<PAGE>
As filed with the Securities and Exchange Commission on January 20, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Creditrust Corporation
(Exact name of registrant as specified in its charter)
Maryland 7389 52-1754916
(Primary Standard (I.R.S.
(State of Industrial EmployerIdentification
incorporation) Classification Code No.)
Number)
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)
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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)
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Copies of all communications, including all communications sent to the agent
for service, should be sent to:
Henry D. Kahn, Esquire Todd H. Baker, Esquire
Piper & Marbury L.L.P. Gibson, Dunn & Crutcher LLP
36 South Charles Street One Montgomery Street
Baltimore, Maryland 21201 San Francisco, California 94104
410-539-2530 415-393-8200
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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: [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Shares to be Proposed Maximum Aggregate Offering Amount of Registration
Registered Price Fee
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<S> <C> <C>
Common Stock, $.01 par
value per share....... $80,005,500(1)(2) $22,242
</TABLE>
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(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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed without +
+notice. Creditrust Corporation may not sell these securities until the +
+registration statement filed with the Securities and Exchange Commission is +
+effective. This prospectus is not an offer to sell these securities and +
+Creditrust Corporation is not soliciting an offer to buy these securities in +
+any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Prospectus (Not Complete)
Issued January 20, 1999
3,000,000 Shares
[LOGO]
Creditrust Corporation
Common Stock
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Creditrust Corporation is offering 2,400,000 shares of common stock and
Joseph K. Rensin, Creditrust's principal stockholder, is offering 600,000
shares of common stock in a firmly underwritten offering. Creditrust
Corporation will not receive any proceeds from the sale of Mr. Rensin's shares.
Our common stock is listed on the Nasdaq National Market under the symbol
"CRDT." On January 19, 1999 the closing price of one share of our common stock
was $23.25.
------------
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page .
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Offering Price $ $
Discounts and Commissions to Underwriters $ $
Offering Proceeds to Company $ $
Offering Proceeds to Mr. Rensin $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if the
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Mr. Rensin has granted the underwriters the right to purchase up to an
additional 450,000 shares of common stock to cover any over-allotments. The
underwriters can exercise this right at any time within thirty days after the
offering. NationsBanc Montgomery Securities LLC expects to deliver the shares
of common stock to investors on , 1999.
NationsBanc Montgomery Securities LLC
Ferris, Baker Watts
Incorporated
------------
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Recent Developments...................................................... 10
Use of Proceeds.......................................................... 10
Price Range of Common Stock.............................................. 11
Dividend Policy.......................................................... 11
Capitalization........................................................... 12
Selected Financial Data.................................................. 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 14
Business................................................................. 28
Management............................................................... 40
Certain Transactions..................................................... 46
Principal Stockholders and Selling Stockholder........................... 47
Description of Capital Stock............................................. 48
Shares Eligible for Future Sale.......................................... 50
Underwriting............................................................. 52
Legal Matters............................................................ 54
Experts.................................................................. 54
Index to Financial Statements............................................ F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and the related notes appearing elsewhere
in this prospectus.
This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section and the financial
statements and the related notes.
The Company
Overview. Creditrust Corporation is a leading information-based purchaser,
collector and manager of defaulted consumer receivables. Defaulted consumer
receivables are the unpaid debts of individuals to credit grantors, including
banks, finance companies, retail merchants and other service providers. We seek
to use our proprietary pricing models and software systems as well as extensive
information databases to generate high rates of return on purchased
receivables. Most of our receivables are VISA(R) and MasterCard(R) credit card
accounts that the issuing banks have charged off their books for non-payment.
By purchasing receivables, we allow credit grantors to make a recovery on these
charged-off accounts. Since Creditrust's founding in 1991 through December 31,
1998, we have invested $69.0 million to purchase receivables at a significant
discount. At December 31, 1998, we managed over 1.3 million accounts with a
charged-off amount of over $2.5 billion. We had over 640 employees at December
31, 1998 and currently operate two facilities which can accommodate over 900
employees.
We believe that the amount of consumer credit card charge-offs has grown and
will continue to grow at a very rapid rate. According to the Nilson Report,
gross credit card charge-offs were $9.1 billion in 1990 and increased to $36.3
billion in 1997. We also believe that the number of credit grantors selling
their charged-off receivables has grown and will continue to grow.
We believe we resolve receivables more efficiently than our competitors,
credit grantors and third-party collection agencies. We can tailor repayment
plans to help obligors, whom we refer to as customers, repay their obligations
as part of a monthly budget. We use a customer-focused approach which
emphasizes treating customers with dignity and respect. Many of our customers
have recently experienced some life-altering event, such as divorce, job loss
or major illness and are currently trying to recover financially from their
setback. By using a friendly approach and providing, when necessary, flexible
repayment plans, we help customers resolve their credit problems. Our customer-
focused approach not only aids our customers but also enables us to realize a
greater return on our receivables. Our experience is that customers are
generally more willing to repay their debts when treated respectfully.
Technology. We use technology to enhance the return on our receivables. When
we purchase receivables, we use our Portfolio Analysis Tool (PAT), a
proprietary portfolio analysis software system. PAT uses historical information
we maintain about all receivables we have managed in the past to help to
forecast future recoveries on receivables and to enable us to determine the
appropriate price to pay for a portfolio of receivables. When we collect on and
manage purchased receivables, we use Mozart, our proprietary revenue and
workflow management software. Mozart assists us in locating customers,
determining the appropriate repayment plans for our customers and monitoring
repayment by our customers. These systems allow us to:
. buy portfolios on more favorable terms;
. collect the portfolios efficiently; and
. identify trends in defaulted consumer portfolios earlier than our
competitors who lack our information advantage.
3
<PAGE>
Business Strategy. Our business goal is to be the most efficient purchaser,
collector and manager of defaulted consumer receivables within our targeted
markets. We seek to attain this goal by emphasizing customer-focused services,
investing in information technology and maintaining an information advantage
over our competitors. The key elements of our business strategy are:
. enhance our knowledge about our customer base by continuously expanding
our information databases;
. emphasize our flexible, customer-focused collection process;
. maintain strong relationships with credit grantors so that we can
continue to purchase defaulted receivables on advantageous terms;
. continue to train our employees to act as financial counselors in the
collections process;
. service substantially larger volumes of receivables without
proportionally increasing our servicing costs; and
. selectively develop new products and services for our expanding customer
base.
Funding Sources. We have funded our receivables purchases and the expansion
of our business through a combination of bank and other warehouse funding,
public and private equity funding and asset-backed securitizations. We raised
net proceeds of $27.3 million in our initial public offering in July 1998. We
currently have a total of $50.0 million in revolving warehouse facilities from
two lenders, and we completed $42.0 million in two asset-backed securitizations
in June and December 1998.
We were incorporated in Maryland in 1991 and our main offices are located at
7000 Security Boulevard, Baltimore, Maryland 21244, (410) 594-7000.
The Offering
Common stock offered by 2,400,000 shares
Creditrust
Common stock offered by Mr. 600,000 shares
Rensin
Common stock to be outstanding 10,384,480 shares(1)
after the offering
Use of proceeds to Creditrust For expansion of our business and for
working capital and general corporate
purposes, including purchasing
additional receivables. Pending this
use, we may decide to use a portion of
the proceeds to repay amounts under our
line of credit facility. Creditrust will
not receive any proceeds from the sale
of common stock by Mr. Rensin.
Nasdaq National Market Symbol CRDT
(1) Does not include 450,000 shares of common stock issuable upon exercise of
outstanding common stock purchase warrants issued in a financing
transaction prior to our initial public offering and 312,500 shares of
common stock issuable upon the exercise of stock options granted under our
stock incentive plans.
4
<PAGE>
Summary Financial Data
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
As of and for Nine Months Ended
the Year Ended December 31, September 30,
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1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Earnings
Data:
Revenue................. $ 2,182 $ 3,639 $ 4,560 $ 5,521 $ 9,826 $ 6,453 $ 16,121
Total Expenses from
Operations............. 1,681 2,984 3,114 4,518 8,782 5,728 10,645
Earnings Before
Extraordinary Loss..... 110 265 734 474 456 252 3,340
Extraordinary Loss...... -- -- -- -- -- -- (567)
Net Earnings............ 110 265 734 474 456 252 2,773
Earnings per Common
Share Basic and
Diluted................ $ .02 $ .04 $ .12 $ .08 $ .08 $ .04 $ .43
Weighted Average Number
of Shares Outstanding
Basic and Diluted...... 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 6,444,444
Other Data:
Weighted Average
Investment in Finance
Receivables(1)......... $ 1,152 $ 1,470 $ 1,731 $ 3,198 $ 5,842 $ 6,110 $ 8,349
Collections on Managed
Receivables(2)......... 2,385 3,971 4,914 6,252 12,420 8,311 12,944
EBITDA(3)............... 514 726 1,538 1,162 1,268 858 5,738
Collections Applied to
Principal (Accretion)
on Finance
Receivables............ 227 328 670 832 2,111 1,742 (641)
Cash Flows provided by
(used in):
Operating Activities... (83) 191 982 1,207 1,237 1,441 (1,232)
Investing Activities... (428) (738) (585) (4,188) 1,431 1,168 (14,712)
Financing Activities... 623 1,015 (138) 2,909 (2,374) (1,950) 25,049
Charged-off Balance of
Managed Receivables (at
end of period)(2)...... $ 71,252 $ 119,256 $ 175,512 $ 434,563 $1,104,647 $1,099,745 $1,937,195
Number of Managed
Accounts............... 27,366 55,524 84,528 213,899 580,353 577,941 890,671
Number of Employees..... 44 44 61 125 245 246 443
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1998
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Actual As adjusted(4)
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<S> <C> <C>
Balance Sheet Data:
Cash and Cash Equivalents......................... $ 9,875 $ 62,156
Total Debt........................................ -- --
Total Stockholders' Equity........................ 32,240 84,521
</TABLE>
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(1) This represents only receivables owned by us. This does not include
receivables owned by other parties but serviced by us, including
receivables that are included in our securitizations.
(2) Managed receivables includes receivables that we own and receivables that
we service but do not own, including receivables included in our
securitizations.
(3) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. EBITDA is presented because we rely on this indicator in the
management of our business as a key measure of our ability to derive cash
from our investing and financing activities and because it provides useful
information regarding our ability to service existing debt, incur
additional debt and fund the purchase of additional receivables or meet
other capital requirements. For instance, an increase in EBITDA would
generally indicate to us that increases in income on finance receivables
and servicing fees represent increased capacity to fund purchases of
additional portfolios without reliance on external funding sources.
Conversely, a reduction in the indicator would mean that there was less
internally generated cash available for new portfolio investments.
Additionally, the manner in which we compute 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.
(4) Gives effect to the issuance of 2,400,000 shares of common stock by us at
an estimated public offering price of $23.25 per share and the application
of the net proceeds from this offering. Upon the closing of this offering
there will be outstanding exercisable warrants and employee stock options,
most of which are not currently exercisable, to purchase an aggregate of
762,500 shares of common stock at a weighted average exercise price of
$13.76 per share.
5
<PAGE>
RISK FACTORS
Before you invest in the common stock, you should be aware of various risks
associated with an investment in our common stock, including those described
below. You should consider carefully these risk factors together with all of
the other information included in this prospectus before you decide to purchase
the common stock.
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The outcome of the events
described in these forward-looking statements is subject to risks and the
actual outcome could differ materially. The sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" as well as those discussed elsewhere in this
prospectus contain a discussion of some of the factors that could contribute to
these differences.
Receivables May Not Be Collectible
We purchase, collect and manage previously defaulted consumer receivables
generated by consumer credit card and other consumer credit transactions. These
are obligations that the individual consumer has failed to pay when due. We
purchase the receivables from credit grantors, including banks, finance
companies, retail merchants and other service providers. Substantially all of
the receivables consist of account balances that the credit grantor has deemed
uncollectible and has charged off from its books. Before we purchase the
receivables, the credit grantors generally make numerous attempts to collect on
the defaulted accounts. Credit grantors typically use their in-house collection
departments, as well as third-party collection agencies to attempt to collect
on the overdue payments. We purchase the receivables at a significant discount
to the amount the customer owes. We believe we can successfully obtain
recoveries on the receivables in amounts in excess of the amount we pay for the
receivables. Despite this belief, actual recoveries on the receivables may vary
as the result of a variety of factors within and beyond our control and may be
less than the amount we expect to recover. We cannot assure the timing or
amounts to be collected on our receivables.
We May Not Be Able to Maintain Our Growth Rate
We expanded rapidly during the last two years, placing great demands on our
management, administrative, operational and financial resources. As of December
31, 1998, we managed over 1.3 million customer accounts, up from 580,000
customer accounts at December 31, 1997. We are trying to continue our rapid
growth, which will place additional demands on our resources. Future growth
will depend on numerous factors including our ability to:
. develop and expand relationships with credit grantors;
. recruit, train and retain a sufficient number of qualified employees;
. obtain additional financing to purchase additional receivables;
. maintain quality service to our customers and credit grantors; and
. enhance and maintain our information technology, operational and
financial systems.
We may not be able to manage our expanding operations effectively, maintain
our historical collection rates, growth or profitability. Our failure to do any
of these things would have a material adverse effect on our business,
profitability and financial condition.
Labor Shortages Could Diminish Our Growth and Profitability
Our industry is very labor intensive and generally experiences high rates of
personnel turnover. We experienced an approximate personnel turnover rate of
15% for 1995, 12% for 1996, 15% for 1997, and 15% for 1998. We calculate this
annual personnel turnover rate by dividing the number of employees who left the
6
<PAGE>
company during a particular month by the number of employees who were employed
at the beginning of the month, averaged over 12 months.
Because of our growth plans and our personnel turnover, our business
requires recruiting and training significant numbers of qualified personnel. A
higher turnover rate among our employees would increase our recruiting and
training costs and could adversely impact our business. If we are unable to
recruit and retain enough employees, we will be forced to limit our growth or
possibly curtail operations. If companies in our business and similar
industries, such as the collection agency business and the teleservices and
telemarketing industries, increase their efforts to recruit available qualified
employees, or if new companies recruit in our labor market, our business and
profitability could be adversely affected. These adverse effects could include
reducing our ability to hire, train and retain qualified employees or
increasing our employee costs.
We Depend on Financing to Purchase Receivables
Our continued success depends on our ability to raise new capital to help us
purchase new receivables. On September 29, 1998, we entered into a warehouse
facility which provided $30 million to finance the purchase of additional
receivables. In addition, on October 28, 1998, we entered into a $20 million
line of credit facility which we use to finance additional purchases of
receivables. We have also funded our operations through equity offerings and
securitizations. If we cannot complete other financing transactions in the
future, our future growth and profitability will be materially adversely
affected. Our ability to finance further purchases of receivables depends on
our continued success in predicting collectibility and cash flows on the pools
of receivables we manage. We cannot guarantee that our operating performance
will attract further financing. Prevailing interest rates may also affect the
cost of future financings, the value of future receivables and our profit
margins on receivables. In recent months, the market for securitizations of
many asset classes, including defaulted consumer receivables, has been very
volatile. We cannot be certain that we will be able to complete future
securitization transactions or that the terms of any future securitization will
be beneficial to us.
Securitizations Expose Us to Various Risks
In June 1998, we completed a securitization of $412 million of charged-off
amount of receivables we owned and $692 million of charged-off amount of
receivables owned by a third party and serviced by us. We completed a second
securitization of $956 million of charged-off amount of receivables we owned in
December 1998. The securitizations resulted in recognition of $17.0 million of
gain on sale included in our statement of earnings, which represented a
significant portion of our total revenues for 1998. We also recorded as assets
residual investments in the securitizations. We receive servicing income with
respect to the securitizations, but in an amount considerably less than the
income on finance receivables we would have received had we not securitized
these receivables. We could also be required to record a charge to earnings
through our statement of earnings if we determined that the value of our
residual investment in securitization had permanently declined to an amount
less than the amount carried on our balance sheet. As a result, our quarterly
results will be materially affected by the timing of securitization
transactions and could be materially adversely affected by any possible future
write-down associated with securitizations. This also may make quarter-to-
quarter comparisons difficult to interpret.
We could lose the right to service the receivables included in
securitizations for a variety of reasons. These reasons include defaults in
servicing obligations, breaches of representations and warranties related to a
securitization, bankruptcy or other insolvency of Creditrust, and other
matters. The loss of the right to service the receivables included in the
securitizations would have a material adverse effect on us.
Fluctuations in Quarterly Operating Results May Have a Negative Impact on Our
Stock Price
Our quarterly operating results may fluctuate based upon, among other
factors, the timing and amount of our collections on receivables, revenues from
the securitizations of our receivables or any charge to earnings
7
<PAGE>
resulting from a decline in the value of our residual interest in a
securitization. Fluctuations in quarterly operating results may adversely
affect the market price of our common stock.
We Use Estimates in Our Accounting
If the value of the portfolios of receivables we purchase turns out to be
less than we estimated, our operating results may be adversely affected. We
recognize revenue based on estimates of future collections on the pools of
receivables we manage. Although our estimates are based on statistical
analysis, the actual amount collected by us on these pools may not correlate to
our historical statistical experience. If collections on these pools are less
than estimated, we may be required to take a charge to earnings in an amount
that could materially adversely affect our earnings.
Unanticipated future events, including further refinements to our cash flow
models, may result in changes in estimates in future periods. We adjust our
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, we
relied largely on the average past performance of our entire portfolio. After
extensive statistical analysis of static pool performance data during the year
ended December 31, 1997, we implemented a further refinement in our cash flow
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 earnings 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. While we believe that our cash flow models will continue to
provide accurate forecasts of future collections, changes in collection
patterns within our portfolios, which may result from a variety of factors
beyond our control, including changes in general economic conditions and
changes in consumer attitudes toward repayment of defaulted obligations, may
make our previous estimates inaccurate or alter the way we make future
estimates.
Possible Shortage of Receivables for Purchase
Our success depends on the continued availability of receivables that meet
our requirements. The availability of portfolios of receivables for purchase at
favorable prices depends on a number of factors outside of our control,
including the continuation of the current growth trend in consumer debt and
competitive factors affecting potential purchasers and sellers of portfolios of
receivables. Any slowing of the consumer debt growth trend could result in less
credit being extended by credit grantors. Consequently, fewer receivables could
be available at prices that we find attractive. If new competitors enter our
business, our access to additional receivables may become limited. In addition,
if our competitors raise the prices they are willing to pay for portfolios of
receivables above those we wish to pay, we may be unable to buy receivables at
prices consistent with our historic return targets.
We Depend on Management and Key Personnel
We believe that our success depends on the performance and continued
services of senior management. We do not have an employment agreement with
Joseph K. Rensin, Chairman and Chief Executive Officer, but do maintain "key
man" life insurance coverage in the amount of $4.0 million on Mr. Rensin. We
have employment agreements with each of our other executive officers. The loss
of the services of Mr. Rensin or other members of the senior management team
could have an adverse effect on our operations and financial results.
Control by Principal Stockholder
Joseph K. Rensin owns 65.0% of the common stock. If all the shares of common
stock offered by this prospectus are sold, Mr. Rensin will beneficially own
approximately 44.2% of the outstanding common stock. If the underwriters over-
allotment option is exercised in full, Mr. Rensin's beneficial ownership would
be reduced to approximately 39.9%. Although Mr. Rensin will no longer be a
majority stockholder, he will likely be able to control effectively most
matters requiring approval by our stockholders, including the election of
directors, the approval of charter amendments, and the approval of major
transactions for which stockholders have approval rights.
8
<PAGE>
Competition
Our business is highly competitive, and we expect that competition from new
and existing competitors will intensify. We compete with other purchasers of
defaulted consumer receivables and with third-party collection agencies. Our
ability to obtain new customers is also affected by the financial services
companies that choose to manage their own defaulted consumer receivables. Some
of these companies may have substantially greater personnel and financial
resources. We seek to compete with these companies on the basis of our superior
information technology capabilities, which we believe enable us to purchase,
collect and manage receivables more effectively than our competitors. Following
allegations of fraud, our competitor Commercial Financial Services, Inc.
recently filed for protection from its creditors under the federal bankruptcy
laws. We are unable to assess the potential long-term effect of this
development on our industry or the markets for purchasing and financing
defaulted consumer receivables.
Government Regulation May Limit Our Collection Activities
Certain of our operations are governed by consumer protection laws and
regulations. Federal and state consumer protection and related laws and
regulations govern the relationship of a customer and a creditor. Significant
laws include the Fair Debt Collection Practices Act, 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 various
federal regulations which relate to these acts), as well as comparable statutes
in the states where customers reside or where credit grantors are located.
Certain of these laws may apply to our collection activities. If credit
grantors who sell receivables to us fail to comply with these laws, our ability
to collect on those receivables could be limited regardless of any act or
omission on our part. Although we frequently receive indemnities from credit
grantors against violations of law, these indemnities may not be adequate to
protect us from losses on the receivables or liabilities to customers. Our
failure to comply with these laws may also limit our ability to collect on the
receivables.
Additional consumer protection laws may be enacted that could impose
requirements on the enforcement of, and collection on receivables. Any new laws
or rulings that may be adopted may adversely affect our ability to collect on
the receivables. In addition, our failure to comply with those laws applicable
to us could adversely affect our ability to enforce the receivables.
Certain Anti-takeover Provisions May Inhibit Changes of Control
Certain provisions of our charter and bylaws and Maryland law could make it
more difficult for a third party to acquire us, even if such a change in
control would be beneficial to stockholders.
Shares Eligible for Future Sale
If one or more of our stockholders sell substantial amounts of our common
stock (including shares issued upon the exercise of warrants or options) in the
public market, the market price of our common stock could drop. Such sales
could make it difficult for us to raise funds through future offerings of
common stock.
Upon completion of this offering, there will be 10,384,480 shares of common
stock outstanding. Of these shares, 5,793,191 shares are freely tradeable
without restriction, except for any shares purchased by an "affiliate." Mr.
Rensin has owned the 4,591,289 shares of common stock not being sold by him in
this offering for more than two years and these shares have not been registered
under the Securities Act of 1933, as amended. He may sell his shares under Rule
144 under the Securities Act, subject to the volume limitations of that Rule.
In addition, the 450,000 shares of common stock that are issuable upon exercise
of the outstanding warrants may be sold under a shelf registration statement
being filed by us.
In addition, Creditrust and each of its directors, including Mr. Rensin,
have agreed 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 NationsBanc Montgomery Securities LLC, for a period of 120 days following
completion of this offering.
9
<PAGE>
RECENT DEVELOPMENTS
In December 1998, we completed our second securitization of receivables. We
may pursue similar transactions in the future. We transferred receivables owned
by us with a charged-off amount of $956 million and a carrying value of $28.6
million at the time of sale to a new finance subsidiary we formed in order to
complete this transaction. This new finance subsidiary issued, through a trust
with an independent trustee, $27.5 million of securitization notes. The trust
secured these notes with the receivables transferred to the new finance
subsidiary as well as a financial guaranty insurance policy. The securitization
was treated as a sale for accounting purposes. Standard & Poor's Corporation
rated these notes with an "AA" rating. We completed a similar transaction in
June 1998.
Institutional investors purchased the securitization notes in a private
placement. The projected recovery value of the receivables we included in the
securitization substantially exceeded the $27.5 million of securitization notes
issued. Upon closing of the securitization, we (1) recorded gain on sale on the
transaction of $11.0 million; (2) recorded a residual interest in
securitization of $14.4 million; and (3) received total cash of $7.4 million,
after repayment of associated debt and our cash used to finance the receivables
of $19.5 million in the aggregate and payment of related transaction costs. Of
the $7.4 million in total cash, $1.65 million was used to fund a reserve
account in trust, leaving net cash of $5.8 million for use in our business. We
accounted for the residual investment in securitization as debt securities that
are available for sale. The residual investment in securitization is estimated
to accrue income at the rate of 12% per annum. We service the receivables and
receive a servicing fee equal to 20% of collections. As servicer, we continue
our collection activities on the receivables in the same manner as we collect
receivables we own. Customer relationships are not affected by the
securitization.
The accounting effect of securitizations is discussed under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note Q of Notes to Financial Statements.
As of December 31, 1998, we owned receivables not included in our
securitizations with a charged-off amount of $474.7 million and a carrying
value of $26.9 million.
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of the 2,400,000
shares of common stock offered by us of $52.3 million, assuming a public
offering price of $23.25 per share and after deducting estimated underwriting
discounts and commissions and offering expenses payable by us. We will not
receive any proceeds from the sale of common stock by Mr. Rensin.
We intend to use the net proceeds of the offering for expansion of our
business and for working capital and general corporate purposes, including
purchasing additional receivables. Pending this use, we may decide to use a
portion of the net proceeds to repay outstanding indebtedness under our line of
credit facility. Outstanding indebtedness on the line of credit facility bears
interest at LIBOR plus 2.5% and is interest-only for the first six months of
each advance. We borrowed under this facility to purchase additional
receivables. Approximately $6.8 million was outstanding under our line of
credit facility as of December 31, 1998.
10
<PAGE>
PRICE RANGE OF COMMON STOCK
We initially offered our common stock to the public on July 29, 1998 at a
price of $15.50 per share. Our common stock is quoted on the Nasdaq National
Market under the symbol "CRDT." The following table sets forth the high and low
closing sales prices as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1998
Third Quarter (from July 29, 1998).......................... $17.13 $14.50
Fourth Quarter.............................................. 25.00 12.63
1999
First Quarter (through January 19, 1999).................... 25.13 23.19
</TABLE>
On January 19, 1999, the last sale price for the common stock as reported by
the Nasdaq National Market was $23.25 per share. On December 31, 1998,
approximately 900 holders of record held our common stock.
DIVIDEND POLICY
We have never declared or paid dividends on our common stock. We expect that
we will retain future earnings, if any, to finance the growth and development
of our business. Thus, we do not intend to declare or pay dividends on the
common stock in the foreseeable future. Our board of directors will determine
when to declare and pay dividends and the amount of any such dividends. Our
board would be required to consider our future earnings, results of operations,
financial condition and capital requirements before deciding to declare a
dividend. Also, under Maryland law, we are prohibited from paying any dividend
unless after giving effect to the payment of the dividend (i) we may continue
to pay our debts in the ordinary course of business, and (ii) our assets equal
or exceed our liabilities plus the preferences of any outstanding preferred
equity securities upon dissolution. Our line of credit facility restricts
payments of dividends that would reduce our net worth below a certain amount.
Future credit facilities may have similar or more stringent restrictions.
11
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of September 30,
1998 and as adjusted to give effect to our receipt of the estimated net
proceeds from the sale of 2,400,000 shares of common stock offered by us at an
estimated public offering price of $23.25. To better understand this table you
should review Management's Discussion and Analysis of Financial Condition and
Results of Operations, our financial statements, including the related notes,
and the other financial information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1998
-----------------------
Actual As Adjusted(1)
------- --------------
(dollars in thousands)
<S> <C> <C>
Debt:
Notes Payable.................................... $ -- $ --
Stockholders' Equity:
Preferred Stock, par value $0.01 per share,
5,000,000 shares authorized; none issued and
outstanding..................................... -- --
Common Stock, par value $0.01 per share,
20,000,000 shares authorized; 8,000,000 shares
issued and 7,984,480 shares outstanding; and
10,400,000 shares issued and 10,384,480 shares
outstanding, as adjusted........................ 80 104
Paid-in Capital.................................. 27,704 79,961
Retained Earnings................................ 4,725 4,725
Stock held for benefit plans..................... (269) (269)
------- -------
Total Stockholders' Equity..................... 32,240 84,521
------- -------
Total Capitalization......................... $32,240 $84,521
======= =======
</TABLE>
- --------
(1) Upon the closing of this offering there will be outstanding exercisable
warrants and employee stock options, most of which are not currently
exercisable, to purchase an aggregate of 762,500 shares of common stock at
a weighted average exercise price of $13.76 per share.
12
<PAGE>
SELECTED FINANCIAL DATA
(dollars in thousands, except share data)
The following table sets forth our selected balance sheet, statement of
earnings and cash flow data as of the end of and for each of the years in the
five-year period ended December 31, 1997 and as of the end of and for each of
the nine month periods ended September 30, 1997 and 1998. The selected
financial data for the years ended December 31, 1995, 1996 and 1997 have been
derived from our audited financial statements included elsewhere in this
prospectus. The selected financial data presented for the nine month periods
ended September 30, 1997 and 1998 are unaudited and are derived from the
financial statements contained elsewhere in this prospectus. 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 our
financial statements and the related notes and "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" included in this
prospectus.
<TABLE>
<CAPTION>
As of and for the
Nine Months Ended
As of and for the Year Ended December 31, September 30,
---------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Earnings
Data:
Revenue:
Income on Finance
Receivables........... $ 2,182 $ 3,639 $ 4,560 $ 5,521 $ 7,246 $ 5,769 $ 6,324
Servicing Fees......... -- -- -- -- 2,580 684 2,380
Gain on Sale........... -- -- -- -- -- -- 7,417
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Revenue........... 2,182 3,639 4,560 5,521 9,826 6,453 16,121
Expenses from
Operations:
Personnel.............. 900 1,390 1,847 2,618 5,922 3,864 7,497
Communications......... 246 361 404 573 912 603 1,103
Rent................... 123 216 240 382 853 594 898
Portfolio Repurchase
Costs................. -- -- -- 384 -- -- --
Other Expenses......... 412 1,016 624 562 1,095 667 1,147
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Expenses from
Operations............. 1,681 2,984 3,114 4,518 8,782 5,728 10,645
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings from
Operations............. 502 656 1,445 1,003 1,044 725 5,476
Other Income (Expense).. (344) (252) (249) (213) (363) (311) 4
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings Before Income
Taxes and Extraordinary
Loss................... 157 404 1,196 790 682 414 5,480
Provision For Income
Taxes.................. 47 139 463 316 225 161 2,140
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings Before
Extraordinary Loss..... 110 265 734 474 456 252 3,340
Extraordinary Loss...... -- -- -- -- -- -- (567)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Earnings............ 110 265 734 474 456 252 2,773
========== ========== ========== ========== ========== ========== ==========
Earnings per Common
Share Basic and
Diluted................ $ .02 $ .04 $ .12 $ .08 $ .08 $ .04 $ .43
Weighted Average Shares
Outstanding Basic and
Diluted................ 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 6,444,444
Other Data:
Weighted Average
Investment in Finance
Receivables(1)......... $ 1,152 $ 1,470 $ 1,731 $ 3,198 $ 5,842 $ 6,110 $ 8,349
Collections on Managed
Receivables(2)......... 2,385 3,971 4,914 6,252 12,420 8,311 12,944
EBITDA(3)............... 514 726 1,538 1,162 1,268 858 5,738
Collections Applied to
Principal (Accretion)
on Finance
Receivables............ 227 328 670 832 2,111 1,742 (641)
Cash Flows Provided by
(Used in)
Operating Activities... (83) 191 982 1,207 1,237 1,441 (1,232)
Investing Activities... (428) (738) (585) (4,188) 1,431 1,168 (14,712)
Financing Activities... 623 1,015 (138) 2,909 (2,374) (1,950) 25,049
Charged-off Balance of
Managed
Receivables(2)......... $ 71,252 $ 119,256 $ 175,512 $ 434,563 $1,104,647 $1,099,745 $1,937,195
Number of Managed
Accounts............... 27,366 55,524 84,528 213,899 580,353 577,941 890,671
Number of Employees..... 44 44 61 125 245 246 443
Balance Sheet Data:
Cash and Cash
Equivalents............ $ 594 $ 289 $ 548 $ 476 $ 770 $ 1,135 $ 9,875
Total Debt.............. -- -- -- 3,793 2,106 2,654 --
Stockholders' Equity.... $ 135 $ 400 $ 1,134 $ 1,608 $ 2,064 $ 1,861 $ 32,240
</TABLE>
- -------
(l) This represents only receivables owned by us. This does not include
receivables owned by other parties but serviced by us, including
receivables that are included in our securitizations.
(2) Managed receivables includes receivables that we own and receivables that
we service but do not own, including receivables included in our
securitizations.
(3) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. EBITDA is presented because we rely on this indicator in the
management of our business as a key measure of our ability to derive cash
from our investing and financing activities and because it provides useful
information regarding our ability to service existing debt, incur
additional debt and fund the purchase of additional receivables or meet
other capital requirements. For instance, an increase in EBITDA would
generally indicate to us that increases in income on finance receivables
and servicing fees represent increased capacity to fund purchases of
additional portfolios without reliance on external funding sources.
Conversely, a reduction in the indicator would mean that there was less
internally generated cash available for new portfolio investments.
Additionally, the manner in which we compute 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.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Creditrust Corporation (the "Company" or "Creditrust") is a leading
information-based purchaser, collector and manager of defaulted consumer
receivables ("Receivables"). Receivables are the unpaid debts of individuals to
credit grantors, including banks, finance companies, retail merchants and other
service providers. Creditrust seeks to use its proprietary pricing models and
software systems as well as extensive information databases to generate high
rates of return on purchased Receivables. Most of its Receivables are VISA(R)
and MasterCard(R) credit card accounts that the issuing banks have charged off
their books for non-payment. By purchasing Receivables, Creditrust allows
credit grantors to make a recovery on these charged-off accounts.
From the Company's founding in 1991, the Company has purchased charged-off
Receivables (measured at the amount charged off by the credit grantors that
originated the charged-off VISA(R), MasterCard(R) and private label credit card
accounts and consumer loan accounts at the date of charge-off) aggregating $1.4
million in 1991, $22.6 million in 1992, $47.3 million in 1993, $48.0 million in
1994, $56.3 million in 1995, $259.1 million in 1996, $670.0 million in 1997,
and $1.4 billion in 1998. Creditrust has invested since its founding in 1991
through December 31, 1998 $69.0 million to purchase receivables at a
significant discount. At December 31, 1998, the Company managed over 1.3
million accounts with a charged-off amount of over $2.5 billion. The following
table illustrates this growth:
[GRAPH APPEARS HERE]
Millions
1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ----
Purchase Amount ($MM) 1.4 22.6 47.3 48.0 56.3 259.1 670.0 1400.0
Total Portfolio ($MM) 1.4 24.0 71.3 119.3 175.6 434.7 1104.7 2504.7
14
<PAGE>
The following table illustrates Creditrust's collection experience for the
periods indicated:
<TABLE>
<CAPTION>
At and for the Nine
As of and for the Year Ended Months Ended
December 31, September 30,
---------------------------- ---------------------
1995 1996 1997 1997 1998
-------- -------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Income on Finance
Receivables............. $ 4,560 $ 5,521 $ 7,246 $ 5,769 $ 6,324
Servicing Fees........... -- -- 2,580 684 2,380
Gain on Sale............. -- -- -- -- 7,417
-------- -------- ---------- ---------- ----------
Total Revenues............. 4,560 5,521 9,826 6,453 16,121
Collections on Managed
Receivables(1)............ 4,914 6,252 12,420 8,311 12,944
Weighted Average Investment
in Finance
Receivables(2)............ 1,731 3,198 5,842 6,111 8,349
Weighted Average Charged-
off Balance on Managed
Receivables(1)(3)......... 146,669 248,990 689,924 553,260 941,970
Charged-off Balance of
Managed Receivables (at
end of period)(1)(4)...... $175,512 $434,563 $1,104,647 $1,099,745 $1,937,195
</TABLE>
- --------
(1) Managed receivables includes Receivables that Creditrust owns and
Receivables that Creditrust services but does not own, including
Receivables included in Creditrust's securitizations.
(2) Does not include any Receivables for which the Company acts as servicer and
represents the average investment balance during the period measured by the
financial statement carrying value of portfolios of Receivables owned by
the Company determined by dividing the total 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 purchased 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 purchased by the Company as of the
end of the period measured by balances charged off by the credit grantors,
without regard to collections or Receivables settled.
The Company accounts for its investment in finance receivables on an accrual
basis using 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. See Note C of Notes to Financial Statements.
For accounting purposes, each static pool is measured as a unit for the
estimated economic life of the static pool (similar to a loan). Income on
finance receivables, collections applied to principal on finance receivables
and provisions for loss or impairment are established on a pool by pool basis.
The effective interest rate for each static pool is estimated based on the
estimated monthly collections over the estimated economic life of each pool.
The estimated economic life of each static pool is 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. While these monthly accruals
increase the carrying value of each pool, monthly collections received for each
static pool reduce each static pool's carrying value. To the extent collections
in any period exceed the income accruals for the pool for such period, the
carrying value of the pool is reduced and the reduction is recorded as
collections applied to principal. After the carrying value of any static pool
is fully amortized, any further collections on that pool would be recorded
entirely as income on finance receivables. If the income accrual in any period
is greater than collections for such period, then the carrying value of the
pool accretes. Creditrust typically records accretion in the early months of
ownership of the static pool as a result of collection rates being lower than
the estimated effective yield, which reflects estimated collections for the
entire economic life of the static pool.
15
<PAGE>
Fair value for each static pool is determined by discounting the projected
recovery value (estimated future cash flows) for the pool at the current
effective interest rate being used by the Company. Any measurement of
impairment and any provision for loss is determined separately for each static
pool. To the extent the Company's estimate of future cash flow for a static
pool, discounted at the then current estimated effective interest rate,
increases or decreases the Company adjusts the estimated effective interest
rate prospectively. To the extent that the carrying value of a particular
static pool exceeds its fair value, a valuation allowance will be recognized
and charged to expense in the amount of such an impairment. The Company has not
recorded an impairment for any period to date. The estimated effective interest
rate 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 the average
past performance of the Company's entire portfolio. After extensive statistical
analysis of static pool performance data during the year ended December 31,
1997, the Company implemented a further refinement in its cash flow 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 cash flow 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 Receivables it
services but does not own. In the quarter ended September 30, 1997, the Company
began recognizing servicing income in connection with its agreement to manage
the liquidation of Receivables owned by a third party. 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 these Receivables
provided the proceeds to the financial institution exceeded a minimum amount.
These Receivables were included in the Initial Securitization described below.
See "Liquidity and Capital Resources."
In June 1998, the Company completed its first securitization of finance
receivables (the "Initial Securitization"). The Initial Securitization included
Receivables owned by the Company with a charged-off amount of $412 million and
a carrying value of $4.6 million as well as $6.5 million of Receivables
Creditrust was servicing for a third party with a charged-off amount of $692
million. These Receivables were transferred to Creditrust SPV2, LLC ("SPV2"), a
special-purpose finance subsidiary. SPV2 issued $14.5 million of 6.43%
securitization notes, secured by the Receivables transferred to SPV2 and a
financial guaranty insurance policy. As of September 30, 1998, the Company
owned Receivables not contributed to the Initial Securitization with a charged-
off amount of $837 million and a carrying value of $20.5 million. The Company
completed a similar securitization transaction in December 1998. See "Recent
Developments."
In the Initial Securitization, the projected recovery value of the
transferred Receivables significantly exceeded the principal balance of the
securitization notes, causing the securitization notes to be over-
collateralized. The Company retains a residual interest in the securitization
representing this interest. The Company acts as servicer with respect to the
Receivables included in the Initial 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
securitizations.
16
<PAGE>
After payment of all principal and interest on the securitization notes, the
Company will receive all collections, subject to an obligation in the Initial
Securitization to pay the seller of a portfolio of receivables which the
Company began servicing in 1997 10% of collections with respect to this
portfolio after aggregate collections on this portfolio exceed a specified
amount.
The Initial Securitization qualified as a sale under generally accepted
accounting principles. Upon closing of the Initial Securitization, the Company:
(1) recognized gain on the sale of the owned Receivables of $6.0 million; (2)
recorded a residual investment in securitization of $4.6 million; and (3)
received total cash of $6.3 million, after payment of the purchase price of the
serviced Receivables included in the Initial Securitization and repayment of
associated debt of $7.5 million in the aggregate and payment of related
transaction costs. Of the $6.3 million in total cash, $435,000 was used to fund
a reserve account in trust, leaving net cash of $5.8 million for use in the
Company's business. The investment in securitization is accounted for under the
provisions of SFAS 115 as debt securities available-for-sale 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. The Company may pursue similar securitization
transactions in the future. The timing of any future securitizations will
affect quarter-to-quarter comparisons. See Note Q of Notes to Financial
Statements for additional discussion concerning the financial statement effects
of the securitizations.
Income taxes have been provided in the results of operations based on the
statutory federal and state rates on accounting income. Temporary differences
arise because income on finance receivables is recognized on the cost recovery
method for federal income tax purposes. Under the cost recovery method, gross
collections on finance receivables are not taxable until the cost of the
finance receivables has been collected. 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.
Imputed loan repayments and interest expense on payments to participants are
recorded as costs for tax purposes when due based on collection participation
levels. Temporary differences in recognition of income on finance receivables
and gain on sale have resulted in deferred tax liabilities. Temporary
differences in recognition of payments to participants and deferred gain
generally have accumulated deferred tax assets. In addition, temporary
differences arise from gain on sale because of securitizations which are
treated as financings for tax purposes. Permanent differences between the
statutory rates and actual rates are minimal. The Company's deferred tax
liabilities have grown as a result of the rapid increase in purchases of
Receivables and gains from securitizations 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.
17
<PAGE>
Results of Operations
The following table sets forth certain statement of earnings and
supplemental cash flow data on an historical basis, each as a percentage of
revenues:
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended September
December 31, 30,
------------------- ------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
Income on finance receivables........... 100.0% 100.0% 73.7% 89.4% 39.2%
Servicing fees.......................... -- -- 26.3 10.6 14.8
Gain on sale............................ -- -- -- -- 46.0
----- ----- ----- ----- -----
Total Revenue......................... 100.0 100.0 100.0 100.0 100.0
Expenses From Operations:
Personnel............................... 40.5 47.4 60.3 59.9 46.5
Contingency legal and court costs....... 8.2 3.8 3.3 3.7 1.9
Communications.......................... 8.9 10.4 9.3 9.3 6.8
Rent and other occupancy................ 5.3 6.9 8.7 9.2 5.6
Professional fees....................... 2.6 2.8 5.1 2.9 2.7
General and administrative.............. 2.9 3.5 2.8 3.8 2.5
Portfolio repurchase costs.............. -- 7.0 -- -- --
----- ----- ----- ----- -----
Total Expenses From Operations........ 68.3 81.8 89.4 88.8 66.0
----- ----- ----- ----- -----
Earnings from Operations.................. 31.7 18.2 10.6 11.2 34.0
Other Income (Expense)
Interest and other...................... 0.5 1.3 0.2 0.1 2.4
Interest expense........................ (5.9) (5.2) (3.8) (4.9) (2.4)
----- ----- ----- ----- -----
Earnings before income taxes and
extraordinary loss....................... 26.2 14.3 6.9 6.4 34.0
Provision for income taxes................ 10.1 5.7 2.3 2.5 13.3
----- ----- ----- ----- -----
Earnings before extraordinary loss........ 16.1 8.6 4.6 3.9 20.7
Extraordinary loss (net of taxes)......... -- -- -- -- (3.5)
----- ----- ----- ----- -----
Net Earnings.............................. 16.1 8.6 4.6 3.9 17.2
===== ===== ===== ===== =====
EBITDA.................................... 33.7 21.0 12.9 13.3 35.6
Collections applied to principal
(accretion) on receivables............... 14.7% 15.1% 21.5% 32.7% (4.0)%
</TABLE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Revenues. Total revenues for the nine months ended September 30, 1998 were
$16.1 million compared to $6.5 million for the nine months ended September 30,
1997, a 147% increase. The nine month results increased significantly due to a
$6.0 million gain on sale resulting from the Company's Initial Securitization.
Revenues for the nine-month period were further benefited by a $658,000 gain on
sale in the first quarter of 1998 resulting from the resale of a portfolio
repurchased under a settlement agreement. Previously deferred income of
$895,000 was recognized against a $237,000 cost of resale. Creditrust also sold
a portfolio of finance receivables in the third quarter of 1998 which resulted
in an $800,000 gain on sale. Income on finance receivables increased by
$500,000 to $6.3 million for the nine months ended September 30, 1998 from $5.8
million in the comparable 1997 period. See "Financial Condition--Deferred
Income."
Income on finance receivables increased in 1998 over 1997 due to the
purchases of Receivables in the second and third quarters of 1998 with proceeds
from the issuance of the Company's Subordinated Notes, Series 1998 (the
"Subordinated Notes") and the initial public offering. The weighted average
investment in Receivables increased to $8.3 million for the nine months ended
September 30, 1998 from $6.1 million for the
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same period in 1997. Collections increased $4.6 million or 56% from $8.3
million to $12.9 million in the nine months ended 1997 and 1998. The charged-
off balances managed by the Company increased from $1.1 billion at September
30, 1997 to $1.9 billion at September 30, 1998, an increase of 72%.
Total Expenses from Operations. Total expenses from operations increased by
$4.9 million from $5.7 million for the nine months ended September 30, 1997 to
$10.6 million for the nine months ended September 30, 1998. Operating expenses
for the nine months ended September 30, 1998 increased over the nine months
ended September 30, 1997 by 85.8% due to (a) a 94% increase in personnel costs
as a result of growing total staff from 246 to 443 as of September 30, 1997 and
1998, respectively; (b) a 51.2% increase in rent and occupancy due to an
increase in utilities, rent and depreciation expense related to the addition of
approximately 36,000 square feet of space and related equipment for the new
operations center started up in March 1997 and occupied in June 1997; and (c)
an increase in communication expense of 82.9% due to increased levels of credit
reporting and long distance usage from a higher volume of accounts.
Operating expenses for the nine months ended September 30, 1998 as a
percentage of revenues decreased primarily due to the gain on sale in the
second quarter of 1998.
Expenses increased in the nine months ended September 30, 1998 primarily as
a result of costs associated with recovery efforts on a greater balance of
Receivables, including the Receivables serviced but not owned by the Company
that were included in the Initial Securitization, and in anticipation of a
greater rate of Receivables purchases following the Company's capital-raising
activities earlier in 1998. Management believes that many of the expense
categories discussed above can support the servicing and management of
substantially larger volumes of Receivables without proportional expense
increases.
Personnel expenses were $3.9 million or 59.9% of revenue in the nine months
ended September 30, 1997 and $7.5 million or 46.5% of revenue for the nine
months ended September 30, 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) significant investment in senior management infrastructure,
including senior management staff in the information technology and legal
departments; (c) increase in the number of account officers to service a larger
volume of Receivables; and (d) an accounting charge incurred in connection with
one of the Company's employee benefit plans.
Rent and other occupancy costs were $594,000 or 9.2% of revenue and $898,000
or 5.6% of revenue in the nine months ended September 30, 1997 and 1998,
respectively. This increase is attributable primarily to utilities and
depreciation expense increases in connection with the addition of approximately
36,000 square feet of space and related equipment for the new operations center
started up in March 1997 and occupied in June 1997 compared to a full nine
months of occupancy in 1998.
Professional fees were $184,000 or 2.9% of revenue and $433,000 or 2.7% of
revenue in the nine months ended September 30, 1997 and 1998, respectively. The
increases were attributable to increased accounting fees and various legal
expenses.
Earnings from Operations. Earnings from operations were $725,000 or 11.2% of
revenues in the nine months ended September 30, 1997 and $5.5 million or 34.0%
of revenues in the nine months ended September 30, 1998. Year to date, this
increase resulted from several factors, particularly the positive effect on
revenues from servicing income and gain on sale, which largely offset the
substantial growth in corporate infrastructure to support a substantially
larger base of operations. Earnings from operations were adversely affected in
the third quarter of 1998 because most of the Company's Receivables were
included in the Initial Securitization. Income on finance receivables was lower
than what the Company would have recognized had it retained the finance
receivables sold in connection with the Initial Securitization. This reduction
in income was partially offset by the 20% servicing fee.
Other Income (Expense). Other income (expense) increased from an expense of
$311,000 in the nine months ended September 30, 1997 to income of $4,000 in the
nine months ended September 30, 1998. Interest
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on the Company's bank debt decreased during both periods as a result of pay-
downs on the credit facility. Offsetting these decreases, the interest expense
on the Subordinated Notes issued in April 1998 increased interest expense
during 1998. The Company earned significant interest income principally on cash
equivalent investments of the proceeds from the Subordinated Notes and the
initial public offering during 1998.
Earnings Before Income Taxes and Extraordinary Loss. As the result of the
foregoing, earnings before income taxes were $414,000 for the nine months ended
September 30, 1997 and $5.5 million for the nine months ended September 30,
1998.
Provision for Income Taxes. Income tax rates were 39% for the nine months
ended September 30, 1997 and 1998. The effective tax rate may fluctuate as a
result of changes in pre-tax income and nondeductible expenses. Deferred tax
liabilities increased from $1.1 million at December 31, 1997 to $2.9 million at
September 30, 1998, principally due to the deferred taxes of approximately $2.3
million provided for on the gain on sale related to the Initial Securitization,
which is treated as a financing transaction for tax purposes, and the reversal
of a deferred tax benefit of $345,000 on the first quarter portfolio resale and
recognition of previously deferred income which was previously taxed.
Extraordinary Loss (Net of Taxes). The extraordinary loss recognized in the
nine months ended September 30, 1998 resulted from the early retirement of $5
million of Subordinated Notes required to be repaid upon the closing of the
Company's initial public offering. The carrying value of the debt was $4.6
million due to the value attributed to the warrants issued in connection with
the debt and credited to paid in capital. The difference in the carrying value
of the debt and the amount owed is original issue discount and was written off
upon the early retirement. In addition, $515,000 of offering costs incurred in
connection with the Subordinated Notes net of amortization was also charged to
extraordinary loss. The after tax effect of the charges was an extraordinary
loss of $567,000.
Net Earnings. Net earnings for the nine months ended September 30, 1997 and
September 30, 1998 were $252,000 and $2.8 million, respectively, an increase of
$2.5 million. The increase was attributable to higher revenues as a result of
the gain on sale from the Initial Securitization and servicing income in 1998
over 1997 of $9.7 million offset by higher costs of $4.8 million and further
decreased by a $2.0 million increase in tax expenses and the extraordinary loss
upon repayment of the Subordinated Notes.
EBITDA. EBITDA increased $4.9 million to $5.7 million for the nine months
ended September 30, 1998 as compared to $858,000 for the nine months ended
September 30, 1997. EBITDA increased consistently with net earnings as a result
of the gain on sale in the nine month period ending September 1998.
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 finance 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.
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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 purchases of Receivables, including the receivables
serviced by the Company for a third-party owner, and in anticipation of
additional purchases in 1998. Management believes that many of the expense
categories discussed above can support the servicing and management 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
were capitalized on the Company's balance sheet at December 31, 1997, but were
recognized in the first nine months of 1998 upon completion of the Initial
Securitization in June 1998 and the initial public offering in August 1998. 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 a bank credit facility on September 23, 1996, to provide
advances of up to $4.0 million for the purchase of Receivables and the
increased volume of Receivables balances financed with this facility. The
facility was retired in June 1998. Interest expense further increased due to
two additional equipment leases completed in 1997.
Earnings Before Income Taxes and Extraordinary Loss. As the result of the
foregoing, earnings before income taxes were $790,000 in the year ended
December 31, 1996 and $682,000 in the year ended December 31, 1997.
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<PAGE>
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.
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%.
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
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<PAGE>
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.
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 Company's bank 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 purchased 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.
Financial Condition
Cash and Cash Equivalents. Cash and cash equivalents increased from $770,000
as of December 31, 1997 to $9.9 million as of September 30, 1998, primarily as
a result of an increase in net cash from financing activities including the
initial public offering offset by investing activities, principally purchases
of Receivables and the Initial Securitization and offset by net cash used in
operating activities.
Finance Receivables. Investment in finance receivables increased 304.0% to
$20.6 million, as of September 30, 1998 from $5.1 million as of December 31,
1997. All of the Receivables owned as of December 31, 1997 were securitized in
the second quarter of 1998 and therefore removed from the balance sheet. The
carrying value of the Receivables, along with the $6.5 million purchase price
of the serviced Receivables included in the Initial Securitization, was
allocated to cost of sales and the residual investment in securitization.
Receivable purchases of $26.1 million during the nine months ended September
30, 1998 included $6.5 million for the serviced receivables and $19.6 million
for additional Receivables. The Company purchased the $19.6 million of finance
receivables during the nine months ended September 30, 1998 with a portion of
the net proceeds from the initial public offering and other cash on hand.
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Residual Investment in Securitization. Residual investment in securitization
increased from none at December 31, 1997 to $4.6 million as of September 30,
1998 as the result of the completion of the Initial Securitization. After
payment of interest and principal on the securitization notes, servicing costs,
trustee fees, insurance premiums and certain other costs, all remaining cash
flows with respect to the securitized Receivables are for the account of the
Company. The carrying value was established by allocating the total cost of the
Receivables included in the Initial Securitization of $11.3 million among the
fair value of the Receivables sold (the $14.5 million face amount of the
securitization notes) and the fair value of the retained interest (estimated by
the Company at $8.1 million), plus a cash reserve of $435,000. The fair value
of the retained interest was estimated by management based on future projected
recoveries employing the Company's Portfolio Analysis Tool (PAT). PAT projected
recoveries were reduced by 20% to take into account unforeseen reduced
collection trends, further reduced for the estimated costs to service in the
future at the 20% servicing rates established in the servicing documents and
then discounted at 12% per annum, reflecting the Company's estimate of a
reasonable rate of return on a subordinated retained interest. Interest income
is accrued on the residual at 12% per annum for the estimated remaining life of
the Receivables of approximately five years. This methodology results in a
discount rate of approximately 30% applied to the Company's total retained
interest in projected recoveries. Once the securitization notes are retired,
any collections will be applied to amortize the investment in residual
including accrued interest income. The investment will be accounted for under
the provisions of SFAS 115 as a security available for sale and marked to
market in the equity accounts of the Company. As of September 30, 1998, no
adjustment was necessary.
Property and Equipment. Property and equipment, net, increased 64.3% to $2.3
million as of September 30, 1998 from $1.4 million as of December 31, 1997 due
to $922,000 in purchases (principally through capital leases) of computer
equipment net of $262,000 of depreciation.
Deferred Costs. Deferred costs increased to $561,000 as of September 30,
1998 from $535,000 as of December 31, 1997. The deferred costs as of December
31, 1997 which represented costs incurred related to the initial public
offering and the Initial Securitization were eliminated upon completion of
these transactions in the first nine months of 1998. The deferred costs as of
September 30, 1998 represents costs incurred related to the establishment of a
warehouse facility.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses
increased 222% from $653,000 at December 31, 1997 to $2.1 million at September
30, 1998. The increase was principally due to increased accrued legal,
accounting, and printing costs incurred in connection with the initial public
offering of $581,000.
Notes Payable and Capitalized Lease Obligations. Notes payable decreased
from $2.1 million as of December 31, 1997 to none as of September 30, 1998.
Capitalized lease obligations increased from $972,000 to $1.8 million for the
same period. The decrease in notes payable was attributable to repayments on
the Company's bank credit facility from proceeds from the Initial
Securitization in June 1998. The increase in capitalized lease obligations is
due to equipment purchases net of lease payments.
Deferred Income. As of December 31, 1997 the Company had deferred income of
$895,000. During the first quarter of 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 purchased
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 a gain on sale of
approximately $658,000 in the first quarter of 1998, approximately $404,000
after tax.
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Deferred Tax Liability. Deferred tax liability at September 30, 1998 is $2.9
million compared to $1.1 million as of December 31, 1997. This increase of $1.8
million was primarily attributable to an increase in deferred income for tax
purposes since the gain from securitization is not taxable income and the
securitization notes are treated as a financing transaction and was further
attributable to a decrease in deferred tax benefit on previously deferred gain
on sale reported in the first quarter of 1998 for book purposes.
Total Stockholders' Equity. Total stockholders' equity increased $30.1
million to $32.2 million at September 30, 1998 from $2.1 million at December
31, 1997 as a result of net income of $2.8 million during the nine months ended
September 30, 1998 and $27.3 million of additional paid in capital resulting
from the Company's initial public offering and $410,000 of additional paid in
capital resulting from the Subordinated Notes and the Company's common stock
purchased for the Company's benefit plans.
Liquidity And Capital Resources
Historically, the Company has derived substantially all of its cash flow
from collections on finance receivables and servicing income. In the past, the
primary sources of funds to purchase Receivables were cash flow, the sale of
participations to third parties, and borrowings under a bank credit facility.
