Distributable Amount for such Payment
Date and all prior Payment Dates, over (ii) the amount of interest, if any,
actually paid to Noteholders on such Payment Date and all prior Payment Dates.
"Interest Distributable Amount" means, with respect to any Payment
Date, the product of (A) one-twelfth of the Note Rate and (B) the Note Balance
as of the immediately preceding Payment Date (after giving effect to payments in
reduction of the Note Balance made on such immediately preceding Payment Date,
if any) or, in the case of the initial Payment Date, the Original Note Balance;
provided, however, that with respect to the initial Payment Date, the amount
calculated in accordance with the preceding clause shall be multiplied by a
fraction, the numerator of which is the number of days from and including the
Closing Date through and including June 30, 1998 and the denominator of which is
30.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"Issuer" means Creditrust SPV2, LLC, in its capacity as issuer of the
Notes pursuant to this Agreement, and each successor thereto (in the same
capacity) pursuant to Section 6.04.
"Lien" means any security interest, lien, charge, pledge, equity or
encumbrance of any kind.
"Monthly Servicer Report" means an Officer's Certificate of the
Servicer completed and executed pursuant to Section 3.06(a), substantially in
the form attached hereto as Exhibit A.
"Nationally Recognized Statistical Rating Agency" means each of Duff &
Phelps Credit Rating Co., Fitch IBCA, Inc., Moody's Investors Service, Inc. and
Standard & Poor's Ratings Services, or any successor thereto.
"Net Proceeds" means, with respect to a Receivable, all monies in
available funds collected, received or otherwise recovered from or for the
account of the related Obligor on such Receivable. Third-Party Fees incurred in
connection with collecting a Receivable will be
6
<PAGE>
deducted from collections on such Receivable by such third parties or by the
Servicer on their behalf and will not constitute Net Proceeds.
"Note" means one of the 6.43% Creditrust Receivables-Backed Notes,
Series 1998-1 executed by the Issuer and authenticated by the Trustee in
substantially the form attached hereto as Exhibit C.
"Note Balance" shall initially equal, on the Closing Date, the Original
Note Balance and, as of any subsequent date of determination, shall equal the
Original Note Balance less all amounts paid to Noteholders on previous Payment
Dates and applied in reduction of the Note Balance.
"Note Insurer" means Asset Guaranty Insurance Company.
"Note Insurer Obligations" means all amounts from time to time payable
to the Note Insurer hereunder, under the Premium Letter or under the Insurance
Agreement, whether constituting principal or interest, whether fixed or
contingent, and howsoever arising (including, without limitation, all
Reimbursement Obligations, and any and all such interest, premiums, fees and
other obligations that accrue after the commencement of an Insolvency
Proceeding, in each such case whether or not allowed as a claim in such
Insolvency Proceeding).
"Note Insurer Premium" means the premium payable to the Note Insurer in
respect of the Policy, in an amount equal to the product of (i) one-twelfth of a
per annum rate equal to the Premium Rate, and (ii) the Note Balance as of the
preceding Payment Date after giving effect to any distributions applied to the
Note Balance on such Payment Date, except that with respect to the initial
Payment Date, the premium shall be equal to the product of (i) one-twelfth of
the Premium Rate, and (ii) the Original Note Balance and (iii) a fraction, the
numerator of which is the number of days in June, 1998 commencing on and
including the Closing Date, and the denominator of which is 30.
"Note Payment Account" means the segregated account or accounts, each
of which shall be an Eligible Account, established and maintained pursuant to
Section 4.01 and entitled "Norwest Bank Minnesota, National Association, as
Trustee for Creditrust Receivables-Backed Notes, Series 1998 -1, Note Payment
Account."
"Note Rate" means 6.43% per annum, calculated on the basis of a 360-day
year consisting of 12 30-day months.
"Note Register" means the register maintained pursuant to Section 5.03.
"Note Registrar" means the Trustee unless a successor thereto is
appointed pursuant to Section 5.03. The Note Registrar initially designates its
offices at Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479-0070
as its offices for purposes of Section 5.07.
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"Noteholder" means the Person in whose name a Note is registered in the
Note Register, except that, solely for the purposes of giving certain consents,
waivers, requests or demands pursuant to this Agreement the interests evidenced
by any Note registered in the name of, or in the name of a Person or entity
holding for the benefit of, the Issuer, the Servicer or any Person actually
known to a Responsible Officer of the Trustee to be controlling, controlled by
or under common control with the Issuer or the Servicer, shall not be taken into
account in determining whether the requisite percentage necessary to effect any
such consent, waiver, request or demand shall have been obtained.
"Obligor" on a Receivable means any Person who owes or may be liable
for payments under such Receivable.
"Officer's Certificate" means a certificate signed by a Responsible
Officer of the Issuer or the Servicer, as the case may be, and delivered to the
Trustee and the Note Insurer.
"Opinion of Counsel" means a written opinion of counsel, who may be an
employee of or outside counsel to the Person responsible for providing such
opinion, and which opinion shall be reasonably acceptable to the Trustee, the
Note Insurer and the other recipients thereof.
"Original Note Balance" means $14,500,000.
"Originating Institution" means any of the banking institutions and
merchants that originated any of the Receivables and their assignees, and it
includes Heartland Bank with respect to the Receivables purchased by Servicer
from Heartland Bank.
"Payment Date" means the tenth day of each calendar month or, if such
day is not a Business Day, the next succeeding Business Day, commencing July 10,
1998.
"Permitted Investments" means, at any time, any one or more of the
following obligations and securities:
(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 or the District of Columbia ,
which are then rated the highest available credit rating for such
obligations by the Required Rating Agencies then providing such a
rating;
(iii) certificates of deposit issued by any depository
institution or trust company (including the Trustee) incorporated under
the laws of the United States or of
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any state thereof, the District of Columbia and subject to supervision
and examination by banking authorities of one or more of such
jurisdictions, provided that the short-term unsecured debt obligations
of such depository institution or trust company are then rated the
highest available credit rating for such obligations by the Required
Rating Agencies then providing such a rating;
(iv) repurchase obligations held by the Trustee that are
acceptable to the Trustee with respect to any security described in
clauses (i) or (ii) hereof or any other security issued or guaranteed
by any other agency or instrumentality of the United States, in either
case entered into with a federal agency or a depository institution or
trust company (acting as principal) described in clause (iii) above,
provided that the party agreeing to repurchase such obligations shall
have the highest available short-term debt rating from the Required
Rating Agencies then providing such a rating; and
(v) freely redeemable shares in money market funds (including
such funds for which the Trustee or an Affiliate of the Trustee serves
as an investment advisor, administrator, shareholder, servicing agent
and/or custodian or subcustodian) which invest solely in the types of
instruments and obligations described in clauses (i) through (iv)
above, so long as such shares of such funds are then rated in the
highest available rating category for money market funds by the
Required Rating Agencies then providing such a rating and
notwithstanding that (i) the Trustee or an Affiliate of the Trustee may
charge and collect fees and expenses from such funds for services
rendered, (ii) the Trustee charges and collects fees and expenses for
services rendered pursuant to this Agreement and (iii) services
performed for such funds and pursuant to this Agreement may converge at
any time. Each of the Issuer and the Servicer hereby specifically
authorizes the Trustee or an Affiliate of the Trustee to charge and
collect all fees and expenses from such funds for services rendered to
such funds, in addition to any fees and expenses the Trustee may charge
and collect for services rendered pursuant to this Agreement;
provided that each of the foregoing investments described in clauses (i) through
(iv) above 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 related
Account is located is the obligor, which may mature on the related Payment
Date), and shall be required to be held to such maturity; and provided further
that each of the Permitted Investments may be purchased by the Trustee through
an Affiliate of the Trustee.
Notwithstanding anything to the contrary contained in this definition,
(a) no Permitted Investment may be purchased at a premium, (b) any of the
foregoing which constitutes a certificated security shall not be considered a
Permitted Investment unless it is registered in the name of the Trustee in its
capacity as such, and (c) any of the foregoing which constitutes an
uncertificated security shall not be considered a Permitted Investment unless
(i) it is registered in
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the name of the Trustee in its capacity as such or in the name of its Financial
Intermediary, (ii) no notation of the right of the issuer thereof to a Lien
thereon is contained in the initial transaction statement therefor sent to the
Trustee, (iii) a Responsible Officer of the Trustee does not have notice or
actual knowledge of (A) any restriction on the transfer thereof imposed by the
issuer thereof, or (B) any adverse claims, and no notation of any such
restriction or of any specific adverse claim as to which the Issuer has a duty
under the law of the state in which the Corporate Trust Office is located at the
time of registration is contained in the initial transaction statement therefor
sent to the Trustee; and (iv) to the actual knowledge of a Responsible Officer
of the Trustee, no creditor has served legal process upon the issuer thereof at
its chief executive office in the United States which legal process attempts to
place a Lien thereon prior to the registration thereof in the name of the
Trustee.
"Person" means 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
"Placement Agent" means Rothschild Inc.
"Policy" means the Financial Guaranty Insurance Policy issued pursuant
to the Insurance Agreement.
"Premium Letter" means the letter agreement between the Note Insurer
and the Issuer, dated as of the Closing Date.
"Premium Rate" has the meaning assigned to such term in the Premium
Letter.
"Proprietary Information" shall have the meaning specified in Section
9.19.
"Purchaser" means Creditrust SPV2, LLC, in its capacity as transferee
of the Receivables under the Receivables Contribution Agreement.
"Qualified Institutional Buyer" have the meaning assigned to such term
in Rule 144A under the Securities Act.
"Rating Agency" means Standard & Poor's Rating Services, a division of
McGraw-Hill Companies, Inc.
"Receivable" means any receivable generated on a credit card account,
revolving account, or installment account and identified in the Schedule of
Receivables.
"Receivable File" means the documents described in Section 2.02
pertaining to a particular Receivable.
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"Receivables Contribution Agreement" means that certain Receivables
Contribution Agreement, dated as of the Closing Date, between the Seller and the
Purchaser.
"Record Date" means, with respect to each Payment Date, the last
Business Day of the calendar month immediately preceding the month in which such
Payment Date occurs. Any amount stated "as of a Record Date" or "on a Record
Date" shall give effect to all applications of collections, and all payments to
any party under this Agreement or to the related Obligor, as the case may be, in
each case as determined as of the opening of business of the Note Registrar on
the related Record Date.
"Redemption Amount" means, with respect to a redemption of the Notes by
the Issuer pursuant to Section 10.01, an amount equal to the sum of (i) the Note
Balance as of the date the Issuer elects to redeem the Notes, (ii) all accrued
and unpaid interest on the Notes through and including the end of the Collection
Period immediately preceding the Payment Date as of which such redemption will
occur, and (iii) all outstanding Note Insurer Obligations then due and payable.
"Reimbursement Obligations" means the sum of (i) each payment made
under the Policy and (ii) interest on any payment made under the Policy from the
date of the payment until the date the Note Insurer is repaid, in full and in
cash, at an annual rate equal to the "Prime Rate" (as hereinafter defined) plus
1% (calculated on the basis of the actual number of days elapsed in a 360 day
year). The term "Prime Rate" means the interest rate published in the "Money
Rates" column in The Wall Street Journal and referred to therein as the "Prime
Rate;" any change in such Prime Rate shall correspondingly change the interest
rate as of the date of any such change.
"Remittance Date" means, with respect to any Payment Date, the third
Business Day next preceding such Payment Date.
"Removed Receivable" means a Receivable which the Servicer is obligated
to acquire pursuant to Section 3.04, the Issuer is obligated to reacquire
pursuant to Section 2.05 or 6.02, or the Issuer has elected to reacquire
pursuant to Section 10.01.
"Required Rating Agencies" means with respect to any debtor or
indebtedness the Rating Agency and one other Nationally Recognized Statistical
Rating Agency; provided that none of the other such Nationally Recognized
Statistical Rating Agencies has given a lower rating to the relevant debtor or
indebtedness than the Rating Agency and such other Nationally Recognized
Statistical Rating Agency.
"Required Reserve Amount" means the amount required to be maintained on
deposit in the Reserve Account for so long as the Notes are outstanding. The
amount is $435,000 on the Closing Date and thereafter shall be maintained at all
times at the greater of (a) three percent (3%) of the Note Balance outstanding
at such time and (b) $290,000.
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"Reserve Account" means the segregated account or accounts, each of
which shall be an Eligible Account, established and maintained pursuant to
Section 4.01 and entitled "Norwest Bank Minnesota, National Association, as
Trustee for Creditrust Receivables-Backed Notes, Series 1998-1, Reserve
Account."
"Reserve Fund Reimbursement Amount" means, with respect to any Payment
Date, the excess of the Required Reserve Amount over the amount then on deposit
in the Reserve Account.
"Responsible Officer" means,
(i) when used with respect to the Trustee, any officer within
the Corporate Trust Office of the Trustee, including any vice
president, assistant vice president, assistant treasurer, assistant
secretary or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated
officers and also, with respect to a particular matter, any other
officer to whom such matter is referred because of such officer's
knowledge of and familiarity with such particular subject, and
(ii) when used with respect to the Issuer or the Servicer, the
president or the chief financial officer of the Issuer or the Servicer,
as the case may be.
"Sale" shall have the meaning specified in Section 8.24.
"Schedule of Receivables" means the CD-ROM containing a true and
complete list of all of the Receivables, delivered to the Trustee and
incorporated by reference herein as Schedule A.
"Securities Act" means the Securities Act of 1933, as amended.
"Seller" means Creditrust Corporation, in its capacity as transferor of
the Receivables under the Receivables Contribution Agreement.
"Servicer" means Creditrust Corporation, in its capacity as servicer of
the Receivables pursuant to this Agreement, and each successor thereto (in the
same capacity) appointed pursuant to Section 8.03.
"Servicer Default" shall have the meaning specified in Section 8.01.
"Servicer's Remittance Date Certificate" means an Officer's Certificate
of the Servicer completed and executed pursuant to Section 3.06(b) and delivered
to the Trustee, in each case specifying Removed Receivables in respect of which
the making of an Acquisition Payment is required hereunder, prepared by the
Servicer as of the opening of business of the Trustee on each applicable
Remittance Date.
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"Servicing Fee" means the fee payable to the Servicer on each Payment
Date, calculated pursuant to Section 3.05, for services rendered during the
related Collection Period, which shall be, for any Payment Date, equal to 20% of
all Net Proceeds collected, received or otherwise recovered from or for the
account of the Obligors during such Collection Period. The term "Servicing Fee"
shall also mean the additional amounts payable for servicing pursuant to Section
8.03.
"Subservicers" shall have the meaning specified in Section 8.07.
"Successor Servicer" means any entity appointed as a successor to the
Servicer pursuant to Section 8.03.
"Third-Party Fees" means, with respect to a Receivable, the amount of
any fees and compensation paid to unrelated third-parties (generally,
contingency fee lawyers) 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.
"Transaction Documents" means, collectively, this Agreement, the
Receivables Contribution Agreement, the Notes, the Policy, the Insurance
Agreement, the Premium Letter, and each of the other documents, instruments and
agreements entered into in connection with any of the foregoing or the
transactions contemplated thereby.
"Transition Fees" shall have the meaning specified in Section 8.02.
"Trust Estate" or "Creditrust Receivables-Backed Notes, Series 1998-1
Trust Estate" means the trust estate established under this Agreement for the
benefit of the Noteholders and the Note Insurer, which consists of the property
described in Section 2.01(b).
"Trust Property" means the property, or interests in property,
constituting the Trust Estate from time to time.
"Trustee" means Norwest Bank Minnesota, National Association, and any
successor trustee appointed pursuant to Section 9.11.
"Trustee Fee" means the fee payable to the Trustee on each Payment Date
for services rendered under this Agreement, which shall be equal to $1,000 per
month, provided, however, that with respect to the initial Payment Date, the
Trustee Fee shall be (i) $1,000 times (ii) a fraction, the numerator of which is
the number of days from and including the Closing Date through June 30, 1998,
and the denominator of which is 30.
"Trustee's Certificate" means a certificate completed and executed by a
Responsible Officer of the Trustee pursuant to Section 9.02 or 9.03,
substantially in the form attached hereto as Exhibit B.
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"UCC" means the Uniform Commercial Code as in effect in the State of
Maryland.
"United States" means the United States of America.
"vice president" of any Person means any vice president of such Person,
whether or not designated by a number or words before or after the title "Vice
President," who is a duly elected officer of such Person.
"Voting Interests" means the aggregate voting power evidenced by the
Notes, corresponding to the outstanding Note Balance of the Notes held by
individual Noteholders; provided, however, that where the Voting Interests are
relevant in determining whether the vote of the requisite percentage of
Noteholders necessary to effect any consent, waiver, request or demand shall
have been obtained, the Voting Interests shall be deemed to be reduced by the
amount equal to the Voting Interests (without giving effect to this provision)
represented by the interests evidenced by any Note registered in the name of, or
in the name of a Person or entity holding for the benefit of, the Issuer, the
Servicer or any Person actually known to a Responsible Officer of the Trustee to
be an Affiliate of either or both of the Issuer and the Servicer.
SECTION 1.02 Interpretation.
Unless otherwise indicated in this Agreement:
(a) reference to and the definition of any document (including this
Agreement) shall be deemed a reference to such document as it may be amended or
modified from time to time;
(b) all references to an "Article," "Section," "Schedule" or "Exhibit"
are to an Article or Section hereof or to a Schedule or an Exhibit attached
hereto;
(c) defined terms in the singular shall include the plural and vice
versa, and the masculine, feminine or neuter gender shall include all genders;
(d) 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;
(e) in the computation of periods of time from a specified date to a
later specified date, the word "from" means "from and including" and the words
"to" and "until" each means "to but excluding";
(f) periods of days referred to in this Agreement shall be counted in
calendar days unless Business Days are expressly prescribed and references in
this Agreement to months and years shall be to calendar months and calendar
years unless otherwise specified;
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(g) accounting terms not otherwise defined herein and accounting terms
partly defined herein to the extent not defined, shall have the respective
meanings given to them under GAAP; and
(h) the headings in this Agreement are for the purpose of reference
only and do not limit or affect its meaning.
ARTICLE II
CREATION OF TRUST ESTATE; CONVEYANCE OF
RECEIVABLES; CUSTODY OF RECEIVABLE FILES
SECTION 2.01 Creation of Trust Estate; Conveyance of Receivables.
(a) Upon the execution of this Agreement by the parties hereto, there
is hereby created for the benefit of the Noteholders and the Note Insurer the
Creditrust Receivables-Backed Notes, Series 1998-1 Trust Estate. The Issuer,
pursuant to the mutually agreed upon terms contained in this Agreement, shall
transfer, assign and otherwise convey to the Trustee on behalf of the
Noteholders and the Note Insurer, without recourse (but subject to the Issuer's
obligations in this Agreement for so long as the Notes remain outstanding), all
of its right, title and interest in and to the Receivables and any proceeds
related thereto, including such other items as shall be specified in this
Agreement.
(b) In consideration of the Trustee's delivery to the Issuer of
authenticated Notes, in authorized denominations, in an aggregate amount equal
to the Original Note Balance, the Issuer does hereby transfer, assign and
otherwise convey to the Trustee, in trust for the benefit of the Noteholders and
the Note Insurer, without recourse (but subject to the Issuer's obligations
herein for so long as the Notes remain outstanding):
(i) all right, title and interest of the Issuer in and to
the Receivables and all monies due thereon or paid thereunder or in respect
thereof on and after the Closing Date (including any Acquisition Payments made
with respect to Removed Receivables reacquired by the Issuer pursuant to Section
2.05 or 6.02 or Removed Receivables acquired by the Servicer pursuant to Section
3.04), net of any Third-Party Fees;
(ii) the rights of the Issuer as Purchaser under the
Receivables Contribution Agreement to enforce the obligations of the Seller
thereunder;
(iii) the Collection Account, the Note Payment Account and
the Reserve Account, and all monies, securities, instruments, accounts, general
intangibles, chattel paper, financial assets, investment property and other
property on deposit or credited to the Collection Account, the Note Payment
Account, and the Reserve Account from time to time (whether or not
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constituting or derived from payments, collections or recoveries received, made
or realized in respect of the Receivables);
(iv) all right, title and interest of the purchaser in, to
and under each Asset Sale Agreement, and all related documents, instruments and
agreements pursuant to which the Seller acquired, or acquired an interest in,
any of the Receivables from an Originating Institution;
(v) all payments due under the Policy;
(vi) all books, records and documents relating to the
Receivables in any medium, including without limitation paper, tapes, disks and
other electronic media;
(vii) all other monies, securities, reserves and other
property now or at any time in the possession of the Trustee or its bailee,
agent or custodian and relating to any of the foregoing; and
(viii) all proceeds, products, rents and profits of any of
the foregoing and all other amounts payable in respect of the foregoing;
including, without limitation, proceeds of insurance policies insuring any of
the foregoing or any indemnity or warranty payable by reason of loss or damage
to or otherwise in respect of any of the foregoing.
(c) The parties hereto intend that the transfer, assignment and
conveyance contemplated by this Agreement shall give the Trustee on behalf of
the Noteholders and the Note Insurer a first priority perfected security
interest in, to and under the Receivables, any other property conveyed hereunder
as a part of the Trust Estate and all proceeds of any of the foregoing. This
Agreement shall be deemed to be the grant of a security interest from the Issuer
to the Trustee on behalf of the Noteholders and the Note Insurer, and the
Trustee on behalf of the Noteholders and the Note Insurer shall have all the
rights, powers and privileges of a secured party under the UCC. The Issuer
agrees to execute and file all filings (including filings under the UCC) and
take all other actions reasonably necessary in any jurisdiction to provide third
parties with notice of the transfer, assignment and conveyance of the
Receivables pursuant to this Agreement and to perfect such transfer, assignment
and conveyance under the UCC.
(d) In connection with the foregoing conveyance, the Issuer shall
ensure that, from and after the time of conveyance of the Trust Estate to the
Trustee on behalf of the Noteholders and the Note Insurer under this Agreement,
the master computer records (including any back-up archives) maintained by or on
behalf of the Issuer that refer to any Receivable indicate clearly the interest
of the Trustee in such Receivable and that the Receivable has been transferred,
assigned and conveyed to the Trustee on behalf of the Noteholders and the Note
Insurer. Indication of the interest of the Trustee in a Receivable shall be
deleted from or modified on such computer records when, and only when, the
Receivable has been paid in full or has been acquired, assigned or released
pursuant to this Agreement.
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SECTION 2.02 Custody of Receivable Files.
In order to assure uniform quality in servicing the Receivables and to
reduce administrative costs, the Trustee on behalf of the Noteholders and the
Note Insurer, upon the execution and delivery of this Agreement, revocably
appoints the Servicer, and the Servicer accepts such appointment, to act as the
agent of the Trustee as custodian of the following documents and instruments
relating to each Receivable:
(i) the related Asset Sale Agreement;
(ii) any other documents received from or made available by
the related Originating Institution in respect of such Receivable;
(iii) a copy of the marked computer records indicating the
interest of the Trustee on behalf of the Noteholders and the Note Insurer, as
evidenced by the Schedule of Receivables; and
(iv) any and all other documents that the Issuer or the
Servicer, as the case may be, shall keep on file, in accordance with its
customary procedures, relating to such Receivable or the related Obligor.
SECTION 2.03 Acceptance By Trustee.
The Trustee hereby acknowledges its acceptance, on behalf of the
Noteholders and the Note Insurer, pursuant to this Agreement, of all right,
title and interest in and to the Receivables and the other Trust Property
conveyed by the Issuer pursuant to this Agreement, and declares and shall
declare from and after the date hereof that the Trustee, on behalf of the
Noteholders and the Note Insurer, holds and shall hold such right, title and
interest, pursuant to the trusts set forth in this Agreement.
SECTION 2.04 Representations and Warranties of Issuer as to the
Receivables.
The Issuer does hereby make the following representations and
warranties as of the Closing Date on which the Trustee is relying in accepting
the Receivables and the other Trust Property and authenticating the Notes:
(a) Characteristics of Receivables. Each Receivable is payable in
United States dollars, has been purchased by Creditrust Corporation, or its
predecessor, Oxford Capital Corporation, from the related Originating
Institution under an Asset Sale Agreement with such Originating Institution, and
has been subsequently transferred, assigned and conveyed by the Seller to the
Issuer pursuant to the Receivables Contribution Agreement.
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(b) Schedule of Receivables. The information set forth in the Schedule
of Receivables is true and correct in all material respects as of the close of
business on the Cut-Off Date, and the Issuer owned no other Receivables as of
the Cut-Off Date.
(c) No Government Obligors. None of the Receivables are due from the
United States or any state or local government, or from any agency, department
or instrumentality of the United States or any state or local government.
(d) Employee Obligors. None of the Receivables are due from any
employee of the Seller (or its predecessor, Oxford Capital Corporation), the
Issuer or any of their respective affiliates.
(e) Good Title. No Receivable has been transferred, assigned, conveyed
or pledged by the Issuer to any Person other than the Trustee. Immediately prior
to the transfer and assignment herein contemplated, the Issuer had good and
marketable title to each Receivable, free and clear of all Liens and rights of
others; immediately upon the transfer and assignment thereof, the Trustee on
behalf of the Noteholders and the Note Insurer shall have good and marketable
title to, or a first priority perfected security interest in, each Receivable,
free and clear of all Liens and rights of others; and the transfer and
assignment herein contemplated has been perfected under the UCC and any other
applicable law.
(f) No Impairment of Rights. As of the Closing Date, the Issuer has not
taken any action that, or failed to take any action the omission of which, would
impair the rights of the Trustee or the Noteholders or the Note Insurer with
respect to any Receivable; provided, however, that the writing down of any
Receivable balance in accordance with Customary Servicing Procedures shall not
be deemed an impairment of the rights of any of the Trustee, the Noteholders or
the Note Insurer.
(g) No Fraudulent Use. As of the Closing Date, no Receivable has been
identified by the Issuer or reported to the Issuer by the related Originating
Institution as having resulted from fraud perpetrated by any Person with respect
to the related account.
(h) All Filings Made. All filings (including UCC filings) necessary in
any jurisdiction to provide third parties with notice of the transfer and
assignment herein contemplated, to perfect the transfer, assignment and
conveyance of the Receivables from the Issuer to the Trustee and to give the
Trustee on behalf of the Noteholders and the Note Insurer a first priority
perfected security interest in the Receivables shall have been made.
(i) UCC Status. No Receivable is secured by "real property" or
"fixtures" or evidenced by an "instrument" under and as defined in the UCC.
(j) Location of Receivable Files. As of the Closing Date each
Receivable File is kept by the Servicer at its offices at 7000 Security Blvd.,
Baltimore, MD 21244.
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SECTION 2.05 Reacquisition of Receivables Upon Breach.
Upon discovery by the Issuer or the Servicer or upon the actual
knowledge of a Responsible Officer of the Trustee of a breach of any of the
representations and warranties of the Issuer set forth in Section 2.04, the
party discovering such breach shall give prompt written notice to the others.
If, as a result of such breach, any Receivable is rendered uncollectible or the
Trustee's rights in, to or under such Receivable or the proceeds thereof are
impaired or such proceeds are not available for any reason to the Trustee free
and clear of any Lien, the Issuer shall reacquire from the Trustee such
Receivable and, if necessary, the Issuer shall enforce the obligation of the
Seller under the Receivables Contribution Agreement to reacquire such Receivable
from the Issuer, unless such breach shall have been cured within 30 days after
the earlier to occur of the discovery of such breach by the Issuer or receipt of
written notice of such breach by the Issuer, such that the relevant
representation and warranty shall be true and correct in all material respects
as if made on such day, and the Issuer shall have delivered to the Trustee, the
Note Insurer and each Noteholder an Officer's Certificate describing the nature
of such breach and the manner in which the relevant representation and warranty
became true and correct. This repurchase obligation shall pertain to all
representations and warranties of the Issuer contained in Section 2.04, whether
or not the Issuer has knowledge of the breach at the time of the breach or at
the time the representations and warranties were made. The Issuer will be
obligated to accept any reassignment of a Receivable as set forth above on the
Remittance Date following the date on which such reassignment obligation arises.
In consideration of the reacquisition of any such Receivable, on the Remittance
Date immediately following the date on which such reassignment obligation
arises, the Issuer shall remit the Acquisition Payment of such Receivable to the
Collection Account in the manner specified in Section 4.03.
Upon any such reacquisition, the Trustee on behalf of the Noteholders
and the Note Insurer shall, without further action, be deemed to transfer,
assign, set-over and otherwise convey to the Issuer, all right, title and
interest of the Trustee on behalf of the Noteholders in, to and under the
Removed Receivable so reacquired, all monies due or to become due with respect
thereto on the aforementioned Remittance Date and all proceeds thereof. The
Trustee shall execute such documents and instruments of transfer and assignment
and take such other actions as shall be reasonably requested by the Issuer to
effect the conveyance of such Receivable pursuant to this Section. The sole
remedies of the Trustee, the Noteholders and the Note Insurer with respect to a
breach of the Issuer's representations and warranties pursuant to Section 2.04
shall be to require the Issuer to reacquire the related Receivable pursuant to
this Section and to enforce the Issuer's obligation hereunder to enforce the
obligation of the Seller under the Receivables Contribution Agreement to
reacquire such Receivable from the Issuer. The Trustee shall have no duty to
conduct any affirmative investigation as to the occurrence of any condition
requiring the reacquisition of any Receivable pursuant to this Section, except
as otherwise provided in Section 9.02.
SECTION 2.06 Duties of Servicer as Custodian.
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(a) Safekeeping. The Servicer, in its capacity as custodian, shall hold
the Receivable Files in its possession from time to time on behalf of the
Trustee for the use and benefit of the Note Insurer and all present and future
Noteholders, and maintain such accurate and complete accounts, records and
computer systems pertaining to each Receivable File as shall enable the Trustee
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 or others. The
Servicer shall conduct, or cause to be conducted, periodic examinations of the
files of receivables owned or serviced by it, which shall include the 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 Trustee to verify the
accuracy of the Servicer's record keeping; provided however that the Trustee
shall be under no obligation to verify the accuracy of the Servicer's
record-keeping unless requested to do so in writing by the Note Insurer, the
Noteholders with Voting Interest in excess of 50% or the Rating Agency. Any such
written request shall specify in detail the procedures to be employed by the
Trustee. The Servicer shall promptly report to the Trustee 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 offices at 7000 Security Blvd., Baltimore, MD 21244,
or at such other office as shall be specified to the Trustee by 30 days' prior
written notice. The Servicer shall make available to the Trustee, the Note
Insurer and the Noteholders or their 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 two Business
Days' prior written notice for examination during normal business hours;
provided, however, that the Noteholders will only be entitled to the access
provided in this subclause (b) in the event of a Servicer Default.
(c) Release of Documents. Upon written instruction from the Trustee,
the Servicer shall release any document in the Receivable Files to the Trustee
or its agent or designee, as the case may be, at such place or places as the
Trustee may designate, as soon as practicable. Nothing in this Section shall
impair the obligation of the Servicer to observe any applicable law prohibiting
disclosure of information regarding the Obligors, which obligation shall be
evidenced by an Opinion of Counsel to such effect, and the failure of the
Servicer to provide access as provided in this Section as a result of such
obligation shall not constitute a breach of this Section. The Servicer shall not
be responsible for any loss occasioned by the failure of the Trustee to return
any document or any delay in doing so.
SECTION 2.07 Instructions; Authority to Act.
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The Servicer shall be deemed to have received proper instructions with
respect to the Receivable Files upon its receipt of written instructions signed
by a Responsible Officer of the Trustee. A certified copy of a bylaw or of a
resolution of the board of directors of the Trustee shall constitute conclusive
evidence of the authority of any such Responsible Officer to act and shall be
considered in full force and effect until receipt by the Servicer of written
notice to the contrary given by the Trustee.
SECTION 2.08 Indemnification of Custodian.
The Servicer, as custodian of the Receivable Files, shall indemnify the
Trustee for any and all liabilities, obligations, losses, compensatory damages,
payments, costs or expenses of any kind whatsoever (including reasonable
attorney's fees and expenses incurred in connection with defending against any
such claim) that may be imposed on, incurred or asserted against the Trustee as
the result of any improper act or omission in any way relating to the
maintenance and custody of the Receivable Files by the Servicer, as custodian;
provided, however, that the Servicer shall not be liable for any portion of any
such amount resulting from the willful misfeasance, bad faith or negligence of
the Trustee.
SECTION 2.09 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 the Servicer shall
resign as Servicer pursuant to Section 7.05 or if all of the rights and
obligations of the Servicer have been terminated pursuant to Section 8.02, the
appointment of the Servicer as custodian of the Receivable Files shall
immediately terminate. As soon as practicable after any termination of such
appointment, the Servicer shall deliver the Receivable Files to the Trustee or
its agent at such place or places as the Trustee may reasonably designate.
SECTION 2.10 Agent for Service.
The agent for service for the Issuer shall be its President whose
address is 7000 Security Boulevard, Baltimore, Maryland 21244, and the agent for
service for the Servicer shall be its president, whose address is 7000 Security
Boulevard, Baltimore, Maryland 21244.
SECTION 2.11 Satisfaction and Discharge of Indenture.
Whenever the following conditions shall have been satisfied:
(a) an amount sufficient to pay and discharge the outstanding Note
Balance, plus accrued and unpaid interest on the Notes, has been paid to the
Noteholders;
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(b) the Issuer has paid or caused to be paid all other sums payable
hereunder by the Issuer;
(c) the Issuer has paid or caused to be paid all Note Insurer
Obligations then outstanding to the Note Insurer; and
(d) the Issuer has delivered to the Trustee an Officers' Certificate of
the Issuer and an Opinion of Counsel each stating that all conditions precedent
herein provided for the satisfaction and discharge of this Agreement with
respect to the Notes and the Policy have been complied with;
then this Agreement and the lien, rights and interests created hereby shall
cease to be of further effect with respect to the Notes, and the Trustee shall,
at the expense of the Issuer, (i) execute and deliver all such instruments as
may be necessary to acknowledge the satisfaction and discharge of this Agreement
with respect to the Notes, (ii) pay, or assign or transfer and deliver, to the
Issuer, all cash, securities and other property held by it as part of the Trust
Estate or other assets remaining after satisfaction of the conditions specified
in clauses (a) and (b) above, and (iii) arrange for the cancellation, surrender
and termination of the Policy pursuant to the terms thereof and of the Insurance
Agreement.
Notwithstanding the satisfaction and discharge of this Agreement with
respect to the Notes, the obligations of the Issuer to the Trustee under Section
9.07, the obligations of the Trustee to the Issuer, the Servicer and to the
Noteholders and the Note Insurer under Section 4.04, the obligations of the
Trustee to the Noteholders and the Note Insurer under Section 2.12, and rights
to receive payments of principal of and interest on the Notes, and payment of
Note Insurer Obligations, and the rights, privileges and immunities of the
Trustee under Article IX, shall survive.
SECTION 2.12 Application of Trust Money.
All money deposited pursuant to Sections 4.02 and 4.03 shall be held in
trust and applied, in accordance with the provisions of the Notes, the Insurance
Agreement and this Agreement to the payment, to the Persons entitled thereto, of
the principal, interest, fees, costs and expenses for whose payment such money
has been deposited with the Trustee.