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 amount of Receivables. The Company exercised a right to
purchase these Receivables and included this portfolio in the Initial
Securitization.
In April 1998, the Company issued $5.0 million of Subordinated Notes in a
private placement transaction. These notes were repaid upon consummation of the
initial public offering. In connection with the private placement, the Company
issued Warrants to purchase 396,000 shares of common stock exercisable at
$12.00 per share and warrants to purchase 54,000 shares of common stock
exercisable at $15.50 per share.
On June 19, 1998, the Company completed the Initial Securitization. Gross
proceeds of the Initial Securitization were $14.5 million. After securitization
expenses, the purchase of the Receivables for which the Company acted as
servicer, and the funding of a reserve amount required in the securitization,
the Company retired its notes payable to its existing senior lender of $1
million resulting in net cash proceeds available for working capital (including
Receivables purchases) of $5.8 million.
On August 3, 1998, the Company completed an initial public offering of its
common stock and, after payment of underwriting discounts and commissions and
other offering expenses, received net proceeds of $27.3 million. A portion of
these proceeds was used to repay principal and interest on the Subordinated
Notes; of the remaining proceeds, a portion has been used to make additional
portfolio purchases and the balance was added to working capital.
In September 1998, the Company, through a special-purpose financing
subsidiary, entered into a securitized Receivables acquisition facility (the
"Warehouse Facility"). Utilizing an indenture and servicing agreement and an
independent trustee, the Company secured a $30 million two-year commitment. The
Warehouse Facility carries a floating interest rate of 65 basis points over
LIBOR and is "AA" rated by Standard & Poor's Corporation. The Warehouse
Facility is secured by a trust estate, primarily consisting of certain
Receivables to be purchased by the Company. The Company placed some of the
Receivables assembled in the facility into the securitization completed in
December 1998 and may securitize additional Receivables that are part of this
trust estate, subject to market conditions, although the Warehouse Facility
does not require such a take out. Generally, the Warehouse Facility provides
95% of the acquisition cost of Receivables purchased and the Company funds the
remaining 5%. The Company also made a one time $900,000 liquidity reserve
payment. Borrowings under the Warehouse Facility are interest-only for six
months, after which time all collections of Receivables, after payment of
servicing costs including the servicing fee for the Company, are used to
reduced the borrowings.
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As of September 30, 1998, the Company had cash and cash equivalents of $9.9
million. Capital expenditures from operations were $147,000 for the nine months
ended September 30, 1998. Capital additions made pursuant to capital leases
were $1.0 million in the first nine months of 1998. Receivables purchases were
$26.2 million for the nine months ended September 30, 1998.
In October 1998, the Company entered into a $20 million revolving line of
credit with a commercial lender to provide Receivables acquisition financing
(the "Line of Credit Facility"). The facility has a term of three years during
which time the Company may borrow and repay funds to purchase Receivables at
80% of cost. Interest is based on prime plus 0.5% or LIBOR plus 2.5% at the
option of the Company on each advance. The facility is secured by substantially
all of the Company's assets, other than Receivables in the Warehouse Facility.
Together, with the Warehouse Facility discussed above, the Company's
Receivables acquisition facilities equal $50 million in revolving acquisition
lines.
In the past, the Company would arrange for certain portfolio purchases to be
financed by related parties when financing from banks or other institutional
lenders was not readily available. In a typical financing arrangement, the
Company would purchase a portfolio of Receivables for the benefit of the
Company and other participants and under which the Company would receive an
above-market servicing fee or a participation interest and in all cases would
continue the collection process. The Company does not intend to utilize these
financing arrangements in the future.
The debt service requirements associated with borrowings under the new
credit facilities will significantly increase liquidity requirements although
both the Line of Credit Facility and the Warehouse Facility have interest only
periods for up to six months. The Company anticipates that its operating cash
flow and proceeds from this offering and its existing credit facilities will be
sufficient to meet its anticipated future operating expenses, and Receivables
purchases and to service its debt requirements as they become due. To the
extent the Company is successful in closing additional term securitizations,
amounts repaid under both facilities may be reborrowed. On December 29, 1998,
the Company completed a second securitization of owned Receivables. See "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, 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 critical
computer systems and business applications software in the normal course of its
business expansion and that its computer systems will be able to utilize
properly dates beyond December 31, 1999. The Company used its in-house
programmers in the modification. Accordingly, the Company is unable to identify
separately the costs of making these systems Year 2000 compliant.
Most of the Company's major vendors are the largest credit grantors in the
country, which the Company expects will become Year 2000 compliant due to the
nature and financial strength of these businesses. Additionally, the Company
does not generally communicate on-line with credit grantors on a continuing
basis, but rather receives discrete data files for analysis and to support
recovery activities. The Company has to date been able to convert data received
from credit grantors and other third parties to be Year 2000 compliant and
26
<PAGE>
expects that it will continue to be able to do so in the future. The Company is
in the process of seeking Year 2000 certifications from key vendors.
The Company also relies on internal and third-party information databases in
its portfolio analysis and collection efforts. A significant amount is
maintained in internal databases. However, the Company must timely receive new
data from third party sources and an interruption in this data supply could
adversely affect the Company's ability to purchase additional portfolios and to
collect on existing receivables. The Company has successfully checked and
converted third-party data that is not Year 2000 compliant, and based on its
efforts to date, believes that it can continually effect any necessary
conversions.
The Company's collection efforts rely heavily on telephone systems. The
Company has contracts with multiple telephone carriers. Based on communications
with vendors to date, the Company believes that major telephone systems will
not be interrupted by Year 2000 failures. However, if a protracted and major
disruption in the availability of local or long-distance telephone service were
to occur as the result of the Year 2000 problem or otherwise, the Company's
collection efforts, and therefore its operations, could be materially adversely
affected. Disruption of power supply by the Company's electric utilities could
also have a serious effect on the Company's ability to conduct business.
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 nine
months ended September 30, 1998.
27
<PAGE>
BUSINESS
General
Creditrust is a leading information-based purchaser, collector and manager
of defaulted consumer receivables. Defaulted consumer receivables are the
unpaid debts of individuals to credit grantors, including banks, finance
companies, retail merchants and other service providers. Creditrust seeks to
use its proprietary pricing models and software systems as well as extensive
information databases to generate high rates of return on purchased
receivables. Most of the Company's receivables are VISA(R) and MasterCard(R)
credit card accounts that the issuing banks have charged off their books for
non-payment. By purchasing receivables, the Company allows credit grantors to
make a recovery on these charged-off accounts. Since its founding in 1991
through December 31, 1998, Creditrust has invested $69.0 million to purchase
receivables at a significant discount. At December 31, 1998, the Company
managed over 1.3 million accounts with a charged-off amount of over $2.5
billion. The Company had over 640 employees at December 31, 1998 and operates
two facilities which can accommodate over 900 employees.
Industry Overview
According to a January 1999 statistical release by the Federal Reserve,
consumer credit at the end of November 1998 exceeded $1.3 trillion. Duff &
Phelps projects that consumer credit will grow to over $1.48 trillion by the
year 2000.
Outstanding credit card receivables have grown as the share of credit card
debt within consumer credit has increased. According to the Nilson Report
credit card receivables represented 41% of consumer credit or $459 billion in
1995 and 44% or $557 billion in 1997. This share of credit card debt is
expected to rise to 46% or $636 billion in 2000 and 51% or $828 billion in
2005.
[GRAPH APPEARS HERE]
$ billions
1995A 1997A 2000E 2005E
----- ----- ----- -----
Other credit card issuers 138 160 172 207
VISA(R), MasterCard(R) 321 397 464 621
Credit card receivables: VISA(R), MasterCard(R) and other credit card issuers
Data Source: Nilson Report
28
<PAGE>
As the amount of credit card debt has risen, total delinquencies have grown
as well. According to the August 1998 Nilson Report the dollar amount of
VISA(R) and MasterCard(R) delinquencies increased from $12.6 billion in 1995
(3.93% of debt outstanding) to $18.8 billion in 1997 (4.72% of debt
outstanding) and is expected to increase further as set forth in the chart
below:
[GRAPH APPEARS HERE]
$billions
1995A 1996A 1997A 1998E 1999E 2000E 2001E 2002E 2003E 2004E 2005E
- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
12.6 17.7 18.8 20.4 21.4 22.4 23.4 23.8 24.0 27.5 32.0
Total credit card debt delinquencies on VISA(R) and MasterCard(R) accounts
Data Source: Nilson Report
According to the Nilson Report gross credit card charge-offs (including all
credit card issuers) as of 1990 was $9.1 billion or 3.83% of total outstanding
credit card receivables and increased in 1997 to $36.3 billion or 6.48% of
outstandings. Concurrently with the increase in the level of charged-off
consumer debt, credit grantors have sought a variety of ways to increase their
collections. Generally, there are three alternatives credit grantors have to
collect outstanding indebtedness: (1) maintain an internal collection staff,
(2) outsource collection efforts to traditional third-party collection
agencies, or (3) sell portfolios of charged-off debt to third parties such as
Creditrust who are willing to pay cash for those accounts. Historically, credit
grantors have relied upon large internal collection staffs for their initial
collection efforts, which efforts tended to be transferred to third-party
collection agencies for accounts 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 credit grantors have chosen to
outsource some or all of their collection efforts. Further, credit grantors
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 states that the total value of credit card
portfolios brokered or sold directly, which was $3.0 billion in 1993, reached
$19.5 billion in 1997, and is projected to grow to $25.0 billion by 2000.
Strategy
Creditrust's business goal is to be the most efficient purchaser, collector
and manager of Receivables within its targeted markets. Creditrust seeks to
attain this goal by emphasizing customer-focused services, investing in
information technology and maintaining an information advantage over its
competitors. The key elements of Creditrust's business strategy are:
. Enhance Our Knowledge of Our Customer Base by Expansion of Our Extensive
Information Databases. Creditrust maintains extensive information
databases compiled from seven years of analyzing and managing over 1.3
million consumer accounts. Creditrust has also developed and is upgrading
on an ongoing basis its proprietary software tools which it uses to
analyze and score
29
<PAGE>
portfolios offered to it for sale and to manage the collections and
information flow process. These systems and data provide the Company with
an information advantage over its competitors and allow it to (1) buy
portfolios on more favorable terms than competing buyers who lack its
information technology advantage, (2) collect the portfolios efficiently
and (3) identify trends in defaulted consumer portfolios earlier than its
competitors who lack this 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.
. Emphasize a Flexible, Customer-Focused Collection Process. The Company
believes that it resolves defaulted consumer receivables more efficiently
than its competitors, credit grantors and third-party collection
agencies. The Company is not faced with the various regulatory and
financial reporting constraints that many credit grantors face. Because
Creditrust's only business is the collection of defaulted consumer
receivables, it is not subject to some of the business and customer
relations constraints faced by credit grantors which must consider the
effect of their collection decisions on their lending business. In the
case of third-party collection agencies, the Company is able to offer
credit terms which most other collectors cannot. Third-party collection
agencies 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.
. Maintain Strong Relationships with Leading Credit Grantors. The Company
pioneered the purchase of defaulted consumer receivables and has
developed strong relationships with many of the largest credit grantors
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. In
addition, the Company has secured "forward flow" contracts with a number
of leading credit grantors. Forward flow contracts provide for a credit
grantor to sell some or all of its receivables over a period of time to
Creditrust on the terms agreed to in the contracts. The diversity of the
credit grantors and their respective customer bases also allows the
Company to maintain geographically diversified portfolios.
. Continue Employee Training. The Company has developed highly effective
training programs and methods. In contrast to many third-party collection
agencies, the Company trains its employees to function in a manner
similar to financial counselors. Our employees routinely help customers
with issues related to their financial health and credit history. The
Company seeks to instill in its employees a culture of professionalism
and reinforces this message through incentive arrangements intended to
moderate the rate of employee turnover in an industry that typically has
high turnover rates.
. Use of Current Platform to Sustain Growth. In 1996 and 1997, the Company
made extensive commitments to expand its operations by moving into new
corporate headquarters and opening its operations center. It has invested
in information technology and telephony systems capable of supporting as
many as 900 account officers. Key members have been added to the
management team. As a result of these investments, Creditrust believes it
is capable of servicing substantially larger volumes of Receivables
without incurring proportional infrastructure and additional fixed costs.
. Develop New Products and Services. The Company believes that it may be in
a position to offer additional products and services to its customers
that aid customers in managing their debts and, where possible, improving
their credit standing. In September 1998, the Company announced the
introduction of its Creditrust Plus MasterCard(R) program. This card is
issued by a third-party bank under Creditrust's name and is intended to
afford certain customers the opportunity to reestablish credit and create
a new positive credit history, while satisfying their existing Creditrust
receivable balance. The Company may introduce other programs from time to
time in the future.
Receivables Analysis and Acquisition
Creditrust purchases defaulted consumer receivables that have been incurred
through VISA(R), MasterCard(R), private label credit cards and consumer loans
issued by credit grantors, including banks, finance
30
<PAGE>
companies, retail merchants and other service providers. The Receivables
typically are charged-off by the credit grantors after a default-period of 180
days. The Company focuses on purchasing such charged-off Receivables. From the
time of purchase, Creditrust has found that the average portfolio of
Receivables has an estimated economic life of 60 months.
Portfolios of Receivables typically are purchased by Creditrust at a
discount from their charged-off amount, typically the aggregate unpaid balance
at the time of charge-off. There is an inverse correlation between purchase
price and the perceived effort necessary to recover the Receivables. Some
credit grantors pursue an auction type sales approach by constructing a
portfolio of Receivables and seeking bids from specially invited competing
parties. Other means of purchasing Receivables include privately negotiated
direct sales when the credit grantors contacts known, reputable purchasers and
the terms are negotiated. Credit grantors have also entered into "forward flow"
contracts that provide for a credit grantor 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.
The Company has historically funded its receivables purchases and the
expansion of its business through a combination of bank and other warehouse
funding, public and private equity funding and asset-backed securitizations.
The Company believes that its growth is partially attributable to its diverse
funding arrangements.
The Company's Acquisitions Department locates and develops new and
continuing sources of portfolios of defaulted consumer 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 related media, and ensuring that Creditrust's purchase costs
stay within clearly defined parameters. The Acquisitions Department also
supervises the Post-Purchase Liaison Group, a group that verifies buy-backs and
returns with sellers after the purchase of Receivables. The Post-Purchase
Liaison Group also coordinates the import of purchased portfolios into Mozart,
the Company's proprietary revenue and workflow management software 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.
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.
Before purchasing any Receivables, Creditrust receives a due diligence disk
or tape containing information about each of the accounts being proposed for
sale. Creditrust uses its PAT software to analyze electronic information
provided on each Receivable account being proposed for sale. PAT reviews and
analyzes each account and compares its asset type, last known geographic
location of the customer, age since last collection, charged-off amount and
other characteristics with Creditrust's recovery results from similar
Receivables purchased in the past. This computer model is updated automatically
every time a customer payment is received. PAT produces a comprehensive
analysis of the proposed portfolio, which 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
recovery value expressed in both dollars and liquidation percentages for the
first year, as well as the total recovery for the portfolio's estimated five-
year economic life. In order to determine a bid price for a portfolio, the
Company uses the PAT-projected recovery value. 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. The Company has a credit committee (the "Credit Committee") which is
composed of the Company's Chief Executive Officer, Chief Financial Officer and
Vice President of Acquisitions. The Credit Committee, by unanimous decision,
determines whether to purchase the portfolio of receivables and establishes a
minimum and maximum bid range based on the PAT-projected recovery for the
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.
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<PAGE>
PAT was developed based on the theory that each portfolio, no matter how
similar it may appear to other similar size portfolios, has its own unique
"fingerprint," because of the individual Receivables of which it is comprised.
No two portfolios will score the same on PAT because of the different
characteristics of the receivables in each portfolio. 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 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. Here, liquidity pertains to
the expected recovery on a receivable divided by its charged-off amount. 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 purchase, 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. Newer Receivables (i.e., Receivables
that are between three and eighteen months past due) generally are more
expensive to purchase than older Receivables. The range of age since default on
Receivables managed by the Company in respect of both number of accounts and
charged-off amount as of December 31, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997 December 31, 1998
--------------------------------------------------- ------------------------
Charged- Charged- Charged-
off off off
No. of Amount No. of Amount No. of Amount
Year Accounts (millions) Year Accounts (millions) Year Accounts (millions)
---- -------- ---------- ---- -------- ---------- ---- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0-2 89,548 $167.6 0-2 73,685 $146.9 0-2 488,276 $1,052.7
2-4 57,809 $130.7 2-4 428,646 $796.1 2-4 228,792 $ 401.7
4-6 30,999 $ 66.5 4-6 52,454 $117.5 4-6 473,105 $ 919.7
6+ 15,210 $ 21.4 6+ 25,553 $ 44.0 6+ 75,356 $ 155.3
</TABLE>
Creditrust specializes in purchasing larger balance Receivables. The Company
has found the best cost-to-collect ratio generally occurs when the charged-off
amount is at least $1,000, and typically less than $8,000. Select ranges of
charged-off amounts of Receivables managed by the Company as of December 31,
1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997 December 31, 1998
-------------------------------------------------------------------- ---------------------------------
Charged- Charged- Charged-
No. of off Amount No. of off Amount No. of off Amount
Range Accounts (millions) Range Accounts (millions) Range Accounts (millions)
----- -------- ---------- ------------- -------- ---------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$0-$1,000 70,680 $ 40.2 $0-$1,000 184,176 $113.4 $0-$1,000 537,928 $ 270.3
$1,001-$5,000 109,703 $251.2 $1,001-$5,000 362,891 $764.5 $1,001-$5,000 618,732 $1,367.3
>$5,001 13,183 $ 94.7 >$5,001 33,271 $226.7 >$5,001 108,869 $ 891.7
</TABLE>
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<PAGE>
The Company's Receivables grouped by asset type as of December 31, 1996,
1997 and 1998 were as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997 December 31, 1998
- ----------------------------------- ---------------------------------- -----------------------------------
Charged- Charged- Charged-
No. of off Amount No. of off Amount No. of off Amount
Asset Type Accounts (millions) Asset Type Accounts (millions) Asset Type Accounts (millions)
- -------------- -------- ---------- -------------- -------- ---------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
VISA(R)/ VISA(R)/ VISA(R)/
MasterCard(R) 102,969 $229.0 MasterCard(R) 487,249 $942.4 MasterCard(R) 1,108,085 $2,243.5
Private Label/ Private Label/ Private Label/
Discover(R) 38,032 $ 39.0 Discover(R) 38,077 $ 39.1 Discover(R) 43,498 $ 45.8
Installment Installment Installment
Obligations 52,565 $118.1 Obligations 55,012 $123.1 Obligations 113,946 $ 240.1
</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. 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:
[CREDITRUST CORP. PIE CHART APPEARS HERE]
Portfolio Composition by State
Other States 32.88%
California 16.96%
Texas 11.92%
Florida 10.59%
New York 8.90%
Pennsylvania 3.68%
Massachusetts 3.87%
Maryland 2.69%
New Jersey 3.25%
Illinois 2.86%
North Carolina 2.40%
This quantitative and qualitative data is evaluated together with
Creditrust's knowledge of the current debt marketplace and any subjective
factors that may be available regarding the portfolio or the seller. The Credit
Committee must decide unanimously whether to purchase 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.
33
<PAGE>
Servicing Organization
Creditrust utilizes two servicing facilities. The headquarters facility,
approximately 19,000 square feet, houses the executive offices and servicing
facilities for approximately 225 employees. The second facility, approximately
36,000 square feet, serves as Creditrust's primary operations center and is
designed to house approximately 700 additional employees, along with
information systems and recruiting departments. Currently, the Company has
approximately 640 employees and is organized into five functional departments:
Acquisitions; Information Technology; 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
Mozart and PAT, 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. PAT and Mozart were developed 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 and
local area networks to Intel Pentium(R)-based PCs. The call centers have been
fully wired so that additional employee terminals simply may be placed onto
open desks and plugged into the network. The architecture of the system is
technologically sophisticated, 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 to experience significant
growth without a need for further upgrade in the near-term. The systems are
fully redundant so as to ensure uninterrupted operations. The Company has
extensive emergency plans in place for access to an off-site call center
location, should the need arise.
Telephony. The Company employs advanced technology in telephony, including
predictive dialers, automatic routers, two Lucent Technologies Definity(R) G-3
telephone systems (scaleable to over 1,500 account officers) and many other
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 is technologically sophisticated, while remaining
scaleable and updateable.
Verification and Research of Account Information. When a portfolio of
Receivables is purchased, 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 credit grantor and
automatically entered into Mozart.
Within 24 hours of importing the Receivable into Mozart 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.
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<PAGE>
Skiptrace Department-Locating Customers
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. Skiptracers are technology-driven telephone
detectives. 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. A working phone number is frequently found for those
customers transferred to the Skiptrace Department. Once a customer is found,
Mozart 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 a traditional "collections shop," uses a
friendly, customer-focused approach to collect on receivables. Instead of
simply calling about an old bill, Creditrust's employees work to maximize yield
while minimizing customer negativity and maintaining a positive working
environment.
The Recovery Department is responsible for recovering account balances and
selling customer service to our customers. The Company employs advanced
Pentium(R) PC Workstations and sophisticated telephone call management systems
to maximize its employee productivity and thereby increase recovery from its
receivables. The telephone call management systems include predictive dialers,
automated call and account distribution systems, digital switching and
customized computer software. Mozart provides the Recovery Department with: (1)
real-time customer reporting; (2) full customer account data information; (3)
collection discussion notes on each account; (4) telephone numbers and
addresses; (5) payment history; (6) automatic notice of acquisition, settlement
letters, reminders and late payment notices; (7) automatic legal pleadings
production; (8) automatic account distribution to employees; (9) surveillance
of on-screen activity and telephone conversations for quality control,
productivity and regulatory compliance; and (10) exception reports on payment
plans. Creditrust's employees work to maximize yield while minimizing customer
apprehension and maintaining a positive working environment. The Recovery
Department currently is organized into teams of 16 with one supervisor per
team. The supervisors work with the team members and assist employees 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.
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, 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.
35
<PAGE>
Mozart 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. 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, which is
an electronic money order system, or by Creditrust's QuickChek pre-authorized
checks drawn on the customer's checking account. Creditrust's QuickChek system
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 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
automatically moves the Receivable to the account officer's late queue for
immediate customer contact.
Late Payment Account Officer. 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 account officer. 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 account officers act as
financial counselors to the customer and may assist the customer in securing
new resources for the resolution of its account.
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 three 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
55 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 "--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
36
<PAGE>
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.
Consumer Resolution Center. Creditrust maintains an independent consumer
resolution center to assist its customers in any dispute they may have with
either the original credit grantor or the efforts made by the Company to
resolve the dispute. The Company has found that a function separate from and
that does not operate in the manner of a recovery department can be useful in
resolving certain matters. In turn, Creditrust's employees are freed up to
address accounts that are capable of immediate resolution. The consumer
resolution center benefits the Company by permitting its employees to use their
time more productively.
Compliance Procedures. The Company's policy is to comply with all provisions
of the Fair Debt Collection Practices Act (the "FDCPA") and applicable state
laws, regardless of whether such laws apply to it. The Company monitors
employee activity on an ongoing basis through its Quality Improvement Group.
Employees 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 employee's
Receivables activities are monitored through the Company's DoubleVision system,
which allows a supervisor or manager to observe exactly what the employee 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, including daily management reports, liquidity reports, telephone
reports, skiptrace reports and account officer cash transaction reports. The
flexibility of Mozart allows management to make real-time queries of any
necessary information.
Competition
The Company's business is highly competitive, and it expects that
competition from new and existing competitors will intensify. The Company
competes with other purchasers of defaulted consumer receivables and with
third-party collection agencies. The Company's ability to obtain new customers
is also materially affected by the financial services companies that choose to
manage their own defaulted consumer receivables. Some of these companies may
have substantially greater personnel and financial resources. The Company seeks
to compete with these companies on the basis of its superior information
technology capabilities, which the Company believes enable it to purchase,
collect and manage receivables more effectively than its competitors. Following
allegations of fraud, the Company's competitor Commercial Financial Services,
Inc. recently filed for protection from its creditors under the federal
bankruptcy laws. The Company is unable to assess the potential long-term effect
of this development on the industry or the markets for purchasing and financing
defaulted consumer receivables.
Trademarks and Proprietary Information
The Company has obtained federal trademark registrations with the United
States Patent and Trademark Office with respect to the name "Creditrust" and
the Creditrust logo.
The Company relies on trade secrets to protect its proprietary rights in its
systems and information databases. The Company attempts to protect its trade
secrets and other proprietary information through agreements with employees and
other security measures. Although the Company intends to protect its rights
vigorously, there can be no assurance that these measures will be successful.
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
37
<PAGE>
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. 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 credit grantors 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 credit grantors 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 purchases Receivables,
the Company is normally indemnified against losses caused by the failure of the
credit grantor 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 defaulted consumer
receivables, the Company may purchase 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 agreements under which the Company
purchased 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 credit grantor.
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, consisting of
approximately 19,000 square feet, at 7000 Security Boulevard, Baltimore,
Maryland 21244. The headquarters facility has capacity for approximately 225
employees and houses all of the training facilities and administrative offices.
The Company has also leased an
38
<PAGE>
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 employees and expanded training and recruiting
departments. The operations center houses the Company's updated communications
and software systems center, which is fully redundant to the computer center,
located at the corporate headquarters.
Employees
As of December 31, 1998, the Company had approximately 640 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.
Additional Information
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company with the Commission can
be inspected and copied at the Public Reference Room maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Information about
the operation of the Public Reference Room may be obtained by calling the
Commission at 1-800-SEC-0330. Copies of such material can also be obtained from
the Commission's Internet web site at http://www.sec.gov. The common stock of
the Company is quoted on the Nasdaq National Market. Reports, proxy statements
and other information concerning the Company can be inspected at the offices of
The Nasdaq Stock Market, 1735 K Street, Washington, D.C. 20006.
39
<PAGE>
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............... 33 Chairman of the Board, President and Chief
Executive Officer
Frederick W. Glassberg(1)(2)... 65 Director
John G. Moran(1)(2)............ 53 Director
Michael S. Witlin.............. 30 Director
John L. Davis.................. 36 Vice President, Business Development and
Corporate Secretary
J. Barry Dumser................ 50 Vice President, General Counsel
John D. Frey................... 53 Vice President, Recovery
James L. Isett................. 42 Vice President, Chief Information Officer
Jefferson B. Moore............. 36 Vice President, Acquisitions
Richard J. Palmer.............. 47 Vice President, Chief Financial Officer and
Treasurer
W. Lawrence Petcovic........... 53 Vice President, Human Resources
</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 served as Chairman of
the Board, President and Chief Executive Officer since that time. Mr. Rensin
was the initial developer of the Company's PAT and Mozart systems and its
extensive database, as well as the customer relations approach to collections
and recovery. Prior to founding Creditrust, Mr. Rensin founded and later sold
two different technology-related companies. 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 has been a director of
Creditrust since 1997. Mr. Glassberg has been since 1991 president of Dornbush
Enterprises, Inc., d/b/a Crystal Hill Advisors or its predecessors, Columbia,
Maryland, which provides commercial real estate management advice and financial
advisory services to corporate and municipal clients. Mr. Glassberg serves on
the Board of Directors of three tax-exempt subsidiaries of The Enterprise
Foundation that own low- and moderate-income housing. Earlier in his career,
Mr. Glassberg served as Chief Financial Officer of a subsidiary of The Rouse
Company from 1973 to 1983.
John G. Moran, Director--Mr. Moran has been a director of Creditrust since
1997. He has been Associate Dean and Executive-in-Residence of the Sellinger
School of Business and Management at Loyola College in Baltimore, Maryland
since 1995 and President of The Moran Group, LTD, which offers management
consulting services to for-profit and not-for-profit organizations, since 1995.
From 1986 until 1995, Mr. Moran was President of Household Bank, FSB (Eastern
Division).
Michael S. Witlin, Director--Mr. Witlin co-founded Creditrust in 1991 and he
served as Vice President of the Company until 1995. From 1995 to 1997, Mr.
Witlin served as a consultant with the Company Entier, providing business
process re-engineering services to privately held and public companies as well
as federal agencies. Since 1998, Mr. Witlin has been a consultant with RWD
Technologies, Inc., providing management and technology consulting services to
Fortune 100 companies.
40
<PAGE>
John L. Davis, Vice President, Business Development and Corporate
Secretary--Mr. Davis has been an employee of Creditrust since 1993. Mr. Davis'
duties have included service in the Recovery Department, various functions in
the Legal Department, including Manager of the Legal Department, and more
recently Vice-President of Business Development. Mr. Davis has been
instrumental in the development of Creditrust's nationwide network of
collection attorneys. Prior to joining Creditrust, Mr. Davis worked in two law
firms, while also earning his BS degree in Paralegal Studies at the University
of Maryland.
J. Barry Dumser, Vice President, General Counsel--Mr. Dumser joined
Creditrust in 1997 as its General Counsel. From 1994 to 1997, Mr. Dumser served
as Vice President, Chevy Chase Bank where he managed the bank's bankruptcy and
deceased processing units and supervised the litigation unit, which supported
the collection efforts with respect to the Chevy Chase Bank's approximately $5
billion credit card portfolio. From 1993 to 1994, Mr. Dumser served as Vice
President and Counsel to Matterhorn Bank Programs and from 1990 to 1994; Mr.
Dumser served as Vice President, Commercial Loan Collateral Control, of First
American Bank of Virginia. 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 1983 and was admitted to the Maryland Bar that same year.
John D. Frey, Vice President, Recovery--Mr. Frey, joined Creditrust in 1998.
From 1995 through 1998, Mr. Frey managed recovery operations of Chevy Chase
Bank, F.S.B., with a credit card portfolio of approximately $5 billion and
served as Vice President Recovery. From 1992 to 1995, Mr. Frey served as Vice
President, Collections for First Card Services; from 1990 to 1992, Mr. Frey was
employed by HHL Financial Services, an accounts receivable management company
primarily serving the healthcare industry. In addition, Mr. Frey served in a
variety of managerial roles in the collection operations of American Express
Company from 1968 to 1990.
James L. Isett, Vice President and Chief Information Officer--Mr. Isett
joined Creditrust in 1998. Prior to joining Creditrust, Mr. Isett was an
independent information technology consultant from 1997 to 1998; Chief
Information Officer for Universal Savings Bank, a credit card processor, from
1996 to 1997, and a member of the information technology departments supporting
credit card operations at American Express Company from 1996 to 1997, at Bank
of America NT & SA from 1994 to 1996, and at National Data Corporation from
1988 to 1994. He received his BS degree from Texas Tech University.
Jefferson Barnes Moore, Vice President, Acquisitions--Mr. Moore joined
Creditrust in 1997. From 1993 to 1997, Mr. Moore was Vice President of Koll-
Dove Global Disposition Services, LLC, where he helped the company develop its
industry-leading defaulted consumer receivables brokerage operations. Prior to
Koll-Dove, Mr. Moore was involved in commercial real estate sales for 12 years.
Mr. Moore received his BS degree in Business Administration from the University
of Missouri, Columbia.
Richard J. Palmer, Vice President, Chief Financial Officer and Treasurer--
Mr. Palmer has been Chief Financial Officer of Creditrust since 1996. From 1983
to 1996, Mr. Palmer served as Chief Financial Officer of, and in various other
financial functions for, CRI, Inc., a national real estate investment company
with headquarters in Rockville, Maryland. Prior to CRI, Inc. Mr. Palmer was
with Grant Thornton LLP from 1976 until 1983 and KPMG Peat, Marwick from 1973
to 1976. Mr. Palmer has a BS 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.
W. Lawrence Petcovic, Vice President, Human Resources--Mr. Petcovic joined
Creditrust in November 1998. He was Vice President of Training at Chevy Chase
Credit Card Operations Center from 1996 to 1998 and Director of Training and
Total Quality Management for The Ryland Group, Inc, a large homebuilder and
financial services company, from 1989 to 1993. Mr. Petcovic has over 22 years
experience in training, human resources, business process improvement, and
operations.
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
41
<PAGE>
are elected to serve until the next annual meeting of stockholders and until
their successors have been elected and qualified.
Board Committees
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.
Further, it 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. Non-employee
directors of the Company 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 non-employee director receives
$1,500 for each Board meeting attended in person and $500 for each Board
meeting attended telephonically. In addition, each non-employee director
receives $500 for each committee meeting attended in person and $300 for each
committee meeting attended telephonically. Non-employee directors also are
reimbursed for expenses incurred to attend meetings of the Board of Directors
and its committees. Further, Mr. Witlin was granted an option to purchase
32,258 shares of common stock on the same terms as the grants to executive
officers described below under "Compensation Pursuant to Plans."
Executive Compensation
The following table sets forth the compensation paid by Creditrust during
the fiscal years ended December 31, 1997 and December 31, 1998 to Creditrust's
Chief Executive Officer and all other executive officers receiving compensation
in excess of $100,000 in 1997 and 1998 (the "Named Executive Officers").
42
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation
----------------- All Other
Name and Principal Position Year Salary Bonus Compensation(1)
- --------------------------- ---- -------- -------- ---------------
<S> <C> <C> <C> <C>
Joseph K. Rensin....................... 1998 $218,846 $ -- $ 1,295
Chairman and Chief Executive Officer 1997 150,010 -- --
Rick W. Chandler(2).................... 1998 95,022 21,664 91,934(3)
Vice President, Recovery 1997 101,637 22,667 --
John L. Davis.......................... 1998 150,010 5,000 1,195
Vice President, Business Development 1997 150,010 16,777 1,772
Jefferson B. Moore..................... 1998 150,010 128,728 1,615
Vice President, Acquisitions 1997 138,470 2,000 --
Richard J. Palmer...................... 1998 150,010 42,584 1,444
Vice President and Chief Financial
Officer 1997 $150,010 $118,589 $ 188
</TABLE>
- --------
(1) Represents amounts contributed by the Company to the individuals' accounts
in the Company's 401(k) plan.
(2) Mr. Chandler was employed by the Company through September 1998. John D.
Frey became the Company's Vice President, Recovery in September 1998.
(3) Includes the amount paid to Mr. Chandler upon cancellation of his options
in connection with the termination of his employment with the Company.
Employment Agreements
The Company has entered into employment agreements with Messrs. Palmer,
Moore, Frey 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. Frey receives annual compensation of $150,000 and incentive compensation
based upon the performance of the Recovery Department. Effective April 14,
1998, the Compensation Committee increased Mr. Rensin's annual salary to
$250,000. Mr. Rensin is also entitled to incentive compensation in an amount up
to $100,000 annually in the discretion of the Compensation Committee.
Messrs. Palmer, Moore, Frey 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, Frey and Davis each have agreed not to compete with
the Company for three years from the date he leaves the Company, subject to
certain geographic limitations. Pursuant to his employment agreement, the
Company reimbursed Mr. Moore for $15,000 in moving expenses in connection with
his relocation to Maryland and $10,000 for his temporary residence costs during
the first several months of his employment, as well as 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 established 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
43
<PAGE>
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 exercised 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.
Currently, there are 800,000 shares of common stock available for issuance
under the Stock Plan, of which 312,500 shares are subject to outstanding
options.
Option Grants In Last Fiscal Year
The following table sets forth information regarding non-qualified stock
options granted under the Stock Plan by Creditrust during the fiscal year ended
December 31, 1998 to each of the Named Executive Officers.
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Rates of Stock
Price Appreciation
Individual Grants for Option Term(4)
---------------------------------------------- -------------------
Number of
Securities Percentage of
Underlying Total Options
Options Granted in Exercise Expiration
Name Granted(1) Fiscal Year(2) Price (3) Date 5% 10%
- ---- ---------- -------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joseph K. Rensin........ -- -- -- -- -- --
John L. Davis........... 64,516 20.65% $15.50 4/6/08 $628,575 $1,593,581
Jefferson B. Moore...... 64,516 20.65 15.50 4/6/08 628,575 1,593,581
Richard J. Palmer....... 64,516 20.65 15.50 4/6/08 628,575 1,593,581
</TABLE>
- --------
(1) Twenty percent of the options vested on the date of grant and the remaining
options vest at a rate of 20% on each anniversary of the date of grant.
(2) Based on an aggregate of 312,500 shares subject to options grant to
employees, officers and directors of Creditrust in the fiscal year ended
December 31, 1998, including the Named Executive Officers.
(3) The options were granted at an exercise price equal to the fair market
value of the common stock on the date of grant.
(4) As mandated by regulations promulgated by the Commission, the table
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 date of grant 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.
Messrs. Frey, Isett and Petcovic have been granted options to purchase a
total of 38,306 shares of common stock at a weighted average exercise price of
$16.97.
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<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 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 Internal Revenue Code of 1986, as amended.
The Compensation Committee administers the Stock Purchase Plan. Under the
terms of the Stock Purchase Plan, all eligible employees of the Company have
the opportunity to purchase common stock through payroll deductions. The
purchase price is determined by the Compensation Committee but in no event will
it be lower than 85% of the lesser of (1) the fair market value of a share of
common stock on the offering date, or (2) the fair market value of a share of
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 common stock on
the principal national securities exchange on which the common stock is
trading. The maximum number of shares for which each employee may purchase
options in each annual period is 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 shares of common stock that have been reserved under the Stock
Purchase Plan is subject to adjustment for recapitalization, stock dividend,
reorganization, merger, consolidation or other changes in capital affecting the
common stock.
Indemnification of Directors and Officers
Pursuant to the Company's Charter and Bylaws, the Company is obligated to
indemnify each of its directors and officers to the fullest extent permitted by
Maryland law 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."
45
<PAGE>
CERTAIN TRANSACTIONS
Mr. Rensin had unconditionally and personally guaranteed (the "Guaranty")
the Company's former bank credit facility, including attorneys fees and
expenses, incurred by the bank in enforcing its rights under the Guaranty. A
portion of the proceeds of the Initial Securitization was used to pay off and
terminate this facility, and, consequently the Guaranty has terminated.
Mr. Rensin had unconditionally and personally guaranteed the Subordinated
Notes. A portion of the proceeds of the initial public offering was used to
repay the Subordinated Notes and consequently terminated this subordinated
guaranty.
Jefferson B. Moore, who has served as the Company's Vice President,
Acquisitions since January 22, 1997, received a loan of $78,000 on February 28,
1997 pursuant to his employment agreement. The Company issued the loan to Mr.
Moore and his wife to assist with their purchase of a residence in Maryland.
Mr. and Mrs. Moore paid a $38,000 installment on May 30, 1997, leaving a
balance of $40,000 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 as the related Receivables are liquidated.
The Company also remitted a payment of approximately $66,000 to a
corporation prior to the initial public offering, of which Mr. Glassberg is an
executive officer, as a finder's fee in connection with the contract for the
receivables that were serviced by the Company and included in the Initial
Securitization.
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.
46
<PAGE>
PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDER
The following table sets forth certain information regarding the beneficial
ownership of the common stock, as of December 31, 1998, and as adjusted to
reflect the sale of the shares of common stock offered hereby by: (1) each
person known by the Company to own beneficially more than 5% of the common
stock; (2) each of the Company's directors; (3) the Named Executive Officers;
(4) the Company's directors and executive officers as a group; and (5) Mr.
Rensin. Except as otherwise indicated, to the knowledge of the Company, the
beneficial owners of the common stock listed below have sole investment and
voting power with respect to such shares.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Prior to Owned After
the Offering Shares the Offering
-------------------- Being -----------------
Name of Beneficial Owner Number Percent Offered(1) Number Percent
------------------------ --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Joseph K. Rensin.......... 5,191,289 65.0% 600,000 4,591,289 44.2%(2)
7000 Security Boulevard
Baltimore, MD 21244
Frederick W. Glassberg.... 1,645 * -- 1,645 *
John G. Moran............. 645 * -- 645 *
Michael S. Witlin......... 7,097(3) * -- 7,097 *
John L. Davis............. 12,903(3) * -- 12,903 *
Jefferson B. Moore........ 13,153(3) * -- 13,153 *
Richard J. Palmer......... 13,253(3) * -- 13,253 *
All directors and
executive officers as a
group (14 persons)(3).... 5,257,324 65.3% 600,000 4,657,324 44.6%
</TABLE>
- --------
* Less than 1%.
(1) Does not include the 450,000 shares of common stock that may be offered by
Mr. Rensin to cover any over-allotments.
(2) If the underwriters' over-allotment option is exercised in full, Mr.
Rensin's beneficial ownership would be reduced to approximately 39.9%.
(3) Includes shares issuable upon the exercise of options which are currently
exercisable.
47
<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"). As of December 31, 1998, the Company had
8,000,000 shares of common stock issued, 7,984,480 shares of common stock
outstanding 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 Charter.
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. If
all the shares of common stock offered by this prospectus are sold, Mr. Rensin
will own 44.2% of the outstanding common stock (39.9% assuming the over-
allotment option is exercised in full). Although Mr. Rensin will no longer be a
majority stockholder, Mr. Rensin will likely be able to control effectively
most matters requiring approval by the Company's stockholders, including the
election of directors, the approval of charter amendments, and the approval of
major transactions for which stockholders have approval rights. 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 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 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 not
issued any series of Preferred Stock.
Warrants
The Company has issued and outstanding Warrants to purchase 396,000 shares
of common stock at an exercise price of $12.00 per share and Warrants to
purchase 54,000 shares of common stock at an exercise price of $15.50 per
share. The Warrants expire on April 1, 2003 and are subject to customary anti-
dilution adjustments upon dividends and distributions on the common stock,
subdivisions or reclassifications of common stock, combinations and
reclassifications of the common stock, and certain transactions occurring prior
to an initial public offering of common stock.
Limitations on Liability of Officers and Directors
The Company's Charter and Bylaws provide for mandatory indemnification of
the officers and directors of the Company to the fullest extent permitted by
the Maryland General Corporation Law ("MGCL"), including
48
<PAGE>
some instances in which indemnification is otherwise discretionary under the
MGCL. The 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 or officers 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 or
officer 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 is generally governed by the MGCL's business combinations
statute. However, the Company's Charter exempts any business combination with
Mr. Rensin or his present or future affiliates from the application of such
statute.
Control Share Acquisitions
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast by
stockholders, excluding shares of stock as to which the acquiring person,
officers of the corporation and directors of the corporation who are employees
of the corporation are entitled to exercise or direct the exercise of the
voting power of the shares in the election of directors. "Control shares" are
voting shares of stock which, if aggregated with all other shares of stock
previously acquired by such person, would entitle the acquirer to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority or (iii) a majority of all voting power. Control
shares do not include shares that the acquiring person is entitled to vote as a
result of having previously obtained stockholder approval. A "control share
acquisition" means the acquisition, directly or indirectly, of control shares,
subject to certain exceptions.
49
<PAGE>
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 common stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 10,400,000 shares of
common stock issued and 10,384,480 shares of common stock outstanding. Except
for the shares of common stock that Mr. Rensin will continue to own, all of the
shares of common stock are 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 4,591,289 shares of common
stock that Mr. Rensin will continue to hold ("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 common stock, or (ii) the
average weekly trading volume in the common stock on the Nasdaq National Market
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 tradable without
restrictions or registration under the Act, unless thereafter held by an
Affiliate of the Company.
There are 450,000 shares of common stock issuable upon exercise of
outstanding warrants. These shares may be sold under a shelf registration
statement filed by the Company.
50
<PAGE>
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. 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.
51
<PAGE>
UNDERWRITING
NationsBanc Montgomery Securities LLC and Ferris, Baker Watts, Incorporated
(the "Underwriters") have severally agreed, subject to the terms and conditions
set forth in an underwriting agreement among the Underwriters, the Company and
the Selling Stockholder (the "Underwriting Agreement"), to purchase from the
Company and the Selling Stockholder the number of shares of common stock
indicated below opposite their respective names at the public offering price
less the discounts and commissions to underwriters set forth on the cover page
of this prospectus. The Underwriting Agreement provides that the obligations of
the Underwriters are subject to certain conditions precedent, and that the
Underwriters are committed to purchase all of such shares if any are purchased.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
NationsBanc Montgomery Securities LLC.............................
Ferris, Baker Watts, Incorporated.................................
---------
Total........................................................... 3,000,000
=========
</TABLE>
The Underwriters have advised the Company and the Selling Stockholder that
the Underwriters propose initially to offer the common stock to the public on
the terms set forth on the cover page of this prospectus. The Underwriters may
allow to selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the offering, the offering
price and other selling terms may be changed by the Underwriters. The common
stock is offered subject to receipt and acceptance by the Underwriters, and to
certain other conditions, including the right to reject an order in whole or in
part. The Underwriters may offer the shares of common stock through a selling
group.
The Selling Stockholder has granted an option to the Underwriters,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to a maximum of 450,000 additional shares of common stock,
respectively, to cover over-allotments, if any, at the same price per share as
the initial 3,000,000 shares to be purchased by the Underwriters. To the extent
that the Underwriters exercise this option, each of the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the table above. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with the offering.
The following table summarizes the compensation to be paid to the
Underwriters by the Company and the Selling Stockholder.
<TABLE>
<CAPTION>
Total
-------------------
Without With
Per Over- Over-
Share allotment allotment
----- --------- ---------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by the
Company............................................ $ $ $
Underwriting discounts and commissions paid by
Selling Stockholder................................ $ $ $
</TABLE>
The Underwriting Agreement provides that the Company and the Selling
Stockholder will indemnify the Underwriters and their controlling persons
against certain liabilities, including civil liabilities under the Securities
Act, or will contribute to payments the Underwriters may be required to make in
respect thereof.
The Selling Stockholder and the other directors of the Company have agreed
that they will not, without the prior written consent of NationsBanc Montgomery
Securities LLC (which consent may be withheld in its sole discretion), directly
or indirectly, sell, offer, contract or grant any option to sell (including
without limitation any short sale), pledge, transfer, establish an open "put
equivalent position" within the meaning of Rule 16a-1(h), under the Exchange
Act ("Rule 16a-1(h)"), or otherwise dispose of any shares of common stock owned
either of record or beneficially by them, or publicly announce the intention to
do any of the foregoing, for a period commencing on the date of this prospectus
and continuing through the close of trading on the date 120 days after such
date. NationsBanc Montgomery Securities LLC, may, in its sole discretion and
52
<PAGE>
at any time without notice, release all or any portion of the securities
subject to these lock-up agreements. In addition, the Company has agreed that
for a period of 120 days after the date of this prospectus it will not, without
the prior written consent of NationsBanc Montgomery Securities LLC (which
consent may be withheld in its sole discretion), directly or indirectly, sell,
offer, contract or grant any option to sell, pledge, transfer or establish an
open "put equivalent position" within the meaning of Rule 16a-1(h), or
otherwise dispose of or transfer, or announce the offering of, or file any
registration statement under the Securities Act in respect of, any shares of
common stock, options or warrants to acquire shares of common stock or
securities exchangeable or exercisable for or convertible into shares of common
stock, subject to certain limited exceptions including granting of options and
sales of shares under the Company's existing option plans.
Until the distribution of the common stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the common stock. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions that
stabilize the price of the common stock. The Underwriters have advised the
Company that such transactions may be effected on the Nasdaq National Market or
otherwise. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the common stock. If the
Underwriters create a short position in the common stock in connection with the
offering, i.e., if they sell more shares of common stock than are set forth on
the cover page of this prospectus, the Underwriters may reduce that short
position by purchasing common stock in the open market. The Underwriters may
also elect to reduce any short position by exercising all or part of the over-
allotment option described above. The Underwriters may also impose a penalty
bid on certain selling group members. This means that if the Underwriters
purchase shares of common stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the common stock, they may reclaim
the amount of the selling concession from the selling group members who sold
those shares as part of the offering.
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the common stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Company estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $450,000.
53
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby and general
corporate legal matters will be passed upon for the Company by Piper & Marbury
L.L.P., Baltimore, Maryland. Certain legal matters relating to the sale of the
shares of Common Stock in this offering will be passed upon for the
Underwriters by Gibson, Dunn & Crutcher LLP, San Francisco, California.
EXPERTS
The financial statements for each of the years ended December 31, 1995, 1996
and 1997 included in this prospectus have been audited by Grant Thornton LLP,
independent certified public accountants, as stated in their reports thereon
appearing elsewhere herein, and are included in reliance on their authority as
experts in accounting and auditing.
54
<PAGE>
CREDITRUST CORPORATION
Index to Financial Statements
<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 September 30, 1998.................................. F-3
Statements of Earnings for the years ended December 31, 1995, 1996 and
1997, and Unaudited Statements of Earnings for the nine months ended
September 30, 1997 and 1998............................................. F-4
Statements of Stockholders' Equity for the years ended December 31, 1995,
1996, and 1997, and Unaudited Statement of Stockholders' Equity for the
nine months ended September 30, 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 nine months ended
September 30, 1997 and 1998............................................. F-6
Notes to Financial Statements............................................ F-7
</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, stockholders' 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,
-------------------------------- September
1995 1996 1997 30, 1998
---------- ---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents........ $ 548,234 $ 475,635 $ 769,576 $ 9,874,525
Accounts Receivable.............. 90,000 13,250 55,766 241,763
Income Taxes Receivable.......... -- 6,414 200,163 242,041
Finance Receivables.............. 1,852,110 6,603,735 5,049,839 20,554,504
Prepaid Expenses................. 17,215 2,813 59,122 359,309
Investment in Securitization..... -- -- -- 4,653,613
Property and Equipment........... 221,312 469,001 1,434,218 2,356,257
Deferred Costs................... -- -- 534,700 561,121
Other Assets..................... 9,380 2,700 100,852 532,274
---------- ---------- ---------- -----------
Total Assets................. $2,738,251 $7,573,548 $8,204,236 $39,375,407
========== ========== ========== ===========
Liabilities and Stockholders'
Equity
Due to Participants.............. $ 947,454 $ 84,131 $ 51,181 $ 54,878
Servicing Remittances Due........ -- -- 101,358 --
Income Taxes Payable............. 109,038 -- -- --
Accounts Payable and Accrued
Expenses........................ 112,176 457,186 653,065 2,123,641
Notes Payable.................... -- 3,792,842 2,105,972 --
Capitalized Lease Obligations.... 61,749 40,744 972,342 1,784,939
Deferred Income.................. -- 895,449 895,449 --
Lease Incentives................. -- 72,000 266,630 303,868
Deferred Tax Liability........... 373,715 623,177 1,093,846 2,868,434
---------- ---------- ---------- -----------
Total Liabilities................ 1,604,132 5,965,529 6,139,843 7,135,760
Stockholders' 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 at December 31,
1995, 1996, and 1997;
8,000,000 shares issued and
7,984,480 shares outstanding
at September 30, 1998......... 60,000 60,000 60,000 80,000
Paid in capital................ 52,824 52,824 52,824 27,703,619
Stock held for benefit plans... -- -- -- (268,690)
Retained earnings.............. 1,021,295 1,495,195 1,951,569 4,724,718
---------- ---------- ---------- -----------
Total Stockholders' Equity... 1,134,119 1,608,019 2,064,393 32,239,647
---------- ---------- ---------- -----------
Total Liabilities and
Stockholders' Equity........ $2,738,251 $7,573,548 $8,204,236 $39,375,407
========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CREDITRUST CORPORATION
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Nine Months ended
Year ended December 31, September 30,
---------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue
Income on finance
receivables.......... $4,559,542 $5,521,063 $7,245,744 $5,769,558 $ 6,324,332
Servicing fees........ -- -- 2,580,200 683,695 2,379,830
Gain on sale.......... -- -- -- -- 7,416,666
---------- ---------- ---------- ---------- -----------
4,559,542 5,521,063 9,825,944 6,453,253 16,120,828
Expenses
Personnel............. 1,846,605 2,617,862 5,922,172 3,864,114 7,497,181
Contingency legal and
court costs.......... 374,492 212,530 320,104 238,460 302,532
Communications........ 404,021 573,118 911,508 602,928 1,102,705
Rent and other
occupancy............ 239,603 382,020 853,344 594,036 898,953
Professional fees..... 117,094 155,754 504,003 183,991 432,912
General and
administrative....... 132,244 193,221 270,509 244,622 411,188
Portfolio repurchase
costs................ -- 383,736 -- -- --
---------- ---------- ---------- ---------- -----------
3,114,059 4,518,241 8,781,640 5,728,151 10,645,471
---------- ---------- ---------- ---------- -----------
Earnings from
Operations............. 1,445,483 1,002,822 1,044,304 725,102 5,475,357
Other Income (Expense)
Interest and other.... 20,533 74,307 14,755 7,143 386,754
Interest expense...... (269,634) (287,530) (377,410) (318,325) (382,571)
---------- ---------- ---------- ---------- -----------
Earnings Before Income
Taxes and Extraordinary
Loss................... 1,196,382 789,599 681,649 413,920 5,479,540
Provision for Income
Taxes.................. 462,759 315,699 225,275 161,429 2,139,968
---------- ---------- ---------- ---------- -----------
Earnings Before
Extraordinary Loss..... 733,623 473,900 456,374 252,491 3,339,572
Extraordinary Loss (net
of taxes).............. -- -- -- -- (566,423)
---------- ---------- ---------- ---------- -----------
Net Earnings............ $ 733,623 $ 473,900 $ 456,374 $ 252,491 $ 2,773,149
========== ========== ========== ========== ===========
Earnings per Common
Share Basic and Diluted
Before Extraordinary
Item................... $ 0.12 $ 0.08 $ 0.08 $ 0.04 $ 0.52
Extraordinary Item...... -- -- -- -- (0.09)
---------- ---------- ---------- ---------- -----------
Earnings per Common
Share Basic and
Diluted................ $ 0.12 $ 0.08 $ 0.08 $ 0.04 $ 0.43
========== ========== ========== ========== ===========
Weighted-Average Number
of Common Shares
Outstanding During the
Period Basic and
Diluted................ 6,000,000 6,000,000 6,000,000 6,000,000 6,444,444
========== ========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CREDITRUST CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Stock
Additional Held for
Common Common Paid in Preferred Preferred Benefit Retained
Shares Stock Capital Shares Stock Plans Earnings Total
--------- ------- ----------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Initial Public Offering
(unaudited)............ 2,000,000 20,000 27,241,289 -- -- -- -- 27,261,289
Value of common stock
Purchase Warrants
issued in connection
with subordinated debt
financing (unaudited).. -- -- 409,506 -- -- -- 409,506
Stock purchased for
benefit plans
(unaudited)............ (15,520) -- -- -- -- (268,690) -- (268,690)
Net Earnings
(unaudited)............ -- -- -- -- -- -- 2,773,149 2,773,149
--------- ------- ----------- --- --- --------- ---------- -----------
Balance at September 30,
1998 (unaudited)....... 7,984,480 $80,000 $27,703,619 -- -- $(268,690) $4,724,718 $32,239,647
========= ======= =========== === === ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CREDITRUST CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
---------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in
Cash and Cash
Equivalents
Cash Flows from
Operating Activities
Net earnings........... $ 733,623 $ 473,900 $ 456,374 $ 252,491 $ 2,773,149
Adjustments to
reconcile net earnings
to net cash and cash
equivalents provided
by operating
activities
Depreciation........... 72,189 84,463 208,643 132,952 261,558
Deferred tax expense... 321,247 249,462 470,670 154,131 1,774,588
Loss on abandoned
property.............. 28,880 -- -- -- --
Gain on sale........... -- -- -- -- (7,416,666)
Extraordinary loss..... -- -- -- -- 928,561
Changes in assets and
liabilities
(Increase) decrease in
accounts receivable.. (90,000) 76,750 (42,516) (56,542) (185,997)
(Increase) decrease in
other assets......... (9,380) 6,680 (98,152) (17,486) (431,422)
(Increase) decrease in
prepaid expenses..... (12,895) 14,402 (56,309) (118,028) (300,187)
(Decrease) increase in
accounts payable and
accrued expenses..... (109,319) 345,010 195,879 983,458 1,470,576
Increase (decrease) in
servicing remittances
due.................. -- -- 101,358 119,418 (101,358)
Increase (decrease) in
lease incentives..... -- 72,000 194,630 (9,000) 37,238
Increase (decrease) in
current income taxes
payable/receivable... 47,512 (115,452) (193,749) -- (41,878)
---------- ---------- ---------- ---------- -----------
Net Cash and Cash
Equivalents (Used in)
Provided by Operating
Activities............. 981,857 1,207,215 1,236,828 1,441,394 (1,231,838)
---------- ---------- ---------- ---------- -----------
Cash Flows from
Investing Activities
Collections applied to
principal (accretion)
on finance
receivables........... 669,770 831,505 2,111,394 1,742,466 (641,238)
Investment in
securitization........ -- -- -- -- (343,849)
Purchases of property
and equipment......... (75,051) (332,152) (122,668) (115,119) (146,861)
Acquisitions of finance
receivables........... (1,179,430) (5,583,130) (557,498) (459,450) (26,178,401)
Proceeds on
securitization........ -- -- -- -- 12,035,685
Proceeds from
portfolios sold, net.. -- -- -- -- 562,181
Deferred gain on sale
of finance
receivables........... -- 895,449 -- -- --
---------- ---------- ---------- ---------- -----------
Net Cash and Cash
Equivalents (Used in)
Provided by Investing
Activities............. (584,711) (4,188,328) 1,431,228 1,167,897 (14,712,483)
---------- ---------- ---------- ---------- -----------
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) (12,787) 3,697
Proceeds from
subordinated debt..... -- -- -- -- 4,529,614
Payments on
subordinated debt..... -- -- -- -- (4,529,614)
(Payments on) proceeds
from notes payable,
net................... (3,958) 3,795,585 (1,626,968) (1,165,120) (2,105,972)
Payments on capital
lease obligations..... (3,747) (23,748) (179,497) (103,105) (224,139)
Proceeds from issuance
of common stock....... -- -- -- -- 27,261,289
Proceeds from issuance
of warrants........... -- -- -- -- 409,506
Common stock purchased
for benefit plans..... -- -- -- -- (268,690)
Deferred costs......... -- -- (534,700) (668,988) (26,421)
---------- ---------- ---------- ---------- -----------
Net Cash and Cash
Equivalents (Used in)
Provided by Financing
Activities............. (138,007) 2,908,514 (2,374,115) (1,950,000) 25,049,270
---------- ---------- ---------- ---------- -----------
Net Increase (Decrease)
in Cash and Cash
Equivalents............ 259,139 (72,599) 293,941 659,291 9,104,949
---------- ---------- ---------- ---------- -----------
Cash and Cash
Equivalents at
Beginning of Period.... 289,095 548,234 475,635 475,635 769,576
---------- ---------- ---------- ---------- -----------
Cash and Cash
Equivalents at End of
Period................. $ 548,234 $ 475,635 $ 769,576 $1,134,926 $ 9,874,525
========== ========== ========== ========== ===========
</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"), was incorporated in Maryland on
October 17, 1991. The Company purchases, collects and manages defaulted
consumer receivables from credit grantors, including banks, finance companies,
retail merchants and other service providers. The Company's customers are
located throughout the United States. Purchases of receivables are financed by
cash from operations, capital raised through stock offerings, loans from third
parties and securitizations.
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 September 30, 1998,
and for the nine months ended September 30, 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
amount 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 may change based on actual results and other factors. The change in
assessment could be material.
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 in the static pools
is not
F-7
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 on securitized receivables under the terms of
an indenture and servicing agreement. The Company recognizes as a servicing fee
20% of collections in a securitization. In accordance with the terms of a
servicing agreement on a non-securitized portfolio from August 1997 through
June 1998, the Company recognized as a servicing fee a predetermined percentage
of collections on the related receivables.
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 records
its debt securities related to securitizations (see Note D) as available-for-
sale. Such securities are recorded at fair value, and unrealized holding gains
and losses, net of the related tax effect, are not reflected in earnings but
are recorded as a separate component of stockholders' equity until realized. A
decline in the value of an available-for-sale security below cost that is
deemed other than temporary is charged to earnings and results in the
establishment of a new cost basis for the security.
Deferred Costs
The Company accounted for expenditures, principally legal and accounting
fees in connection with its preparation to sell stock in its initial public
offering, as capitalized and deferred until the offering occurred. The costs
were netted against the capital raised in the offering.
The Company accounted for legal and professional fees in connection with its
initial securitization efforts as capitalized and deferred until it closed the
initial securitization. When a securitization is accounted for as a sale under
SFAS No. 125, all transaction costs, including legal and accounting fees, are
expensed when the gain on sale is recognized.
The Company capitalized legal and accounting costs incurred in connection
with its placement of senior subordinated notes in 1998. These costs were
allocated between the financing costs of the notes and the paid in
F-8
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
capital of the warrants. The debt financing costs were amortized until the
notes were paid off with the proceeds of the initial public offering at which
time the balance of deferred costs were expensed and included in the
extraordinary loss.
The Company capitalized legal and accounting costs incurred in connection
with its establishment of the warehouse and revolving line of credit facilities
in 1998. These costs will be amortized over the terms of these facilities.
Due to Participants/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 arrangements 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 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 income for the
period in that
F-9
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. For the years
ended December 31, 1995, 1996, and 1997 and the nine months ended September 30,
1998, the Company had no material 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 stockholders' equity and
per share amounts, give retroactive effect to the stock split.
Initial Public Offering
On July 29, 1998, the Company commenced an initial public offering of 2.0
million shares of common stock at an initial public offering price of $15.50
per share. The Company's sole stockholder also sold 500,000 shares of common
stock in the offering, which closed on August 3, 1998, and an additional
308,711 shares pursuant to an underwriters' over-allotment option which was
subsequently exercised and closed on September 2, 1998. After payment of
underwriting discounts and commissions and estimated other offering expenses,
the Company received net proceeds of $27.3 million. A portion of these proceeds
was used to repay the subordinated notes; of the remaining proceeds, a portion
was used to make additional portfolio purchases and the balance was added to
working capital.
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 statement of earnings
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS calculation. At December 31, 1997, the
Company had no common stock equivalents. As of September 30, 1998, the Company
had issued options to purchase 364,516 shares of common stock and warrants to
purchase 450,000 shares of common stock. These common stock equivalents did not
result in a difference between basic and diluted earnings per share.
F-10
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE C--FINANCE RECEIVABLES
The Company purchases defaulted consumer receivables at a discount from the
actual contractual receivable balance. The following summarizes the change in
finance receivables as of:
<TABLE>
<CAPTION>
Year Ended
December 31, Nine Months Ended
---------------------------------------- September 30,
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
Purchases of finance
receivables.......... 1,179,430 5,583,130 557,498 26,178,401
Collections applied to
principal on finance
receivables.......... (669,770) (831,505) (2,111,394) 641,238
Securitization of
finance receivables.. -- -- -- (11,314,974)
------------ ------------ ------------ ------------
Balance, at end of
period................. $ 1,852,110 $ 6,603,735 $ 5,049,839 $ 20,554,504
------------ ------------ ------------ ------------
Unrecorded discount
(unaudited)............ $175,511,601 $426,121,742 $403,307,742 $817,457,708
============ ============ ============ ============
</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 September 30, 1997 and
1998, no provision for loss has been recorded.
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 earnings for 1997 by approximately $700,000.
NOTE D--INVESTMENT IN SECURITIZATION
Residual investment in securitization at September 30, 1998 represent
$4,654,000 attributable to the Company's initial securitization, (Series 1998-
1) that closed in June 1998 (see Note Q). The residual investment accrues
interest at 12% per annum.
NOTE E--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 September 30,
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 and Cash Equivalents
The carrying amount approximates fair value.
F-11
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accounts Receivable
Accounts receivable at December 31, 1996 and 1997 and September 30, 1998
includes 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 September 30, 1998.
Investment in Securitizations
Investment in securitizations is recorded at estimated fair value based on
discounted future cash flow.
Due to Participants
Due to participants represents loans to the Company from selling the rights
to a portion of the future income on certain finance receivable portfolios. The
Company accounts for these transactions as loans, imputing the interest rate
using the amounts financed and the projected future payments on the debt. At
December 31, 1995, 1996, and 1997, the carrying amount of due to participants
approximates fair value.
Notes Payable
Quoted market prices for the same or similar issues or the current rate
offered to the Company for debt of the same remaining maturities are used to
estimate the fair value of the Company's notes payable. At December 31, 1996
and 1997, the carrying amount of the notes payable approximates fair value.
NOTE F--PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
December 31,
------------------------------ September 30,
1995 1996 1997 1998
-------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Computer equipment........... $142,552 $198,710 $ 845,215 $1,988,982
Furniture and fixtures....... 152,565 410,240 855,631 882,905
Leasehold improvements....... -- 13,145 95,109 108,165
-------- -------- ---------- ----------
295,117 622,095 1,795,955 2,979,552
Less accumulated depreciation
and amortization............ (73,805) (153,094) (361,737) (623,295)
-------- -------- ---------- ----------
$221,312 $469,001 $1,434,218 $2,356,257
======== ======== ========== ==========
</TABLE>
F-12
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE G--DEFERRED COSTS
The Company has deferred certain costs related to a securitization, initial
public offering, senior subordinated notes placement efforts and establishment
of credit facilities. Deferred costs consist of the following at:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Securitization................................... $331,595 $ --
Initial public offering.......................... 203,105 --
Senior subordinated notes........................ -- --
Credit facilities................................ -- 561,121
-------- --------
$534,700 $561,121
======== ========
</TABLE>
NOTE H--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 arrangements 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 September 30, 1998, the balance due to
participants was $947,454, $84,131, $51,181 and $54,878, respectively, which
represents the fair value of estimated future payments to participants.
Interest expense due to participants was $269,634, $204,448, $20,574, $15,068
and $3,697 for the years ended December 31, 1995, 1996 and 1997 and the nine
months ended September 30, 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 I--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at:
<TABLE>
<CAPTION>
December 31,
-------------------------- September 30,
1995 1996 1997 1998
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Accounts payable.................. $ 43,504 $216,215 $238,684 $ 687,200
Accrued other liabilities......... 22,908 68,425 105,350 789,262
Accrued salaries, taxes and fringe
benefits......................... 45,764 172,546 309,031 647,179
-------- -------- -------- ----------
$112,176 $457,186 $653,065 $2,132,641
======== ======== ======== ==========
</TABLE>
NOTE J--NOTES PAYABLE
Bank Line of Credit
On September 23, 1996, the Company entered into a credit facility with a
commercial bank to provide acquisition financing for finance receivables. As of
December 31, 1996 and 1997, the Company had borrowed $3,792,842, and
$2,105,972, respectively, net of principal payments made, pursuant to this
facility. Each advance was repayable over 24 equal monthly installments. All
the advances had final installments due between
F-13
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
October 1998 and March 1999. Interest was 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.
The Company had pledged all its receivables, property and intangible assets to
secure the facility which was guaranteed by the Company's President. The
facility contains certain covenants, the most restrictive of which stipulated a
minimum level of net worth, cash flow to current funded debt and a debt service
coverage ratio. The Company had complied with all covenants as of December 31,
1996 and 1997. As of December 31, 1996, 1997 and September 30, 1997 and 1998,
interest expense associated with this facility totaled $59,827, $296,189,
$239,856 and $68,472, respectively. As of December 31, 1996 there was $207,158
available to the Company under this agreement. There was no credit available
under this agreement at December 31, 1997. The facility was retired in June
1998 upon the closing of the initial securitization.
As of December 31, 1997, required principal payments were as follows:
<TABLE>
<S> <C>
1998................. 2,011,838
1999................. 94,134
---------
2,105,972
=========
</TABLE>
Warehouse Facility
In September 1998 the Company established a $30 million revolving warehouse
facility for use in acquiring finance receivables. The warehouse facility
carries a floating interest rate of 65 basis points over LIBOR with the
revolving period expiring in October 2000. The final due date of all payments
due under the facility is October 2005. The warehouse facility is secured by a
trust estate, primarily consisting of specific consumer receivables to be
acquired by the Company and held by a newly formed special purpose financing
subsidiary. Generally, the warehouse facility provides 95% of the acquisition
costs of receivables purchased with the Company funding the remaining 5% and a
one time $900,000 liquidity reserve requirement. As of September 30, 1998 there
were no amounts borrowed under the facility. During November 1998, the Company
borrowed approximately $15.5 million under this facility, which was repaid in
December 1998.
Revolving Line of Credit
In October 1998, the Company entered into a $20 million revolving line of
credit with a commercial lender to provide receivables financing. The facility
has a term of three years during which time the Company may borrow and repay
funds to purchase receivables at 80% of acquisition cost. Interest is based on
prime plus 0.5% or LIBOR plus 2.5% at the option of the Company on each
advance. The facility is secured by any receivables purchased under the
facility and substantially all of the Company's other assets. The facility
contains certain covenants, the most restrictive of which is a minimum level of
net worth. During the fourth quarter of 1998, the Company borrowed
approximately $9.2 million under this facility, of which $2.4 million was
subsequently repaid.
NOTE K--SUBORDINATED NOTES AND EXTRAORDINARY LOSS
In April 1998, the Company sold $5.0 million aggregate principal amount of
subordinated notes, 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 exercise price is $12.00 per share for
396,000 of the warrants and $15.50 for 54,000 of the warrants. Upon the closing
of the initial public offering in August 1998, the notes plus accrued interest
at 10% per annum were repaid.
The Company recorded the fair value of the subordinated notes at $4.5
million and recorded as paid-in capital the remaining consideration of $410,000
net of offering expenses attributable to the fair value of the
F-14
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
warrants. The effective interest rate on the subordinated notes based on this
allocation is 12.8%. The Company repaid the subordinated notes at $5.0 million
plus accrued interest. This resulted in the Company recording an extraordinary
charge for the early repayment of indebtedness which, including debt issuance
costs, resulted in an extraordinary charge in August 1998 of $566,000 after-
tax, net of amortization of financing costs and original issue discount
expensed between April 2, 1998 and the date of pay-off.
NOTE L--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 $1,784,939 as of December 31, 1995, 1996 and 1997 and September
30, 1998, respectively. Interest rates range from 7% to 12.7%; and interest
expense was $739, $3,629, $60,647, $36,189 and $87,067 in 1995, 1996 and 1997
and the nine months ended September 30, 1997 and 1998, respectively.
As of 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 M--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 primarily result from the
use of the cost recovery method of accounting for finance receivables for
income tax purposes versus the effective interest rate method for financial
reporting purposes.
The provision for income taxes consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Current expense (refund)
Federal..................................... $115,811 $ 52,794 $(161,050)
State....................................... 25,701 13,443 (39,113)
-------- -------- ---------
141,512 66,237 (200,163)
Deferred
Federal..................................... 263,020 204,246 346,519
State....................................... 58,227 45,216 78,919
-------- -------- ---------
321,247 249,462 425,438
-------- -------- ---------
Total......................................... $462,759 $315,699 $ 225,275
======== ======== =========
</TABLE>
F-15
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
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 1997 adjustments to the deferred tax
liability. The 1997 adjustment to the deferred tax liability is due to the
Company's current year analysis of its 1996 and prior tax returns compared to
the respective deferred tax liabilities. The Company's analysis resulted in
1996 and prior differences which were adjusted through the 1997 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 N--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 repurchased 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
F-16
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
issuer. Consequently, in the first quarter of 1998, the Company recorded a gain
on sale net of taxes on the resale and recognition of previously deferred
income as follows:
<TABLE>
<S> <C>
Proceeds from resale.......................................... $ 800,000
Deferred income recognized.................................... 895,449
Cost of portfolio............................................. (1,037,819)
-----------
Gain on sale.................................................. 657,630
Deferred taxes................................................ (253,976)
-----------
Gain on sale after taxes...................................... $ 403,654
===========
</TABLE>
NOTE O--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 a 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 nine months ended
September 30, 1997 and 1998, net of the offset amortized, was $140,027,
$210,040, $159,247 and $191,143, respectively. In October 1998, the Company
amended this lease to expand the leased space in return for additional monthly
rent.
In September 1997, the Company entered into an agreement to lease additional
office space for its operations center to accommodate future expansion. The
lease required no payments for the first six months. The Company recorded the
free rent period as a lease incentive and is amortizing it straight-line over
the term of the lease. The Company issued a $250,000 letter of credit as a
deposit on the lease. This letter of credit was cancelled under the lease terms
in September 1998. Rent expense for this lease for 1997 was $331,932 including
$204,541 of accrued lease incentive. Rent expense for this lease for the nine
months ended September 30, 1997 and 1998 was $232,438 and $304,625,
respectively, including $8,799 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.
F-17
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Forward Flow Agreements
Beginning in September 1998, the Company entered into multiple forward flow
agreements with certain financial institutions which obligate the Company to
purchase, on a monthly basis, portfolios of charged-off receivables meeting
certain criteria. The monthly obligations, in aggregate, range from a maximum
of approximately $13.0 million at January 1999 to a minimum of approximately
$1.0 million at December 2000.
NOTE P--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 received servicing fees of
85% of net collections through February 1998, followed by 60% of collections
until the bank received a required amount under the contract. The Company
securitized the portfolio in June 1998 and will not receive servicing fees on
the same terms (see Note Q).
NOTE Q--GAIN ON SALE AND SECURITIZATIONS
In June 1998, a special-purpose finance company formed by the Company
issued, through a trust created under an indenture and servicing agreement with
an independent trustee, $14.5 million principal amount of 6.43% Creditrust
Receivables--Backed Notes, Series 1998-1. The securitization notes are secured
by a trust estate, consisting of, among other things, consumer receivables
previously owned by the Company with a carrying value as of June 1998 of
approximately $4.8 million and all of the serviced receivables. The company
purchased the serviced receivables included in the securitization for $6.5
million. After payment of the purchase price of the serviced receivables,
retirement of the Company's credit facility (see Note J), and payment of
transaction costs, the Company received cash of $5.8 million and recognized
gain on sale of $6.0 million and recorded a residual investment in
securitization of $4.6 million. 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 and has a "AA" rating from Standard &
Poor's Corporation.
NOTE R--GAIN ON SALE ON FINANCE RECEIVABLES
The Company sold miscellaneous finance receivables in July 1998 for $800,000
to a major credit card issuer. The finance receivables sold were fully
amortized, resulting in a gain on sale of $800,000.
NOTE S--RELATED PARTY TRANSACTIONS
The Company remitted payments on loans due participants (including interest)
of approximately $416,000, $743,000, $58,000, $45,000 and $0 to related parties
during the years ended December 31, 1995, 1996 and 1997 and the nine months
ended September 30, 1997 and 1998, respectively.
Additionally, included in accounts receivable are amounts due from non-
stockholder employees of $13,250, $55,766, $69,792 and $15,000 as of December
31, 1996, 1997, September 30, 1997 and 1998, respectively.
The Company also remitted a payment of $66,329 to a non-stockholder related
party as a finder's fee in connection with the servicing contract during the
year ended December 31, 1997.
F-18
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE T--BENEFIT PLANS
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 nine months
ended September 30, 1997 and 1998, the Company's contribution was $5,203,
$4,379, $3,168, $2,376 and $2,010, respectively.
Employee Stock Purchase Plan
In conjunction with the initial public offering, the Company 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 can 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.
Stock Incentive Plan
In conjunction with the initial public offering, the Company reserved a
total of 800,000 shares of common stock for issuance pursuant to the 1998
Creditrust Stock Incentive Plan. The 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. Options to purchase 364,516 shares of
common stock at an exercise price of $15.50 per share were issued to certain
executive employees and a director upon the closing of the initial public
offering in August 1998.
Directors Compensation Plan
In August 1998, pursuant to the directors compensation plan, the Company
purchased 2,580 shares of common stock in the open market for its outside
directors for $44,000.
NOTE U--SUPPLEMENTAL CASH FLOWS INFORMATION
Supplemental Disclosures of Cash Flow Information
The Company paid the following amounts for interest and income taxes during
the period ended:
<TABLE>
<CAPTION>
December 31, September 30,
-------------------------- -----------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest........................ $269,634 $287,530 $377,410 $318,325 $382,571
-------- -------- -------- -------- --------
Income taxes.................... $ 94,000 $181,681 $ 8,000 $ -- $ --
-------- -------- -------- -------- --------
</TABLE>
F-19
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 period ended:
<TABLE>
<CAPTION>
December 31, September 30,
----------------------- -------------------
1995 1996 1997 1997 1998
------- ---- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Equipment and furniture pur-
chases....................... $64,081 $-- $1,051,193 $885,678 $1,036,736
------- ---- ---------- -------- ----------
The Company recorded an investment in a securitization with a carrying value
as follows for the period ended:
<CAPTION>
December 31, September 30,
----------------------- -------------------
1995 1996 1997 1997 1998
------- ---- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Investment in Securitization.. -- -- -- -- $4,309,764
------- ---- ---------- -------- ----------
</TABLE>
NOTE V--SUBSEQUENT EVENTS (UNAUDITED)
Securitization
On December 29, 1998, the Company closed its second securitization and
through a special-purpose, wholly-owned subsidiary issued $27,500,000 in bonds
backed by certain finance receivables. The transaction qualifies under SFAS 125
as a sale and the Company recorded approximately $11.0 million gain on sale in
December 1998, derecognized the receivables with a carrying value of
approximately $28.6 million, and recorded a residual investment in
securitization of approximately $14.4 million.
Facility Lease
In January 1999 the Company entered into a facility lease agreement for a
satellite operations center. The lease begins in February 1999 and expires in
January 2003. The Company has an option to terminate the lease after twenty-
four months, or anytime thereafter, with three months prior notice.
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 Shares
Common Stock
[Company Logo]
----------------
PROSPECTUS
, 1999
----------------
NationsBanc Montgomery Securities LLC
Ferris, Baker Watts
Incorporated
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth estimated expenses in connection with the
offering described in this Registration Statement, all of which are to be borne
by the Registrant. All amounts are estimates, except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 22,242
NASD filing fee.................................................... 8,501
Nasdaq National Market listing fee................................. 17,500
Printing and engraving expenses.................................... 100,000
Legal fees and expenses............................................ 150,000
Accounting fees and expenses....................................... 125,000
Transfer agent and registrar's fees................................ 5,000
Miscellaneous expenses............................................. 21,757
--------
Total............................................................ $450,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers.
The Charter of the Company provides that, to the fullest extent permitted by
the Maryland General Corporation Law (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 Charter further mandates that the Company shall advance
expenses to its directors and officers to the full extent permitted by the
MGCL. The Charter also permits 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 Company's Charter provides that, to the fullest extent that limitations
on the liability of directors. And officers are permitted by the MGCL, no
director or officer of the Company shall have any liability to the Company or
its stockholders for monetary damages. The MGCL provides that a corporation's
charter may include a provision which restricts or limits the liability of its
directors or officers to the corporation or its stockholders for money damages
except: (i) to the extent that it is proved that the person actually received
an improper benefit or profit in money, property or services, for the amount of
the benefit or profit in money, property or services actually received, or (ii)
to the extent that a judgment or other final adjudication adverse to the person
is entered in a proceeding based on a finding in the proceeding that the
person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. This provision does not limit the ability of the Company or its
stockholders to obtain other relief, such as an injunction or recission.
The 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.
The following information relates to unregistered securities issued or sold
by the Company within the last three years:
On April 2, 1998, the Registrant issued $5,000,000 principal amount of
Senior Subordinated Notes, Series 1998 and Warrants to purchase 450,000 shares
of common stock in a transaction exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Act"), pursuant to Rule 506 under
the Act. The
II-1
<PAGE>
Placement Agents were Ferris, Baker Watts, Incorporated and Boenning &
Scattergood, Inc. The net proceeds were used to purchase defaulted consumer
receivables and for general corporate purposes. Neither the Registrant nor any
person acting on its behalf offered or sold the Senior Subordinated Notes or
Warrants by any form of general solicitation or general advertising. The
Registrant reasonably believes that the Senior Subordinated Notes and Warrants
were sold only to accredited investors, and the Registrant provided all
material information available to the investors. Further, the Registrant
exercised reasonable care to assure that the investors were not underwriters,
as such term is defined in Section 2 (11) of the Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 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.*
Senior Subordinated Note Series and Common Stock Warrant Purchase
4.4 Agreement.*
4.5 Registration Rights Agreement.*
5 Opinion of Piper & Marbury L.L.P.
10.1 Creditrust 1998 Stock Incentive Plan.*
10.2 Creditrust 1998 Employee Stock Purchase Plan.*
10.3 Employment Agreement between the Company and Jefferson B. Moore.*
10.4 Employment Agreement between the Company and Richard J. Palmer.*
10.5 Employment Agreement between the Company and John D. Frey.
10.6 Employment Agreement between the Company and John L. Davis.*
Agreement dated March 13, 1997 by and between Crystal Hill Advisors
10.7 and the Company.*
10.8 Servicing Agreement, dated August 6, 1997, by and between Creditrust
Corporation and Heartland Bank.*
10.9 Loan and Security Agreement, dated September 23, 1996, by and between
Oxford Capital Corporation and Signet Bank.*
10.10 Lease Agreement, dated January 24, 1996, by and between BRIT Limited
Partnership and Oxford Capital Corporation.*
10.11 Lease Agreement, dated January 22, 1997, by and between A&E Partners
and Creditrust Corporation.*
10.12 First Amendment to Lease, dated February 27, 1997, by and between A&E
Partners and Creditrust Corporation.*
10.13 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.*
Limited Liability Company Agreement of Creditrust SPV2, LLC, dated
10.14 June 19, 1998.*
10.15 Indenture and Servicing Agreement, dated as of September 1, 1998, by
and among Creditrust Funding I LLC, Norwest Bank Minnesota, National
Association, Creditrust Corporation and Asset Guaranty Insurance
Company.**
10.16 Credit Agreement, dated as of October 28, 1998, between Creditrust
Corporation, the Lenders party thereto and Sunrock Capital Corp.
10.17 Indenture and Servicing Agreement, dated as of December 29, 1998, by
and among Creditrust SPV98-2, LLC, Norwest Bank Minnesota, National
Association, Creditrust Corporation and Asset Guaranty Insurance
Company.
10.18 Limited Liability Company Agreement of Creditrust SPV98-2, LLC, dated
as of December 29, 1998.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No Description
------- -----------
<C> <S>
21.1 List of Subsidiaries.
23.1 Consent of Grant Thornton LLP.
Consent of Piper & Marbury L.L.P. (included in the opinion filed as
23.2 Exhibit 5).
24 Powers of Attorney.
</TABLE>
- --------
* Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Reg. No. 333-50103) and incorporated herein by reference.
** Previously filed as an exhibit to the Company's Quarterly Report on Form 10-
Q for the quarterly period ended September 30, 1998 and incorporated herein
by reference.
(b) Financial Statement Schedules:
None.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions of its Charter
or 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 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 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Baltimore, State of
Maryland, on January 20, 1999.
Creditrust Corporation
By: /s/ Joseph K. Rensin
-------------------------------
Joseph K. Rensin Chairman of the
Board and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on this 20th day of January, 1999.
Signature Title Date
/s/ Joseph K. Rensin Chairman of the January 20,
- ------------------------------------- Board and Chief 1999
Joseph K. Rensin Executive Officer
(Principal
Executive Officer)
/s/ Richard J. Palmer Vice President, January 20,
- ------------------------------------- Chief Financial 1999
Richard J. Palmer Officer and
Treasurer
(Principal
Financial and
Accounting Officer)
* Director January 20,
- ------------------------------------- 1999
Frederick W. Glassberg
* Director January 20,
- ------------------------------------- 1999
John G. Moran
* Director January 20,
- ------------------------------------- 1999
Michael S. Witlin
* By: /s/ Joseph K. Rensin
---------------------------------
Joseph K. Rensin
Attorney in fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No Description Page
------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1 Charter of the Company.*
3.2 By-Laws of the Company.*
4.1 Form of stock certificate.*
4.2 Form of Senior Subordinated Note, Series 1998.*
4.3 Form of Common Stock Purchase Warrant.*
4.4 Senior Subordinated Note Series and Common Stock Warrant
Purchase Agreement.*
4.5 Registration Rights Agreement.*
5 Opinion of Piper & Marbury L.L.P.
10.1 Creditrust 1998 Stock Incentive Plan.*
10.2 Creditrust 1998 Employee Stock Purchase Plan.*
10.3 Employment Agreement between the Company and Jefferson B.
Moore.*
10.4 Employment Agreement between the Company and Richard J.
Palmer.*
10.5 Employment Agreement between the Company and John D. Frey.
10.6 Employment Agreement between the Company and John L. Davis.*
10.7 Agreement dated March 13, 1997 by and between Crystal Hill
Advisors and the Company.*
10.8 Servicing Agreement, dated August 6, 1997, by and between
Creditrust Corporation and Heartland Bank.*
10.9 Loan and Security Agreement, dated September 23, 1996, by and
between Oxford Capital Corporation and Signet Bank.*
10.10 Lease Agreement, dated January 24, 1996, by and between BRIT
Limited Partnership and Oxford Capital Corporation.*
10.11 Lease Agreement, dated January 22, 1997, by and between A&E
Partners and Creditrust Corporation.*
10.12 First Amendment to Lease, dated February 27, 1997, by and
between A&E Partners and Creditrust Corporation.*
10.13 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.*
10.14 Limited Liability Company Agreement of Creditrust SPV2, LLC,
dated June 19, 1998.*
10.15 Indenture and Servicing Agreement, dated as of September 1,
1998, by and among Creditrust Funding I LLC, Norwest Bank
Minnesota, National Association, Creditrust Corporation and
Asset Guaranty Insurance Company.**
10.16 Credit Agreement, dated as of October 28, 1998, between
Creditrust Corporation, the Lenders party thereto and Sunrock
Capital Corp.
10.17 Indenture and Servicing Agreement, dated as of December 29,
1998, by and among Creditrust SPV98-2, LLC, Norwest Bank
Minnesota, National Association, Creditrust Corporation and
Asset Guaranty Insurance Company.
10.18 Limited Liability Company Agreement of Creditrust SPV98-2, LLC,
dated as of December 29, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No Description Page
------- ----------- ----
<C> <S> <C>
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>
- --------
* Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Reg. No. 333-50103) and incorporated herein by reference.
** Previously filed as an exhibit to the Company's Quarterly Report on Form 10-
Q for the quarterly period ended September 30, 1998 and incorporated herein
by reference.
<PAGE>
Exhibit 1.1
Draft of , 1999
------
[Execution Copy]
[Conformed Copy]
[3,000,000] Shares
Creditrust Corporation
Common Stock
Underwriting Agreement
dated [ ], 1999
<PAGE>
TABLE OF CONTENTS
Section 1. Representations and Warranties....................................2
A. Representations and Warranties of the Company....................2
(a) Compliance with Registration Requirements...................2
(b) Offering Materials Furnished to Underwriters................2
(c) Distribution of Offering Material by the Company............3
(d) The Underwriting Agreement..................................3
(e) Authorization of the Common Shares..........................3
(f) No Applicable Registration or Other Similar Rights..........3
(g) No Material Adverse Change..................................3
(h) Independent Accountants.....................................3
(i) Preparation of the Financial Statements.....................3
(j) Incorporation and Good Standing of the Company
and its Subsidiaries........................................4
(k) Capitalization and Other Capital Stock Matters..............4
(l) Stock Exchange Listing......................................4
(m) Non-Contravention of Existing Instruments; No
Further Authorizations or Approvals Required................5
(n) No Material Actions or Proceedings..........................5
(o) Intellectual Property Rights................................6
(p) All Necessary Permits, etc..................................6
(q) Title to Properties.........................................6
(r) Tax Law Compliance..........................................6
(s) Company Not an Investment Company...........................6
(t) Insurance...................................................7
(u) No Price Stabilization or Manipulation......................7
(v) Related Party Transactions..................................7
(w) Compliance with Law.........................................7
(x) Licenses....................................................7
(y) No Unlawful Contributions or Other Payments.................8
(z) Company's Accounting System.................................8
(aa) Compliance with Environmental Laws.........................8
(bb) ERISA Compliance...........................................9
(cc) Year 2000..................................................9
B. Representations and Warranties of the Selling Shareholder......10
(a) The Underwriting Agreement.................................10
(b) The Custody Agreement and Power of Attorney................10
(c) Title to Common Shares to be Sold; All Authorizations
Obtained...................................................10
(d) Delivery of the Common Shares to be Sold...................10
(e) Non-Contravention; No Further Authorizations or
Approvals Required.........................................10
(f) No Registration or Other Similar Rights....................11
(g) No Further Consents, etc...................................11
(h) Disclosure Made by Such Selling Shareholder in the
Prospectus.................................................11
i
<PAGE>
(i) No Price Stabilization or Manipulation.....................11
(j) Confirmation of Company Representations and Warranties.....11
Section 2. Purchase, Sale and Delivery of the Common Shares.................11
The Firm Common Shares.........................................12
The First Closing Date.........................................12
The Optional Common Shares; the Second Closing Date............12
Public Offering of the Common Shares...........................13
Payment for the Common Shares..................................13
Delivery of the Common Shares..................................13
Delivery of Prospectus to the Underwriters.....................14
Section 3. Additional Covenants.............................................14
A. Covenants of the Company........................................14
(a) Underwriters' Review of Proposed Amendments
and Supplements............................................14
(b) Securities Act Compliance..................................14
(c) Amendments and Supplements to the Prospectus and
Other Securities Act Matters...............................14
(d) Copies of any Amendments and Supplements to the Prospectus.15
(e) Blue Sky Compliance........................................15
(f) Use of Proceeds............................................15
(g) Transfer Agent.............................................15
(h) Earnings Statement.........................................15
(i) Periodic Reporting Obligations.............................15
(j) Agreement Not To Offer or Sell Additional Securities.......15
(k) Future Reports to the Underwriters.........................16
B. Covenants of the Selling Shareholder............................16
(a) Agreement Not to Offer or Sell Additional Securities.......16
(b) Delivery of Forms W-8 and W-9..............................16
Section 4. Payment of Expenses..............................................17
Section 5. Conditions of the Obligations of the Underwriters................17
(a) Accountants' Comfort Letter................................18
(b) Compliance with Registration Requirements; No Stop
Order; No Objection from NASD..............................18
(c) No Material Adverse Change or Ratings Agency Change........18
(d) Opinion of Counsel for the Company.........................19
(e) Opinion of Counsel for the Underwriters....................19
(f) Officers' Certificate......................................19
(g) Bring-down Comfort Letter..................................19
(h) Opinion of Counsel for the Selling Shareholder.............19
(i) Selling Shareholder's Certificate..........................20
(j) Selling Shareholder's Documents............................20
ii
<PAGE>
(k) Lock-Up Agreement from Certain Securityholders of the
Company Other Than the Selling Shareholder.................20
(l) Additional Documents.......................................20
Section 6. Reimbursement of Underwriters' Expenses..........................20
Section 7. Effectiveness of this Agreement..................................21
Section 8. Indemnification..................................................21
(a) Indemnification of the Underwriters........................21
(b) Indemnification of the Company, its Directors
and Officers...............................................22
(c) Notifications and Other Indemnification Procedures.........23
(d) Settlements................................................24
Section 9. Contribution.....................................................24
Section 10. Default of One or More of the Several Underwriters..............25
Section 11. Termination of this Agreement...................................26
Section 12. Representations and Indemnities to Survive Delivery.............27
Section 13. Notices.........................................................27
Section 14. Successors......................................................28
Section 15. Partial Unenforceability........................................28
Section 16. Governing Law Provisions........................................28
Section 17. Failure of the Selling Shareholder to Sell and Deliver Common
Shares..........................................................29
Section 18. General Provisions..............................................29
iii
<PAGE>
Underwriting Agreement
[Date], 1999
NATIONSBANC MONTGOMERY SECURITIES LLC
FERRIS, BAKER WATTS, INCORPORATED
As Underwriters
c/o NATIONSBANC MONTGOMERY SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
Introductory. Creditrust Corporation, a Maryland corporation (the
"Company), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of [2,400,000] shares of its Common
- ----------
Stock, par value $0.01 per share (the "Common Stock"); and the shareholder of
the Company named in Schedule B (the "Selling Shareholder") proposes to sell to
----------
the Underwriters an aggregate of [600,000] shares of Common Stock. The
[2,400,000] shares of Common Stock to be sold by the Company and the [600,000]
shares of Common Stock to be sold by the Selling Shareholder are collectively
called the "Firm Common Shares". In addition, the Selling Shareholder has
granted to the Underwriters an option to purchase up to an additional [450,000]
shares (the "Optional Common Shares") of Common Stock, as provided in Section 2.
The Firm Common Shares and, if and to the extent such option is exercised, the
Optional Common Shares are collectively called the "Common Shares".
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-l (File No.
333-[ ]), which contains a form of prospectus to be used in connection with the
public offering and sale of the Common Shares. Such registration statement, as
amended, including the financial statements and exhibits thereto, in the form in
which it was declared effective by the Commission under the Securities Act of
1933 and the rules and regulations promulgated thereunder (collectively, the
"Securities Act"), including any information deemed to be a part thereof at the
time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities
Act, is called the "Registration Statement". Any registration statement filed by
the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule
462(b) Registration Statement", and from and after the date and time of filing
of the Rule 462(b) Registration Statement the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. Such prospectus, in the
form first used by the Underwriters to confirm sales of the Common Shares, is
called the "Prospectus"; provided, however, if the Company has, with the consent
of NMS, elected to rely upon Rule 434 under the Securities Act, the term
"Prospectus" shall mean the Company's prospectus subject to completion (each, a
"preliminary prospectus") dated [ ], 1999 (such preliminary prospectus is called
the "Rule 434 preliminary prospectus"), together with the applicable term sheet
(the "Term Sheet") prepared and filed by the Company with the Commission under
Rules 434 and 424(b) under the Securities Act and all references in this
Agreement to the date of the Prospectus shall mean the date of the Term Sheet.
All references in this Agreement to the Registration Statement, the Rule 462(b)
Registration Statement, a preliminary prospectus, the Prospectus or the Term
Sheet, or any
1
<PAGE>
amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR").
The Company and the Selling Shareholder hereby confirm their respective
agreements with the Underwriters as follows:
Section 1. Representations and Warranties
A. Representations and Warranties of the Company. The Company hereby
represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has complied
to the Commission's satisfaction with all requests of the Commission for
additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been instituted
or are pending or, to the best knowledge of the Company, are contemplated or
threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Common Shares.
Each of the Registration Statement, any Rule 462(b) Registration Statement and
any post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus, as
amended or supplemented, as of its date and at all subsequent times, did not and
will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Underwriters expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Underwriters [ ] complete manually signed copies of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Underwriters have
reasonably requested.
2
<PAGE>
(c) Distribution of Offering Material by the Company. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Common Shares, any offering material in connection with the
offering and sale of the Common Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized for
issuance and sale pursuant to this Agreement and, when issued and delivered by
the Company pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is given
in the Prospectus: (i) there has been no material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings, business,
operations or prospects, whether or not arising from transactions in the
ordinary course of business, of the Company and its subsidiaries, considered as
one entity (any such change is called a "Material Adverse Change"); (ii) the
Company and its subsidiaries, considered as one entity, have not incurred any
material liability or obligation, indirect, direct or contingent, not in the
ordinary course of business nor entered into any material transaction or
agreement not in the ordinary course of business; and (iii) there has been no
dividend or distribution of any kind declared, paid or made by the Company or,
except for dividends paid to the Company or other subsidiaries, any of its
subsidiaries on any class of capital stock or repurchase or redemption by the
Company or any of its subsidiaries of any class of capital stock.
(h) Independent Accountants. Grant Thornton LLP, who have expressed
their opinion with respect to the financial statements (which term as used in
this Agreement includes the related notes thereto) filed with the Commission as
a part of the Registration Statement and included in the Prospectus, are
independent public or certified public accountants as required by the Securities
Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act").
(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly the consolidated financial position of the
Company and its subsidiaries as of and at the dates indicated and the results of
their operations and cash flows for the periods specified. Such
3
<PAGE>
financial statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved, except as may be expressly stated in the related notes thereto. No
other financial statements or supporting schedules are required to be included
in the Registration Statement. The financial data set forth in the Prospectus
under the captions "Prospectus Summary--Summary Selected Financial Data",
"Selected Financial Data" and "Capitalization" fairly present the information
set forth therein on a basis consistent with that of the audited financial
statements contained in the Registration Statement.
(j) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation and has corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Prospectus and, in the case of the Company, to enter into
and perform its obligations under this Agreement. Each of the Company and each
subsidiary is duly qualified as a foreign corporation to transact business and
is in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions where the failure to so
qualify or to be in good standing would not, individually or in the aggregate,
result in a Material Adverse Change. All of the issued and outstanding capital
stock of each subsidiary has been duly authorized and validly issued, is fully
paid and nonassessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance or claim. The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than the
subsidiaries listed in Exhibit 21.1 to the Registration Statement.
(k) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in the
Prospectus). The Common Stock (including the Common Shares) conforms in all
material respects to the description thereof contained in the Prospectus. All of
the issued and outstanding shares of Common Stock (including the shares of
Common Stock owned by the Selling Shareholder) have been duly authorized and
validly issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the outstanding
shares of Common Stock were issued in violation of any preemptive rights, rights
of first refusal or other similar rights to subscribe for or purchase securities
of the Company. There are no authorized or outstanding options, warrants,
preemptive rights, rights of first refusal or other rights to purchase, or
equity or debt securities convertible into or exchangeable or exercisable for,
any capital stock of the Company or any of its subsidiaries other than those
accurately described in the Prospectus. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted thereunder, set forth in the Prospectus accurately and
fairly presents the information required to be shown with respect to such plans,
arrangements, options and rights.
(l) Stock Exchange Listing. The Common Stock (including the Common
Shares) is registered pursuant to Section 12(g) of the Exchange Act and is
listed on the Nasdaq National Market, and the Company has taken no action
designed to, or likely to have the effect of
4
<PAGE>
terminating the registration of the Common Stock under the Exchange Act or
delisting the Common Stock from the Nasdaq National Market, nor has the Company
received any notification that the Commission or the National Association of
Securities Dealers, LLC (the "NASD") is contemplating terminating such
registration or listing.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of its
subsidiaries is in violation of its charter or by-laws or is in default (or,
with the giving of notice or lapse of time, would be in default) ("Default")
under any indenture, mortgage, loan or credit agreement, note, contract,
franchise, lease or other instrument to which the Company or any of its
subsidiaries is a party or by which it or any of them may be bound (including,
without limitation, the (1) Indenture and Servicing Agreement, dated as of June
1, 1998, by and among Creditrust SPV2, LLC, Norwest Bank Minnesota, National
Association, the Company and Asset Guaranty Insurance Company, (2) Indenture and
Servicing Agreement, dated as of September 1, 1998, by and among Creditrust
Funding I LLC, Norwest Bank Minnesota, National Association, the Company and
Asset Guaranty Insurance Company, (3) Credit Agreement, dated as of October 28,
1998, between the Company, the lenders party thereto and Sunrock Capital Corp.
and (4) Indenture and Servicing Agreement, dated as of December 29, 1998, by and
among Creditrust SPV98-2 LLC, Norwest Bank Minnesota, National Association, the
Company and Asset Guaranty Insurance Company), or to which any of the property
or assets of the Company or any of its subsidiaries is subject (each, an
"Existing Instrument"), except for such Defaults as would not, individually or
in the aggregate, result in a Material Adverse Change. The Company's execution,
delivery and performance of this Agreement and consummation of the transactions
contemplated hereby and by the Prospectus (i) have been duly authorized by all
necessary corporate action and will not result in any violation of the
provisions of the charter or by-laws of the Company or any subsidiary, (ii) will
not conflict with or constitute a breach of, or Default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its subsidiaries pursuant to, or require the
consent of any other party to, any Existing Instrument, except for such
conflicts, breaches, Defaults, liens, charges or encumbrances as would not,
individually or in the aggregate, result in a Material Adverse Change and (iii)
will not result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company or any subsidiary. No
consent, approval, authorization or other order of, or registration or filing
with, any court or other governmental or regulatory authority or agency, is
required for the Company's execution, delivery and performance of this Agreement
and consummation of the transactions contemplated hereby and by the Prospectus,
except such as have been obtained or made by the Company and are in full force
and effect under the Securities Act, applicable state securities or blue sky
laws and from the NASD.
(n) No Material Actions or Proceedings. There are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened (i) against or affecting the Company or any of
its subsidiaries, (ii) which has as the subject thereof any officer or director
of, or property owned or leased by, the Company or any of its subsidiaries or
(iii) relating to environmental or discrimination matters, where in any such
case (A) there is a reasonable possibility that such action, suit or proceeding
might be determined adversely to the Company or such subsidiary and (B) any such
action, suit or proceeding, if so determined adversely, would reasonably be
expected to result in a Material Adverse Change or adversely
5
<PAGE>
affect the consummation of the transactions contemplated by this Agreement. No
material labor dispute with the employees of the Company or any of its
subsidiaries exists or, to the best of the Company's knowledge, is threatened or
imminent.
(o) Intellectual Property Rights. The Company and its subsidiaries own
or possess sufficient trademarks, trade names, patent rights, copyrights,
licenses, approvals, trade secrets and other similar rights (collectively,
"Intellectual Property Rights") reasonably necessary to conduct their businesses
as now conducted and as described in the Prospectus, and the expected expiration
of any of such Intellectual Property Rights would not result in a Material
Adverse Change. Neither the Company nor any of its subsidiaries has received any
notice of infringement or conflict with asserted Intellectual Property Rights of
others, which infringement or conflict, if the subject of an unfavorable
decision, would result in a Material Adverse Change.
(p) All Necessary Permits, etc. The Company and each subsidiary possess
such valid and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies necessary to
conduct their respective businesses, and neither the Company nor any subsidiary
has received any notice of proceedings relating to the revocation or
modification of, or non-compliance with, any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, could result in a Material Adverse Change.
(q) Title to Properties. The Company and each of its subsidiaries has
good and marketable title to all the properties and assets reflected as owned in
the financial statements referred to in Section 1(A)(i) above, in each case free
and clear of any security interests, mortgages, liens, encumbrances, equities,
claims and other defects, except such as do not materially and adversely affect
the value of such property and do not materially interfere with the use made or
proposed to be made of such property by the Company or such subsidiary. The real
property, improvements, equipment and personal property held under lease by the
Company or any subsidiary are held under valid and enforceable leases, with such
exceptions as are not material and do not materially interfere with the use made
or proposed to be made of such real property, improvements, equipment or
personal property by the Company or such subsidiary.
(r) Tax Law Compliance. The Company and its consolidated subsidiaries
have filed all necessary federal, state and foreign income and franchise tax
returns or have properly requested extensions thereof and have paid all taxes
required to be paid by any of them and, if due and payable, any related or
similar assessment, fine or penalty levied against any of them. The Company has
made adequate charges, accruals and reserves in the applicable financial
statements referred to in Section 1(A)(i) above in respect of all federal, state
and foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its consolidated subsidiaries has not been
finally determined.
(s) Company Not an Investment Company. The Company has been advised of
the rules and requirements under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). The Company is not, and after receipt of payment
for the Common Shares will not be, an "investment company" within the meaning of
Investment Company Act and will not take any action that it would cause it to
become subject to the Investment Company Act.
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(t) Insurance. Each of the Company and its subsidiaries are insured by
recognized, financially sound and reputable institutions with policies in such
amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and its subsidiaries against theft, damage, destruction, acts of vandalism and
earthquakes. The Company has no reason to believe that it or any subsidiary will
not be able (i) to renew its existing insurance coverage as and when such
policies expire or (ii) to obtain comparable coverage from similar institutions
as may be necessary or appropriate to conduct its business as now conducted and
at a cost that would not result in a Material Adverse Change. Neither of the
Company nor any subsidiary has been denied any insurance coverage which it has
sought or for which it has applied.
(u) No Price Stabilization or Manipulation. The Company has not taken
and will not take, directly or indirectly, any action designed to or that might
be reasonably expected to cause or result in stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of the
Common Shares.
(v) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or any subsidiary or any other
person required to be described in the Prospectus which have not been described
as required.
(w) Compliance with Law. Neither the Company nor any of its
subsidiaries is in violation of any federal, state or local statute,
administrative regulation, order or other law ("Applicable Law") including,
without limitation, the Fair Debt Collection Practices Act, the Federal
Truth-In-Lending Act (and the Federal Reserve Board's Regulation S issued
thereunder), the Fair Debt Billing Act, the Equal Credit Opportunity Act (and
the Federal Reserve Board's Regulation B issued thereunder), the Fair Credit
Reporting Act or the Electronic Fund Transfer Act, and comparable state
statutes, the consequences of which violations(s) would, individually or in the
aggregate, result in a Material Adverse Change. The Company has not received any
notice of, and to the best knowledge of the Company, has not been threatened
with and is not under investigation with respect to, any violation or a possible
violation of any Applicable Law, except such violation(s) as would not,
individually or in the aggregate, result in a Material Adverse Change.
(x) Licenses. The Company has full right, power and authority and has
obtained and holds all licenses, consents, authorizations, approvals, orders,
certificates and permits (collectively, "Licenses") of and from, and has made
all declarations and filings with all courts, regulatory bodies, administrative
agencies, or other governmental bodies, necessary to own, lease, license and use
its properties and assets and to conduct its business in the manner described in
or contemplated by the Prospectus, except as otherwise described therein, and
except where the failure to so obtain or hold or to so make or file would, not
individually or in the aggregate, result in a Material Adverse Change. The
Company has not received any notice of proceedings relating to, and to its best
knowledge, no governmental body is considering limiting, suspending, modifying
or revoking, any such License which would, individually or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, result in a Material
Adverse Change. The Prospectus fairly and accurately describes each License the
absence of which would, individually or in the aggregate, result in a Material
Adverse Change, or which
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would materially and adversely affect the Company's ability to acquire and
collect on the "Receivables" (as such term is defined in the Prospectus) and
otherwise to expand the business operations of the Company as described in or
contemplated by the Prospectus. The Company has filed with the appropriate
governmental authorities each and every statement, report, information or form
required to be filed by it pursuant to any Applicable Law, except where the
failure(s) to so file would not, individually or in the aggregate, result in a
Material Adverse Change, and all such filings or submissions were in compliance
with Applicable Law in all material respects when filed, and no deficiencies
have been asserted by any regulatory commission, agency or authority with
respect to such filings or submissions, except where the failure(s) to so file
or cure would not, individually or in the aggregate, result in a Material
Adverse Change. To the Company's best knowledge, except as disclosed in the
Registration Statement and the Prospectus, there are not pending any changes
under any Applicable Law or License that would have, individually or in the
aggregate, a Material Adverse Effect.
(y) No Unlawful Contributions or Other Payments. Neither the Company
nor any of its subsidiaries nor, to the best of the Company's knowledge, any
employee or agent of the Company or any subsidiary, has made any contribution or
other payment to any official of, or candidate for, any federal, state or
foreign office in violation of any law or of the character required to be
disclosed in the Prospectus.
(z) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(aa) Compliance with Environmental Laws. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
neither the Company nor any of its subsidiaries is in violation of any federal,
state, local or foreign law or regulation relating to pollution or protection of
human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or wildlife,
including without limitation, laws and regulations relating to emissions,
discharges, releases or threatened releases of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum and
petroleum products (collectively, "Materials of Environmental Concern"), or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environmental Concern
(collectively, "Environmental Laws"), which violation includes, but is not
limited to, noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company or its subsidiaries
under applicable Environmental Laws, or noncompliance with the terms and
conditions thereof, nor has the Company or any of its subsidiaries received any
written communication, whether from a governmental authority, citizens group,
employee or otherwise, that alleges that the Company or any of its subsidiaries
is in violation of any Environmental Law; (ii) there is no claim, action or
cause of action filed with a court or governmental authority, no investigation
with respect to which the Company has received written notice, and no written
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notice by any person or entity alleging potential liability for investigatory
costs, cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising out
of; based on or resulting from the presence, or release into the environment, of
any Material of Environmental Concern at any location owned, leased or operated
by the Company or any of its subsidiaries, now or in the past (collectively,
"Environmental Claims"), pending or, to the best of the Company's knowledge,
threatened against the Company or any of its subsidiaries or any person or
entity whose liability for any Environmental Claim the Company or any of its
subsidiaries has retained or assumed either contractually or by operation of
law; and (iii) to the best of the Company's knowledge, there are no past or
present actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the release, emission, discharge, presence or
disposal of any Material of Environmental Concern, that reasonably could result
in a violation of any Environmental Law or form the basis of a potential
Environmental Claim against the Company or any of its subsidiaries or against
any person or entity whose liability for any Environmental Claim the Company or
any of its subsidiaries has retained or assumed either contractually or by
operation of law.
(bb) ERISA Compliance. The Company and its subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or maintained by
the Company, its subsidiaries or their "ERISA Affiliates" (as defined below) are
in compliance in all material respects with ERISA. "ERISA Affiliate" means, with
respect to the Company or a subsidiary, any member of any group of organizations
described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of
1986, as amended, and the regulations and published interpretations thereunder
(the "Code") of which the Company or such subsidiary is a member. No "reportable
event" (as defined under ERISA) has occurred or is reasonably expected to occur
with respect to any "employee benefit plan" established or maintained by the
Company, its subsidiaries or any of their ERISA Affiliates. No "employee benefit
plan" established or maintained by the Company, its subsidiaries or any of their
ERISA Affiliates, if such "employee benefit plan" were terminated, would have
any "amount of unfunded benefit liabilities" (as defined under ERISA). Neither
the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of; or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates that is intended to be qualified under Section 401(a) of the Code is
so qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
(cc) Year 2000. All material disclosure regarding year 2000 compliance
that is required to be described under the Securities Act and the regulations
and pronouncements of the Commission has been included in the Prospectus. The
Company will not incur material operating expenses or costs to ensure that its
information systems will be year 2000 complaint, other than as disclosed in the
Prospectus.
Any certificate signed by an officer of the Company and delivered to
the Underwriters or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
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B. Representations and Warranties of the Selling Shareholder. The
Selling Shareholder represents, warrants and covenants to each Underwriter as
follows:
(a) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling Shareholder
and is a valid and binding agreement of such Selling Shareholder, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(b) The Custody Agreement and Power of Attorney. Each of the (i)
Custody Agreement signed by such Selling Shareholder and Creditrust Corporation,
as custodian (the "Custodian"), relating to the deposit of the Common Shares to
be sold by such Selling Shareholder (the "Custody Agreement") and (ii) Power of
Attorney appointing certain individuals named therein as such Selling
Shareholder's attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set
forth therein relating to the transactions contemplated hereby and by the
Prospectus (the "Power of Attorney"), of such Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a valid
and binding agreement of such Selling Shareholder, enforceable in accordance
with its terms, except as rights to indemnification thereunder may be limited by
applicable law and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(c) Title to Common Shares to be Sold; All Authorizations Obtained.
Such Selling Shareholder has, and on the First Closing Date and the Second
Closing Date (as defined below) will have, good and valid title to all of the
Common Shares which may be sold by such Selling Shareholder pursuant to this
Agreement on such date and the legal right and power, and all authorizations and
approvals required by law to enter into this Agreement and its Custody Agreement
and Power of Attorney, to sell, transfer and deliver all of the Common Shares
which may be sold by such Selling Shareholder pursuant to this Agreement and to
comply with its other obligations hereunder and thereunder.
(d) Delivery of the Common Shares to be Sold. Delivery of the Common
Shares which are sold by such Selling Shareholder pursuant to this Agreement
will pass good and valid title to such Common Shares, free and dear of any
security interest, mortgage, pledge, lien, encumbrance or other claim.
(e) Non-Contravention; No Further Authorizations or Approvals Required.
The execution and delivery by such Selling Shareholder of, and the performance
by such Selling Shareholder of its obligations under, this Agreement, the
Custody Agreement and the Power of Attorney will not contravene or conflict
with, result in a breach of, or constitute a Default under, or require the
consent of any other party to any agreement or instrument to which such Selling
Shareholder is a party or by which it is bound or under which it is entitled to
any right or benefit, any provision of applicable law or any judgment, order,
decree or regulation applicable to such Selling Shareholder of any court,
regulatory body, administrative agency, governmental body or arbitrator having
jurisdiction over such Selling Shareholder. No consent, approval, authorization
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<PAGE>
or other order of, or registration or filing with, any court or other
governmental authority or agency, is required for the consummation by such
Selling Shareholder of the transactions contemplated in this Agreement, except
such as have been obtained or made and are in full force and effect under the
Securities Act, applicable state securities or blue sky laws and from the NASD.