ARTICLE III
ADMINISTRATION AND SERVICING OF RECEIVABLES
SECTION 3.01 Duties of Servicer.
The Servicer, as agent for the Trustee, shall manage, service,
administer and make collections on and in respect of the Receivables with
reasonable care, using that degree of skill and attention that the Servicer
exercises with respect to all comparable defaulted consumer
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receivables that it services for itself or others (whether or not the Servicer
shall then be servicing comparable defaulted consumer receivables for itself or
others). 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, implementation of payment plans, sending payment information to
Obligors, reporting tax information to Obligors in accordance with its customary
practices, accounting for collections, publishing monthly and annual statements
to the Trustee with respect to payments, generating federal income tax
information and performing the other duties specified herein. In performing the
above-referenced services, the Servicer shall perform in accordance with
Customary Servicing Procedures 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.
Without limiting the generality of the foregoing, the Servicer shall be
authorized and empowered by the Trustee to execute and deliver, on behalf of
itself, the Trustee, the Noteholders the Note Insurer, or any of them, any and
all instruments of satisfaction or cancellation, or of partial or full release
or discharge and all other comparable instruments, with respect to the
Receivables. The Servicer is hereby authorized to commence, in its own name or
in the name of the Trustee, 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
Trustee 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 and the other property conveyed as part of the Trust
Estate pursuant to Section 2.01 with respect to 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 Trustee 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
Trustee on behalf of the Noteholders and the Note Insurer shall, at the
Servicer's expense and written direction, take reasonable steps to enforce such
Receivable, including bringing suit in its name or the name of the Noteholders
and the Note Insurer. The Servicer shall deposit or cause to be deposited into
the Collection Account, within one Business Day of its receipt thereof, all
proceeds realized in connection with any such action pursuant to Section 4.02.
The Trustee 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.
SECTION 3.02 Collection of Receivable Payments.
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The Servicer shall make reasonable efforts to collect all payments due
and payable in connection with the Receivables, and shall at all times follow
the Customary Servicing Procedures in so doing. The Servicer shall be authorized
to write down the balance of any Receivable in accordance with the Customary
Servicing Procedures without the prior consent of the Trustee; provided however,
that such write-down will not affect the rights of the Noteholders or the Note
Insurer to any amounts thereafter collected with respect to such Receivable. The
Servicer may, in accordance with the Customary Servicing Procedures, waive any
charges or fees that otherwise may be collected in the ordinary course of
servicing the Receivables.
SECTION 3.03 Covenants of Servicer.
The Servicer hereby makes the following covenants with respect to each
Receivable on which the Trustee is relying in accepting the Receivables in trust
and authenticating the Notes:
(a) Fulfillment of Obligations. The Servicer shall duly fulfill all
obligations on its part to be fulfilled under or in connection with the
Receivables, shall perform such obligations in accordance with the Customary
Servicing Procedures, and shall maintain in effect all licenses and
qualifications required in order to service the Receivables and shall comply in
all respects with all other requirements of law in connection with servicing the
Receivables, the failure to comply with which would have a material adverse
effect on the rights or interests of the Noteholders or the Note Insurer.
(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 the Receivables balance in accordance with Customary
Servicing Procedures shall not be deemed a rescission or cancellation of such
Receivables.
(c) No Impairment. The Servicer shall do nothing to impair the rights
of the Trustee, the Trust Estate, the Noteholders or the Note Insurer with
respect to the Receivables; provided, however, that the writing down of the
Receivables balance in accordance with Customary Servicing Procedures shall not
be deemed an impairment of the rights of the Trustee, the Noteholders or the
Note Insurer. The Servicer shall not engage in any pattern of conduct under
which it intentionally elects to write down a Receivables balance from an
Obligor rather than writing down amounts due from the same Obligor which are not
a part of the Receivables if the Servicer has actual knowledge that such
write-downs discriminate against the Noteholders, or with knowledge that the
effect of such intentional election is to discriminate against the Noteholders.
(d) No Instruments. Except in connection with its enforcement or
collection of the Receivables, the Servicer shall take no action to cause any
Receivables to be evidenced by any instruments (as defined in the UCC) and if
any Receivable is so evidenced (whether or not in
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connection with such enforcement or collection), it shall be assigned to the
Servicer as provided in Section 3.04.
SECTION 3.04 Purchase of Receivables Upon Breach and Other Events.
Upon discovery by the Issuer or the Servicer or upon the actual
knowledge of a Responsible Officer of the Trustee of a breach of any of the
covenants of the Servicer set forth in Section 3.03 that materially and
adversely affects the rights or interests of the Noteholders or the Note
Insurer, the party discovering such breach shall give prompt written notice to
the others. If, as a result of such breach, any Receivables are rendered
uncollectible or the Trustee's rights in, to or under such Receivables or the
proceeds thereof are impaired or such proceeds are not available for any reason
to the Trustee free and clear of any Lien, the Servicer shall acquire from the
Trustee such Receivables, unless such breach shall have been cured within 30
days after the earlier to occur of the discovery of such breach by the Servicer
or receipt of written notice of such breach by the Servicer, such that the
relevant covenant shall be true and correct in all material respects as if made
on such day, and the Servicer shall have delivered to the Trustee a certificate
of a Responsible Officer of the Servicer describing the nature of such breach
and the manner in which the relevant covenant became true and correct. The
Servicer will be obligated to accept the assignment of such Receivables as set
forth above on the Remittance Date following the date on which such assignment
obligation arises. In consideration of the acquisition of any such Receivables,
on the Remittance Date immediately following the date on which such acquisition
obligation arises, the Issuer shall remit the Acquisition Payment of such
Receivables to the Collection Account in the manner specified in Section 4.03.
Upon any such acquisition, the Trustee on behalf of the Noteholders and the Note
Insurer shall, without further action, be deemed to transfer, assign, set-over
and otherwise convey to the Servicer, all right, title and interest of the
Trustee on behalf of the Noteholders and the Note Insurer in, to and under such
Removed Receivables, all monies due or to become due with respect thereto after
the aforementioned Remittance Date and all proceeds thereof. The Trustee shall
execute such documents and instruments of transfer and assignment and take such
other actions as shall be reasonably requested by the Servicer to effect the
conveyance of such Receivables pursuant to this Section. The sole remedy of the
Trustee, the Noteholders and the Note Insurer with respect to a breach pursuant
to Section 3.03 shall be to require the Servicer to acquire the related
Receivables pursuant to this Section, except as otherwise provided in Section
7.02, 8.01 or 8.02. The Trustee shall have no duty to conduct any affirmative
investigation as to the occurrence of any condition requiring the acquisition of
any Receivable pursuant to this Section except as otherwise provided in Section
9.02.
SECTION 3.05 Servicing Fee; Payment of Certain Expenses By Servicer.
As compensation for the performance of its obligations hereunder, the
Servicer shall be entitled to receive on each Payment Date the Servicing Fee as
provided in Section 4.04. Except to the extent otherwise provided herein, the
Servicer shall be required to pay from its servicing compensation all expenses
incurred in connection with servicing the Receivables including,
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without limitation, recovery and collection expenses related to the enforcement
of the Receivables (other than those specified in the following proviso),
payment of the fees and disbursements of the Rating Agency and independent
accountants and all other fees and expenses that are not expressly stated in
this Agreement to be payable by the Trustee, the Noteholders, the Note Insurer
or the Issuer; provided, however, that the Servicer shall not be liable for any
liabilities, costs or expenses of the Trustee, the Noteholders or the Note
Insurer 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), except as otherwise expressly provided in this
Agreement.
SECTION 3.06 Monthly Servicer Report; Servicer's Remittance Date
Certificate.
(a) On or before 11:00 a.m. New York, New York time on each
Determination Date, the Servicer shall deliver to the Trustee and to the Note
Insurer a Monthly Servicer Report executed by a Responsible Officer of the
Servicer substantially in the form attached hereto as Exhibit A (and setting
forth such additional information as requested by the Trustee, the Note Insurer,
the Rating Agency or any Noteholder from time to time, which information the
Servicer is able to reasonably provide) containing all information necessary to
make the payments required by Section 4.04 in respect of the Collection Period
immediately preceding the date of such Monthly Servicer Report and all
information necessary for the Trustee to send statements to Noteholders and the
Note Insurer pursuant to Section 4.06(a).
(b) On or before 11:00 a.m. New York, New York time on each Remittance
Date on which the Issuer or the Servicer, as applicable, shall be obligated
hereunder to acquire a Removed Receivable, the Servicer shall deliver to the
Trustee and to the Note Insurer a Servicer's Remittance Date Certificate
identifying each such Removed Receivable to be so acquired by reference to the
related Obligor's account number (as specified in the Schedule of Receivables),
and the amount of the Acquisition Payment with respect thereto.
SECTION 3.07 Annual Statement as to Compliance; Notice of Default.
(a) The Servicer shall deliver to the Note Insurer and the Trustee, on
or before March 31 of each calendar year, beginning in March 1999, an Officer's
Certificate executed by the chief financial officer of the Servicer, 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 Closing Date through December 31, 1998) 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.
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(b) The Servicer shall deliver to the Note Insurer and the Trustee,
promptly after having obtained knowledge thereof, but in no event later than
three Business Days thereafter, an Officer's Certificate specifying the nature
and status of any Servicer Default, or Event of Default, or other occurrence
which would have a material adverse effect on the rights or interests of the
Note Insurer.
SECTION 3.08 Periodic Accountants Report.
The Servicer, at its own expense, shall cause Grant Thornton LLP or
another firm of nationally recognized independent public accountants acceptable
to the Note Insurer (who may also render other services to the Servicer or to
the Issuer) to deliver to the Note Insurer and Trustee a report of agreed upon
procedures acceptable to the Controlling Party of the Servicer with respect to
the Servicer's accounting for matters regarding the Trust Estate including cash
receipts, account posting and remittances to the Accounts during the preceding
reporting period. The first reporting period is from the Closing Date through
July 31, 1998, and each subsequent reporting period is each subsequent month
thereafter through December 31, 1998, and thereafter the reporting period shall
be such longer period as the Note Insurer shall determine from time to time by
written notice to the Servicer (with a copy to the Trustee) (and in the absence
of such written notice by the Note Insurer, each subsequent reporting period
shall be each subsequent quarter thereafter). Each such report must be delivered
within forty-five days after the end of each reporting period. Such report shall
also indicate that the firm is independent with respect to the Issuer and the
Servicer within the meaning of the Code of Professional Ethics of the American
Institute of Certified Public Accountants. In the event such independent public
accountants require the Trustee to agree to the procedures to be performed by
such firm in any of the reports required to be prepared pursuant to this Section
3.08, the Servicer shall direct the Trustee in writing to so agree; it being
understood and agreed that the Trustee will deliver such letter of agreement in
conclusive reliance upon the direction of the Servicer, and the Trustee has not
made any independent inquiry or investigation as to, and shall have no
obligation or liability in respect of, the sufficiency, validity or correctness
of such procedures.
SECTION 3.09 Quarterly Servicer's Compliance Report.
The Servicer, at its own expense, shall cause Grant Thornton LLP or
another firm of nationally recognized independent public accountants (who may
also render other services to the Servicer or to the Issuer) to deliver to the
Trustee and the Note Insurer, within thirty days after the end of each calendar
quarter of each year, beginning with the calendar quarter ending in September of
1998, a report concerning the activities of the Servicer during the preceding
calendar quarter to the effect that such accountants have performed agreed-upon
procedures acceptable to the Controlling Party with respect to each of the
Monthly Servicer Reports for the period under review. The report should specify
the procedures performed on such Monthly Servicer Reports (which procedures
should include recalculating all calculations contained in such Monthly Servicer
Reports and taking other pertinent information from supporting schedules
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of the Servicer) and any exceptions, if any, shall be set forth therein. Such
report shall also indicate that the firm is independent with respect to the
Issuer and the Servicer within the meaning of the Code of Professional Ethics of
the American Institute of Certified Public Accountants. In the event such
independent public accountants require the Trustee to agree to the procedures to
be performed by such firm in any of the reports required to be prepared pursuant
to this Section 3.09, the Servicer shall direct the Trustee in writing to so
agree; it being understood and agreed that the Trustee will deliver such letter
of agreement in conclusive reliance upon the direction of the Servicer, and the
Trustee has not made any independent inquiry or investigation as to, and shall
have no obligation or liability in respect of, the sufficiency, validity or
correctness of such procedures.
SECTION 3.10 Access to Certain Documentation and Information.
The Servicer shall provide the Note Insurer, the Trustee and the
Noteholders with access to the documentation relating to the Receivables as
provided in Section 2.06(b). In each case, access to documentation relating to
the Receivables shall be afforded without charge but only upon reasonable
request and during normal business hours at the offices of the Servicer. Nothing
in this Section shall impair the obligation of the Servicer to observe any
applicable law prohibiting disclosure of information regarding the Obligors,
which obligation shall be evidenced by an Opinion of Counsel to such effect, and
the failure of the Servicer to provide access as provided in this Section as a
result of such obligation shall not constitute a breach of this Section.
SECTION 3.11 Reports to Noteholders, the Rating Agency and the
Placement Agent.
The Trustee shall provide to the Note Insurer, each Noteholder, the
Rating Agency and the Placement Agent, a copy of each (i) Servicer's Remittance
Date Certificate, (ii) Monthly Servicer Report, (iii) Officer's Certificate of
annual statement as to compliance described in Section 3.07(a), (iv) Officer's
Certificate with respect to Servicer Defaults and Events of Default, described
in Section 3.07(b), (v) accountants' report described in Section 3.08, (vi)
accountants' report described in Section 3.09, (vii) statement to Noteholders
pursuant to Section 4.06(a), and (viii) Trustee's Certificate delivered pursuant
to Section 9.02 or 9.03.
SECTION 3.12 Tax Treatment.
Notwithstanding anything to the contrary set forth herein, the Issuer
has entered into this Agreement with the intention that for federal, state and
local income and franchise tax purposes (i) the Notes, which are characterized
as indebtedness at the time of their issuance, will qualify as indebtedness
secured by the Receivables and (ii) neither the Trust nor the Trust Estate shall
be treated as an association or publicly traded partnership taxable as a
corporation. The Issuer, by entering into this Agreement, each Noteholder, by
its acceptance of a Note and each purchaser of a beneficial interest therein, by
accepting such beneficial interest, agree to treat such Notes as debt for
federal, state and local income and franchise tax purposes. The Trustee shall
treat the
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Trust Estate as a security device only, and shall not file tax returns or obtain
an employer identification number on behalf of the Trust Estate. The provisions
of this Agreement shall be construed in furtherance of the foregoing intended
tax treatment.
ARTICLE IV
THE ACCOUNTS; PAYMENTS;
STATEMENTS TO NOTEHOLDERS
SECTION 4.01 Accounts.
The Trustee shall establish and maintain, or cause to be established
and maintained, the Collection Account, the Reserve Account and the Note Payment
Account, which shall each be an Eligible Account, for the benefit of the
Noteholders and the Note Insurer. All amounts held in the Collection Account,
the Reserve Account or the Note Payment Account shall, to the extent permitted
by this Agreement and applicable laws, rules and regulations, be invested in
Permitted Investments by the depository institution or trust company then
maintaining such Account only upon written direction of the Issuer, provided,
however, in the event the Issuer fails to provide such written direction to the
Trustee, and until the Issuer provides such written direction, the Trustee shall
invest in Permitted Investments satisfying the requirements of clause (v) of the
definition thereof. Investments held in Permitted Investments in the Accounts
shall not be sold or disposed of prior to their maturity. Earnings on investment
of funds in the Collection Account and Reserve Account shall remain in such
Accounts for disposition in accordance with this Agreement. Earnings on
investment of funds in the Note Payment Account shall be remitted by the Trustee
to the Collection Account promptly upon receipt thereof in the Note Payment
Account. Any losses and investment expenses relating to any investment of funds
in any of the Accounts shall be for the account of the Issuer, 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. The taxpayer
identification number associated with each of the Accounts shall be that of the
Issuer and the Issuer will report for federal, state and local income tax
purposes the income, if any, earned on funds in the relevant Account. The Issuer
hereby acknowledges that all amounts on deposit in each Account (including
investment earnings thereon) are held in trust by the Trustee for the benefit of
the Noteholders and the Note Insurer, subject to any express rights of the
Issuer set forth herein, and shall remain at all times during the term of this
Agreement under the sole dominion and control of the Trustee. Payments from the
Collection Account shall be made only on the Business Day prior to the Payment
Date and only to the Note Payment Account.
SECTION 4.02 Collections.
Each of the Servicer and the Issuer shall remit to the Collection
Account all items of payment it receives or otherwise obtains by or on behalf of
the Obligors on or in respect of the Receivables on the next Business Day after
receipt thereof. Other than as specifically contemplated pursuant to Section
4.03, the Servicer shall not remit to the Collection Account,
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and shall take all reasonable actions to prevent other Persons from remitting to
the Collection Account, amounts which do not constitute payments, collections or
recoveries received, made or realized in respect of the Receivables, and the
Trustee will return to Issuer any such amounts upon receiving written evidence
reasonably satisfactory to the Trustee that such amounts are not a part of the
Trust Estate.
SECTION 4.03 Additional Deposits.
(a) The following additional deposits shall be made to the Collection
Account, as applicable: (i) the Issuer shall remit the aggregate Acquisition
Payments with respect to Removed Receivables reacquired pursuant to Section 2.05
or 6.02; and (ii) the Servicer shall remit the aggregate Acquisition Payments
with respect to Removed Receivables acquired pursuant to Section 3.04. The
following deposits shall be made to the Note Payment Account, as applicable: (x)
the Issuer shall remit the Redemption Amount pursuant to Section 10.02; (y) the
Note Insurer shall remit any required payment pursuant to the Policy; and (z)
the Trustee shall transfer the Available Funds from the Collection Account to
the Note Payment Account on the Business Day prior to the Payment Date.
(b) All deposits required to be made pursuant to this Section by the
Issuer or the Servicer, as the case may be, may be made in the form of a single
deposit. All deposits required to be made by the Note Insurer, shall be made in
immediately available funds, no later than the date and time required pursuant
to the terms of the Policy.
SECTION 4.04 Allocations and Payments.
(a) On each Determination Date, the Servicer shall calculate, (i) the
amount of funds on deposit in each of the Accounts and the amount of Available
Funds, and (ii) as applicable, the Trustee Fee, the Backup Servicing Fee, the
Servicing Fee, the Interest Distributable Amount, the Required Reserve Amount,
the Reserve Fund Reimbursement Amount, the amount to be paid to Noteholders in
respect of principal, and the amount payable by the Note Insurer pursuant to the
Policy, which amounts shall be set forth in the Monthly Servicer Report for the
related Payment Date. The Servicer shall send the Monthly Servicer Report to the
Trustee and the Note Insurer by 11:00 a.m. New York, New York time on each such
Determination Date.
(b) On each Payment Date, the Trustee shall make the following payments
from the applicable Accounts in the following order of priority and in the
amounts set forth in the Monthly Servicer Report for such Payment Date; provided
however, that such payments shall be made only to the extent of funds then on
deposit in the applicable Account, and provided, further that payments from the
Note Payment Account shall be made only on the Payment Date:
(i) from Available Funds transferred from the Collection
Account to the Note Payment Account, to itself, an amount equal to the sum of
the Trustee Fee for such Payment Date, plus all accrued and unpaid Trustee Fees,
if any, for prior Payment Dates, plus all
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reasonable out of pocket expenses (but only up to $200,000 during the term of
this Agreement) to which the Trustee is entitled to payment (to the extent
expressly set forth under this Agreement);
(ii) from Available Funds transferred from the Collection
Account to the Note Payment Account, to the Servicer, an amount equal to the sum
of the Servicing Fee for the related Collection Period, plus all accrued and
unpaid Servicing Fees, if any, for prior Collection Periods, plus an amount
equal to any Transition Fees then owing to the Servicer (if any);
(iii) from Available Funds transferred from the Collection
Account to the Note Payment Account, to the Backup Servicer, the Backup Servicer
Fee for such Payment Date, plus all accrued and unpaid Backup Servicer Fees, if
any, for prior Payment Dates, plus all reasonable out of pocket expenses to
which the Backup Servicer Trustee is entitled to payment (to the extent
expressly set forth under this Agreement);
(iv) to the Noteholders, pro rata, based on their
respective Note Balances (A) from Available Funds transferred from the
Collection Account to the Note Payment Account, an amount equal to the sum of
the Interest Distributable Amount for such Payment Date plus any outstanding
amount of Interest Carryover Shortfall, if any, for prior Payment Dates provided
that (B) if Available Funds transferred from the Collection Account to the Note
Payment Account, are insufficient to pay the amount described in clause (A)
above, the Trustee will withdraw from the Reserve Account an amount equal to the
lesser of the amount then on deposit in the Reserve Account and the amount of
such interest shortfall for disbursement to the Noteholders in reduction of such
shortfall, and provided further that (C) if the amount described in clause (A)
above remains unpaid after the application of amounts withdrawn from the Reserve
Account in accordance with clause (B) above, the Trustee will withdraw from the
amount remitted by the Note Insurer to the Note Payment Account for disbursement
to the Noteholders in reduction of such shortfall an amount equal to the lesser
of the amount then on deposit in the Note Payment Account pursuant to a payment
by the Note Insurer and the amount of such interest shortfall;
(v) for so long as no Insurer Default shall have occurred
and be continuing, to the Note Insurer, (A) from Available Funds transferred
from the Collection Account to the Note Payment Account the sum of (x) the Note
Insurer Premium for such Payment Date, plus (y) all accrued but unpaid Note
Insurer Premiums, if any, for prior Payment Dates plus (z) the aggregate amount
of all other Note Insurer Obligations payable to the Note Insurer and
outstanding on such Payment Date, provided that (B) if Available Funds
transferred from the Collection Account to the Note Payment Account are
insufficient to pay the amounts due the outstanding Note Insurer Obligations
then payable, the Trustee will withdraw from the Reserve Account an amount equal
to the lesser of the amount then on deposit in the Reserve Account and the
amount of such shortfall, and remit such lesser amount to the Note Insurer in
reduction of such shortfall;
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(vi) from Available Funds transferred from the Collection
Account to the Note Payment Account, to the Reserve Account, an amount equal to
the lesser of remaining Available Funds and the Reserve Fund Reimbursement
Amount for such Payment Date, if applicable;
(vii) to the Noteholders, pro rata, based on their
respective Note Balances (A) any remaining Available Funds transferred from the
Collection Account to the Note Payment Account in reduction of the Note Balance
of the Notes, until the Note Balance is reduced to zero, (B) if such Payment
Date is the Payment Date on which the Issuer is effecting an optional redemption
of the Notes pursuant to Section 10.01, and there is an outstanding Note Balance
after payment of the amounts described in clause (A) above, the Trustee will
disburse to the Noteholders for payment on the Note Balance any amounts
deposited in the Note Payment Account by the Issuer in respect of the Redemption
Amount pursuant to Section 10.02, (C) if such Payment Date is the Final Payment
Date or the Payment Date on which the Issuer is effecting an optional redemption
of the Notes pursuant to Section 10.01, and there is an outstanding Note Balance
(after payment of the amounts described in clauses (A) and (B) above), the
Trustee will withdraw from all remaining funds on deposit in the Collection
Account and remit to the Note Payment Account, an amount equal to the lesser of
the amount then on deposit in the Collection Account and the amount of the
outstanding Note Balance and remit such lesser amount to the Noteholders in
reduction of the outstanding Note Balance, (D) if on the Final Payment Date
there is an outstanding Note Balance (after payment of the amounts described in
clauses (A), (B) and (C) above), the Trustee will withdraw from the Reserve
Account an amount equal to the lesser of the amount then on deposit in the
Reserve Account and the amount of the outstanding Note Balance and remit such
lesser amount to the Noteholders in reduction of the outstanding Note Balance,
and (E) if on the Final Payment Date there is an outstanding Note Balance after
all amounts have been withdrawn from the Reserve Account in accordance with
clause (D) above, the Trustee will disburse to the Noteholders for payment on
the Note Balance any amounts deposited in the Note Payment Account by the Note
Insurer; and
(viii) remaining amounts in the following order of
priority: (A) any of the Trustee's reasonable, out of pocket expenses to which
the Trustee is entitled to payment (to the extent expressly set forth in this
Agreement) which have exceeded $200,000 in the aggregate during the term of this
Agreement; then to (B) any amounts which would have been paid to the Note
Insurer under subsection (b)(v) but for the occurrence and continuation of an
Insurer Default; and then (C) to the Issuer.
(c) The Servicer shall on each Payment Date instruct the Trustee to
distribute to each Noteholder of record on the related Record Date by wire
transfer of immediately available funds, the amount to be paid to such
Noteholder in respect of the related Note on such Payment Date. The Servicer
shall on each Payment Date instruct the Trustee to distribute to the Note
Insurer by wire transfer of immediately available funds, the amount to be paid
to the Note Insurer on such Payment Date.
SECTION 4.05 Reserve Account.
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(a) Pursuant to Section 4.01, the Trustee shall establish and maintain
the Reserve Account which shall be an Eligible Account, for the benefit of the
Noteholders and the Note Insurer. On or prior to the Closing Date, the Issuer
shall deposit an amount equal to the Required Reserve Amount into the Reserve
Account. Thereafter, on each Payment Date, to the extent of funds then on
deposit in the Note Payment Account an amount equal to the lesser of (x)
Available Funds remaining on such Payment Date after required payments pursuant
to Section 4.04(b)(i) through (v), and (y) the Reserve Fund Reimbursement
Amount, shall be deposited into the Reserve Account.
(b) Consistent with the limited purposes for which the Reserve Account
is to be established, (x) on each Payment Date, an amount equal to the aggregate
of amounts described in Sections 4.04(b)(iv)(B), (v)(B) (if no Insurer Default
has occurred and is continuing) and (vii)(D), if any, shall be withdrawn from
the Reserve Account by the Trustee and remitted to the Noteholders or the Note
Insurer (as the case may be) for payment as described in those Sections, and (y)
upon payment of all sums payable hereunder with respect to the Notes, any
amounts then on deposit in the Reserve Account shall be remitted by the Trustee
to the Note Insurer to the extent of any unpaid Note Insurer Obligations then
outstanding, until all such Note Insurer Obligations are paid in full, and any
remaining amounts then on deposit in the Reserve Account shall be released from
the lien of the Trust Estate and paid to the Issuer.
(c) Amounts held in the Reserve Account shall be invested in Permitted
Investments at the direction of the Issuer as provided in Section 4.01. Such
investments shall not be sold or disposed of prior to their maturity.
(d) The Trustee shall pay to the Issuer on each Payment Date the amount
by which the amount in the Reserve Account exceeds the Required Reserve Amount,
after giving effect to all distributions required to be made from the Reserve
Account or the Note Payment Account on such date.
SECTION 4.05A Note Payment Account.
(a) Pursuant to Section 4.01, the Trustee shall establish and maintain
the Note Payment Account which shall be an Eligible Account, for the benefit of
the Noteholders and the Note Insurer. The Note Payment Account shall be funded
to the extent that (x) the Issuer shall remit the Redemption Amount pursuant to
Section 10.02, (y) the Note Insurer shall remit any required payment pursuant to
the Policy, or (z) the Trustee shall remit the Available Funds from the
Collection Account pursuant to Section 4.03.
(b) On each Payment Date, an amount equal to the aggregate of amounts
described in Section 4.04(b) shall be withdrawn from the Note Payment Account by
the Trustee and remitted to the Noteholders and other persons or Accounts
described therein for payment as described in
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that Section, and (y) upon payment of all sums payable hereunder with respect to
the Notes, any amounts then on deposit in the Note Payment Account shall be
remitted by the Trustee to the Note Insurer to the extent of any unpaid Note
Insurer Obligations then outstanding, until all such Note Insurer Obligations
are paid in full, and any remaining amounts then on deposit in the Note Payment
Account shall be released from the lien of the Trust Estate and paid to the
Issuer.
(c) Amounts held in the Note Payment Account shall be invested in
Permitted Investments at the direction of the Issuer as provided in Section
4.01. Such investments shall not be sold or disposed of prior to their maturity.
SECTION 4.06 Statements to Noteholders.
(a) On each Payment Date, the Trustee shall include with each payment
to each Noteholder of record and the Note Insurer the Monthly Servicer Report
furnished pursuant to Section 3.06, setting forth for the related Collection
Period the information provided in Exhibit A.
(b) Within a reasonable period of time after the end of each calendar
year, but not later than the latest date permitted by law, the Trustee shall
mail a statement or statements prepared by the Servicer to the Note Insurer and
each Person who at any time during such calendar year shall have been a
Noteholder that provides the information that the Servicer actually knows is
necessary under applicable law for the preparation of such income tax returns.
ARTICLE IV A
THE POLICY
SECTION 4A.01 The Policy. The Servicer and the Issuer agree,
simultaneously with the execution and delivery of this Agreement, to cause the
Note Insurer to issue the Policy to the Trustee for the benefit of the Trust in
accordance with the terms thereof.
SECTION 4A.02 Claims Under Policy. (a) If on any Determination Date
the Servicer has reported to the Trustee in the Monthly Servicer Report that the
Servicer has determined that (A) as of the opening of business of the Trustee on
such Determination Date, the amount of Available Funds on deposit in the
Collection Account, together with any amounts on deposit in the Reserve Account
and the Note Payment Account, are insufficient to provide for the payment in
full of the Interest Distributable Amount payable on the related Payment Date
(after giving effect to each payment required to be made prior to such payment
on such Payment Date pursuant to Section 4.04(b)), and/or (B) if such Payment
Date is the Final Payment Date and the Note Balance has not been reduced to zero
prior to such Determination Date, and all amounts then on deposit in the
Collection Account, together with any amounts then on deposit in the Reserve
Account and the Note Payment Account are insufficient to make a payment to the
Noteholders reducing the Note Balance to zero (after giving effect to each
payment required to be made prior to such payment on the Final Payment Date
pursuant to Section 4.04(b)), then by
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2:00 p.m., New York time on such Determination Date, the Trustee shall deliver
to the Note Insurer and the Servicer a completed notice for payment in the form
set forth as Exhibit A to the Policy (the "Notice for Payment"), and shall
confirm delivery of such Notice for Payment, each as specified in the Policy.
The Notice for Payment shall specify the amount of the Interest Deficiency Draw
Amount and/or the Final Principal Deficiency Amount (as each such term is
defined in the Policy) and shall constitute a claim pursuant to the Policy. Upon
receipt of any payments on behalf of the Trust under the Policy, the Trustee
shall deposit any Interest Deficiency Draw Amount and/or Principal Deficiency
Draw Amount in the Note Payment Account. Such amounts shall be distributed
pursuant to Section 4.04.
(b) The Trustee shall receive in the Note Payment
Account, as attorney-in-fact of each Noteholder, any payment from the Note
Insurer and disburse the same to each Noteholder, for the purposes and in the
respective amounts required in accordance with the provisions of Section 4.04.
(c) The Trustee shall keep complete and accurate records
of the amount of payments received from the Note Insurer and the Note Insurer
shall have the right to inspect such records at reasonable times upon one
Business Day's prior notice to the Trustee. The statements the Trustee prepared
in the normal course of business with respect to accounts similar in nature to
the Note Payment Account shall fulfill the record requirements of this Section.
(d) If any of the payments guaranteed by the Policy are
voided (a "Preference Event") pursuant to a final and non-appealable order under
any applicable bankruptcy, insolvency, receivership or similar law in an
Insolvency Proceeding and, as a result of such a Preference Event, the Trustee
is required to return such voided payment, or any portion of such voided
payment, made in respect of the Notes (an "Avoided Payment"), the Trustee shall
furnish to the Note Insurer (x) a certified copy of a final order of a court
exercising jurisdiction in such Insolvency Proceeding to the effect that the
Trustee is required to return any such payment or portion thereof during the
term of the Policy because such payment was voided under applicable law, with
respect to which order the appeal period has expired without an appeal having
been filed (the "Final Order"), (y) an assignment, in form reasonably
satisfactory to the Note Insurer, irrevocably assigning to the Note Insurer all
rights and claims of the Trustee relating to or arising under such Avoided
Payment and (z) a Notice for Payment appropriately completed and executed by the
Trustee. Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Final Order and not
to the Trustee directly. The Trustee is not permitted to make a claim on the
Trust or on any Noteholder for payments made to Noteholders which are
characterized as preference payments by any bankruptcy court having jurisdiction
over any bankrupt Obligor unless ordered to do so by such bankruptcy court.
SECTION 4A.03. Surrender of Policy. The Trustee shall surrender the
Policy to the Note Insurer for cancellation upon its expiration in accordance
with the terms thereof.
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SECTION 4A.04 Rights of Subrogation and Assignment.
(a) The parties hereto agree that to the extent the Note Insurer makes
any payment with respect to the Notes under the Policy, the Note Insurer shall
become subrogated to the rights of the recipients of such payments to the extent
of such payments (including, without limitation, to the fullest extent permitted
by law, all rights of the Trustee and each Noteholder in the conduct of any
related Insolvency Proceeding). In furtherance and not by way of limitation of
the foregoing, and subject to and conditioned upon any payment with respect to
the Notes by or on behalf of the Note Insurer, the Trustee shall assign, and the
Noteholders, by reason of their acquisition and holding of the Notes, shall be
deemed to have agreed to the assignment, to the Note Insurer, of all rights to
the payment of interest or principal with respect to the Notes which are then
due for payment, together with all other rights and remedies of the Trustee or
the Noteholders with respect to the Notes (including, without limitation, all
rights of the Trustee and each Noteholder in the conduct of any related
Insolvency Proceeding), to the extent of all payments made by the Note Insurer
with respect to the Notes. The Trustee shall take all such actions and deliver
all such instruments as may be reasonably requested or required by the Note
Insurer to effectuate the purpose or provisions of the foregoing subrogation
and/or assignment.
(b) The foregoing rights of subrogation and assignment described in
clause (a) above are in all cases in addition to, and not in limitation of, all
equitable rights of subrogation and other rights and remedies otherwise
available to the Note Insurer in respect of payments under the Policy, and the
Note Insurer hereby specifically reserves all such rights and remedies.
ARTICLE V
THE NOTES
SECTION 5.01 The Notes.
(a) The Notes shall be non-recourse obligations of the Issuer and the
Trust Estate shall be the sole source of payments of principal thereof and
interest thereon. Notwithstanding anything else to the contrary contained
herein, the Notes shall not be considered a general obligation of the Issuer for
any purpose.
(b) The Notes shall be issued on the Closing Date and shall accrue
interest at the Note Rate from and including the Closing Date.
(c) The Notes shall be substantially in the form attached hereto as
Exhibit C, and shall be issuable in minimum denominations of $1,000,000 and
integral multiples of $1,000 in excess thereof. The Notes shall each be executed
by the Issuer and authenticated by the Trustee by the manual or facsimile
signature of a Responsible Officer of the Trustee. Notes bearing the manual or
facsimile signatures of individuals who were, at the time when such signatures
were affixed, authorized to sign on behalf of the Issuer or the Trustee shall be
valid and binding obligations of the Issuer, notwithstanding that such
individuals or any of them have ceased to be
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so authorized prior to the authentication and delivery of such Notes or did not
hold such offices at the date of such Notes. The Notes shall be dated the date
of their authentication.