(f) No Registration or Other Similar Rights. Such Selling Shareholder
does not have any registration or other similar rights to have any equity or
debt securities registered for sale by the Company under the Registration
Statement or included in the offering contemplated by this Agreement, except for
such rights as are described in the Prospectus under "Shares Eligible for Future
Sale".
(g) No Further Consents, etc. No consent, approval or waiver is
required under any instrument or agreement to which such Selling Shareholder is
a party or by which it is bound or under which it is entitled to any right or
benefit, in connection with the offering, sale or purchase by the Underwriters
of any of the Common Shares which may be sold by such Selling Shareholder under
this Agreement or the consummation by such Selling Shareholder of any of the
other transactions contemplated hereby.
(h) Disclosure Made by Such Selling Shareholder in the Prospectus. All
information furnished by or on behalf of such Selling Shareholder in writing
expressly for use in the Registration Statement and Prospectus is, and on the
First Closing Date and the Second Closing Date will be, true, correct, and
complete in all material respects, and does not, and on the First Closing Date
and the Second Closing Date will not, contain any untrue statement of a material
fact or omit to state any material fact necessary to make such information not
misleading. Such Selling Shareholder confirms as accurate the number of shares
of Common Stock set forth opposite such Selling Shareholder's name in the
Prospectus under the caption "Principal Stockholders and Selling Stockholder"
(both prior to and after giving effect to the sale of the Common Shares).
(i) No Price Stabilization or Manipulation. Such Selling Shareholder
has not taken and will not take, directly or indirectly, any action designed to
or that might be reasonably expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Common Shares.
(j) Confirmation of Company Representations and Warranties. Such
Selling Shareholder is not aware that any of the representations and warranties
of the Company contained in Section 1(A) hereof is untrue or inaccurate in any
material respect and is not prompted to sell shares of Common Stock by any
information concerning the Company which is not set forth in the Registration
Statement and the Prospectus.
Any certificate signed by or on behalf of the Selling Shareholder and
delivered to the Underwriters or to counsel for the Underwriters shall be deemed
to be a representation and warranty by such Selling Shareholder to each
Underwriter as to the matters covered thereby.
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Section 2. Purchase, Sale and Delivery of the Common Shares.
The Firm Common Shares. Upon the terms herein set forth, (i) the
Company agrees to issue and sell to the several Underwriters an aggregate of
[2,400,000] Firm Common Shares and (ii) the Selling Shareholder agrees to sell
to the several Underwriters an aggregate of [600,000] Firm Common Shares. On the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Underwriters
agree, severally and not jointly, to purchase from the Company and the Selling
Shareholder the respective number of Firm Common Shares set forth opposite their
names on Schedule A. The purchase price per Firm Common Share to be paid by the
several Underwriters to the Company and the Selling Shareholder shall be $[ ]
per share.
The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of the managing Underwriter, NationsBanc Montgomery Securities LLC
("NMS"), 600 Montgomery Street, San Francisco, California (or such other place
as may be agreed to by the Company and the Underwriters) at 6:00 a.m. San
Francisco time, on the third [fourth] full business day after the date of this
Agreement, or such other time and date not later than 10:30 a.m. San Francisco
time, on the date ten full business days after the date of this Agreement as the
Underwriters shall designate by notice to the Company (the time and date of such
closing are called the "First Closing Date"). The Company and the Selling
Shareholder hereby acknowledge that circumstances under which the Underwriters
may provide notice to postpone the First Closing Date as originally scheduled
include, but are in no way limited to, any determination by the Company , the
Selling Shareholder or the Underwriters to recirculate to the public copies of
an amended or supplemented Prospectus or a delay as contemplated by the
provisions of Section 10.
The Optional Common Shares; the Second Closing Date. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Selling
Shareholder hereby grants an option to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of [450,000] Optional Common
Shares from such Selling Shareholder at the purchase price per share to be paid
by the Underwriters for the Firm Common Shares. The option granted hereunder is
for use by the Underwriters solely in covering any over-allotments in connection
with the sale and distribution of the Firm Common Shares. The option granted
hereunder may be exercised at any time (but not more than once) upon notice by
the Underwriters to the Selling Shareholder (with a copy to the Company), which
notice may be given at any time within 30 days from the date of this Agreement.
Such notice shall set forth (i) the aggregate number of Optional Common Shares
as to which the Underwriters are exercising the option, (ii) the names and
denominations in which the certificates for the Optional Common Shares are to be
registered and (iii) the time, date and place at which such certificates will be
delivered (which time and date may be simultaneous with, but not earlier than,
the First Closing Date, and in such case the term "First Closing Date" shall
refer to the time and date of delivery of certificates for the Firm Common
Shares and the Optional Common Shares). Such time and date of delivery, if
subsequent to the First Closing Date, is called the "Second Closing Date" and
shall be determined by the Underwriters and shall not be earlier than three nor
later than five full business days after delivery of such notice of exercise. If
any Optional Common Shares are to be purchased, (a) each Underwriter agrees,
severally and not jointly, to purchase the number of Optional Common Shares
(subject to such adjustments to eliminate fractional shares as the Underwriters
may determine) that bears the same proportion to the total number of Optional
Common Shares to be purchased as the number
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of Firm Common Shares set forth on Schedule A opposite the name of such
----------
Underwriter bears to the total number of Firm Common Shares and (b) the Selling
Shareholder agrees to sell the Optional Common Shares (subject to such
adjustments to eliminate fractional shares as the Underwriters may determine).
The Underwriters may cancel the option at any time prior to its expiration by
giving written notice of such cancellation the Selling Shareholder (with a copy
to the Company).
Public Offering of the Common Shares. The Underwriters hereby advise
the Company and the Selling Shareholder that the Underwriters intend to offer
for sale to the public, as described in the Prospectus, their respective
portions of the Common Shares as soon after this Agreement has been executed and
the Registration Statement has been declared effective as the Underwriters, in
their sole judgment, have determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares to be sold
by the Company shall be made at the First Closing Date by wire transfer of
immediately available funds to the order of the Company. Payment for the Common
Shares to be sold by the Selling Shareholder shall be made at the First Closing
Date (and, if applicable, at the Second Closing Date) by wire transfer of
immediately available funds to the order of the Custodian.
NMS, individually and not on behalf of the Underwriters, may (but shall
not be obligated to) make payment for any Common Shares to be purchased by any
Underwriter whose funds shall not have been received by the Underwriters by the
First Closing Date or the Second Closing Date, as the case may be, for the
account of such Underwriter, but any such payment shall not relieve such
Underwriter from any of its obligations under this Agreement.
The Selling Shareholder hereby agrees that (i) it will pay all stock
transfer taxes, stamp duties and other similar taxes, if any, payable upon the
sale or delivery of the Common Shares to be sold by such Selling Shareholder to
the several Underwriters, or otherwise in connection with the performance of
such Selling Shareholder's obligations hereunder and (ii) the Custodian is
authorized to deduct for such payment any such amounts from the proceeds to such
Selling Shareholder hereunder and to hold such amounts for the account of such
Selling Shareholder with the Custodian under the Custody Agreement.
Delivery of the Common Shares. The Company and the Selling Shareholder
shall deliver, or cause to be delivered, to the Underwriters for the accounts of
the several Underwriters certificates for the Firm Common Shares to be sold by
them at the First Closing Date, against the irrevocable release of a wire
transfer of immediately available funds for the amount of the purchase price
therefor. The Selling Shareholder shall also deliver, or cause to be delivered,
to the Underwriters for the accounts of the several Underwriters, certificates
for the Optional Common Shares the Underwriters have agreed to purchase from
such Selling Shareholder at the First Closing Date or the Second Closing Date,
as the case may be, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price therefor. The
certificates for the Common Shares shall be in definitive form and registered in
such names and denominations as the Underwriters shall have requested at least
two full business days prior to the First Closing Date (or the Second Closing
Date, as the case may be) and shall be made available for inspection on the
business day preceding the First Closing Date (or the Second Closing Date, as
the case may be) at a location in New York City as the Underwriters
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may designate. Time shall be of the essence, and delivery at the time and place
specified in this Agreement is a further condition to the obligations of the
Underwriters.
Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m.
on the second business day following the date the Common Shares are first
released by the Underwriters for sale to the public, the Company shall deliver
or cause to be delivered, copies of the Prospectus in such quantities and at
such places as the Underwriters shall request.
Section 3. Additional Covenants.
A. Covenants of the Company. The Company further covenants and agrees
with each Underwriter as follows:
(a) Underwriters' Review of Proposed Amendments and Supplements. During
such period beginning on the date hereof and ending on the later of the First
Closing Date or such date as in the opinion of counsel for the Underwriters, the
Prospectus is no longer required by law to be delivered in connection with sales
by an Underwriter or dealer (the "Prospectus Delivery Period"), prior to
amending or supplementing the Registration Statement (including any registration
statement filed under Rule 462(b) under the Securities Act) or the Prospectus,
the Company shall furnish to the Underwriters for review a copy of each such
proposed amendment or supplement, and the Company shall not file any such
proposed amendment or supplement to which the Underwriters reasonably object.
(b) Securities Act Compliance. After the date of this Agreement, the
Company shall promptly advise the Underwriters in writing (i) of the receipt of
any comments of, or requests for additional or supplemental information from,
the Commission, (ii) of the time and date of any filing of any post-effective
amendment to the Registration Statement or any amendment or supplement to any
preliminary prospectus or the Prospectus, (iii) of the time and date that any
post-effective amendment to the Registration Statement becomes effective and
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereto or of any order preventing or suspending the use of any preliminary
prospectus or the Prospectus, or of any proceedings to remove, suspend or
terminate from listing or quotation the Common Stock from any securities
exchange upon which it is listed for trading or included or designated for
quotation, or of the threatening or initiation of any proceedings for any of
such purposes. If the Commission shall enter any such stop order at any time,
the Company will use its best efforts to obtain the lifting of such order at the
earliest possible moment. Additionally, the Company agrees that it shall comply
with the provisions of Rules 424(b), 430A and 434, as applicable, under the
Securities Act and will use its reasonable efforts to confirm that any filings
made by the Company under such Rule 424(b) were received in a timely manner by
the Commission.
(c) Amendments and Supplements to the Prospectus and Other Securities
Act Matters. If, during the Prospectus Delivery Period, any event shall occur or
condition exist as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
or if in the opinion of the Underwriters or counsel for the Underwriters it is
otherwise necessary to amend or supplement the Prospectus to comply with
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law, the Company agrees to promptly prepare (subject to Section 3(A)(a) hereof),
file with the Commission and furnish at its own expense to the Underwriters and
to dealers, amendments or supplements to the Prospectus so that the statements
in the Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be misleading or
so that the Prospectus, as amended or supplemented, will comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Underwriters, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any amendments
and supplements thereto as the Underwriters may request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Underwriters and counsel for the Underwriters to qualify or register the Common
Shares for sale under (or obtain exemptions from the application of) the state
securities or blue sky laws or Canadian provincial Securities laws of those
jurisdictions designated by the Underwriters, shall comply with such laws and
shall continue such qualifications, registrations and exemptions in effect so
long as required for the distribution of the Common Shares. The Company shall
not be required to qualify as a foreign corporation or to take any action that
would subject it to general service of process in any such jurisdiction where it
is not presently qualified or where it would be subject to taxation as a foreign
corporation. The Company will advise the Underwriters promptly of the suspension
of the qualification or registration of (or any such exemption relating to) the
Common Shares for offering, sale or trading in any jurisdiction or any
initiation or threat of any proceeding for any such purpose, and in the event of
the issuance of any order suspending such qualification, registration or
exemption, the Company shall use its best efforts to obtain the withdrawal
thereof at the earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Common Shares sold by it in the manner described under the caption
"Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Underwriters an earnings
statement (which need not be audited) covering the twelve-month period ending
[ ] that satisfies the provisions of Section 11(a) of the Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act. Additionally, the Company shall report the use of proceeds from
the issuance of the Common Shares as may be required under Rule 463 under the
Securities Act.
(j) Agreement Not To Offer or Sell Additional Securities. During the
period of 120 days following the date of the Prospectus, the Company will not,
without the prior written
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consent of NMS (which consent may be withheld at the sole discretion of NMS),
directly or indirectly, sell, offer, contract or grant any option to sell,
pledge, transfer or establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or
transfer, or announce the offering of, or file any registration statement under
the Securities Act in respect of, any shares of Common Stock, options or
warrants to acquire shares of the Common Stock or securities exchangeable or
exercisable for or convertible into shares of Common Stock (other than as
contemplated by this Agreement with respect to the Common Shares); provided,
however, that the Company may issue options to purchase its Common Stock or
shares of its Common Stock issuable upon exercise of options, pursuant to any
stock option, stock bonus or other stock plan or arrangement described in the
Prospectus; provided, further that holders of options to acquire shares of
Common Stock granted on or after January 19, 1999 or shares of Common Stock
acquired upon the exercise of such options, agree in writing not to sell, offer,
dispose of or otherwise transfer any such options or shares during such 120 day
period without the prior written consent of NMS (which consent may be withheld
at the sole discretion of NMS).
(k) Future Reports to the Underwriters. During the period of five years
hereafter the Company will furnish to the Underwriters c/o NMS at 600 Montgomery
Street, San Francisco, CA 94111 Attention: Carter Mack, Managing Director: (i)
as soon as practicable after the end of each fiscal year, copies of the Annual
Report of the Company containing the balance sheet of the Company as of the
close of such fiscal year and statements of income, shareholders' equity and
cash flows for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as practicable
after the filing thereof; copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on Form l0-Q, Current Report on Form 8-K or other report
filed by the Company with the Commission, the NASD or any securities exchange;
and (iii) as soon as available, copies of any report or communication of the
Company mailed generally to holders of its capital stock.
B. Covenants of the Selling Shareholder. The Selling Shareholder
further covenants and agrees with each Underwriter:
(a) Agreement Not to Offer or Sell Additional Securities. The Selling
Shareholder will not, without the prior written consent of NMS (which consent
may be withheld in its sole discretion), directly or indirectly, sell, offer,
contract or grant any option to sell (including without limitation any short
sale), pledge, transfer, establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any
shares of Common Stock, options or warrants to acquire shares of Common Stock,
or securities exchangeable or exercisable for or convertible into shares of
Common Stock currently or hereafter owned either of record or beneficially (as
defined in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the
undersigned, or publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing through the
close of trading on the date 120 days after the date of the Prospectus.
(b) Delivery of Forms W-8 and W-9. To deliver to the Underwriters prior
to the First Closing Date a properly completed and executed United States
Treasury Department Form W-8 (if the Selling Shareholder is a non-United States
person) or Form W-9 (if the Selling Shareholder is a United States Person).
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NMS, on behalf of the several Underwriters, may, in its sole
discretion, waive in writing the performance by the Company or the Selling
Shareholder of any one or more of the foregoing covenants or extend the time for
their performance.
Section 4. Payment of Expenses. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of the Company's
obligations hereunder and in connection with the transactions contemplated
hereby, including without limitation (i) all expenses incident to the issuance
and delivery of the Common Shares (including all printing and engraving costs),
(ii) all fees and expenses of the registrar and transfer agent of the Common
Stock, (iii) all necessary issue, transfer and other stamp taxes in connection
with the issuance and sale of the Common Shares to the Underwriters, (iv) all
fees and expenses of the Company's counsel, independent public or certified
public accountants and other advisors, (v) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution of
the Registration Statement (including financial statements, exhibits, consents
and certificates of experts), each preliminary prospectus and the Prospectus,
and all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Common Shares for offer
and sale under the state securities or blue sky laws or the provincial
securities laws of Canada, and, if requested by the Underwriters, preparing and
printing a "Blue Sky Survey" or memorandum, and any supplements thereto,
advising the Underwriters of such qualifications, registrations and exemptions,
(vii) the filing fees incident to, and the reasonable fees and expenses of
counsel for the Underwriters in connection with, the NASD's review and approval
of the Underwriters' participation in the offering and distribution of the
Common Shares, (viii) the fees and expenses associated with including the Common
Shares on the Nasdaq National Market, and (ix) all other fees, costs and
expenses referred to in Item 13 of Part II of the Registration Statement. Except
as provided in this Section 4, Section 6, Section 8 and Section 9 hereof, the
Underwriters shall pay their own expenses, including the fees and disbursements
of their counsel.
The Selling Shareholder agrees with each Underwriter to pay (directly
or by reimbursement) all fees and expenses incident to the performance of its
obligations under this Agreement which are not otherwise specifically provided
for herein, including but not limited to (i) fees and expenses of counsel and
other advisors for such Selling Shareholder, (ii) fees and expenses of the
Custodian and (iii) expenses and taxes incident to the sale and delivery of the
Common Shares to be sold by such Selling Shareholder to the Underwriters
hereunder (which taxes, if any, may be deducted by the Custodian under the
provisions of Section 2 of this Agreement).
This Section 4 shall not affect or modify any separate, valid agreement
relating to the allocation of payment of expenses between the Company, on the
one hand, and the Selling Shareholder, on the other hand.
Section 5. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company and
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the Selling Shareholder set forth in Sections 1(A) and 1(B) hereof as of the
date hereof and as of the First Closing Date as though then made and, with
respect to the Optional Common Shares, as of the Second Closing Date as though
then made, to the timely performance by the Company and the Selling Shareholder
of their respective covenants and other obligations hereunder, and to each of
the following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the Underwriters
shall have received from Grant Thornton LLP, independent public or certified
public accountants for the Company, a letter dated the date hereof addressed to
the Underwriters, in form and substance satisfactory to the Underwriters,
containing statements and information of the type ordinarily included in
accountant's "comfort letters" to underwriters, delivered according to Statement
of Auditing Standards No. 72 (or any successor bulletin), with respect to the
audited and unaudited financial statements and certain financial information
contained in the Registration Statement and the Prospectus (and the Underwriters
shall have received a reasonable number of conformed copies of such accountants'
letter for each of the several Underwriters).
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the Optional
Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by
Rule 424(b) under the Securities Act; or the Company shall have filed a
post-effective amendment to the Registration Statement containing the
information required by such Rule 430A, and such post-effective
amendment shall have become effective; or, if the Company elected to
rely upon Rule 434 under the Securities Act and obtained the
Underwriters' consent thereto, the Company shall have filed a Term
Sheet with the Commission in the manner and within the time period
required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in
effect and no proceedings for such purpose shall have been instituted
or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the fairness
and reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change or Ratings Agency Change. For the period
from and after the date of this Agreement and prior to the First Closing Date
and, with respect to the Optional Common Shares, the Second Closing Date:
(i) in the judgment of the Underwriters there shall not have
occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading or
of any review
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for a possible change that does not indicate the direction of the
possible change, in the rating accorded any securities of the Company
or any of its subsidiaries by any "nationally recognized statistical
rating organization" as such term is defined for purposes of Rule
436(g)(2) under the Securities Act.
(d) Opinion of Counsel for the Company. On each of the First Closing
Date and the Second Closing Date the Underwriters shall have received the
favorable opinion of Piper & Marbury L.L.P., counsel for the Company, dated as
of such Closing Date, the form of which is attached as Exhibit A (and the
Underwriters shall have received a reasonable number of conformed copies of such
counsel's legal opinion for each of the several Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date the Underwriters shall have received
the favorable opinion of Gibson, Dunn & Crutcher LLP, counsel for the
Underwriters, dated as of such Closing Date, with respect to certain matters
(and the Underwriters shall have received a reasonable number of conformed
copies of such counsel's legal opinion for each of the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and the
Second Closing Date the Underwriters shall have received a written certificate
executed by the Chairman, Chief Executive Officer and President of the Company
and the Chief Financial Officer of the Company, dated as of such Closing Date,
to the effect set forth in subsections (b)(ii) and (c)(ii) of this Section 5,
and further to the effect that:
(i) for the period from and after the date of this Agreement
and prior to such Closing Date, there has not occurred any Material
Adverse Change;
(ii) the representations, warranties and covenants of the
Company set forth in Section 1 (A) of this Agreement are true and
correct with the same force and effect as though expressly made on and
as of such Closing Date, and
(iii) the Company has complied with all the agreements
hereunder and satisfied all the conditions on its part to be performed
or satisfied hereunder at or prior to such Closing Date.
(g) Bring-down Comfort Letter. On each of the First Closing Date and
the Second Closing Date the Underwriters shall have received from Grant Thornton
LLP, independent public or certified public accountants for the Company, a
letter dated such date, in form and substance satisfactory to the Underwriters,
to the effect that they reaffirm the statements made in the letter furnished by
them pursuant to subsection (a) of this Section 5, except that the specified
date referred to therein for the carrying out of procedures shall be no more
than three business days prior to the First Closing Date or Second Closing Date,
as the case may be (and the Underwriters shall have received a reasonable number
of conformed copies of such accountants' letter for each of the several
Underwriters).
(h) Opinion of Counsel for the Selling Shareholder. On each of the
First Closing Date and the Second Closing Date the Underwriters shall have
received the favorable opinion of Piper & Marbury L.L.P., counsel for the
Selling Shareholder, dated as of such Closing Date, the
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form of which is attached as Exhibit B (and the Underwriters shall have received
a reasonable number of conformed copies of such counsel's legal opinion for each
of the several Underwriters).
(i) Selling Shareholder's Certificate. On each of the First Closing
Date and the Second Closing Date the Underwriters shall receive a written
certificate executed by the Attorney-in-Fact of the Selling Shareholder, dated
as of such Closing Date, to the effect that:
(i) the representations, warranties and covenants of such
Selling Shareholder set forth in Section 1(B) of this Agreement are
true and correct with the same force and effect as though expressly
made by such Selling Shareholder on and as of such Closing Date; and
(ii) such Selling Shareholder has complied with all the
agreements and satisfied all the conditions on its part to be performed
or satisfied at or prior to such Closing Date.
(j) Selling Shareholder's Documents. On the date hereof, the Company
and the Selling Shareholder shall have furnished for review by the Underwriters
copies of the Powers of Attorney and Custody Agreements executed by the Selling
Shareholder and such further information, certificates and documents as the
Underwriters may reasonably request.
(k) Lock- Up Agreement from Certain Securityholders of the Company
Other Than the Selling Shareholder. On the date hereof, the Company shall have
furnished to the Underwriters an agreement in the form of Exhibit C hereto from
each director of the Company, and such agreement shall be in full force and
effect on each of the First Closing Date and the Second Closing Date.
(l) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, the Underwriters and counsel for the Underwriters
shall have received such information, documents and opinions as they may
reasonably require for the purposes of enabling them to pass upon the issuance
and sale of the Common Shares as contemplated herein, or in order to evidence
the accuracy of any of the representations and warranties, or the satisfaction
of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Underwriters by notice to the Company and the Selling Shareholder at any time on
or prior to the First Closing Date and, with respect to the Optional Common
Shares, at any time prior to the Second Closing Date, which termination shall be
without liability on the part of any party to any other party, except that
Section 4, Section 6, Section 8 and Section 9 shall at all times be effective
and shall survive such termination.
Section 6. Reimbursement of Underwriters' Expenses. If this Agreement
is terminated by the Underwriters pursuant to Section 5, Section 7, Section 10
or Section 11 or Section 17, or if the sale to the Underwriters of the Common
Shares on the First Closing Date is not consummated because of any refusal,
inability or failure on the part of the Company or the Selling Shareholder to
perform any agreement herein or to comply with any provision hereof, the Company
agrees to reimburse the Underwriters (or such Underwriters as have terminated
this Agreement with respect to themselves), severally, upon demand for all
out-of-pocket expenses
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that shall have been reasonably incurred by the Underwriters in connection with
the proposed purchase and the offering and sale of the Common Shares, including
but not limited to fees and disbursements of counsel, printing expenses, travel
expenses, postage, facsimile and telephone charges.
Section 7. Effectiveness of this Agreement.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Underwriters of the effectiveness of the
Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company or the Selling
Shareholder to any Underwriter, except that the Company and the Selling
Shareholder shall be obligated to reimburse the expenses of the Underwriters
pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company or the
Selling Shareholder, or (c) any party hereto to any other party except that the
provisions of Section 8 and Section 9 shall at all times be effective and shall
survive such termination.
Section 8. Indemnification.
(a) Indemnification of the Underwriters. Each of the Company and the
Selling Shareholder, jointly and severally, agrees to indemnify and hold
harmless each Underwriter, its officers and employees, and each person, if any,
who controls any Underwriter within the meaning of the Securities Act and the
Exchange Act against any loss, claim, damage, liability or expense, as incurred,
to which such Underwriter or such controlling person may become subject, under
the Securities Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company), insofar as such loss, claim, damage, liability or expense (or actions
in respect thereof as contemplated below) arises out of or is based (i) upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the
Securities Act, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; or (iii)
in whole or in part upon any inaccuracy in the representations and warranties of
the Company or the Selling Shareholder contained herein; or (iv) in whole or in
part upon any failure of the Company or the Selling Shareholder to perform their
respective obligations hereunder or under law; or (v) any act or failure to act
or any alleged act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Common Stock or the offering contemplated hereby,
and which is included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon any matter covered by clause
(i) or (ii) above, provided that the Company shall not be liable under this
clause (v) to the extent that a court of competent jurisdiction shall have
determined by a final judgment that such loss, claim, damage,
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<PAGE>
liability or action resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its bad faith or
willful misconduct; and to reimburse each Underwriter and each such controlling
person for any and all expenses (including the fees and disbursements of counsel
chosen by NMS) as such expenses are reasonably incurred by such Underwriter or
such controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that the foregoing indemnity agreement shall not
apply to any loss, claim, damage, liability or expense to the extent, but only
to the extent, arising out of or based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company and the Selling
Shareholder by the Underwriters expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and provided, further, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit of
any Underwriter from whom the person asserting any loss, claim, damage,
liability or expense purchased Common Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense, and provided, further,
that the liability of the Selling Shareholder for a breach of the
representations and warranties contained in Section 1(B) or for indemnification
or contribution under this Section 8 or Section 9, respectively, or otherwise at
law or in equity (other than claims based in whole or in part on fraud), shall
be limited to an amount equal to the initial public offering price of the Common
Shares sold by the Seller Shareholder, less the underwriting discounts and
commissions as set forth on the cover page of the Prospectus, and that the
Company and the Selling Shareholder may agree, as among themselves and without
limiting the rights of the Underwriters under this Agreement, as to the
respective amounts of such liability for which they each shall be responsible.
The indemnity agreement set forth in this Section 8(a) shall be in addition to
any liabilities that the Company and the Selling Shareholder may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement, the Selling Shareholder and each person, if any, who
controls the Company or any Selling Shareholder within the meaning of the
Securities Act or the Exchange Act, against any loss, claim, damage, liability
or expense, as incurred, to which the Company, or any such director, officer,
Selling Shareholder or controlling person may become subject, under the
Securities Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arises out of or is based upon
any untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or arises out of or is based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the
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statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company and the
Selling Shareholder by the Underwriters expressly for use therein; and to
reimburse the Company, or any such director, officer, Selling Shareholder or
controlling person for any legal and other expense reasonably incurred by the
Company, or any such director, officer, Selling Shareholder or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. Each of the
Company and the Selling Shareholder hereby acknowledges that the only
information that the Underwriters have furnished to the Company and the Selling
Shareholder expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are the
statements set forth in the table in the first paragraph and as the second
and [__] paragraphs under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct. The indemnity agreement
set forth in this Section 8(b) shall be in addition to any liabilities that each
Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 8 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (NMS in the case of Section 8(b) and Section 9), representing
the
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indemnified parties who are parties to such action) or (ii) the indemnifying
party shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, in each of which cases the fees and expenses of
counsel shall be at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8 shall not
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by Section
8(c) hereof, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement, compromise or consent
to the entry of judgment in any pending or threatened action, suit or proceeding
in respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
Section 9. Contribution.
If the indemnification provided for in Section 8 is for any reason held
to be unavailable to or otherwise insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount paid or payable by such indemnified party, as incurred, as a
result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Shareholder, on the one hand,
and the Underwriters, on the other hand, from the offering of the Common Shares
pursuant to this Agreement or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company and the Selling Shareholder, on the one
hand, and the Underwriters, on the other hand, in connection with the statements
or omissions or inaccuracies in the representations and warranties herein which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received by
the Company and the Selling Shareholder, on the one hand, and the Underwriters,
on the other hand, in connection with the offering of the Common Shares pursuant
to this Agreement shall be deemed to be in the same respective proportions as
the total net proceeds from the offering of the Common Shares pursuant to this
Agreement (before deducting expenses) received by the Company and the Selling
Shareholder, and the total underwriting discount received by the Underwriters,
in each case as set forth on the front cover page of the Prospectus (or, if Rule
434 under the Securities Act is used, the corresponding location on the Term
Sheet) bear to the aggregate initial public offering price
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of the Common Shares as set forth on such cover. The relative fault of the
Company and the Selling Shareholder, on the one hand, and the Underwriters, on
the other hand, shall be determined by reference to, among other things, whether
any such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact or any such inaccurate or alleged
inaccurate representation or warranty relates to information supplied by the
Company or the Selling Shareholder, on the one hand, or the Underwriters, on the
other hand, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.
The Company, the Selling Shareholder and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 9 were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
- ----------
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
Section 10. Default of One or More of the Several Underwriters. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
----------
bears to the aggregate number of
25
<PAGE>
Firm Common Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the non-
defaulting Underwriters, to purchase the Common Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date. If, on the First Closing Date or the Second Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Common
Shares and the aggregate number of Common Shares with respect to which such
default occurs exceeds 10% of the aggregate number of Common Shares to be
purchased on such date, and arrangements satisfactory to the non-defaulting
Underwriters and the Company for the purchase of such Common Shares are not made
within 48 hours after such default, this Agreement shall terminate without
liability of any party to any other party except that the provisions of Section
4, Section 6, Section 8 and Section 9 shall at all times be effective and shall
survive such termination. In any such case either the non-defaulting
Underwriters or the Company shall have the right to postpone the First Closing
Date or the Second Closing Date, as the case may be, but in no event for longer
than seven days in order that the required changes, if any, to the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 11. Termination of this Agreement. Prior to the First Closing
Date this Agreement may be terminated by the Underwriters by notice given to the
Company and the Selling Shareholder if at any time (i) trading or quotation in
any of the Company's securities shall have been suspended or limited by the
Commission or by the Nasdaq National Market, or trading in securities generally
on either the Nasdaq Stock Market shall have been suspended or limited, or
minimum or maximum prices shall have been generally established on any of such
stock exchanges by the Commission or the NASD; (ii) a general banking moratorium
shall have been declared by any of federal, New York or California authorities;
(iii) there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective substantial change in United States' or
international political, financial or economic conditions, as in the judgment of
the Underwriters is material and adverse and makes it impracticable to market
the Common Shares in the manner and on the terms described in the Prospectus or
to enforce contracts for the sale of securities; (iv) in the judgment of the
Underwriters there shall have occurred any Material Adverse Change; or (v) the
Company shall have sustained a loss by strike, fire, flood, earthquake, accident
or other calamity of such character as in the judgment of the Underwriters may
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured. Any
termination pursuant to this Section 11 shall be without liability on the part
of (a) the Company or the Selling Shareholder to any Underwriter, except that
the Company and the Selling Shareholder shall be obligated to reimburse the
expenses of the Underwriters and the Underwriters pursuant to Sections 4 and 6
hereof, (b) any Underwriter to the Company or the Selling Shareholder, or (c) of
any party hereto to any other party except that the provisions of Section 8 and
Section 9 shall at all times be effective and shall survive such termination.
26
<PAGE>
Section 12. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Shareholder and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Shareholder, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
Section 13. Notices. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Underwriters:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
with a copy to:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 913-6241
Attention: Jeffrey R. Lapic, Esq.
If to the Company:
Creditrust Corporation
700 Security Boulevard
Baltimore, Maryland 21244-2543
Facsimile: (410) 594-9621
Attention: Joseph K. Rensin, Chairman, President and Chief
Executive Officer
If to the Selling Shareholder:
Joseph K. Rensin
c/o Creditrust Corporation
700 Security Boulevard
Baltimore, Maryland 21244-2543
Facsimile: (410) 594-9621
Attention: Joseph K. Rensin, Chairman, President and Chief
Executive Officer
Any party hereto may change the address for receipt of communications
by giving written notice to the others.
27
<PAGE>
Section 14. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and personal representatives, and no
other person will have any right or obligation hereunder. The term "successors"
shall not include any purchaser of the Common Shares as such from any of the
Underwriters merely by reason of such purchase.
Section 15. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
Section 16. Governing Law Provisions.
(a) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or the
courts of the State of California in each case located in the City and County of
San Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.
(c) Waiver of Immunity. With respect to any Related Proceeding, each
party irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and execution to
which it might otherwise be entitled in the Specified Courts, and with respect
to any Related Judgment, each party waives any such immunity in the Specified
28
<PAGE>
Courts or any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such Related
Proceeding or Related Judgment, including, without limitation, any immunity
pursuant to the United States Foreign Sovereign Immunities Act of 1976, as
amended.
Section 17. Failure of the Selling Shareholder to Sell and Deliver
Common Shares. If the Selling Shareholder shall fail to sell and deliver to the
Underwriters the Common Shares to be sold and delivered by such Selling
Shareholder at the First Closing Date pursuant to this Agreement, then the
Underwriters may at their option, by written notice from the Underwriters to the
Company and the Selling Shareholder, either (i) terminate this Agreement without
any liability on the part of any Underwriter or, except as provided in Sections
4, 6, 8 and 9 hereof, the Company or the Selling Shareholder, or (ii) purchase
the shares which the Company has agreed to sell and deliver in accordance with
the terms hereof. If the Selling Shareholder shall fail to sell and deliver to
the Underwriters the Common Shares to be sold and delivered by such Selling
Shareholder pursuant to this Agreement at the First Closing Date or the Second
Closing Date, then the Underwriters shall have the right, by written notice from
the Underwriters to the Company and the Selling Shareholder, to postpone the
First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
Section 18. General Provisions. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company and the Custodian the enclosed
copies hereof, whereupon this instrument, along with all counterparts hereof,
shall become a binding agreement in accordance with its terms.
29
<PAGE>
Very truly yours,
CREDITRUST CORPORATION
By:
--------------------------
[Title]
JOSEPH K. RENSIN
By:
--------------------------
(Attorney-in-fact)
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Underwriters in San Francisco, California as of the date first above
written.
NATIONSBANC MONTGOMERY SECURITIES LLC
FERRIS, BAKER WATTS, INCORPORATED
By NATIONSBANC MONTGOMERY SECURITIES LLC
By:
30
<PAGE>
SCHEDULE A
Underwriters Number of Firms
Common Shares
to be Purchased
NationsBanc Montgomery Securities LLC........ [___]
Ferris, Baker Watts, Incorporated............ [___]
Total........................................ [2,400,000]
---------
Schedule A-1
<PAGE>
SCHEDULE B
Selling Shareholder Number of Firm Common Maximum Number of
Shares to be Sold Optional Common
Shares to be Sold
Joseph K. Rensin
c/o Creditrust Corporation
7000 Security Boulevard [600,000] [450,000]
------- -------
Baltimore, MD 21244
Total: [600,000] [450,000]
======= =======
Schedule B-1
<PAGE>
EXHIBIT A
The final opinion in draft form should be attached as Exhibit A at the time this
Agreement is executed.
Opinion of counsel for the Company to be delivered pursuant to Section
5(d) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Maryland.
(ii) The Company has corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its
obligations under the Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except for
such jurisdictions where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, result in a
Material Adverse Change.
(iv) Each significant subsidiary of the Company (as defined
in Rule 405 under the Securities Act) has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and, to the best knowledge of
such counsel, is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good standing
would not, individually or in the aggregate, result in a Material
Adverse Change.
(v) All of the issued and outstanding capital stock of each
such significant subsidiary of the Company has been duly authorized and
validly issued, is fully paid and non-assessable and is owned by the
Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance or, to the best
knowledge of such counsel, any pending or threatened claim.
(vi) The authorized, issued and outstanding capital stock of
the Company (including the Common Stock) conform to the descriptions
thereof set forth in the Prospectus. All of the outstanding shares of
Common Stock (including the shares
Exhibit A-1
<PAGE>
of Common Stock owned by the Selling Shareholder) have been duly
authorized and validly issued, are fully paid and nonassessable and, to
the best of such counsel's knowledge, have been issued in compliance
with the registration and qualification requirements of federal and
state securities laws. The form of certificate used to evidence the
Common Stock is in due and proper form and complies with all applicable
requirements of the charter and by-laws of the Company and the General
Corporation Law of the State of Maryland. The description of the
Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans,
arrangements, options and rights.
(vii) No shareholder of the Company or any other person has
any preemptive right, right of first refusal or other similar right to
subscribe for or purchase securities of the Company arising (i) by
operation of the charter or by-laws of the Company or the General
Corporation Law of the State of Maryland or (ii) to the best knowledge
of such counsel, otherwise.
(viii) The Underwriting Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the
Company, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and public
policy and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles.
(ix) The Common Shares to be purchased by the Underwriters
from the Company have been duly authorized for issuance and sale
pursuant to the Underwriting Agreement and, when issued and delivered
by the Company pursuant to the Underwriting Agreement against payment
of the consideration set forth therein, will be validly issued, fully
paid and nonassessable.
(x) [Each of] The Registration Statement [and the Rule
462(b) Registration Statement, if any,] has been declared effective by
the Commission under the Securities Act. To the best knowledge of such
counsel, no stop order suspending the effectiveness of either of the
Registration Statement [or the Rule 462(b) Registration Statement, if
any,] has been issued under the Securities Act and no proceedings for
such purpose have been instituted or are pending or are contemplated or
threatened by the Commission. Any required filing of the Prospectus and
any supplement thereto pursuant to Rule 424(b) under the Securities Act
has been made in the manner and within the time period required by such
Rule 424(b).
(xi) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus, and each amendment or
supplement to the Registration Statement and the, as of their
respective effective or issue dates (other than the financial
statements and supporting schedules included therein or in exhibits to
or
Exhibit A-2
<PAGE>
excluded from the Registration Statement, as to which no opinion need
be rendered) comply as to form in all material respects with the
applicable requirements of the Securities Act.
(xii) The Common Shares have been approved for listing on the
Nasdaq National Market.
(xiii) The statements (i) in the Prospectus under the captions
"Risk Factors--Government Regulation and --Shares Eligible for Future
Sale", "Description of Capital Stock", "Dividend Policy", "Management's
Discussion and Analysis and Results of Operations--Liquidity and
Capital Resources", "Business--Legal Proceedings", "Business--Trade-
marks and Proprietary Information", "Business--Government Regulation",
"Management--Employment Agreements", Management--Compensation Pursuant
to Plans", "Management--Indemnification of Directors and Officers",
"Certain Transactions", and "Underwriting" and (ii) in Item 14 and
Item 15 of the Registration Statement, insofar as such statements
constitute matters of law, summaries of legal matters, the Company's
charter or by-law provisions, documents or legal proceedings, or legal
conclusions, have been reviewed by such counsel and fairly present and
summarize, in all material respects, the matters referred to therein.
(xiv) To the best knowledge of such counsel, there are no
legal or governmental actions, suits or proceedings pending or
threatened which are required to be disclosed in the Registration
Statement, other than those disclosed therein.
(xv) To the best knowledge of such counsel, there are no
Existing Instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed or incorporated by
reference as exhibits thereto; and the descriptions thereof and
references thereto are correct in all material respects.
(xvi) No consent, approval, authorization or other order of;
or registration or filing with, any court or other governmental
authority or agency, is required for the Company's execution, delivery
and performance of the Underwriting Agreement and consummation of the
transactions contemplated thereby and by the Prospectus, except as
required under the Securities Act, applicable state securities or blue
sky laws and from the NASD.
(xvii) The execution and delivery of the Underwriting
Agreement by the Company and the performance by the Company of its
obligations thereunder (other than performance by the Company of its
obligations under the indemnification section of the Underwriting
Agreement, as to which no opinion need be rendered) (i) have been duly
authorized by all necessary corporate action on the part of the
Company, (ii) will not result in any violation of the provisions of the
charter or by-laws of the Company or any subsidiary, (iii) will not
constitute a breach of, or Default under, or result in the creation or
imposition of
Exhibit A-3
<PAGE>
any lien, charge or encumbrance upon any property or assets of the
Company or any of its subsidiaries pursuant to, (A) the Company's
[warehouse facilities and securitizations] or (B) to the best knowledge
of such counsel, any other material Existing Instrument, or (iv) to the
best knowledge of such counsel, will not result in any violation of any
law, administrative regulation or administrative or court decree
applicable to the Company or any subsidiary.
(xviii) The Company is not, and after receipt of payment for
the Common Shares will not be, an "investment company" within the
meaning of Investment Company Act.
(xix) Except as disclosed in the Prospectus under the caption
"Shares Eligible for Future Sale", to the best knowledge of such
counsel, there are no persons with registration or other similar rights
to have any equity or debt securities registered for sale under the
Registration Statement or included in the offering contemplated by the
Underwriting Agreement, other than the Selling Shareholder, except for
such rights as have been duly waived.
(xx) To the best knowledge of such counsel, neither the
Company nor any subsidiary is in violation of its charter or by-laws or
any law, administrative regulation or administrative or court decree
applicable to the Company or any subsidiary or is in Default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any material Existing Instrument, except in each
such case for such violations or Defaults as would not, individually or
in the aggregate, result in a Material Adverse Change.
In addition, such counsel shall state that they have
participated in conferences with officers and other representatives of
the Company, representatives of the independent public or certified
public accountants for the Company and with representatives of the
Underwriters at which the contents of the Registration Statement and
the Prospectus, and any supplements or amendments thereto, and related
matters were discussed and, although such counsel is not passing upon
and does not assume any responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement
or the Prospectus (other than as specified above), and any supplements
or amendments thereto, on the basis of the foregoing, nothing has come
to their attention which would lead them to believe that either the
Registration Statement or any amendments thereto, at the time the
Registration Statement or such amendments became effective, contained
an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus, as of its date or at the
First Closing Date or the Second Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading
(it being understood that such counsel need express no belief as to the
financial statements or other financial or statistical data
Exhibit A-4
<PAGE>
derived therefrom, included in the Registration Statement or the
Prospectus or any amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Maryland or the federal law of the United
States, to the extent they deem proper and specified in such opinion, upon the
opinion (which shall be dated the First Closing Date or the Second Closing Date,
as the case may be, shall be satisfactory in form and substance to the
Underwriters, shall expressly state that the Underwriters may rely on such
opinion as if it were addressed to them and shall be furnished to the
Underwriters) of other counsel of good standing whom they believe to be reliable
and who are satisfactory to counsel for the Underwriters; provided, however,
that such counsel shall further state that they believe that they and the
Underwriters are justified in relying upon such opinion of other counsel, and
(B) as to matters of fact, to the extent they deem proper, on certificates of
responsible officers of the Company and public officials.
With respect to the statements in the Prospectus under the captions
"Risk Factors - Government Regulation" and "Business - Government Regulation",
J. Barry Dumser, Vice President, General Counsel of the Company, may render the
opinions described in paragraph (xiii) above.
Exhibit A-5
<PAGE>
EXHIBIT B
The final opinion in draft form should be attached as Exhibit B at the time this
Agreement is executed.
The opinion of such counsel pursuant to Section 5(h) shall be rendered
to the Underwriters at the request of the Company and shall so state therein.
References to the Prospectus in this Exhibit B include any supplements thereto
---------
at the Closing Date.
(i) The Underwriting Agreement has been duly authorized,
executed and delivered by or on behalf of, and is a valid and binding
agreement of, such Selling Shareholder, enforceable in accordance with
its terms, except as rights to indemnification thereunder may be
limited by applicable law or public policy and except as the
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles.
(ii) The execution and delivery by such Selling Shareholder
of, and the performance by such Selling Shareholder of its obligations
under, the Underwriting Agreement and its Custody Agreement and its
Power of Attorney will not, to the best of such counsel's knowledge,
violate or contravene any provision of applicable law or regulation, or
violate, result in a breach of or constitute a default under the terms
of any other agreement or instrument to which such Selling Shareholder
is a party or by which it is bound, or any judgment, order or decree
applicable to such Selling Shareholder of any court, regulatory body,
administrative agency, governmental body or arbitrator having
jurisdiction over such Selling Shareholder.
(iii) Such Selling Shareholder has good and valid title to all
of the Common Shares which may be sold by such Selling Shareholder
under the Underwriting Agreement and has the legal right and power, and
all authorizations and approvals required to enter into the
Underwriting Agreement and its Custody Agreement and its Power of
Attorney, to sell, transfer and deliver all of the Common Shares which
may sold by such Selling Shareholder under the Underwriting Agreement
and to comply with its other obligations under the Underwriting
Agreement, its Custody Agreement and its Power of Attorney.
(iv) Each of the Custody Agreement and Power of Attorney of
such Selling Shareholder has been duly authorized, executed and
delivered by such Selling Shareholder and is a valid and binding
agreement of such Selling Shareholder, enforceable in accordance with
its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles.
(v) Assuming that the Underwriters purchase the Common
Shares which are sold by such Selling Shareholder pursuant to the
Underwriting
Exhibit B-1
<PAGE>
Agreement for value, in good faith and without notice of any adverse
claim, the delivery of such Common Shares pursuant to the Underwriting
Agreement will pass good and valid title to such Common Shares, free
and clear of any adverse claim within the meaning of the Uniform
Commercial Code.
(vi) To the best of such counsel's knowledge, no consent,
approval, authorization or other order of, or registration or filing
with, any court or governmental authority or agency, is required for
the consummation by such Selling Shareholder of the transactions
contemplated in the Underwriting Agreement, except as required under
the Securities Act, applicable state securities or blue sky laws, and
from the NASD.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Maryland or the federal law of the United
States, to the extent they deem proper and specified in such opinion, upon the
opinion (which shall be dated the First Closing Date or the Second Closing Date,
as the case may be, shall be satisfactory in form and substance to the
Underwriters, shall expressly state that the Underwriters may rely on such
opinion as if it were addressed to them and shall be furnished to the
Underwriters) of other counsel of good standing whom they believe to be reliable
and who are satisfactory to counsel for the Underwriters; provided, however,
that such counsel shall further state that they believe that they and the
Underwriters are justified in relying upon such opinion of other counsel, and
(B) as to matters of fact, to the extent they deem proper, on certificates of
the Selling Shareholder and public officials.
Exhibit B-2
<PAGE>
EXHIBIT C
[Date]
NationsBanc Montgomery Securities LLC
Ferris, Baker Watts, Incorporated
c/o NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
RE: Creditrust Corporation (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company by,
among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of NationsBanc
Montgomery Securities LLC (which consent may be withheld in its sole
discretion), directly or indirectly, sell, offer, contract or grant any option
to sell (including without limitation any short sale), pledge, transfer,
establish an open "put equivalent position" within the meaning of Rule 16a-1(h)
under the Securities Exchange Act of 1934, or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock, or
securities exchangeable or exercisable for or convertible into shares of Common
Stock currently or hereafter owned either of record or beneficially (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) by the
undersigned, or publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing through the
close of trading on the date 120 days after the date of the Prospectus;
provided, however, that the foregoing restrictions do not apply to options to
acquire shares of Common Stock granted to the undersigned before January 19,
1999, or shares of Common Stock acquired pursuant to the exercise of options
granted to the undersigned before January 19, 1999. The undersigned also agrees
and consents to the entry of stop transfer instructions with the Company's
transfer agent and registrar against the transfer of shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock held
by the undersigned except in compliance with the foregoing restrictions.
Exhibit C-1
<PAGE>
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
- -----------------------------
Printed Name of Holder
By:
- -----------------------------
Signature
- -----------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
Exhibit C-2
<PAGE>
Exhibit 5
[PIPER & MARBURY L.L.P. LETTERHEAD APPEARS HERE]
January 19, 1999
Creditrust Corporation
7000 Security Boulevard
Baltimore, Maryland 21244
Re: Registration Statement on Form S-1
----------------------------------
Gentlemen:
We have acted as counsel to Creditrust Corporation, a Maryland corporation
(the "Company"), in connection with the Company's Registration Statement on Form
S-1 (the "Registration Statement") filed with the Securities and Exchange
==============================
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"). The Registration Statement relates to up to 3,450,000 shares of the
Company's Common Stock, par value $.01 per share (the "Common Stock").
In this capacity, we have examined the Company's Charter and By-Laws, the
proceedings of the Board of Directors of the Company relating to the issuance of
the Common Stock and such other documents, instruments and matters of law as we
have deemed necessary to the rendering of this opinion. In such examination, we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, and the conformity with originals of all
documents submitted to us as copies.
Based upon the foregoing, we are of the opinion and advise you that each of
the shares of Common Stock described in the Registration Statement has been duly
authorized and, upon sale of such Common Stock as contemplated by the
Registration Statement, will be validly issued, fully paid and nonassessable.
<PAGE>
CREDITRUST CORPORATION
January 19, 1999
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name as it appears under the
caption "Legal Matters." In giving our consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Act or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Piper & Marbury L.L.P.
<PAGE>
Exhibit 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 9th day of
October, 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 D. Frey
(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, Recovery 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. Definitions. Unless the context otherwise requires, when used in
------------
this Agreement, the following terms shall have the following
meanings:
1
<PAGE>
i. "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.
ii. "Eligible Collectors" are defined as any collector 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.
iii. "Good Funds" are defined as any moneys that have been
deposited and have cleared. Any checks returned "NSF" would
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.
iv. "Group Average" is defined as the total amount of Good Funds
collected by the Eligible Collectors, divided by the number
of Eligible Collectors.
B. Base Compensation. Creditrust shall pay to Executive, an annual
------------------
base salary of One Hundred Fifty Thousand Dollars ($150,000)
during the term of the Agreement. Creditrust shall pay Executive's
annual salary to him in accordance with standard payment practices
of Creditrust as adopted or employed by Creditrust from time.
C. Incentive Compensation. Executive 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
2
<PAGE>
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.
D. Management Bonus. The Recovery Manager will also receive a
-----------------
management bonus of $10.00 for each Eligible Collector.
E. 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.
3
<PAGE>
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.
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.
4
<PAGE>
11) MISCELLANEOUS 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 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, Chairman and CEO
THE EXECUTIVE
/s/ John D. Frey
- -----------------------------------------
John D. Frey
5
<PAGE>
Exhibit 10.16
================================================================================
CREDIT AGREEMENT
between
CREDITRUST CORPORATION
as Borrower
THE LENDERS PARTY HERETO
and
SUNROCK CAPITAL CORP.
as Agent
Dated as of October 28, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
BACKGROUND .............................................................. 1
SECTION 1. DEFINITIONS ................................................. 1
1.1. Defined Terms ................................................. 1
1.2. Other Definitional Provisions ................................. 12
1.3. Construction .................................................. 12
SECTION 2. THE LOANS ................................................... 13
2.1. Loans ......................................................... 13
2.2. Loan Procedures ............................................... 14
2.3. General Provisions Regarding Loans ............................ 15
2.4. Fees .......................................................... 15
2.5. Notes; Repayment of Loans ..................................... 16
2.6. Interest on Loans ............................................. 16
2.7. Default Rate; Inability to Determine Interest Rate ............ 17
2.8. Termination and Extension of Commitment ....................... 17
2.9. Optional and Mandatory Prepayments of Loans ................... 18
2.10. Illegality .................................................... 18
2.11. Requirements of Law ........................................... 19
2.12. Taxes ......................................................... 20
2.13. Indemnity ..................................................... 21
2.14. Pro Rata Treatment, etc ....................................... 22
2.15. Payments; Loan Account ........................................ 22
2.16. Conversion and Continuation Options ........................... 23
SECTION 3. REPRESENTATIONS AND WARRANTIES .............................. 24
3.1. Financial Condition ........................................... 24
3.2. No Adverse Change ............................................. 24
3.3. Existence; Compliance with Law ................................ 24
3.4. Power; Authorization; Enforceable Obligations ................. 24
3.5. No Legal Bar .................................................. 25
3.6. No Material Litigation ........................................ 25
3.7. No Default .................................................... 25
3.8. Taxes ......................................................... 25
3.9. Federal Regulations ........................................... 25
3.10. ERISA ......................................................... 26
3.11. Investment Company Act; Public Utility Holding Company Act .... 26
3.12. Purpose of Loans .............................................. 27
3.13. Environmental Matters ......................................... 27
3.14. Patents, Trademarks, etc ...................................... 28
3.15. Ownership of Property ......................................... 28
3.16. Licenses, etc ................................................. 28
3.17. No Burdensome Restrictions .................................... 28
3.18. Labor Matters ................................................. 28
3.19. No Material Misstatements ..................................... 28
3.20. Asset Purchase Agreements and Receivables ..................... 28
3.21. Title to Collateral; Perfected Security Interest .............. 29
i
<PAGE>
3.22. Year 2000 ..................................................... 29
SECTION 4. CONDITIONS PRECEDENT; CLOSING ............................... 29
4.1. Conditions to Closing ......................................... 29
4.2. Conditions to Each Loan ....................................... 31
4.3. Conditions to Release of Collateral ........................... 32
4.4. Closing ....................................................... 33
SECTION 5. AFFIRMATIVE COVENANTS ....................................... 33
5.1. Financial Statements .......................................... 33
5.2. Certificates; Other Information ............................... 34
5.3. Payment of Obligations ........................................ 34
5.4. Conduct of Business and Maintenance of Existence .............. 35
5.5. Maintenance of Property; Insurance ............................ 35
5.6. Inspection of Property; Books and Records; Discussions ........ 36
5.7. Notices ....................................................... 36
5.8. Environmental Laws ............................................ 37
5.9. Compliance with Security Documents ............................ 37
5.10. Establishment of Borrower Collection Accounts ................ 37
SECTION 6. NEGATIVE COVENANTS .......................................... 37
6.1. Net Worth Covenant ............................................ 37
6.2. Limitation on Debt ............................................ 38
6.3. Limitation on Liens ........................................... 38
6.4. Prohibitions on Fundamental Changes ........................... 39
6.5. Limitation on Sale of Assets .................................. 39
6.6. Prohibitions on Acquisitions .................................. 40
6.7. Prohibition on Distributions .................................. 40
6.8. Limitation on Contingent Obligations .......................... 40
6.9. Transactions with Affiliates .................................. 40
6.10. Continuation of or Change in Business ......................... 40
6.11. Preservation of Status of Collateral .......................... 40
SECTION 7. EVENTS OF DEFAULT ........................................... 41
7.1. Events of Default ............................................. 41
7.2. Remedies ...................................................... 43
SECTION 8. THE AGENT ................................................... 45
8.1. Appointment ................................................... 45
8.2. Delegation of Duties .......................................... 45
8.3. Exculpatory Provisions ........................................ 45
8.4. Reliance by Agent ............................................. 45
8.5. Notice of Default ............................................. 46
8.6. Non-Reliance on Agent and Other Lenders ....................... 46
8.7. Indemnification ............................................... 46
8.8. Agent in its Individual Capacity .............................. 47
8.9. Successor Agent ............................................... 47
8.10. Beneficiaries ................................................. 47
SECTION 9. MISCELLANEOUS ............................................... 47
9.1. Amendments and Waivers ........................................ 47
ii
<PAGE>
9.2. Notices ....................................................... 48
9.3. No Waiver; Cumulative Remedies ................................ 49
9.4. Survival of Representations and Warranties .................... 49
9.5. Payment of Expenses and Taxes ................................. 49
9.6. Successors and Assigns ........................................ 50
9.7. Confidentiality ............................................... 53
9.8. Adjustments; Set-off .......................................... 53
9.9. Counterparts .................................................. 54
9.10. Severability .................................................. 54
9.11. Integration ................................................... 54
9.12. GOVERNING LAW ................................................. 55
9.13. Submission To Jurisdiction; Waivers ........................... 55
9.14. Acknowledgements .............................................. 55
SCHEDULES
SCHEDULE I Lender and Commitment Information
SCHEDULE 3.6 Existing Litigation
SCHEDULE 3.10 ERISA Matters
SCHEDULE 3.13 Environmental Matters
SCHEDULE 6.2 Existing Debt of the Borrower
SCHEDULE 6.3 Existing Liens
EXHIBITS
EXHIBIT A Form of Borrowing Request
EXHIBIT B Form of Note
EXHIBIT C Form of Assignment and Acceptance
EXHIBIT D Form of Opinion
iii
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT ("Agreement") dated as of October 28, 1998, by and
among CREDITRUST CORPORATION, a Maryland corporation (the "Borrower"), the
financial institutions from time to time parties to this Agreement (the
"Lenders") and SUNROCK CAPITAL CORP., a Delaware corporation, as agent (in such
capacity, the "Agent").
BACKGROUND
----------
1. The Borrower is engaged in the business of acquiring, managing and
collecting accounts of delinquent consumer debt, such as VISA(R), Mastercard(R)
and private label credit card accounts and consumer loan accounts issued by
originating institutions.
2. The Borrower has requested that the Lenders extend a revolving line of
credit to the Borrower for the purpose of providing funds to allow the Borrower
to acquire additional Receivables (as defined below) pursuant to certain asset
purchase agreements.
NOW, THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements herein set forth and for other consideration, the
receipt and sufficiency of which is hereby acknowledged and intending to be
legally bound hereby, covenant and agree as follows:
SECTION 1. DEFINITIONS
1.1. Defined Terms . As used in this Agreement, the following terms shall
-------------
have the following meanings:
"Acquired Eligible Portfolio: an Eligible Portfolio which has been acquired
---------------------------
by the Borrower and financed in part with the proceeds of a Loan.
"Affiliate": any Person (other than a Subsidiary, or an officer,
---------
director or employee of the Borrower who would not be an Affiliate but for
such Person's status as an officer, director and/or employee) which, directly
or indirectly, through one or more intermediaries, controls, or is controlled
by, or is under common control with, the Borrower, and any member, director,
officer or employee of any such Person or any Subsidiary of the Borrower. For
purposes of this definition, "control" shall mean the power, directly or
indirectly, either to (i) vote 5% or more of the securities having ordinary
voting power for the election of directors of such Person or (ii) direct or
in effect cause the direction of the management and policies of such Person
whether by contract or otherwise.
"Asset Purchase Agreement": each asset purchase agreement entered into
------------------------
between the Borrower and each Originating Institution in connection with the
purchase of Receivables by the Borrower from such Originating Institution.
<PAGE>
"Base Rate": for any day, a rate per annum (rounded upwards, if necessary,
---------
to the next 1/100th of 1%) equal to the Prime Rate in effect on such day. Any
change in the Base Rate due to a change in the Prime Rate shall be effective on
the effective date of such change in the Prime Rate.
"Base Rate Borrowing": a Borrowing comprised of Base Rate Loans.
-------------------
"Base Rate Loans": Loans bearing interest at a rate determined by reference
---------------
to the Base Rate.
"Borrower Collection Accounts": the bank deposit account or accounts
----------------------------
established by the Borrower in the name of the Borrower, in each case in order
to receive payments on the Receivables from all Portfolios which have not been
transferred or become otherwise subject to a Securitized Offering, which is
assigned to and shall, upon the occurrence of an Event of Default, be subject to
the control of the Agent, for the benefit of the Lenders.
"Borrowing": a group of Loans of a single Type made by the Lenders on a
---------
single date and, as to Eurodollar Loans, as to which a single Interest Period is
in effect.
"Borrowing Request": a request made pursuant to Section 2.2 in
-----------------
substantially the form of Exhibit A hereto.
"Business Day": a day other than a Saturday, Sunday or other day on which
------------
commercial banks in Philadelphia, Pennsylvania or Baltimore, Maryland are
authorized or required by law to close; provided, however, that, when used in
connection with a Eurodollar Loan, the term "Business Day" shall also exclude
any day on which banks are not open for dealings in dollar deposits in the
London Interbank Market.
"Capital Lease": at any time, a lease with respect to which the lessee is
-------------
required to recognize the acquisition of an asset and the incurrence of a
liability in accordance with GAAP.
"Capital Stock": any and all shares, interests, participation or other
-------------
equivalents (however designated) of capital stock of a corporation, any and all
equivalent ownership interests in a Person (other than a corporation) and any
and all warrants or options to purchase any of the foregoing.
"Change of Control": At any time after the Closing Date Joseph K. Rensin
-----------------
ceases for any reason to own and control, directly or indirectly, at least 51%
of the outstanding voting stock of the Borrower, provided, however, that if
Capital Stock of Borrower is sold in a public offering, no Change of Control
shall occur so long as he remains the owner of at least 25% of the outstanding
voting stock of the Borrower and remains the largest shareholder.
"Closing": as defined in Section 4.4.
-------
2
<PAGE>
"Closing Date": as defined in Section 4.4.
------------
"Code": the Internal Revenue Code of 1986, as amended from time to time.
----
"Collateral": all right, title and interest of the Borrower in and to the
----------
Receivables and other property described in Section 2 of the Security Agreement.
"Commitment": as to any Lender, the obligation of such Lender to make Loans
----------
to the Borrower hereunder in an aggregate principal amount at any one time
outstanding not to exceed the amount set forth opposite such Lender's name on
Schedule I hereto or in the Assignment and Acceptance pursuant to which such
Lender becomes a party to this Agreement, as the same may be permanently
terminated and extended from time to time pursuant to the provisions of Section
2.8 or changed by subsequent assignments pursuant to subsection 9.6(b).
"Commitment Fee": as defined in subsection 2.4(b).
--------------
"Commitment Percentage": as to any Lender at any time, the proportion
---------------------
(expressed as a percentage) that such Lender's Commitment bears to the Total
Commitment (or, at any time after the Commitments shall have expired or been
terminated, the percentage which the amount of such Lender's Loans constitutes
of the aggregate amount of the Loans of the Lenders then outstanding).
"Commonly Controlled Entity": an entity, whether or not incorporated, which
--------------------------
is under common control with the Borrower within the meaning of Section 4001 of
ERISA or is part of a group which includes the Borrower and which is treated as
a single employer under Section 414 of the Code.
"Contingent Obligation": with respect to any Person any obligation (except
---------------------
the endorsement in the ordinary course of business of instruments for deposit or
collection) of such Person guaranteeing or in effect guaranteeing any Debt of
any other Person (for the purpose of this definition, the "Primary Obligor") in
any manner, whether directly or indirectly, including (without limitation) Debt
incurred through an agreement, contingent or otherwise, by such Person:
(a) to purchase such Debt of the Primary Obligor or any Property or
assets constituting security therefor;
(b) to advance or supply funds
(i) for the purpose of payment of such Debt, or
(ii) to maintain working capital or other balance sheet
condition or any income statement condition of the Primary Obligor or
otherwise to advance or make available funds for the purchase or
payment of such Debt or obligation; or
3
<PAGE>
(c) to lease Property or to purchase Securities or other Property or
services primarily for the purpose of assuring the owner of such Debt or
obligation of the ability of the Primary Obligor to make payment of the
Debt or obligation.
For purposes of computing the amount of any Contingent Obligation, in connection
with any computation of Debt or other obligation, it shall be assumed that,
without duplication, the Debt or other obligation of the Primary Obligor that is
the subject of such Contingent Obligation is a direct obligation of the issuer
of such Contingent Obligation.
"Contractual Obligation": as to any Person, any provision of any security
----------------------
issued by such Person or of any material agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound the breach of which could reasonably be expected to have a
Material Adverse Effect.
"Debt": For any Person: (a) obligations created, issued or incurred by such
----
Person for borrowed money (whether by loan, the issuance and sale of debt
securities or the sale of property to another Person subject to an understanding
or agreement, contingent or otherwise, to repurchase such property from such
Person); (b) obligations of such Person to pay the deferred purchase or
acquisition price of property or services, other than trade accounts payable
arising, and accrued expenses incurred, in the ordinary course of business so
long as such trade accounts payable are payable within 90 days of the date the
respective goods are delivered or the respective services are rendered; (c)
indebtedness of others secured by a Lien on the property of such Person, whether
or not the respective indebtedness so secured has been assumed by such Person
(but excluding any such Debt to the extent that such Debt exceeds the fair
market value of such assets, as established by the Borrower to the reasonable
satisfaction of the Agent, unless such Debt is assumed by such Person); (d) the
non-contingent obligations of such Person under letters of credit or similar
instruments issued or accepted by banks and other financial institutions for the
account of such Person; (e) obligations under Capital Leases of such Person; (f)
Contingent Obligations of such Person; (g) all non-contingent payment
obligations of such Person under any interest rate protection agreement
(including without limitation any interest rate swaps, caps, floors, collars and
similar agreements) and currency swaps and similar agreements; (h) the liability
of such Person in respect of banker's acceptances and the estimated liability
under any participating mortgage, convertible mortgage or similar arrangement;
(i) all indebtedness, payment obligations and contingent obligations of any
partnership in which such Person holds a general partnership interest but only
if and to the extent such Person has recourse liability for such obligations;
and (j) all obligations, liabilities, reserves and any other items that would be
listed as a liability on a balance sheet of such Person determined on a
consolidated basis in accordance with GAAP, but excluding all general
contingency reserves and reserves for deferred income taxes and investment
credit and excluding trade accounts payable excluded from this definition
pursuant to clause (b) above.
4
<PAGE>
"Default": any of the events specified in Section 7, whether or not any
-------
requirement for the giving of notice, the lapse of time, or both, or any other
condition precedent therein set forth, has been satisfied.
"Distribution": in respect of any corporation or limited liability company,
------------
(a) dividends, distributions or other payments on account of any capital stock
of the corporation or interests in the limited liability company (except
distributions in common stock of such corporation); (b) the redemption or
acquisition of such stock or interests or of warrants, rights or other options
to purchase such stock or interests (except when solely in exchange for common
stock of such corporation); and (c) any payment on account of, or the setting
apart of any assets for a sinking or other analogous fund for, the purchase,
redemption, defeasance, retirement or other acquisition of any share of any
class of capital stock of such corporation or of interests in such limited
liability company or any warrants or options to purchase any such stock or
interests.
"Dollars" and "$": dollars in lawful currency of the United States of
------- -
America.
"Eligible Portfolio": any Portfolio which at the time of purchase has a PAT
------------------
Recovery Estimate of not less than the product of * .
"Environmental Laws": any and all foreign, Federal, state, local or
------------------
municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees
or binding requirements of any Governmental Authority, or binding Requirement of
Law (including common law) regulating, relating to or imposing liability or
standards of conduct concerning protection of the environment, as now or may at
any time hereafter be in effect.
"ERISA": the Employee Retirement Income Security Act of 1974, as amended
-----
from time to time.
"Eurocurrency Reserve Requirements": for any day as applied to a Eurodollar
---------------------------------
Loan, the aggregate (without duplication) of the rates (expressed as a decimal
fraction) of reserve requirements applicable to any Lender in effect on such day
(including, without limitation, basic, supplemental, marginal and emergency
reserves under any regulations of the Board of Governors of the Federal Reserve
System or other Governmental Authority having jurisdiction with respect thereto)
dealing with reserve requirements prescribed for eurocurrency funding (currently
referred to as "Eurocurrency Liabilities" in Regulation D of such Board)
maintained by a member bank of such System.
"Eurodollar Base Rate": with respect to any Eurodollar Loan for any
--------------------
Interest Period, the rate of interest per annum for a period equal to such
Interest Period published from time to time in the Wall Street Journal as the
-------------------
average of the London interbank offered rates of interest per annum for Dollars
quoted by major banks designated by the British Bankers' Association (or
appropriate successor) or if the Wall Street Journal shall
-------------------
5
<PAGE>
cease to publish such a rate, in such other financial publication of recognized
standing as the Agent shall select.
"Eurodollar Borrowing": a Borrowing comprised of Eurodollar Loans.
--------------------
"Eurodollar Loan": any Loan bearing interest at a rate determined by
---------------
reference to the Eurodollar Rate in accordance with the provisions of Section 2.
"Eurodollar Rate": with respect to each Interest Period pertaining to a
---------------
Eurodollar Loan, a rate per annum determined in accordance with the following
formula (rounded upward to the nearest 1/100th of 1%):
Eurodollar Base Rate
---------------------------------------
1.00 - Applicable Eurocurrency Reserve Requirements
"Event of Default": any of the events specified in Section 7, provided that
----------------
any requirement for the giving of notice, the lapse of time, or both, or any
other condition, has been satisfied.
"Exchange Act": The Securities Exchange Act of 1934, as amended.
------------
"Exposure": as to any Lender at any date, an amount equal to the aggregate
--------
principal amount of all Loans made by such Lender then outstanding
"Fee Letter": that certain letter dated the Closing Date between the
----------
Lenders and the Agent providing for the allocation of interest and fees payable
hereunder and under the Notes, as the same may hereafter be amended, modified or
supplemented pursuant to the applicable provisions thereof.
"GAAP": at any time with respect to the determination of the character or
----
amount of any asset or liability or item of income or expense, or any
consolidation or other accounting computation, generally accepted accounting
principles as in effect on the date of, or at the end of the period covered by,
the financial statements from which such asset, liability, item of income, or
item of expense, is derived, or, in the case of any such computation, as in
effect on the date when such computation is required to be determined.
"Governmental Authority": any nation or government, any state or other
----------------------
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
"Insolvency": with respect to any Multiemployer Plan, the condition that
----------
such Plan is insolvent within the meaning of Section 4245 of ERISA.
"Insolvent": pertaining to a condition of Insolvency.
---------
6
<PAGE>
"Interest Payment Date": as to any Loan, the first day of each month
---------------------
commencing on November 1, 1998.
"Interest Period": with respect to any Eurodollar Loan:
---------------
(a) initially the period commencing on the borrowing or conversion
date, as the case may be, with respect to such Eurodollar Loan and ending one,
three or six months thereafter, as selected by the Borrower in its notice of
borrowing or notice of conversion, given with respect thereto; and
(b) thereafter, each period commencing on the last day of the next
preceding Interest Period applicable to such Eurodollar Loan and ending one,
three or six months thereafter, as selected by the Borrower by irrevocable
notice to the Lender not less than two Business Days prior to the last day of
the then current Interest Period with respect thereto;
provided that, the foregoing provisions relating to Interest Periods are subject
- -------- ----
to the following:
(i) if any Interest Period would end on a day other than a Business
Day, such Interest Period shall be extended to the next succeeding Business Day
unless, with respect to Eurodollar Loans only, such next succeeding Business Day
would fall in the next calendar month, in which case such Interest Period shall
end on the next preceding Business Day;
(ii) with respect to Eurodollar Loans, any Interest Period that begins
on the last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of a calendar month; and
(iii) an Interest Period that otherwise would extend beyond the
Termination Date shall end on the Termination Date.
"Lien": any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other security
interest or any preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement and any Capital Lease having
substantially the same economic effect as any of the foregoing).
"Loan Account": as defined in subsection 2.14(d).
------------
"Loans": the revolving loans made by the Lenders to the Borrower pursuant
to Section 2.2(a). Each Loan shall be a Eurodollar Loan or a Base Rate Loan.
7
<PAGE>
"Loan Documents": this Agreement, the Notes, the Security Agreement and the
--------------
Support Agreement.
"Material Adverse Effect": a material adverse effect on (a) the business,
-----------------------
financial condition or results of operations of the Borrower or (b) the ability
of the Borrower duly and punctually to pay its material Debts or (c) the ability
of the Borrower duly and punctually to perform its obligations hereunder or
under any of the other Loan Documents.
"Material Subsidiary": any Subsidiary of the Borrower having at any time
-------------------
assets valued on its books in excess of $2,000,000.
"Materials of Environmental Concern": any gasoline or petroleum (including
----------------------------------
crude oil or any fraction thereof) or petroleum products or any hazardous or
toxic substances, materials or wastes, defined or regulated as such in or under
any Environmental Law, including, without limitation, asbestos, polychlorinated
biphenyls, and ureaformaldehyde insulation.
"Multiemployer Plan": a Plan which is a multiemployer plan as defined in
------------------
Section 4001(a)(3) of ERISA.
"Net Proceeds": 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 deducted from collections on such Receivable and
will not constitute Net Proceeds.
"Net Worth" at any particular date, Stockholder's Equity as required by
---------
GAAP to be reported on the Borrower's financial statements.
"Note or Notes": the individual or collective reference to the promissory
-------------
note or notes of the Borrower in the form of Exhibit B executed and delivered as
provided in Section 2.6.
"Obligor": as to any Receivable, means any Person who owes or may be liable
-------
for payments under such Receivable.
"Originating Institution": any of the banking institutions and merchants
-----------------------
that originated any of the Receivables.
"Participant": as defined in subsection 8.6(b).
-----------
"PAT" or "Portfolio Analysis Tool": the Borrower's proprietary computer
--- -----------------------
software which it uses to review and analyze the Receivables in each Portfolio
in order to project anticipated recoveries on such Receivables over certain time
periods.
8
<PAGE>
"PAT Recovery Estimate": the valuation of the recovery potential of a
---------------------
Portfolio performed by the Borrower to project its expected value through the
application of PAT.
"PBGC": the Pension Benefit Guaranty Corporation established pursuant to
----
Subtitle A of Title IV of ERISA.
"Person": an individual, partnership, corporation, business trust, joint
------
stock company, limited liability company, trust, unincorporated association,
joint venture, Governmental Authority or other entity of whatever nature.
"Plan": at a particular time, any employee benefit plan which is covered by
----
ERISA and in respect of which the Borrower or a Commonly Controlled Entity is
(or, if such plan were terminated at such time, would under Section 4069 of
ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA.
"Portfolio": at any date, the aggregate Receivables purchased by the
---------
Borrower from an Originating Institution pursuant to an Asset Purchase
Agreement.
"Portfolio Purchase Price": for each Portfolio, an amount equal to the
------------------------
purchase price of such Portfolio paid or to be paid pursuant to the Asset
Purchase Agreement in respect thereof.
"Prime Rate": the rate of interest per annum published from time to time in
----------
the Wall Street Journal which is designated as the prime rate for domestic
commercial banks or, if the Wall Street Journal shall cease to publish such a
prime rate, in such other financial publication of recognized standing as the
Agent shall select.
"Property": any interest in any kind of property or asset, whether real,
--------
personal or mixed, and whether tangible or intangible.
"Receivable": any receivable generated on a credit card account, revolving
----------
account, or installment account and identified on a Schedule of Receivables.
"Receivable File": with respect to each Receivable, (i) the related Asset
---------------
Purchase Agreement; (ii) any other documents or records received from or made by
the related Originating Institution in respect of such Receivable; (iii) a copy
of the marked computer records indicating the interest of the Agent on behalf of
the Lenders, as evidenced by a Schedule of Receivables; and (iv) any and all
other documents that the Borrower shall keep on file, in accordance with its
customary procedures, relating to such Receivable or the related Obligor.
"Receivables Purchase Agreement": an agreement pursuant to which the
------------------------------
Borrower agrees to sell to a Special Purpose Entity, and such Special Purpose
Entity agrees to purchase, all or any portion of the Receivables.
9
<PAGE>
"Regulation U": Regulation U of the Board of Governors of the Federal
------------
Reserve System as from time to time in effect, and all official rulings and
interpretations thereunder or thereof.
"Regulation X": Regulation X of the Board of Governors of the Federal
------------
Reserve System as from time to time in effect, and all official rulings and
interpretations thereunder or thereof.
"Related Collateral": as defined in the Security Agreement.
------------------
"Reorganization": with respect to any Multiemployer Plan, the condition
--------------
that such plan is in reorganization within the meaning of Section 4241 of ERISA.
"Reportable Event": any of the events set forth in Section 4043(b) of
----------------
ERISA, except to the extent that notice thereof has been waived by the PBGC.
"Required Lenders": at any time, Lenders, the Exposure of which aggregate
----------------
at least 66 2/3% of the Total Exposure at such time.
"Requirement of Law": as to any Person, the certificate of incorporation,
------------------
by-laws, operating agreement or other organizational or governing documents of
such Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case binding upon
such Person or any of its property or to which such Person or any of its
property is subject.
"Responsible Officer": the chief executive officer, president, or chief
-------------------
financial officer.
"S&P": Standard & Poor's Rating Group, a division of McGraw-Hill
---
Corporation.
"Schedule of Receivables": the computer records (which may consist of a
-----------------------
CD-Rom) containing a true and complete list of all of the Receivables owned by
the Borrower, delivered to the Agent which Schedule shall be updated by the
Borrower on a monthly basis.
"Security": "security" as defined in Section 2(1) of the Securities Act of
--------
1933, as amended.
"Security Agreement": the Security Agreement of even date herewith between
------------------
the Borrower and the Agent granting to the Agent for the ratable benefit of the
Lenders a security interest in the Borrower's Receivables and other Property as
described therein, as the same may hereafter be amended, modified or
supplemented pursuant to the applicable provisions thereof.
10
<PAGE>
"Securitized Offering": an offering of notes or other securities backed by
--------------------
receivables similar to the Receivables pursuant to which such receivables are
transferred by the Borrower to another Person making the offering.
"Single Employer Plan": any Plan which is covered by Title IV of ERISA, but
--------------------
which is not a Multiemployer Plan.
"Solvent": as to any Person, as of the time of determination, the financial
-------
condition under which the following conditions are satisfied:
(a) the fair market value of the assets of such Person will exceed the
debts and liabilities, subordinated, contingent or otherwise, of such
Person;
(b) the present fair saleable value of the Property of such Person
will be greater than the amount that will be required to pay the probable
liability of such Person on its debts and other liabilities, subordinated,
contingent or otherwise, as such debts and other liabilities become
absolute and matured;
(c) such Person will be able to pay its debts and liabilities,
subordinated, contingent or otherwise, as such debts and liabilities become
absolute and matured; and
(d) such Person will not have unreasonably small capital with which to
conduct the businesses in which it is engaged as such businesses are then
conducted and are proposed to be conducted after the date thereof.
"Special Purpose Entity": any special purpose corporation, limited
----------------------
partnership, limited liability company, trust or other vehicle created by
Borrower solely for the purpose of a Securitized Offering.
"Subsidiary": as to any Person, (i) any corporation, limited liability
----------
company, company or trust of which 50% or more (by number of shares or number of
votes) of the outstanding capital stock, interests, shares or similar items of
beneficial interest normally entitled to vote for the election of one or more
directors, members or trustees (regardless of any contingency which does or may
suspend or dilute the voting rights) is at such time owned directly or
indirectly by such person or one or more of such Person's Subsidiaries, or any
partnership of which such Person is a general partner or of which 50% or more of
the partnership interests is at the time directly or indirectly owned by such
Person or one or more of such Person's Subsidiaries, and (ii) any corporation,
company, trust, partnership or other entity which is controlled or capable of
being controlled by such Person or one or more of such Person's subsidiaries.
"Support Agreement": the Support Agreement of even date herewith from
-----------------
Joseph K. Rensin in favor of the Agent for the ratable benefit of the Lenders,
as the same may hereafter be amended, modified or supplemented pursuant to the
applicable provisions thereof.
11
<PAGE>
"Termination Date": October 28, 2001, or any subsequent date to which the
----------------
Termination Date shall have been extended pursuant to subsection 2.8(c).
"Third-Party Fees": with respect to a Receivable, the amount of any court
----------------
costs, fees and compensation paid or owed to unrelated third-parties (generally,
contingency fee lawyers) retained or otherwise engaged by the Borrower, under
fee or compensation arrangements that are contingent upon, and determined by
reference to, amounts recovered in respect of the related Receivable.
"Total Commitment": at any time, the aggregate amount of the Lenders'
----------------
Commitments, as in effect at such time.
"Total Exposure": at any time, the aggregate amount of the Lenders'
--------------
Exposures at such time.
"Tranche": the collective reference to Eurodollar Loans in each case whose
-------
Interest Periods begin on the same date and end on the same later date (whether
or not such Loans originally were made on the same date).
"Type": when used in respect of any Loan or Borrowing, shall refer to the
----
Rate by reference to which interest on such Loan or on the Loans comprising such
Borrowing is determined. For purposes hereof, "Rate" shall include the
Eurodollar Rate or the Base Rate.
"Voting Stock": capital stock of any class or classes of a corporation the
------------
holders of which are ordinarily, in the absence of contingencies, entitled to
elect a majority of the directors (or Persons performing similar functions) and,
as applicable, any equity, participation or ownership interests in any
partnership, business trust, joint stock company, limited liability company,
trust, unincorporated association, joint venture or any other Person which
interests are similar by analogy to capital stock or ownership rights giving
rise to voting or governance rights.
1.2. Other Definitional Provisions. Unless otherwise specified therein,
-----------------------------
all terms defined in this Agreement shall have the defined meanings when used in
the Notes, the other Loan Documents or any certificate or other document made or
delivered pursuant hereto.
1.3. Construction. (a) Unless the context of this Agreement otherwise
------------
clearly requires, references to the plural include the singular, the singular
the plural and the part the whole, "or" has the inclusive meaning represented by
the phrase "and/or," and "including" has the meaning represented by the phrase
"including without limitation." References in this Agreement to "determination"
of or by the Agent or the Lenders shall be deemed to include good faith
estimates by the Agent or the Lenders (in the case of quantitative
determinations) and good faith beliefs by the Agent or the Lenders (in the case
of qualitative determinations). Whenever the Agent or the Lenders are granted
the right herein to act in their sole discretion or to grant or withhold consent
such right shall be exercised in good faith. All references herein to the
"knowledge of" or "best knowledge of" a Borrower shall be deemed to refer to the
knowledge of
12
<PAGE>
a Responsible Officer thereof. The words "hereof," "herein," "hereunder",
"hereby" and similar terms in this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement. The section and other
headings contained in this Agreement and the Table of Contents preceding this
Agreement are for reference purposes only and shall not control or affect the
construction of this Agreement or the interpretation thereof in any respect.
Section, subsection, schedule and exhibit references are to this Agreement
unless otherwise specified.
(b) Except as otherwise provided in this Agreement, all
computations and determinations as to accounting or financial matters and all
financial statements to be delivered pursuant to this Agreement shall be made
and prepared in accordance with GAAP (including principles of consolidation
where appropriate) applied on a basis consistent (except for changes concurred
in by the Borrower's independent public accountants) with the financial
statements contained in the Borrower's final prospectus dated July 29, 1998 and
the Borrower's form 10-Q filed September 11, 1998. As used herein and in the
Notes, and any certificate or other document made or delivered pursuant hereto,
accounting terms relating to the Borrower thereof not defined in subsection 1.1
and accounting terms partly defined in subsection 1.1, to the extent not
defined, shall have the respective meanings given to them under GAAP. In the
event that any future change in GAAP, without more, materially affects the
Borrower's compliance with any financial covenant herein, the Borrower and the
Lenders and the Agent shall use their best efforts to modify such covenant in
order to account for such change and to secure for the Lenders the intended
benefits of such covenant.
SECTION 2. THE LOANS
2.1. Loans. (a) Subject to the terms and conditions and relying upon the
-----
representations and warranties herein set forth, each Lender, severally and not
jointly, agrees to make Loans to the Borrower for the purpose described in
Section 3.12, at any time and from time to time on or after the date hereof and
until the Termination Date or until the Commitment of such Lender shall have
been terminated in accordance with the terms hereof, in an aggregate principal
amount at any time outstanding not exceeding the amount of such Lender's
Commitment, provided that, no Loan made by the Lenders shall exceed 80% of the
-------------
Portfolio Purchase Price for the Eligible Portfolio being acquired with the
proceeds of such Loan and provided further that (i) no Loan shall be made if
---------------------
after giving effect to the making of such Loan and the simultaneous application
of the proceeds thereof, the outstanding aggregate principal amount of all Loans
made by all Lenders exceeds the Total Commitment at such time and (ii) at all
times the outstanding aggregate principal amount of all Loans required to be
made by each Lender shall equal the product of (y) its Commitment Percentage
times (z) the outstanding aggregate principal amount of all Loans required to be
made pursuant to Section 2.2 at such time.
(b) Each Loan shall be made as part of a Borrowing consisting
of Loans made by the Lenders ratably in accordance with their Commitment
Percentages and Section 2.14; provided, however, that, the failure of any Lender
to make any Loan shall not in itself relieve any other Lender of its obligation
to lend hereunder (it being understood, however, that no Lender shall be
responsible for the failure of any other Lender to make any Loan required to be
made by such other Lender).
13
<PAGE>
Within the foregoing limits, the Borrower may borrow, repay and reborrow
under the Commitments on or after the date hereof and prior to the Termination
Date, subject to the terms, provisions and limitations set forth herein.
2.2. Loan Procedures. (a) In order to request a Borrowing, the Borrower
---------------
shall hand deliver or telecopy (or notify by telephone and promptly confirm by
hand delivery or telecopy) to the Agent the completed Borrowing Request (i) in
the case of a Eurodollar Borrowing, not later than 2:00 p.m., Philadelphia time,
three Business Days before a proposed Borrowing and (ii) in the case of a Base
Rate Borrowing, not later than 11:00 a.m., Philadelphia time, on the day of a
proposed Borrowing. Such notice shall be irrevocable and shall in each case
specify (x) whether the Borrowing then being requested is to be a Eurodollar
Borrowing or a Base Rate Borrowing; (y) the date of such Borrowing (which shall
be a Business Day) and the amount thereof; and (z) if such Borrowing is to be a
Eurodollar Borrowing, the Interest Period with respect thereto. If no election
as to the Type of Borrowing is specified in any such notice, then the requested
Revolving Borrowing shall be a Base Rate Borrowing. If no Interest Period with
respect to any Eurodollar Borrowing is specified in any such notice, then the
Borrower shall be deemed to have selected an Interest Period of one month's
duration. The Agent shall promptly advise the Lenders of any notice given
pursuant to this Section 2.2 and of each Lender's portion of the requested
Borrowing.
(b) Subject to Section 2.3(a), each Lender shall make each Loan to be
made by it hereunder on the proposed date thereof by wire transfer of
immediately available funds to the designated account of the Agent in
Philadelphia, Pennsylvania, not later than 2:00 p.m., Philadelphia time, and the
Agent shall by 3:00 p.m., Philadelphia time, wire transfer the amounts so
received to the designated account of the Borrower or, if a Borrowing shall not
occur on such date because any condition precedent herein specified shall not
have been met, return the amounts so received to the respective Lenders. Unless
the Agent shall have received notice from a Lender prior to the date of any
Borrowing that such Lender will not make available to the Agent such Lender's
portion of such Borrowing, the Agent may assume that such Lender has made such
portion available to the Agent on the date of such Borrowing in accordance with
this paragraph (b) and the Agent may, in reliance upon such assumption, make
available to the Borrower on such date a corresponding amount. If and to the
extent that such Lender shall not have made such portion available to the Agent,
such Lender and the Borrower severally agree to repay to the Agent forthwith on
demand such corresponding amount together with interest thereon, for each day
from the date such amount is made available to the Borrower until the date such
amount is repaid to the Agent at the interest rate applicable at the time to the
Loans comprising such Borrowing. If such Lender shall repay to the Agent such
corresponding amount, such amount shall constitute such Lender's Loan as part of
such Borrowing for purposes of this Agreement.
2.3. General Provisions Regarding Loans. (a) The Borrower may refinance all
----------------------------------
or any part of any Borrowing with any other Borrowing, subject to the conditions
and limitations set forth herein and elsewhere in this Agreement. Any Borrowing
or part thereof so refinanced shall be deemed to be repaid in accordance with
Section 2.5 with the proceeds of a new Borrowing hereunder and the proceeds of
the new Borrowing, to the extent they do not exceed
14
<PAGE>
the principal amount of the Borrowing being refinanced, shall not be paid by the
Lenders to the Agent or by the Agent to the Borrower pursuant to Section 2.2(b).
(b) All Borrowings, conversions and continuations of Loans hereunder
and all selections of Interest Periods hereunder shall be in such amounts and be
made pursuant to such elections that, after giving effect thereto, (A) the
aggregate principal amount of the Loans comprising each Tranche of Eurodollar
Loans shall be equal to $1,000,000 or a whole multiple of $100,000 in excess
thereof and (B) the Borrower shall not have outstanding at any one time more
than in the aggregate six (6) separate Tranches of Eurodollar Loans.
(c) Notwithstanding any other provision of this Agreement, the
Borrower shall not be entitled to request any Borrowing if the Interest Period
requested with respect thereto would end after the Termination Date.
2.4. Fees.
----
(a) Upon the execution of this Agreement, the Borrower agrees to pay
to the Agent for the benefit of the Lenders a closing fee of $100,000.
(b) The Borrower agrees to pay to the Agent for the benefit of the
Lenders, on the first day of each month and on the date on which the Commitments
shall be terminated as provided herein, a commitment fee (a "Commitment Fee") at
--------------
a rate per annum equal to one quarter of one percent (1/4%) on the average daily
amount of the unused Commitments of the Lenders during the preceding month (or
shorter period commencing with the date hereof or ending with the Termination
Date or any date on which the Commitments shall be terminated). All Commitment
Fees shall be computed on the basis of the actual number of days elapsed over a
year of 360 days. The Commitment Fee shall commence to accrue on the date
hereof, and shall cease to accrue on the earlier of the Termination Date and the
termination of the Commitments as provided herein.
(c) The Borrower agrees to pay to the Agent for the benefit of the
Lenders a facility fee of $100,000 which shall be deemed fully earned at Closing
but which shall be payable in two installments of $50,000 each on the first and
second anniversaries of the Closing Date.
(d) The Borrower agrees to pay the Agent for its own account a
collateral management fee equal to $5,000 per month; the first such payment to
be due at Closing and thereafter on the first day of each month beginning
November 1, 1998.
(e) All fees shall be paid on the dates due, in immediately available
funds, to the Agent for distribution, if and as appropriate, among the Lenders.
Once paid, none of the fees shall be refundable under any circumstances, other
than as a result of an error in calculation.
2.5. Notes; Repayment of Loans. (a) The Loans made by each Lender shall be
-------------------------
evidenced by a single promissory note duly executed on behalf of the Borrower,
dated the
15
<PAGE>
Closing Date, in substantially the form attached hereto as Exhibit B with the
blanks appropriately filled, payable to such Lender in a principal amount equal
to the Commitment of such Lender. Each Note shall bear interest from the date
thereof on the outstanding principal balance thereof as set forth in Section
2.6.
(b) The outstanding principal balance of each Borrowing (that is, the
total amount of the Loans made to purchase an Acquired Eligible Portfolio) which
has not been prepaid in full pursuant to the provisions of subsection 2.9 on or
before the date which is six (6) months after the date such Borrowing was made
shall be payable in twenty four (24) equal monthly installments commencing on
the first day of the month following such six-month anniversary and on the first
day of each month thereafter; provided, however, that the outstanding principal
-------- -------
balance of all Loans shall be due and payable on the Termination Date.
(c) Each Lender shall, and is hereby authorized by the Borrower to,
endorse on the schedule attached to the relevant Note held by such Lender (or on
a continuation of such schedule attached to each such Note and made a part
thereof), or otherwise to record in such Lender's internal records, an
appropriate notation evidencing the date and amount of each Loan of such Lender,
each payment or prepayment of principal of any Loan and the other information
provided for on such schedule; provided, however, that the failure of any Lender
-------- -------
to make such a notation or any error therein shall not in any manner affect the
obligation of the Borrower to repay the Loan made by such Lender in accordance
with the terms hereof and of the relevant Note.
2.6. Interest on Loans. (a) Subject to the provisions of Section 2.7, each
-----------------
Base Rate Loan shall bear interest (computed on the basis of the actual number
of days elapsed over a year of 360 days) at a rate per annum equal to the Base
Rate plus 1/2%.
----
(b) Subject to the provisions of Section 2.7, each Eurodollar Loan
shall bear interest (computed on the basis of the actual number of days elapsed
over a year of 360 days) at a rate per annum equal to the Eurodollar Rate for
the Interest Period in effect for such Loan plus 2.5%.
----
(c) Accrued interest on each Loan shall be payable on each Interest
Payment Date for the period ending on the last day of the immediately preceding
month and in the case of each Eurodollar Loan also on the last day of each
Interest Period for such Loan; provided that, interest accruing on overdue
-------- ----
amounts pursuant to Section 2.7 shall be payable on demand as provided in the
Notes. The Eurodollar Rate or the Base Rate for each Interest Period or day
within an Interest Period shall be determined by the Agent, and such
determination shall be conclusive absent manifest error.
2.7. Default Rate; Inability to Determine Interest Rate. (a) To the extent
--------------------------------------------------
not contrary to any Requirement of Law, upon the occurrence and during the
continuation of an Event of Default, any principal, past due interest, fee or
other amount outstanding hereunder or under the Notes shall, at the option of
the Required Lenders, bear interest for each day thereafter until paid in full
(after as well as before judgment) at a rate per annum which shall be equal to
2.5% above the Base Rate (but in no event shall any such rate exceed the maximum
rate
16
<PAGE>
permitted by any Requirement of Law). The Borrower acknowledges that such
increased interest rate reflects, among other things, the fact that such loans
or other amounts have become a substantially greater risk given its default
status and that the Lenders are entitled to additional compensation for such
risk.
(b) In the event, and on each occasion, that on the day two Business
Days prior to the commencement of any Interest Period for a Eurodollar Loan, the
Agent shall have determined (which determination absent manifest error shall be
conclusive and binding upon the Borrower) that reasonable means do not exist for
ascertaining the Eurodollar Base Rate, the Agent shall, as soon as practicable
thereafter, give written, telegraphic or telephonic notice of such determination
to the Borrower and the Lenders, and any request by the Borrower for a
Eurodollar Loan or for conversion to or maintenance of a Eurodollar Loan
pursuant to the terms of this Agreement shall be deemed a request for a Base
Rate Loan. After such notice shall have been given and until the circumstances
giving rise to such notice no longer exist, each request for a Eurodollar Loan
shall be deemed to be a request for a Base Rate Loan. Each determination by the
Agent hereunder shall be conclusive absent manifest error.
2.8. Termination and Extension of Commitment. (a) The Commitments shall be
---------------------------------------
automatically terminated on the Termination Date.
(b) Subject to the terms and conditions set forth in this paragraph,
upon at least three Business Days' prior irrevocable written or telecopy notice
to the Agent, the Borrower may at any time prior to the Termination Date
permanently terminate the Total Commitment. In connection with any such
termination, the Borrower shall repay the entire outstanding principal amount of
the Loans, together with all accrued and unpaid Commitment Fees and other sums
due to the Agent and the Lenders hereunder and under the Notes, including (if
such termination occurs prior to July 28, 2001) a prepayment fee in the amount
of one percent (1%) of the amount of the Total Commitment so terminated.
(c) Unless either the Borrower or any Lender through the Agent,
notifies the other party in writing at least ninety (90) days prior to the then
current Termination Date that it does not elect to extend its Commitment beyond
such Termination Date, then, subject to the condition precedent that on or
before the Termination Date then in effect the Borrower pays to the Agent for
the benefit of the Lenders an extension fee of $50,000, (i) the Commitments
shall without further act by any party hereto, be extended by one year beyond
the Termination Date then in effect and (ii) the term "Termination Date" shall
thereafter mean the date which is one year after the Termination Date then in
effect.
2.9. Optional and Mandatory Prepayments of Loans. (a) The Borrower shall
-------------------------------------------
have the right at any time and from time to time to prepay any Loan, in whole or
in part, without premium or penalty (but in any event subject to Section 2.13),
upon prior written, telecopy or telephonic notice to the Agent given no later
than 2:00 p.m., Philadelphia time, one Business Day before any proposed
prepayment.
17
<PAGE>
(b) If a certificate delivered pursuant to subsection 5.2(b) shows
that during the period since the date of acquisition of all Acquired Eligible
Portfolios which have been owned by the Borrower for at least six months and not
transferred by the Borrower in connection with a Securitized Offering, the Net
Proceeds received by the Borrower on account of the Receivables in all such
Acquired Eligible Portfolios is less than seventy percent (70%) of the PAT
Recovery Estimate for all such Acquired Eligible Portfolios for such period,
then Borrower shall prepay to the Agent for the account of the Lenders, an
amount equal to the product of (x) one percent (1%) times (y) the aggregate
amount of the Loans made by the Lenders and applied toward the Portfolio
Purchase Price of all such Acquired Eligible Portfolios, times (z) the
difference (rounded to the nearest whole number) between (i) seventy and (ii)
the percentage of Net Proceeds actually collected on all such Acquired Eligible
Portfolios during such period. Such amount shall be applied as a prepayment of
such Loans and shall be made ratably among the Lenders in accordance with their
respective Commitment Percentages and shall be applied to installments due on
such Loans in inverse order of maturity.
(c) Upon the sale or transfer by the Borrower of all or any part of
the Receivables in an Acquired Eligible Portfolio in connection with a
Securitized Offering, whether pursuant to a Receivables Purchase Agreement or
otherwise, the Borrower shall immediately repay to the Agent for the account of
the Lenders the outstanding principal amount of, and accrued interest on, the
Loan related to such Acquired Eligible Portfolio.
(d) Each notice of prepayment shall specify the prepayment date and
the principal amount of each Loan to be prepaid. All prepayments under this
Section on other than Base Rate Borrowings shall be accompanied by accrued
interest on the principal amount being prepaid to the date of prepayment.
(e) No payment on account of principal or interest shall be due in
connection with, or as a condition to, the sale or transfer by Borrower in the
ordinary course of its business of any Receivables which are not part of an
Acquired Eligible Portfolio, or any other Collateral sold or disposed of by
Borrower in the ordinary course of business for fair consideration in accordance
with the provisions of the Loan Documents.
2.10. Illegality. Notwithstanding any other provision herein, if any
----------
change after the date of this Agreement in any Requirement of Law or in the
interpretation or application thereof shall make it unlawful for any Lender to
make or maintain Eurodollar Loans as contemplated by this Agreement, (a) the
commitment of such Lender hereunder to make Eurodollar Loans, continue
Eurodollar Loans as such and convert or refinance Base Rate Loans to Eurodollar
Loans shall forthwith be cancelled and (b) such Lender's Loans then outstanding
as Eurodollar Loans, if any, shall be converted automatically to Base Rate Loans
on the respective last days of the then current Interest Periods with respect to
such Loans or within such earlier period as required by law. If any such
conversion of a Eurodollar Loan occurs on a day which is not the last day of the
then current Interest Period with respect thereto, the Borrower shall pay to
such Lender such amounts, if any, as may be required pursuant to Section 2.13.
2.11. Requirements of Law. (a) In the event that any change after the date
-------------------
of this Agreement in any Requirement of Law or in the interpretation, or
application thereof or
18
<PAGE>
compliance by any Lender with any request or directive (whether or not having
the force of law) from any central bank or other Governmental Authority made
subsequent to the date hereof:
(i) shall subject any Lender to any tax of any kind whatsoever
with respect to this Agreement, any Note or any Eurodollar Loan made
by it, or change the basis of taxation of payments to such Lender in
respect thereof (except for taxes covered by Section 2.12 and taxes on
the overall net income, gross receipts or revenue of such Lender);
(ii) shall impose, modify or hold applicable any reserve,
special deposit or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances,
loans or other extensions of credit by, or any other acquisition of
funds by, any office of such Lender which is not otherwise included in
the determination of the interest rate on such Eurodollar Loan
hereunder; or
(iii) shall impose on such Lender any other condition;
and the result of any of the foregoing is to increase the cost to such Lender,
by an amount which such Lender reasonably deems to be material, of making,
converting into, continuing or maintaining Eurodollar Loans or to reduce any
amount receivable hereunder in respect thereof then, in any such case, the
Borrower shall as promptly as practicable pay such Lender, upon its demand, any
additional amounts necessary to compensate such Lender for such increased cost
or reduced amount receivable. If any Lender becomes entitled to claim any
additional amounts pursuant to this subsection, it shall as promptly as
practicable notify the Borrower, through the Agent, of the event by reason of
which it has become so entitled. A certificate as to any additional amounts
payable pursuant to this subsection submitted by such Lender, through the Agent,
to the Borrower shall be conclusive in the absence of manifest error. This
covenant shall survive the termination of this Agreement and the payment of the
Notes and all other amounts payable hereunder. If any amount is refunded to such
Lender, such Lender will promptly reimburse Borrower for amounts paid in respect
of the refunded amount.
(b) In the event that any Lender shall have determined that any
change after the date of this Agreement in any Requirement of Law regarding
capital adequacy or in the interpretation or application thereof or compliance
by such Lender or any corporation controlling such Lender with any request or
directive regarding capital adequacy (whether or not having the force of law)
from any Governmental Authority made subsequent to the date hereof does or shall
have the effect of reducing the rate of return on such Lender's or such
corporation's capital as a consequence of its obligations hereunder to a level
below that which such Lender or such corporation could have achieved but for
such change or compliance (taking into consideration such Lender's or such
corporation's policies with respect to capital adequacy) by an amount reasonably
deemed by such Lender to be material, then from time to time, after submission
as promptly as practicable by such Lender to the Borrower (with a copy to the
Agent) of a written request therefor, the Borrower shall pay to such Lender such
additional amount or amounts as will compensate such Lender for such reduction.
19
<PAGE>
(c) Each Lender agrees that it will use reasonable efforts in order
to avoid or to minimize, as the case may be, the payment by the Borrower of any
additional amount under subsections 2.11(a) and (b); provided, however, that no
-------- -------
Lender shall be obligated to incur any expense, cost or other amount in
connection with utilizing such reasonable efforts.
2.12. Taxes. (a) All payments made by the Borrower under this Agreement
-----
and the Notes shall be made free and clear of, and without deduction or
withholding for or on account of, any present or future income, stamp or other
taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now
or hereafter imposed, levied, collected, withheld or assessed by any
Governmental Authority, excluding, in the case of the Agent and each Lender, net
income taxes and franchise or gross receipts taxes (imposed in lieu of net
income taxes) imposed on the Agent or such Lender, as the case may be, as a
result of a present or former connection between the jurisdiction of the
government or taxing authority imposing such tax and the Agent or such Lender or
any political subdivision or taxing authority thereof or therein (all such
non-excluded taxes, levies, imposts, duties, charges, fees, deductions and
withholdings being hereinafter called "Taxes"). Except as provided in Section
2.12(c) and the penultimate sentence of this Section 2.12(a), if any Taxes are
required to be withheld from any amounts payable to the Agent or any Lender
hereunder or under the Notes, the amounts so payable to the Agent or such Lender
shall be increased to the extent necessary to yield to the Agent or such Lender
(after payment of all Taxes) interest or any such other amounts payable
hereunder at the rates or in the amounts specified in this Agreement and the
Notes. Whenever any Taxes are payable by the Borrower, as promptly as possible
thereafter the Borrower shall send to the Agent for its own account or for the
account of such Lender, as the case may be, a certified copy of an original
official receipt received by the Borrower showing payment thereof. If the
Borrower fails to pay any Taxes when due to the appropriate taxing authority or
fails to remit to the Agent the required receipts or other required documentary
evidence, the Borrower shall indemnify the Agent and the Lenders for any
incremental taxes, interest or penalties that may become payable by the Agent or
any Lender as a result of any such failure. If as a result of a payment by the
Borrower of Taxes pursuant to this subsection a Lender receives a tax benefit or
tax savings such as by receiving a credit against, refund of, or reduction in
Taxes which such Lender would not have received but for the payment by the
Borrower of Taxes pursuant to this subsection, then such Lender shall promptly
pay to the Borrower the amount of such credit, refund, reduction or any other
similar item. The agreements in this subsection shall survive the termination of
this Agreement and the payment of the Notes and all other amounts payable
hereunder.
(b) Each Lender that is not incorporated under the laws of the United
States of America or a state thereof agrees that it will deliver to the Borrower
and the Agent (i) two duly completed copies of United States Internal Revenue
Service Form 1001 or 4224 or successor applicable form, as the case may be, and
(ii) an Internal Revenue Service Form W-8 or W-9 or successor applicable form.
Each such Lender also agrees to deliver to the Borrower and the Agent two
further copies of the said Form 1001 or 4224 and Form W-8 or W-9, or successor
applicable forms or other manner of certification, as the case may be, on or
before the date that any such form expires or becomes obsolete or after the
occurrence of any event requiring a change in the most recent form previously
delivered by it to the Borrower, and such extensions or renewals thereof as may
reasonably be requested by the Borrower or the Agent, unless in any such case an
event (including, without limitation, any change in treaty, law or regulation)
has
20
<PAGE>
occurred prior to the date on which any such delivery would otherwise be
required which renders all such forms inapplicable or which would prevent such
Lender from duly completing and delivering any such form with respect to it and
such Lender so advises the Borrower and the Agent. Such Lender shall certify (i)
in the case of a Form 1001 or 4224, that it is entitled to receive payments
under this Agreement without deduction or withholding of any United States
federal income taxes and (ii) in the case of a Form W-8 or W-9, that it is
entitled to an exemption from United States backup withholding tax. Each Lender
shall deliver to the Borrower and the Agent, with respect to Taxes imposed by
any Governmental Authority other than the United States of America, similar
forms, if available (or the information that would be contained in similar forms
if such forms were available), to the forms which are required to be provided
under this subsection with respect to Taxes of the United States of America.
(c) The Borrower shall not be required to pay any additional amounts
to the Agent or any Lender in respect of payments of United States withholding
tax or other Taxes made by the Borrower which are consistent with the forms and
information delivered to the Borrower and the Agent or if the payment of such
amounts would not have arisen but for a failure by the Agent or such Lender to
comply with the requirements of subsection 2.12(b) or the Agent or such Lender
did not timely deliver to the Borrower the forms listed or described in
subsection 2.12(b) or did not take such other steps as reasonably may be
available to it under applicable tax laws and any applicable tax treaty or
convention to obtain an exemption from, or reduction (to the lowest applicable
rate) of, such United States withholding tax and other Taxes or, if such steps
were taken, the information was not timely and duly delivered to the Borrower.
2.13. Indemnity. (a) The Borrower agrees to indemnify each Lender and to
---------
hold each Lender harmless from any loss or expense which such Lender may sustain
or incur as a consequence of (i) default by the Borrower in payment when due of
the principal amount of or interest on any Eurodollar Loan or Base Rate Loan,
(ii) default by the Borrower in making a borrowing of, conversion into or
continuation of Eurodollar Loans or Base Rate Loans after the Borrower has given
a notice requesting the same in accordance with the provisions of this
Agreement, (iii) default by the Borrower in making any prepayment after the
Borrower has given a notice thereof in accordance with the provisions of this
Agreement or (iv) the making of a prepayment of Eurodollar Loans or Base Rate
Loans on a day which is not the last day of an Interest Period with respect
thereto, including, without limitation, in each case, any such loss or expense
arising from the reemployment of funds obtained by it or from fees payable to
terminate the deposits from which such funds were obtained. This covenant shall
survive the termination of this Agreement and the payment of the Notes and all
other amounts payable hereunder.
(b) For the purpose of calculation of all amounts payable to a Lender
under subsection 2.13(a), each Lender shall be deemed to have actually funded
its relevant Eurodollar Loan through the purchase of a deposit bearing interest
at the Eurodollar Base Rate in an amount equal to the amount of the Eurodollar
Loan and having a maturity comparable to the relevant Interest Period; provided,
--------
however, that each Lender may fund each of its Eurodollar Loans in any manner it
- -------
sees fit, and the foregoing assumption shall be utilized only for the
calculation of amounts payable under this Section.
21
<PAGE>
2.14. Pro Rata Treatment, etc. Except as required under Section 2.10 and
-----------------------
subject to the provisions of the Fee Letter, each Borrowing, each payment or
prepayment of principal of any Borrowing, each conversion of Loans, each payment
of interest on the Loans and each payment of Commitment Fees and other fees
payable for the benefit of the Lenders shall be made pro rata among the Lenders
in accordance with their respective Commitment Percentages. Each Lender agrees
that in computing such Lender's portion of any Borrowing to be made hereunder,
the Agent may, in its discretion, round each Lender's percentage of such
Borrowing to the next higher or lower whole dollar amount.
2.15. Payments; Loan Account. (a) The Borrower shall make each payment
----------------------
(including principal of or interest on any Loan or any fees or other amounts)
hereunder not later than 2:00 p.m., Philadelphia time, on the date when due in
Dollars to the Agent at its offices at 11 Penn Center, 1835 Market Street,
Philadelphia, Pennsylvania, or at such other place as may be designated by the
Agent, in immediately available funds.
(b) Whenever any payment (including principal of or interest on any
Loan or any Commitment Fees or other amounts) hereunder shall become due, or
otherwise would occur, on a day that is not a Business Day, such payment may be
made on the next succeeding Business Day, and such extension of time shall in
such case be included in the computation of interest or Commitment Fees, if
applicable.
(c) Any and all payments on account of the Loans will be applied to
accrued and unpaid interest, outstanding principal and other sums due hereunder
or under the Loan Documents, either as expressly provided in this Agreement or
if not so expressly provided, and in any event after the occurrence and during
the continuance of an Event of Default, then in such order as the Agent, in its
discretion, elects. If the Borrower makes a payment or payments and such payment
or payments, or any part thereof, are subsequently invalidated, declared to be
fraudulent or preferential, set aside or are required to be repaid to a trustee,
receiver, or any other person under any bankruptcy act, state or federal law,
common law or equitable cause, then to the extent of such payment or payments,
the obligations or part thereof hereunder intended to be satisfied shall be
revived and continued in full force and effect as if said payment or payments
had not been made.
(d) The Agent will maintain on its books on behalf of the Lenders a
loan account (the "Loan Account") to which shall be charged all advances of
Loans when made to the Borrower and all accrued interest and fees, expenses,
charges and other amounts due and payable hereunder and under the Notes on the
date when due and to which shall be credited all payments, repayments and
prepayments made by the Borrower pursuant to this Agreement and the Notes on the
date when received by the Agent. All outstanding amounts shown on the Loan
Account shall constitute Loans hereunder and shall be evidenced by the Notes and
secured by the Collateral. Except in the case of manifest error in computation,
the Loan Account will be conclusive and binding on the Borrower as to the amount
at any time due to the Lenders from the Borrower under this Agreement and the
Notes.
2.16. Conversion and Continuation Options. The Borrower shall have the
-----------------------------------
right at any time upon prior irrevocable notice to the Agent (i) not later than
11:00 a.m., Philadelphia
22
<PAGE>
time, on the Business Day of conversion, to convert any Eurodollar Loan to a
Base Rate Loan, (ii) not later than 2:00 p.m., Philadelphia time, three Business
Days prior to conversion or continuation, to (y) convert any Base Rate Loan into
a Eurodollar Loan, or (z) to continue any Eurodollar Loan as a Eurodollar Loan
for any additional Interest Period and (iii) not later than 2:00 p.m.,
Philadelphia time, three Business Days prior to conversion, to convert the
Interest Period with respect to any Eurodollar Loan to another permissible
Interest Period, subject in each case to the following:
(a) a Eurodollar Loan may not be converted at a time other than the
last day of the Interest Period applicable thereto;
(b) any portion of a Loan maturing or required to be repaid in less
than one month may not be converted into or continued as a Eurodollar Loan;
(c) no Eurodollar Loan may be continued as such and no Base Rate Loan
may be converted to a Eurodollar Loan when any Default or Event of Default has
occurred and is continuing;
(d) any portion of a Eurodollar Loan that cannot be converted into or
continued as a Eurodollar Loan by reason of paragraph 2.16(b) or 2.16(c)
automatically shall be converted at the end of the Interest Period in effect for
such Loan to a Base Rate Loan;
(e) on the last day of any Interest Period for Eurodollar Loans, if
the Borrower has failed to give notice of conversion or continuation as
described in this subsection, such Loans shall be automatically converted to
Base Rate Loans on the last day of such then expiring Interest Period; and
SECTION 3. REPRESENTATIONS AND WARRANTIES
To induce the Lenders to enter into this Agreement, and to make the Loans,
the Borrower hereby represents and warrants to the Agent and each Lender that:
3.1. Financial Condition. (a) The audited consolidated balance sheets of
-------------------
the Borrower and its consolidated Subsidiaries as at December 31, 1997 and the
related statements of income and of cash flows for the fiscal year ended on such
date, copies of which have heretofore been furnished to each Lender, present
fairly the financial condition of the Borrower and its consolidated Subsidiaries
as at such date, and the results of its operations and its consolidated cash
flows for the fiscal year then ended. All such financial statements, including
the related schedules and the notes thereto, have been prepared in accordance
with GAAP applied consistently throughout the periods involved. Neither the
Borrower nor any of its consolidated Subsidiaries has, at the date of the most
recent balance sheet referred to above, any material Contingent Obligation,
liability for taxes, or any long-term lease or unusual forward or long-term
commitment, including, without limitation, any interest rate or foreign currency
swap or exchange transaction, which is required by GAAP to be but is not
reflected in the foregoing statements or in the notes thereto.