SECTION 5.02 Authentication and Delivery of the Notes.
The Trustee shall cause to be authenticated and delivered to or upon
the order of the Issuer, in exchange for the Receivables and the other property
included in the Trust Estate, simultaneously with the assignment, transfer and
conveyance to the Trustee of the Receivables and the constructive delivery to
the Trustee on behalf of the Noteholders of the Receivable Files and the other
components of the Trust Estate, the Notes duly authenticated by the Trustee, in
authorized denominations equaling in the aggregate the Note Balance. No Note
shall be entitled to any benefit under this Agreement or be valid for any
purpose, unless there appears thereon a certificate of authentication
substantially in the form set forth in the form of such Note attached hereto as
Exhibit C, executed by the Trustee by manual or facsimile signature, and such
certificate upon any Note shall be conclusive evidence, and the only evidence,
that such Note has been duly authenticated and delivered under this Agreement.
SECTION 5.03 Registration of Transfer and Exchange of Notes.
(a) The Note Registrar shall maintain a Note Register in which, subject
to such reasonable regulations as it may prescribe, the Note Registrar shall
provide for the registration of the Notes and transfers and exchanges thereof as
provided in this Agreement. The Trustee is hereby initially appointed Note
Registrar for the purpose of registering the Notes and transfers and exchanges
thereof as provided in this Agreement. In the event that, subsequent to the
Closing Date, the Trustee notifies the Servicer that it is unable to act as Note
Registrar, the Servicer shall appoint another bank or trust company, agreeing to
act in accordance with the provisions of this Agreement applicable to it, and
otherwise acceptable to the Trustee, to act as successor Note Registrar under
this Agreement.
(b) Upon surrender for registration of transfer of any Note at the
Corporate Trust Office, the Issuer shall execute, and the Trustee shall
authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Notes in authorized denominations of a like
aggregate principal amount.
(c) Notes may be exchanged for other Notes of authorized denominations
of a like aggregate principal amount, at the option of the related Noteholder
upon surrender of the Note to be exchanged at any such office or agency.
Whenever any Note is so surrendered for exchange, the Issuer shall execute and
the Trustee shall authenticate and deliver the Note that the Noteholder making
the exchange is entitled to receive. Every Note presented or surrendered for
registration of transfer or exchange shall be accompanied by a written
instrument of transfer in form satisfactory to the Trustee and the Note
Registrar duly executed by the Noteholder thereof or his or her attorney duly
authorized in writing.
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(d) No service or other charge shall be made for any registration of
transfer or exchange of Notes by the Trustee or the Servicer, but the Trustee
may require payment of a sum sufficient to cover any tax or governmental charge
that may be imposed in connection with any transfer or exchange of Notes.
(e) Any Notes surrendered for registration of transfer or exchange
shall be canceled and subsequently destroyed by the Trustee.
(f) Each purchaser of a Note or of a beneficial interest therein shall
be deemed to have represented and warranted, by accepting such Note or
beneficial Interest as follows:
(i) it is acquiring the Notes for its own account or for
an account with respect to which it exercises sole investment discretion, and
that it or such account is a Qualified Institutional Buyer or an Accredited
Investor acquiring the Notes for investment purposes and not for distribution;
(ii) it acknowledges that the Notes have not been registered
under the Securities Act and not be sold except as permitted below;
(iii) it understands and agrees that such Notes are being
offered only in a transaction not involving any public offering within the
meaning of the Securities Act, such Notes may be resold, pledge or transferred
only (1) to a person who has certified that it is a Qualified Institutional
Buyer that purchases for its own account or for the account of a Qualified
Institutional Buyer to whom notice is given that the resale, pledge or transfer
is being made in reliance on Rule 144A or (2) to an institution that is an
Accredited Investor who has certified to the Issuer and the Trustee that such
transferee is an institutional Accredited Investor;
(iv) it understands that the notification requirements
referred to in clause (iii) above will be satisfied by virtue of the fact that
the following legend will be placed on the Notes, unless otherwise agreed by the
Issuer:
"THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES
LAWS, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THIS NOTE IS SUBJECT
TO CERTAIN RESTRICTIONS AND CONDITIONS SET FORTH IN THE INDENTURE AND
SERVICING AGREEMENT UNDER WHICH THIS NOTE IS ISSUED (A COPY OF WHICH IS
AVAILABLE FROM THE TRUSTEE UPON REQUEST).
(v) it (x) has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks of its
prospective investment in the Notes; and
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(y) has the ability to bear the economic risks of its prospective investment and
can afford the complete loss of such investment; and
(vi) it understands that the Issuer, the Placement Agent,
and others will rely upon the truth and accuracy of the foregoing
acknowledgments, representations, warranties and agreements and agrees that if
any of the acknowledgments, representations, warranties and agreements deemed to
have been made by it by its purchase of the Notes are no longer accurate, it
shall promptly notify the Issuer and the Placement Agent. If it is acquiring the
Notes as a fiduciary or agent for one or more investor accounts, it represents
that it has sole investment discretion with respect to each such account and it
has full power to make the foregoing acknowledgments, representations,
warranties and agreements on behalf of each such account.
(g) No transfer of any Notes shall be made unless that transfer is made
pursuant to an effective registration statement under the Securities Act, and
effective registration or qualification under applicable state securities laws,
or is made in a transaction that does not require such registration or
qualification. If such a transfer is to be made without registration under the
Securities Act (other than in connection with the initial issuance thereof or
the initial transfer thereof by the Issuer, the Placement Agent or the initial
purchasers), then the Note Registrar shall refuse to register such transfer
unless it receives (and upon receipt, may conclusively rely upon) either: (i) a
certificate from the Noteholder desiring to effect such transfer substantially
in the form attached as Exhibit D-1 hereto, and a certificate from such
Noteholder's prospective transferee substantially in the form attached as either
Exhibit D-2 hereto or as Exhibit D-3 hereto; or (ii) an Opinion of Counsel
reasonably satisfactory to the Note Registrar to the effect that such transfer
may be made without registration under the Securities Act (which Opinion of
Counsel shall not be an expense of the Trust Estate or of the Issuer, the
Servicer, the Trustee or the Note Registrar in their respective capacities as
such), together with the written certification(s) as to the facts surrounding
such transfer from the Noteholder desiring to effect such transfer and/or such
Noteholder's prospective transferee on which such Opinion of Counsel is based.
None of the Issuer, the Trustee or the Note Registrar is obligated to register
or qualify the Notes under the Securities Act or any other securities law or to
take any action not otherwise required under this Agreement to permit the
transfer of any Note without registration or qualification. Any Holder of a Note
desiring to effect such a transfer shall, and upon acquisition of such a Note
shall be deemed to have agreed to, indemnify the Trustee, the Note Registrar and
the Issuer against any liability that may result in the transfer is not so
exempt or is not made in accordance with such federal and state laws.
In connection with transfer of the Notes, the Issuer shall
furnish upon request of a Noteholder to such Holder and any prospective
purchaser designated by such Noteholder the information required to be delivered
under paragraph (d)(4) of Rule 144A of the Securities Act.
(h) To the extent permitted under applicable law, the Trustee shall be
under no liability to any Person for any registration of transfer of any Note
that is in fact not permitted by this Section 5.03 or for making any payments
due to the Noteholder thereof or taking any other
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action with respect to such Noteholder under the provisions of this Agreement so
long as the transfer was registered by the Trustee in accordance with the
requirements of this Agreement.
SECTION 5.04 Mutilated, Destroyed, Lost or Stolen Notes.
If (i) any mutilated Note is surrendered to the Note Registrar, or the
Note Registrar receives evidence to its satisfaction of the destruction, loss or
theft of any Note, and (ii) there is delivered to the Note Registrar and the
Trustee such security or indemnity as may be required by them to save each of
them harmless (the general obligation of an institutional investor that is
investment grade rated being sufficient indemnity), then, in the absence of
notice that such Note has been acquired by a bona fide purchaser, the Issuer
shall execute and the Trustee shall authenticate and deliver, in exchange for or
in lieu of any such mutilated, destroyed, lost or stolen Note, a new Note of
like tenor and denomination or ownership interest, as applicable. In connection
with the issuance of any new Note under this Section, the Issuer or the Trustee
may require the payment by the Noteholder thereof of a sum sufficient to cover
any tax or other governmental charge that may be imposed in relation thereto.
If, after the delivery of such replacement Note or payment with respect
to a destroyed, lost or stolen Note, a bona fide purchaser of the original Note
in lieu of which such replacement Note was issued presents for payment such
original Note, the Issuer and the Trustee shall be entitled to recover such
replacement Note (or such payment) from the Person to whom it was delivered or
any Person taking such replacement Note from such Person to whom such
replacement Note was delivered or any assignee of any such Person, except a bona
fide purchaser, and shall be entitled to recover upon the security or indemnity
provided therefor to the extent of any loss, damage, cost or expense incurred by
the Issuer or the Trustee in connection therewith.
SECTION 5.05 Persons Deemed Owners.
Prior to due presentation of a Note for registration of transfer, the
Trustee, the Note Registrar and any of their respective agents may treat the
Person in whose name any Note is registered as the owner of such Note for the
purpose of receiving payments pursuant to Section 4.04 and for all other
purposes whatsoever, and neither the Trustee, the Note Registrar nor any of
their respective agents shall be affected by any notice to the contrary.
SECTION 5.06 Access to List of Noteholders' Names and Addresses.
The Note Registrar shall furnish or cause to be furnished to the
Servicer, within 15 days after receipt by the Note Registrar of a written
request therefor from the Servicer, a list of the names and addresses of the
Noteholders as of the most recent Record Date. If three or more Noteholders, or
one or more Noteholders evidencing not less than 25% of the Voting Interests
(hereinafter referred to as "Applicants"), apply in writing to the Trustee, and
such application states that the Applicants desire to communicate with other
Noteholders with respect to their
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rights under this Agreement or under the Notes and such application is
accompanied by a copy of the communication that such Applicants propose to
transmit, then the Trustee shall, within five Business Days after the receipt of
such application, afford such Applicants access, during normal business hours,
to the current list of Noteholders as reflected in the Note Register. Every
Noteholder, by receiving and holding a Note, agrees with the Servicer and the
Trustee that neither the Servicer nor the Trustee shall be held accountable by
reason of the disclosure of any such information as to the names and addresses
of the Noteholders under this Agreement, regardless of the source from which
such information was derived.
SECTION 5.07 Surrendering of Notes.
Each Noteholder shall surrender its Note within 14 days of receipt of
the final payment received in connection therewith, whether by optional
redemption of the Issuer or otherwise. Each Noteholder, by its acceptance of the
final payment with respect to its Note, will be deemed to have relinquished any
further right to receive payments under this Agreement and any interest in the
Trust Estate. Each Noteholder shall indemnify and hold harmless the Issuer, the
Trustee and any other Person against whom a claim is asserted in connection with
such Noteholder's failure to tender the Note to the Trustee for cancellation.
SECTION 5.08 Maintenance of Office or Agency.
The Trustee shall maintain in the City of Minneapolis, Minnesota, an
office or offices or agency or agencies where Notes may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Trustee in respect of the Notes and this Agreement may be served. The
Trustee initially shall designate the Corporate Trust Office as its office for
such purposes. The Trustee shall give prompt written notice to the Issuer, the
Servicer and the Noteholders of any change in the location of the Note Register
or any such office or agency.
ARTICLE VI
THE ISSUER
SECTION 6.01 Representations of Issuer.
The Issuer hereby makes the following representations on which the
Trustee is relying in accepting the Receivables in trust and authenticating the
Notes and the Note Insurer is relying in issuing the Policy. The representations
shall speak as of the execution and delivery of this Agreement and shall survive
the transfer, assignment and conveyance of the Receivables to the Trustee.
(a) Organization and Good Standing. The Issuer is duly organized and
validly existing as a limited liability company in good standing under the laws
of the State of Maryland, with 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
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has, power, authority and legal right to acquire, own, hold, transfer, assign
and convey the Receivables.
(b) Due Qualification. The Issuer is duly qualified to do business as a
foreign limited liability company in good standing, and has obtained all
necessary licenses and approvals in all jurisdictions in which the ownership or
lease of property or the conduct of its business requires such qualifications,
licenses or approvals.
(c) Power and Authority. The Issuer has the power and authority to
execute and deliver this Agreement and the other Transaction Documents to which
it is a party, and to carry out their respective terms; the Issuer has full
power and authority to transfer, assign and convey the property to be
transferred, assigned and conveyed to and deposited with the Trustee as part of
the Trust Estate and has duly authorized such transfer, assignment and
conveyance to the Trustee by all necessary action; and the execution, delivery
and performance by the Issuer of this Agreement and each of the other
Transaction Documents to which it is a party has been duly authorized by all
necessary action of the Issuer.
(d) Valid Transfers; Binding Obligations. This Agreement evidences a
valid transfer, assignment and conveyance of the Receivables, or the grant of a
first priority perfected security interest under the UCC in the Receivables,
which is effective for so long as the Notes or the Note Insurer Obligations
remain outstanding, enforceable against creditors of and purchasers from the
Issuer, and each of the Transaction Documents to which the Issuer is a party
constitutes a legal, valid and binding obligation of the Issuer 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.
(e) No Violation. The consummation of the transactions contemplated by
this Agreement and the other Transaction Documents and the fulfillment of the
terms of this Agreement and the other Transaction Documents 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 Issuer or any indenture, agreement or other
instrument to which the Issuer 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 Issuer of any court or of any federal or state regulatory
body, administrative agency or other governmental instrumentality having
jurisdiction over the Issuer or its properties, which breach, default, conflict,
Lien or violation would have a material adverse effect on the rights or
interests of the Noteholders or the Note Insurer.
(f) 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 Issuer's knowledge, threatened, against or affecting the Issuer: (i)
asserting the invalidity of this Agreement, the Notes or any of the other
Transaction Documents to which the Issuer is a party, (ii) seeking to
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prevent the issuance of the Notes or 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 Issuer of its
obligations under, or the validity or enforceability of, this Agreement, the
Notes or any of the other Transaction Documents, or (iv) relating to the Issuer
and which might adversely affect the federal income tax attributes of the Notes.
(g) No Subsidiaries. The Issuer has no subsidiaries.
(h) Not an Investment Company. The Issuer is not an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act, and none of the issuance of the Notes, the
execution and delivery of the Transaction Documents to which the Issuer is a
party, or the performance by the Issuer of its obligations thereunder, or the
use of the proceeds of the Notes by the Issuer will violate any provision of the
Investment Company Act, or any rule, regulation or order issued by the
Securities and Exchange Commission thereunder.
SECTION 6.02 Reacquisition of Receivables Upon Breach.
Upon discovery by the Issuer or the Servicer (which discovery shall be
deemed to have occurred upon the receipt of notice by a Responsible Officer of
the Issuer or the Servicer) or upon the actual knowledge of a Responsible
Officer of the Trustee of a breach of any of the representations and warranties
of the Issuer set forth in Section 6.01, the party discovering such breach shall
give prompt written notice to the others. If such breach has or would have a
material adverse effect on the rights or interests of the Noteholders or the
Note Insurer, the Issuer shall reacquire the Receivables and, if necessary, the
Issuer shall enforce the obligation of the Seller under the Receivables
Contribution Agreement to reacquire the Receivables from the Issuer, unless such
breach shall have been cured within 30 days after the earlier to occur of the
discovery of such breach by the Issuer or receipt of written notice of such
breach by the Issuer, such that the relevant representation and warranty shall
be true and correct in all material respects as if made on such day, and the
Issuer shall have delivered to the Trustee a certificate of any Responsible
Officer of the Issuer describing the nature of such breach and the manner in
which the relevant representation and warranty became true and correct. This
repurchase obligation shall pertain to all representations and warranties of the
Issuer contained in Section 6.01, whether or not the Issuer has knowledge of the
breach at the time of the breach or at the time the representations and
warranties were made. The Issuer will be obligated to accept the reassignment of
the Receivables as set forth above on the Remittance Date next succeeding the
date on which such reassignment obligation arises. In consideration of the
reacquisition of the Receivables, on such Remittance Date, the Issuer shall
remit the aggregate Acquisition Payments of the Receivables to the Collection
Account in the manner specified in Section 4.03. The payment of such
consideration, in immediately available funds, will be considered a payment in
full of the Receivables.
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Upon any such reacquisition, the Trustee on behalf of the Noteholders
and the Note Insurer shall, without further action, be deemed to transfer,
assign, set-over and otherwise convey to the Issuer, all right, title and
interest of the Trustee on behalf of the Noteholders and the Note Insurer in, to
and under the Removed Receivables, all monies due or to become due with respect
thereto after the aforementioned Remittance Date and all proceeds thereof. The
Trustee shall execute such documents and instruments of transfer and assignment
and take such other actions as shall be reasonably requested by the Issuer to
effect the conveyance of the Receivables pursuant to this Section.
Notwithstanding the forgoing, the Controlling Party may by delivery of prior
written notice waive any breach and repurchase obligation of the Issuer pursuant
to this Section 6.02. The Trustee shall have no duty to conduct any affirmative
investigation as to the occurrence of any condition requiring the reacquisition
of the Receivables pursuant to this Section, except as otherwise provided in
Section 9.02.
SECTION 6.03 Liability of Issuer; Indemnities.
The Issuer shall be liable in accordance with this Agreement only to
the extent of the obligations in this Agreement specifically undertaken by the
Issuer in such capacity under this Agreement and shall have no other obligations
or liabilities hereunder.
SECTION 6.04 Merger or Consolidation of, or Assumption of the
Obligations of, the Issuer; Certain Limitations.
(a) Any corporation or limited liability company (i) into which the
Issuer may be merged or consolidated, (ii) which may result from any merger,
conversion or consolidation to which the Issuer shall be a party, or (iii) which
may succeed to all or substantially all of the business of the Issuer, which
corporation or limited liability company in any of the foregoing cases executes
an agreement of assumption to perform every obligation of the Issuer under this
Agreement, shall be the successor to the Issuer under this Agreement without the
execution or filing of any document or any further act on the part of any of the
parties to this Agreement, except that if the Issuer in any of the foregoing
cases is not the surviving entity, then the surviving entity shall execute an
agreement of assumption to perform every obligation of the Issuer hereunder. The
Issuer (1) shall provide notice of any merger, consolidation or succession
pursuant to this Section to the Rating Agency, the Trustee, the Note Insurer,
the Noteholders and the Placement Agent, (2) for so long as the Notes are
outstanding, shall receive from the Rating Agency a letter to the effect that
such merger, consolidation or succession will not result in a qualification,
downgrading or withdrawal of the then-current rating on the Notes, and (3) shall
receive from the Controlling Party its prior written consent to such merger,
consolidation or succession.
(b) (i) The business, activities and purpose of the Issuer shall be
limited as specified in its articles of organization.
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(ii) So long as any outstanding debt of the Issuer or the
Notes is rated by the Rating Agency, the Issuer shall not issue unsecured notes
or otherwise borrow money unless (A) the Issuer has made a written request to
the Rating Agency to issue unsecured notes or incur indebtedness and such notes
or borrowings are rated by the Rating Agency the same as or higher than the
rating afforded any outstanding rated debt or the Notes, and (B) such notes or
borrowings (1) are fully subordinated (and which shall provide for payment only
after payment in respect of all outstanding rated debt and/or the Notes) or are
nonrecourse against any assets of the Issuer other than the assets pledged to
secure such notes or borrowings, (2) do not constitute a claim against the
Issuer in the event such assets are insufficient to pay such notes or
borrowings, and (3) where such notes or borrowings are secured by the rated debt
or the Notes, are fully subordinated (and which shall provide for payment only
after payment in respect of all outstanding rated debt and/or the Notes) to such
rated debt or the Notes.
(iii) The Issuer shall not issue unsecured notes or
otherwise borrow money, or otherwise grant any consensual Lien in favor of any
Person (other than the Lien granted pursuant hereto) absent the prior written
consent of the Controlling Party.
(c) Notwithstanding any other provision of this Section and any
provision of law, the Issuer shall not do any of the following without the
affirmative unanimous vote of all managers of the Issuer (which includes a duly
appointed Independent Manager, as required by the articles of organization and
bylaws of Issuer),
(i) (A) dissolve or liquidate, in whole or in part, or
institute proceedings to be adjudicated bankrupt or insolvent, (B) consent to
the institution of bankruptcy or insolvency proceedings against it, (C) file a
petition seeking or consent to reorganization or relief under any applicable
federal or state law relating to bankruptcy, (D) consent to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the limited liability company or a substantial part of its
property, (E) make any assignment for the benefit of creditors, (F) admit in
writing its inability to pay its debts generally as they become due, or (G) take
any action in furtherance of the actions set forth in clauses (A) through (F)
above; or
(ii) merge or consolidate with or into any other person or
entity or sell or lease its property and all or substantially all of its assets
to any person or entity; or
(iii) modify any provision of its articles or organization or
bylaws.
SECTION 6.05 Limitation on Liability of Issuer and Others.
The Issuer and any manager or officer or employee or agent of the
Issuer 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. The Issuer shall not be under any
obligation to appear in, prosecute or defend any legal action that is
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not incidental to its obligations as Issuer under this Agreement and that in its
opinion may involve it in any expense or liability.
SECTION 6.06 Issuer May Own Notes.
The Issuer and any Person controlling, controlled by or under common
control with the Issuer may, in its individual or any other capacity, become the
owner or pledgee of one or more Notes with the same rights as it would have if
it were not the Issuer or an affiliate thereof, except as otherwise specifically
provided in the definition of the term "Noteholder." The Notes so owned by or
pledged to the Issuer or such controlling or commonly controlled Person shall
have an equal and proportionate benefit under the provisions of this Agreement,
without preference, priority or distinction as among any of the Notes, except as
set forth herein with respect to, among other things, certain rights to vote,
consent or give directions to the Trustee as a Noteholder.
SECTION 6.07 Covenants of Issuer.
(a) Bylaws. The Issuer hereby covenants not to change its bylaws
without notice to the Trustee, the Rating Agency and the Note Insurer, and (ii)
the prior written consent of the Controlling Party.
(b) Merger of the Issuer. Without the prior written consent of the
Controlling Party, the Issuer shall not merge with or into or, or transfer or
sell all or substantially all of its assets to, any person.
(c) Preservation of Existence. The Issuer hereby covenants to do or
cause to be done all things necessary on its part to preserve and keep in full
force and effect its existence as a limited liability company, and to maintain
each of its licenses, approvals, registrations or qualifications in all
jurisdictions in which its ownership or lease of property or the conduct of its
business requires such licenses, approvals, registrations or qualifications,
except for failures to maintain any such licenses, approvals, registrations or
qualifications which, individually or in the aggregate, would not have a
material adverse effect on the ability of Issuer to perform its obligations
hereunder or under any of the other Transaction Documents.
(d) Compliance with Laws. The Issuer hereby covenants to comply in all
material respects with all applicable laws, rules and regulations and orders of
any governmental authority, the noncompliance with which would have a material
adverse effect on the business, financial condition or results of operations of
the Issuer or on the ability of the Issuer to repay the Notes or the Note
Insurer Obligations, or perform any of its other obligations under this
Agreement or the other Transaction Documents.
(e) Payment of Taxes. The Issuer hereby covenants to pay and discharge
promptly or cause to be paid and discharged promptly all taxes, assessments and
governmental charges or
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levies imposed upon the Issuer or upon its income and profits, or upon any of
its property or any part thereof, before the same shall become in default,
provided that the Issuer shall not be required to pay and discharge any such
tax, assessment, charge or levy so long as the validity or amount thereof shall
be contested in good faith by appropriate proceedings and the Issuer shall have
set aside on its books adequate reserves with respect to any such tax,
assessment, charge or levy so contested, or so long as the failure to pay any
such tax, assessment, charge or levy would not have a material adverse effect on
the ability of the Issuer to perform its obligations hereunder.
(f) Exercise of Rights Under the Transaction Documents. The Issuer
hereby covenants to exercise its rights as the Purchaser under the Receivables
Contribution Agreement and take such other action in connection with the
Transaction Documents as may be appropriate or desirable, taking into account
the associated costs, to maximize the collection of amounts payable to the Trust
Estate.
(g) Investments. The Issuer hereby covenants that it will not without
the prior written consent of the Controlling Party, acquire or hold any
indebtedness for borrowed money of another person, or any capital stock,
debentures, partnership interests or other ownership interests or other
securities of any Person, other than the Receivables acquired under the
Receivables Contribution Agreement.
ARTICLE VII
THE SERVICER
SECTION 7.01 Representations of Servicer.
The Servicer hereby makes the following representations on which the
Trustee is relying in accepting the Receivables in trust and authenticating the
Notes and the Note Insurer is relying in issuing the Policy. The representations
shall speak as of the execution and delivery of this Agreement and shall survive
the transfer of the Receivables to the Trustee.
(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 on behalf
of the Trustee.
(b) Due Qualification. The Servicer is duly qualified to do business as
a foreign corporation in good standing, and has obtained all necessary licenses
and approvals in all jurisdictions in which the ownership or lease of property
or the conduct of its business (including the servicing of the Receivables as
required by this Agreement) requires such qualification, licenses and approvals,
except where the failure to be qualified or to obtain such qualifications,
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licenses and approvals would not materially and adversely affect the rights or
interests of any of the Noteholders, the Note Insurer or the Trust Estate.
(c) Power and Authority. The Servicer has the corporate power and
authority to execute and deliver this Agreement and each of the other
Transaction Documents to which it is a party, 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.
(d) Binding Obligations. This Agreement and each of the other
Transaction Documents to which the Servicer is a party constitutes a legal,
valid and binding obligation of the Servicer enforceable in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws affecting creditors' rights
generally or by general principles of equity.
(e) No Violation. The consummation of the transactions contemplated by
this Agreement and each of the other Transaction Documents and the fulfillment
of the terms of this Agreement and each of the other Transaction Documents does
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, or would have, a material adverse effect
on the rights or interests of the Noteholders or the Note Insurer.
(f) 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, the Notes, or any of the other
Transaction Documents, (ii) seeking to prevent the issuance of the Notes or the
consummation of any of the transactions contemplated by this Agreement or any of
the other Transaction Documents, (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, the
Notes or any of the other Transaction Documents, or (iv) relating to the
Servicer and which might adversely affect the federal income tax attributes of
the Notes.
(g) No Subsidiaries. Servicer has no subsidiaries, other than the
Issuer and Creditrust Mortgage Corporation.
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(h) Not an Investment Company. The Servicer is not an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act, and none of the issuance of the Notes, the
execution and delivery of the Transaction Documents to which the Servicer is a
party, or the performance by the Servicer of its obligations thereunder, will
violate any provision of the Investment Company Act, or any rule, regulation or
order issued by the Securities and Exchange Commission thereunder.
SECTION 7.02 Liability of Servicer; Indemnities.
(a) The Servicer shall be liable in accordance herewith only to the
extent of the obligations specifically undertaken by the Servicer under this
Agreement and shall have no other obligations or liabilities under this
Agreement. Such obligations shall include the following:
(i) the Servicer shall indemnify, defend and hold
harmless the Trustee, the Note Insurer and the Trust Estate from and against any
taxes that may at any time be asserted against the Trustee or the Trust Estate
with respect to the transactions contemplated in this Agreement or any of the
other Transaction Documents, including, without limitation, any sales, gross
receipts, general corporation, tangible or intangible personal property,
privilege or license taxes (but not including any taxes asserted with respect
to, and as of the date of, the transfer of the Receivables to the Trust, the
issuance and original sale of the Notes, or asserted with respect to ownership
of the Receivables, or federal or other income taxes arising out of payments on
the Notes) and costs and expenses in defending against the same;
(ii) the Servicer shall indemnify, defend and hold
harmless the Trustee, the Trust Estate, the Noteholders and the Note Insurer
from and against any and all costs, expenses, losses, claims, damages and
liabilities to the extent that such cost, expense, loss, claim, damage or
liability arose out of, and was imposed upon the Trustee, the Trust Estate, any
Noteholder or the Note Insurer through the negligence, willful misfeasance or
bad faith of the Servicer in connection with the transactions contemplated by
this Agreement and the other Transaction Documents, or by reason of the breach
by the Servicer of any of its representations, warranties or covenants hereunder
or under any of the other Transaction Documents; and
(iii) the Servicer shall indemnify, defend and hold
harmless the Trustee from and against all costs, expenses, losses, claims,
damages and liabilities arising out of or incurred in connection with the
acceptance or performance of the trusts and duties contained in this Agreement,
except to the extent that such cost expense, loss, claim, damage or liability:
(A) shall be due to the willful misfeasance, bad faith or negligence of the
Trustee, (B) shall arise from the breach by the Trustee of any of its
representations or warranties set forth in Section 9.14, (C) relates to any tax
other than the taxes with respect to which either the Issuer or the Servicer
shall be required to indemnify the Trustee, or (D) shall arise out of or be
incurred in connection with the performance by the Trustee of the duties as the
Backup Servicer under this Agreement.
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(b) Indemnification under this Section 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 Trustee.
(c) The provisions of this Section shall survive the resignation or
removal of the Servicer or the Trustee and the termination of this Agreement.
SECTION 7.03 Merger or Consolidation of, or Assumption of the
Obligations of, the Servicer.
Any corporation (i) into which the Servicer may be merged or
consolidated, (ii) which may result from any merger, conversion or consolidation
to which the Servicer shall be a party, or (iii) which may succeed to all or
substantially all of the business of the Servicer, which corporation in any of
the foregoing cases executes an agreement of assumption to perform every
obligation of the Servicer under this Agreement, shall be the successor to the
Servicer under this Agreement without the execution or filing of any paper or
any further act on the part of any of the parties to this Agreement; provided,
however, that (i) such merger, consolidation or conversion shall not cause a
Servicer Default, and (ii) prior to any such merger, consolidation or conversion
the Servicer shall have provided to the Trustee and the Noteholders a letter
from the Rating Agency indicating that such merger, consolidation or conversion
will not result in the qualification, reduction or withdrawal of the rating then
assigned to the Notes by the Rating Agency. The Servicer shall provide notice of
any merger, consolidation or succession pursuant to this Section to the Trustee,
the Noteholders, the Note Insurer, the Rating Agency and the Placement Agent.
SECTION 7.04 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 Note Insurer, the Trustee or the
Noteholders, 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 willful misfeasance, bad faith or negligence of the
Servicer in connection with the transactions contemplated by this Agreement and
any of the other Transaction Documents, or the breach by the Servicer of any of
its representations, warranties or covenants hereunder or under any of the other
Transaction Documents. The Servicer and any director, officer, employee or agent
of the Servicer may rely in good faith on any document of any kind prima facie
properly executed and submitted by any Person respecting any matters arising
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
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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 Noteholders 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 7.05 Servicer Not to Resign.
Subject to the provisions of Section 7.03, 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 Creditrust
Corporation shall be communicated to the Trustee, the Note Insurer, the
Noteholders and the Rating Agency at the earliest practicable time and any such
determination shall be evidenced by an Opinion of Counsel to such effect
delivered to the Trustee and the Noteholders concurrently with or promptly after
such notice. No such resignation shall become effective until the Backup
Servicer or a Successor Servicer shall have assumed the responsibilities and
obligations of Creditrust Corporation in accordance with Sections 8.02 or 8.03.
SECTION 7.06 Backup Servicing.
(a) Norwest Bank Minnesota, National Association is hereby appointed to
act as Backup Servicer with respect to this Agreement and the transactions
contemplated hereby and by the other Transaction Documents. The Backup Servicer
hereby acknowledges that the format of and information contained on the computer
diskette to be supplied by the Servicer pursuant to Section 7.06(b) below is
compatible with and can be read by the computer systems maintained by the Backup
Servicer and that all tests necessary to confirm such compatibility and
readability have been made.
(b) The Servicer agrees to provide monthly to the Backup Servicer a
computer diskette with all information necessary for the Backup Servicer to
perform all of the servicing obligations of the Servicer under this Agreement.
The Servicer further agrees to provide all updates with respect to its computer
processing necessary for the Backup Servicer to maintain a continuous ability to
fulfill the role of Servicer under this Agreement.
(c) The Backup Servicer shall assume its duties as Successor Servicer
in accordance with Sections 8.02 and 8.03 except upon determination that the
Backup Servicer is legally unable to perform the duties of the Servicer under
this Agreement as provided in Section 8.03.
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(d) On or before 11 a.m., New York, New York time on each Determination
Date, the Servicer will deliver to the Backup Servicer a computer diskette (or
other electronic transmission) in a format acceptable to the Backup Servicer
containing the fields listed in Exhibit E hereto, which fields contain
information with respect to the Receivables as of the close of business on the
last day of the related Collection Period. The Backup Servicer shall not be
obligated to verify the information contained in such transmission or the
Monthly Servicer Report.
(e) Other than the duties specifically set forth in this Agreement, the
Backup Servicer shall have no obligations hereunder, including without
limitation to supervise, verify, monitor or administer the performance of the
Servicer. The Backup Servicer shall have no liability for any actions taken or
omitted by the Servicer. The duties and obligations of the Backup Servicer shall
be determined solely by the express provisions of this Agreement and no implied
covenants or obligations shall be read into this Agreement against the Backup
Servicer. The Backup Servicer shall not be required to expend or risk its own
funds or otherwise incur financial liability in the performance of any of its
duties hereunder, or in the exercise of any of its rights or powers (other than
in the ordinary course of the performance of such duties or the exercise of such
rights or powers), if the repayment of such funds or adequate written indemnity
against such risk or liability is not reasonably assured to it in writing prior
to the expenditure or risk of such funds or incurrence of financial liability.
(f) Neither the Backup Servicer nor any of its directors, officers,
employees or agents shall be under any liability to any of the parties hereto,
except as specifically 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
Backup Servicer against any misfeasance, bad faith or negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties under this Agreement. The Backup Servicer and any of its directors,
officers, employees or agents 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 7.07 General Covenants of Servicer.
Creditrust Corporation covenants and agrees that from the Closing Date
until it is no longer the Servicer hereunder:
(a) Board. Servicer will maintain an independent board of directors
with a majority of "qualified outside directors" (as defined in the NASD Rules
for National Market Designations).
(b) Stockholder's Equity. Servicer shall not permit its Stockholder's
Equity to be less than the sum of (i) $1,750,000 plus (ii) 75% of the net
earnings of the Servicer for the period commencing on January 1, 1998 and ending
at the end of the Servicer's then most recent fiscal
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quarter (treated for this purpose as a single accounting period). For purposes
of this section, if net earnings of the Servicer for any period shall be less
than zero, the amount calculated pursuant to clause (ii) above for such period
shall be zero.
(c) Investments. Without the prior written consent of the Controlling
Party, Servicer shall not acquire or hold any indebtedness for borrowed money of
another person, or any capital stock, debentures, partnership interests or other
ownership interests or other securities of any person (collectively,
"Investments"), other than Investments made in the ordinary course of Servicer's
business as conducted on the Closing Date. This covenant shall not apply after
the Servicer's common stock is registered under Section 12 of the Exchange Act.