23
<PAGE>
(b) (i) As of the Closing Date and after giving effect to this
Agreement and any Loans to be made on the Closing Date, the Borrower is Solvent.
(ii) The Borrower does not intend to incur debts beyond its
ability to pay such debts as they mature, taking into account the timing of and
amounts of cash to be received by it and the timing of the amounts of cash to be
payable on or in respect of its Debt.
3.2. No Adverse Change. Since June 30, 1998 to the Closing Date, there has
-----------------
been no change in the business, Properties, operations or financial condition of
the Borrower or any other development or event which has had a Material Adverse
Effect.
3.3. Existence; Compliance with Law. The Borrower (a) is duly organized,
------------------------------
validly existing and in good standing under the laws of the jurisdiction of its
organization, (b) has the corporate power and authority, and the legal right, to
own and operate its property, to lease the property it operates as lessee and to
conduct the business in which it is currently engaged, (c) is duly qualified as
a foreign entity and in good standing under the laws of each jurisdiction where
its ownership, lease or operation of property or the conduct of its business
requires such qualification, except to the extent that the failure to be so
qualified would not, in the aggregate, have a Material Adverse Effect and (d) is
in compliance with all Requirements of Law the non-compliance with which would
have a Material Adverse Effect.
3.4. Power; Authorization; Enforceable Obligations. The Borrower has the
---------------------------------------------
power (corporate or otherwise), authority, and legal right, to make, deliver and
perform this Agreement, the Notes and the other Loan Documents to which it is a
party and to borrow hereunder and has taken all necessary corporate action to
authorize the borrowings on the terms and conditions of this Agreement and the
Notes and to authorize the execution, delivery and performance of this
Agreement, the Notes and the other Loan Documents to which it is a party. No
consent or authorization of, filing with or other act by or in respect of, any
Governmental Authority or any other Person (including stockholders and creditors
of the Borrower) is required in connection with the borrowings hereunder or with
the execution, delivery, performance, validity or enforceability of this
Agreement, the Notes or the other Loan Documents. This Agreement has been, and
each Note and other Loan Document will be, duly executed and delivered on behalf
of the Borrower. This Agreement constitutes, and each Note and other Loan
Document when executed and delivered will constitute, a legal, valid and binding
obligation of the Borrower enforceable against the Borrower in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (whether enforcement is sought by proceedings in equity or
at law).
3.5. No Legal Bar. The execution, delivery and performance of this
------------
Agreement, the Notes and the other Loan Documents by the Borrower, the
borrowings hereunder and the use of the proceeds thereof will (i) not violate
any Requirement of Law, (ii) not violate any Contractual Obligation of the
Borrower, and (iii) not result in, or require, the creation or imposition of any
Lien on any of its properties or revenues pursuant to any such Requirement of
Law or Contractual Obligation other than pursuant to the Security Agreement.
24
<PAGE>
3.6. No Material Litigation. Except as set forth on Schedule 3.6, no
----------------------
litigation, investigation or proceeding of or before any arbitrator or
Governmental Authority is pending or, to the knowledge of the Borrower,
threatened against the Borrower or against any of the respective properties or
revenues or against any Plan (a) with respect to this Agreement, the Notes or
the other Loan Documents or any of the transactions contemplated hereby, or (b)
as to which there is a reasonable likelihood of an adverse determination and
which, if adversely determined, would have a Material Adverse Effect.
3.7. No Default. The Borrower is not in default under or with respect to
----------
any of its Contractual Obligations in any respect which would have a Material
Adverse Effect. No Event of Default has occurred and is continuing.
3.8. Taxes. The Borrower has filed or caused to be filed all tax returns
-----
which, to the knowledge of the Borrower, are required to be filed (or has
obtained authorized extensions for such filings) and has paid all taxes shown to
be due and payable on said returns or on any assessments made against it or any
of its property and all other taxes, fees or other charges imposed on it or any
of its property by any Governmental Authority (other than any amount the
validity of which is currently being contested in good faith by appropriate
proceedings and with respect to which reserves in conformity with GAAP have been
provided on the books of the Borrower, as the case may be); no material tax Lien
has been filed against the Borrower and, to the knowledge of the Borrower, no
claim is being asserted, with respect to any such material tax, fee or other
charges.
3.9. Federal Regulations. No part of the proceeds of any Loans will be
-------------------
used for "purchasing" or "carrying" any "margin stock" within the respective
meanings of each of the quoted terms under Regulation U or for any purpose which
violates the provisions of Regulation U. If requested by any Lender or the
Agent, the Borrower will furnish to the Agent and each Lender a statement to the
foregoing effect in conformity with the requirements of FR Form U-1 referred to
in said Regulation U. No part of the proceeds of the loans hereunder will be
used for any purpose which violates, or which is inconsistent with, the
provisions of Regulation X.
3.10. ERISA. (a) Each Plan has complied in all respects with the
-----
applicable provisions of ERISA and the Code, except to the extent that failure
to so comply would not have a Material Adverse Effect. No prohibited transaction
or accumulated funding deficiency (each as defined in subsection 7.1(h)) or
Reportable Event has occurred with respect to any Single Employer Plan which
would have a Material Adverse Effect, except as disclosed on Schedule 3.10.
(b) The present value of all accrued benefits under each Single
Employer Plan maintained by the Borrower or a Commonly Controlled Entity (based
on those assumptions used to fund the Plans), as calculated on a termination
basis, did not, as of the last annual valuation date, exceed the value of the
assets of the Plans allocable to such benefits by an amount which exceeds
$500,000 or which would have a Material Adverse Effect.
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<PAGE>
(c) Neither the Borrower nor any Commonly Controlled Entity has
had a complete or partial withdrawal from any Multiemployer Plan for which any
liability remains unsatisfied which would exceed $500,000 or which, together
with liabilities referred in subsections (b) and (d) hereof, would exceed
$500,000 or which in either event would have a Material Adverse Effect, and
neither the Borrower nor any Commonly Controlled Entity would become subject
under ERISA to any liability which would exceed $500,000 or which, together with
other liabilities referred in subsections (b) and (d) hereof or this subsection
(c), would exceed $500,000 or which in either event would have a Material
Adverse Effect if any of the Borrower or such Commonly Controlled Entity were to
withdraw completely from any Multiemployer Plan as of the valuation date most
closely preceding the date this representation is made or deemed made. To the
best of the Borrower's knowledge, such Multiemployer Plans are neither in
Reorganization as defined in Section 4241 of ERISA nor Insolvent.
(d) The present value (determined using actuarial and other
assumptions which are reasonable in respect of the benefits provided and the
employees participating) of the liability of the Borrower and each Commonly
Controlled Entity for post-retirement benefits to be provided to their current
and former employees under Plans which are welfare benefit plans (as defined in
Section 3(1) of ERISA) does not, in the aggregate, exceed the assets under all
such Plans allocable to such benefits by an amount which exceeds $500,000 or
which, together with liabilities referred in subsections (b) and (c) hereof,
exceeds $500,000 or which in either event would have a Material Adverse Effect.
3.11. Investment Company Act; Public Utility Holding Company Act. The
----------------------------------------------------------
Borrower is not (a) an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended; (b) a "holding company" or a "subsidiary company" of a "holding
company" or an "affiliate" of either a "holding company" or a "subsidiary
company" within the meaning of the Public Utility Holding Company Act of 1935,
as amended, or (c) subject to any other federal or state law or regulation which
purports to restrict or regulate its ability to borrow money.
3.12. Purpose of Loans. The proceeds of the Loans shall be used by the
----------------
Borrower to acquire Eligible Portfolios from Originating Institutions pursuant
to Asset Purchase Agreements.
3.13. Environmental Matters. Except as set forth in Schedule 3.13, to the
---------------------
knowledge of the Borrower, each of the representations and warranties set forth
in paragraphs (a) through (e) of this subsection is true and correct with
respect to each parcel of real property owned or operated by the Borrower (the
"Properties"), except to the extent that the facts and circumstances giving rise
to any such failure to be so true and correct would not have a Material Adverse
Effect:
(a) The Properties do not contain, and have not previously
contained, in, on, or under, including, without limitation, the soil and
groundwater thereunder, any Materials of Environmental Concern in concentrations
which violate Environmental Laws.
26
<PAGE>
(b) The Properties and all operations and facilities at the
Properties are in compliance with Environmental Laws, and there is no Materials
of Environmental Concern contamination or violation of any Environmental Law
which would materially interfere with the continued operation of any of the
Properties or materially impair the fair saleable value of any thereof.
(c) As of the Closing Date, the Borrower has not received any
written complaint, notice of violation, alleged violation, investigation or
advisory action or of potential liability or of potential responsibility
regarding a violation of Environmental Law or permit compliance with regard to
the Properties, nor is the Borrower aware that any Governmental Authority is
contemplating delivering to the Borrower any such notice.
(d) Materials of Environmental Concern have not been generated,
treated, stored, disposed of, at, on or under any of the Properties, nor have
any Materials of Environmental Concern been transferred from the Properties to
any other location except in either case in the ordinary course of business of
the Borrower and in material compliance with all Environmental Laws.
(e) There are no governmental, administrative actions or judicial
proceedings pending or contemplated under any Environmental Laws to which the
Borrower is or will be named as a party with respect to the Properties, nor are
there any consent decrees or other decrees, consent orders, administrative
orders or other orders, or other administrative or judicial requirements
outstanding under any Environmental Law with respect to any of the Properties.
3.14. Patents, Trademarks, etc. The Borrower has obtained and holds in full
------------------------
force and effects all patents, trademarks, servicemarks, trade names, copyrights
or licenses therefor and other such rights, free from burdensome restrictions,
which are necessary for the operation of its business as presently conducted. To
the Borrower's' best knowledge, no material product, process, method, substance,
part or other material presently sold by or employed by the Borrower in
connection with such business infringes any patent, trademark, service mark,
trade name, copyright, license or other right owned by any other Person so as to
have a Material Adverse Effect. There is not pending or, to Borrower's
knowledge, threatened any claim or litigation against or affecting any of the
Borrower contesting its right to sell or use any such product, process, method,
substance, part or other material which would have a Material Adverse Effect.
3.15. Ownership of Property. The Borrower has good and marketable fee
---------------------
simple title to or valid leasehold interests in all real property owned or
leased by the Borrower, and good title to all of the Collateral subject to no
Lien of any kind except Liens permitted hereby. The Borrower enjoys peaceful and
undisturbed possession under all of its respective leases except to the extent
the lack thereof would not have a Material Adverse Effect.
3.16. Licenses, etc. The Borrower has obtained and holds in full force and
-------------
effect, all franchises, licenses, permits, certificates, authorizations,
qualifications, easements, rights of way and other rights, consents and
approvals which are necessary for the operation of its
27
<PAGE>
business as presently conducted except any the absence of which would not
reasonably be expected to have a Material Adverse Effect.
3.17. No Burdensome Restrictions. The Borrower is not a party to any
--------------------------
agreement or instrument or subject to any other Contractual Obligation or any
charter or corporate restriction or any provision of any applicable law, rule or
regulation which, individually or in the aggregate, could reasonably be expected
to have a Material Adverse Effect.
3.18. Labor Matters. There are no collective bargaining agreements or
-------------
Multiemployer Plans covering the employees of the Borrower, and the Borrower has
not suffered any strikes, walkouts, work stoppages or other material labor
difficulty within the last five years and to the best knowledge of the Borrower,
there are none now threatened.
3.19. No Material Misstatements. No information, report, financial
-------------------------
statement, exhibit or schedule furnished by or on behalf of the Borrower to the
Agent or any Lender in connection with the negotiation of this Agreement or any
Note or other Loan Document or included therein contains any misstatement of
fact, or omitted or omits to state any fact necessary to make the statements
therein not misleading, where such misstatement or omission would in Borrower's
judgment be material to the interests of the Lenders with respect to the
Borrower's ability (taken as a whole) to perform its obligations hereunder.
3.20. Asset Purchase Agreements and Receivables. The representations and
-----------------------------------------
warranties of the Borrower regarding the Asset Purchase Agreements and the
Receivables contained in Section 4 of the Security Agreement are true and
correct in all material respects and, to the Borrower's knowledge, the
representations and warranties of each Originating Institution under its Asset
Purchase Agreement shall be true and correct in all material respects as of the
closing of the sale under such Asset Purchase Agreement.
3.21. Title to Collateral; Perfected Security Interest. With respect to
------------------------------------------------
each item of Collateral, including, without limitation, the Receivables, the
Borrower owns good and marketable title thereto, free and clear of all Liens,
charges or claims except Liens permitted hereby or Liens which would not have a
material adverse effect on the value of the Collateral or the collectibility of
the Receivables. Upon the funding of any Loan, the Agent, for the ratable
benefit of the Lenders, shall have a perfected security interest of first
priority under applicable law in the related Collateral subject to no other
Liens.
3.22. Year 2000. The Borrower has reviewed the areas within its business
---------
and operations which could be adversely affected by, and has developed or is
developing a program to address on a timely basis, the risk that certain
computer applications used by the Borrower may be unable to recognize and
perform properly date-sensitive functions involving dates prior to and after
December 31, 1999 (the "Year 2000 Problem"). The Year 2000 Problem will not
result in any Material Adverse Effect.
All of the foregoing representations and warranties shall survive the
execution and delivery of the Notes and the making by the Lenders of the Loans
hereunder.
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<PAGE>
SECTION 4. CONDITIONS PRECEDENT; CLOSING
4.1. Conditions to Closing. The agreement of each Lender to enter into
---------------------
this Agreement and make its initial Loan is subject to the satisfaction,
immediately prior to or concurrently with such Loans, of the following
conditions precedent:
(a) Loan Documents. The Agent shall have received (i) this Agreement
--------------
executed by the Borrower, with a counterpart for each Lender, (ii) for the
account of each Lender, a Note conforming to the requirements hereof and
executed by the Borrower, (iii) the Support Agreement executed by Joseph K.
Rensin and (iv) the Security Agreement executed by the Borrower.
(b) Corporate Proceedings. The Agent shall have received a copy of
---------------------
the resolutions or other proceedings or action, in form and substance
satisfactory to the Agent, taken on behalf of the Borrower authorizing (i) the
execution, delivery and performance of this Agreement, the Notes and the other
Loan Documents to which it is a party, and (ii) the borrowings contemplated
hereunder, as of the Closing Date, which certificates shall state that such
resolutions, or other proceedings or action thereby certified have not been
amended, modified, revoked or rescinded and shall be in form and substance
satisfactory to the Agent.
(c) Representations and Warranties True; No Default. The
-----------------------------------------------
representations and warranties of the Borrower contained in Section 3 hereof
shall be true and accurate on and as of the Closing Date in all material
respects with the same effect as though such representations and warranties had
been made on and as of such date (except representations and warranties which
relate solely to an earlier date or time, which representations and warranties
shall be true and correct on and as of the specific dates or times referred to
therein), and the Borrower shall have performed and complied with all covenants
and conditions hereof; and no Event of Default or Default under this Agreement
shall have occurred and be continuing or shall exist.
(d) Corporate Documents. The Agent shall have received, with a
-------------------
counterpart for each Lender, true and complete copies of the certificate of
incorporation and bylaws of the Borrower certified as of the Closing Date as
complete and correct copies thereof by a duly authorized officer of the Borrower
and any good standing certificate recently issued by the Secretaries of State
(or the equivalent thereof) of each state in which the Borrower has been
incorporated or is required to be qualified to transact business.
(e) Incumbency. The Agent shall have received a written certificate
----------
dated the Closing Date by a Responsible Officer of the Borrower as to the names
and signatures of the officers of the Borrower authorized to sign this Agreement
and the other Loan Documents. The Agent may conclusively rely on such
certificate until it shall receive a further certificate by a Responsible
Officer of such Borrower amending such prior certificate.
(f) Fees. The Borrower shall have paid (i) the closing fee in the
----
amount of $100,000 and (ii) all other fees and expenses due and payable
hereunder on or before
29
<PAGE>
the Closing Date (if then invoiced), including without limitation the reasonable
fees and expenses of counsel to the Agent.
(g) Legal Opinions. The Agent shall have received, with a counterpart
--------------
for each Lender, the executed legal opinion of Piper & Marbury, L.L.P., counsel
to the Borrower and to Joseph K. Rensin, addressed to the Lenders and
satisfactory in form and substance to the Agent and its counsel covering such
matters incident to the transactions contemplated by this Agreement and the
other Loan Documents as the Agent may reasonably require. The Borrower hereby
directs such counsel to deliver such opinion, upon which the Lenders and the
Agent may rely.
(h) No Material Adverse Change. There shall be no material adverse
--------------------------
change in the business, operations, Property, or financial or other condition of
the Borrower nor any material change in the management of the Borrower or an
event which would cause or constitute a Material Adverse Effect; and there shall
be delivered to the Agent for the benefit of each Lender a certificate dated the
Closing Date and signed on behalf of the Borrower by a Responsible Officer to
each such effect.
(i) No Litigation. No action, proceeding, investigation,
-------------
regulation or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or legislative body to enjoin, restrain or
prohibit, or to obtain damages in respect of this Agreement or the consummation
of the transactions contemplated hereby or which, in the Agent's sole
discretion, would make it inadvisable to consummate the transactions
contemplated by this Agreement.
(j) Evidence of Insurance. The Borrower shall have provided to
---------------------
each of the Lenders copies of the evidence of insurance required by subsection
5.5(b) and evidence of the life insurance required by subsection 5.5(c).
(k) UCC Searches. The Agent shall have received financing
------------
statement searches and such other evidence as the Agent reasonably deems
necessary to show that the Borrower has good, marketable and unencumbered title
to its assets, free and clear of any Liens except for Liens permitted hereby.
(l) Consents. Certified copies of all documents evidencing any
--------
necessary corporate action, consents and governmental approvals (if any) with
respect to this Agreement shall have been delivered to the Agent.
(m) Financing Statements. Evidence (which may be telephonic) of
--------------------
the filing of proper financing statements on Form UCC-1 naming the Borrower as
debtor and the Agent as secured party, or other similar instruments or
documents, as may be necessary or, in the reasonable opinion of the Agent,
desirable under the UCC of all applicable jurisdictions to perfect the interest
of the Agent in the Collateral; and
30
<PAGE>
(n) Additional Documents. The Agent shall have received such
--------------------
additional documents, certificates and information as the Agent may require
pursuant to the terms hereof or as the Agent may otherwise reasonably request.
4.2. Conditions to Each Loan. The agreement of each Lender to make any
-----------------------
Loan requested to be made by it on any date (including, without limitation, the
first such Loan hereunder) is subject to the satisfaction of the following
conditions precedent:
(a) Action as to Collateral. As to each Eligible Portfolio which
-----------------------
is to be acquired with the proceeds of such Loan, the Asset Purchase Agreement
pursuant to which such Eligible Portfolio has been (or will from the proceeds of
such Loan be) purchased by the Borrower shall have been executed and delivered
by the Borrower and the applicable Originating Institution, shall have been
delivered to the Agent and be in form and substance satisfactory to the Agent,
shall be in full force and effect with all conditions precedent to the purchase
of the Eligible Portfolio thereunder having been satisfied with no defaults in
existence, and such Originating Institution shall have performed all its
obligations thereunder which, pursuant to the terms of the applicable Asset
Purchase Agreement, are required to be performed prior to the purchase of the
Eligible Portfolio thereunder.
(b) Representations and Warranties. Each of the representations
------------------------------
and warranties made by the Borrower herein or which are contained in any other
Loan Document or any certificate, document or financial or other statement
furnished at any time under or in connection herewith or therewith shall be true
and correct in all material respects on and as of such date as if made on and as
of such date (except representations and warranties which expressly relate
solely to an earlier date or time, which representations and warranties shall be
true and correct on and as of the specific dates or times referred to therein);
(c) No Default. No Default or Event of Default shall have occurred
----------
and be continuing on such date or after giving effect to the Loans requested to
be made on such date; and
(d) No Contravention of Law. The making of the Loans shall not
-----------------------
contravene any Requirement of Law applicable to the Borrower or any of the
Lenders.
(e) Net Worth Requirement. The Net Worth of the Borrower shall be
---------------------
at least the amount set forth opposite each period during which the requested
Loans are to be made:
Period Required Net Worth
------ ------------------
Closing Date - 12/30/98 $30,000,000
12/31/98 - 12/30/99 $33,000,000
12/31/99 - 12/30/00 $36,000,000
12/31/00 and thereafter $39,000,000
31
<PAGE>
Each Borrowing by the Borrower hereunder shall constitute a representation and
warranty by the Borrower as of the date of such Borrowing that the conditions
contained in this Section 4.2 have been satisfied.
4.3. Conditions to Release of Collateral. (a) The Borrower shall be
-----------------------------------
entitled to the release of the Agent's security interest in the Receivables in
an Acquired Eligible Portfolio and all the Related Collateral upon satisfaction
of the following conditions precedent:
(i) The Agent shall have received from the Borrower the certificate
of a Responsible Officer specifying that all, or any portion of, the Acquired
Eligible Portfolio which is the subject of the release will be sold and
transferred by the Borrower in connection with a Securitized Offering;
(ii) No Default or Event of Default shall have occurred and be
continuing on the date of such release or after giving effect to the release
requested to be made on such date; and
(iii) The Borrower shall prepay the outstanding principal balance of
the Borrowing made with respect to such Acquired Eligible Portfolio.
(b) The Borrower shall be entitled to a release of the Agent's security
interest in (i) Receivables other than those in an Acquired Eligible Portfolio
(and the Related Collateral) upon their sale by the Borrower to a Special
Purpose Entity, and (ii) all other Collateral upon its sale by the Borrower in
the ordinary course of business for fair consideration provided that at the time
of such sale no Default or Event of Default shall have occurred and be
continuing. The Agent shall provide such evidence of such release as the
Borrower may request, but the release of the Collateral described in this clause
(b) shall occur automatically and without any further action by the Agent upon
the sale described above.
4.4. Closing. The closing (the "Closing") of the transactions contemplated
-------
hereby shall take place at the offices of Ballard Spahr Andrews & Ingersoll,
LLP, 1735 Market Street, Philadelphia, PA 19103, commencing at 11:00 A.M.,
Philadelphia time, on October 28, 1998 or such other place or date as to which
the Agent, the Lenders and the Borrower shall agree. The date on which the
Closing shall be completed is referred to herein as the "Closing Date".
------------
SECTION 5. AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitments remain in
effect, any Note remains outstanding and unpaid, or any other amount is owing to
any Lender or the Agent hereunder, the Borrower shall:
5.1. Financial Statements. Furnish to each Lender:
--------------------
(a) as soon as available, but in any event not later than 90 days
after the close of each fiscal year of the Borrower, a copy of the annual audit
report for such year for
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<PAGE>
the Borrower, including therein consolidated (and as to any Material Subsidiary
consolidating) balance sheets of the Borrower and its consolidated Subsidiaries
as at the end of such fiscal year, and related consolidated (and as to any
Material Subsidiary consolidating) statements of income, retained earnings and
cash flow of the Borrower and its consolidated Subsidiaries for such fiscal
year, setting forth in each case in comparative form the corresponding figures
for the preceding fiscal year, all in reasonable detail, prepared in accordance
with GAAP applied on a basis consistently maintained throughout the period
involved and with the prior year with such changes therein as shall be approved
by the Borrower's independent certified public accountants, such consolidated
financial statements to be certified by Grant Thornton LLP or other independent
certified public accountants selected by the Borrower reasonably acceptable to
the Required Lenders, without any exception or qualification;
(b) as soon as available, but in any event not later than 30 days
after each month end, an unaudited balance sheet of the Borrower on a
consolidated (and as to any Material Subsidiary consolidating) basis and
unaudited statement of income and stockholder's equity and cash flow of the
Borrower on a consolidated (and as to any Material Subsidiary consolidating)
basis reflecting results of operations from the beginning of the fiscal year to
the end of such month and for such month prepared on a basis consistent with
prior past practices and complete and correct in all material respects, subject
to normal year end adjustments; and
(c) as soon as available, but in any event not later than 60 days
prior to the beginning of the Borrower's fiscal year, commencing with fiscal
year 1999, month by month projected operating budget and cash flow of the
Borrower on a consolidated (and as to any Material Subsidiary consolidating)
basis for such fiscal year (including an income statement for each month and a
balance sheet as at the end of the last month in each fiscal quarter.)
5.2. Certificates; Other Information. Furnish to each Lender:
-------------------------------
(a) concurrently with the delivery of the financial statements
referred to in subsections 5.1(a) and (b), (i) a certificate on behalf of the
Borrower executed by a Responsible Officer, showing in detail the calculations
demonstrating compliance with the financial covenants set forth in Section 6.1,
stating that, to the best of his or her knowledge, the Borrower during such
period has kept, observed, performed and fulfilled each and every covenant and
condition contained in this Agreement and in the Notes and the other Loan
Documents applicable to it and that he or she obtained no knowledge of any
Default or Event of Default except as specifically indicated;
(b) with respect to each Acquired Eligible Portfolio, beginning on the
six-month anniversary of the acquisition of such Acquired Eligible Portfolio and
continuing thereafter until such Acquired Eligible Portfolio is transferred to
or otherwise becomes subject to a Securitized Offering or the Borrowing made to
purchase such Acquired Eligible Portfolio is otherwise paid, not later than
thirty (30) days after the end of each fiscal quarter of the Borrower, a
collections performance report for such Acquired Eligible Portfolios in
reasonable detail and certified on behalf of the Borrower by a Responsible
Officer;
33
<PAGE>
(c) with respect to each Portfolio owned or acquired by the Borrower
(whether or not transferred to or otherwise subject to a Securitized Offering),
not later than thirty (30) days after the end of each month, a collections
performance report for such Portfolios in reasonable detail and certified on
behalf of the Borrower by a Responsible Officer;
(d) any reports, notices or proxy statements generally distributed by
the Borrower to its stockholders on a date no later than the date supplied to
the stockholders;
(e) promptly after the Borrower's receipt thereof, a copy of any
"management letter" or other material report received by the Borrower from its
certified public accountants; and
(f) promptly, such additional financial and other information as any
Lender or the Agent may from time to time reasonably request.
5.3. Payment of Obligations. Pay, discharge or otherwise satisfy at or
----------------------
before maturity or before they become delinquent, as the case may be, all its
Debt obligations of whatever nature, except (x) in the case of Debt other than
that described in subsection 7.1(f), when the amount or validity thereof is
currently being contested in good faith by appropriate proceedings and reserves
in conformity with GAAP with respect thereto have been provided on the books of
the Borrower, as the case may be, or (y) where the failure so to pay such Debt
is in the normal course of the Borrower's business as now conducted and would
not have a Material Adverse Effect.
5.4. Conduct of Business and Maintenance of Existence. Subject to Section
------------------------------------------------
6.10 hereof, continue to engage in all material respects in business of the same
general type as now conducted by it and, except to the extent that failure to do
so would not have a Material Adverse Effect, preserve, renew and keep in full
force and effect its corporate existence and take all reasonable action to
maintain all rights, privileges, trademarks, trade names, licenses, franchises
and other authorizations necessary in the normal conduct of its business; comply
with all Contractual Obligations (other than those which evidence Debt) and
Requirements of Law except to the extent that failure to comply therewith would
not reasonably be expected to have, in the aggregate, a Material Adverse Effect.
5.5. Maintenance of Property; Insurance. (a) Maintain in good repair,
----------------------------------
working order and condition (ordinary wear and tear excepted) in accordance with
the general practice of other businesses of similar character and size, all
Property material or necessary to its business, and from time to time make or
cause to be made all appropriate repairs, renewals or replacements thereof.
(b) Insure its properties, assets and operations against loss or
damage by fire and such other insurable hazards as such assets are commonly
insured (including fire, extended coverage, property damage, worker's
compensation, public liability and business interruption insurance) and against
other risks (including fidelity, theft of documents, forgery and errors and
omissions) in such amounts as similar properties, assets and risks are insured
by prudent companies in similar circumstances carrying on similar businesses,
and with reputable
34
<PAGE>
and financially sound insurers, including self-insurance to the extent
customary. The Borrower shall deliver (i) on the Closing Date and annually
thereafter an original certificate of insurance signed by the Borrower's
independent insurance broker describing and certifying as to the existence of
the insurance on the Borrower's properties, assets and risks required to be
maintained by this Agreement and (ii) at the request of the Agent from time to
time a summary schedule indicating all insurance then in force with respect to
the Borrower. The Borrower shall notify the Lenders promptly of any occurrence
causing a material loss or decline in value of the properties, assets and
operations and the estimated (or actual, if available) amount of such loss or
decline. Following the occurrence and continuance of an Event of Default, any
monies constituting insurance proceeds shall, if received by the Borrower, be
held in trust for the benefit of the Lenders and promptly paid over to the
Agent, on behalf of the Lenders, and all such proceeds may, at the option of the
Agent, either (i) be applied by the Lenders to the payment of the Loans in such
manner as the Lenders may reasonably determine, or (ii) be disbursed to the
Borrower on such terms as are deemed appropriate by the Lenders for the repair,
restoration and/or replacement of property in respect of which such proceeds
were paid. Otherwise, so long as no Event of Default has occurred, any monies
constituting insurance proceeds received by the Borrower shall be applied by the
Borrower to the repair, restoration and/or replacement of property in respect of
which such proceeds were paid, all as the Borrower reasonably deems appropriate.
(c) Maintain at all times in effect free and clear of any Lien or
assignment a key man life insurance policy on the life of Joseph K. Rensin in a
face amount of not less than $4,000,000, the proceeds of which shall be payable
to the Borrower.
5.6. Inspection of Property; Books and Records; Discussions. (a) Upon
------------------------------------------------------
reasonable notice, permit any of the officers or authorized employees or
representatives of the Agent or any of the Lenders to visit and inspect during
normal business hours any of its properties and to examine and make excerpts
from its books and records and discuss its business affairs, finances and
accounts (including those of its Affiliates) with its officers, all in such
detail and at such times and as often as any of the Lenders may reasonably
request.
(b) Maintain and keep proper books of record and account which enable
the Borrower to issue financial statements in accordance with GAAP and as
otherwise required by applicable Requirements of Law, and in which full, true
and correct entries shall be made in all material respects of all its dealings
and business and financial affairs.
(c) Permit an audit by the Agent, or a Person selected by the Agent,
of the Collateral to be conducted four (4) times in any calendar year, the costs
of which audits shall be paid by the Borrower in an amount up to $750 per diem
plus out-of-pocket expenses; provided that, if an Event of Default shall occur,
the Lender may request additional audits of the Collateral, the expense of which
additional audits shall also be paid for by the Borrower.
5.7. Notices. Promptly, upon Borrower becoming aware, give notice to the
-------
Agent and each Lender of:
(a) the occurrence of any Default or Event of Default;
35
<PAGE>
(b) any (i) default or event of default under any Debt of the Borrower
(ii) litigation, investigation or proceeding which may exist at any time between
the Borrower and any Governmental Authority which, if not cured or if adversely
determined, as the case may be, would have a Material Adverse Effect;
(c) any litigation or proceeding which, if adversely determined, would
have a Material Adverse Effect on the Borrower;
(d) the following events, as soon as possible and in any event within
30 days after the Borrower knows or has reason to know thereof: (i) the
occurrence of any Reportable Event with respect to any Single Employer Plan, or
any withdrawal from, or the termination, Reorganization or Insolvency of any
Multiemployer Plan which may, individually or in the aggregate, result in a
liability which would have a Material Adverse Effect or (ii) the institution of
proceedings or the taking of any other action by the PBGC or the Borrower or any
Commonly Controlled Entity or any Multiemployer Plan with respect to the
withdrawal from, or the terminating, Reorganization or Insolvency of, any Single
Employer Plan in a distress termination under Section 4041(c) of ERISA or
Multiemployer Plan; and
(e) an event which has had a Material Adverse Effect.
Each notice pursuant to this subsection shall be accompanied by a statement of
the Borrower, executed on its behalf by a Responsible Officer, setting forth
details of the occurrence referred to therein and stating what action the
Borrower proposes to take with respect thereto.
5.8. Environmental Laws. (a) Comply with, and require compliance by all
------------------
tenants and to the extent possible, all subtenants, if any, with, all
Environmental Laws and obtain and comply with and maintain, and require that all
tenants and to the extent possible, all subtenants obtain and comply with and
maintain, any and all licenses, approvals, registrations or permits required by
Environmental Laws except to the extent that failure to so comply or obtain or
maintain such documents would not have a Material Adverse Effect.
(b) Except as set forth in Schedule 3.13, comply with all lawful and
binding orders and directives of all Governmental Authorities respecting
Environmental Laws except to the extent that failure to so comply would not have
a Material Adverse Effect.
(c) Defend, indemnify and hold harmless the Agent and the Lenders, and
their respective employees, officers and directors, from and against any claims,
demands, penalties, fines, liabilities, settlements, damages, costs and expenses
of whatever kind or nature known or unknown, contingent or otherwise, arising
out of, or in any way relating to the violation of or noncompliance with any
Environmental Laws applicable to the real property owned or operated by the
Borrower, or any orders, requirements or demands of Governmental Authorities
related thereto, including, without limitation, attorneys' and consultants'
fees, investigation and laboratory fees, court costs and litigation expenses,
except to the extent that any of the foregoing arise out of the negligence or
willful misconduct of any of the foregoing enumerated parties.
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5.9. Compliance with Security Documents. The Borrower will at all times
----------------------------------
comply with all of the provisions of, and perform all of its obligations under,
the Security Agreement.
5.10. Establishment of Borrower Collection Accounts. The Borrower agrees
---------------------------------------------
that within thirty (30) days from the Closing Date, it will establish one or
more Borrower Collection Accounts to which all collections of Receivables will
be transferred and the right to control such Borrower Collection Accounts upon
the occurrence of an Event of Default shall have been assigned to the Agent for
the benefit of each Lender.
SECTION 6. NEGATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitments remain in
effect, any Note remains outstanding and unpaid, or any other amount is owing to
any Lender or the Agent hereunder, the Borrower shall not, directly or
indirectly:
6.1. Net Worth Covenant.
------------------
Permit at any time its Net Worth to be less than the sum of (i)
$30,000,000 plus (ii) an amount equal to 50% of the consolidated net income (but
not loss) of the Borrower determined in accordance with Section 1.3(b) of this
Agreement for each fiscal year of the Borrower commencing with the Borrower's
fiscal year ending December 31, 1998, each increase to be effective as of the
last day of each fiscal year.
6.2. Limitation on Debt. At any time incur, create, assume, or suffer to
------------------
exist any Debt except:
(a) Debt in respect of the Loans and other obligations of the Borrower
under this Agreement and the Notes;
(b) Current accounts payable incurred in the ordinary course of the
Borrower's business, accrued expenses and other current items arising out of
transactions (other than borrowings) in the ordinary course of the Borrower's
business;
(c) Existing Debt for borrowed money and obligations in respect of
Capital Leases, in each case as described on Schedule 6.2;
(d) Future purchase money Debt and obligations in respect of Capital
Leases provided that such Debt and obligations (i) do not exceed one hundred
percent (100%) of the purchase price of the assets purchased and/or leased and
(ii) do not exceed an additional $2,000,000 in such Debt and Capital Leases in
the aggregate in any fiscal year, measured by the principal amount of the
purchase money Debt or the capitalized cost to the Borrower of the equipment
subject to the Capital Lease;
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(e) Letter of credit in the face amount of $250,000 issued by First
Union National Bank in favor of A and E Partners L.P.; and
(f) Debt of any corporation or other entity acquired by Borrower in an
acquisition permitted under Section 6.6, and not created in contemplation of
such acquisition.
Any of such future or existing permitted Debt may not be refinanced or
replaced for an amount greater than the then outstanding principal balance
thereof without the consent of the Lender.
6.3. Limitation on Liens. Create, incur, assume or suffer to exist any
-------------------
Lien upon any of its property, assets or revenues, whether now owned or
hereafter acquired, except for:
(a) The following, (i) if the validity or amount thereof is being
contested in good faith by appropriate and lawful proceedings diligently
conducted so long as levy and execution thereon have been stayed and continue to
be stayed or (ii) if a final judgment is entered and such judgment is discharged
within thirty (30) days of entry, and in either case they do not materially
impair the ability of the Borrower to perform its obligations hereunder or under
the other Loan Documents:
(A) Claims or Liens for taxes, assessments or charges due and
payable and subject to interest or penalty, provided that the Borrower
maintains such reserves or other appropriate provisions as shall be required
by GAAP and pays all such taxes, assessments or charges forthwith upon the
commencement of proceedings to foreclose any such Lien;
(B) Claims, Liens or encumbrances upon, and defects of title to,
real or personal property including any attachment of personal or real
property or other legal process prior to adjudication of a dispute on the
merits; and
(C) Claims or Liens of mechanics, materialmen, warehousemen,
carriers, landlords, or other statutory nonconsensual Liens;
(b) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation;
(c) liens incurred or deposits made to secure the performance of bids,
trade contracts (other than for borrowed money), leases, statutory obligations,
surety and appeal bonds, performance bonds and other obligations of a like
nature incurred in the ordinary course of business of the Borrower;
(d) easements, rights-of-way, restrictions, leases, subleases and
other similar encumbrances incurred in the ordinary course of business which, in
the aggregate, are not substantial in amount and which do not interfere with the
ordinary conduct of the business of the Borrower;
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(e) other Liens not otherwise encumbering any of the Collateral which
are incurred in the ordinary course of business and secure Debt of the Borrower
permitted under Section 6.2; and
(f) Any lien existing on any asset of any corporation or other entity
at the time such corporation or other entity is acquired by Borrower in an
acquisition permitted under Section 6.6, and not created in contemplation of
such event, or any lien existing on any asset prior to the acquisition thereof
by the Borrower and not created in contemplation of such acquisition.
6.4. Prohibitions on Fundamental Changes. Enter into any merger or
-----------------------------------
consolidation, unless the Borrower is the surviving entity, or unless such event
occurs in connection with an acquisition permitted under Section 6.6, or
liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of,
all or substantially all of its property, business or assets, except that the
Borrower may sell substantially all of its Receivables from time to time in
Securitized Offerings. 6.5. Limitation on Sale of Assets . Convey, sell, lease,
assign, transfer or otherwise dispose of any of its property, business or assets
(including, without limitation, accounts receivables and leasehold interests),
whether now owned or hereafter acquired, except if such conveyance, sale,
transfer, lease or disposition is made in the ordinary course of business, in
compliance with all existing applicable Contractual Obligations (including the
other applicable provisions of this Agreement) and Requirements of Law and the
proceeds, if any, of any such transaction are used for the Borrower's corporate
purposes.
6.6. Prohibitions on Acquisitions. From and after the date hereof, acquire
----------------------------
by purchase or through merger or consolidation any stock or securities of or any
partnership interest in or all or substantially all of the assets of any other
Person, except Special Purpose Entities, and except for such other acquisitions
the consummation of which would not result in a Default or otherwise cause the
Borrower to breach any covenant in this Agreement.
6.7. Prohibition on Distributions. At any time make (or incur any
----------------------------
liability to make) or pay any Distribution in respect of the Borrower, except
for such Distributions as would not cause the Borrower to breach the covenant in
Section 6.1.
6.8. Limitation on Contingent Obligations. Create, incur, assume or suffer
------------------------------------
to exist any Contingent Obligation except guarantees made in the ordinary course
of its business by the Borrower of obligations of any of its Subsidiaries or
Affiliates, provided those obligations are otherwise permitted under this
Agreement.
6.9. Transactions with Affiliates. Except as expressly permitted in this
----------------------------
Agreement, directly or indirectly enter into any transaction or arrangement
whatsoever or make any payment to or otherwise deal with any Affiliate, except,
as to all of the foregoing in the ordinary course of and pursuant to the
reasonable requirements of the Borrower's business and upon fair and reasonable
terms no less favorable to the Borrower than would be obtained in a
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comparable arm's length transaction with a Person not an Affiliate of the
Borrower. This covenant shall not apply to transactions between the Borrower and
a Special Purpose Entity.
6.10. Continuation of or Change in Business . Engage in any business either
-------------------------------------
directly or through any Subsidiary except for businesses of the same general
type in which the Borrower is engaged on the date of this Agreement and any
business directly related to such existing business, except with the prior
written consent of the Required Lenders, which consent shall not be unreasonably
withheld.
6.11. Preservation of Status of Collateral . Except as expressly permitted
------------------------------------
by this Agreement or the Security Agreement, (a) sell, transfer, exchange or
otherwise dispose of any portion of the Collateral, or (b) grant any Lien,
charge, security interest, mortgage or other encumbrance on the Collateral or
any part thereof or any interest therein or the proceeds thereof other than the
Lien of the Security Agreement, or (c) permit the Lien of the Security Agreement
not to constitute a valid first priority perfected security interest in the
Collateral, except as and to the extent otherwise permitted under the terms of
the Security Agreement.
SECTION 7. EVENTS OF DEFAULT
7.1. Events of Default . If any of the following events shall occur and be
-----------------
continuing:
(a) The Borrower shall fail to pay any principal of any Note
when due in accordance with the terms thereof or hereof; or the Borrower shall
fail to pay any interest on the Note, or any other amount payable hereunder,
within five (5) days after such payment is due; or
(b) Any representation or warranty made or deemed made by the
Borrower herein or which is contained in any certificate, document or financial
or other statement furnished at any time under or in connection with this
Agreement shall prove to have been incorrect in any material respect on or as of
the date made or deemed made; or
(c) The Borrower shall default in the observance or performance
of any agreement contained in Sections 6.1 or 6.7; or
(d) The Borrower shall default in the observance or performance
of any other agreement contained in this Agreement (other than as provided in
paragraphs (a) through (c) of this Section 7.1) or any other Loan Document, and
such default shall continue unremedied for a period of thirty (30) days after
the earlier of (i) the Borrower has knowledge of such default or (ii) the giving
of written notice of such default to the Borrower by the Agent or by any of the
Lenders;
(e) One or more judgments or decrees shall be entered against
the Borrower involving in the aggregate a liability (not paid or fully covered
by insurance) of $500,000 or more and all such judgments or decrees shall not
have been vacated, discharged,
40
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settled, satisfied or paid, or stayed or bonded pending appeal, within sixty
(60) days from the entry thereof; or
(f) The Borrower shall (i) default in the payment of any amount
due under any Debt of the Borrower in excess of $500,000 in the aggregate (other
than the Notes), beyond the period of grace, if any, provided in the instrument
or agreement under which such Debt was created; or (ii) default in the
observance or performance of any other agreement contained in any such Debt or
in any instrument or agreement evidencing, securing or relating thereto beyond
any applicable notice and grace period, or any other event shall occur the
effect of which default or other event is to cause, or to permit the holder or
holders or beneficiary or beneficiaries of such Debt (or a trustee or agent on
behalf of such holder or holders or beneficiary or beneficiaries) to cause such
Debt to become due and payable prior to its stated maturity or any such Debt is
declared to be due and payable prior to its stated maturity unless such default,
event or declaration referred to in this subparagraph (ii) is waived or cured to
the satisfaction of such other party as demonstrated to the satisfaction of the
Agent by the Borrower prior to the Agent taking any action under Section 7.2 in
respect of such occurrence; or
(g) (i) The Borrower shall commence any case, proceeding or
other action (A) under any existing or future law of any jurisdiction, domestic
or foreign, relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to it, or
seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution, composition or
other relief with respect to it or its debts, or (B) seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or any
substantial part of its assets, or the Borrower shall make a general assignment
for the benefit of its creditors; or (ii) there shall be commenced against the
Borrower any case, proceeding or other action of a nature referred to in clause
(i) above which (A) results in the entry of an order for relief or any such
adjudication or appointment or (B) remains undismissed, undischarged or unbonded
for a period of sixty (60) days; or (iii) there shall be commenced against the
Borrower any case, proceeding or other action seeking issuance of a warrant of
attachment, execution, distraint or similar process on a claim in excess of
$500,000 against all or any substantial part of its assets which results in the
entry of an order for any such relief which shall not have been vacated,
discharged, or stayed or bonded pending appeal within sixty (60) days from the
entry thereof; or (iv) the Borrower shall take any action in furtherance of, or
indicating its consent to, approval of, or acquiescence in, any of the acts set
forth in clause (i), (ii), or (iii) above; or (v) the Borrower shall generally
not, or shall be unable to, or shall admit in writing its inability to, pay its
debts as they become due; or
(h) (i) Any Person shall engage in any "prohibited transaction"
(as defined in Section 406 of ERISA or Section 4975 of the Code) involving any
Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of
ERISA), whether or not waived, shall exist with respect to any Plan, (iii) a
Reportable Event shall occur with respect to, or proceedings shall commence to
have a trustee appointed, or a trustee shall be appointed, to administer or to
terminate, any Single Employer Plan, which Reportable Event or institution of
proceedings is, in the reasonable opinion of the Required Lenders, likely to
result in the termination by action of the PBGC or any court of such Plan for
purposes of Title IV of ERISA, or (iv) any Single Employer Plan shall terminate
for purposes of Title IV of ERISA; and in each
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case in clauses (i) through (iv) above, such event or condition, together with
all other such events or conditions, if any would have a Material Adverse
Effect; or
(i) Any Change of Control shall occur; or
(j) Any of the Loan Documents shall cease to be a legal, valid
and binding agreement enforceable against each party executing the same or such
party's successors and assigns (as permitted under the Loan Documents) in
accordance with the respective terms thereof or shall in any way be terminated
(except in accordance with its terms) or become or be declared ineffective or
inoperative or shall in any way be challenged and thereby deprive or deny the
Lenders and the Agent the intended benefits thereof or they shall thereby cease
substantially to have the rights, titles, interests, remedies, powers or
privileges intended to be created thereby; or
(k) A notice of lien or assessment in excess of $500,000 is
filed of record with respect to all or any part of the Borrower's assets having
a value of at least that amount by the United States, or any department, agency
or instrumentality thereof, or by any state, county, municipal, or other
governmental agency, including, without limitation, the PBGC, becomes payable
and the same is not paid, vacated, bonded or stayed pending appeal within thirty
(30) days after the same becomes payable; or
(l) The Borrower ceases to be Solvent; or
(m) Except as otherwise permitted in this Agreement, the
Borrower ceases to conduct its business as contemplated or the Borrower is
enjoined, restrained or in any way prevented by court order from conducting all
or any material part of its business and such injunction, restraint or other
preventive order is not dismissed within sixty (60) days after the entry
thereof.
7.2. Remedies . (a) If an Event of Default specified under subsections 7.1
--------
(a) through (f) or (h) through (m) shall occur and be continuing, the Lenders
shall be under no further obligation to make Loans hereunder, and the Agent,
upon the request of the Required Lenders, shall by written notice to the
Borrower, terminate the Commitments and/or declare the unpaid principal amount
of the Notes then outstanding and all interest accrued thereon, any unpaid fees
and all other Debt of the Borrower to the Lenders hereunder and thereunder to be
forthwith due and payable, and the same shall thereupon become and be
immediately due and payable to the Agent for the benefit of each Lender
presentment, demand, protest or any other notice of any kind, all of which are
hereby expressly waived.
(b) If an Event of Default specified under subsections 7.1(g)
hereof shall occur, the Commitments shall immediately terminate and the Lenders
shall be under no further obligation to make Loans hereunder, and the unpaid
principal amount of the Notes then outstanding and all interest accrued thereon,
any unpaid fees and all other obligations of the Borrower to the Lenders
hereunder and thereunder shall be immediately due and payable, without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived.
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(c) If an Event of Default shall occur and be continuing, any
Lender to whom any obligation is owed by the Borrower hereunder or under any
other Loan Document or any Participant of such Lender which has agreed in
writing to be bound by the provisions of Section 9.6 hereof and any branch,
subsidiary or Affiliate of such Lender or Participant shall have the right, in
addition to all other rights and remedies available to it, without notice to the
Borrower, to set-off against and apply to the then unpaid balance of all the
Loans and all other obligations of the Borrower hereunder or under any other
Loan Document any debt owing to, and any other funds held in any manner for the
account of, the Borrower by such Lender or Participant or by such branch,
Subsidiary or Affiliate, including, without limitation, all funds in all deposit
accounts (whether time or demand, general or special, provisionally credited or
finally credited, or otherwise) now or hereafter maintained by the Borrower for
its own account (but not including funds held in custodian or trust accounts or
other accounts established solely for the benefit of parties other than the
Borrower) with such Lender or Participant or such branch, Subsidiary or
Affiliate. Such right shall exist whether or not any Lender or the Agent shall
have made any demand under this Agreement or any other Loan Document, whether or
not such debt owing to or funds held for the account of the Borrower is or are
matured or unmatured and regardless of the existence or adequacy of any
collateral, guaranty or any other security, right or remedy available to the any
Lender or the Agent.
(d) Notwithstanding any provision herein to the contrary or in
the other Loan Documents, any proceeds received by the Agent from any payment
made by the Borrower under this Agreement or the other Loan Documents after the
Commitments have been terminated, or received by the Agent from the foreclosure,
sale, lease, collection upon, realization of or other disposition of any
Collateral or any other collateral which may have been provided to the Agent
after the Commitments have been terminated (including without limitation
insurance proceeds), shall be applied by the Agent as follows, unless otherwise
agreed by all the Lenders:
(i) first, to reimburse the Agent for out-of-pocket costs,
expenses and disbursements, including without limitation reasonable attorneys'
fees and legal expenses, incurred by the Agent in connection with collection of
any obligations of the Borrower under any of the Loan Documents;
(ii) second, to accrued and unpaid interest on the Loans;
(iii) third, to the principal amount of the Loans then
outstanding;
(iv) fourth, to fees payable under this Agreement and the other
Loan Documents (ratably according to the respective amounts then outstanding);
(v) fifth, to the repayment of all other indebtedness then due
and unpaid of the Borrower to the Lenders incurred under this Agreement or any
of the other Loan Documents, whether of principal, interest, fees, expenses or
otherwise (ratably according to the respective amounts then outstanding); and
(vi) the balance, if any, as required by law.
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(e) Each Lender agrees that (i) if at any time it shall receive
the proceeds of any Collateral or any proceeds thereof or (ii) if after the
Commitments have been terminated it shall receive any payment on account of the
Loans or any other amounts owing hereunder or under the other Loan Documents (in
either case other than through application by the Agent in accordance with
subsection 7.2(d)), it shall promptly turn the same over to the Agent for
application in accordance with the terms of subsection 7.2(d).
(f) In addition to the other rights and remedies contained in
this Agreement or in the other Loan Documents, the Loans shall, at the Required
Lenders' option, bear the interest rates provided in Section 2.7 hereof.
(g) In addition to all of the rights and remedies contained in
this Agreement or in any of the other Loan Documents, the Agent shall have all
of the rights and remedies under applicable Law, all of which rights and
remedies shall be cumulative and non-exclusive, to the extent permitted by Law.
The Agent may, and upon the request of the Required Lenders shall, exercise all
post-default rights granted to them and the Lenders under the Loan Documents or
applicable Law.
SECTION 8. THE AGENT
8.1. Appointment . Each Lender hereby irrevocably designates and appoints
-----------
Sunrock Capital Corp. as the Agent of such Lender under this Agreement. Each
such Lender irrevocably authorizes the Agent as the agent for such Lender to
take such action on its behalf under the provisions of this Agreement and to
exercise such powers and perform such duties as are expressly delegated to the
Agent by the terms of this Agreement, together with such other powers as are
reasonably incidental thereto. Notwithstanding any provision to the contrary
elsewhere in this Agreement, the Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or otherwise exist against the Agent. The Agent agrees to act as the
Agent on behalf of the Lenders to the extent provided in this Agreement.
8.2. Delegation of Duties . The Agent may execute any of its duties under
--------------------
this Agreement by or through agents or attorneys-in-fact and shall be entitled
to engage and pay for the advice and services of counsel concerning all matters
pertaining to such duties. The Agent shall not be responsible to the Lenders for
the negligence or misconduct of any agents or attorneys in-fact selected by them
with reasonable care.
8.3. Exculpatory Provisions . Neither the Agent nor any of its officers,
----------------------
directors, employees, agents, attorneys-in-fact or Affiliates shall be (i)
liable for any action lawfully taken or omitted to be taken by them or such
Person under or in connection with this Agreement (except for their or such
Person's own gross negligence or willful misconduct) or (ii) responsible in any
manner to any of the Lenders for any recitals, statements, representations or
warranties made by the Borrower or any officer thereof contained in this
Agreement or in any certificate, report, statement or other document referred to
or provided for in, or received by the Agent under
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or in connection with, this Agreement or for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement, the Notes or the
other Loan Documents or for any failure of the Borrower to perform its
obligations hereunder or thereunder. The Agent shall not be under any obligation
to any Lender to ascertain or to inquire as to the observance or performance of
any of the agreements contained in, or conditions of, this Agreement or the
other Loan Documents, or to inspect the properties, books or records of the
Borrower.
8.4. Reliance by Agent . The Agent shall be entitled to rely, and shall be
-----------------
fully protected in relying, upon any Note, writing, resolution, notice, consent,
certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype
message, statement, order or other document or conversation believed by them to
be genuine and correct and to have been signed, sent or made by the proper
Person or Persons and upon advice and statements of legal counsel (including,
without limitation, counsel to the Borrower), independent accountants and other
experts selected by the Agent. The Agent may deem and treat the payee of any
Note as the owner thereof for all purposes unless a written notice of
assignment, negotiation or transfer thereof shall have been filed with the
Agent. The Agent shall be fully justified in failing or refusing to take any
action under this Agreement unless it shall first receive such advice or
concurrence of the Required Lenders as it deems appropriate or it shall first be
indemnified to its satisfaction by the Lenders against any and all liability and
expense which may be incurred by it by reason of taking or continuing to take
any such action. The Agent shall in all cases be fully protected in acting, or
in refraining from acting, under this Agreement, the Notes and the other Loan
Documents in accordance with a request of the Required Lenders, and such request
and any action taken or failure to act pursuant thereto shall be binding upon
all the Lenders and all future holders of the Notes.
8.5. Notice of Default . The Agent shall not be deemed to have knowledge or
-----------------
notice of the occurrence of any Default or Event of Default hereunder unless it
has received notice from a Lender or the Borrower referring to this Agreement,
describing such Default or Event of Default and stating that such notice is a
"notice of default". In the event that the Agent receives such a notice, the
Agent shall give notice thereof to the Lenders. The Agent shall take such action
with respect to such Default or Event of Default as shall be reasonably directed
by the Required Lenders; provided that unless and until the Agent shall have
received such directions, the Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Default or
Event of Default as they shall deem advisable in the best interests of the
Lenders.
8.6. Non-Reliance on Agent and Other Lenders . Each Lender expressly
---------------------------------------
acknowledges that neither the Agent nor any of its officers, directors,
employees, agents, attorneys-in-fact or Affiliates has made any representations
or warranties to it and that no act by the Agent hereinafter taken, including
any review of the affairs of the Borrower, shall be deemed to constitute any
representation or warranty by the Agent to any Lender. Each Lender represents to
the Agent that it has, independently and without reliance upon the Agent or any
other Lender, and based on such documents and information as it has deemed
appropriate, made its own appraisal of and investigation into the business,
operations, property, financial and other condition and creditworthiness of the
Borrower and made its own decision to make its Loans hereunder and enter into
this Agreement. Each Lender also represents that it will, independently
45
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and without reliance upon the Agent or any other Lender, and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit analysis, appraisals and decisions in taking or not taking
action under this Agreement and the other Loan Documents, and to make such
investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of the
Borrower. Except for notices, reports and other documents expressly required to
be furnished to the Lenders by the Agent hereunder, the Agent shall not have any
duty or responsibility to provide any Lender with any credit or other
information concerning the business, operations, property, condition (financial
or otherwise), prospects or creditworthiness of the Borrower which may come into
the possession of the Agent or any of its officers, directors, employees,
agents, attorneys-in-fact or Affiliates.