(d) Compensation. Without the prior written consent of the Controlling
Party, Servicer shall not pay cash compensation, in any form, whether current or
deferred, to Joseph Rensin, or any other officer (or person who is equivalent to
an officer) of more than $300,000 per year. This covenant shall not apply after
the Servicer's common stock is registered under Section 12 of the Exchange Act.
(e) Dividends. Without the prior written consent of the Controlling
Party, Servicer shall not increase the dividends paid with respect to its stock
over the amount paid in 1997. This covenant shall not apply after the Servicer's
common stock is registered under Section 12 of the Exchange Act.
(f) Changes in Subordinated Debt. Without the prior written consent of
the Controlling Party, Servicer shall not pay any amounts due with respect to
its subordinated debt other than in accordance with the terms of such
subordinated debt as are in effect as of the Closing Date. This covenant shall
not apply after the Servicer's common stock is registered under Section 12 of
the Exchange Act.
(g) Related Person Transaction. Without the prior written consent of
the Controlling Party, Servicer shall not enter into any Related Person
Transaction other than on terms that are no less favorable to Servicer than
those that would have been obtained in a comparable transaction by Servicer with
a non-Related Person. The term "Related Person" means, as to Servicer, any
shareholder, director, officer or employee thereof or any relative thereof. The
term "Related Person Transaction" means, (i) any sale, lease, transfer or other
disposition of Servicer's property to any Related Person, or (ii) the purchase,
lease or other acquisition by Servicer of any property from any Related Person,
or (iii) the making of any contract, agreement, understanding, loan, advance,
guarantee, or other credit support with or for the benefit of any Related
Person.
(h) Sale of Assets. Without the prior written consent of the
Controlling Party, Servicer shall not convey, sell, lease, license, transfer or
otherwise dispose of, in one transaction or in a series of transactions, all or
substantially all of its assets, other than with respect to securitization
transactions of its receivables.
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(i) Bankruptcy. Servicer shall not take any action in any capacity to
file any bankruptcy, reorganization or insolvency proceedings against Issuer, or
cause Issuer to commence any insolvency, reorganization or bankruptcy
proceedings, under any applicable state or federal law, including without
limitation any readjustment of debt, or marshaling of assets or liabilities or
similar proceedings.
(j) Legal Existence. Servicer shall do or cause to be done all things
necessary on its part to preserve and keep in full force and effect its
existence as a corporation in the jurisdiction of its incorporation, and to
maintain each of its licenses, approvals, registrations or qualifications in all
jurisdictions in which its ownership or lease of property or the conduct of its
business requires such licenses, approvals, registrations or qualifications;
except for failures to maintain any such licenses, approvals, registrations or
qualifications which, individually or in the aggregate, would not have a
material adverse effect on the ability of Servicer to perform its obligations
hereunder or under any of the other Transaction Documents.
(k) Compliance With Laws. Servicer shall comply in all material
respects, with all laws, rules and regulations and orders of any governmental
authority applicable to its operation, the noncompliance with which would have a
material adverse effect on the business, financial condition or results of
operations of the Servicer or on the ability of the Servicer to perform its
obligations hereunder or under any of the other Transaction Documents.
(l) Taxes. Servicer shall pay and discharge all taxes, assessments and
governmental charges or levies imposed upon Servicer or upon its income and
profits, or upon any of its property or any part thereof, before the same shall
become in default, provided that Servicer shall not be required to pay and
discharge any such tax, assessment, charge or levy so long as the validity or
amount thereof shall be contested in good faith by appropriate proceedings and
Servicer shall have set aside on its books adequate reserves with respect to any
such tax, assessment, charge or levy so contested, or so long as the failure to
pay any such tax, assessment, charge or levy would not have a material adverse
effect on the ability of the Servicer to perform its obligations hereunder.
(m) Financial Statements. Servicer shall maintain its financial books
and records in accordance with GAAP. Servicer shall furnish to the Note Insurer
and the Trustee:
(i) Quarterly Statements. As soon as available and in
any event within 45 days after the end of each of the calendar
quarters of each fiscal year of the Servicer, the consolidated
balance sheet of the Servicer and the related statements of
income, shareholders' equity and cash flows, each for the
period commencing at the end of the preceding fiscal year and
ending with the end of such fiscal quarter, prepared in
accordance with GAAP consistently applied; and
(ii) Annual Statements. As soon as available and in
any event within 90 days after the end of each fiscal year of
the Servicer, the balance sheets of the
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Servicer and the related statements of income, shareholder's
equity and cash flows for the fiscal year then ended, each
prepared in accordance with GAAP consistently applied and
reported on by a firm of nationally recognized independent
public accountants.
In the case of each of subsections 7.07(c) through (h) above, the consent of the
Controlling Party referred to therein shall not be unreasonably delayed or
unreasonably withheld.
ARTICLE VIII
SERVICER DEFAULT; EVENTS OF DEFAULT
SERVICER EVALUATION EVENT; REMEDIES
SECTION 8.01 Servicer Default.
For purposes of this Agreement, each of the following shall constitute
a "Servicer Default":
(a) any failure by the Servicer to deliver to the Trustee or the Note
Insurer the Monthly Servicer Report for the related Collection Period, or any
failure by the Servicer to make any payment, transfer or deposit, or deliver to
the Trustee any proceeds or payment required to be so delivered under the terms
of the Notes, this Agreement or any of the other Transaction Documents to which
it is a party, or to make any payment of Note Insurer Obligations on the day
when due, in each case that continues unremedied for a period of one Business
Day after the earlier to occur of (x) discovery by a Responsible Officer of the
Servicer, or (y) the date on which written notice has been given to the Servicer
by the Trustee or the Controlling Party, or to the Trustee, the Note Insurer and
the Servicer by Noteholders evidencing not less than 25% of the Voting
Interests; or
(b) any failure on the part of the Servicer duly to observe or perform
any other covenants or agreements of the Servicer set forth in the Notes, this
Agreement, the Insurance Agreement or any of the other Transaction Documents to
which the Servicer is a party, which failure (i) would have a material adverse
effect on the rights or interests of the Note Insurer, the Noteholders, the
Trustee or the Trust Estate and (ii) continues unremedied for a period of 30
days after the earlier to occur of (x) discovery by a Responsible Officer of the
Servicer or (y) the date on which written notice of such failure, requiring the
same to be remedied, shall have been given to the Servicer by the Controlling
Party or the Trustee, or to the Trustee, the Note Insurer and the Servicer by
Noteholders evidencing not less than 25% of the Voting Interests; or the
Servicer delegates its duties under the Notes, this Agreement, the Insurance
Agreement or any of the other Transaction Documents to which it is a party,
except as specifically permitted pursuant to Section 8.07, and such delegation
continues unremedied for a period of 15 days after written notice, requiring
such delegation to be remedied, shall have been given to the Servicer by the
Trustee or the Controlling Party, or to the Trustee, the Note Insurer and the
Servicer by Noteholders evidencing not less than 25% of the Voting Interests; or
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(c) 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
(d) 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 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; or
(e) any representation, warranty or certification made by the
Creditrust Corporation in this Agreement, the Insurance Agreement or in any
other Transaction Document to which it is a party, or in any certificate
delivered pursuant to this Agreement, the Insurance Agreement or in any other
Transaction Document to which it is a party, proves to have been incorrect when
made, which (i) would have a material adverse effect on the rights of the
Noteholders, the Note Insurer or the Trust Estate, respectively, and (ii) if
capable of remedy, continues unremedied for a period of 30 days after the
earlier to occur of (x) discovery by a Responsible Officer of the Servicer or
(y) the date on which written notice thereof, requiring the same to be remedied,
shall have been given to the Servicer by the Controlling Party or the Trustee,
or to the Trustee, the Note Insurer and the Servicer by Noteholders evidencing
not less than 25% of the Voting Interests; or
(f) The failure by the Servicer to make any required payment in excess
of $100,000 on any obligation of Servicer, other than Servicer's obligations to
make payment on account of trade accounts payable which are in dispute in the
normal course of business, within 2 Business Days after Servicer has received
written notice from any such creditor of Servicer's failure to make such
payment; or
(g) Commencing December 31, 1998, and on the last day of each June and
December thereafter, the cumulative amount of Net Proceeds in respect of all
Receivables from the Closing Date to such date is less than the amounts
specified in Schedule B.
(h) Beginning on October 1, 1998, and on the first date of each month
thereafter, for the preceding three calendar months (including any portion of
June, 1998 following the Closing Date), the average initial payment plan for the
Receivables is less than 50% of the average Charged-Off Balance related to such
Receivables; or
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(i) Servicer suffers the loss, suspension or other material impairment
of any required license or permit in any State of the United States (or the
District of Columbia) where Obligors are located which, in the aggregate for
such State (or the District of Columbia), accounts for more than $50,000,000 in
initial Charged-Off Balances of Receivables, unless such loss, suspension or
impairment is cured within 60 days after any Responsible Officer of the Servicer
has knowledge of such loss, suspension or material impairment; or
(j) Either Joseph Rensin or Richard Palmer terminates or shall have
terminated his respective employment with the Servicer, or become disabled for a
period of three consecutive months or more, or die and a replacement reasonably
satisfactory to the Controlling Party has not been appointed within 90 days
after such death, termination or disability; or
(k) Joseph Rensin shall (i) cease to be President or Chairman of the
Board of Servicer, unless a replacement reasonably satisfactory to the
Controlling Party is appointed within 90 days thereafter, or (ii) engage in
material business activities other than the management of Servicer; or
(l) There occurs any reduction of Joseph Rensin's personal investment
in Servicer below an amount equal to 51% of the outstanding common stock of
Servicer, or such lesser amount as may be acceptable to the Controlling Party.
(m) Servicer sells, transfers, pledges or otherwise disposes of its
membership interest in Issuer, whether voluntarily or by operation of law,
foreclosure or other enforcement by a Person of its remedies against the
Servicer, except pursuant to a merger, consolidation or a sale of all or
substantially all the assets of Servicer in a transaction not prohibited by this
Agreement; provided, however, that the Servicer may pledge its membership
interest in the Issuer to a secured lender (x) in connection with a pledge of
all or substantially all of the assets of the Servicer to secure indebtedness
owed to such lender for borrowed money, or (y) with the prior written consent of
the Note Insurer.
Notwithstanding the foregoing, the cure periods referred to in each of
clauses (a), (f) and (j) above may be extended for an additional period of five
Business Days each, or such longer period not to exceed 30 Business Days as may
be acceptable to the Controlling Party, if such delay or failure was caused by
an act of God or other similar occurrence. Upon the occurrence of any such event
the Servicer shall not be relieved from using its best efforts to perform its
obligations in a timely manner in accordance with the terms of this Agreement
and the Servicer shall provide the Trustee, the Note Insurer, the Rating Agency,
the Placement Agent and the Noteholders prompt notice of such failure or delay
by it, together with a description of its effort to so perform its obligations.
The Servicer shall notify the Trustee and the Note Insurer in writing of any
Servicer Default that it discovers within one Business Day of such discovery.
SECTION 8.02 Consequences of a Servicer Default.
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(a) If a Servicer Default shall occur and be continuing, so long as
such Servicer Default has not been cured or waived pursuant to Section 8.05, the
Trustee shall, upon the direction of the Controlling Party, and may (with the
written consent of the Controlling Party), at its discretion, by notice then
given in writing to the Servicer and the Note Insurer, terminate all (but not
less than all) of the rights and obligations of the Servicer, as Servicer under
this Agreement and the other Transaction Documents, and in and to the
Receivables and proceeds thereof. On or after the receipt by the Servicer of
such written notice, all authority and power of the Servicer under this
Agreement, whether with respect to the Notes, the Receivables, the Transaction
Documents or otherwise, shall, without further action, pass to and be vested in
the Backup Servicer pursuant to and under this Section or such Successor
Servicer as may be appointed under Section 8.03; and, without limitation, the
Backup Servicer or such Successor Servicer shall be hereby authorized and
empowered to execute and deliver, on behalf of the predecessor Servicer, as
attorney-in-fact or otherwise, any and all documents and other instruments, and
to do or accomplish all other acts or things necessary or appropriate to effect
the purposes of such notice of termination, whether to complete the transfer and
endorsement of the Receivables and related documents, or otherwise. The
predecessor Servicer shall cooperate with the Backup Servicer or the Successor
Servicer, as applicable, in effecting the termination of the responsibilities
and rights of the predecessor Servicer under this Agreement, including, without
limitation, the transfer to the Backup Servicer or the Successor Servicer, as
applicable, for administration by it of all cash amounts that shall at the time
be held by the predecessor Servicer for deposit with respect to the Receivables,
or have been deposited by the predecessor Servicer in the Accounts with respect
to the Receivables or thereafter received by the predecessor Servicer with
respect to the Receivables. All reasonable costs and expenses (including
attorneys' fees) incurred in connection with transferring the Receivable Files
to the Backup Servicer or the Successor Servicer, as applicable, and amending
this Agreement to reflect such succession as Servicer pursuant to this Section
shall be paid first, pursuant to Section 4.04(b)(iii), and second, by the
predecessor Servicer upon presentation of reasonable documentation of such costs
and expenses; provided, however, that the amount of such costs and expenses
shall not exceed $75,000 (the amount of such costs and expenses are referred to
herein as the "Transition Fees").
(b) In addition to the remedial provisions set forth in clause (a)
above, and not by way of limitation of any remedies to which any of the Trustee,
the Note Insurer or the Noteholders are entitled upon the occurrence of a
Servicer Default, the Issuer and the Servicer acknowledge and agree that, so
long as a Servicer Default shall occur and be continuing, and such Servicer
Default has not been cured or waived pursuant to Section 8.05, the Trustee
shall, upon the direction of the Controlling Party and may (with the written
consent of the Controlling Party), at its discretion, by notice then given in
writing to the Servicer and the Note Insurer, direct the Servicer (or Backup
Servicer or Successor Servicer as the case may be) to (x) deposit all checks and
other items of collections received in respect of Receivables directly into an
Account immediately upon receipt, and/or (y) instruct each Obligor to remit all
collections in respect of receivables directly to an Account designated for such
purpose.
SECTION 8.03 Backup Servicer to Act; Appointment of Successor Servicer.
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On and after the time the Servicer receives a notice of termination
pursuant to Section 8.02 or tenders its resignation pursuant to Section 7.05,
the Backup Servicer shall, by an instrument in writing, assume the rights and
responsibilities of the Servicer in its capacity as Servicer under this
Agreement and the Insurance Agreement and the transactions set forth or provided
for in this Agreement and the Insurance Agreement, and shall be subject to all
the responsibilities, restrictions, duties and liabilities relating thereto
placed on the Servicer by the terms and provisions of this Agreement and the
Insurance Agreement; provided, however, that the Backup Servicer shall not be
liable for any acts, omissions or obligations of the Servicer prior to such
succession or for any breach by the Servicer of any of its representations and
warranties contained in this Agreement, in the Insurance Agreement or in any
related Transaction Document. As compensation therefor, the Backup Servicer
shall be entitled to such compensation (whether payable out of the Collection
Account or otherwise) as the Servicer would have been entitled to under this
Agreement if no such notice of termination or resignation had been given.
Notwithstanding anything herein to the contrary, Norwest Bank Minnesota,
National Association shall not resign from the obligations and duties imposed on
it as Backup 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 Norwest Bank Minnesota, National Association shall be
communicated to the Trustee, the Noteholders, the Note Insurer, and the Rating
Agency at the earliest practicable time and any such determination shall be
evidenced by an Opinion of Counsel to such effect delivered to the Trustee and
the Noteholders concurrently with or promptly after such notice. In the event
the Backup Servicer is unable or unwilling so to act, it shall appoint or
petition a court of competent jurisdiction to appoint any established
institution having a net worth of not less than $50,000,000 and whose regular
business includes the servicing of consumer receivables as a successor servicer
(a "Successor Servicer"). In connection with such appointment and assumption,
the Backup Servicer may make such arrangements for the compensation of such
Successor Servicer out of payments on or in respect of the Receivables as it and
such Successor Servicer shall agree; provided however, that no such compensation
shall be in excess of an amount acceptable to the Controlling Party and the
Rating Agency and provided that if the Successor Servicer is an Affiliate of the
Trustee, such fees will not exceed the actual costs of providing such servicing.
The Backup Servicer and such Successor Servicer shall take such action,
consistent with this Agreement, as shall be necessary to effectuate any such
succession. The Backup Servicer shall not be relieved of its duties as Successor
Servicer under this Section until the newly appointed Successor Servicer shall
have assumed the responsibilities and obligations of the Servicer under this
Agreement.
SECTION 8.04 Notification to Note Insurer, Noteholders, Rating Agency
and Placement Agent.
Upon a Responsible Officer of the Trustee obtaining actual knowledge of
(i) the occurrence of a Servicer Default and the expiration of any cure period
applicable thereto or (ii) any termination of, or appointment of a successor to,
the Servicer pursuant to this Agreement, the
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Trustee shall give prompt written notice thereof to Noteholders at their
respective addresses appearing in the Note Register and to the Rating Agency,
the Note Insurer and the Placement Agent.
SECTION 8.05 Waiver of Past Servicer Defaults.
The Trustee shall at the direction of the Controlling Party waive any
Servicer Default or other default by the Servicer in the performance of its
obligations hereunder and its consequences, except a default in making any
required deposits to or payments from the Accounts in accordance with this
Agreement or in respect of a covenant or provision of this Agreement that under
Section 11.01 cannot be modified or amended without the consent of each
Noteholder. Upon any such waiver of a past default, such default shall cease to
exist, and any Servicer Default arising therefrom shall be deemed to have been
remedied for every purpose of this Agreement. No such waiver shall extend to any
subsequent or other default or impair any right consequent thereon except to the
extent expressly so waived.
SECTION 8.06 [Deleted]
SECTION 8.07 Subservicers.
(a) The Backup Servicer may, at its own expense, enter into
subservicing agreements with subservicers (the "Subservicers") for the servicing
and administration of all or any part of the Receivables. References in this
Agreement to actions taken or to be taken by the Backup Servicer in servicing
and managing the Receivables include actions taken by a Subservicer on behalf of
the Backup Servicer. Each Subservicer shall be authorized to transact business
in the state or states in which the related Receivables it is to service or
manage are situated, if and to the extent required by applicable law to enable
the Subservicer to perform its obligations hereunder and under the applicable
subservicing agreement. Each subservicing agreement shall be upon such terms and
conditions as are not inconsistent with this Agreement and as to which the
Backup Servicer and the Subservicer have agreed. For purposes of this Agreement,
the Backup Servicer shall be deemed to have received any payment when the
Subservicer receives such payment. The Backup Servicer shall notify the Trustee,
the Issuer, the Note Insurer and the Rating Agency in writing promptly upon the
appointment of any Subservicer.
(b) As part of its servicing activities hereunder, the Backup Servicer,
for the benefit of the Trustee, the Note Insurer and the Noteholders, shall
enforce the obligations of each Subservicer under the related subservicing
agreement. Such enforcement, including, without limitation, the legal
prosecution of claims, termination of subservicing agreements and pursuit of
other appropriate remedies, shall be in accordance with the servicing standards
set forth herein. The Backup Servicer shall pay the costs of such enforcement at
its own expense and shall be reimbursed therefor only from (i) a general
recovery resulting from such enforcement only to the extent, if any, that such
recovery exceeds all amounts due in respect of the related Receivables,
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or (ii) a specific recovery of costs, expenses or attorneys fees against the
party against whom such enforcement is directed.
(c) Notwithstanding any subservicing agreement any of the provisions of
this Agreement relating to agreements or arrangements between the Backup
Servicer and a Subservicer, or reference to actions taken through a Subservicer
or otherwise, the Back-up Servicer shall remain obligated and liable to the
Trustee, the Note Insurer and the Noteholders for the servicing, managing,
collecting and administering of the Receivables and the other assets included in
the Trust Estate in accordance with the provisions of Section 2.1 without
diminution of such obligation or liability by virtue of such subservicing
agreement or arrangements or by virtue of indemnification from a Subservicer and
to the same extent and under the same terms and conditions as if the Backup
Servicer alone were servicing, managing, collecting and administering the
Receivables and the other assets included in the Trust Estate.
SECTION 8.08 Events of Default.
"Event of Default" wherever used herein, means, with respect to Notes
issued hereunder, any one of the following events (whatever the reason for such
Event of Default and whether it shall 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):
(a) default in the payment of any interest, premiums or any other
amounts due and owing on any Note or in respect of the Note Insurer Obligations
(which default continues for a period of two Business Days) or failure to pay
the Notes or the Note Insurer Obligations in full on or before the Final Payment
Date;
(b) the Note Insurer is required to make a payment under the Policy;
(c) if the Issuer shall breach or default in the due observance of the
covenants of the Issuer set forth in Section 6.07;
(d) if the Issuer shall breach, or default in the due observance or
performance of, any other of its covenants in this Agreement, which breach or
default would have a material adverse effect on the rights or interests of the
Note Insurer or the Noteholders, and such default shall continue for a period of
30 days after the earlier to occur of (x) discovery by a Responsible Officer of
the Servicer or (y) the date on which written notice of such failure, requiring
the same to be remedied, shall have been given to the Servicer by the Note
Insurer or the Trustee, or to the Trustee, the Note Insurer and the Servicer by
Noteholders evidencing not less than 25% of the Voting Interests;
(e) if any representation or warranty of the Issuer made in this
Agreement or any certificate or other writing delivered pursuant hereto or in
connection herewith shall prove to
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have been breached in any material respect as of the time when the same shall
have been made or deemed made, which breach would have a material adverse effect
on the rights or interests of the Note Insurer or the Noteholders, and such
breach shall continue for a period of 30 days after the earlier to occur of (x)
discovery by a Responsible Officer of the Servicer or (y) the date on which
written notice of such failure, requiring the same to be remedied, shall have
been given to the Servicer by the Note Insurer or the Trustee, or to the
Trustee, the Note Insurer and the Servicer by Noteholders evidencing not less
than 25% of the Voting Interests;
(f) the entry of a decree or order for relief by a court having
jurisdiction in respect of the Issuer in an involuntary case under the federal
bankruptcy laws, as now or hereafter in effect, or any other present or future
federal or state bankruptcy, insolvency or similar law, or appointing a
receiver, liquidator, assignee, trustee, custodian, sequestrator or other
similar official of the Issuer or of any substantial part of its property, or
ordering the winding up or liquidation of the affairs of the Issuer and the
continuance of any such decree or order unstayed and in effect for a period of
30 consecutive days; or
(g) the commencement by the Issuer of a voluntary case under the
federal bankruptcy laws, as now or hereafter in effect, or any other present or
future federal or state bankruptcy, insolvency or similar law, or the consent by
the Issuer to the appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian, sequestrator or other similar official of the
Issuer or of any substantial part of its property or the making by the Issuer of
an assignment for the benefit of creditors or the failure by the Issuer
generally to pay its debts as such debts become due or the taking of corporate
action by the Issuer in furtherance of any of the foregoing.
SECTION 8.09 Acceleration of Maturity; Rescission and Annulment.
If an Event of Default occurs and is continuing, then and in every such
case, so long as such Event of Default has not been cured or waived pursuant
hereto, the Trustee shall, upon the direction of the Controlling Party, and may
with the written consent of the Controlling Party, at its discretion, by notice
then given in writing to the Issuer, the Servicer and the Note Insurer, declare
all of the Notes to be immediately due and payable and upon any such declaration
such Notes, in an amount equal to the Note Balance of such Notes, together with
accrued and unpaid interest thereon to the date of such acceleration, and
together with all unpaid Trustee Fees, Backup Servicing Fees, and Servicing
Fees, shall become immediately due and payable.
At any time after such a declaration of acceleration of maturity of the
Notes has been made and before a judgment or decree for payment of the money due
has been obtained by the Trustee as hereinafter in this Article provided, the
Note Insurer by written notice to the Issuer and the Trustee, may rescind and
annul such declaration and its consequences if:
(a) the Issuer has paid or deposited with the Trustee a sum sufficient
to pay:
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(i) all payments of principal of, and interest on, all
Notes and all other amounts which would then be due hereunder or upon such Notes
if the Event of Default giving rise to such acceleration had not occurred; and
(ii) all sums paid by the Trustee hereunder and the
reasonable compensation, expenses and disbursements of the Trustee, its agents
and counsel; and
(b) all Events of Default, other than the nonpayment of the principal
of Notes which have become due solely by such acceleration, have been cured or
waived as provided in Section 8.21.
No such rescission shall affect any subsequent default or impair any
right consequent thereon.
SECTION 8.10 Collection of Indebtedness and Suits for Enforcement by
Trustee.
Subject to the following sentence, if an Event of Default occurs and is
continuing, the Trustee may in its discretion proceed to protect and enforce its
rights and the rights of the Note Insurer and the Noteholders by any proceedings
the Trustee deems appropriate to protect and enforce any such rights, whether
for the specific enforcement of any covenant or agreement in this Agreement or
in aid of the exercise of any power granted herein, or enforce any other proper
remedy. Any proceedings brought by the Trustee on behalf of the Note Insurer or
the Noteholders or by the Note Insurer or any Noteholder against the Issuer
shall be limited to the preservation, enforcement and foreclosure of the Liens,
assignments, rights and security interests under this Agreement and the other
Transaction Documents and no attachment, execution or other suit or process
shall be sought, issued or levied upon any assets, properties or funds of the
Issuer, other than the Trust Estate relative to the Notes in respect of which
such Event of Default has occurred. If there is a foreclosure of any such liens,
assignments, rights and security interests under this Agreement, by private
power of sale or otherwise, no judgment for any deficiency upon the indebtedness
represented by the Notes may be sought or obtained by the Trustee or any
Noteholder against the Issuer. The Trustee shall be entitled to recover the
costs and expenses expended by it pursuant to this Section 8.10 including
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
SECTION 8.11 Remedies.
If an Event of Default shall have occurred and be continuing and the
Notes have been declared due and payable and such declaration and its
consequences have not been rescinded and annulled, the Trustee (subject to
Section 8.24, to the extent applicable) shall, at the direction of the
Controlling Party, and may (with the written consent of the Controlling Party)
at its discretion, do one or more of the following:
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(a) institute proceedings for the collection of all amounts then
payable on the Notes, under this Agreement or under any of the other Transaction
Documents, whether by declaration or otherwise, enforce any judgment obtained,
and collect from the Issuer monies adjudged due, subject in all cases to the
provisions of Section 8.10;
(b) in accordance with Section 8.24, sell the Trust Estate or any
portion thereof or rights or interest therein, at one or more public or private
Sales called and conducted in any manner permitted by law;
(c) institute proceedings from time to time for the complete or partial
foreclosure of this Agreement with respect to the Trust Estate;
(d) exercise any remedies of a secured party under the UCC and take any
other appropriate action to protect and enforce the rights and remedies of the
Trustee, the Note Insurer or the Noteholders hereunder; and
(e) refrain from selling the Trust Estate and apply all Available Funds
pursuant to Section 8.14.
SECTION 8.12 Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, composition or other judicial
proceeding relative to the Issuer or any other obligor upon any of the Notes or
the property of the Issuer or of such other obligor or their creditors, the
Trustee (irrespective of whether the Notes shall then be due and payable as
therein expressed or by declaration or otherwise and irrespective of whether the
Trustee shall have made any demand on the Issuer for the payment of any overdue
principal or interest) shall be entitled and empowered, by intervention in such
proceeding or otherwise to:
(a) file and prove a claim for the whole amount of principal and
interest owing and unpaid in respect of the Notes and the Note Insurer
Obligations and file such other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee (including any claim for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel) and of the Noteholders allowed in such
Proceeding, and
(b) collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any receiver,
assignee, trustee, liquidator, or sequestrator (or other similar official) in
any such proceeding is hereby authorized by each Noteholder and the Note Insurer
to make such payments to the Trustee and, in the event that the Trustee shall
consent to the making of such payments directly to the Noteholders, to pay to
the Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 9.07.
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Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Noteholder or the
Note Insurer any plan of reorganization, arrangement, adjustment or composition
affecting any of the Notes or the rights of any Noteholder or the Note Insurer,
or to authorize the Trustee to vote in respect of the claim of any Noteholder or
the Note Insurer in any such Proceeding.
SECTION 8.13 Trustee May Enforce Claims without Possession of Notes.
All rights of action and claims under this Agreement or any of the
Notes or any of the other Transaction Documents may be prosecuted and enforced
by the Trustee without the possession of any of the Notes or the production
thereof in any proceeding relating thereto, and any such proceeding instituted
by the Trustee shall be brought in its own name as trustee of an express trust,
and any recovery of judgment shall be for the ratable benefit of the Noteholders
in respect of which such judgment has been recovered and shall be paid as
provided in Section 8.14.
SECTION 8.14 Application of Money Collected.
If the Notes have been declared due and payable following an Event of
Default and such declaration and its consequences have not been rescinded and
annulled, any money collected by the Trustee with respect to such Notes pursuant
to this Article or otherwise and any other monies that may then be held or
thereafter received by the Trustee as security for such Notes shall be treated
like Available Funds and applied as provided in Section 4.04(b).
SECTION 8.15 Limitation on Suits.
No Noteholder shall have any right to institute any proceedings,
judicial or otherwise, with respect to this Agreement, or for the appointment of
a receiver or trustee, or for any other remedy hereunder, unless:
(a) such Noteholder has previously given written notice to the Trustee
of a continuing Event of Default;
(b) the Noteholders representing not less than 25% of the Voting
Interests shall have made written request to the Trustee to institute
proceedings in respect of such Event of Default in its own name as Trustee
hereunder;
(c) such Noteholders have offered to the Trustee indemnity in full
against the costs, expenses and liabilities to be incurred in compliance with
such request;
(d) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding;
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(e) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Note Insurer (so long as no
Insurer Default is then in effect) or the Noteholders representing more than 50%
of the Voting Interests; and
(f) for so long as no Insurer Default is then in effect, the Note
Insurer shall have given its written consent to the Trustee to the pursuit by
the Trustee of such remedies;
it being understood and intended that no one or more Noteholders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Agreement to affect, disturb or prejudice the rights of any other
Noteholders or to obtain or to seek to obtain priority or preference over any
other Noteholders or to enforce any right under this Agreement, except in the
manner herein provided and for the equal and ratable benefit of all the
Noteholders.
In the event the Trustee shall receive conflicting or inconsistent
requests and indemnity from two or more groups of Noteholders, each representing
less than 50% of the Voting Interests, and the Trustee shall not have received
any conflicting or inconsistent requests and indemnity from the Note Insurer at
such time, the Trustee in its sole discretion may determine what action, if any,
shall be taken notwithstanding any other provision herein to the contrary.
SECTION 8.16 Unconditional Rights of Noteholders to Receive Principal
and Interest.
Subject to the provisions in this Agreement (including Section 8.10)
limiting the right to recover amounts due on a Note to recovery from amounts in
the Trust Estate, the Noteholder shall have the right to the extent permitted by
applicable law, which right is absolute and unconditional, to receive payment of
principal of and interest on such Note on the Final Payment Date and to
institute suit for the enforcement of any such payment and such right shall not
be impaired without the consent of such Noteholder.
SECTION 8.17 Restoration of Rights and Remedies.
If the Trustee, the Note Insurer or any Noteholder has instituted any
proceeding to enforce any right or remedy under this Agreement and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Noteholder, then and in every
such case the Issuer, the Trustee, the Note Insurer and the Noteholders shall,
subject to any determination in such proceeding, be restored severally and
respectively to their former positions hereunder, and thereafter all rights and
remedies of the Trustee and the Noteholders shall continue as though no such
proceeding had been instituted.
SECTION 8.18 Rights and Remedies Cumulative.
No right or remedy herein conferred upon or reserved to the Trustee, to
the Note Insurer or to the Noteholders is intended to be exclusive of any other
right or remedy, and every right
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and remedy shall, to the extent permitted by law, be cumulative and in addition
to every other right and remedy given hereunder or now or hereafter existing at
law or in equity or otherwise. The assertion or employment of any right or
remedy hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 8.19 Delay or Omission Not Waiver.
No delay or omission of the Trustee, of the Note Insurer or of any
Noteholder to exercise any right or remedy accruing upon any Event of Default
shall impair any such right or remedy or constitute a waiver of any such Event
of Default or an acquiescence therein. Every right and remedy given by this
Article or by law to the Trustee, to the Note Insurer or to the Noteholders may
be exercised from time to time, and as often as may be deemed expedient, by the
Trustee, the Note Insurer or by the Noteholders, as the case may be.
SECTION 8.20 Control by Note Insurer and Noteholders.
The Controlling Party shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee; provided that:
(a) such direction shall not be in conflict with any rule of law , with
this Agreement or any inconsistent direction of the Note Insurer hereunder
(unless at such time there shall be an Insurer Default in effect);
(b) any direction by Noteholders (if the Note Insurer is not the
Controlling Party) to the Trustee to undertake a Sale of the Trust Estate shall
be by the Noteholders representing the percentage of the outstanding Note
Balance of the Outstanding Notes specified in Section 8.24(b)(i), unless Section
8.24(b)(ii) is applicable; and
(c) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction; provided, however, that, subject
to Section 9.01, the Trustee need not take any action which it determines might
involve it in liability or be unjustly prejudicial to the Noteholders not
consenting.
SECTION 8.21 Waiver of Past Defaults.
The Controlling Party may on behalf of the Noteholders of all the Notes
waive any past default hereunder and its consequences, except a default:
(a) in the payment of any installment of principal of or interest on,
any Note; or
(b) in respect of a covenant or provision hereof which under Section
11.01 cannot be modified or amended without the consent of the Noteholders.
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Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured for every
purpose of this Agreement; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
SECTION 8.22 Undertaking for Costs.
All parties to this Agreement agree, and each Noteholder by his
acceptance of a Note hereunder shall be deemed to have agreed, that any court
may in its discretion require, in any suit for the enforcement of any right or
remedy under this Agreement, or in any suit against the Trustee for any action
taken, suffered or omitted by it as Trustee, the filing by any party litigant in
such suit of an undertaking to pay the costs of such suit, and that such court
may in its discretion assess reasonable costs, including reasonable attorneys'
fees, against any party litigant in such suit, having due regard to the merits
and good faith of the claims or defenses made by such party litigant; but the
provisions of this Section 8.22 shall not apply to any suit instituted by the
Trustee or the Note Insurer, to any suit instituted by any Noteholder, or group
of Noteholders representing more than 10% of the Voting Interests, or to any
suit instituted by any Noteholder for the enforcement of the payment of
principal of or interest on any Note on the Final Payment Date.
SECTION 8.23 Waiver of Stay or Extension Laws.
The Issuer covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension of law wherever enacted,
now or at any time hereafter in force, which may affect the covenants in, or the
performance of, this Agreement; and the Issuer (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
SECTION 8.24 Sale of Trust Estate.
(a) The power to effect any sale (a "Sale") of any portion of the Trust
Estate pursuant to Section 8.11 shall not be exhausted by any one or more Sales
as to any portion of the Trust Estate remaining unsold, but shall continue
unimpaired until the entire Trust Estate shall have been sold or all amounts
payable on the Notes and under this Agreement with respect thereto shall have
been paid. The Trustee may from time to time postpone any Sale by public
announcement made at the time and place of such Sale.