8.7. Indemnification . The Lenders agree to indemnify the Agent in its
---------------
capacity as such (to the extent not reimbursed by the Borrower and without
limiting the obligation of the Borrower to do so), ratably according to its
respective Commitment Percentage, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind whatsoever which may at any time
(including, without limitation, at any time following the payment of the Notes)
be imposed on, incurred by or asserted against the Agent in any way relating to
or arising out of this Agreement, the other Loan Documents, or any documents
contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by the Agent under
or in connection with any of the foregoing; provided that no Lender shall be
liable for the payment of any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
resulting solely from the Agent's gross negligence or willful misconduct. The
agreements in this Section 8.7 shall survive the payment of the Notes and all
other amounts payable hereunder.
8.8. Agent in its Individual Capacity . The Agent and its Affiliates may
--------------------------------
make loans to, accept deposits from and generally engage in any kind of business
with the Borrower as though it was not the Agent hereunder. With respect to
Loans made or renewed by the Agent and any Note issued to the Agent, the Agent
shall have the same rights and powers under this Agreement as any Lender and may
exercise the same as though it were not the Agent, and the terms "Lender" and
"Lenders" shall include the Agent in its individual capacity.
8.9. Successor Agent . The Agent may resign as the Agent upon sixty (60)
---------------
days' notice to the Lenders and the Borrowers. If the Agent shall resign under
this Agreement, then the Required Lenders shall appoint from among the Lenders a
successor agent for the Lenders, which appointment shall be subject to the
approval of the Borrower (which approval shall not be unreasonably withheld and
shall not be required if at the time there shall have occurred and be continuing
a Default or Event of Default), whereupon such successor agent shall succeed to
the rights, powers and duties of the Agent, and the term "Agent" shall mean such
successor agent effective upon its appointment, and the former Agent's rights,
powers and duties as Agent shall be terminated, without any other or further act
or deed on the part of such former Agent or any of the parties to this Agreement
or any holders of the Notes. After any retiring Agent's resignation as Agent,
the provisions of this Section 8.9 shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent under this Agreement.
46
<PAGE>
8.10. Beneficiaries . Except as expressly provided herein, the provisions
-------------
of this Section 8 are solely for the benefit of the Agent and the Lenders, and
the Borrower shall not have any rights to rely on or enforce any of the
provisions hereof. In performing their functions and duties under this Agreement
the Agent shall act solely as agent of the Lenders and does not assume and shall
not be deemed to have assumed any obligation toward or relationship of agency or
trust with or for the Borrower.
SECTION 9. MISCELLANEOUS
9.1. Amendments and Waivers . Neither this Agreement, any Note or any other
----------------------
Loan Document, nor any terms hereof or thereof may be amended, supplemented or
modified except in accordance with the provisions of this subsection. With the
written consent of the Required Lenders, the Agent and the Borrower may, from
time to time, enter into written amendments, supplements or modifications hereto
and to the Notes and the other Loan Documents for the purpose of adding any
provisions to this Agreement or the Notes or the other Loan Documents or
changing in any manner the rights of the Lenders or of the Borrower hereunder or
thereunder or waiving, on such terms and conditions as the Agent may specify in
such instrument, any of the requirements of this Agreement or the Notes or the
other Loan Documents or any Default or Event of Default and its consequences;
provided, however, that no such waiver and no such amendment, supplement or
modification shall directly or indirectly (a) reduce the amount or extend the
maturity of any Note or any installment thereof, or reduce the rate or extend
the time of payment of interest thereon, or reduce any fee payable to any Lender
hereunder, or change the duration or amount of any Lender's Commitment, or
amend, modify or waive any provision of this subsection or reduce the percentage
specified in the definition of Required Lenders, or consent to the assignment or
transfer by the Borrower of any of its rights and obligations under this
Agreement, the Notes and the other Loan Documents, or release all or
substantially all of the Collateral (other than in accordance with the
provisions of this Agreement or the Security Agreement), in each case without
the consent of the Lender affected thereby or (b) amend, modify or waive any
provision of this Section 9.1 or increase the percentage specified in the first
proviso of subsection 2.1(a) or reduce the percentages specified in the
definition of Required Lenders or consent to the assignment or transfer by the
Borrower of any of its rights and obligations under this Agreement, the Notes
and the other Loan Documents, in each case without the written consent of all
the Lenders, or (c) amend, modify or waive any provision of Section 8 without
the written consent of the then Agent. Any such waiver and any such amendment,
supplement or modification shall apply equally to each of the Lenders and shall
be binding upon the Borrower, the Lenders, the Agent and all future holders of
the Notes. In the case of any waiver, the Borrower, the Lenders and the Agent
shall be restored to their former position and rights hereunder and under the
outstanding Notes, and any Default or Event of Default waived shall be deemed to
be cured and not continuing; but no such waiver shall extend to any subsequent
or other Default or Event of Default, or impair any right consequent thereon.
9.2. Notices . All notices, requests and demands to or upon the respective
-------
parties hereto to be effective shall be in writing, and, unless otherwise
expressly provided herein, shall be deemed to have been duly given or made when
delivered by hand, or one Business Day after being deposited with a national
overnight delivery service, charges prepaid, or otherwise when
47
<PAGE>
received, addressed as follows in the case of the Borrower and the Agent, and as
set forth in Schedule I in the case of the other parties hereto, or to such
other address as may be hereafter notified by the respective parties hereto and
any future holders of the Notes:
The Borrower: Creditrust Corporation
7000 Security Boulevard
Baltimore, MD 21244-2543
Attention: Joseph K. Rensin
with a copy to: Steven D. Shattuck
Piper & Marbury LLP
36 S. Charles Street
Baltimore, MD 21201
(provided that failure to send a copy of any notice to said counsel shall in no
way affect, limit or invalidate any notice sent to the Borrower or the exercise
of any of the Lenders' or the Agent's rights or remedies pursuant to a notice
sent to the Borrower.)
The Agent: Sunrock Capital Corp.
11 Penn Center
1835 Market Street
Philadelphia, Pennsylvania 19103
Attention: John D. Erwin
Telecopy: 215-979-7679
with a copy to: Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street, 51st Floor
Philadelphia, Pennsylvania 19103
Attention: Vincent J. Marriott, III
Telecopy: 215-864-8236
provided that any notice, request or demand to or upon the Agent or the Lenders
- --------
pursuant to Sections 2.2 or 2.8 shall not be effective until received.
9.3. No Waiver; Cumulative Remedies . No failure to exercise and no delay
------------------------------
in exercising, on the part of the Agent or any Lender, any right, remedy, power
or privilege hereunder shall operate as a waiver thereof; nor shall any single
or partial exercise of any right, remedy, power or privilege hereunder preclude
any other or further exercise thereof or the exercise of any other right,
remedy, power or privilege. The rights, remedies, powers and privileges herein
provided are cumulative and not exclusive of any rights, remedies, powers and
privileges provided by law.
9.4. Survival of Representations and Warranties . All representations and
------------------------------------------
warranties made hereunder and in any document, certificate or statement
delivered pursuant
48
<PAGE>
hereto or in connection herewith shall survive the execution and delivery of
this Agreement, the Notes and the other Loan Documents.
9.5. Payment of Expenses and Taxes . The Borrower agrees (a) to pay or
-----------------------------
reimburse the Agent on demand for all of its out-of-pocket costs and expenses
incurred in connection with the development, preparation and execution of, and
any amendment, supplement or modification to, this Agreement, the Notes, the
other Loan Documents, and any other documents prepared in connection herewith or
therewith, and the consummation of the transactions contemplated hereby and
thereby, including, without limitation, the reasonable fees and disbursements of
counsel to the Agent (which counsel may or may not include employees of the
Lender), (b) to pay or reimburse each Lender and the Agent on demand for all of
their costs and expenses incurred in connection with the enforcement or
preservation of any rights under this Agreement, the other Loan Documents, and
any such other documents related to this Agreement or any other Loan Document,
including, without limitation, reasonable fees and disbursements of counsel to
the Agent (which counsel may or may not include employees of the Agent) and the
several Lenders, and (c) to pay on demand, indemnify, and hold each Lender and
the Agent harmless from, any and all recording and filing fees and any and all
liabilities with respect to, or resulting from any delay in paying, stamp,
excise and other similar taxes, if any (other than Taxes expressly excluded from
the definition of Taxes in Section 2.12) which may be payable or determined to
be payable in connection with the execution and delivery of, or consummation of
any of the transactions contemplated by, or any amendment, supplement or
modification of, or any waiver or consent under or in respect of, this
Agreement, the Notes, the other Loan Documents, and any such other documents,
and (d) to pay on demand, indemnify, and hold each Lender and the Agent harmless
from and against any and all other liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever with respect to the execution, delivery, enforcement,
and, incident to a Default or Event of Default, the performance and
administration of this Agreement, the Notes, the other Loan Documents, and any
such other documents or the transactions contemplated hereby or thereby or any
action taken or omitted under or in connection with any of the foregoing (all
the foregoing, collectively, the "indemnified liabilities"), provided, that the
Borrower shall have no obligation hereunder to the Agent or any Lender with
respect to indemnified liabilities arising from the gross negligence or willful
misconduct of the Agent or any such Lender. Borrower shall be given notice of
any claim for indemnified liabilities and shall be afforded a reasonable
opportunity to participate in the defense, compromise or settlement thereof. The
agreements in this subsection shall survive repayment of the Notes and all other
amounts payable hereunder.
9.6. Successors and Assigns . (a) Whenever in this Agreement any of the
----------------------
parties hereto is referred to, such reference shall be deemed to include the
successors and assigns of such party, and all covenants, promises and agreements
by or on behalf of the Borrower, the Agent or the Lenders that are contained in
this Agreement shall bind and inure to the benefit of their respective
successors and assigns. The Borrower may not assign or transfer any of their
rights or obligations under this Agreement or the other Loan Documents without
the prior written consent of each Lender.
49
<PAGE>
(b) Each Lender may, in accordance with applicable law, assign all or a
portion of its interests, rights and obligations under this Agreement and the
other Loan Documents (including all or a portion of its Commitment and the Loans
at the time owing to it and the Notes held by it); provided, however, that (i)
each such assignment shall be to a Lender or Affiliate thereof, or, with the
consent of the Agent and, prior to the occurrence of an Event of Default, of the
Borrower (which consent of the Borrower shall not be unreasonably withheld or
delayed) to one or more financial institutions, (ii) so long as the Commitments
are in effect, the amount of each such assignment (determined as of the date the
Assignment and Acceptance with respect to such assignment is delivered to the
Agent) shall not be less than $5,000,000 (or the entire amount of its remaining
Commitment if less than $5,000,000 and (iii) the parties to each such assignment
shall execute and deliver to the Agent an Assignment and Acceptance, together
with the Note or Notes subject to such assignment and a processing and
recordation fee of $2,500 (except in the case of an assignment by any Lender to
one of its Affiliates). Upon acceptance and recording pursuant to paragraph (d)
of this Section 9.6, from and after the effective date specified in each
Assignment and Acceptance, which effective date shall be at least five Business
Days after the execution thereof, (A) the assignee thereunder shall be a party
hereto and to the Fee Letter and, to the extent of the interest assigned by such
Assignment and Acceptance, have the rights and obligations of a Lender under
this Agreement and the Fee Letter and (B) the assigning Lender thereunder shall,
to the extent of the interest assigned by such Assignment and Acceptance, be
released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of an assigning
Lender's rights and obligations under this Agreement, such Lender shall cease to
be a party hereto but shall continue to be entitled to the benefits of Sections
2.11, 2.12, 2.13 and 9.5 (to the extent that such Lender's entitlement to such
benefits arose out of such Lender's position as a Lender prior to the applicable
assignment), as well as to any Commitment Fees and other fees accrued for its
account and not yet paid. Notwithstanding any provision of this subsection 9.6,
after the Commitments have been terminated, any Lender may assign all or any
portion of its interests, rights and obligations under this Agreement and the
other Loan Documents to any Person (whether or not an entity described in clause
(i) above).
(c) By executing and delivering an Assignment and Acceptance, the assigning
Lender thereunder and the assignee thereunder shall be deemed to confirm to and
agree with each other and the other parties hereto as follows: (i) such
assigning Lender warrants that it is the legal and beneficial owner of the
interest being assigned thereby, free and clear of any adverse claim, and that
its Commitment and/or Commitments and the outstanding balances of its Loans, in
each case without giving effect to assignments thereof which have not become
effective, are as set forth in such Assignment and Acceptance, (ii) except as
set forth in (i) above, such assigning Lender makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement or
the other Loan Documents, or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement or the other Loan Documents,
or any other instrument or document furnished pursuant hereto or thereto, or the
financial condition of the Borrower or the performance or observance by the
Borrower of any of its obligations under this Agreement or any other instrument
or document furnished pursuant hereto; (iii) such assignee represents and
warrants that it is legally authorized to enter into such Assignment and
Acceptance; (iv) such assignee confirms that it has received a copy of this
Agreement, together
50
<PAGE>
with copies of the most recent financial statements delivered pursuant to
Section 5.1 and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into such
Assignment and Acceptance; (v) such assignee will independently and without
reliance upon the Agent, such assigning Lender or any other Lender and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this Agreement; (vi) such assignee appoints and authorizes the Agent to take
such action as agent on its behalf and to exercise such powers under this
Agreement as are delegated to the Agent by the terms hereof, together with such
powers as are reasonably incidental thereto; and (vii) such assignee agrees that
it will perform in accordance with their terms all the obligations which by the
terms of this Agreement are required to be performed by it as a Lender.
(d) The Agent shall maintain at its offices in Philadelphia, Pennsylvania a
copy of each Assignment and Acceptance and the names and addresses of the
Lenders, and the Commitment, and principal amount of the Loans owing to, each
Lender pursuant to the terms hereof from time to time (the "Register"). The
entries in the Register shall be conclusive in the absence of error and the
Borrower, the Agent and the Lenders may treat each person whose name is recorded
in the Register pursuant to the terms hereof as a Lender hereunder for all
purposes of this Agreement. The Register shall be available for inspection by
the Borrower and any Lender, at any reasonable time and from time to time upon
reasonable prior notice.
(e) Upon its receipt of a duly completed Assignment and Acceptance executed
by an assigning Lender and an assignee together with the Note or Notes subject
to such assignment, the processing and recordation fee referred to in paragraph
(b) above, the Agent shall (i) accept such Assignment and Acceptance, (ii)
record the information contained therein in the Register and (iii) give prompt
notice thereof to the Lenders. Within five Business Days after receipt of
notice, the Borrower, at its own expense, shall execute and deliver to the
Agent, in exchange for the surrendered original Note(s) (x) a new Note to the
order of such assignee in an amount equal to the portion of the Commitment
assumed by it pursuant to such Assignment and Acceptance and, (y) if the
assigning Lender has retained a Commitment, a new Note to the order of such
assigning Lender in a principal amount equal to the applicable Commitment
retained by it. Such new Notes shall be in an aggregate principal amount equal
to the aggregate principal amount of such surrendered Notes; such new Notes
shall be dated the date of the surrendered Notes which they replace and shall
otherwise be in substantially the form of Exhibit B hereto. Canceled Notes shall
be returned to the Borrower.
(f) Each Lender may sell participations to one or more financial
institutions approved by the Borrower (which approval shall not be unreasonably
withheld or delayed, and which approval shall not be required at any time
following the occurrence of an Event of Default) (each a "Participant") in all
-----------
or a portion of its rights and obligations under this Agreement (including all
or a portion of its Commitment and the Loans owing to it and the Note held by
it); provided, however, that (i) such Lender's obligations under this Agreement
-------- -------
shall remain unchanged, (ii) such Lender shall remain solely responsible to the
other parties hereto for the performance of such obligations, (iii) such Lender
shall remain the holder of the Note for all purposes under this Agreement, (iv)
the Borrower, the Agent and the other Lenders shall
51
<PAGE>
continue to deal solely and directly with such Lender in connection with such
Lender's rights and obligations under this Agreement, (v) in any proceeding
under the Bankruptcy Code such Lender shall be, to the extent permitted by law,
the sole representative with respect to the obligations held in the name of such
Lender whether for its own account or for the account of any Participant and
(vi) such Lender shall retain the sole right to enforce the obligations of the
Borrower relating to the Loans and to approve any amendment, modification or
waiver of any provision of this Agreement or the Note or Notes held by such
Lender or any other Loan Document.
(g) If amounts outstanding under this Agreement and the Notes are due
or unpaid, or shall have been declared or shall have become due and payable upon
the occurrence of an Event of Default, each Participant shall be deemed to have
the right of set-off in respect of its participating interest in amounts owing
under this Agreement and any Note to the same extent as if the amount of its
participating interest were owing directly to it as a lender under this
Agreement or any Note, provided that in purchasing such participation such
--------
Participant shall be deemed to have agreed to share with the Lenders the
proceeds thereof as provided in Section 8.8. The Borrower also agrees that each
Participant shall be entitled to the benefits of Sections 2.11, 2.12, 2.13, 8.5
and 8.8 with respect to its participation in the Commitments and the Loans
outstanding from time to time; provided, that no Participant shall be entitled
--------
to receive any greater amount pursuant to such Sections than the Lender selling
the participation would have been entitled to receive in respect of the amount
of the participation transferred by such Lender to such Participant had no such
transfer occurred.
(h) If any Participant is organized under the laws of any
jurisdiction other than the United States or any state thereof, the Lender
selling the participation, concurrently with the sale of a participating
interest to such Participant, shall cause such Participant (i) to represent to
the Lender selling the participation (for the benefit of such Lender the other
Lenders, the Agent and the Borrower) that under applicable law and treaties no
taxes will be required to be withheld by the Agent, the Borrower or the Lender
selling the participation with respect to any payments to be made to such
Participant in respect of its participation in the Loans and (ii) to agree (for
the benefit of such Lender the other Lenders, the Agent and Borrower) that it
will deliver the tax forms and other documents required to be delivered in order
to assure that no such withholding taxes need to be paid and comply from time to
time with all applicable U.S. laws and regulations with respect to withholding
tax exemptions.
9.7. Confidentiality. The Lenders agree that they will maintain all
---------------
information and financial statements provided to them or otherwise obtained by
they with respect to the Borrower confidential and that it will not disclose the
same or use it for any purposes; provided that nothing herein shall prevent any
--------
Lenders from disclosing any such information (a) to the Agent or any other
Lender, (b) to any prospective assignee or participant in connection with any
assignment or participation of Loans permitted by this Agreement, (c) to its
employees, directors, lenders, attorneys, accountants and other professional
advisers, provided that any such person is advised by such Lender that such
information is subject to the confidentiality limitations of this Section, (d)
upon the request or demand of any Governmental Authority having jurisdiction
over such Lender, (e) in response to any order of any court or other
Governmental Authority or as may otherwise be required pursuant to any
Requirement of Law, provided that the Borrower has (unless prohibited by the
terms of any such order or requirement) been advised at least ten (10)
52
<PAGE>
days (or if such is not possible or practicable, such lesser number of days as
is possible or practicable under the circumstances) prior to such disclosure of
the existence of such order or requirement, (f) which has been publicly
disclosed other than in breach of this Agreement, or (g) in connection with the
exercise of any remedy hereunder or under the Notes.
9.8. Adjustments; Setoff. (a) If any Lender (a "benefitted Lender") shall
-------------------
at any time receive any payment of all or part of its Loans, or interest
thereon, or receive any collateral in respect thereof (whether voluntarily or
involuntarily, by set-off, pursuant to events or proceedings of the nature
referred to in subsection 7.1(g), or otherwise), in a greater proportion than
any such payment to or collateral received by any other Lender, if any, in
respect of such other Lender's Loans, or interest thereon, being paid in respect
of Loans being repaid simultaneously therewith or Loans required hereby to be
paid proportionately such benefitted Lender shall purchase for cash from the
other Lenders such portion of each such other Lender's Loan, or shall provide
such other Lenders with the benefits of any such collateral, or the proceeds
thereof, as shall be necessary to cause such benefitted Lender to share the
excess payment or benefits of such collateral or proceeds ratably with each of
the Lenders; provided, however, that if all or any portion of such excess
payment or benefits is thereafter recovered from such benefitted Lender, such
purchase shall be rescinded, and the purchase price and benefits returned, to
the extent of such recovery, but without interest. The Borrower agrees that each
Lender so purchasing a portion of another Lender's Loan may exercise all rights
of payment (including, without limitation, rights of set-off) with respect to
such portion as fully as if such Lender were the direct holder of such portion.
(b) In addition to any rights and remedies, of the Lenders provided by law, upon
the occurrence of an Event of Default, each Lender shall have the right, without
prior notice to the Borrower, any such notice being expressly waived by the
Borrower to the extent permitted by applicable law, upon any amount becoming due
and payable by the Borrower hereunder or under the Notes (whether at the stated
maturity, by acceleration or otherwise) to set-off and appropriate and apply
against such amount any and all deposits (general or special, time or demand,
provisional or final), in any currency, and any other credits, indebtedness or
claims, in any currency, in each case whether direct or indirect, absolute or
contingent, matured or unmatured, at any time held or owing by such Lender to or
for the credit or the account of the Borrower. Each Lender agrees promptly to
notify the Borrower and the Agent after any such set-off and application made by
such Lender, provided that the failure to give such notice shall not affect the
validity of such set-off and application.
9.9. Counterparts. This Agreement may be executed by one or more of the
------------
parties to this Agreement on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. A set of the copies of this Agreement signed by all the parties
shall be lodged with the Borrower and each of the Lenders.
9.10. Severability. Any provision of this Agreement which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
53
<PAGE>
9.11. Integration. This Agreement represents the agreement of the
-----------
Borrower, the Agent and the Lenders, with respect to the subject matter hereof,
and there are no promises, undertakings, representations or warranties by the
Agent or any Lender relative to subject matter hereof not expressly set forth or
referred to herein or in the Notes or the other Loan Documents.
9.12. GOVERNING LAW. THIS AGREEMENT, THE NOTES AND THE OTHER LOAN
-------------
DOCUMENTS HAVE BEEN EXECUTED IN THE COMMONWEALTH OF PENNSYLVANIA AND SAID
DOCUMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT, THE
NOTES AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE COMMONWEALTH OF PENNSYLVANIA.
9.13. Submission To Jurisdiction; Waivers. The Borrower hereby irrevocably
-----------------------------------
and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement, the Notes or the other Loan Documents, or
for recognition and enforcement of any judgement in respect thereof, to the non-
exclusive general jurisdiction of the Courts of the Commonwealth of
Pennsylvania, the courts of the United States of America for the Eastern
District of Pennsylvania, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have to the
venue of any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same;
(c) agrees that service of process in any such action or proceeding
may be effected by sending a copy thereof in the manner and to the address set
forth in Section 9.2; and
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the right
to sue in any other jurisdiction.
9.14. Acknowledgements. The Borrower hereby acknowledges that:
----------------
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement, the Notes and the other Loan Documents;
(b) neither the Agent nor any Lender has any fiduciary relationship
to the Borrower, and the relationship between the Agent and the Lenders, on one
hand, and the Borrower, on the other hand, is solely that of debtor and
creditor; and
(c) no joint venture exists among the Lenders or among the Borrower
and the Lenders.
54
<PAGE>
9.15. Limitation of Liability. No claim may be made by the Borrower or any
-----------------------
other Person against the Lenders, or the Affiliates, directors, officers,
employees, attorneys or agent of any of the Lenders for any special, indirect,
consequential or punitive damages in respect of any claim for breach of contract
or any other theory of liability arising out of or related to the transactions
contemplated by this Agreement, the other Loan Documents or any other
transactions or any act, omission or event occurring in connection therewith;
and the Borrower hereby waives, releases and agrees not to sue upon any claim
for any such damages, whether or not accrued and whether or not known or
suspected to exist in its favor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
CREDITRUST CORPORATION
By: /s/ Joseph K. Rensin
-----------------------------
Title: President and Chief
--------------------------
Executive Officer
--------------------------
SUNROCK CAPITAL CORP.,
as Agent and as a Lender
By: /s/
-----------------------------
Title: Vice President
* Text omitted pursuant to a request for confidential treatment and filed
separately with the Securities and Exchange Commission.
55
<PAGE>
SCHEDULE I
----------
Lender and Commitment Information
---------------------------------
Lender Commitment
-----------------
Sunrock Capital Corp. $20,000,000
11 Penn Center
1835 Market Street
Philadelphia, PA 19103
<PAGE>
Exhibit 10.17
(Execution Copy)
INDENTURE AND SERVICING AGREEMENT
-------------
CREDITRUST SPV98-2, 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 December 1, 1998
-------------
CREDITRUST RECEIVABLES-BACKED NOTES, SERIES 1998-2
-------------------
<PAGE>
TABLE OF CONTENTS
I. DEFINITIONS
1.01 Definitions ........................................................2
1.02 Interpretation .......................................................16
II. CREATION OF TRUST ESTATE;CUSTODY
OF RECEIVABLE FILES
2.01 Creation of Trust Estate..............................................17
2.02 Custody Of Receivable Files..........................................198
2.03 Acceptance By Trustee.................................................19
2.04 Representations and Warranties of Issuer as to the Receivables........19
2.05 Repayment for Receivables Upon Breach.................................20
2.06 Duties of Servicer as Custodian......................................221
2.07 Instructions; Authority to Act........................................23
2.08 Indemnification of Custodian..........................................23
2.09 Effective Period and Termination......................................23
2.10 Agent for Service....................................................243
2.11 Satisfaction and Discharge of Indenture..............................243
III. ADMINISTRATION AND SERVICING OF RECEIVABLES
3.01 Duties of Servicer...................................................254
3.02 Collection of Receivable Payments....................................265
3.03 Covenants of Servicer.................................................26
3.04 Repayment in Respect of Receivables Upon Breach and Other Events.....276
3.05 Servicing Fee; Payment of Certain Expenses By Servicer...............287
3.06 Monthly Servicer Report; Servicer's Remittance Date Certificate......28
3.07 Annual Statement as to Compliance; Notice of Default.................298
3.08 Periodic Accountants Report...........................................29
3.09 Quarterly Servicer's Compliance Report................................29
3.10 Access to Certain Documentation and Information.......................30
3.11 Reports to Noteholders, the Rating Agency and the Placement Agent....310
3.12 Tax Treatment .......................................................310
-i-
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IV THE ACCOUNTS; PAYMENTS; STATEMENTS
TO NOTEHOLDERS
4.01 Accounts .......................................................31
4.02 Collections ......................................................321
4.03 Additional Deposits...................................................32
4.04 Allocations and Payments.............................................332
4.05 Reserve Account......................................................365
4.05A Note Payment Account.................................................376
4.06 Statements to Noteholders............................................376
4.07 Application of Trust Money............................................37
IVA. THE POLICY
4A.01 The Policy ......................................................387
4A.02 Claims Under Policy..................................................387
4A.03 Surrender of Policy..................................................398
V. THE NOTES
5.01 The Notes .......................................................39
5.02 Authentication and Delivery of the Notes..............................40
5.03 Registration of Transfer and Exchange of Notes.......................410
5.04 Mutilated, Destroyed, Lost or Stolen Notes............................43
5.05 Persons Deemed Owners................................................443
5.06 Access to List of Noteholders' Names and Addresses....................44
5.07 Surrendering of Notes................................................454
5.08 Maintenance of Office or Agency......................................454
VI. THE ISSUER
6.01 Representations of Issuer............................................454
6.02 Repayment in Respect of Receivables Upon Breach......................510
6.03 Liability of Issuer...................................................52
6.04 Merger or Consolidation of, or Assumption of the Obligations of,
the Issuer; Certain Limitations......................................521
6.05 Limitation on Liability of Issuer and Others.........................543
6.06 Issuer May Own Notes.................................................543
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6.07 Covenants of Issuer..................................................543
VII. THE SERVICER
7.01 Representations of Servicer...........................................58
7.02 Liability of Servicer; Indemnities...................................620
7.03 Merger or Consolidation of, or Assumption of the Obligations of,
the Servicer.........................................................632
7.04 Limitation on Liability of Servicer and Others........................63
7.05 Servicer Not to Resign...............................................643
7.06 Backup Servicing.....................................................643
7.07 General Covenants of Servicer........................................654
VIII. SERVICER DEFAULT; EVENTS OF DEFAULT SERVICER
EVALUATION EVENT; REMEDIES
8.01 Servicer Default......................................................69
8.02 Consequences of a Servicer Default...................................732
8.03 Backup Servicer to Act; Appointment of Successor Servicer............743
8.04 Notification to Note Insurer, Noteholders, Rating Agency and
Placement Agent......................................................764
8.05 Waiver of Past Servicer Defaults.....................................764
8.06 [Deleted] .......................................................76
8.07 Subservicers .......................................................76
8.08 Events of Default....................................................775
8.09 Acceleration of Maturity; Rescission and Annulment...................797
8.10 Collection of Indebtedness and Suits for Enforcement by Trustee......780
8.11 Remedies ......................................................780
8.12 Trustee May File Proofs of Claim......................................79
8.13 Trustee May Enforce Claims without Possession of Notes...............820
8.14 Application of Money Collected.......................................820
8.15 Limitation on Suits..................................................820
8.16 Unconditional Rights of Noteholders to Receive Principal and
Interest.............................................................831
8.17 Restoration of Rights and Remedies....................................83
8.18 Rights and Remedies Cumulative........................................83
8.19 Delay or Omission Not Waiver..........................................84
8.20 Control by Controlling Party..........................................84
8.21 Waiver of Past Defaults..............................................842
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8.22 Undertaking for Costs.................................................85
8.23 Waiver of Stay or Extension Laws.....................................853
8.24 Sale of Trust Estate.................................................853
8.25 Action on Notes......................................................875
8.26 No Recourse to Other Trust Estates or Other Assets of the Issuer.....886
8.27 License ......................................................886
IX. THE TRUSTEE
9.01 Duties of Trustee....................................................886
9.02 Trustee's Certificate.................................................88
9.03 Trustee's Release of Removed Receivables..............................88
9.04 Certain Matters Affecting the Trustee.................................89
9.05 Limitation on Trustee's Liability.....................................92
9.06 Trustee May Own Notes.................................................93
9.07 Trustee's Fees and Expenses...........................................94
9.08 Indemnity of Trustee, Backup Servicers and Successor Servicer.........94
9.09 Eligibility Requirements for Trustee..................................95
9.10 Resignation or Removal of Trustee....................................953
9.11 Successor Trustee....................................................964
9.12 Merger or Consolidation of Trustee...................................964
9.13 Appointment of Co-Trustee or Separate Trustee........................974
9.14 Representations and Warranties of Trustee.............................98
9.15 Tax Returns ......................................................997
9.16 Trustee May Enforce Claims Without Possession of Notes...............997
9.17 Suit for Enforcement.................................................997
9.18 Rights of Controlling Party to Direct Trustee.........................97
9.19 Confidential Information..............................................98
X. REDEMPTION
10.01 Redemption at the Option of the Issuer; Election to Redeem............98
10.02 Deposit of Redemption Amount..........................................99
10.03 Notice of Redemption by the Trustee...................................99
10.04 Surrendering of Notes.................................................99
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XI. MISCELLANEOUS PROVISIONS
11.01 Amendment .........................................................1020
11.02 Protection of Title to Trust Estate.................................1041
11.03 Limitation of Rights of Noteholders.................................1053
11.04 Governing Law .......................................................106
11.05 Notices ......................................................106
11.06 Severability of Provisions; Counterparts.............................107
11.07 Assignment ......................................................107
11.08 No Petition ......................................................107
11.09 Noteholder Direction.................................................108
11.10 No Substantive Review of Compliance Documents........................108
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This Indenture and Servicing Agreement, dated as of December 1, 1998
(the "Agreement") is executed by and among Creditrust SPV98-2, 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.
"Additional Servicing Fee" means the amount, calculated in accordance
------------------------
with Section 8.03, which is payable to the Successor Servicer and which exceeds
the amount of the Servicing Fee.
"Adverse Claim" means a lien, security interest, charge, encumbrance or
-------------
other right or claim of any Person.
"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 1998-2 dated as of December 1, 1998,
among Creditrust SPV98-2, LLC, as Issuer, Norwest Bank Minnesota, National
Association, as Trustee and Backup Servicer, Creditrust Corporation, as
Servicer, and Asset Guaranty Insurance Company, as Note Insurer, as the same may
be amended or supplemented from time to time.
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"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 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 December 31, 1998, and the denominator of which is 31.
"Benefit Plan" means with respect to any Person any employee benefit
------------
plan as defined in Section3(3) of ERISA in respect of which the Person or any
ERISA Affiliate of such Person is, or at any time during the immediately
preceding six years was, an "employer" as defined in Section 3(5) of ERISA.
"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.
"By-laws" means the bylaws of Issuer.
-------
"Charged-Off Balance" means, with respect to each Receivable, the
-------------------
original charged-off balance as required to be set forth in the Schedule of
Receivables.
"Closing Date" means December 29, 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
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Bank Minnesota, National Association, as Trustee for Creditrust Receivables-
Backed Notes, Series 1998-2 Collection Account."
"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.
"Consumer Account" means any receivable generated on a credit card
----------------
account, revolving account, or installment account.
"Controlling Party" means (A) while an Insurer Default is in effect,
-----------------
the Noteholders with Voting Interests in excess of 50% of all outstanding Voting
Interests, and (B) at all other times, the Note Insurer.
"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 Procedures" means the customary practices, policies,
--------------------
standards and procedures of the Servicer relating to the acquisition and
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 the Note Insurer.
"Cut-Off Date" means November 5, 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
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<PAGE>
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.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended.
"ERISA Affiliate" means with respect to any Person (a) any corporation
---------------
which is a member of the same controlled group of corporations (within the
meaning of Section 414(b) of the Code) as such Person; (b) a trade or business
(whether or not incorporated) under common control (within the meaning of
Section 414(c) of the Code) with such Person, or (c) a member of the same
affiliated service group (within the meaning of Section 414(m) of the Code) as
such Person, any corporation described in clause (a) above or any trade or
business described in clause (b) above.
"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 January 12, 2004 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 were distributed.
"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 Member" means a member of the Issuer which is a
------------------
corporation and (a) which is not (i) an Affiliate of the Seller or the Servicer
or (ii) a holder (directly or indirectly) of any voting securities of any
Affiliate of the Issuer, and (b) which is a wholly owned Affiliate of a company
that provides, in the ordinary course of its business, advisory, management or
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<PAGE>
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 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;
(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 determine that the
Note Insurer is insolvent within the meaning of Section 1309 of the New York
Insurance Law; or (ii) 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 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
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<PAGE>
creditors; or (iii) 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.
(c) the Policy has been determined to be unenforceable in a
final, non-appealable order of a court of competent jurisdiction.
"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 December 31, 1998 and the denominator of
which is 31.
"Investment Company Act" means the Investment Company Act of 1940, as
----------------------
amended.
"Issuer" means Creditrust SPV98-2, 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.
"LLC Agreement" means the limited liability company agreement of
-------------
Issuer.
"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.
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<PAGE>
"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 and court
costs incurred in connection with collecting a Receivable will be 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 8.61% Creditrust Receivables-Backed Notes,
----
Series 1998-2 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, a New York
------------
stock insurance corporation.
"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 from and including the Closing Date
through and including December 31, 1998, and the denominator of which is 31.
"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 1998-2, Note Payment
Account."
"Note Rate" means 8.61% per annum, calculated on the basis of a
---------
360-day year consisting of twelve 30-day months.
"Note Register" means the register maintained pursuant to Section 5.03.
-------------
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<PAGE>
"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.
"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 $27,500,000.
----------------------
"Originating Institution" means any of the banking institutions and
-----------------------
merchants that originated any of the Receivables and their assignees.
"Payment Date" means the twelfth day of each calendar month or, if such
------------
day is not a Business Day, the next succeeding Business Day, commencing February
12, 1999.
"PBGC" shall mean the Pension Benefit Guaranty Corporation and any
----
Person succeeding to the functions thereof.
"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;
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<PAGE>
(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 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 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 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.
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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
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 by the Note
------
Insurer 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 SPV98-2, LLC, in its capacity as transferee of
---------
the Receivables under the Receivables Contribution Agreement.
"Purchase Agreement" means the Purchase Agreement signed by the
------------------
Noteholders.
"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., and any successor thereto.
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"Receivable" means any receivable in connection with a Consumer Account
----------
identified in the Schedule of Receivables.
"Receivable File" means the documents described in Section 2.02 pertaining
---------------
to a particular Receivable.
"Receivables Contribution Agreement" means the 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 the end of the Collection Period
immediately preceding the Payment Date as of which such redemption will occur,
(iii) any other amounts owed to the Noteholders hereunder or under the Purchase
Agreement, and (iv) 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.
"Release Payment" means, with respect to any Removed Receivable in respect
---------------
of which a payment is made by the Issuer or the Servicer under this Agreement
and as of the Remittance Date on which the "Release 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.
"Remittance Date" means, with respect to any Payment Date, the third
---------------
Business Day next preceding such Payment Date.
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"Removed Receivable" means a Receivable which the Servicer is obligated to
------------------
acquire pursuant to Section 3.04, or which the Issuer is obligated to make a
payment in respect of pursuant to Section 2.05 or 6.02, or in the event the
Issuer has elected to make a redemption pursuant to Section 10.01, all of the
Receivables.
"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
(in which case, for the avoidance of doubt, such other Nationally Recognized
Statistical Rating Agency giving the lower rating shall be one of the "Required
Rating Agencies").
"Required Reserve Amount" means the amount required to be deposited in the
-----------------------
Reserve Account on the Closing Date and thereafter maintained in the Reserve
Account for so long as the Notes are outstanding. The amount is $1,650,000.
"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 1998-2, 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, the chief financial officer, the chief legal officer, the chief
recovery officer or the chief acquisitions officer of the Issuer or the
Servicer, as the case may be.
"Sale" shall have the meaning specified in Section 8.24.
----
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"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 a Release Payment is required hereunder, prepared by the Servicer as
of the opening of business of the Trustee on each applicable Remittance Date.
"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 to a Successor Servicer for servicing
pursuant to Section 8.03, but only to the extent such amounts do not exceed the
amount calculated in accordance with the preceding sentence; all amounts in
excess thereof are herein called the "Additional Service Fee."
"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 and any Collection
----------------
Period, the amount of any fees or compensation paid or owed 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, and which must be commercially reasonable.
"Transaction Documents" means, collectively, this Agreement, the
---------------------
Receivables Contribution Agreement, the Notes, the Purchase Agreement, the
Policy, the Insurance
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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.
"Transferee Certificate" means a certificate in the form of Exhibit D-2 or
----------------------
D-3.
"Transition Fees" shall have the meaning specified in Section 8.02.
---------------
"Trust Estate" or "Creditrust Receivables-Backed Notes, Series 1998-2 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 December 31,
1998, and the denominator of which is 31.
"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.
---------
"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
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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.
"Year 2000 Compliant" shall have the meaning set forth in section 7.01(i).
-------------------
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;
(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.
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ARTICLE II
CREATION OF TRUST ESTATE; CUSTODY OF RECEIVABLE FILES
SECTION 2.01 Creation of Trust Estate.
(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 1998-2 Trust Estate. The Issuer,
pursuant to the mutually agreed upon terms contained in this Agreement, shall
grant a security interest to the Trustee on behalf of the Noteholders and the
Note Insurer in all of its right, title and interest in and to the Trust Estate,
including, without limitation, the Receivables and any proceeds related thereto,
and 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 grant a security interest
to the Trustee, in trust for the benefit of the Noteholders and the Note
Insurer, which security interest constitutes the Trust Estate, in the following
property and rights in property, whether now owned or existing or hereafter
acquired or arising, whether tangible or intangible, and wheresoever located:
(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
(including any fees and charges paid by the Obligors) on and after the Closing
Date (including any Release Payments made with respect to Removed Receivables
for which payment is made 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" (the terms in quotations are defined in the UCC) 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 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;
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(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 security interest granted under
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, and all other property described in this Section 2.01 as a part of
the Trust Estate and all proceeds of any of the foregoing in order to secure the
Note Insurer Obligations and the obligations of the Issuer to the Trustee, the
Noteholders and the Note Insurer, under the Notes, this Agreement, the Purchase
Agreement, the Insurance Agreement and all other Transaction Documents. 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 security interest granted pursuant to this Agreement
and to perfect such security interest under the UCC.
(d) The Issuer shall ensure that, from and after the time of the grant of
the security interest in the Trust Estate, 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 is subject to a security interest in favor of
the Trustee. 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.
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 relating to each
Receivable:
(i) the related Asset Sale Agreement;
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(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 the security
interest in and to the Receivables and the other Trust Property granted 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 security interest, pursuant to the terms 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 (i) the Trustee is relying in accepting a grant of
a security interest in the Receivables and the other Trust Property and
authenticating the Notes; (ii) the Noteholders are relying in purchasing the
Notes; (iii) the Note Insurer is relying in issuing the Policy; and (iv) the
Rating Agency is relying in providing its rating of the Notes:
(a) Characteristics of Receivables. Each Receivable is payable in United
------------------------------
States dollars, has been purchased by Creditrust Corporation from the related
Originating Institution under an Asset Sale Agreement with such Originating
Institution in accordance with the Customary Procedures of Creditrust
Corporation, and has been subsequently transferred, assigned and conveyed by the
Seller to the Issuer pursuant to the Receivables Contribution Agreement.
(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.
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<PAGE>
(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, 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. The Issuer has good
and marketable title to each Receivable, free and clear of all Liens and rights
of others; the Trustee on behalf of the Noteholders and the Note Insurer has a
first priority perfected security interest in, each Receivable, free and clear
of all Liens and rights of others; and such security interest 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 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 security interest
granted herein, and to give the Trustee on behalf of the Noteholders and the
Note Insurer a first priority perfected security interest in the Trust Estate,
including 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. Each Receivable
is either an "account" or a "general intangible" 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.
SECTION 2.05 Repayment for 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
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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 repay a portion of the Note Balance
equal to the Release Payment related to 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
repayment 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 make the repayment related
to the Receivable as set forth above on the Remittance Date following the date
on which such repayment obligation arises. In consideration of the release of
any such Receivable, on the Remittance Date immediately following the date on
which such repayment obligation arises, the Issuer shall remit the Release
Payment of such Receivable to the Collection Account in the manner specified in
Section 4.03.
Upon any such repayment, the Trustee on behalf of the Noteholders and the
Note Insurer shall, without further action, be deemed to release its security
interest in, to and under the Removed Receivable so released, 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 release and take such other actions as shall be reasonably requested by the
Issuer to effect the security interest release 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 make repayment for 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 repayment for any Receivable pursuant to this Section,
except as otherwise provided in Section 9.02.
SECTION 2.06 Duties of Servicer as Custodian.
(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
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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 25% 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 and the Note Insurer
by 30 days' prior written notice, provided that the Servicer shall have taken
all actions necessary or reasonably requested by the Trustee or the Note Insurer
to amend any existing financing statements and continuation statements, and file
additional financing statements and take any other steps reasonably requested by
the Trustee or the Note Insurer to further perfect or evidence the rights,
claims or security interests of any of the Trustee or the Note Insurer under any
of the Transaction Documents. 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, and will make
available for discussion about the Receivables, Responsible Officers of the
Servicer having knowledge of such matters, upon not less than two Business Days'
prior written notice for examination during normal business hours.
(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.
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
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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;
(b) the Issuer has paid or caused to be paid all other sums payable
hereunder by the Issuer;
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(c) the Issuer has paid or caused to be paid all Note Insurer Obligations
then outstanding to the Note Insurer;
(d) the obligation of the Note Insurer under the Policy shall have been
terminated; and
(e) the Issuer has delivered to the Trustee an Officers' Certificate of the
Issuer and an Opinion of Counsel from outside counsel to the Issuer 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), (b) and (c) 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 4.07, 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.
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 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
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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 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 Issuer or 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 and the Issuer 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 and the Issuer 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. The Servicer shall deposit or cause to be deposited into the
Collection Account, within one Business Day of its receipt thereof, all Net
Proceeds realized in connection with any such action pursuant to Section 4.02.
The Trustee and the Issuer 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.
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 Procedures in so doing. The Servicer shall be authorized to write down
the balance of any Receivable in accordance with the Customary 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 Procedures, waive any charges or fees that
otherwise may be collected in the ordinary course of servicing the Receivables.
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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 pursuant to this Agreement, shall perform such obligations in
accordance with the Customary 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 a Receivables balance in accordance with Customary
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 a Receivable
balance in accordance with Customary 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 (i) to write down a Receivable balance from an Obligor
rather than writing down a Consumer Account due from the same Obligor which is
not a part of the Receivables, or (ii) to apply a payment received from an
Obligor to a Consumer Account which is not a Receivable rather than to a
Receivable (unless expressly instructed to do so by an Obligor) if the Servicer
has actual knowledge that such write-downs or payment applications 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 connection with such enforcement
or collection), it shall be assigned to the Servicer as provided in Section
3.04.
SECTION 3.04 Repayment in Respect 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
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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 Issuer 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 Servicer shall remit the Release
Payment of such Receivables to the Collection Account in the manner specified in
Section 4.03. Upon any such acquisition, and the remitting of the Release
Payment to the Collection Account, the Trustee on behalf of the Noteholders and
the Note Insurer shall, without further action, be deemed to have released its
security interest 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 take such
other actions as shall be reasonably requested by the Servicer to further
evidence such release. 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, 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
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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
the Note Insurer a Servicer's Remittance Date Certificate identifying each such
Removed Receivable acquired by reference to the related Obligor's account number
(as specified in the Schedule of Receivables), and the amount of the Release
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 2000, 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, 1999) 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.
(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.
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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
Controlling Party (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
January 31, 1999, and each subsequent reporting period is each subsequent month
thereafter through March 31, 1999, and thereafter the reporting period shall be
such longer period as the Controlling Party 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 Controlling Party, each subsequent reporting
period shall be each subsequent quarter thereafter). Each such report must be
delivered within forty-five (45) 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 March 31, 1999,
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 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
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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. The Trustee shall provide to each Noteholder a copy of
any notice, report or other document provided by the Trustee to the Rating
Agency or to the Note Insurer.
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 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.
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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, each of which shall 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 Net Proceeds it receives or otherwise obtains from or on behalf of the
Obligors from or in respect of the Receivables on the next Business Day after
receipt thereof, by automatic clearing house ("ACH") transfer from the account
into which payments from or on behalf of the Obligors are initially deposited.
Other than as specifically contemplated pursuant to Section 4.03, the Servicer
shall not remit to the Collection Account, 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
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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 Release
Payments with respect to Removed Receivables for which a payment is to be made
pursuant to Section 2.05 or 6.02; and (ii) the Servicer shall remit the
aggregate Release Payments with respect to Removed Receivables for which payment
is to be made pursuant to Section 3.04.
(b) The following deposits shall be made to the Note Payment Account, as
applicable: (i) the Issuer shall remit the Redemption Amount pursuant to Section
10.02; (ii) the Note Insurer shall remit any required payment pursuant to the
Policy; and (iii) the Trustee shall transfer all Available Funds from the
Collection Account to the Note Payment Account on the Business Day prior to the
Payment Date.
(c) 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 Additional 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
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Note Payment Account shall be made only on the Payment Date:
(i) to the Trustee (A) from Available Funds transferred from
the Collection Account to the Note Payment Account, 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) 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 shortfall for
disbursement to the Trustee in reduction of such shortfall;
(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 Successor Servicer, if any,
(which expenses and costs, including any amount reimbursed, will not exceed
$75,000);
(iii) to the Backup Servicer (A) from Available Funds
transferred from the Collection Account to the Note Payment Account, 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 (but only up to $100,000 during the term of this Agreement) to which
the Backup Servicer is entitled to payment (to the extent expressly set forth
under this Agreement) 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 shortfall for disbursement to the Backup
Servicer in reduction of such shortfall;
(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
----
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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;
(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 Successor Servicer (A) from Available Funds
transferred from the Collection Account to the Note Payment Account, an amount
equal to the Additional Servicing Fee for the related Collection Period, plus
----
all accrued and unpaid Additional Servicing Fees, if any, for prior Collection
Periods, 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 shortfall for disbursement to the Successor Servicer in
reduction of such shortfall;
(viii) 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
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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
(ix) 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 of the Backup Servicer's reasonable out of pocket expenses to which
the Backup Servicer is entitled to payment (to the extent expressly set forth in
this Agreement) which have exceeded $100,000 in the aggregate during the term of
this Agreement; then to (C) 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 (D) 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.
(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.
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(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 that Section, and 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.
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(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
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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 income tax returns.
SECTION 4.07 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 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 and the Insurance Agreement.
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 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
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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 prepares 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 or a
Noteholder 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
or such Noteholder 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 or such Noteholder 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 or such
Noteholder relating to or arising under such Avoided Payment and (z) a Notice
for Payment appropriately completed and executed by the Trustee or such
Noteholder. 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.
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
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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. For the avoidance of doubt, any payment made
under the Policy in respect of interest or principal due under the Notes shall
not reduce in any manner the amount of interest or principal (or the Note
Balance) otherwise due hereunder or under the Notes.
(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 the Note Balance
shall accrue interest at the Note Rate from and including the Closing Date.
(c) Other than Notes issued on the Closing Date, 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 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.
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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 consideration of the grant by the Issuer of a security
interest in the Receivables and the other property included in the Trust Estate
to the Trustee 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 its attorney duly authorized in writing.
(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
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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 may 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 (y) has the ability to bear the
economic risks of its prospective investment and can afford the complete loss of
such investment; and
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(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 made without registration under the
Securities Act (other than in connection with the initial issuance 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 if the transfer is not so exempt or is not made in
accordance with such federal and state laws. In connection with the 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 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.
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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, the Note
Insurer, the Issuer 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 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
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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 after 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
grant of a security interest in 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 Delaware, 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 has, power,
authority and legal right to acquire, own, hold, transfer, assign and convey the
Receivables.
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(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 Maryland and in all other 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 grant a security interest in the Trust Estate and has duly
authorized such grant 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 Grant; Binding Obligations. This Agreement evidences a valid
--------------------------------
grant of a first priority perfected security interest under the UCC in the
Receivables, and such other of the Trust Estate as to which a security interest
may be perfected under UCC, 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 LLC Agreement 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 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 Issuer of its obligations
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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. Neither the Issuer nor the Trust Estate is
-------------------------
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 under the
Transaction Documents, 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.
(i) No Violation of Securities Act. The Issuer has not offered or sold,
------------------------------
and will not offer or sell, any Notes in any manner that would render the
issuance and sale of the Notes a violation of the Securities Act, or any state
securities or "blue sky" laws or require registration pursuant thereto, nor has
it authorized, nor will it authorize, any Person to act in such manner. No
registration under the Securities Act is required for the sale of the Notes as
contemplated hereby, assuming the accuracy of the Noteholder's representations
and warranties set forth in the Purchase Agreement.
(j) Truth and Completeness of Private Placement Memorandum. As of the
------------------------------------------------------
Closing Date, the Private Placement Memorandum does not contain an untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that no representation is made hereby
with regard to the information or the financial statements relating to the Note
Insurer contained in the Private Placement Memorandum.
(k) No Violation of Exchange Act or Regulations T, U or X. None of the
-----------------------------------------------------
transactions contemplated in the Transaction Documents (including the use of the
proceeds from the sale of the Notes) will result in a violation of Section 7 of
the Exchange Act, or any regulations issued pursuant thereto, including
Regulations T, U and X of the Board of Governors of the Federal Reserve System,
12 C.F.R., Chapter II. The Issuer does not own nor does it intend to carry or
purchase any "margin security" within the meaning of said Regulation U,
including margin securities originally issued by it or any "margin stock" within
the meaning of said Regulation U.
(l) No Tax Returns. No tax returns were required to be filed by the Issuer
--------------
by the Closing Date.
(m) No Restriction on Issuer Affecting its Business. The Issuer is not a
-----------------------------------------------
party to any contract or agreement, or subject to any charter or other
restriction which materially and
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adversely affects its business nor has it agreed or consented to cause any of
its properties to become subject to any Lien other than the Lien created hereby.
(n) Perfection of Security Interest. All filings and recordings as may be
-------------------------------
necessary to perfect the interest of the Issuer in the Receivables and such
other portion of the Trust Estate as to which a security interest may be
perfected under the UCC, have been accomplished and are in full force and
effect. All filings and recordings against the Issuer required to perfect the
Lien of the Trustee on such Receivables and such other portion of the Trust
Estate as to which a security interest may be perfected under the UCC, have been
accomplished and are in full force and effect. The Issuer will from time to
time, at its own expense, execute and file such additional financing statements
(including continuation statements) as may be necessary to ensure that at any
time, the interest of the Issuer in all of the Receivables and such other
portion of the Trust Estate as to which a security interest may be perfected
under the UCC, and the Lien of the Trustee on all of the Receivables and such
other portion of the Trust Estate as to which a security interest may be
perfected under the UCC are fully protected.
(o) All Taxes, Fees and Charges Relating to Transaction and Transaction
-------------------------------------------------------------------
Documents Paid. Any taxes, fees and other governmental charges in connection
- --------------
with the execution and delivery of the Transaction Documents and the execution
and delivery and sale of the Notes have been or will be paid by the Issuer at or
prior to the Closing Date.
(p) No Requirement that Issuer File a Registration Statement. There are no
--------------------------------------------------------
contracts, agreements or understandings between the Issuer and any person
granting said person the right to require the Issuer to file a registration
statement under the Securities Act with respect to any Notes owned or to be
owned by such person.
(q) No Broker, Finder or Financial Adviser Other Than Rothschild. Neither
------------------------------------------------------------
the Issuer nor any of its officers, directors, employees or agents has employed
any broker, finder or financial adviser other than Rothschild Inc. or incurred
any liability for fees or commissions to any person other than Rothschild Inc.
in connection with the offering, issuance or sale of the Notes.
(r) Notes Authorized, Executed, Authenticated, Validly Issued and
-------------------------------------------------------------
Outstanding. The Notes have been duly and validly authorized and, when duly and
- -----------
validly executed and authenticated by the Trustee in accordance with the terms
of this Agreement and delivered to and paid for by each Noteholder as provided
herein, will be validly issued and outstanding and entitled to the benefits
hereof.
(s) Location of Principal Executive Office and Records. The principal
--------------------------------------------------
place of business and principal executive office of the Issuer, and the office
where Issuer maintains all of its records, is located at 7000 Security Blvd.,
Baltimore, MD 21244; provided that, at any time after the Closing Date, upon 30
days' prior written notice to each of the Servicer, the Note Insurer and the
Trustee, the Issuer may relocate its principal place of business and principal
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executive office, and/or the office where it maintains all of its records, to
another location within the United States to the extent that the Issuer shall
have taken all actions necessary or reasonably requested by the Servicer, the
Trustee or the Controlling Party to amend its existing financing statements and
continuation statements, and file additional financing statements and to take
any other steps reasonably requested by the Servicer, the Trustee or the Note
Insurer to further perfect or evidence the rights, claims or security interests
of any of the Servicer, the Trustee or the Note Insurer under any of the
Transaction Documents.
(t) Ownership of the Issuer. One hundred percent (100%) of the Units of
-----------------------
the Issuer are directly owned (both beneficially and of record) by Creditrust
Corporation. Such Units are validly issued, fully paid and nonassessable and no
one other than Creditrust Corporation has any options, warrants or other rights
to acquire Units from the Issuer.
(u) Solvency. The Issuer (i) is not "insolvent" (as such term is defined
--------
in ss. 101(32)(A) of the Bankruptcy Code); (ii) is able to pay its debts as they
become due; and (iii) does not have unreasonably small capital for the business
in which it is engaged or for any business or transaction in which it is about
to engage.
(v) Reporting and Accounting Treatment. For reporting and accounting
----------------------------------
purposes, and in its books of account and records, the Issuer will treat the
transfer of the Receivables pursuant to the Receivables Contribution Agreement
as an absolute assignment of Creditrust Corporation's full right, title and
ownership interest in the Receivables and the Issuer has not in any other manner
accounted for or treated the transactions.