(b) To the extent permitted by law, the Trustee shall not, in any
private Sale sell or otherwise dispose of the Trust Estate, or any portion
thereof, unless:
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(i) the Controlling Party shall consent to, or direct the
Trustee to make such Sale; or
(ii) to the extent that an Insurer Default is then in
effect, the proceeds of such Sale would be not less than the sum of all amounts
due to the Trustee hereunder and the entire amount which would be distributable
to the Note Insurer and the Noteholders, in full payment thereof in accordance
with Section 8.14, on the Payment Date next succeeding the date of such Sale,
together with any amounts then owing to the Note Insurer.
The purchase by the Trustee of all or any portion of the Trust Estate
at a private Sale shall not be deemed a Sale or disposition thereof for purposes
of this Section 8.24(b).
(c) Unless the Controlling Party has otherwise consented or directed
the Trustee, at any public Sale of all or any portion of the Trust Estate at
which a minimum bid equal to or greater than the amount described in paragraph
(ii) of subsection (b) of this Section 8.24 has not been established by the
Trustee and no Person bids an amount equal to or greater than such amount, the
Trustee shall prevent such sale and bid an amount at least $1.00 more than the
highest other bid in order to preserve the Trust Estate.
(d) In connection with a Sale of all or any portion of the Trust
Estate:
(i) any of the Noteholders or the Note Insurer may bid
for and purchase the property offered for Sale, and upon compliance with the
terms of sale may hold, retain and possess and dispose of such property, without
further accountability, and may, in paying the purchase money therefor, deliver
any of the Notes or claims for interest thereon in lieu of cash up to the amount
which shall, upon distribution of the net proceeds of such Sale, be payable
thereon, and such Notes, in case the amounts so payable thereon shall be less
than the amount due thereon, shall be returned to the holders thereof after
being appropriately stamped to show such partial payment;
(ii) the Trustee may bid for and acquire the property
offered for Sale in connection with any public Sale thereof, and, in lieu of
paying cash therefor, may make settlement for the purchase price by crediting
the gross Sale price against the sum of (A) the amount which would be
distributable to the Noteholders and the Note Insurer as a result of such Sale
in accordance with Section 8.14 on the Payment Date next succeeding the date of
such Sale and (B) the expenses of the Sale and of any proceedings in connection
therewith which are reimbursable to it, without being required to produce the
Notes in order to complete any such Sale or in order for the net Sale price to
be credited against such Notes, and/or the Note Insurer Obligations, and any
property so acquired by the Trustee shall be held and dealt with by it in
accordance with the provisions of this Agreement;
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(iii) the Trustee shall execute and deliver an appropriate
instrument of conveyance transferring its interest in any portion of the Trust
Estate in connection with a Sale thereof;
(iv) the Trustee is hereby irrevocably appointed the agent
and attorney-in-fact of the Issuer to transfer and convey its interest in any
portion of the Trust Estate in connection with a Sale thereof, and to take all
action necessary to effect such Sale; and
(v) no purchaser or transferee at such a Sale shall be
bound to ascertain the Trustee's authority, inquire into the satisfaction of any
conditions precedent or see to the application of any moneys.
(e) Notwithstanding anything in this Agreement to the contrary, if an
Event of Default specified in Section 8.08(a) is the Event of Default, or one of
the Events of Default, on the basis of which the Notes have been declared due
and payable, then the Trustee shall, at the direction of the Controlling Party,
or may, in its discretion (together with the written consent of the Controlling
Party), sell the Trust Estate without compliance with this Section 8.24.
(f) This Section 8.24(f) only applies during such time as the Rating
Agency has rated the financial strength of the Note Insurer below BBB-. If,
during such time, an Event of Default has occurred and is continuing such that
the Trustee has the right to effect a Sale, then notwithstanding any provision
of this Agreement to the contrary, the Note Insurer hereby agrees that the
Noteholders with Voting Interests in excess of 50% of all outstanding Voting
Interests shall have the right to direct the Trustee to sell all or
substantially all the Trust Estate pursuant to this Agreement and applicable
law, whether or not the Note Insurer is the Controlling Party at such time. If
the Note Insurer is the Controlling Party, then it shall direct the Trustee to
effect such a Sale of all or substantially all of the Trust Estate promptly upon
receiving written direction to do so from the Noteholders with Voting Interests
in excess of 50% of all outstanding Voting Interests
SECTION 8.25 Action on Notes.
The Trustee's right to seek and recover judgment under this Agreement
shall not be affected by the seeking, obtaining or application of any other
relief under or with respect to this Agreement. Neither the Lien of this
Agreement nor any rights or remedies of the Trustee, the Note Insurer or the
Noteholders shall be impaired by the recovery of any judgment by the Trustee
against the Issuer or by the levy of any execution under such judgment upon any
portion of the Trust Estate.
SECTION 8.26 No Recourse to Other Trust Estates or Other Assets of the
Issuer.
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The Trust Estate granted to the Trustee as security for the Notes
serves as security only for the Notes. Holders of the Notes shall have no
recourse against the trust estate granted as security for any other series of
notes issued by the Issuer, and no judgment against the Issuer for any amount
due with respect to the Notes may be enforced against either the trust estate
securing any other series or any other assets of the Issuer, nor may any
prejudgment lien or other attachment be sought against any such other trust
estate or any other assets of the Issuer.
SECTION 8.27 License.
Servicer hereby licenses to each "Qualified Successor Servicer"
(hereinafter defined) on a non-exclusive basis, a copy of Servicer's "Mozart"
software currently in use by Servicer for the collection of accounts by
Servicer, solely for the limited purpose of collecting the Receivables. The
licensee shall have no right to copy the software or sub-license or assign this
license except to another "Qualified Successor Servicer". The licensee shall not
be obligated to pay any royalty or other fee to Servicer for such license. The
term "Qualified Successor Servicer" means any Successor Servicer (or Subservicer
thereof) which has not, nor has any Affiliate thereof, within the two year
period immediately prior to its appointment as Successor Servicer (or
Subservicer, as the case may be), purchased accounts for the purpose of
collecting them and retaining all or a portion of the proceeds for itself. The
Qualified Successor Servicer shall sign a confidentiality agreement reasonably
satisfactory to Servicer in form and substance under which it agrees to maintain
the confidentiality of the software.
ARTICLE IX
THE TRUSTEE
SECTION 9.01 Duties of Trustee.
(a) The Trustee, both prior to and after the occurrence of a Servicer
Default, undertakes to perform such duties and only such duties as are
specifically set forth in this Agreement. The Trustee shall exercise such of the
rights and powers vested in it by this Agreement and use the same degree of care
and skill in their exercise, as a prudent person would exercise or use under the
circumstances in the conduct of his or her own affairs; provided, however, that
if the Trustee in its capacity as Backup Servicer assumes the duties of the
Servicer pursuant to Section 8.02 or 8.03, the Trustee in performing such duties
shall use the degree of skill and attention customarily exercised by a servicer
with respect to defaulted consumer receivables that it services for itself or
others.
(b) The Trustee, upon receipt of all resolutions, certificates,
statements, opinions, reports, documents, orders or other instruments furnished
to the Trustee that shall be specifically required to be furnished pursuant to
any provision of this Agreement shall examine them to determine whether they
conform to the requirements of this Agreement.
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(c) No provision of this Agreement shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, its own bad faith or its own willful misfeasance; provided, however,
that:
(i) prior to the occurrence of a Servicer Default
actually known to a Responsible Officer of the Trustee, and after the curing or
waiving of all such Servicer Defaults that may have occurred, the duties and
obligations of the Trustee shall be determined solely by the express provisions
of this Agreement, the Trustee shall not be liable except for the performance of
such duties and obligations as are specifically set forth in this Agreement, no
implied duties or obligations shall be read into this Agreement against the
Trustee, the permissive right of the Trustee to do things enumerated in this
Agreement shall not be construed as a duty and, in the absence of bad faith on
the part of the Trustee, the Trustee may conclusively rely, as to the truth of
the statements and the correctness of the opinions expressed therein, upon any
certificates or opinions furnished to the Trustee and conforming to the
requirements of this Agreement;
(ii) the Trustee shall not be personally liable for an
error of judgment made in good faith by a Responsible Officer of the Trustee,
unless it shall be proved that the Trustee was negligent in performing its
duties in accordance with the terms of this Agreement; and
(iii) the Trustee shall not be personally liable with
respect to any action taken, suffered or omitted to be taken in good faith in
accordance with
(A) the direction or consent of the Note Insurer (to
the extent that an Insurer Default is not then in effect), or
(B) the direction of Noteholders evidencing not less
than 25% of the Voting Interests (unless a different percentage is
otherwise specifically set forth herein with respect to any applicable
action), together with the written consent of the Note Insurer (to the
extent that an Insurer Default is not then in effect),
in each case relating to the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or power
conferred upon the Trustee, under this Agreement.
(d) The Trustee shall not be required to expend or risk its own funds
or otherwise incur financial liability in the performance of any of its duties
under this Agreement, or in the exercise of any of its rights or powers, if
there shall be reasonable grounds for believing that the repayment of such funds
or adequate indemnity against such risk or liability is not reasonably assured
to it, and none of the provisions contained in this Agreement shall in any event
require the Trustee to perform, or be responsible for the manner of performance
of, any of the obligations of the Servicer under this Agreement except during
such time, if any, as the Trustee
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in its capacity as Backup Servicer shall be the successor to, and be vested with
the rights, duties, powers and privileges of, the Servicer in accordance with
the terms of this Agreement.
(e) Except for actions expressly authorized by this Agreement, the
Trustee shall take no action reasonably likely to impair the security interests
created or existing under any Receivable or to impair the value of any
Receivable.
(f) All information obtained by the Trustee regarding the Obligors and
the Receivables, whether upon the exercise of its rights under this Agreement or
otherwise, shall be maintained by the Trustee in confidence and shall not be
disclosed to any other Person, unless such disclosure is required by this
Agreement or any applicable law or regulation.
SECTION 9.02 Trustee's Certificate.
On or as soon as practicable after each date on which the Servicer or
Issuer acquires Removed Receivables, the Trustee, upon receipt of written notice
of such acquisition, shall submit to the Servicer or the Issuer, as applicable,
a Trustee's Certificate (substantially in the form attached hereto as Exhibit
B), identifying the acquirer and the Receivables so acquired, executed by the
Trustee and completed as to its date and the date of this Agreement, and
accompanied by a copy of the Monthly Servicer Report and the Servicer's
Remittance Date Certificate for the related Collection Period. The Trustee's
Certificate submitted with respect to such Payment Date shall operate, as of
such Payment Date, as an assignment without recourse, representation or
warranty, to the Issuer or the Servicer, as the case may be, of all the
Trustee's right, title and interest in and to such Removed Receivable and to the
other property conveyed to the Trust Estate pursuant to Section 2.01 with
respect to such Removed Receivable, and all security and documents relating
thereto, such assignment being an assignment outright and not for security.
SECTION 9.03 Trustee's Assignment of Removed Receivables.
With respect to all Removed Receivables, the Trustee shall, by a
Trustee's Certificate (substantially in the form attached hereto as Exhibit B)
assign, without recourse, representation or warranty, to the Issuer or the
Servicer, as applicable, all the Trustee's right, title and interest in and to
each Removed Receivable and the other property included in the Trust Estate
pursuant to Section 2.01 with respect to such Removed Receivable, and all
security and any documents relating thereto, such assignment being an assignment
outright and not for security; and the Issuer or the Servicer, as applicable,
shall thereupon own each such Removed Receivable, and all such related security
and documents, free of any further obligation to the Trustee or the Note Insurer
or the Noteholders with respect thereto. If in any enforcement suit or legal
proceeding it is held that the Servicer may not enforce a Removed Receivable on
the ground that it is not a real party in interest or a holder entitled to
enforce such Removed Receivable, the Trustee on behalf of the Note Insurer and
the Noteholders shall, at the Servicer's written direction and expense, take
such reasonable steps as the Trustee deems necessary to enforce the Removed
Receivable,
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including bringing suit in the Trustee's name or the names of the Note Insurer
or of the Noteholders.
SECTION 9.04 Certain Matters Affecting the Trustee.
(a) Except as otherwise provided in Section 9.01:
(i) the Trustee may rely and shall be protected in acting
or refraining from acting upon any resolution, Officer's Certificate,
certificate of auditors or any other certificate, statement, instrument,
opinion, report, notice, request, consent, order, appraisal, bond or other paper
or document believed by it to be genuine and to have been signed or presented by
the proper party or parties;
(ii) the Trustee may consult with counsel and any advice
of counsel or Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken or suffered or omitted by it under
this Agreement in good faith and in accordance with such advice of counsel or
Opinion of Counsel;
(iii) the Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Agreement, or to institute,
conduct or defend any litigation under this Agreement or in relation to this
Agreement, at the request, order or direction of the Note Insurer or any of the
Noteholders pursuant to the provisions of this Agreement, unless the Note
Insurer or any such Noteholders shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities that may be
incurred therein or thereby (the general obligation of an institutional investor
that is investment grade rated being sufficient indemnity); nothing contained in
this Agreement shall, however, relieve the Trustee of the obligations, upon the
occurrence of a Servicer Default actually known to a Responsible Officer of the
Trustee (that shall not have been cured or waived), to exercise such of the
rights and powers vested in it by this Agreement, and to use the same degree of
care and skill in their exercise as a prudent person would exercise or use under
the circumstances in the conduct of his or her own affairs;
(iv) the Trustee shall not be personally liable for any
action taken, suffered or omitted by it in good faith and believed by it to be
authorized or within the discretion or rights or powers conferred upon it by
this Agreement;
(v) prior to the occurrence of a Servicer Default and
after the curing or waiving of all Servicer Defaults that may have occurred, the
Trustee shall not be bound to make any investigation into the facts of matters
stated in any resolution, certificate, statement, instrument, opinion, report,
notice, request, Consent order, approval, bond or other paper or document,
unless requested in writing to do so by the Note Insurer or the Noteholders
evidencing not less than 25% of the Voting Interests; provided, however, that if
the payment within a reasonable time to the Trustee of the costs, expenses or
liabilities likely to be incurred by it in the making of such investigation is,
in the opinion of the Trustee, not reasonably assured to the
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Trustee by the security afforded to it by the terms of this Agreement, the
Trustee may require reasonable indemnity against such cost, expense or liability
as a condition to so proceeding; the reasonable expense of every such
examination shall be paid by the Issuer or, if paid by the Trustee, shall be
reimbursed by the Issuer upon demand; and nothing in this clause shall derogate
from the obligation of the Servicer to observe any applicable law prohibiting
disclosure of information regarding the Obligors; and
(vi) the Trustee may execute any of the trusts or powers
under this Agreement or perform any duties under this Agreement either directly
or by or through agents or attorneys or a custodian and shall not be liable or
responsible for the misconduct or negligence of any of its agents or attorneys
or a custodian appointed with due care by the Trustee.
(b) No Noteholder will have any right to institute any proceeding with
respect to this Agreement, unless such Noteholder shall have given to the
Trustee written notice of default and shall have obtained the prior written
consent of the Note Insurer to the institution of such proceeding (in the event
that no Insurer Default is in effect at such time) and (i) the Servicer Default
arises from the Servicer's failure to remit collections or payments when due or
(ii) Noteholders evidencing not less than 25% of the Voting Interests have made
written request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder, and have offered to the Trustee reasonable indemnity, and
the Trustee for 30 days has neglected or refused to institute any such
proceedings.
SECTION 9.05 Limitation on Trustee's Liability.
The Trustee makes no representations as to the validity or sufficiency
of this Agreement or of the Notes (other than the certificate of authentication
thereon, as applicable), or of any Receivable or related document. The Trustee
shall have no obligation to perform any of the duties of the Issuer or the
Servicer unless explicitly set forth in this Agreement. The Trustee shall at no
time have any responsibility or liability for or with respect to the legality,
validity and enforceability of any security interest in any Receivable, or the
perfection and priority of such a security interest or the maintenance of any
such perfection and priority, or for or with respect to the efficacy of the
Trust Estate or its ability to generate the payments to be paid to Noteholders
and the Note Insurer under this Agreement, including without limitation the
existence and contents of any Receivable or any computer file or other record
thereof; the validity of the assignment of any Receivable to the Trustee or of
any intervening assignment; the completeness of any Receivable; the performance
or enforcement of any Receivable; the compliance by the Issuer or the Servicer
with any covenant or the breach by the Issuer or the Servicer of any warranty or
representation made under this Agreement or in any related document and the
accuracy of any such warranty or representation prior to the Trustee's receipt
of notice or other discovery of any noncompliance therewith or any breach
thereof, any investment of monies by the Issuer or any loss resulting therefrom
(it being understood that the Trustee shall remain responsible as Trustee for
any property that it may hold as part of the Trust Estate); the acts or
omissions of the Issuer, the Servicer or any Obligor; any action of the Servicer
taken in the name
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of or as the agent of the Trustee; or any action by the Trustee taken at the
instruction of the Servicer; provided however, that the foregoing shall not
relieve the Trustee of its obligation to perform its duties under this
Agreement. Except with respect to a claim based on the failure of the Trustee to
perform its duties under this Agreement or based on the Trustee's negligence,
willful misconduct or bad faith, no recourse shall be had for any claim based on
any provision of this Agreement, the Notes or any Receivable or assignment
thereof against the institution serving as Trustee in its individual capacity.
The Trustee shall not have any personal obligation, liability or duty whatsoever
to any Noteholder, the Note Insurer or any other Person with respect to any such
claim, and any such claim shall be asserted solely against the Trust Estate or
any indemnitor who shall furnish indemnity as provided in this Agreement. The
Trustee shall not be accountable for the use or application by the Issuer of the
Notes or the proceeds thereof, if any, or for the use or application of any
funds paid to or collected by the Servicer in respect of the Receivables. The
Trustee shall have no responsibility for filing any financing or continuation
statement in any public office at any time or to otherwise perfect or maintain
the perfection of any security interest or lien granted to it hereunder (unless
the Trustee in its capacity as Backup Servicer shall have become the Successor
Servicer) or to prepare or file any Securities and Exchange Commission filing
with respect to the Notes or to record this Agreement.
The recitals contained in this Agreement and in the Notes, except the
certificates of authentication on the Notes, shall be taken as the statements of
the Issuer, and the Trustee assumes no responsibility for their correctness or
completeness. The Trustee makes no representations as to the validity or
condition of any Trust Estate or any part thereof, or as to the title of the
Issuer thereto or as to the security afforded thereby or hereby, or as to the
validity or genuineness of any securities at any time pledged and deposited with
the Trustee hereunder or as to the validity or sufficiency of this Agreement or
the Notes. The Trustee shall not be accountable for the use or application by
the Issuer of the Notes or the proceeds thereof or of any money paid to the
Issuer under any provisions hereof.
The Trustee will not be responsible for any losses incurred in
connection with investments in Permitted Investments made in accordance with the
terms of this Agreement, other than losses arising out of the Trustee's
negligence, bad faith or willful misconduct.
SECTION 9.06 Trustee May Not Own Notes.
The Trustee in its individual or any other capacity may not become the
owner or pledgee of Notes. The Trustee in its individual or any other capacity
may deal with the Issuer and the Servicer in banking transactions, with the same
rights as it would have if it were not the Trustee.
SECTION 9.07 Trustee's Fees and Expenses.
The Trustee shall be entitled to reasonable compensation (which shall
not be limited by any provision of law in regard to the compensation of a
trustee of an express trust) for all services rendered by it in the execution of
the trusts created by this Agreement and in the
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exercise and performance of any of the powers and duties of the Trustee under
this Agreement, which shall equal the Trustee Fee, paid as provided in Section
4.04, and payment or reimbursement for all reasonable expenses and disbursements
(including the reasonable compensation and the expenses and disbursements of its
counsel and of all persons not regularly in its employ) incurred or made by the
Trustee in defense of any action brought against it in connection with this
Agreement except any such expense or disbursement as may arise from its
negligence, willful misfeasance or bad faith or that is the responsibility of
Noteholders under this Agreement. Additionally, the Servicer, pursuant to
Section 7.02, shall indemnify the Trustee with respect to certain matters.
SECTION 9.08 Indemnity of Trustee, Backup Servicers and Successor
Servicer.
Upon the appointment of a Backup Servicer or a Successor Servicer
pursuant to Section 8.02 or 8.03, such Backup Servicer, Successor Servicer and
the Trustee and their respective agents and employees shall be indemnified by
the Trust Estate and held harmless against any loss, liability, or expense
(including reasonable attorney's fees and expenses) arising out of or incurred
in connection with the acceptance of performance of the trusts and duties
contained in this Agreement to the extent that (i) the Successor Servicer,
Backup Servicer or the Trustee, as the case may be, shall not be indemnified for
such loss, liability or expense by the Servicer pursuant to Section 8.02 or
8.03; (ii) such loss, liability, or expense shall not have been incurred by
reason of the Successor Servicer's, the Backup Servicer's or the Trustee's
willful misfeasance, bad faith or negligence; and (iii) such loss, liability or
expense shall not have been incurred by reason of the Successor Servicer's, the
Backup Servicer's or the Trustee's breach of its respective representations and
warranties pursuant to Sections 8.02, 8.03, 9.09 and 9.14, respectively.
The Successor Servicer, the Backup Servicer and/or the Trustee shall be
entitled to the indemnification provided by this Section only to the extent all
amounts due the Servicer, the Note Insurer and all Noteholders pursuant to
Section 4.04 have been paid in full and all amounts required to be deposited in
the Reserve Account with respect to any Payment Date pursuant to Section 4.05
have been so deposited.
SECTION 9.09 Eligibility Requirements for Trustee.
Except as otherwise provided in this Agreement, the Trustee under this
Agreement shall at all times be a corporation having its corporate trust office
in the same state (or the District of Columbia or the Commonwealth of Puerto
Rico) as the location of the Corporate Trust Office as specified in this
Agreement; organized and doing business under the laws of such state (or the
District of Columbia or the Commonwealth of Puerto Rico) or the United States;
authorized under such laws to exercise corporate trust powers; having a combined
capital and surplus of at least $50,000,000 and subject to supervision or
examination by federal or state authorities; and shall have the highest
available long-term unsecured debt rating by the Required Rating Agencies then
providing such a rating or be otherwise acceptable to the Rating Agency and the
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Controlling Party, as evidenced by a letter to such effect from the Rating
Agency (which acceptance may be evidenced in the form of a letter, dated on or
shortly before the Closing Date, assigning an initial rating to the Notes) and
the Note Insurer (as applicable).
If the Trustee shall publish reports of condition at least annually,
pursuant to law or to the requirements of the aforesaid supervising or examining
authority, then for the purpose of this Section, the combined capital and
surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. In
case at any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section, the Trustee shall resign immediately in the manner
and with the effect specified in Section 9.10.
SECTION 9.10 Resignation or Removal of Trustee.
(a) The Trustee may at any time resign and be discharged from the
trusts created by this Agreement by giving at least 30 days' prior written
notice thereof to the Servicer and the Noteholders. Upon receiving such notice
of resignation, the Servicer shall promptly appoint a successor Trustee
acceptable to the Noteholders by written instrument, in duplicate, one copy of
which instrument shall be delivered to the resigning Trustee and one copy to the
successor Trustee. If no successor Trustee shall have been so appointed and have
accepted appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(b) If at any time the Trustee shall cease to be eligible in accordance
with the provisions of Section 9.09 and shall fail to resign after written
request therefor by the Servicer, or the Controlling Party, or if at any time
the Trustee shall be legally unable to act, or shall be adjudged bankrupt or
insolvent, or a receiver of the Trustee or of its property shall be appointed,
or any public officer shall take charge or control of the Trustee or of its
property or affairs for the purpose of rehabilitation, conservation or
liquidation, then the Controlling Party may remove the Trustee. If the Trustee
is removed under the authority of the immediately preceding sentence, the
Servicer shall promptly appoint a successor Trustee acceptable to the
Controlling Party, by written instrument, in duplicate, one copy of which
instrument shall be delivered to the Trustee so removed and one copy to the
successor Trustee, and pay all fees owed to the outgoing Trustee.
(c) Any resignation or removal of the Trustee and appointment of a
successor Trustee pursuant to any of the provisions of this Section shall not
become effective until acceptance of appointment by the successor Trustee as
provided in Section 9.11. The Servicer shall give the Rating Agency, the
Placement Agent, the Note Insurer and the Noteholders notice of any such
resignation or removal of the Trustee and appointment and acceptance of a
successor Trustee.
SECTION 9.11 Successor Trustee.
Any successor Trustee appointed as provided in Section 9.10 shall
execute, acknowledge and deliver to the Servicer and to its predecessor Trustee
an instrument accepting such
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appointment under this Agreement, and thereupon the resignation or removal of
the predecessor Trustee shall become effective and such successor Trustee,
without any further act, deed or conveyance, shall become fully vested with all
the rights, powers, duties and obligations of its predecessor under this
Agreement, with like effect as if originally named as Trustee. The predecessor
Trustee shall deliver to the successor Trustee all documents and statements held
by it under this Agreement; and the Servicer and the predecessor Trustee shall
execute and deliver such instruments and do such other things as may reasonably
be required for fully and certainly vesting and confirming in the successor
Trustee all such rights, powers, duties and obligations. No successor Trustee
shall accept appointment as provided in this Section unless at the time of such
acceptance such successor Trustee shall be eligible under the provisions of
Section 9.09. Upon acceptance of appointment by a successor Trustee as provided
in this Section, the Servicer shall mail notice of the successor of such Trustee
under this Agreement to all Noteholders at their addresses as shown in the Note
Register and shall give notice by mail to the Rating Agency, the Placement Agent
and the Note Insurer. If the Servicer fails to mail such notice within ten days
after acceptance of appointment by the successor Trustee, the successor Trustee
shall cause such notice to be mailed at the expense of the Servicer.
SECTION 9.12 Merger or Consolidation of Trustee.
Any corporation (i) into which the Trustee may be merged or
consolidated, (ii) which may result from any merger, conversion, or
consolidation to which the Trustee shall be a party or (iii) which may succeed
to all or substantially all the corporate trust business of the Trustee, which
corporation executes an agreement of assumption to perform every obligation of
the Trustee under this Agreement, shall be the successor of the Trustee
hereunder, provided such corporation shall be eligible pursuant to Section 9.09,
without the execution or filing of any instrument or any further act on the part
of any of the parties hereto, anything herein to the contrary notwithstanding.
Notice of any such merger shall be given by the Trustee to the Rating Agency,
the Placement Agent, the Noteholders and the Note Insurer.
SECTION 9.13 Appointment of Co-Trustee or Separate Trustee.
Notwithstanding any other provisions of this Agreement, at any time,
for the purpose of meeting any legal requirements of any jurisdiction in which
any part of the Trust Estate may at the time be located, the Servicer and the
Trustee acting jointly shall have the power and shall execute and deliver all
instruments to appoint one or more Persons approved by the Trustee to act as
co-trustee, jointly with the Trustee or separate trustee or separate trustees,
of all or any part of the Trust Estate, and to vest in such Person, in such
capacity and for the benefit of the Noteholders and the Note Insurer, such title
to the Trust Estate, or any part thereof, and, subject to the other provisions
of this Section, such powers, duties, obligations, rights and trusts as the
Servicer and the Trustee may consider necessary or desirable. If the Servicer
shall not have joined in such appointment within 15 days after the receipt by it
of a request so to do, or in the case a Servicer Default shall have occurred and
be continuing, the Trustee alone shall have the power to make such appointment.
No co-trustee or separate trustee under this Agreement shall
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be required to meet the terms of eligibility as a successor trustee pursuant to
Section 9.09 and no notice of a successor Trustee pursuant to Section 9.11 and
no notice to Noteholders or the Note Insurer of the appointment of any
co-trustee or separate trustee shall be required pursuant to Section 9.11.
Each separate trustee and co-trustee shall, to the extent permitted by
law, be appointed and act subject to the following provisions and conditions:
(i) all rights, powers, duties and obligations conferred
or imposed upon the Trustee shall be conferred upon and exercised or performed
by the Trustee and such separate trustee or co-trustee jointly (it being
understood that such separate trustee or co-trustee is not authorized to act
separately without the Trustee joining in such act), except to the extent that
under any law of any jurisdiction in which any particular act or acts are to be
performed (whether as Trustee under this Agreement or as successor to the
Servicer under this Agreement), the Trustee shall be incompetent or unqualified
to perform such act or acts, in which event such rights, powers, duties and
obligations (including the holding of title to the Trust Estate or any portion
thereof in any such jurisdiction) shall be exercised and performed singly by
such separate trustee or co-trustee, but solely at the direction of the Trustee;
(ii) no trustee under this Agreement shall be personally
liable by reason of any act or omission of any other trustee under this
Agreement;
(iii) the Servicer and the Trustee acting jointly (or
during the continuation of a Servicer Default, the Trustee alone) may at any
time accept the resignation of or remove any separate trustee or co-trustee; and
(iv) the Trustee shall remain primarily liable for the actions
of any separate trustees and co-trustee.
Any notice, request or other writing given to the Trustee shall be
deemed to have been given to each of the then separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Agreement and the conditions
of this Section. Each separate trustee and co-trustee, upon its acceptance of
the mats conferred, shall be vested with the estates or property specified in
its instrument of appointment, either jointly with the Trustee or separately, as
may be provided therein, subject to all the provisions of this Agreement,
including, but not limited to, every provision of this Agreement relating to the
conduct of, affecting the liability of, or affording protection to, the Trustee.
Each such instrument shall be filed with the Trustee and a copy thereof given to
the Servicer.
Any separate trustee or co-trustee may at any time appoint the Trustee
its agent or attorney-in-fact with full power and authority, to the extent not
prohibited by law, to do any lawful act under or in respect of this Agreement on
its behalf and in its name. If any separate
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trustee or co-trustee shall die, become incapable of acting, resign or be
removed, all of its estates, properties, rights, remedies and trusts shall vest
in and be exercised by the Trustee, to the extent permitted by law, without the
appointment of a new or successor trustee. Notwithstanding anything to the
contrary in this Agreement, the appointment of any separate trustee or
co-trustee shall not relieve the Trustee of its obligations and duties under
this Agreement.
SECTION 9.14 Representations and Warranties of Trustee.
The Trustee hereby makes the following representations and warranties
on which the Issuer, the Note Insurer and the Noteholders are relying:
(i) Organization and Good Standing. The Trustee is a national
banking association duly organized, validly existing and in good standing;
(ii) Power and Authority. The Trustee has full power,
authority and right to execute, deliver and perform this Agreement and has taken
all necessary action to authorize the execution, delivery and performance by it
of this Agreement;
(iii) No Violation. The execution, delivery and performance
by the Trustee of this Agreement (a) shall not violate any provision of any law
governing the banking and tug powers of the Trustee or, to the best of the
Trustee's knowledge, any order, writ, judgment, or decree of any court,
arbitrator, or governmental authority applicable to the Trustee or any of its
assets, (b) shall not violate any provision of the charter or by-laws of the
Trustee, and (c) shall not violate any provision of, or constitute, with or
without notice or lapse of time, a default under, or result in the creation or
imposition of any Lien on any properties included in the Trust Estate pursuant
to the provisions of any mortgage, indenture, contract, agreement or other
undertaking to which it is a party, which violation, default or Lien could
reasonably be expected to materially and adversely affect the Trustee's
performance or ability to perform its duties under this Agreement or the
transactions contemplated in this Agreement;
(iv) No Authorization Required. The execution, delivery
and performance by the Trustee of this Agreement shall not require the
authorization, consent, or approval of, the giving of notice to, the filing or
registration with, or the taking of any other action in respect of, any
governmental authority or agency regulating the banking and corporate trust
activities of the Trustee; and
(v) Duly Executed. This Agreement shall have been duly
executed and delivered by the Trustee and shall constitute the legal, valid, and
binding agreement of the Trustee, enforceable in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws affecting creditors' rights
generally or by general principles of equity.
SECTION 9.15 Tax Returns.
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In the event the Trustee shall be required to file tax returns on
behalf of the Trust Estate, the Servicer shall prepare or shall cause to be
prepared any tax returns required to be filed by the Trust Estate and shall
remit such returns to the Trustee for signature at least five days before such
returns are due to be filed. The Trustee, upon request, shall furnish the
Servicer with all such information known to the Trustee as may be reasonably
required in connection with the preparation of all tax returns of the Trust
Estate, and shall, upon request, execute such returns.
SECTION 9.16 Trustee May Enforce Claims Without Possession of Notes.
All rights of action and claims under this Agreement or the Notes may
be prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name as
Trustee. Any recovery of judgment shall, after provision for the payment of the
reasonable compensation, expenses and disbursements of the Trustee, its agents
and counsel, be for the ratable benefit of the Note Insurer and the Noteholders
in respect of which such judgment has been obtained, in the order of priority
specified in Section 4.04(b).
SECTION 9.17 Suit for Enforcement.
If a Servicer Default shall occur and be continuing, the Trustee, in
its discretion may, subject to the provisions of Section 9.01, proceed to
protect and enforce its rights and the rights of the Note Insurer and the
Noteholders under this Agreement by a suit, action or proceeding in equity or at
law or otherwise, whether for the specific performance of any covenant or
agreement contained in this Agreement or in aid of the execution of any power
granted in this Agreement or for the enforcement of any other legal, equitable
or other remedy as the Trustee, being advised by counsel, shall deem most
effectual to protect and enforce any of the rights of the Trustee, the Note
Insurer or the Noteholders.
SECTION 9.18 Rights of Note Insurer and Noteholders to Direct Trustee.
The Controlling Party shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee,
or exercising any trust or power conferred on the Trustee; provided, however,
that subject to Section 9.01, the Trustee shall have the right to decline to
follow any such direction if the Trustee being advised by counsel determines
that the action so directed may not lawfully be taken, or if the Trustee in good
faith shall, by a Responsible Officer of the Trustee, determine that the
proceedings so directed would be illegal or subject it to personal liability or
be unduly prejudicial to the rights of the Note Insurer or Noteholders not
parties to such direction; provided, further, however, that nothing in this
Agreement shall impair the right of the Trustee to take any action deemed proper
by the Trustee and which is not inconsistent with such direction by the
Noteholders.
SECTION 9.19 Confidential Information.
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The Trustee acknowledges that, in the course of meeting its respective
duties and obligations under this Agreement, it may obtain information relating
to the Servicer or the Issuer which is of a confidential and proprietary nature
("Proprietary Information"). Such Proprietary Information may include, but is
not limited to, non-public trade secrets, know how, invention techniques,
processes, programs, schematics, software source documents, data, and financial
information. The Trustee 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 its duties under this
Agreement, nor shall the Trustee disclose any such Proprietary Information
without the written consent of the Servicer or the Issuer unless legally
required to disclose such information. The Trustee further agrees to immediately
return all Proprietary Information (including copies thereof) in its possession,
custody, or control upon termination of this Agreement for any reason.
The Trustee shall not disclose, advertise or publish the existence or
the terms or conditions of this Agreement without prior written consent of the
Servicer or the Issuer. Notwithstanding the foregoing, this Section 9.19 shall
not prohibit disclosure of information that is required to be disclosed by the
Trustee pursuant to federal or state laws or regulation. In particular the
Trustee agrees that it shall not, without the prior consent of the Servicer or
the Issuer, disclose the existence of this Agreement or any of the terms herein
to any Person other than counsel to the Trustee or an employee or director of
the Trustee 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 the Servicer and/or the Issuer
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.
ARTICLE X
REDEMPTION
SECTION 10.01 Redemption at the Option of the Issuer; Election to
Redeem.
The Issuer shall have the option to redeem the Notes on any Payment
Date following the first Payment Date on which the Note Balance is less than 10%
of the Original Note Balance. The election of the Issuer to redeem the Notes
pursuant to this Section shall be evidenced by delivery to the Trustee no later
than the tenth day of the month preceding the month in which the Payment Date as
of which such redemption will be effected occurs of an Officer's Certificate of
the Issuer stating the Issuer's intention to redeem the Notes and specifying the
Redemption Amount therefor. No prepayment premium or penalty is payable with
respect to any such redemption.
SECTION 10.02 Deposit of Redemption Amount.
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In the case of any redemption pursuant to Section 10.01, the Issuer
shall, on or before the Remittance Date preceding the Payment Date on which such
redemption is to be effected, deposit in the Note Payment Account pursuant to
Section 4.03 an amount equal to the Redemption Amount and shall thereafter
succeed to all interests in and to the Trust Estate subject to Section 2.11. The
Redemption Amount shall be paid as provided in Section 4.04(b).
SECTION 10.03 Notice of Redemption by the Trustee.
Upon receipt of notice from the Issuer of its election to redeem the
Notes pursuant to Section 10.01 and deposit by the Issuer of the Redemption
Amount pursuant to Section 10.02, the Trustee shall provide notice of redemption
of the Notes by first class mail, postage prepaid, mailed no later than the
Business Day following the date on which such deposit was made, to the Note
Insurer at the its address herein and to each Noteholder at such Noteholder's
address as listed in the Note Register. Notice of redemption of Notes shall be
given by the Trustee in the name and at the expense of the Issuer, as
applicable.
SECTION 10.04 Surrendering of Notes.
Each Noteholder shall surrender its Note within 14 days to receipt of
the final payment due in connection therewith. Each Noteholder, by its
acceptance of the final payment with respect to its Note, will be deemed to have
relinquished any further right to receive payments under this Agreement and any
interest in the Trust Estate. Each Noteholder shall indemnify and hold harmless
the Issuer, the Trustee and any other Person against whom a claim is asserted in
connection with such Noteholder's failure to tender the Note to the Trustees for
cancellation.
ARTICLE XI
MISCELLANEOUS PROVISIONS
SECTION 11.01 Amendment.
(a) This Agreement may be amended by the Issuer, the Servicer, and the
Trustee, without the consent of the Note Insurer or any of the Noteholders, (i)
to cure any ambiguity, to correct or supplement any provision in this Agreement
which may be inconsistent with any other provision of this Agreement, to add,
change or eliminate any other provision of this Agreement with respect to
matters or questions arising under this Agreement that shall not be inconsistent
with the provisions of this Agreement or to add or provide for any credit
enhancement (other than the Policy) and (ii) to change the Required Reserve
Amount or the manner in which the Reserve Account is funded in the event the
Required Reserve Amount exceeds 25% of the then outstanding Note Balance;
provided, however, that the Required Reserve Amount will not be reduced to below
25% of the outstanding Note Balance without consent of all Noteholders and the
Note Insurer; provided further, (x) that any such action shall not, as evidenced
by an Officer's Certificate of the Issuer delivered to the Trustee by the
Issuer, adversely affect in any material respect the interests of the Note
Insurer or the Noteholders; and (y) that in connection with any
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amendment pursuant to clause (ii) above the Servicer shall deliver to the
Trustee a letter from the Rating Agency to the effect that such amendment will
not cause the then-current rating on the Notes to be qualified, reduced or
withdrawn.
(b) This Agreement may also be amended from time to time by the Issuer,
the Servicer the Trustee, and the Note Insurer, with the consent of Noteholders
evidencing not less than 66 2/3% of the Voting Interests (which consent of any
Noteholder given pursuant to this Section or pursuant to any other provision of
this Agreement shall be conclusive and binding on such Noteholder and on all
future holders of such Note and of any Note issued upon the transfer thereof or
in exchange thereof or in lieu thereof whether or not notation of such consent
is made upon the Note), for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Agreement, or of
modifying in any manner the rights of such Noteholders; provided, however, that
no such amendment shall (i) except as otherwise provided in Section 11.01 (a),
reduce in any manner the amount of, or delay the timing of, any payments that
shall be required to be made on any Note or deposits of amounts to be so paid or
the Required Reserve Amount of the Reserve Account without the consent of each
Noteholder (provided that an amendment of the terms of a Servicer Default shall
not be deemed to be within the scope of this clause (i)); (ii) change the
definition or the manner of calculating the interest accrued on the Notes
without the consent of the Noteholders; (iii) reduce the aforesaid percentage of
the Voting Interest required to consent to any such amendment, without the
consent of all Noteholders; or (iv) adversely affect the rating of the Notes by
the Rating Agency without the consent of Noteholders (but excluding for purposes
of such calculation and action all Notes held by the Issuer, the Servicer or any
of their affiliates) evidencing not less than 50% of the Voting Interests.
(c) Prior to the execution of any amendment or consent thereto pursuant
to this Section 11.01, the Trustee shall furnish written notification of the
substance of such amendment or consent to the Rating Agency and the Placement
Agent.
(d) Promptly after the execution of any amendment or consent thereto
pursuant to Section 11.01(b), the Trustee shall furnish written notification of
the substance of such amendment or consent to each Noteholder. It shall not be
necessary for the consent of Noteholders pursuant to Section 11.01(b) to approve
the particular form of any proposed amendment or consent, but it shall be
sufficient if such consent shall approve the substance thereof. The manner of
obtaining such consents and of evidencing the authorization by Noteholders of
the execution thereof shall be subject to such reasonable requirements as the
Trustee may prescribe.
(e) Prior to the execution of any amendment to this Agreement, the
Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating
that the execution of such amendment is authorized or permitted by this
Agreement. The Trustee may, but shall not be obligated to, enter into any such
amendment which affects the Trustee's own rights, duties or immunities under
this Agreement or otherwise.
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(f) There will be no change in the identity of the Servicer, the Backup
Servicer or the Trustee without the prior written consent of the Controlling
Party, subject to the rights of the Backup Servicer and the Trustee to resign in
accordance with the provisions of this Agreement.
SECTION 11.02 Protection of Title to Trust Estate.
(a) Either of the Issuer or the Servicer or both shall execute and file
such financing statements and cause to be executed and filed such continuation
and other statements, all in such manner and in such places as may be required
by law fully to preserve, maintain and protect the interests of the Note
Insurer, the Noteholders and the Trustee under this Agreement in the Receivables
and in the proceeds thereof. Each of the Issuer and the Servicer shall deliver
(or cause to be delivered) to the Trustee file-stamped copies of, or filing
receipts for, any document filed as provided, above, as soon as available
following such filing.
(b) Neither the Issuer nor the Servicer shall change its name, identity
or organizational structure in any manner that would, could or might make any
financing statement or continuation statement filed in accordance with paragraph
(a) above seriously misleading within the meaning of Section 9-402(7) of the
UCC, unless it shall have given the Trustee at least 10 days' prior written
notice thereof and shall have filed within 30 days after such change appropriate
amendments to all such previously filed financing statements or continuation
statements.
(c) Each of the Issuer and the Servicer shall give the Trustee at least
10 days' prior written notice of any relocation of its principal executive
office if, as a result of such relocation, the applicable provisions of the UCC
would require the filing of any amendment of any previously filed financing
statement or continuation statement or of any new financing statement, and shall
within 30 days after such relocation file any such amendment or new financing
statement. The Servicer shall at all times maintain each office from which it
services Receivables and its principal executive office within the United
States.
(d) 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 Accounts (or any
of them) in respect of such Receivables.
(e) The Servicer shall maintain its computer records so that, from and
after the time of transfer, assignment and conveyance under this Agreement of
the Receivables to the Trustee, the Servicer's master computer records
(including any back-up archives) that refer to any Receivables indicate clearly
the interest of the Trustee in such Receivables and that the Receivable is held
by the Trustee on behalf of the Note Insurer and the Noteholders. Indication
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of the Trustee'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.
(f) If at any time Issuer or Servicer propose to assign, convey, grant
a security interest in, or otherwise transfer any interest in defaulted consumer
receivables to any prospective purchaser, lender or other transferee, the
Servicer shall give to such prospective acquirer, lender or other transferee
computer tapes, records or print-outs (including any restored from back-up
archives) that, if they refer in any manner whatsoever to any Receivable,
indicate clearly that such Receivable has been transferred, assigned and
conveyed and is owned by the Trustee unless such Receivable has been paid in
full, acquired or assigned pursuant to this Agreement.
(g) The Servicer shall permit the Trustee and its agents, upon not less
than two Business Days' prior written notice and during normal business hours,
to inspect, audit and make copies of and abstracts from the Servicer's records
regarding any Receivables then or previously included in the Trust Estate.
Nothing in this Section shall impair the obligation of the Servicer to observe
any applicable law prohibiting disclosure of information regarding the Obligors,
and the failure of the Servicer to provide access as provided in this Section as
a result of such obligation shall not constitute a breach of this Section.
(h) Upon request, the Servicer shall furnish to the Trustee and/or the
Note Insurer, within five Business Days of such request, a list of all
Receivables (by account number and name of Obligor) then held as part of the
Trust Estate.
(i) The Servicer shall deliver to the Trustee, promptly after the
execution and delivery of each amendment to any financing statement, an Opinion
of Counsel stating that, in the opinion of such Counsel, either (i) all
financing statements and continuation statements have been executed and filed
that are necessary fully to preserve and protect the interest of the Trustee in
the Receivables, and reciting the details of such filings or referring to prior
Opinions of Counsel in which such details are given, or (ii) no such action is
necessary to preserve and protect such interest.
SECTION 11.03 Limitation of Rights of Noteholders.
(a) The death or incapacity of any Noteholder shall not operate to
terminate this Agreement or the Trust Estate, nor entitle its legal
representatives or heirs to claim an accounting or to take any action or
commence any proceeding in any court for a partition or winding up of the Trust
Estate, nor otherwise affect the rights, obligations and liabilities of the
parties to this Agreement or any of them.
(b) No Noteholder shall have any right to vote (except as expressly
provided in this Agreement) or in any manner otherwise control the operation and
management of the Trust
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Estate, or the obligations of the parties to this Agreement, nor shall anything
set forth in this Agreement, or contained in the terms of the Notes, be
construed so as to constitute the Noteholders from time to time as partners or
members of an association; nor shall any Noteholder be under any liability to
any third person by reason of any action pursuant to any provision of this
Agreement.
(c) No Noteholder shall have any right by virtue or by availing itself
of any provisions of this Agreement to institute any suit, action, or proceeding
in equity or at law upon or under or with respect to this Agreement, unless such
Noteholder previously shall have given to the Trustee a written notice of
default and of the continuance thereof and have obtained the consent of the Note
Insurer to the institution of such action, suit or proceeding (to the extent
that there shall be no Insurer Default in effect at such time), as hereinbefore
provided, and unless Noteholders evidencing not less the 25% of the Voting
Interests shall have made written request upon the Trustee to institute such
action, suit or proceeding in its own name as Trustee under this Agreement and
shall have offered to the Trustee such reasonable indemnity as it may require
against the costs, expenses, and liabilities to be incurred therein or thereby,
and the Trustee, for 30 days after its receipt of such notice, request and offer
of indemnity, shall have neglected or refused to institute any such action suit,
or proceeding and during such 30-day period, no request or waiver inconsistent
with such written request has been given to the Trustee pursuant to this Section
or Section 9.04; it being understood and intended, and being expressly
covenanted by each Noteholder with every other Noteholder and the Trustee, that
no one or more Noteholders shall have any right in any manner whatever by virtue
or by availing itself or themselves of any provisions of this Agreement to
affect, disturb, or prejudice the rights of the other Noteholders, or to obtain
or seek to obtain priority over or preference to any other Noteholder, other
than as provided in this Agreement, or to enforce any right under this
Agreement, except in the manner provided in this Agreement and for the equal,
ratable, and common benefit of all Noteholders. For the protection and
enforcement of the provisions of this Section, each and every Noteholder and the
Trustee shall be entitled to such relief as can be given either at law or in
equity.
SECTION 11.04 Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York and the obligations, rights and remedies of
the parties under this Agreement shall be determined in accordance with such
laws.
SECTION 11.05 Notices.
All demand, notices and communications under this Agreement shall be in
writing, and either personally delivered, mailed by certified mail, return
receipt requested, or sent by facsimile transmission, and shall be deemed to
have been duly given upon receipt (i) in the case of the Issuer or the Servicer,
to the agent for service as specified in Section 2.10 of this Agreement, or at
such other address as shall be designated by the Issuer or the Servicer in a
written notice to the Trustee; (ii) in the case of the Trustee, at the Corporate
Trust Office; (iii) in the case of the
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Rating Agency at 25 Broadway, New York, New York, 10004, and (iv) in the case of
the Note Insurer, at 335 Madison Avenue, 25th Floor, New York, New York 10017
(Fax: (212) 682-5377). Any notice required or permitted to be mailed to a
Noteholder shall be given by first class mail, postage prepaid, at the address
of such Noteholder as shown in the Note Register. Any notice so mailed within
the time prescribed in this Agreement shall be conclusively presumed to have
been duly given, whether or not the Noteholder shall receive such notice.
SECTION 11.06 Severability of Provisions; Counterparts.
(a) 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 or the Notes, or the
rights of the Noteholders.
(b) 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.
SECTION 11.07 Assignment.
Notwithstanding anything to the contrary contained in this Agreement,
except as provided in Sections 6.04 and 7.03 and as provided in the provisions
of this Agreement concerning the resignation of the Servicer, this Agreement may
not be assigned by the Issuer or the Servicer without the prior written consent
of the Note Insurer and Noteholders evidencing not less than 66 2/3% of the
Voting Interests.
SECTION 11.08 No Petition.
Each of the Servicer and the Trustee covenants and agrees that prior to
the date which is one year and one day after the termination of this Agreement,
it will not institute against, or join any other Person in instituting against,
the Issuer any bankruptcy, reorganization arrangement, insolvency or liquidation
proceeding or other proceedings under any federal or state bankruptcy or similar
law. Notwithstanding the foregoing, nothing herein shall be deemed to prohibit
the Trustee from filing proofs of claim or otherwise participating in any such
proceeding instituted by another person. This Section 11.08 shall survive the
termination of this Agreement or the termination of the Servicer or the Trustee,
as the case may be, under this Agreement.
****
[ signatures appear on next page ]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Indenture and
Servicing Agreement to be duly executed by their respective officers as of the
day and year first above written.
CREDITRUST SPV2, LLC,
as Issuer
By: /s/ Joseph K. Rensin
----------------
Name: Joseph K. Rensin
Title: President
CREDITRUST CORPORATION,
as Servicer
By: /s/ Joseph K. Rensin
----------------
Name: Joseph K. Rensin
Title: President
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, not in its individual capacity,
but solely as Trustee and as Backup Servicer
By: /s/ Bruce C. Wandersee
------------------
Name: Bruce C. Wandersee
Title: Assistant Vice President
ASSET GUARANTY INSURANCE
COMPANY
By: /s/ Scott Mangan
------------
Name: Scott Mangan
Title: Vice President
<PAGE>
EXHIBIT A
FORM OF MONTHLY SERVICER REPORT
Pursuant to the Indenture and Servicing Agreement dated as of June 1,
1998 (the "Indenture and Servicing Agreement") among Creditrust SPV2, LLC, as
Issuer, Creditrust Corporation, as servicer (the "Servicer"), Norwest Bank
Minnesota, National Association, as trustee (in such capacity, the "Trustee")
and as backup servicer, and Asset Guaranty Insurance Company, as Note Insurer
(the "Note Insurer"), the Servicer is required to provide the Note Insurer and
Trustee with certain information each Determination Date with respect to the
Creditrust Receivables-Backed Notes, Series 1998-1. Capitalized terms used in
this certificate have the meanings set forth in the Indenture and Servicing
Agreement.
<TABLE>
<S> <C> <C>
A. Amount of Available Funds for the related Collection
Period..................................................................... $__________
B. Information Regarding the Trustee Fee and Backup Servicing Fee
(I) the total amount of the Trustee Fee and Backup Servicing Fee accrued
with respect to such Payment Date.......................................... $__________
(II) the total amount of the accrued and past due Trustee Fee and
Backup Servicing Fee with respect to prior Payment Dates................... $__________
(III) the total amount of payments made on such Payment Date with respect to
the Trustee Fee and Backup Servicing Fee................................... $__________
(IV) the total amount of the accrued and unpaid Trustee Fee and
Backup Servicing Fee to be carried forward to subsequent Payment
Dates........................................................................ $__________
C. Information Regarding the Servicing Fee
(I) the total amount of the Servicing Fee accrued with respect to
such Payment Date............................................................ $__________
(II) the total amount of the accrued and past due Servicing Fee with respect
to prior Payment Dates..................................................... $__________
(III) the total amount of payments made on such Payment Date with respect to
the Servicing Fee.......................................................... $__________
(IV) the total amount of the accrued and unpaid Servicing Fee to be carried
forward to subsequent Payment Dates........................................ $__________
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
D. Amount of Transition Fees................................................ $__________
E. Information Regarding Payments With Respect to Notes
(I) the total Interest Distributable Amount for such Payment
Date .................................................................... $__________
(a) the total amount of accrued interest for such Payment Date........
$__________
(b) the total amount of Interest Carryover Shortfall from the
immediately preceding Payment Date.................................. $__________
(II) the total amount of payments made on such Payment Date with respect to
the Interest Distributable Amount.......................................... $__________
(III) the total amount from clause (II) derived from withdrawal from
the Reserve Account............................................................ $__________
(IV) the total amount of the reduction of the Note Balance made on
such Payment Date............................................................... $__________
(V) the total amount from clause (IV) derived from a withdrawal from
the Reserve Account............................................................ $__________
(VI) the outstanding Note Balance after payments made in respect thereof on
such Payment Date.......................................................... $__________
F. Information Regarding the Reserve Account
(I) the Reserve Fund Reimbursement Amount for such Payment Date, to
be deposited in the Reserve Account........................................... $__________
(II) the total amount of any deposits to the Reserve Account on such Payment
Date $__________
(III) the total amount on deposit in the Reserve Account after withdrawals, if
any, from such account made on such Payment
Date .................................................................... $__________
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
G. Information Regarding Removed Receivables
(I) the account number of each Removed Receivables with respect to
such Payment Date.......................................................... $__________
(II) the amount of the Acquisition Payment with respect to the
Removed Receivables described in clause (I)................................ $__________
H. Information Regarding Payments from Note Insurer
(I) the total amount required to be paid by Note Insurer on account of the
Interest Distributable Amount ............................................. $__________
(II) the total amount required to be paid by the Note Insurer on account of
the payment of the remaining Note Balance on the Final Payment Date........ $__________
</TABLE>
[Creditrust Corporation],
as Servicer
------------------
[President][Vice President]
[Principal Accounting Officer or Chief
Financial Officer]
of Servicer
Dated:__________________
3
<PAGE>
EXHIBIT B
FORM OF TRUSTEE'S CERTIFICATE
Norwest Bank Minnesota, National Association, as trustee (the
"Trustee") of Creditrust Receivables Backed Notes, Series 1998-1 Trust created
pursuant to the Indenture and Servicing Agreement dated as of June 1, 1998 (the
"Indenture and Servicing Agreement") among Creditrust SPV2, LLC, as Issuer,
Creditrust Corporation, as Servicer, Norwest Bank Minnesota, National
Association, as trustee and backup servicer, and Asset Guaranty Insurance
Company, as Note Insurer, does hereby sell, transfer, assign and otherwise
convey to the [Issuer][Servicer], without any recourse, representation or
warranty, all of the Trustee's right, title and interest in and to all of the
Receivables identified in the attached Servicer's Remittance Date Certificate as
"Removed Receivables," which are to be [reacquired by the Issuer pursuant to
Section 2.05 or 6.02] [acquired by the Servicer pursuant to Section 3.04] of the
Indenture and Servicing Agreement, and all security and documents relating
thereto.
Capitalized terms used herein that are not otherwise defined shall have
the meanings ascribed thereto in the Indenture and Servicing Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand this ___ day of
___________, ____.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Trustee
By: _______________________________
Name:
Title:
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<PAGE>
EXHIBIT C
FORM OF NOTE
Creditrust SPV2, LLC
Creditrust Receivables - Backed Notes, Series 1998-1
THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES
LAWS, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THIS NOTE IS SUBJECT
TO CERTAIN RESTRICTIONS AND CONDITIONS SET FORTH IN THE INDENTURE AND
SERVICING AGREEMENT UNDER WHICH THIS NOTE IS ISSUED (A COPY OF WHICH IS
AVAILABLE FROM THE TRUSTEE UPON REQUEST).
U.S. $__________
CUSIP #_____________________
Creditrust SPV2, LLC, a limited liability company organized under the
laws of Maryland, (the "Issuer"), for value received, hereby promises to pay [ ]
or registered assigns, (a) upon presentation and surrender of this Note (except
as otherwise permitted by the Indenture referred to below), the principal sum of
_______________________________ United States Dollars (U.S. $____________) on
July 7, 2003 (the "Final Payment Date") unless the unpaid principal of this Note
becomes due and payable at an earlier date by declaration of acceleration, call
for redemption or otherwise, (b) interest on the seventh day of each month,
commencing July 7, 1998, at the rate equal to [ %] per annum on the unpaid
principal amount hereof until the principal hereof is paid or duly provided for.
Interest shall be computed on the basis of a 360-day year consisting of twelve
30-day months. The interest so payable on any Payment Date will, as provided in
the Indenture hereinafter referred to, be paid to the Person in whose name this
Note is registered at the close of business on the Record Date for such interest
payment.
Payments in respect of principal and interest due on any Payment Date
of this Note shall be payable by wire transfer in immediately available funds to
a Dollar account maintained by the Noteholder or, if a wire transfer cannot be
effected, by Dollar check delivered to the Noteholder. Notwithstanding the
foregoing, the final payment of interest and principal due on this Note shall be
made (except as otherwise provided in the Indenture) only upon presentation and
surrender of this Note at the Corporate Trust Office of the Trustee. The person
in whose name this Note is registered shall be treated as the owner hereof for
all purposes.
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<PAGE>
Except as specifically provided herein and in the Indenture, the Issuer
shall not be required to make any payment with respect to any tax, assessment or
other governmental charge imposed by any government or any political subdivision
or taxing authority thereof or therein.
Unless the certificate of authentication hereon has been executed by
the Trustee by the manual signature of one of its Responsible Officers, this
Note shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
This Note is one of a duly authorized issue of Creditrust Receivables -
Backed Notes, Series 1998-1, of the Issuer (the "Notes"), limited in principal
amount to U.S. $14,500,000 issued and to be issued under an indenture dated as
of June 1, 1998 (the "Indenture") between (among others) the Issuer and Norwest
Bank Minnesota, National Association (the "Trustee", which term includes any
successor trustee as permitted under the Indenture). Reference is hereby made to
the Indenture for a statement of the respective rights, limitations of rights,
duties and immunities thereunder of the Issuer, the Trustee and the Noteholders
and the terms upon which the Notes are, and are to be, authenticated and
delivered.
Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Indenture.
The Notes are issuable only in definitive, fully registered form
without coupons, in minimum denominations of $1,000,000 and integral multiples
of $1,000 in excess thereof.
The principal of each Note shall be payable at the Final Payment Date
thereof unless the unpaid principal of such Note becomes due and payable on an
earlier date by declaration of acceleration, call for redemption, or otherwise.
Title to Notes shall pass by registration in the Note Register kept at
the Corporate Trust Office. No service charge shall be made for exchange or
registration of transfer of this Note.
If an Event of Default shall occur and be continuing, the Notes may
become or be declared due and payable in the manner and with the effect provided
in the Indenture. The remedies of the Noteholder hereof, as provided herein or
in the Indenture, shall be cumulative and concurrent and may be pursued solely
against the assets of the Issuer consisting of the Trust Estate. No failure on
the part of the Noteholder in exercising any right or remedy hereunder shall
operate as a waiver or release thereof, nor shall any single or partial exercise
of any such right or remedy preclude any other further exercise thereof or the
exercise of any other right or remedy hereunder.
Asset Guaranty Insurance Company ("AGIC"), a stock insurance company
incorporated in the State of New York, has issued its Financial Guaranty
Insurance Policy (the "Policy") insuring the payment of principal of and
interest on this Note, on the dates and in the amounts as provided in the
Policy. Reference is made to the Policy for the complete provisions thereof. The
2
<PAGE>
owner of this Note acknowledges and consents to he subrogation and assignment
rights of AGIC as more fully set forth in the Policy.
AS PROVIDED IN THE INDENTURE, THE INDENTURE AND THE NOTES SHALL BE
CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED THEREIN WITHOUT REGARD TO THE
CONFLICT OF LAWS PRINCIPLES THEREOF.
IN WITNESS WHEREOF, the Issuer has caused this Note to be duly
executed.
Dated as of: June ____, 1998
Creditrust SPV2, LLC
By:
-----------------------------
Name: Joseph K. Rensin
Title: President
CERTIFICATE OF AUTHENTICATION
This is one of the Notes referred to in the within-mentioned Indenture.
Norwest Bank Minnesota, National Association
as Trustee
By:
--------------------------------------
Responsible Officer
3
<PAGE>
EXHIBIT D-1
FORM OF TRANSFEROR CERTIFICATE
______ __, 199_
Norwest Bank Minnesota, National Association
Norwest Center
Sixth and Marquette
Minneapolis, MN 55479-0113
Attention: Corporate Trust Services (Creditrust Receivables-Backed Notes, Series
1998-1)
Re: Creditrust Receivables-Backed Notes, Series 1998-1 (the
"Notes")
Ladies and Gentlemen:
This letter is delivered to you in connection with the transfer by
____________________ (the "Transferor") to _______________________ (the
"Transferee") of a Note (the "Transferred Note") [having an initial principal
balance as of June __, 1998 (the "Closing Date") of $_____________]. The Notes
were issued pursuant to the Indenture and Servicing Agreement (the "Indenture
and Servicing Agreement"), dated as of June 1, 1998, among Creditrust SPV2, LLC,
as issuer, Creditrust Corporation, as servicer, Asset Guaranty Insurance
Company, as note insurer and Norwest Bank Minnesota, National Association, as
trustee. All terms used herein and not otherwise defined shall have the meanings
set forth in the Indenture and Servicing Agreement. The Transferor hereby
certifies, represents and warrants to you, as Certificate Registrar, that:
1. The Transferor is the lawful owner of the Transferred Note
with the full right to transfer such Note free from any and all claims
and encumbrances whatsoever.
2. Neither the Transferor nor anyone acting on its behalf has
(a) offered, transferred, pledged, sold or otherwise disposed of any
Note, any interest in any Note or any other similar security to any
person in any manner, (b) solicited any offer to buy or accepted a
transfer, pledge or other disposition of any Note, any interest in any
Note or any other similar security from any person in any manner, (c)
otherwise approached or negotiated with respect to any Note, any
interest in any Note or any other similar security with any person in
any manner, (d) made any general solicitation by means of general
advertising or in any other manner, or (e) taken any other action,
which (in the case of any of the acts described in clauses (a) through
(e) hereof) would constitute a distribution of any Note under the
Securities Act of 1933 (the "Securities Act"), or would render the
disposition of any Note a violation of Section 5 of the Securities Act
or any state securities laws, or would require registration or
qualification of any Note pursuant to the Securities Act or any state
securities laws.
<PAGE>
Very truly yours,
------------------------------
(Transferor)
By:
---------------------------
Name:
---------------------------
Title:
---------------------------
<PAGE>
- 3 -
BALT04A:132800:6:06/18/98
26251-1
EXHIBIT D-2
FORM OF TRANSFEREE CERTIFICATE
______ __, 199_
Norwest Bank Minnesota, National Association
Norwest Center
Sixth and Marquette
Minneapolis, MN 55479-0113
Attention: Corporate Trust Services (Creditrust Receivables-Backed Notes, Series
1998-1)
Re: Creditrust Receivables-Backed Notes, Series 1998-1 (the
"Notes")
Ladies and Gentlemen:
This letter is delivered to you in connection with the
transfer by ____________________ (the "Transferor") to _______________________
(the "Transferee") of a Note (the "Transferred Note") [having an initial
principal balance as of June __, 1998 (the "Closing Date") of $_____________].
The Notes were issued pursuant to the Indenture and Servicing Agreement (the
"Indenture and Servicing Agreement"), dated as of June 1, 1998, among Creditrust
SPV2, LLC, as issuer, Creditrust Corporation, as servicer, Asset Guaranty
Insurance Company, as note insurer and Norwest Bank Minnesota, National
Association, as trustee. All terms used herein and not otherwise defined shall
have the meanings set forth in the Indenture and Servicing Agreement. The
Transferee hereby certifies, represents and warrants to you, as Note Registrar,
that:
1. The Transferee is acquiring the Transferred Note for its
own account for investment and not with a view to or for sale or transfer in
connection with any distribution thereof, in whole or in part, in any manner
which would violate the Securities Act of 1933, as amended (the "Securities
Act"), or any applicable state securities laws.
2. The Transferee understands that (a) the Notes have not been
and will not be registered under the Securities Act or registered or qualified
under any applicable state securities laws, (b) neither the Issuer nor the
Trustee is obligated so to register or qualify the Notes and (c) the Notes may
not be resold or transferred unless they are (i) registered pursuant to the
Securities Act and registered or qualified pursuant to any applicable state
securities laws or (ii) sold or transferred in transactions which are exempt
from such registration and qualification and the Note Registrar has received
either (A) certifications from both the transferor and the transferee
(substantially in the forms attached to the Indenture and Servicing Agreement)
setting forth the facts surrounding the transfer or (B) an opinion of counsel
satisfactory to the Note Registrar with respect to the availability of such
exemption, together with copies of the certification(s) from the Transferor
and/or Transferee setting forth the facts surrounding the transfer upon which
such opinion is based.
<PAGE>
3. The Transferee understands that it may not sell or
otherwise transfer any portion of its interest in the Transferred Note except in
compliance with the provisions of Section 5.03 of the Indenture and Servicing
Agreement, which provisions it has carefully reviewed, and that the Transferred
Note will bear legends substantially to the following effect:
THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS, AND MAY
NOT BE SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT IN
COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. THE
TRANSFER OF THIS CERTIFICATE IS SUBJECT TO CERTAIN RESTRICTIONS AND CONDITIONS
SET FORTH IN THE INDENTURE AND SERVICING AGREEMENT UNDER WHICH THIS CERTIFICATE
IS ISSUED, (A COPY OF WHICH IS AVAILABLE FROM THE TRUSTEE UPON REQUEST).
4. Neither the Transferee nor anyone acting on its behalf has
(a) offered, pledged, sold, disposed of or otherwise transferred any Note, any
interest in any Note or any other similar security to any person in any manner,
(b) solicited any offer to buy or accept a pledge, disposition or other transfer
of any Note, any interest in any Note or any other similar security from any
person in any manner, (c) otherwise approached or negotiated with respect to any
Note, any interest in any Note or any other similar security with any person in
any manner, (d) made any general solicitation by means of general advertising or
in any other manner, or (e) taken any other action, that (in the case of any of
the acts described in clauses (a) through (e) above) would constitute a
distribution of any Note under the Securities Act, would render the disposition
of any Note a violation of Section 5 of the Securities Act or any state
securities law or would require registration or qualification of any Note
pursuant thereto. The Transferee will not act, nor has it authorized or will it
authorize any person to act, in any manner set forth in the foregoing sentence
with respect to any Note.
5. The Transferee has been furnished with all information
regarding (a) the Issuer, (b) the Notes and distributions thereon, (c) the
Indenture and Servicing Agreement, and (d) all related matters, that it has
requested.
6. The Transferee is an "accredited investor" as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act and has such knowledge
and experience in financial and business matters as to be capable of evaluating
the merits and risks of an investment in the Notes; the Transferee has sought
such accounting, legal and tax advice as it has considered necessary to make an
informed investment decision; and the Transferee is able to bear the economic
risks of such an investment and can afford a complete loss of such investment.
2
<PAGE>
Very truly yours,
------------------------------
(Transferee)
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
3
<PAGE>
EXHIBIT D-3
FORM OF TRANSFEREE CERTIFICATE
FOR QIBs
______ __, 199_
Norwest Bank Minnesota, National Association
Norwest Center
Sixth and Marquette
Minneapolis, MN 55479-0113
Attention: Corporate Trust Services (Creditrust Receivables-Backed Notes, Series
1998-1)
Re: Creditrust Receivables-Backed Notes, Series 1998-1 (the
"Notes")
Ladies and Gentlemen:
This letter is delivered to you in connection with the
transfer by ____________________ (the "Transferor") to _______________________
(the "Transferee") of a Note (the "Transferred Note") [having an initial
principal balance as of June __, 1998 (the "Closing Date") of $_____________].
The Notes were issued pursuant to the Indenture and Servicing Agreement (the
"Indenture and Servicing Agreement"), dated as of June 1, 1998, among Creditrust
SPV2, LLC, as issuer, Creditrust Corporation, as servicer, Asset Guaranty
Insurance Company, as note insurer and Norwest Bank Minnesota, National
Association, as trustee. All terms used herein and not otherwise defined shall
have the meanings set forth in the Indenture and Servicing Agreement. The
Transferee hereby certifies, represents and warrants to you, as Note Registrar,
that:
1.The Transferee is a "qualified institutional buyer" as that
term is defined in Rule 144A ("Rule 144A") under the Securities Act of
1933 (the "Securities Act") and has completed one of the forms of
certification to that effect attached hereto as Annex 1 and Annex 2.
The Transferee is aware that the sale to it is being made in reliance
on Rule 144A. The Transferee is acquiring the Transferred Note for its
own account or for the account of a qualified institutional buyer, and
understands that such Note may be resold, pledged or transferred only
(i) to a person reasonably believed to be a qualified institutional
buyer that purchases for its own account or for the account of a
qualified institutional buyer to whom notice is given that the resale,
pledge or transfer is being made in reliance on Rule 144A, or (ii)
pursuant to another exemption from registration under the Securities
Act.
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<PAGE>
2.The Transferee has been furnished with all information
regarding (a) the Notes and distributions thereon, (b) the nature,
performance and servicing of the Receivables, (c) the Indenture and
Servicing Agreement, and (d) any credit enhancement mechanism
associated with the Notes, that it has requested.
Very truly yours,
------------------------------
(Transferee)
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
2
<PAGE>
ANNEX 1 TO EXHIBIT D-3
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
[For Transferees Other Than Registered Investment Companies]
The undersigned hereby certifies as follows to [name of Transferor]
(the "Transferor") and Norwest Bank Minnesota, National Association, as Note
Registrar, with respect to the Note being transferred (the "Transferred Note")
as described in the Transferee Note to which this certification relates and to
which this certification is an Annex:
1. As indicated below, the undersigned is the chief financial officer,
a person fulfilling an equivalent function, or other executive officer of the
entity purchasing the Transferred Note (the "Transferee").