(w) Governmental and Other Consents. No consents, approvals, authorization
-------------------------------
or orders of, registration or filing with, or notice to any governmental
authority or court is required for the execution, delivery and performance of,
or compliance with, the Transaction Documents by the Issuer, except such
consent, approvals, authorizations, filings and notices that have already been
made or obtained.
(x) Accuracy of Information. The representations and warranties of the
-----------------------
Issuer in the Transaction Documents are true and correct in all material
respects as of the Closing Date.
(y) Separate Identity. The Issuer is operated as an entity separate from
-----------------
Creditrust Corporation. In addition, the Issuer:
(i) has its own board of managers,
(ii) has at least one Independent Member, who is not a direct,
indirect, or beneficial stockholder, officer, director, employee,
affiliate, associate, customer or supplier of any of the Servicer or its
Affiliates (other than, in the case of the Issuer, managers thereof) or
relatives of any thereof,
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<PAGE>
(iii) maintains its assets in a manner which facilitates their
identification and segregation from those of the Servicer,
(iv) has all office furniture, fixtures and equipment necessary
to operate its business,
(v) conducts all intercompany transactions with the Servicer on
terms which the Issuer reasonably believes to be on an arm's-length basis,
(vi) has not guaranteed any obligation of the Servicer or any of
its Affiliates, nor has it had any of its obligations guaranteed by
any such entities and has not held itself out as responsible for debts
of any such entity or for the decisions or actions with respect to the
business affairs of any such entity,
(vii) has not permitted the commingling or pooling of its funds
or other assets with the assets of the Servicer or any of its
Affiliates (other than in respect of items of payment and funds which
may be commingled until deposit into the Collection Account in
accordance with this Agreement),
(viii) has separate deposit and other bank accounts to which
neither the Servicer nor any of its Affiliates has any access and does
not at any time pool any of its funds with those of the Servicer or
any of its Affiliates, except for such funds which may be commingled
until deposit into the Collection Account in accordance with this
Agreement,
(ix) maintains financial records which are separate from those of
the Servicer or any of its Affiliates,
(x) compensates all employees, consultants and agents, or
reimburses the Servicer from the Issuer's own funds, for services
provided to the Issuer by such employees, consultants and agents,
(xi) conducts all of its business (whether in writing or orally)
solely in its own name,
(xii) is not, directly or indirectly, named as a direct or
contingent beneficiary or loss payee on any insurance policy covering
the property of the Servicer or any of its Affiliates and has entered
into no agreement to be named as such a beneficiary or payee,
(xiii) acknowledges that the Trustee and the Note Insurer are
entering into the transactions contemplated by this Agreement and the
other Transaction
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<PAGE>
Documents in reliance on the Issuer's identity as a separate legal entity
from the Servicer, and
(xiv) practices and adheres to company formalities such as complying
with its By-laws and resolutions and the holding of regularly scheduled
board of managers meetings.
(z) ERISA Compliant. The Issuer and all ERISA Affiliates are in compliance
---------------
with all applicable federal or state laws, including the rules and regulations
promulgated thereunder, relating to discrimination in the hiring, promotion or
pay of employees, any applicable federal or state wages and hours law, and the
provisions of the ERISA applicable to its business, except where such
noncompliance would not, individually or in the aggregate, have a Material
Adverse Effect. The employee benefit plans, including employee welfare benefit
plans (the "Employee Plans") of the Issuer and all ERISA Affiliates have been
operated in compliance with the Code, all regulations, rulings and announcements
promulgated or issued thereunder and all other applicable governmental laws and
regulations (except to the extent such noncompliance would not, individually or
in the aggregate, have a Material Adverse Effect). No reportable event under
Section 4043(b) of ERISA or any prohibited transaction under Section 406 of
ERISA has occurred with respect to any Employee Plan maintained by the Issuer or
any ERISA Affiliate. There are no pending or, to the Issuer's best knowledge,
threatened, claims by or on behalf of any Employee Plan, by any employee or
beneficiary covered under any such plan or by any governmental authority or
otherwise involving such plans or any of their respective fiduciaries (other
than for routine claims for benefits). All Employee Plans that are group health
plans have been operated in compliance with the group health plan continuation
coverage requirements of Section 4980B of the Code in all material respects.
"Material Adverse Effect" means, when used in connection with the Issuer, any
development, change or effect that is materially adverse to the business,
properties, assets, net worth, condition (financial or other), or results of
operations of the Issuer or that reasonably could be expected to be materially
adverse to the prospects of the Issuer. Neither the Issuer nor any of its ERISA
Affiliates have a "defined benefit plan" as defined in ERISA.
SECTION 6.02 Repayment in Respect 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 with respect to all or a portion of the Receivables, the Issuer
shall repay a portion of the Note Balance equal to the Release Payment related
to such 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
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<PAGE>
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 repayment 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 make the repayment related to such Receivables as set forth above
on the Remittance Date next succeeding the date on which such repayment
obligation arises. In consideration of the release of the Receivables, on such
Remittance Date, the Issuer shall remit the aggregate Release Payments of the
Receivables to the Collection Account in the manner specified in Section 4.03.
Upon any such repayment, the Trustee on behalf of the Noteholders and the
Note Insurer shall, without further action, be deemed to have released its
security interest 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 and
take such other actions as shall be reasonably requested by the Issuer to effect
the security interest release pursuant to this Section. Notwithstanding the
foregoing, the Controlling Party may by delivery of prior written notice waive
any breach and repayment 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 repayment for any Receivables
pursuant to this Section, except as otherwise provided in Section 9.02.
SECTION 6.03 Liability of Issuer.
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) Merger, Etc. 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
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<PAGE>
every obligation of the Issuer hereunder, and the surviving entity shall have
taken all actions necessary or reasonably requested by the Issuer, the Trustee
or the Note Insurer to amend its existing financing statements and continuation
statements, and file additional financing statements and to take any other steps
reasonably requested by the Issuer, the Trustee or the Note Insurer to further
perfect or evidence the rights, claims or security interests of any of the
Issuer, the Trustee or the Note Insurer under any of the Transaction Documents.
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, absent which consent, the Issuer shall not become a
party to such merger, consolidation or succession.
(b) Certain Limitations. (i) The business, activities and purpose of the
-------------------
Issuer shall be limited as specified in its LLC Agreement.
(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) Unanimous Consent. 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 Members of the Issuer (which includes the
Independent Member),
(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
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<PAGE>
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;
(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 LLC Agreement or By-laws.
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 not incidental to its
obligations as Issuer under this Agreement or as the Purchaser under the
Receivables Contribution 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. The Issuer may not
pledge any Note acquired by the Issuer.
SECTION 6.07 Covenants of Issuer.
(a) LLC Agreement and By-laws. The Issuer hereby covenants not to change,
-------------------------
or agree to any change of, its LLC Agreement or By-laws 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, Asset Sales and Purchases. Without the prior
-----------------------------------------------
written consent of the Controlling Party, the Issuer shall not merge with or
into, or transfer or sell all or substantially all of its assets to, or buy all
or substantially all the assets of, 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
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<PAGE>
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 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.
(h) Keeping Records and Books of Account. The Issuer hereby covenants and
------------------------------------
agrees to maintain and implement administrative and operating procedures
(including, without limitation, an ability to recreate records evidencing the
Receivables in the event of the destruction or loss of the originals thereof)
and keep and maintain, all documents, books, records and other information
reasonably necessary or advisable for the collection of all Receivables
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<PAGE>
(including, without limitation, records adequate to permit the daily
identification of all collections with respect to, and adjustments of amounts
payable under, each Receivable).
(i) Benefit Plan. The Issuer hereby covenants and agrees to comply in all
------------
material respects with the provisions of ERISA, the Code, and all other
applicable laws, and the regulations and interpretations thereunder to the
extent applicable, with respect to each Benefit Plan. Issuer covenants that it
will not, and it will cause any ERISA Affiliate to not:
(i) engage in any non-exempt prohibited transaction (within the
meaning of Code Section 4975 or ERISA Section 406) with respect to any Benefit
Plan which would result in a material liability to the Issuer or the Servicer;
(ii) permit to exist any accumulated funding deficiency, as
defined in Section 302(a) of ERISA and Section 412(a) of the Code, with respect
to any Benefit Plan of the Issuer or any ERISA affiliate which is subject to
Section 302(q) of ERISA or 412 of the Code;
(iii) terminate any Benefit Plan of the Issuer or any ERISA
Affiliate so as to result in any material liability to the Issuer or an ERISA
Affiliate; or
(iv) create any defined benefit plan (as defined in ERISA).
(j) No Release. The Issuer shall not take any action and shall use its best
----------
efforts not to permit any action to be taken by others that would release any
Person from any of such Person's covenants or obligations under any document,
instrument or agreement included in the Trust Estate, or which would result in
the amendment, hypothecation, subordination, termination or discharge of, or
impair the validity or effectiveness of, any such document, instrument or
agreement.
(k) Separate Identity. The Issuer hereby covenants and agrees to take all
-----------------
actions required to maintain the Issuer's status as a separate legal entity.
Without limiting the foregoing, the Issuer shall:
(i) conduct all of its business, and make all communications to
third parties (including all invoices (if any), letters, checks and other
instruments) solely in its own name (and not as a division of any other Person),
and require that its employees, if any, when conducting its business identify
themselves as such (including, without limitation, by means of providing
appropriate employees with business or identification cards identifying such
employees as the Issuer's employees);
(ii) compensate all employees, consultants and agents directly
or indirectly through reimbursement of the Servicer, from the Issuer's bank
accounts, for services provided to the Issuer by such employees, consultants and
agents and, to the extent any employee, consultant or agent of the Issuer is
also an employee, consultant or agent of the Servicer, allocate the
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<PAGE>
compensation of such employee, consultant or agent between the Issuer and the
Servicer on a basis which reflects the respective services rendered to the
Issuer and the Servicer;
(iii) (A) pay its own incidental administrative costs and
expenses from its own funds, and (B) allocate all other shared overhead expenses
(including, without limitation, telephone and other utility charges, the
services of shared employees, consultants and agents, and reasonable legal and
auditing expenses) which are not reflected in the Servicing Fee, and other items
of cost and expense shared between the Issuer and the Servicer, on the basis of
actual use to the extent practicable, and to the extent such allocation is not
practicable, on a basis reasonably related to actual use or the value of
services rendered;
(iv) at all times have at least one Independent Member, with at
least one independent director, and have at least one officer responsible for
managing its day-to-day business and manage such business by or under the
direction of its board of managers;
(v) maintain its books and records separate from those of any
Affiliate;
(vi) prepare its financial statements separately from those of
its Affiliates and ensure that any consolidated financial statement have notes
to the effect that the Issuer 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, as the case may be;
(vii) not commingle its funds or other assets with those of any
of its Affiliates (other than in respect of items of payment or funds which may
be commingled until deposit into the Collection Account in accordance with this
Agreement), and not to hold its assets in any manner that would create an
appearance that such assets belong to any such Affiliate, not maintain bank
accounts or other depository accounts to which any such Affiliate is an account
party, into which any such Affiliate makes deposits or from which any such
Affiliate has the power to make withdrawals, and not act as an agent or
representative of any of its Affiliates in any capacity;
(viii) not permit any of its Affiliates to pay the Issuer's
operating expenses;
(ix) not guarantee any obligation of any of its Affiliates nor
have any of its obligations guaranteed by any such Affiliate (either directly or
by seeking credit based on the assets of such Affiliate), or otherwise hold
itself out as responsible for the debts of any Affiliate;
(x) maintain at all times stationery separate from that of any
Affiliate and have all its officers and employees conduct all of its business
solely in its own name;
(xi) hold regular meetings of its board of managers in
accordance with the provisions of its LLC Agreement and otherwise take such
actions as are necessary on its part to
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ensure that all corporate procedures required by its LLC Agreement and By-laws
are duly and validly taken;
(xii) respond to any inquiries made to it with respect to
ownership of a Receivable by stating that it is the owner of such Receivable,
and, if requested to do so, that the Trustee has been granted a security
interest in such Receivable;
(xiii) on or before March 31 of each year, beginning in 2000,
the Issuer shall deliver to the Trustee an Officer's Certificate stating that
Issuer has, during the preceding year, observed all of the requisite company
formalities and conducted its business and operations in such a manner as
required for the Issuer to maintain its separate company existence from any
other entity; and
(xiv) take such other actions as are necessary on its part to
ensure that the facts and assumptions set forth in the non-consolidation opinion
delivered by Issuer's counsel remain true and correct at all times.
(l) Compliance with all Transaction Documents. The Issuer hereby covenants
-----------------------------------------
and agrees to comply in all material respects with the terms of, employ the
procedures outlined in and enforce the obligations of the parties to all of the
Transaction Documents to which the Issuer is a party, and take all such action
to such end as may be from time to time reasonably requested by the Trustee,
and/or the Controlling Party, maintain all such Transaction Documents in full
force and effect and make to the parties thereto such reasonable demands and
requests for information and reports or for action as the Issuer is entitled to
make thereunder and as may be from time to time reasonably requested by the
Trustee.
(m) No Sales, Liens, Etc. Against Receivables and Trust Property. The
------------------------------------------------------------
Issuer hereby covenants and agrees, except for releases contemplated hereunder,
not to sell, assign (by operation of law or otherwise) or otherwise dispose of,
or create or suffer to exist, any Lien (other than the Lien created hereby) upon
or with respect to, any Receivables or Trust Estate, or any interest in either
thereof, or upon or with respect to any Account, or assign any right to receive
income in respect thereof. The Issuer shall immediately notify the Trustee of
the existence of any Lien on any Receivables or Trust Estate, and the Issuer
shall defend the right, title and interest of each of the Issuer and the Trustee
in, to and under the Receivables and Trust Estate, against all claims of third
parties.
(n) No Change in Business. The Issuer covenants that it shall not make any
---------------------
change in the character of its business.
(o) No Change in Name, Etc. The Issuer covenants that it shall not make any
----------------------
change to its corporate name, or use any trade names, fictitious names, assumed
names or "doing business as" names.
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(p) No Institution of Insolvency Proceedings. The Issuer covenants that it
----------------------------------------
shall not institute Insolvency Proceedings with respect to the Issuer or any
Affiliate thereof or consent to the institution of Insolvency Proceedings
against the Issuer or any affiliate thereof or take any action in furtherance of
any such action, or seek dissolution or liquidation in whole or in part of the
Issuer or any Affiliate thereof.
(q) No Change in Principal Executive Office or Location of Records. The
--------------------------------------------------------------
Issuer covenants that it shall maintain its principal place of business and
principal executive office, and the office where it maintains all of its
records, at 7000 Security Blvd., Baltimore, MD 21244; provided that, at any time
after the Closing Date, upon 30 days' prior written notice to each of the
Servicer, the Note Insurer and the Trustee, the Issuer may relocate its
principal place of business and principal executive office, and/or the office
where it maintains all of its records, to another location within the United
States to the extent that the Issuer shall have taken all actions necessary or
reasonably requested by the Servicer, the Trustee or the Controlling Party to
amend its existing financing statements and continuation statements, and file
additional financing statements and to take any other steps reasonably requested
by the Servicer, the Trustee or the Note Insurer to further perfect or evidence
the rights, claims or security interests of any of the Servicer, the Trustee or
the Note Insurer under any of the Transaction Documents. As of the Closing Date,
each Receivable File shall be kept by the Issuer at its offices at 7000 Security
Blvd., Baltimore, MD 21244.
(r) Access to Certain Documentation and Information. The Issuer shall
-----------------------------------------------
provide the Note Insurer, the Trustee and the Noteholders with access to the
documentation relating to the Receivables required to be maintained at the
location described in Section 6.07(q), and will make available for discussion
about the Receivables, Responsible Officers of the Issuer having knowledge of
such matters. 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 Issuer. Nothing in this Section
shall impair the obligation of the Issuer 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 Issuer to provide access as provided in this Section as a result of such
obligation shall not constitute a breach of this Section.
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 grant of a security interest to the Trustee.
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(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 Issuer and 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,
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, as amended and restated, 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.
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(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. As of the Closing Date, Servicer has no subsidiaries,
---------------
other than the Issuer, Creditrust Mortgage Corporation and other limited
liability companies formed solely for the purpose of securitization
transactions, including Creditrust SPV2, LLC and Creditrust Funding I LLC.
(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.
(i) Year 2000. The Servicer 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 ("Year 2000 Compliant")
and does not believe that any further material expenditures will be necessary to
make these systems Year 2000 Compliant.
(j) Ownership of the Issuer. One hundred percent (100%) of the Units of the
-----------------------
Issuer are directly owned (both beneficially and of record) by the Servicer.
Such Units are validly issued, fully paid and nonassessable and no one other
than the Servicer has any options, warrants or other rights to acquire Units
from the Issuer.
SECTION 7.02 Liability of Servicer; Indemnities.
(a) Obligations. 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, the Noteholders 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
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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.
(b) Expenses. 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) Survival. The provisions of this Section shall survive the resignation
--------
or removal of the Servicer or the Trustee and the termination of this Agreement.
(d) Successor Servicer Liability. Notwithstanding anything to the contrary
----------------------------
contained in this Agreement, the Successor Servicer shall have no liability or
obligation with respect to any Servicer indemnification obligations of any prior
Servicer. Upon assuming its role as Successor Servicer, the Successor Servicer
shall be responsible only for the indemnification obligations set forth in
Section 7.02(a)(ii).
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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 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.
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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 or other acceptable data 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 Successor 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.
(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.
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(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) Stockholders' Equity. Servicer shall not permit its stockholders'
--------------------
equity as required to be shown on its financial statements in accordance with
GAAP to be less than the sum of (i) $20,000,000 plus (ii) 75% of the cumulative
after-tax consolidated net income of the Servicer for the period commencing on
October 1, 1998 and ending at the end of the Servicer's then most recent fiscal
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) 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
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transaction by Servicer with a non-Related Person. The term "Related Person"
means, as to Servicer, any stockholder, 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.
(d) 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.
(e) 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 reorganization, bankruptcy proceedings or
Insolvency Proceedings under any applicable state or federal law, including
without limitation any readjustment of debt, or marshaling of assets or
liabilities or similar proceedings.
(f) 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.
(g) 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.
(h) 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.
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(i) Financial Statements. Servicer shall maintain its financial books and
--------------------
records in accordance with GAAP. Servicer shall furnish to the Note Insurer, the
Noteholders and the Backup Servicer:
(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 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.
(j) Compliance with all Transaction Documents. The Servicer hereby
-----------------------------------------
covenants and agrees to comply in all material respects with the terms of,
employ the procedures outlined in and enforce the obligations of the parties to
all of the Transaction Documents to which the Servicer is a party, and take all
such action to such end as may be from time to time reasonably requested by the
Trustee, maintain all such Transaction Documents in full force and effect and
make to the parties thereto such reasonable demands and requests for information
and reports or for action as the Servicer is entitled to make thereunder and as
may be from time to time reasonably requested by the Trustee.
(k) No Change in Principal Executive Office or Location of Records. The
--------------------------------------------------------------
Servicer covenants that it shall maintain its principal place of business and
principal executive office, and the office where it maintains all of its
records, at 7000 Security Blvd., Baltimore, MD 21244; provided that, at any time
after the Closing Date, upon 30 days' prior written notice to each of the
Issuer, the Note Insurer and the Trustee, the Servicer may relocate its
principal place of business and principal executive office, and/or the office
where it maintains all of its records, to another location within the United
States to the extent that the Servicer shall have taken all actions necessary or
reasonably requested by the Issuer, the Trustee or the Controlling Party to
amend its existing financing statements and continuation statements, and file
additional financing statements and to take any other steps reasonably requested
by the Issuer, the Trustee or the Note Insurer to further perfect or evidence
the rights, claims or security interests of any of the Issuer, the Trustee or
the Note Insurer under any of the Transaction Documents. As of the Closing Date,
each Receivable File shall be kept by the Servicer at its offices at 7000
Security Blvd., Baltimore, MD 21244.
(l) Maintenance of Insurance. The Servicer hereby covenants and agrees to
------------------------
maintain one or more policies of "all-risk" property and general liability
insurance with financially sound and reputable insurers, providing coverage in
scope and amount which is at least consistent with
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the scope and amount of such insurance coverage obtained by prudent and
similarly situated Persons in the same jurisdiction and the same business as
Servicer.
(m) Separate Identity. The Servicer hereby covenants and agrees to take all
-----------------
actions required to maintain the Issuer's status as a separate legal entity.
Without limiting the foregoing, the Servicer shall:
(i) cause Issuer to conduct all of its business, and make all
communications to third parties (including all invoices (if any), letters,
checks and other instruments) solely in its own name (and not as a division of
any other Person), and require that its employees, if any, when conducting its
business identify themselves as such;
(ii) cause Issuer to compensate all employees, consultants and
agents directly or indirectly through reimbursement of the Servicer, from the
Issuer's bank accounts, for services provided to the Issuer by such employees,
consultants and agents and, to the extent any employee, consultant or agent of
the Issuer is also an employee, consultant or agent of the Servicer, allocate
the compensation of such employee, consultant or agent between the Issuer and
the Servicer on a basis which reflects the respective services rendered to the
Issuer and the Servicer;
(iii) cause Issuer to (A) pay its own incidental administrative costs
and expenses from its own funds, and (B) allocate all other shared overhead
expenses (including, without limitation, telephone and other utility charges,
the services of shared employees, consultants and agents, and reasonable legal
and auditing expenses) which are not reflected in the Servicing Fee, and other
items of cost and expense shared between the Issuer and the Servicer, on the
basis of actual use to the extent practicable, and to the extent such allocation
is not practicable, on a basis reasonably related to actual use or the value of
services rendered;
(iv) cause Issuer to at all times have at least one Independent
Member, with at least one independent director, and have at least one officer
responsible for managing its day-to-day business and manage such business by or
under the direction of its board of managers;
(v) cause Issuer to maintain its books and records separate from
those of any Affiliate;
(vi) cause Issuer to prepare its financial statements separately from
those of its Affiliates and ensure that any consolidated financial statement
have notes to the effect that the Issuer 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, as the case may be;
(vii) cause Issuer to not commingle its funds or other assets with
those of any of its Affiliates (other than in respect of items of payment or
funds which may be commingled until deposit into the Collection Account in
accordance with this Agreement), and not to hold its assets in any manner that
would create an appearance that such assets belong to any such
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Affiliate, not maintain bank accounts or other depository accounts to which any
such Affiliate is an account party, into which any such Affiliate makes deposits
or from which any such Affiliate has the power to make withdrawals, and not act
as an agent or representative of any of its Affiliates in any capacity;
(viii) not permit any of its Affiliates to pay the Issuer's operating
expenses;
(ix) not permit Issuer to guarantee any obligation of any of its
Affiliates nor have any of its obligations guaranteed by any such Affiliate
(either directly or by seeking credit based on the assets of such Affiliate), or
otherwise hold itself out as responsible for the debts of any Affiliate;
(x) cause Issuer to maintain at all times stationery separate from
that of any Affiliate and have all its officers and employees conduct all of its
business solely in its own name;
(xi) cause Issuer to hold regular meetings of its board of managers
in accordance with the provisions of its LLC Agreement and otherwise take such
actions as are necessary on its part to ensure that all company procedures
required by its LLC Agreement and By-laws are duly and validly taken;
(xii) cause Issuer to respond to any inquires made directly to it with
respect to ownership of a Receivable by stating that it is the owner of such
contributed Receivable, and, if requested to do so, that the Trustee has been
granted a security interest in such Receivable; and
(xiii) cause Issuer to take such other actions as are necessary on its
part to ensure that the facts and assumptions set forth in the non-consolidation
opinion delivered by Issuer's counsel remain true and correct at all times.
(n) Benefit Plan. The Servicer hereby covenants and agrees to comply in all
------------
material respects with the provisions of ERISA, the Code, and all other
applicable laws, and the regulations and interpretations thereunder to the
extent applicable, with respect to each Benefit Plan. Servicer covenants that it
will not, and it will cause any ERISA Affiliate to not:
(i) engage in any non-exempt prohibited transaction (within the
meaning of Code Section 4975 or ERISA Section 406) with respect to any Benefit
Plan which would result in a material liability to the Servicer;
(ii) permit to exist any accumulated funding deficiency, as defined
in Section 302(a) of ERISA and Section 412(a) of the Code, with respect to any
Benefit Plan of the Servicer or any ERISA affiliate which is subject to Section
302(q) of ERISA or 412 of the Code;
(iii) terminate any Benefit Plan of the Servicer or any ERISA
Affiliate so as to result in any material liability to the Servicer or an ERISA
Affiliate; or
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(iv) create any defined benefit plan (as defined in ERISA).
In the case of each of subsections 7.07(c) and (d) 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 the 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;
(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;
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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;
(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;
(e) Any representation, warranty or certification made by 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 (without regard to any amount
deposited in the Reserve Account), 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;
(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;
(g) Commencing June 30, 1999, 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 April 1, 1999, and on the first date of each month
thereafter, for the preceding three calendar months (including any portion of
December 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;
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(i) Servicer suffers the loss, suspension or other material impairment of
any required license or permit in any state or commonwealth of the United States
(or the District of Columbia) where Obligors are located which, in the aggregate
for such state or commonwealth (or the District of Columbia), accounts for more
than $50,000,000 in the 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;
(j) Either Joseph K. Rensin or Richard J. 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;
(k) Joseph K. Rensin shall (i) cease to be Chief Executive Officer 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;
(l) There occurs any reduction of Joseph K. 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 any 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 Controlling Party;
(n) The existence of an Event of Default (or similar event which permits
the acceleration of the obligations) and the expiration of any applicable cure
period in (i) any securitization transactions to which Creditrust Corporation or
any of its Affiliates is a party, or (ii) any obligation of Creditrust
Corporation or any of its Affiliates for the repayment of borrowed money with a
principal balance then exceeding $100,000; or
(o) The existence in any audit of the Servicer of a material exception, as
determined by the Note Insurer in the reasonable exercise of its judgment.
Notwithstanding the foregoing, the cure periods referred to in each of
clauses (a), (f), (i) 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
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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. The Trustee shall have
no duty or obligation to determine whether or not a Servicer Default has
occurred.
SECTION 8.02 Consequences of a Servicer Default.
(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)(ii), 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").
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(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.
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, plus any additional amounts determined in the manner set forth below,
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, or the assumption by the Backup
Servicer of the status of Successor Servicer, the Backup Servicer may make such
arrangements for the compensation of such Successor Servicer (including itself)
out of payments on or in respect of
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the Receivables as provided in the next sentence. Any Successor Servicer
appointed pursuant to this Section 8.03 must have, and must certify that it has,
the experience and ability to service the Receivables in accordance with the
obligations of the Servicer hereunder, and the ability to make the same relevant
representations regarding the servicing of the Receivables as the Servicer makes
hereunder, including being Year 2000 Compliant. The Successor Servicer shall be
entitled to compensation equal to the greater of (A) the Servicing Fee and (B)
the current "market rate" paid for servicing receivables similar to the
Receivables which rate shall be determined by averaging bids obtained from not
less than three entities experienced in the servicing of receivables similar to
the Receivables and that are not Affiliates of the Trustee, the Backup Servicer,
the Servicer or the Issuer and are reasonably acceptable to the Note Insurer;
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 greater of the Servicing Fee or the lowest of the three bids obtained as
provided in this sentence. 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 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]
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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, 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,
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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 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;
(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
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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;
(h) the occurrence and continuation of a Servicer Default;
(i) the IRS or the PBGC shall have filed notice of one or more Adverse
Claims against the Servicer, the Issuer or any of their ERISA Affiliates under
ERISA or the Code, which constitutes a Lien on the Receivables, and such notice
shall have remained in effect for more than thirty (30) Business Days unless,
prior to the expiration of such period, such Adverse Claims shall have been
adequately bonded by such Servicer, Issuer, or the ERISA Affiliate (as the case
may be) in a transaction with respect to which the Controlling Party has given
its prior written approval; or
(j) the Issuer or the Trust Estate shall have become subject to
registration as an "investment company" within the meaning of the Investment
Company Act as determined by a court of competent jurisdiction in a final and
non-appealable order.
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, any other
amount payable to the Noteholders hereunder or under the Purchase Agreement, any
amount payable to the Note Insurer with respect to the Note Insurer Obligations
and together with all unpaid Trustee Fees, Backup Servicing Fees, Transition
Fees, Additional Servicing Fees and Servicing Fees, shall become immediately due
and payable; provided that if an Insurer Default has occurred, upon the
occurrence of an Event of Default described in Section 8.08(f) or Section
8.08(g), such acceleration shall be deemed to occur automatically without any
action by the Controlling Party.
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 Controlling Party; 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 Controlling Party.
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, and all Note
Insurer Obligations, shall have been paid. The Trustee may from time to time
postpone any public 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.
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SECTION 8.26 No Recourse to Other Trust Estates or Other Assets of the
Issuer.
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. The Servicer hereby represents that it has
all right, title and interest in and to its "Mozart" software necessary to grant
a royalty-free license to the Qualified Successor Servicer as provided herein.
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.
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(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.
(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 rights 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
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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 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 Release 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), release
---------
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; 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
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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, 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
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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 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
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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 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 Own Notes.
The Trustee in its individual or any other capacity may 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.
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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 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
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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
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
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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 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
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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 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
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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 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 and the Noteholders are relying:
(i) Organization and Good Standing. The Trustee is a national
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banking association duly organized, validly existing and in good standing;
(ii) Power and Authority. The Trustee has full power,
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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
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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
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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
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(v) Duly Executed. This Agreement shall have been duly executed and
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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.
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)(i).
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 Controlling Party 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
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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.
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 in full on any Payment
Date on or after the 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
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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.
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 (plus any additional
amount necessary, after taking into account all amounts in the Collection
Account, Note Payment Account and Reserve Account, to pay all due but unpaid
Trustee expenses, Additional Servicing Fees, Transition Fees and Trustee Fees,
collectively, the "Supplemental Redemption Amount") and shall thereafter succeed
to all interests in and to the Trust Estate subject to Section 2.11. The
Redemption Amount and the Supplemental 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 and
the Supplemental 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 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 after 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, the Note Insurer 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.
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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) provided that any such action shall not, as
evidenced by an Officer's Certificate of the Issuer delivered to the Trustee and
the Note Insurer by the Issuer, adversely affect in any material respect the
interests of the Note Insurer or the Noteholders, 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 the Controlling
Party; provided further, (x) that any such action shall not, as evidenced by an
Officer's Certificate of the Issuer delivered to the Trustee and the Note
Insurer 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
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
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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.
(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 Note Insurer
and the Noteholders with Voting Interests in excess of 50% of all outstanding
Voting Interests, 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
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<PAGE>
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 the grant of a security interest in the Receivables and other
Trust Property under this Agreement to the Trustee for the benefit of the
Noteholders and the Note Insurer, 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. Indication 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 is subject to a security interest in favor
of 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.
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(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 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
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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,
including Section 5-1401 of the General Obligation Law of New York, but
otherwise without regard to conflict of laws provisions.
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 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.
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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, the Trustee and the Note Insurer 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.
SECTION 11.09 Noteholder Direction.
Notwithstanding anything to the contrary contained in this Agreement,
provided the Trustee has sent out notices to Noteholders in accordance with this
Agreement, the Trustee may act as directed by a majority of the outstanding
Noteholders (but only to the extent the Noteholders are entitled under this
Agreement to so direct the Trustee with respect to such action) responding in
writing to the request contained in such notice; provided, however, that
Noteholders representing at least 66 2/3% of the outstanding principal balance
of the Notes as of the time such notice is sent to Noteholders must have
responded to such notice from the Trustee. In addition, the Trustee shall not
have any liability to any Noteholder with respect to any action taken pursuant
to such notice if the Noteholder does not respond to such notice within the time
period set forth in such Notice.
SECTION 11.10 No Substantive Review of Compliance Documents.
Other than as specifically set forth in this Agreement, any reports,
information or other documents provided to the Trustee are for purposes only of
enabling the sending party to comply with its document delivery requirements
hereunder and the Trustee's receipt of any such information shall not constitute
constructive or actual notice of any information contained therein or
determinable from any information contained therein, including the Issuer or the
Servicer's compliance with any of its covenants, representations or warranties
hereunder.
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<PAGE>
****
[ 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 SPV98-2, 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: Chairman and
Chief Executive Officer
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
-------------------------------
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<PAGE>
EXHIBIT A
CREDITRUST CORPORATION
FORM OF MONTHLY SERVICER REPORT
COLLECTION PERIOD:
PAYMENT DATE:
DETERMINATION DATE:
Pursuant to the Indenture and Servicing Agreement dated as of December 1,
1998 (the "Indenture and Servicing Agreement") among Creditrust SPV98-2, 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 Guarantee Insurance Company, as Note Insurer
(the "Note Insurer"), the Servicer is required to provide the Note Insurer and
the Trustee with certain information each Determination Date with respect to the
Creditrust Receivables-Backed Notes, Series 1998-2. Capitalized terms used in
this certificate have the meanings set forth in the Indenture and Servicing
Agreement.
<TABLE>
<S> <C>
A. Collections $
Third Party Fees ________
Net Proceeds $
Repurchases
Sales
Interest on Collections Account
Interest on Note Account ________
Available Funds received for the related Collection Period $
========
Total funds in the Collection Account as of Determination Date
Customer refunds due to servicer
Accrued legal and court costs due to servicer
Non Collection Period Net Proceeds in the Collection Account
Interest on Note Account ________
Available Funds $
========
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 Date $_______
(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
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
(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 $_______
(V) Additional Servicing Fees $_______
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 proceeding 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 required in the Reserve Account after
withdrawals, if any, from such account made on such payment Date $_______
(IV) Interest credited to the account due Issuer $_______
(V) Current Reserve Account Balance $_______
(VI) Excess Reserve Fund Balance due Issuer $_______
</TABLE>
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<PAGE>
<TABLE>
<S> <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 Release 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 Note Insurer on
account of the payments of the remaining Note Balance on the
Final Payment Date $_______
I. Information Regarding Payments to Note Insurer
(I) the total amount required to be paid to Note Insurer for Note
Insurance Premium $_______
(II) the aggregate amount of all other Note Insurance Obligations
payable to the Note Insurer and outstanding $_______
Total Disbursements of Available Funds $_______
J. The Company's net worth exceeds the requirements of Section 7.07 (b)
of the Indenture and Servicing Agreement
Sum of: 1) 20,000,000 plus $
(unaudited) 2) 75% of earnings from 10/01/98 $_______
Required Amount $
=======
Net Worth at 12/31/98 $
=======
</TABLE>
Creditrust Corporation,
as Servicer
------------------------------------------
Richard J. Palmer,
Vice President and Chief Financial Officer
Dated: _________________
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<PAGE>
EXHIBIT B
FORM OF TRUSTEE'S CERTIFICATE
Norwest Bank Minnesota, National Association, as trustee (the "Trustee") of
Creditrust Receivables Backed Notes, Series 1998-2 Trust created pursuant to the
Indenture and Servicing Agreement dated as of December 1, 1998 (the "Indenture
and Servicing Agreement") among Creditrust SPV98-2, 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 release its security interest in and to all of the
Receivables identified in the attached Servicer's Remittance Date Certificate as
"Removed Receivables," for which [the Issuer has a repayment obligation pursuant
to Section 2.05 or 6.02] [the Servicer has a repayment obligation 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 SPV98-2, LLC
Creditrust Receivables - Backed Notes, Series 1998-2
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).
Note Number: U.S. $__________
CUSIP #_____________________
Creditrust SPV98-2, 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
January 12, 2004 (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 twelfth day of each month,
commencing February 12, 1999, 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
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<PAGE>
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.
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 1998-2 of the Issuer (the "Notes"), limited in principal
amount to U.S. $[_______] issued and to be issued under an indenture dated as of
December 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")
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<PAGE>
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 owner of this Note acknowledges and
consents to the 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: December ____, 1998
Creditrust SPV98-2, 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
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<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 Operations (Creditrust Receivables-Backed Notes,
Series 1998-2)
Re: Creditrust Receivables-Backed Notes, Series 1998-2 (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 December __, 1998 (the "Closing Date") of $_____________]. The
Notes were issued pursuant to the Indenture and Servicing Agreement (the
"Indenture and Servicing Agreement"), dated as of December 1, 1998, among
Creditrust SPV98-2, 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
Note 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 (d) hereof) would constitute a distribution of any Note
under the Securities Act of 1933, as amended (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:________________________
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<PAGE>
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 Operations (Creditrust Receivables-Backed Notes,
Series 1998-2)
Re: Creditrust Receivables-Backed Notes, Series 1998-2 (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 December __, 1998 (the "Closing Date") of $_____________]. The
Notes were issued pursuant to the Indenture and Servicing Agreement (the
"Indenture and Servicing Agreement"), dated as of December 1, 1998, among
Creditrust SPV98-2, 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 a legend 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 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.
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 (d) hereof) 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.
Very truly yours,
------------------------------
(Transferee)
By:___________________________
Name:_________________________
Title:________________________
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<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 Operations (Creditrust Receivables-Backed Notes,
Series 1998-2)
Re: Creditrust Receivables-Backed Notes, Series 1998-2 (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 December __, 1998 (the "Closing Date") of $_____________]. The
Notes were issued pursuant to the Indenture and Servicing Agreement (the
"Indenture and Servicing Agreement"), dated as of December 1, 1998, among
Creditrust SPV98-2, 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, as
amended (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.
2. The Transferee has been furnished with all information regarding
(a) the Notes and distributions thereon, (b) the nature, performance and
servicing of the
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<PAGE>
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:________________________
-120-
<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 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
-121-
<PAGE>
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.)
--------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
-122-
<PAGE>
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
Yes No Note only 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 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.
-123-
<PAGE>
--------------------------------------------
Print Name of Transferee or Adviser
--------------------------------------------
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-124-
<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).
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).
-125-
<PAGE>
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
Yes No Note only 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:
---------------------------------
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<PAGE>
IF AN ADVISER:
---------------------------------------
Print Name of Transferee
Date:
--------------------------------
-127-
<PAGE>
EXHIBIT E
BACKUP SERVICER FIELDS
Customer Information Fields Receivable Information Fields
- --------------------------- -----------------------------
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
-128-
<PAGE>
SCHEDULE A
SCHEDULE OF RECEIVABLES
[See CD-ROM delivered to Trustee]
-129-
<PAGE>
Exhibit 10.18
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIMITED LIABILITY COMPANY AGREEMENT
OF
CREDITRUST SPV98-2, LLC
---------------------------
Dated as of December 29, 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 SPV98-2, LLC
================================================================================
THIS LIMITED LIABILITY COMPANY AGREEMENT (this "Agreement"), dated as
of December 29, 1998, is made and executed by CREDITRUST CORPORATION, a Maryland
corporation ("Creditrust"), and GSS HOLDINGS II, INC., a Delaware corporation
("Global"), as members (the "Members").
PRELIMINARY STATEMENTS:
The Members have caused Creditrust SPV98-2, 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. The Members now desire 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, the parties hereto hereby agree 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.
The Members have caused Creditrust SPV98-2, LLC to be formed as a
limited liability company under the Delaware Limited Liability Company Act, 6
DEL. C. (S)18-101, et seq. (the "LLC Act").
Section 1.2 Registered Office and Registered Agent; Principal Office and
Principal 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).
B. The principal office and principal executive office of the Company
shall, at all times during the term of the Indenture (as such term is defined in
Section 4.2) be maintained in
- -2-
<PAGE>
the State of Maryland. The present address of the principal office and principal
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 acquire, own, hold, sell, transfer, pledge or otherwise
dispose of, interests in consumer loan receivables generated on credit
card accounts and installment accounts ("Receivables") acquired by
Creditrust and/or any Affiliate (as hereinafter defined), and any other
property related thereto, 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"), and to enter into, comply and
perform under such Receivables Contribution Agreement;
(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 maintain, enforce, protect and service (or arrange for
an agent to so maintain, enforce, protect and service) the Receivables;
(4) To finance the acquisition of the Receivables by selling
interests in the Receivables to, and/or borrower from, one or more
trusts, banks, financial institutions, commercial paper issuers,
insurance companies or similar entities, and in connection with any
such financing arrangement, to pledge as security all or substantially
all of its assets, including, without limitation, all of its right,
title and interest in and to the Receivables;
(5) To loan or otherwise invest, or to distribute to its
Members, the proceeds derived from the sale, pledge or ownership of the
Receivables as determined by the Company's Board of Managers; and
(6) To engage in any lawful act or activity and to exercise
any powers permitted to limited liability companies organized under the
LLC Act that, in either case, are incidental to and necessary or
convenient for the accomplishment of the above mentioned purposes.
Section 1.4 Certificate of Formation.
The Members have 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
- -3-
<PAGE>
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.
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.
Section 1.6 Tax Characterization.
At all times during which all of the outstanding Units (as defined
below) or other equity interests in the Company are held by a single person, 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 the holder of all its Units. At all
times during which two or more persons hold Units in the Company, 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 Initial Capital Contributions
A. The Members shall be divided into Class A Members and Class B
Members. Unless otherwise expressly provided in this Agreement to the contrary,
(i) Creditrust and each subsequent holder of one or more Units who has been
admitted to the Company as a Member shall be referred to herein as a "Class A
Member" and Global, and any successor thereto, shall be referred to as the
"Class B Member" and (ii) any reference to "Members" or a "Member" shall include
the Class A Members and the Class B Member. The Members, their respective Class
designations, capital contributions, addresses and number of Units (if any) are
set forth on Schedule A hereto. Schedule A shall be amended from time to time to
---------- ----------
reflect any changes to the information set forth thereon.
- -4-
<PAGE>
B. Pursuant to the terms of the Receivables Contribution Agreement,
Creditrust shall make an initial capital contribution to the Company by
assigning and transferring to the Company those certain Receivables which are
identified on the Schedule of Receivables. In exchange for such transfer and
contribution, the Company shall issue to Creditrust 100 Units of ownership
interest in the Company, which, as of the date such Units are issued, shall
represent all the issued and outstanding Units in the Company.
C. The Company shall have at all times one Class B Member. The Class
B Member shall be a special class of Member the sole rights of which are limited
to voting on certain actions and decisions by the Company as provided herein.
The Class B Member (i) shall have no obligation to make any capital
contributions to the Company, (ii) will not be issued any Units in the Company,
(iii) will not be entitled to receive any distributions from the Company and
(iv) will not be entitled to participate in the business and affairs of the
Company or vote on any matters requiring the consent or approval of the Members,
except as expressly provided herein. The Class B Member shall at all times be a
corporation which shall have at least one Independent Director and shall at all
times be an Independent Member.
For purposes of this Agreement, the term "Affiliate" shall mean, (i) Creditrust,
(ii) any stockholder, partner, director, manager, officer, agent or employee of
Creditrust or (iii) other Person that directly or indirectly controls, is
controlled by, or is under common control with Creditrust or the Company, and
the term "Independent Director" shall mean an individual
(a) who is not (i) a stockholder (whether direct, indirect or
beneficial, other than indirect stock ownership in Creditrust or any
Affiliate by any person through a mutual fund or similar diversified
investment pool), customer, advisor or supplier of Creditrust or any
Affiliate; (ii) a director, officer or employee of Creditrust or any
Affiliate (other than as an Independent Director of any Affiliates)
(Creditrust and Affiliates, other than the Company, being hereinafter
referred to as the "Parent Group"); (iii) a person related to any
person referred to in clauses (i) and (ii); and (iv) a trustee,
conservator or receiver for any member of the Parent Group; and
(b) who has (i) prior experience as an independent director
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 (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.
Notwithstanding anything in this Agreement to the contrary, in addition to any
requirements under the charter and by-laws of the Class B Member, the
affirmative vote of the Independent Director shall be required for the Class B
Member to authorize (i) any of the matters specified in Section 4.1.E hereof,
(ii) any amendment of this Agreement for which the consent of the Class B Member
is required or (iii) any other actions or decisions under this Agreement for
which the
- -5-
<PAGE>
consent of the Class B Member is required. In the event that the Independent
Director resigns as a director of the Class B Member, or such position is
otherwise vacated, no action requiring the affirmative vote of the Class B
Member shall be taken until a successor Independent Director is elected to the
board of directors of the Class B Member and such Independent Director approves
such action. No Independent Director 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.
Section 2.2 Additional Capital Contributions.
A. Other than the initial contribution of Receivables by Creditrust
to the Company pursuant to 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. [Reserved].
C. 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 Class A 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 Sections 5.1.B and 5.3.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 (or any other person) may be admitted to
the Company as an additional or substitute Member without the prior approval of
the Board of Managers.
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.
Each Class A 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 of a
single class.
Section 2.5 Capital Accounts.
An individual capital account (the "Capital Account") shall be
maintained for each Class A Member. The Capital Account of a Class A Member
shall be increased by (a) the amount of cash or the agreed fair market value of
any property contributed by such Class A Member (net of
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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 Class A Member, and decreased by (c) the amount of all
distributions to such Class A Member and (d) the amount of all Losses (and any
item thereof) allocated to such Class A 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
(S)1.704-(1)(b)(2)(iv).
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 Distributions to Members.
A. The net cash proceeds from the issuance of the Receivables-Backed
Notes or any other sources of cash 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.
B. No distributions shall be made to the Class B Member.
Section 3.2 Allocations of Profits and Losses.
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 Units held by each. No Profits or Losses shall be allocated to the
Class B Member.
Section 3.3 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 hereunder shall be allocated to each Class A Member in the
same proportion as Profits or Losses are
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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 3.3 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 3.4 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 Class A Members in accordance
with the number of Units held by each.
ARTICLE IV
MANAGEMENT OF BUSINESS AND AFFAIRS OF THE COMPANY
Section 4.1 Management of Business and Affairs of the Company.
A. Except as otherwise provided herein, 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 this
Agreement. The number of Managers of the Company shall be three (3), which
number may be increased or decreased in accordance with the By-Laws of the
Company and the terms of this Agreement. 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
Richard J. Palmer
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").
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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:
Name Office(s)
---- ---------
Joseph K. Rensin President
Richard J. Palmer Vice President and Treasurer
John L. Davis Secretary
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 its Affiliates
and from any other person or entity;
(2) To maintain its bank accounts separate from those of its
Affiliates and those of 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 its Affiliates
and 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;
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(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;
(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
Members (including the Class B Member) shall be required for the Company to:
(1) (a) 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; (b) 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; (c) 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; (d) make or consent to any
general assignment for the benefit of creditors; (e) admit in writing
its inability to pay its debts generally as they become due, or declare
or effect a moratorium on its debt; or (f) take any action in
furtherance of any of the actions set forth in the preceding clauses
(a) through (e) of this paragraph; or
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(2) Dissolve or liquidate, in whole or in part, consolidate
or merge with or into any other entity or convey, sell or transfer all
or substantially all of its properties or assets substantially as an
entirety to any entity; or acquire all or substantially all of the
properties, assets or capital stock or other ownership interests of any
other entity; provided, that the foregoing shall not be 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 for the indebtedness which is represented by the Receivables-
Backed Notes and is incurred pursuant to the terms of the Indenture for
the purchase or other acquisition of the Receivables; 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.
By its signature below, the Class B Member acknowledges that, when voting on
whether the Company will take any action described in this Section 4.1.E, the
Class B Member shall owe its primary 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
Controlling Party (as such term is defined in the Indenture).
Section 4.2 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, Norwest Bank
Minnesota, National Association, as Trustee and as Backup Servicer, and
Asset Guaranty Insurance Company, as Note Insurer, substantially in the
form attached hereto as Exhibit D (the "Indenture"), relating to, among
other things, the grant of a security interest in the Receivables to
the trustee
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named therein as security for the obligations of the Company under the
Receivables-Backed Notes and the Note Insurer Obligations and the
servicing of the Receivables by Creditrust;
(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) an agreement with Asset Guaranty Insurance Company
relating to insurance for the Receivables-Backed Notes; and
(v) all other Transaction Documents (as defined in 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, grant a security interest in the
Receivables to the trustee in accordance with the terms of the Indenture.
Section 4.3 No Participation of Members in Business and Affairs of the
Company.
A. 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.
B. 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 the election of
Managers of the Company or on any other matter submitted to a vote by the
Members.
Section 4.4 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. The 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
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<PAGE>
interest in the Company as a Class B Member 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 exercise of its rights under 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. The 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 4.4 shall be inadequate, the non-breaching party shall have the right to
enforce the provisions of this Section 4.4 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
4.4. It is the intention of the parties that the provisions of this Section 4.4
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 4.4 shall be determined to be
invalid or unenforceable, either in whole or in part, Section 4.4 shall be
deemed amended to delete or modify, as necessary, the offending provisions and
to alter the balance of this Section 4.4 in order to render the same valid and
enforceable to the fullest extent permissible as aforesaid.
Section 4.5 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,
(ii) the Class B Member and its directors, officers, employees, representatives
and agents to the fullest extent permitted or authorized by the laws of the
State of Delaware now or hereafter in force, including (without limitation) the
advance of expenses, and (iii) 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 hereunder
with respect to acts or omissions occurring prior to such amendment or repeal.
The
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<PAGE>
indemnification shall (x) be 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, Officer or Class B Member
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, Officers and Class B Members
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 Class A 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 Class A Member's Units without the prior written consent
of the Board of Managers 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, without the prior written consent of the
Controlling Party (as such term is defined in the Indenture).
B. Any Class A Member may sell or assign (for any consideration or no
consideration) all of its Units to an Affiliate of the Class A Member that (i)
holds 100% of the ownership and effective control over the Class A Member, (ii)
100% of the ownership and effective control over which is held by the
transferring Class A Member or (iii) is under common 100% control with the
transferring Class A Member. A permitted transferee of a Class A Member under
this Section 5.1.B shall be admitted to the Company as a substitute Class A
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;
(ii) the transferor Class A Member grants to the transferee the
right to be admitted to the Company as a substitute Class A Member;
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(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 Class A Member in the Company.
C. No Class B Member shall have any right to assign or Transfer any
of its rights under this Agreement and any purported assignment or Transfer
shall be void ab initio.
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 an Event of Default under
the Indenture.
Section 5.3 Withdrawal or Removal of Members.
A. No Class A Member shall have any right to withdraw from the
Company as a Member without the prior consent of the Board of Managers.
B. At any time after the date that is 90 days following the date on
which all Receivables-Backed Notes have been redeemed in full and all Note
Insurer Obligations (as such term is defined in the Indenture) have been
satisfied in full, the Class B Member may withdraw as a Member by delivery of
written notice to the Company, effective immediately upon delivery of such
written notice. At any time prior to such date, the Class B Member may only
withdraw upon the first to occur of (i) 90 days after the date on which written
notice of its withdrawal is delivered to the Company and the Note Insurer and
all Noteholders or (ii) the admission of a substitute Class B Member selected by
the Board of Managers with the consent of the Note Insurer and all Noteholders
(such consent not to be unreasonably withheld, conditioned or delayed). Upon the
withdrawal of the Class B Member hereunder, the Class B Member shall, except for
the indemnification provisions of Section 4.5 hereof, have no further rights
under this Agreement.
C. At any time after the date that is 60 days following the date on
which all Receivables-Backed Notes have been redeemed in full and all Note
Insurer Obligations (as such term is defined in the Indenture) have been
satisfied in full, the Board of Managers may remove the Class B Member as a
member of the Company by delivery of written notice thereof to the Class B
Member. Upon the sending of such notice, the Class B Member shall automatically
and
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without the requirement of any further action by the Company or any other
Member, be deemed to have withdrawn from the Company as a Member and, except for
the indemnification provisions of Section 4.5 hereof, shall have no further
rights under this Agreement.
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 with respect to a Class A
Member, the trustee, receiver, executor, administrator, committee or conservator
of such Class A Member shall have only the rights of an assignee of the Units of
the former Class A Member for the purpose of settling or managing the former
Class A 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 Class A 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 have been redeemed in full 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 by action of the Board of Managers.
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 Class A 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,
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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.
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.
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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.
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.
- -18-
<PAGE>
(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,
altered, changed, repealed or amended only pursuant to a written amendment
adopted by the Board of Managers and approved by Class A Members holding a
majority of the Units. 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, altered, changed, repealed or amended
without the prior consent of (i) the Class B Member and (ii) the Controlling
Party (as such term is defined in the Indenture). 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
- -19-
<PAGE>
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.
[ signatures appear on next page ]
- -20-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed or caused this
Limited Liability Company Agreement of Creditrust SPV98-2, LLC to be executed on
this 29th day of December, 1998, but effective as of the year and date first
above written.
WITNESS: MEMBER:
- -------- -------
CLASS A MEMBER:
--------------
CREDITRUST CORPORATION
/s/ By: /s/ Joseph K. Rensin
- ------------------------- ------------------------------------
Joseph K. Rensin
Chairman and Chief Executive Officer
CLASS B MEMBER:
--------------
GSS HOLDINGS II, INC.
/s/ By: /s/ Andrew L. Stidd
- ------------------------- ------------------------------------
Andrew L. Stidd
President
- --------------------------------------------------------------------------------
IDENTIFICATION OF SCHEDULES AND EXHIBITS
- ----------------------------------------
Schedules
- ---------
A Names, Addresses, Units and Capital Contributions of Members
Exhibits
- --------
A Receivables Contribution Agreement
B Certificate of Formation
C By-Laws
D Form of Indenture
- -21-
<PAGE>
================================================================================
LIMITED LIABILITY COMPANY AGREEMENT
OF
CREDITRUST SPV98-2, LLC
Names, Addresses, Units and Capital Contributions of Members
Schedule A
----------
================================================================================
Name and Address of Member Capital Contributions Units
- --------------------------------------------------------------------------------
CLASS A MEMBER
- --------------
Creditrust Corporation Receivables pursuant to 100 Units
7000 Security Boulevard Receivables Contribution
Baltimore, Maryland 21244 Agreement
- --------------------------------------------------------------------------------
CLASS B MEMBER NA None
- --------------
GSS Holdings II, Inc.
25 West 43rd Street, Suite 704
New York, New York 10036
================================================================================
- -22-
<PAGE>
Exhibit 21.1
List of Subsidiaries
--------------------
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Organization
------------------ ----------------------------
<S> <C>
Creditrust Funding I LLC Delaware
Creditrust SPV2, LLC Delaware
Creditrust SPV98-2, LLC Delaware
</TABLE>
<PAGE>
Exhibit 23.1
Accountants and [LOGO OF GRANT THORNTON
Management Consultants APPEARS HERE]
The US 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 caption "Experts."
/s/ Grant Thornton LLP
Vienna, Virginia
January 20, 1999
Suite 375
2070 Chain Bridge Road
Vienna, VA 22182-2536
Tel: 703 847-7500
Fax: 703 848-9580
<PAGE>
Exhibit 24
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joseph K. Rensin (with full power to each of them
to act alone) as his or her true and lawful attorney-in-fact and agent, with
full power of substitution, for him or her and in his or her name, place and
stead in any and all capacities to sign (1) a registration statement on Form S-1
any or all amendments or post-effective amendments to this Registration
Statement, including amendments made pursuant to Rule 462 under the Securities
Act of 1933, as amended, relating to a public offering of approximately
3,000,000 shares of Common Stock of Creditrust Corporation, (2) a registration
statement on Form S-1 any or all amendments or post-effective amendments to this
Registration Statement, including amendments made pursuant to Rule 462 under the
Securities Act of 1933, as amended, relating to a shelf registration of 450,000
shares of Common Stock issuable upon exercise of certain warrants, and (3) a
registration statement on Form S-8 relating to Creditrust's employee stock
option and employee stock purchase plans, and to file the same with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, to sign any and all applications, registration statements,
notices or other document necessary or advisable to comply with the applicable
state securities laws, and to file the same, together with all other documents
in connection therewith, with the appropriate state securities authorities,
granting unto said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, thereby ratifying and confirming all that said attorneys-in-fact and
agents of any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
----- ----- ----
<S> <C> <C>
Chairman, President, Chief Executive January __, 1999
- ------------------------------ Officer and Director
Joseph K. Rensin
/s/ Frederick W. Glassberg Director January 14, 1999
- ------------------------------
Frederick W. Glassberg
/s/ John G. Moran Director January 18, 1999
- ------------------------------
John G. Moran
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Michael S. Witlin Director January 18, 1999
- ------------------------------
Michael S. Witlin
</TABLE>