2. The Transferee is a "qualified institutional buyer" as that term is
defined in Rule 144A under the Securities Act of 1933 ("Rule 144A") because (i)
the Transferee owned and/or invested on a discretionary basis $ / in
securities (other than the excluded securities referred to below) as of the end
of the Transferee's most recent fiscal year (such amount being calculated in
accordance with Rule 144A) [Transferee must own and/or invest on a
discretionary basis at least $100,000,000 in securities unless Transferee is a
dealer, and, in that case, Transferee must own and/or invest on, a discretionary
basis at least $10,000,000 in securities.] and (ii) the Transferee satisfies the
criteria in the category marked below.
- Corporation, etc. The Transferee is a corporation (other than
a bank, savings and loan association or similar institution),
business trust, partnership, or any organization described in
Section 501(c)(3) of the Internal Revenue Code of 1986.
- Bank. The Transferee (a) is a national bank or a banking
institution organized under the laws of any State, U.S.
territory or the District of Columbia, the business of which
is substantially confined to banking and is supervised by the
State or territorial banking commission or similar official or
is a foreign bank or equivalent institution, and (b) has an
audited net worth of at least $25,000,000 as demonstrated in
its latest annual financial statements, a copy of which is
attached hereto, as of a date not more than 16 months
preceding the date of sale of the Note in the case of a U.S.
bank, and not more than 18 months preceding such date of sale
for a foreign bank or equivalent institution.
- Savings and Loan. The Transferee (a) is a savings and loan
association, building and loan association, cooperative bank,
homestead association or
3
<PAGE>
similar institution, which is supervised and examined by a
State or Federal authority having supervision over any such
institutions or is a foreign savings and loan association or
equivalent institution and (b) has an audited net worth of at
least $25,000,000 as demonstrated in its latest annual
financial statements, a copy of which is attached hereto, as
of a date not more than 16 months preceding the date of sale
of the Note in the case of a U.S. savings and loan
association, and not more than 18 months preceding such date
of sale for a foreign savings and loan association or
equivalent institution.
- Broker-dealer. The Transferee is a dealer registered pursuant
to Section 15 of the Securities Exchange Act of 1934 and we
owned and invested, on a discretionary basis, for our own
account or the accounts of other qualified institutional
buyers, in the aggregate at least the amount of securities
specified below (not less than $10 million), calculated as
provided in Rule 144A, as of the date specified below.
- Insurance Company. The Transferee is an insurance company
whose primary and predominant business activity is the writing
of insurance or the reinsuring of risks underwritten by
insurance companies and which is subject to supervision by the
insurance commissioner or a similar official or agency of a
State, U.S. territory or the District of Columbia.
- State or Local Plan. The Transferee is a plan established and
maintained by a State, its political subdivisions, or any
agency or instrumentality of the State or its political
subdivisions, for the benefit of its employees.
- ERISA Plan. The Transferee is an employee benefit plan within
the meaning of Title I of the Employee Retirement Income
Security Act of 1974.
- Investment Advisor. The Transferee is an investment advisor
registered under the Investment Advisers Act of 1940.
- Other. (Please supply a brief description of the entity and a
cross-reference to the paragraph and subparagraph under
subsection (a)(1) of Rule 144A pursuant to which it qualifies.
Note that registered investment companies should complete
Annex 2 rather than this Annex 1.)
4
<PAGE>
3. The term "securities" as used herein does not include (i) securities
of issuers that are affiliated with the Transferee, (ii) securities that are
part of an unsold allotment to or subscription by the Transferee, if the
Transferee is a dealer, (iii) bank deposit notes and certificates of deposit,
(iv) loan participations, (v) repurchase agreements, (vi) securities owned but
subject to a repurchase agreement and (vii) currency, interest rate and
commodity swaps. For purposes of determining the aggregate amount of securities
owned and/or invested on a discretionary basis by the Transferee, the Transferee
did not include any of the securities referred to in this paragraph.
4. For purposes of determining the aggregate amount of securities owned
and/or invested on a discretionary basis by the Transferee, the Transferee used
the cost of such securities to the Transferee, unless the Transferee reports its
securities holdings in its financial statements on the basis of their market
value, and no current information with respect to the cost of those securities
has been published, in which case the securities were valued at market. Further,
in determining such aggregate amount, the Transferee may have included
securities owned by subsidiaries of the Transferee, but only if such
subsidiaries are consolidated with the Transferee in its financial statements
prepared in accordance with generally accepted accounting principles and if the
investments of such subsidiaries are managed under the Transferee's direction.
However, such securities were not included if the Transferee is a
majority-owned, consolidated subsidiary of another enterprise and the Transferee
is not itself a reporting company under the Securities Exchange Act of 1934.
5. The Transferee acknowledges that it is familiar with Rule 144A and
understands that the parties to which this certification is being made are
relying and will continue to rely on the statements made herein because one or
more sales to the Transferee may be in reliance on Rule 144A.
Will the Transferee be purchasing the Transferred Note only
Yes No for the Transferee's own account?
6. If the answer to the foregoing question is "no", then in each case
where the Transferee is purchasing for an account other than its own, such
account belongs to a third party that is itself a "qualified institutional
buyer" within the meaning of Rule 144A, and the "qualified institutional buyer"
status of such third party has been established by the Transferee through one or
more of the appropriate methods contemplated by Rule 144A.
7. The Transferee will notify each of the parties to which this
certification is made of any changes in the information and conclusions herein.
Until such notice is given, the Transferee's purchase of the Transferred Note
will constitute a reaffirmation of this
5
<PAGE>
certification as of the date of such purchase. In addition, if the Transferee is
a bank or savings and loan as provided above, the Transferee agrees that it will
furnish to such parties any updated annual financial statements that become
available on or before the date of such purchase, promptly after they become
available.
6
<PAGE>
------------------------------------
Print Name of Transferee or Adviser
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
7
<PAGE>
ANNEX 2 TO EXHIBIT D-3
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
[For Transferees That Are Registered Investment Companies]
The undersigned hereby certifies as follows to [name of Transferor]
(the "Transferor") and Norwest Bank Minnesota, National Association, as Note
Registrar, with respect to the mortgage pass-through certificate being
transferred (the "Transferred Note") as described in the Transferee Note to
which this certification relates and to which this certification is an Annex:
1. As indicated below, the undersigned is the chief financial officer,
a person fulfilling an equivalent function, or other executive officer of the
entity purchasing the Transferred Note (the "Transferee") or, if the Transferee
is a "qualified institutional buyer" as that term is defined in Rule 144A under
the Securities Act of 1933 ("Rule 144A") because the Transferee is part of a
Family of Investment Companies (as defined below), is an executive officer of
the investment adviser (the "Adviser").
2. The Transferee is a "qualified institutional buyer" as defined in
Rule 144A because (i) the Transferee is an investment company registered under
the Investment Company Act of 1940, and (ii) as marked below, the Transferee
alone owned and/or invested on a discretionary basis, or the Transferee's Family
of Investment Companies owned, at least $100,000,000 in securities (other than
the excluded securities referred to below) as of the end of the Transferee's
most recent fiscal year. For purposes of determining the amount of securities
owned by the Transferee or the Transferee's Family of Investment Companies, the
cost of such securities was used, unless the Transferee or any member of the
Transferee's Family of Investment Companies, as the case may be, reports its
securities holdings in its financial statements on the basis of their market
value, and no current information with respect to the cost of those securities
has been published, in which case the securities of such entity were valued at
market.
- The Transferee owned and/or invested on a discretionary basis
$ in securities (other than the excluded securities referred
to below) as of the end of the Transferee's most recent fiscal
year (such amount being calculated in accordance with Rule
144A).
- The Transferee is part of a Family of Investment Companies
which owned in the aggregate $ in securities (other than the
excluded securities referred to below) as of the end of the
Transferee's most recent fiscal year (such amount being
calculated in accordance with Rule 144A).
8
<PAGE>
3. The term "Family of Investment Companies" as used herein means two
or more registered investment companies (or series thereof) that have the same
investment adviser or investment advisers that are affiliated (by virtue of
being majority owned subsidiaries of the same parent or because one investment
adviser is a majority owned subsidiary of the other).
4. The term "securities" as used herein does not include (i) securities
of issuers that are affiliated with the Transferee or are part of the
Transferee's Family of Investment Companies, (ii) bank deposit notes and
certificates of deposit, (iii) loan participations, (iv) repurchase agreements,
(v) securities owned but subject to a repurchase agreement and (vi) currency,
interest rate and commodity swaps. For purposes of determining the aggregate
amount of securities owned and/or invested on a discretionary basis by the
Transferee, or owned by the Transferee's Family of Investment Companies, the
securities referred to in this paragraph were excluded.
5. The Transferee is familiar with Rule 144A and understands that the
parties to which this certification is being made are relying and will continue
to rely on the statements made herein because one or more sales to the
Transferee will be in reliance on Rule 144A.
Will the Transferee be purchasing the Transferred Note only
Yes No for the Transferee's own account?
6. If the answer to the foregoing question is "no", then in each case
where the Transferee is purchasing for an account other than its own, such
account belongs to a third party that is itself a "qualified institutional
buyer" within the meaning of Rule 144A, and the "qualified institutional buyer"
status of such third party has been established by the Transferee through one or
more of the appropriate methods contemplated by Rule 144A.
7. The undersigned will notify the parties to which this certification
is made of any changes in the information and conclusions herein. Until such
notice, the Transferee's purchase of the Transferred Note will constitute a
reaffirmation of this certification by the undersigned as of the date of such
purchase.
--------------------------------------
Print Name of Transferee or Adviser
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
9
<PAGE>
IF AN ADVISER:
----------------------------------------
Print Name of Transferee
Date:
----------------------------------
<PAGE>
EXHIBIT E
BACKUP SERVICER FIELDS
<TABLE>
<CAPTION>
Customer Information Fields Receivable Information Fields
- --------------------------- -----------------------------
<S> <C>
Primary Debtor's Name Type of Account
Primary Debtor's Social Security Number Date Purchased
Primary Debtor's Mailing Address Charged-off Balance
Secondary Debtor's Name Charged-off Date
Secondary Debtor's Social Security Number Name of Seller
Account Home Phone Number Seller Assigned Account Number
Account Work Phone Number Negotiated Settlement Amount
Debtor ID Last Payment Date
Total Amount Paid to Date
Next Payment Amount
Total Amount Outstanding
Package ID
</TABLE>
<PAGE>
SCHEDULE A
SCHEDULE OF RECEIVABLES
[See CD-ROM delivered to Trustee]
<PAGE>
SCHEDULE B
CUMULATIVE AVAILABLE FUNDS
<TABLE>
<CAPTION>
Quarter Ending Minimum Cumulative Available Funds ($)
- -------------- --------------------------------------
<S> <C>
December 1998 6,095,879
June 1999 10,627,429
December 1999 14,587,590
June 2000 18,182,346
December 2000 21,238,256
June 2001 23,836,910
December 2001 25,337,106
June 2002 26,383,736
December 2002 26,558,685
</TABLE>
<PAGE>
<PAGE>
Exhibit 10.15
LIMITED LIABILITY COMPANY AGREEMENT
OF
CREDITRUST SPV2, LLC
Dated as of June 17, 1998
THE UNITS OF LLC INTEREST DESCRIBED IN THIS AGREEMENT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933
ACT") OR UNDER THE SECURITIES LAWS OF THE STATE OF DELAWARE OR ANY
OTHER JURISDICTION (THE "STATE ACTS"). CONSEQUENTLY, UNITS IN THE
COMPANY MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED
OR OTHERWISE DISPOSED OF, EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF
THE 1933 ACT, THE STATE ACTS AND THIS AGREEMENT.
<PAGE>
===============================================================================
LIMITED LIABILITY COMPANY AGREEMENT
OF
CREDITRUST SPV2, LLC
===============================================================================
THIS LIMITED LIABILITY COMPANY AGREEMENT (this "Agreement"), dated as
of June 17, 1998, is made and executed by Creditrust Corporation, a Maryland
corporation ("Creditrust"), as the initial member.
PRELIMINARY STATEMENTS:
Creditrust Corporation, a Maryland corporation ("Creditrust"), has
caused Creditrust SPV2, LLC (the "Company") to be formed as a limited liability
company under the laws of the State of Delaware for the purposes set forth
herein. Creditrust desires to enter into this Agreement in order to establish
the manner in which the business and affairs of the Company shall be managed and
to determine the respective rights, duties and obligations of the members of the
Company.
NOW THEREFORE, Creditrust hereby declares that the Limited Liability
Company Agreement of the Company shall be as follows:
ARTICLE I
FORMATION; NAME; REGISTERED OFFICE;
PURPOSE; TERM
Section 1.1 Formation.
Creditrust has caused Creditrust SPV2, LLC to be formed as a limited
liability company under the Delaware Limited Liability Company Act, 6 DEL. C.
ss. 18-101, et seq. (the "LLC Act").
Section 1.2 Registered Office and Registered Agent; Principal Office
and Chief Executive Office.
A. The initial address of the registered office of the Company in the
State of Delaware and the name and address of the initial resident agent of the
Company in the State of Delaware are as set forth in the Certificate of
Formation (as defined below).
<PAGE>
B. The principal office and chief executive office of the Company
shall, at all times during the term of the Indenture (as such term is defined
below) be maintained in the State of Maryland. The present address of the
principal office and chief executive office of the Company in the State of
Maryland is 7000 Security Boulevard, Baltimore, Maryland 21244.
Section 1.3 Purpose.
The purposes for which the Company is formed and the business and
objects to be carried on and promoted by it are limited solely to the following:
(1) To purchase or otherwise acquire from Creditrust, pursuant
to the terms of a Receivables Contribution Agreement by and between the
Company and Creditrust substantially in the form attached hereto as
Exhibit A (the "Receivables Contribution Agreement"), own, hold, sell,
transfer, assign, pledge, finance, refinance and otherwise deal with
certain pools of receivables (including, among others, consumer loan
receivables generated on credit card accounts, medical accounts and
installment accounts), identified in the Receivables Contribution
Agreement (collectively, the "Receivables");
(2) To authorize, issue, hold, retain an interest (including a
subordinated or ownership interest) in, sell, deliver or otherwise deal
with notes or other obligations secured by the Receivables
("Receivables-Backed Notes") and, in connection therewith, to pledge or
otherwise grant security interests in the Receivables, and any other
assets as determined by the Company's Board of Managers;
(3) To act as settlor or depositor of a trust formed to issue
a series of Receivables-Backed Notes secured by the Receivables
designated as the 6.43% Creditrust Receivables-Backed Notes, Series
1998-1;
(4) To use proceeds of the sale of Receivables-Backed Notes in
connection with the funding or acquisition of Receivables, the funding
of reserve accounts or other credit enhancement vehicles, the payment
of various expenses associated with the issuance of Receivables-Backed
Notes and for general company purposes (including, without limitation,
for distribution to the members) and to arrange for and enter into
agreements providing for credit enhancement of the Receivables-Backed
Notes or other evidences of indebtedness of the Company;
(5) To transfer, pledge or assign the rights to any amounts
remitted or to be remitted to the Company under an indenture, pooling
and servicing agreement, trust agreement or other agreement entered
into by the Company in connection with the issuance of the
Receivables-Backed Notes by the Company or by any trust or other entity
established by the Company for such purpose;
-2-
<PAGE>
(6) To hold or make such interim investments as may be
required by the applicable nationally recognized statistical rating
agency or agencies to be pledged by the Company as a condition to
receiving the desired rating on any obligations issued by the Company
pursuant to paragraph (2) of this Section 1.3, plus any investment
income on such investments, with such investments to include any
investments permitted under any indenture pursuant to which the Company
(or any trust or other entity) shall issue Receivables-Backed Notes;
and
(7) To enter into agreements that provide for the
administration, servicing and collection of amounts due on such
Receivables.
The Company shall not engage in any activity other than those necessary for,
incident to, connected with or arising out of the purposes stated in this
Section 1.3, nor shall the Company incur any indebtedness (other than
indebtedness imposed by and owed to any governmental entity), except for
indebtedness connected with or arising out of the purposes stated in this
Section 1.3.
Section 1.4 Certificate of Formation.
Creditrust has caused a certificate of formation of the Company (the
"Certificate of Formation") to be executed by an authorized person and filed for
record with the Delaware Secretary of State as of the date of this Agreement, a
copy of which is attached hereto as Exhibit B. The Officers and Managers shall
take all necessary action to maintain the Company in good standing as a limited
liability company under the LLC Act, including (without limitation) the filing
of any certificates of correction, articles of amendment and such other
applications and certificates as may be necessary to protect the limited
liability of the Members and to cause the Company to comply with the applicable
laws of any jurisdiction in which the Company owns property or does business.
Each Member, by his or its signature below or by its acquiring Units
and agreeing to be admitted to the Company as a Member, hereby accepts and
agrees to be bound by each and all the provisions of the Certificate of
Formation.
Section 1.5 Term.
The term of the Company commenced on the date that the Certificate of
Formation was filed and received by the Secretary of State of the State of
Delaware. The Company shall have perpetual existence; provided, however, that
the Company may be dissolved in accordance with Section 6.1 of this Agreement.
-3-
<PAGE>
Section 1.6 Tax Characterization.
At all times during which the Company has only one Member, the Company
shall, for federal and state income tax purposes, be disregarded as a separate
entity such that all the assets and liabilities of the Company shall be treated
as the assets and liabilities of its sole Member. At all times during which the
Company has two or more Members, the Company shall, for federal and state income
tax purposes, be classified as a partnership rather than an association taxable
as a corporation. Each Member, by its execution or acceptance of this Agreement,
covenants and agrees that it will file its own federal and state income and
other tax returns in a manner that its consistent with the Company being
classified as a partnership and will not take any action which is inconsistent
with the classification of the Company as a partnership.
ARTICLE II
MEMBERS; INTERESTS IN THE COMPANY; CAPITAL CONTRIBUTIONS
Section 2.1 Members and Capital Contributions
A. As of the date hereof, Creditrust Corporation, a Maryland
corporation ("Creditrust") is the sole Member of the Company.
B. Pursuant to the terms of a Receivables Contribution Agreement to be
entered into by and between the Company and Creditrust Corporation substantially
in the form attached hereto, Creditrust shall transfer and assign to the
Company, as a capital contribution to the Company, certain Receivables,
consisting of (i) a pool of Receivables to be purchased by Creditrust from
Heartland Bank, a federally chartered savings association ("Heartland"),
pursuant to a Receivables Purchase Agreement by and between Creditrust and
Heartland (the "Heartland Purchase Agreement"), which Receivables had previously
been purchased by Heartland from Citibank, N.A. (such pool of Receivables is
hereinafter referred to as the "Citibank Receivables") and (ii) certain other
Receivables owned by Creditrust. In exchange for such transfer and contribution,
the Company will issue (1) to Creditrust all the Units in the Company, other
than the sole Class B Unit (as defined below) in the Company and (2) to
Heartland, at the direction of Creditrust pursuant to the Receivables
Contribution Agreement, the sole Class B Unit in satisfaction of certain
obligations of Creditrust to Heartland under the Heartland Purchase Agreement.
C. Simultaneously with the closing of the transactions contemplated by
the Receivables Contribution Agreement and the Heartland Purchase Agreement, the
Class B Unit shall be issued to Heartland and Heartland shall be admitted to the
Company as the sole Class B Member upon the execution and delivery by Heartland
of a counterpart signature page to this Agreement in which Heartland accepts and
agrees to be bound by all the provisions of this Agreement.
-4-
<PAGE>
D. Upon the closing of the transactions contemplated by the Receivables
Contribution Agreement and the Heartland Purchase Agreement, the respective
names, addresses, number and Class of Units and capital contributions of the
Members shall be as set forth on Schedule A. Schedule A shall be amended from
time to time to reflect any changes to the information set forth thereon.
Section 2.2 No Additional Capital Contributions.
A. Other than the contribution of the Receivables to the Company by
Creditrust pursuant to the Receivables Contribution Agreement and Section 2.1,
no Member shall be required to make any capital contributions to the Company or
to lend any funds to the Company.
B. Subject to the other provisions of this Agreement, the Board of
Managers, on behalf of the Company, may from time to time seek and accept from
one or more Members selected by the Board of Managers additional capital
contributions of cash or in-kind contributions of property on such terms and
subject to such conditions as may be determined by the Board of Managers in its
sole discretion.
Section 2.3 Additional Members.
A. Except as provided in Section 5.1.B, no individual, corporation,
partnership, limited liability company, joint venture, association, joint stock
company, trust, unincorporated organization or government or any agency or
political subdivision thereof ("Person") may be admitted to the Company as an
additional or substitute Member without the prior approval of the Board of
Managers and the prior written consent of the Class B Member.
B. In addition to any other requirements set forth in this Agreement,
no person shall be admitted to the Company as an additional or substitute Member
unless and until such person has accepted and agreed to all the provisions of
this Agreement by executing a counterpart signature page hereto or an amendment
to this Agreement.
Section 2.4 Issuance and Classification of Units.
A. Each Member's ownership interest in the Company shall be represented
by units of membership interest ("Units"). An unlimited number of Units are
authorized. Units shall not be certificated. The Units shall be divided into two
classes: "Class A Units" and a single "Class B Unit". Unless otherwise expressly
provided in this Agreement to the contrary, (i) other than the Unit issued to
Heartland as the single Class B Unit, all Units shall be classified as Class A
Units, (ii) any reference to "Units" shall include Class A Units and the Class B
Unit, (iii) each holder of one or more Class A Units shall be referred to herein
as a "Class A Member" and Heartland, and any successor to its Class B Unit,
shall be referred to as the "Class B Member" and (iv) any
-5-
<PAGE>
reference to "Members" or a "Member" shall include the Class A Members and the
Class B Member.
B. The Class B Unit is a unit of special ownership interest in the
Company which shall entitle the holder thereof only to the rights and
obligations expressly set forth in this Agreement. The following is a
description (which is qualified in its entirety by the other provisions of this
Agreement) of the particular distinctions and limitations applicable to the
Class B Unit:
(i) The Class B Unit shall be issued to Heartland at the
direction of Creditrust in accordance with the Heartland Purchase
Agreement and the Receivables Contribution Agreement and Heartland
shall have no obligation to make any Capital Contributions to the
Company with respect to the Class B Unit issued to it.
(ii) The Class B Member shall have only the rights to receive
distributions from the Company specified under Section 3.2.B and 3.5.
(iii) Except as expressly provided in this Agreement, the
Class B Member shall not be entitled to participate in the business and
affairs of the Company or to vote on any matters requiring the consent
or approval of the Members.
(iv) The Class B Member shall have the right to select the
Independent Manager (as defined below) of the Company pursuant to
Section 4.2.A.
Section 2.5 Capital Accounts.
An individual capital account (the "Capital Account") shall be
maintained for each Member. The Capital Account of a Member shall be increased
by (a) the amount of cash or the agreed fair market value of any property
contributed by such Member (net of any liabilities assumed by the Company and
any liabilities to which such property is subject) and (b) the amount of all
Profits (and any item thereof) allocated to such Member, and decreased by (c)
the amount of all distributions to such Member and (d) the amount of all Losses
(and any item thereof) allocated to such Member. The Capital Accounts shall be
determined, maintained and adjusted in accordance with the Internal Revenue Code
of 1986, as amended (the "Code") and the Treasury Regulations issued thereunder,
including the capital account maintenance rules in Treasury Regulations
ss.1.704-(1)(b)(2)(iv).
-6-
<PAGE>
Section 2.6 General Rules Relating to Capital of the Company.
A. No Member shall be personally liable for the return of the capital
contributions of the Members, or any portion thereof, it being expressly
understood that any such return of contributions shall be made solely from the
Company assets.
B. Except as expressly provided herein, no Member shall have the right
to withdraw or receive a return of all or any part of such Member's capital
contributions. No Member shall have any right to demand or receive property
(other than cash) in return of capital contributions.
ARTICLE III
ALLOCATIONS AND DISTRIBUTIONS
Section 3.1 Certain Definitions for Article III.
For purposes of this Article III, terms used with initial capital
letters, which are not otherwise defined in the body of this Agreement, shall
have the meanings given to them below:
Citibank Receivables Net Collections: with respect to the
Citibank Receivables and any calendar month,
(i) all monies collected, received or otherwise
recovered with respect to the Citibank Receivables during such
calendar month, including, without limitation, (a) collections
from or on the account of obligors on the Citibank Receivables
and (b) the proceeds, net of third-party costs and expenses,
from any sale, exchange or other disposition of or financing
(including a subsequent securitization) secured by the
Citibank Receivables (but only so much of such net proceeds
that are directly attributable to the Citibank receivables) in
accordance with the terms of this Agreement or the
Supplemental Servicing Agreement,
less
(ii) any fees and compensation due in such calendar
month to unrelated third-party attorneys under fee or
compensation arrangements that are contingent upon, and
determined by reference to, amounts recovered in respect of
the related Citibank Receivables.
The Citibank Receivables Net Collections shall not be reduced by the
amount of any servicing and disposition fees paid or payable to
Creditrust under the Indenture or the Supplemental Servicing Agreement
(as such terms are defined in Section 4.4 below).
-7-
<PAGE>
Crossover Date: the date on which the aggregate amount of (i)
all servicing and disposition fees paid to or retained by Creditrust
with respect to the Citibank Receivables under the servicing agreement
with Heartland prior to the acquisition of the Citibank Receivables by
the Company, plus all servicing and disposition fees paid to Creditrust
with respect to the Citibank Receivables under the Indenture or the
Supplemental Servicing Agreement plus all distributions to Creditrust
under Section 3.2.A (and all amounts retained by the Company for
distribution to Creditrust under Section 3.2.A) with respect to the
Citibank Receivables exceeds (ii) $15,371,354.50.
Profits or Losses: the taxable income or taxable loss of the
Company for federal income tax purposes for each fiscal year taking
into account all items of income, gain, loss, deduction and credit,
subject to the following adjustments:
(i) Any income of the Company that is exempt from
federal income tax shall be added to such taxable income or
loss.
(ii) Any expenditures of the Company described in
Code Section 705(a)(2)(B), or treated as Code Section
705(a)(2)(B) expenditures pursuant to Treasury Regulations
ss.1.704-1(b)(2)(iv)(i), shall be subtracted from such taxable
income or loss.
Section 3.2 Distributions Prior to Dissolution and Termination.
The net cash proceeds from the issuance of the Receivables-Backed Notes
not required to be retained by the Company under the Indenture or other
documents and agreements entered into by the Company in connection with the
Receivables-Backed Notes, may be distributed to the Class A Members at such
times and in such amounts as may be determined by the Board of Managers in its
discretion. Other than such distributions, the Company shall not make any
distributions to its Members prior to the date on which the Receivables are
released from all liens under the Indenture. From and after such date, but prior
to the dissolution and termination of the Company, the Company shall make the
following distributions to the Members:
A. Class A Units. Cash not needed by the Company for the operation of
its business or required to be distributed to the Class B Members under Section
3.2.B shall be distributed monthly to the Class A Members on or before the tenth
day of each calendar month (or the next succeeding business day, if such tenth
day is not a business day), with respect to net cash receipts of the Company for
the preceding calendar month. All such distributions shall be made to the Class
A Members in proportion to the number of Class A Units held by each. Unless
otherwise prohibited under the terms of this Agreement or the Indenture, the
Company may make in-kind distributions of property to the Class A Members of
such property, at such times, in such amounts and on such terms
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as may be determined by the Board of Managers; provided, however, that no
in-kind distributions shall be made of all or any portion of the Citibank
Receivables without the prior written consent of the Class B Member.
B. Class B Unit. From and after the Crossover Date, the Class B Member
shall be entitled to receive a distribution of cash from the Company equal to
10.0% of all Citibank Receivables Net Collections; provided, however, that any
distributions which would otherwise be required to be made to the Class B Member
under this Section 3.2.B prior to the date on which the Citibank Receivables are
released from the Indenture shall be deferred until the date on which the
Citibank Receivables are released from the Indenture. Any amounts deferred under
the preceding sentence shall cumulate and shall be distributed to the Class B
Member, together with interest at the rate of 6% per annum from the date
otherwise payable hereunder to the date actually paid, from any cash receipts of
the Company prior to any distributions to the Class A Members under Section
3.2.A. Distributions to the Class B Member under this Section 3.2.B shall be
made on or before the tenth day of each calendar month (or the next succeeding
business day, if such tenth day is not a business day), with respect to Citibank
Receivables Net Collections for the preceding calendar month.
Section 3.3 Allocations of Profits and Losses.
A. In General. After giving effect to the Regulatory Allocations
provided under Section 3.3.B and the special allocations to the Class B Member
under Section 3.3.C, Profits and Losses for each fiscal year (or other portion
thereof) of the Company shall be allocated among the Class A Members in
proportion to the number of Class A Units held by each.
B. Regulatory Allocations. Notwithstanding any other provisions of this
Section 3.3, the special allocations provisions set forth on Schedule 3.3.B,
which are hereby incorporated into this Section 3.3.B by this reference as if
set forth in their entirety, shall apply prior to any other allocations of
Profits and Losses (and any items of income, gain, loss or deduction).
C. Special Allocation of Profits to Class B Members. Prior to any other
allocations of Profits under Section 3.3.A, Profits shall be allocated to the
Class B Member in each fiscal year (or other portion thereof) until the
aggregate amount of Profits allocated to the Class B Member in the current and
all prior fiscal years is equal to the cumulative amount of Citibank Receivables
Net Collections (if any) distributed to the Class B Member for such fiscal year
and all prior fiscal years in accordance with Section 3.2.B. The Class B Member
shall not be allocated any Losses.
Section 3.4 Allocation of Taxable Income and Taxable Loss.
A. Except as otherwise provided herein, each item of taxable income,
gain, loss, deduction, preference or recapture entering into the computation of
Profits or Losses
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hereunder shall be allocated to each Member in the same proportion as Profits or
Losses are allocated and in accordance with the provisions of Section 704(b) of
the Code and the Treasury Regulations thereto.
B. In accordance with Code Section 704(c) and the Treasury Regulations
thereunder, income, gain, loss, and deduction with respect to any property
contributed to the capital of the Company or with respect to which the value has
been adjusted on the books of the Company shall, for tax purposes (but not for
purposes of maintaining the Members' respective Capital Accounts), be allocated
among the Members so as to take account of any variation between the adjusted
basis of such property to the Company for federal income tax purposes and its
fair market value using such method as may be selected by the Board of Managers.
C. Allocations pursuant to this Section 3.4 are for purposes of
federal, state, and local taxes and shall not affect, or in any way be taken
into account in computing, any Member's Capital Account or share of Profits,
Losses, other items, or distributions pursuant to any provision of this
Agreement.
Section 3.5 Distributions Upon Dissolution and Termination
Upon the dissolution and termination of the Company, the assets
remaining after satisfaction (whether by payment or by establishment of reserves
therefor) of creditors shall be distributed to the Members in accordance with
the provisions of Section 3.3.
ARTICLE IV
MANAGEMENT OF BUSINESS AND
AFFAIRS OF THE COMPANY
Section 4.1 Management of Business and Affairs of the Company.
A. The exclusive authority to manage, control and operate the Company
shall be vested in the Board of Managers of the Company, consisting of
individuals, who need not be members, elected by the members as Managers in
accordance with the Certificate of Formation and the Limited Liability Company
Agreement of the Company. The number of Managers of the Company shall be three
(3), which number may not be increased or decreased. One of the Managers shall
be an Independent Manager. As used herein, an "Independent Manager" shall be an
individual (a) who is not (i) a manager, director, officer, consultant, agent,
employee, customer or supplier of any Affiliate (as defined below) of the
Company, (ii) a natural person related to any manager, director, officer,
consultant, agent or employee of any Affiliate of the Company, (iii) a holder
(directly or indirectly) of any voting securities of any Affiliate of the
Company, or (iv) a natural person related to a holder (directly or indirectly)
of any voting securities of any Affiliate of the Company and (b) who has (A)
prior experience as an independent director
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for a corporation or similar entity whose organic documents require the
unanimous written consent of all independent directors or managers thereof
before such entity could consent to the institution of bankruptcy or insolvency
proceedings against it or could file a petition seeking relief under any
applicable federal or state law relating to bankruptcy, and (B) at least three
years of employment experience with one or more entities that provide, in the
ordinary course of their respective businesses, advisory, management or
placement services to issuers of securitization or structured finance
instruments, agreements or securities. In the event that the Independent Manager
resigns, or such position is otherwise vacated, no action requiring the
unanimous affirmative vote of the Board of Managers shall be taken until a
successor Independent Manager is elected and approves such action. No
Independent Manager shall be a trustee in bankruptcy for the Company or any
affiliate of the Company or any significant customer of or supplier to the
Company.
The names of the Managers who will serve until the first annual meeting
and until successor(s) are elected and qualify are as follows:
Joseph K. Rensin
John L. Davis
Andrew L. Stidd (the initial Independent Manager)
At all times after the Class B Unit has been issued, the Class B Member shall
have the sole right to remove the Independent Manager and to elect a successor
Independent Manager in accordance with the provisions hereof. Except for such
right and any other rights to consent to or approve of actions and decisions of
the Company expressly provided for in this Agreement, the Class B Member shall
not be entitled to vote on any matter submitted to a vote by the Members.
B. For purposes of carrying out the business of the Company, the
Members hereby adopt as the By-Laws of the Company the By-Laws attached hereto
as Exhibit C and incorporated by this reference as if set forth fully herein
(the "By-Laws").
C. The Board of Managers shall appoint Officers of the Company for the
purpose of managing the day-to-day operations of the Company, who shall be
elected and shall have the powers as set forth in the By-Laws. The names of the
initial Officers initially serving the Company and the capacities in which they
serve are as follows:
<TABLE>
<CAPTION>
Name Office(s)
----- ---------
<S> <C>
Joseph K. Rensin President
Richard J. Palmer Vice President and Treasurer
John L. Davis Secretary
</TABLE>
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<PAGE>
D. Notwithstanding the general grant of authority to the Board of
Managers under the foregoing provisions of this Section 4.1, the Managers shall
cause the Company:
(1) To maintain books and records separate from any other
person or entity;
(2) To maintain its bank accounts separate from any other
person or entity;
(3) Not to commingle its assets with those of any other person
or entity and to hold all of its assets in its own name;
(4) To conduct its own business in its own name;
(5) To maintain separate financial statements, showing its
assets and liabilities separate and apart from those of any other
person or entity and to cause such financial statements to be prepared
in accordance with generally accepted accounting principles;
(6) To pay its own liabilities and expenses only out of its
own funds;
(7) To observe all corporate and other organizational
formalities;
(8) To maintain an arm's length relationship with its
Affiliates and to enter into transactions with Affiliates only on a
commercially reasonable basis;
(9) Not to assume, guarantee or become obligated for the debts
of any other entity or person;
(10) To allocate fairly and reasonably any overhead expenses
that are shared with any Affiliate, including paying for office space
and services performed by any employee of an Affiliate;
(11) To use separate stationery, invoices, and checks bearing
its own name;
(12) To hold itself out as a separate entity;
(13) To correct any known misunderstanding regarding its
separate identity;
(14) Not to guaranty or become obligated for the debts of any
other entity or hold out its credit as being available to satisfy the
obligations of others;
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(15) Except in connection with the Receivables-Backed Notes,
not to pledge the Receivables or any of its other assets for its
benefit or the benefit of any other entity;
(16) Not to incur or assume any indebtedness except for such
indebtedness that may be incurred by the Company in connection with the
issuance of Receivables-Backed Notes;
(17) To cause any of the Company's financial statements which
are consolidated with those of Creditrust to contain footnotes or other
disclosures which describe the Company's business and otherwise inform
Creditrust's creditors that the Company is a separate entity whose
creditors have a claim on its assets prior to those assets becoming
available to its equity holders and therefore to any creditors of
Creditrust or any of its Affiliates; and
(18) Take such other actions to ensure that the factual
assumptions set forth in, and forming the basis of the legal opinions
of Piper & Marbury L.L.P., counsel to Creditrust, which have or are
expected to be issued in connection transactions contemplated by the
Indenture and relating to the issues of substantive consolidation and
true sale of the Receivables are true and correct at all times.
E. Notwithstanding anything to the contrary set forth in the
Certificate of Formation or this Agreement, the unanimous consent of all of the
Managers (including the Independent Manager) shall be required for the Company
to:
(1) File or consent to a voluntary petition or otherwise
initiate proceedings for the Company to be adjudicated bankrupt or
insolvent or seeking an order for relief as a debtor under the
Bankruptcy Code or file or consent to the filing of, or cause the
filing of, any petition seeking any composition, bankruptcy,
reorganization, readjustment, liquidation, dissolution or similar
relief for the Company under any applicable state or federal bankruptcy
laws or any other present or future applicable federal, state or other
statue or law relative to bankruptcy, insolvency or other relief for
debtors; or seek or consent to the appointment of a trustee, receiver,
conservator, assignee, sequestrator, custodian, liquidator (or other
similar official) of the Company or of all or any substantial part of
the properties and assets of the Company to make or consent to any
general assignment for the benefit of creditors or admit in writing its
inability to pay its debts generally as they become due, or declare or
effect a moratorium on its debt or take any action in furtherance of
any such action; or
(2) Dissolve or liquidate, in whole or in part, consolidate or
merge with or into any other entity or convey, sell or transfer its
properties or assets substantially as an entirety to any entity;
provided, that the foregoing shall not be
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construed as limiting the ability of the Company to make distributions
to its members in accordance with this Agreement; or
(3) Incur or assume any indebtedness for borrowed money except
Receivables-Backed Notes; or
(4) Acquire any Receivables, other than the Receivables
acquired in connection with the issuance of the Receivables-Backed
Notes and the transactions contemplated by the Indenture.
When voting on whether the Company will take any action described in this
Section 4.1.E, each Manager shall owe its primary fiduciary duty or other
obligation to the company (including, without limitation, the Company's
creditors) and not to the members (except to the extent as may specifically be
required by applicable law). Every Member of the Company shall be deemed to have
consented to the foregoing provisions of this Section 4.1.E, specifically and
without limitation, the waiver of his, her or its right to cause a dissolution
of the Company under applicable law by virtue of such Member's acquisition of
Units of the Company and admission to the Company as a Member.
Notwithstanding the foregoing and so long as any Receivables-Backed Notes remain
outstanding and/or any Note Insurer Obligations (as such term is defined in the
Indenture) remain outstanding, the Managers shall have no authority to take any
action enumerated in this Section 4.1.E without the written consent of the Note
Insurer (as such term is defined in the Indenture), or, after the occurrence of
an Insurer-Default (as such term is defined in the Indenture) the written
consent of a majority (determined in accordance with relative outstanding
principal balances) of the holders of the outstanding Receivables-Backed Notes.
Section 4.2. Special Rights and Approvals of Class B Member.
A. The Class B Member shall have the sole right to elect, remove and
replace the Independent Manager.
B. In addition to any other limitations set forth in Section 4.1
hereof, the Company shall have no authority to, and shall not, take any of the
following actions without the prior written consent of the Class B Member:
(i) Take any action enumerated in Section 4.1.E;
(ii) Issue additional Units to any Person or, except for any
substitute Member admitted pursuant to Section 5.1.B, admit any Person
as an additional Member;
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<PAGE>
(iii) Except for the contracts and agreements expressly
authorized under this Agreement, enter into any contract or agreement
with any (i) stockholder, partner, member, director, manager, officer,
agent or employee of Creditrust or (ii) other Person that directly or
indirectly controls, is controlled by, or is under common control with
Creditrust (an "Affiliate");
(iv) Sell, transfer, exchange, convey, distribute or otherwise
dispose of any or all of the Company's right, title or interest in the
Citibank Receivables to Creditrust or an Affiliate thereof;
(v) Make any decisions required or permitted to be made by the
Company under or enforce any of the Company's rights under the
Supplemental Servicing Agreement (as defined in Section 4.4); or
(vi) Amend or terminate the Certificate of Formation,
Supplemental Servicing Agreement (as defined below) or Receivables
Contribution Agreement, or, except as provided in Section 8.5, this
Agreement.
C. The Independent Manager shall be vested with the sole and exclusive
authority, independent of any other Managers or Officers of the Company, (i) to
direct the Company in making any decisions required or permitted to be made by
the Company under or enforcing any of the Company's rights under the
Supplemental Servicing Agreement and (ii) upon the termination of the
Supplemental Servicing Agreement in accordance with its terms, to select and
engage a successor servicer for the Citibank Receivables, for such compensation,
on such terms conditions and subject to such conditions as may be determined by
the Independent Manager in the exercise of his reasonable discretion.
Section 4.3 Approval of Certain Agreements and Transactions
A. Each Member, by its execution or acceptance of this Agreement,
hereby ratifies and approves the execution and delivery by the Company of, and
the performance of the obligations of the Company under, the following documents
and agreements that are to be executed and delivered concurrently with the
closing of the transactions contemplated by the Receivables Contribution
Agreement:
(i) the Receivables Contribution Agreement;
(ii) the Indenture and Servicing Agreement by and among the Company, as
Issuer, Creditrust, as Servicer, and the trustee named therein substantially in
the form attached hereto as Exhibit D (the "Indenture"), relating to, among
other things, the transfer of the Receivables to the trustee named therein as
security for the obligations of the Company under the Receivables-Backed
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Notes and the servicing of the Receivables by Creditrust during the term that
the Receivables are subject to the Indenture;
(iii) separate purchase agreements with the purchasers of the
Receivables-Backed Notes on such terms as may be determined by the
Board of Managers and Officers of the Company;
(iv) the Servicing Agreement to be entered into by and between
the Company and Creditrust Corporation substantially in the form
attached hereto as Exhibit E (the "Supplemental Servicing Agreement"),
relating to the servicing of the Citibank Receivables after the
Citibank Receivables have been released from the Indenture.
B. Each Member, by its execution or acceptance of this Agreement,
hereby authorizes and directs the Company to borrow money on the terms set forth
in the Indenture, to issue the Receivables-Backed Notes to evidence such
indebtedness and, in connection therewith, transfer the Receivables to the
trustee in accordance with the terms of the Indenture.
Section 4.4 No Participation of Members in Business and Affairs of the
Company.
No Member, in its capacity as such, shall have any authority or right
to act for or bind the Company or to participate in or have any control over
Company business, except for such rights to consent to or approve of the actions
and decisions of the Board of Managers as are expressly provided for in this
Agreement or the Certificate of Formation.
Section 4.5 Other Businesses of Members; Covenants Regarding
Noncompetition and Nondisclosure.
A. Any Member and any Affiliate of any Member may engage in or possess
an interest in other business ventures of any nature or description
independently or with others, and neither the Company nor any Member shall have
any rights in or to such independent ventures or the income or profits derived
therefrom, and such activities shall not be construed as a breach of any duty of
loyalty or other duty to the other Members or the Company.
B. Each Class B Member, by its execution or acceptance of this
Agreement, (i) acknowledges that it may obtain information relating to the
Company and Creditrust that is of a confidential and proprietary nature
("Proprietary Information"), including, but is not limited to, non-public trade
secrets, invention techniques, processes, programs, schematics, software source
documents, data, and financial information and (ii) agrees at all times, both
during the period in which it is a Member and for a period of three (3) years
after the complete termination of its interest in the Company as a Class B
Member
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<PAGE>
for any reason (including the dissolution and termination of the
Company), keep in trust and confidence all such Proprietary Information, and
shall not use such Proprietary Information other than in connection with the
ownership of its Class B Units in accordance with the terms of this Agreement,
nor shall any Class B Member disclose any such Proprietary Information of the
Company or Creditrust without the written consent of Creditrust unless legally
required to disclose such information. Each Class B Member further agrees to
immediately return all Proprietary Information of the Company and Creditrust
(including copies thereof) in its possession, custody, or control upon the
complete termination of its interest in the Company as a Class B Member for any
reason.
C. Each Class B Member acknowledges and agrees that since a remedy at
law for any breach or attempted breach of the restrictive covenants of this
Section 4.5 shall be inadequate, the non-breaching party shall have the right to
enforce the provisions of this Section 4.5 by an action for specific performance
and injunctive or other equitable relief, filed in any court of competent
jurisdiction in the State of Delaware, without the necessity of proving actual
damages, in case of any such breach or attempted breach, in addition to whatever
other remedies may exist at law. The parties also waive any requirement for
securing or posting any bond in connection with obtaining any such injunctive or
other equitable relief. The parties hereto recognize that the laws and public
policies of the various states of the United States may differ as to the
validity and enforceability of agreements similar to those contained in Section
4.5. It is the intention of the parties that the provisions of this Section 4.5
shall be enforced to the fullest extent permissible under the laws and public
policies of the State of Delaware or any other jurisdiction in which enforcement
may be sought. In the event that this Section 4.5 shall be determined to be
invalid or unenforceable, either in whole or in part, Section 4.5 shall be
deemed amended to delete or modify, as necessary, the offending provisions and
to alter the balance of this Section 4.5 in order to render the same valid and
enforceable to the fullest extent permissible as aforesaid.
Section 4.6 Indemnification.
A. The Company shall indemnify (i) its Managers and Officers to the
fullest extent permitted or authorized by the laws of the State of Delaware now
or hereafter in force applied as if the Company were a Delaware corporation,
including (without limitation) the advance of expenses under the procedures and
to the full extent permitted by law, and (ii) other employees and agents of the
Company to such extent as shall be authorized by the Board of Managers and is
permitted by law. The foregoing rights of indemnification shall not be exclusive
of any other rights to which those seeking indemnification may be entitled. The
Board of Managers may take such action as is necessary to carry out these
indemnification provisions and is expressly empowered to adopt, approve and
amend from time to time such resolutions or contracts implementing such
provisions or such further indemnification arrangements as may be permitted by
law. No amendment of the Certificate of Formation or this Agreement or repeal of
any of the provisions thereof shall limit or eliminate the right to
indemnification provided
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hereunder with respect to acts or omissions occurring prior to such amendment or
repeal. The indemnification shall (x) be payable solely from the assets of the
Company and no Member shall have any personal or corporate liability therefor
and (y) be expressly subordinate to any obligations of the Company on or with
respect to the Receivables-Backed Notes and/or the Note Insurer Obligations (as
such term is defined in the Indenture) and the distributions to the Class B
Member set forth in Section 3.2 hereof.
B. To the fullest extent permitted by Delaware statutory or decisional
law, as amended or interpreted, no Manager or Officer of the Company shall be
personally liable to the Company or any Members for money damages. No amendment
of the Certificate of Formation or this Agreement, or repeal of any of their
respective provisions shall limit or eliminate the limitation on liability
provided to Managers and Officers hereunder with respect to any act or omission
occurring prior to such amendment or repeal.
ARTICLE V
RESTRICTIONS ON TRANSFERS OF UNITS AND
WITHDRAWALS BY MEMBERS
Section 5.1 Transfer of Units.
A. Except as provided in this Section 5.1, (i) no Member shall endorse,
sell, give, assign, transfer or otherwise dispose of, voluntarily or
involuntarily or by operation of law (hereinafter referred to as "Transfer") all
or any part of such Member's Units without the prior written consent of the
Board of Managers and each other Member and (ii) prior to the date on which all
Receivables-Backed Notes and all Note Insurer Obligations (as such term is
defined in the Indenture) have been satisfied in full, Creditrust shall not
Transfer any of its Class A Units without the prior written consent of the Note
Insurer (as such term is defined in the Indenture), or, after the occurrence of
an Insurer-Default (as such term is defined in the Indenture) the prior written
consent of a majority (determined in accordance with relative outstanding
principal balances) of the holders of the Receivables Backed Notes. .
B. Any Member may sell or assign (for any consideration or no
consideration) all of its Units to an Affiliate of the Member that (i) holds
100% of the ownership and effective control over the Member, (ii) 100% of the
ownership and effective control over which is held by the transferring Member or
(iii) is under common 100% control with the transferring Member. A permitted
transferee of a Member under this Section 5.1.B shall be admitted to the Company
as a substitute Member with respect to the Units transferred to it upon the
satisfaction of all of the following conditions:
(i) an executed or authenticated copy of the written
instrument of assignment or Transfer is delivered to the Company;
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(ii) the transferor Member grants to the transferee the right
to be admitted to the Company as a substitute Member;
(iii) the transferee agrees to be bound by all of the terms of
this Agreement by executing a counterpart signature page to this
Agreement; and
(iv) the Units acquired by the transferee consist of all the
Units of the transferor Member in the Company.
Section 5.2 Additional Restrictions on Transfers
A. The Units described in this Agreement have not been registered under
the Securities Act of 1933, as amended (the "1933 Act") or under the securities
laws of the State of Delaware or any other jurisdiction (the "State Acts").
Consequently, in addition to any and all other restrictions on transferability
set forth herein, the Units may not be sold, assigned, pledged, hypothecated or
otherwise disposed of or Transferred, except in accordance with the provisions
of the 1933 Act and the State Acts.
B. In addition to any and all other restrictions on Transfers set forth
herein, no Units may be sold, assigned, pledged, hypothecated or otherwise
disposed of if such Transfer would cause or result in a default under the
Indenture.
Section 5.3 No Right of Withdrawal.
No Member shall have any right to withdraw from the Company as a Member
without the prior consent of the Board of Managers and the prior written consent
of each other Member.
Section 5.4 Effect of Bankruptcy, Dissolution, Liquidation or
Termination of a Member.
The bankruptcy, dissolution, liquidation or termination of a Member
shall not cause a termination or dissolution of the Company, and the business of
the Company shall continue. Upon any such occurrence, the trustee, receiver,
executor, administrator, committee or conservator of such Member shall have only
the rights of an assignee of the Units of the former Member for the purpose of
settling or managing the former Member's estate or property. The Transfer by
such trustee, receiver, executor, administrator, committee or conservator of any
Unit shall be subject to all of the restrictions hereunder to which such
Transfer would have been subject if such Transfer had been made by the bankrupt,
dissolved, liquidated or terminated Member.
Section 5.5 Automatic Redemption of Class B Unit.
A. Upon the first to occur of (i) August 6, 2002 and (ii) 60 days
following the date on which the Company no longer holds any of the Citibank
Receivables, the Class B Unit shall, without the requirement of any further
action by the Company or any other
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Member and simultaneously with the occurrence of any such event, automatically
be redeemed by the Company and the Class B Member shall be deemed to have
withdrawn from the Company as a Member thereof, provided, however, that such
redemption shall in no event occur prior to the date that is 60 days following
the date on which all Receivables-Backed Notes and all Note Insurer Obligations
(as such term is defined in the Indenture) have been satisfied in full. Upon
such redemption, (i) the Class B Member shall be entitled to receive from the
Company, in redemption of its Class B Unit, cash equal to the greater of one
hundred dollars ($100.00) or 10% of the fair market value of the Citibank
Receivables and (ii) the Class B Member shall have no further rights or
interests in the Company or under this Agreement whatsoever, other than as an
unsecured creditor with respect to the purchase price payable to it in
redemption of its Class B Unit.
B. For purposes of this Section 5.5, the fair market value of the
Citibank Receivables shall be the amount agreed upon by the Class B Member and
representatives of the Company in writing during the 60-day period ending on
August 6, 2002; provided, however, that if the Class B Member and the Company
are unable in good faith to agree on the fair market value of the Cititbank
Receivables within such 60-day period, the fair market value of the Citibank
Receivables shall be determined by an independent appraiser mutually acceptable
to the Company and the Class B Member; provided further, however, that if the
Company and the Class B Member are unable to agree on an independent appraiser
within 10 business days after August 6, 2002, the fair market value of the
Citibank Receivables shall equal the average of three appraisals, one selected
by the Company, one by the Class B Member and one selected by the other two
appraisers. The fair market value of the Citibank Receivables as so determined
shall be final and binding on the parties. Each appraiser selected hereunder
shall have significant experience in valuing financial assets substantially
similar to the Receivables. The costs and fees payable to any appraisers
retained in connection with this Section 5.5.B shall be borne by the party
selecting such appraiser (i.e, by the Company and the Class B Member), other
than the costs and fees payable to an appraiser jointly selected by the Company
and the Class B Member or selected by the other two appraisers selected by the
Company and the Class B Member.
ARTICLE VI
DISSOLUTION OF THE COMPANY
Section 6.1 Dissolution
A. The Company shall not dissolve and terminate prior to the date that
is one year and one day after the date on which all Receivables-Backed Notes and
all Note Insurer Obligations (as such term is defined in the Indenture) have
been satisfied in full. At any time thereafter, the Company may be dissolved
upon the unanimous consent of all Managers (including the Independent Manager)
to dissolve and terminate the Company, together with the prior written consent
of the Class B Member.
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<PAGE>
B. The Company shall not be dissolved upon a person ceasing to be a
Member, including the occurrence, with respect to any Member, of any of the
events specified under Section 18-801(b) of the LLC Act.
Section 6.2 Liquidation and Termination.
A. Upon the dissolution of the Company, the Officers and Managers of
the Company shall cause the Company to liquidate by converting the assets of the
Company to cash or its equivalent and arranging for the affairs of the Company
to be wound up with reasonable speed but with a view towards obtaining fair
value for Company assets, and, after satisfaction (whether by payment or by
establishment of reserves therefor) of creditors shall distribute the remaining
assets to and among the Members in accordance with the provisions of Section 3.5
hereof.
B. Each Member shall look solely to the assets of the Company for all
distributions with respect to the Company and such Member's capital contribution
thereto and share of profits, gains and Losses thereof and shall have no
recourse therefor (upon dissolution or otherwise) against any other Member.
ARTICLE VII
BOOKS AND RECORDS; ACCOUNTING,
TAX ELECTIONS, ETC.
Section 7.1 Books, Records and Reports.
A. The Company shall keep correct and complete books and records of its
accounts and transactions and minutes of the proceedings of its Members and
Board of Managers and of any executive or other committee when exercising any of
the powers of the Board of Managers. The books and records of the Company may be
in written form or in any other form which can be converted within a reasonable
time into written form for visual inspection. Minutes shall be recorded in
written form, but may be maintained in the form of a reproduction. The original
or a certified copy of this Agreement shall be kept at the principal office of
the Company. The books and records of the Company shall be maintained by the
Secretary of the Company and shall be available for examination by any Member,
or its duly authorized representatives, during regular business hours.
B. The President or chief financial officer shall prepare or cause to
be prepared and shall furnish to the Members within ninety (90) days of the end
of each fiscal year (i) a balance sheet and report of the receipts,
disbursements, Profits or Loss of the Company, and each Member's share of such
items for the fiscal year, and (ii) information sufficient for the Members to
report their respective shares of the profits and losses of the Company for
income tax purposes. The cost of such financial and tax reports shall be an
expense of the Company.
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<PAGE>
Section 7.2 Bank Accounts Checks, Drafts, Etc.
The bank accounts of the Company shall be maintained in accounts in the
name of and under the tax identification number for the Company in such banking
institutions as the Managers shall determine. All checks, drafts and orders for
the payment of money, notes and other evidences of indebtedness, issued in the
name of the Company, shall be signed by such Officers as may be authorized by
the Board of Managers from time to time.
Section 7.3 Fiscal Year; Methods of Accounting.
The fiscal year of the Company shall be the year ending December 31,
unless otherwise determined by the Board of Managers. The method of accounting
to be used in keeping the books of the Company shall be determined by the Board
of Managers in accordance with applicable law.
Section 7.4. Tax Matters Partner.
If, at any time, the Company has more than one Member and is required
to identify one of the Members as the "Tax Matters Partner" of the Company for
federal income tax purposes, Creditrust shall be designated as the Tax Matters
Partner. If the Company receives from the Internal Revenue Service a Final
Company Administration Adjustment pursuant to Section 6223 of Code, the Tax
Matters Partner agrees to notify the Members of such receipt within ten (10)
days thereof. If it is determined to seek judicial review of such IRS action
pursuant to Section 6226 of Code, then the Tax Matters Partner shall select the
judicial forum for such review in accordance with the recommendation of counsel.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Binding Provisions.
The covenants and agreements contained herein shall be binding upon and
inure to the benefit of the successors and assigns of the respective parties
hereto.
Section 8.2 Separability of Provisions.
Each provision of this Agreement shall be considered separable and if
for any reason any provision or provisions herein are determined to be invalid
and contrary to any existing or future law, such invalidity shall not impair the
operation of or affect any other provisions of this Agreement.
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<PAGE>
Section 8.3 Rules of Construction.
Unless the context clearly indicates to the contrary, the following
rules apply to the construction of this Agreement:
(i) References to the singular include the plural, and
references to the plural include the singular.
(ii) Words of the masculine gender include correlative words
of the feminine and neuter genders.
(iii) The headings or captions used in this Agreement are for
convenience of reference and do not constitute a part of this
Agreement, nor affect its meaning, construction, or effect.
(iv) References to a person include any individual,
corporation, partnership, limited liability company, joint venture,
association, joint stock company, trust, unincorporated organization or
government or agency or political subdivision thereof.
(v) Any reference in this Agreement to a particular "Article,"
"Section" or other subdivision shall be to such Article, Section or
subdivision of this Agreement unless the context shall otherwise
require.
(vi) Any use of the word "including" in this Agreement shall
not be construed as limiting the phrase so modified to the particular
items or actions enumerated.
(vii) When any reference is made in this document or any of
the schedules or exhibits attached to the Agreement, it shall mean this
Agreement, together with all other schedules and exhibits attached
hereto, as though one document.
Section 8.4 Applicable Law.
This Agreement shall be construed and enforced in accordance with the
laws of the State of Delaware, without regard to conflict of law principles.
Section 8.5 Entire Agreement; Amendments.
A. This Agreement constitutes the entire agreement of the parties
hereto with respect to the subject matter hereof.
B. This Agreement and the Certificate of Formation may be modified or
amended only pursuant to a written amendment adopted by the Board of Managers
and approved by Members holding a majority of the Class A Units; provided,
however, no
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<PAGE>
amendment shall be effective with respect to the rights or obligations of the
Class B Member without its prior written consent. Once an amendment to this
Agreement and/or the Certificate of Formation has been adopted as provided in
this Section 8.5, the proper Officers of the Company shall authorize the
preparation and filing, if necessary, of a written amendment to this Agreement
and/or the Certificate of Formation, as applicable.
C. Notwithstanding the foregoing, so long as any Receivables-Backed
Notes are outstanding and/or any Note Insurer Obligations (as such term is
defined in the Indenture) remain outstanding, neither this Agreement nor the
Certificate of Formation may be modified or amended without the prior consent of
the Note Insurer (as such term is defined in the Indenture), or, after the
occurrence of an Insurer-Default (as such term is defined in the Indenture) the
written consent of a majority (determined in accordance with relative
outstanding principal balances) of the holders of the Receivables Backed Notes.
Each Member and Manager agrees that it shall not cause or permit any action to
be taken to amend this Agreement or the Certificate of Formation in
contravention of this Section 8.5.C.
Section 8.6 Covenant of Members Regarding Bankruptcy Petition.
Each Member hereby covenants and agrees, for itself and its Affiliates,
that prior to the date that is one year and one day after the date on which all
Receivables-Backed Notes and all Note Insurer Obligations (as such term is
defined in the Indenture) have been satisfied in full, the Member shall not,
directly or indirectly, file or consent to a voluntary petition or otherwise
initiate proceedings for the Company to be adjudicated bankrupt or insolvent or
seeking an order for relief as a debtor under the Bankruptcy Code or file or
consent to the filing of, or cause the filing of, any petition seeking any
composition, bankruptcy, reorganization, readjustment, liquidation, dissolution
or similar relief for the Company under any applicable state or federal
bankruptcy laws or any other present or future applicable federal, state or
other statue or law relative to bankruptcy, insolvency or other relief for
debtors.
Section 8.7 Counterparts.
This Agreement may be executed in several counterparts and all so
executed shall constitute one agreement binding on all parties hereto,
notwithstanding that all the parties have not signed the original or the same
counterpart. Any counterpart hereof signed by a party against whom enforcement
of this Agreement is sought shall be admissible into evidence as an original
hereof to prove the contents hereof.
[ signature appear on next page ]
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<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Limited Liability
Company Agreement of Creditrust SPV2, LLC to be executed as of the year and date
first above written.
WITNESS: MEMBER:
- -------- -------
CREDITRUST CORPORATION
/s/ Steven M. Sharkey By: /s/ Joseph K. Rensin
- ------------------------------- ---------------------------------
Joseph K. Rensin
President
- -------------------------------------------------------------------------------
IDENTIFICATION OF SCHEDULES AND EXHIBITS
- ----------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Schedules
A Names, Addresses, Units and Capital Contributions of Members
Exhibits
A Form of Receivables Contribution Agreement
B Certificate of Formation
C By-Laws
D Form of Indenture
E Form of Supplemental Servicing Agreement
</TABLE>
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<PAGE>
LIMITED LIABILITY COMPANY AGREEMENT
OF
CREDITRUST SPV2, LLC
Names, Addresses, Units and Capital Contributions of Members
Schedule A
<TABLE>
<CAPTION>
------------------------------------- ------------------------------------ -------------------------
Name and Address Capital Contributions Units
------------------------------------- ------------------------------------ -------------------------
<S> <C> <C>
Creditrust Corporation Receivables pursuant to 100 Class A Units
7000 Security Boulevard Receivables Contribution
Baltimore, Maryland 21244 Agreement
------------------------------------- ------------------------------------ -------------------------
------------------------------------- ------------------------------------ -------------------------
NA
Heartland Bank 1 Class B Unit
------------------------------------- ------------------------------------ -------------------------
</TABLE>
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<PAGE>
LIMITED LIABILITY COMPANY AGREEMENT
OF
CREDITRUST SPV2, LLC
COUNTERPART SIGNATURE PAGE
The undersigned intending to be admitted to Creditrust SPV2, a Delaware
limited liability company (the "Company"), as the Class B Member thereof and to
accept and agree to be bound by all the terms and provisions of the Limited
Liability Company Agreement of the Company dated as of June 17, 1998, does
hereby cause this Counterpart Signature Page to be executed, acknowledged and
delivered by the undersigned authorized person in its name and on its behalf.
WITNESS: MEMBER:
HEARTLAND BANK
/s/ Andrew Love By: /s/ William I. Peters, Jr. (SEAL)
- ------------------- ----------------------------------------
Name: William I. Peters, Jr.
Title: Vice President
Dated:
----------------------
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<PAGE>
LIMITED LIABILITY COMPANY AGREEMENT
OF
CREDITRUST SPV2, LLC
Regulatory Allocations
Schedule 3.3.B
1. Additional Definitions.
The defined terms used in this Schedule 3.3.B shall have the following
meanings and other terms not defined herein shall have meanings specified in the
Limited Liability Company Agreement to which this Schedule 3.3.B is attached:
Company Minimum Gain: has the same meaning as the term
"partnership minimum gain" in Treasury Regulations ss.1.704-2(b)(2), as
determined under Treasury Regulations ss.1.704-2(d).
Member Nonrecourse Debt: has the same meaning as the term
"partner nonrecourse debt" in Treasury Regulations ss.1.704-2(b)(4).
Member Nonrecourse Debt Minimum Gain: any amount, with respect
to each Member Nonrecourse Debt, equal to the Company Minimum Gain that
would result if such Member Nonrecourse Debt were treated as a
Nonrecourse Liability, determined in accordance with Treasury
Regulations ss.1.704-2(i)(3).
Member Nonrecourse Deductions: has the same meaning as the
term "partner nonrecourse deductions" in Treasury Regulations
ss.ss.1.704-2(i)(1) and 1.704-2(i)(2).
Nonrecourse Deductions: has the meaning set forth in Treasury
Regulations ss.1.704-2(b)(1).
Nonrecourse Liability: has the meaning set forth in Treasury
Regulations ss.1.704-2(b)(3) of the Treasury Regulations.
2. Regulatory Allocations.
Prior to any other allocations under Section 3.3, the following special
allocations shall be made in the following order:
A. Minimum Gain Chargeback. Except as otherwise provided in Section
1.704-2(f) of the Treasury Regulations, notwithstanding any other provision of
this Section 3.3, if there is a net decrease in Company Minimum Gain during any
fiscal year, each Member shall be specially allocated items of Company income
and gain for such
-i-
<PAGE>
fiscal year (and, if necessary, subsequent fiscal years) in an amount equal to
such Member's share of the net decrease in Company Minimum Gain, determined in
accordance with Treasury Regulations ss.1.704-2(g). Allocations pursuant to the
previous sentence shall be made in proportion to the respective amounts required
to be allocated to each Member pursuant thereto. The items to be so allocated
shall be determined in accordance with sections 1.704-2(f) (6) and 1.704-2(j)
(2) of the Treasury Regulations. This Paragraph A is intended to comply with the
minimum gain charge back requirement in Section 1.704-2(f) of the Treasury
Regulations and shall be interpreted consistently therewith.
B. Member Minimum Gain Chargeback. Except as otherwise provided in
Section 1.704-2(i) (4) of the Treasury Regulations, notwithstanding any other
provision of Section 3.3, if there is a net decrease in Member Nonrecourse Debt
Minimum Gain attributable to a Member Nonrecourse Debt during any fiscal year,
each Member who has a share of the Member Nonrecourse Debt Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance with
Section 1.704-2(i) (5) of the Treasury Regulations, shall be specially allocated
items of Company income and gain for such fiscal year (and, if necessary,
subsequent fiscal years) in an amount equal to such Member's share of the net
decrease in Member Nonrecourse Debt, determined in accordance with Treasury
Regulations ss.1.704-2(i) (4). Allocations pursuant to the previous sentence
shall be made in proportion to the respective amounts required to be allocated
to each Member pursuant thereto. The items to be so allocated shall be
determined in accordance with Sections 1.704-2(i) (4) and 1.704-2(j) (2) of the
Treasury Regulations. This Paragraph B is intended to comply with the minimum
gain charge back requirement in Section 1.704-2(i) (4) of the Treasury
Regulations and shall be interpreted consistently therewith.
C. Qualified Income Offset. In the event any Member unexpectedly
receives any adjustments, allocations, or distributions described in Sections
1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6) of
the Treasury Regulations, items of Company income and gain shall be specially
allocated to such Member in an amount and manner sufficient to eliminate, to the
extent required by the Treasury Regulations, the Adjusted Capital Account
Deficit of the Member as quickly as possible, provided that an allocation
pursuant to this Paragraph C shall be made only if and to the extent that the
Member would have an Adjusted Capital Account Deficit after all other
allocations provided for in Section 3.3 have been tentatively made as if this
Paragraph C were not in the Agreement.
D. Gross Income Allocation. In the event any Member has a deficit
Capital Account at the end of any fiscal year which is in excess of the amount
such Member is obligated to restore pursuant to the penultimate sentences of
Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Member
shall be specially allocated items of Company income and gain in the amount of
such excess as quickly as possible, provided that an allocation pursuant to this
Paragraph D shall be made only if and to the extent that such Member would have
a deficit Capital Account in excess of such amount
-ii-
<PAGE>
after all other allocations provided for in Section 3.3 have been made as if
Paragraph C and this Paragraph D were not in the Agreement.
E. Nonrecourse Deductions. Nonrecourse Deductions for any fiscal year
shall be allocated to the Members in proportion to the respective number of
Units held by each.
F. Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for
any fiscal year shall be specially allocated to the Member who bears the
economic risk of loss with respect to the Member Nonrecourse Debt to which such
Member Nonrecourse Deductions are attributable in accordance with Treasury
Regulations ss.1.704-2(i) (1).
G. Section 754 Adjustments. To the extent an adjustment to the adjusted
tax basis of any Company asset, pursuant to Code Section 734(b) or Code Section
743(b) is required, pursuant to Treasury Regulations ss.1.704-1(b)(2)(iv)(m)(2)
or 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital
Accounts as the result of a distribution to a Member in complete liquidation of
such Member's interest in the Company, the amount of such adjustment to Capital
Accounts shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such basis) and such
gain or loss shall be specially allocated to the Members in accordance with
their interests in the Company in the event Treasury Regulations
ss.1.704-1(b)(2)(iv)(m)(2) applies, or to the Member to whom such distribution
was made in the event Treasury Regulations ss.1.704-1(b)(2)(iv)(m)(4) applies.
H. Curative Allocations. The allocations set forth in this Schedule
3.3.B (collectively, the "Regulatory Allocations") are intended to comply with
certain requirements of the Treasury Regulations. It is the intent of the
Members that, to the extent possible, all Regulatory Allocations shall be offset
either with other Regulatory Allocations or with special allocations of other
items of Company income, gain, loss or deduction pursuant to this Paragraph H.
Therefore, notwithstanding any other provision of Section 3.3 (other than the
Regulatory Allocations), the Management Committee shall make or cause the
Company to make such offsetting special allocations of Company income, gain,
loss or deduction in whatever manner it determines appropriate so that, after
such offsetting allocations are made, each Member's Capital Account balance is,
to the extent possible, equal to the Capital Account balance such Member would
have had if the Regulatory Allocations were not part of the Agreement and all
Company items were allocated pursuant to Section 3.3 (other than this Schedule
3.3.B.)
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<PAGE>
Exhibit 16
Arthur Andersen LLP
8000 Towers Crescent Drive
Vienna, VA 22182
June 23, 1998
Office of the Chief Accountant
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Dear Sir/Madam:
We have read the proposed "Change In Independent Public Accountants" section
included in the Registration Statement of Creditrust Corporation to be filed
with the Securities and Exchange Commission inasmuch as it discusses
Creditrust Corporation's relationship with Arthur Andersen LLP and are in
agreement with the statements contained therein.
Very truly yours,
ARTHUR ANDERSEN LLP
By
ARTHUR ANDERSEN LLP
cc: Richard J. Palmer, CFO, Creditrust Corporation
<PAGE>
Exhibit 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Name of Subsidiaries Jurisdiction of Organization
- -------------------- -----------------------------
<C> <C>
Creditrust SPV2, LLC Delaware
</TABLE>
<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
June 23, 1998
