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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 333-50103
CREDITRUST CORPORATION
(Exact name of Registrant as specified in its charter)
Maryland 52-1754916
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7000 Security Boulevard, Baltimore, Maryland
(Address of principal executive offices)
21244-2543
(Zip Code)
(410) 594-7000
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark X whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 22, 2000, the aggregate market value of the outstanding shares
of the Registrant's Common Stock, par value $0.01 per share, held by non-
affiliates was approximately $24.6 million, based on the average closing price
of the Common Stock as reported by Nasdaq National Market on March 22, 2000.
Determination of affiliate status for this purpose is not a determination of
affiliate status for any other purpose.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the most recent practicable date.
Outstanding at
Class March 22, 2000
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Common stock, par value $0.01 per share...... 10,453,548 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
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FORM 10-K CROSS-REFERENCE SHEET
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PART I
Item 1. Business ................................................................... 1
Item 2. Properties ................................................................. 8
Item 3. Legal Proceedings .......................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders ........................ 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...... 8
Item 6. Selected Financial Data .................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................. 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................. 27
Item 8. Consolidated Financial Statements and Supplementary Data ................... 28
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure ................................................................. 52
PART III
Item 10. Directors and Executive Officers of the Registrant* ........................ 52
Item 11. Executive Compensation* .................................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and Management* ............ 54
Item 13. Certain Relationships and Related Transactions* ............................ 54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............ 55
Signatures.............................................................................. 57
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* Incorporated by reference from the registrant's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on May 25, 2000, which Proxy
Statement will be filed no later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
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PART I
Item 1. Business
General
Creditrust Corporation (the "Company" or "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 enhance their yields by making a recovery on these
charged-off accounts. Since its founding in 1991 through December 31, 1999,
Creditrust has invested $215.0 million to purchase receivables at a significant
discount. At December 31, 1999, the Company managed 2.0 million accounts with a
charged-off amount of over $4.9 billion. The Company currently has over 900
employees and operates three facilities, which can accommodate over 2,500
employees.
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 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.
Creditrust purchases portfolios of receivables at a discount from their
charged-off amount, typically the aggregate unpaid balance at the time of
charge-off by the credit grantors. 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 contact 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 credit
facilities, public and private equity funding and asset-backed securitizations.
The Company believes that its historical 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.
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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.
The Company purchased a majority of its 1999 receivables through forward flow
agreements entered into late in 1998. Each purchase of receivables is analyzed
using the PAT analysis to ensure consistent file quality. All of the Company's
forward flow commitments have expired or terminated. For the foreseeable
future, the Company plans to buy receivables that meet the Company's criteria
when such receivables become available.
Servicing Organization
Creditrust utilizes three 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 co-primary operations center and is
designed to house approximately 700 employees, along with information systems
and recruiting departments. The third facility, approximately 94,000 square
feet, includes a call center and our new centralized Information Technology
center and has the capacity of housing approximately 1,600 additional employees.
The Company 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:
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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 seven years and are believed 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 Compaq NT-
based servers and are connected via fiber-optic wide area networks and local
area networks to Intel Pentium(R)-based client 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.
The Company invested over $2 million in its new IT center in 1999. The current
architecture is capable of supporting over 5,000 account officers with the
simple addition of client workstations. This should allow the Company to
experience significant growth without a need for further upgrade in the near-
term. The servers the systems operate on 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
Davox predictive dialers, Cisco automatic routers, three Lucent Technologies
Definity(R) G-3 telephone systems (scaleable to over 5,000 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. Adequate bandwidth (voice and data) is in place with
scalability configured to support additional growth. 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.
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.
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 Company maintains millions of
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. In addition, the Company employs various external electronic
skiptrace databases to scrub accounts against in order to obtain current phone
numbers and addresses. In addition, an electronic skip process is in place
that regularly and consistently searches thousands of accounts against external
databases in an effort to match more current customer phone numbers and
addresses. This process is technology driven and provides additional workflow
for Creditrust accounts. All skip matches are loaded directly into dialers for
immediate customer contact.
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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.
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 repayment 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 participates as an
authorized agent for the Quick Collect/TM/ program and is therefore able to
receive payments directly in its offices within minutes. 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.
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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, dozens of 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.
Foreclosure and Asset Disposition. Creditrust, through its Legal Department,
occasionally engages in the execution and foreclosure of real property. In the
event that a judgment has been secured, and real estate has been verified as
belonging solely to the customer, foreclosure in support of execution of
judgment is considered. Unlike foreclosure pursuant to the power of sale
contained in a mortgage or deed of trust, a judicial sale of real property
follows the state court rules for sheriff's levy and seizure of property. Those
rules vary widely by state.
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.
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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. 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 companies 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.
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
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 Fair Debt Collections Practices Act, the Fair Credit Reporting 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 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
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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 for 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. The Company's policy is to respond promptly and fully
to inquiries from the Federal, state and local regulators in connection with
alleged complaints from our customers.
Employees
The Company currently has over 900 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.
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Item 2. 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
the administrative offices. The Company has also leased an additional facility
located approximately one mile 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 employees. In
May 1999, the Company leased another operations center consisting of
approximately 94,000 square feet, located at 10150 York Road, Cockeysville,
Maryland 21030. This operations center will also house the information
technology, training and recruiting departments, and has the capacity to
accommodate approximately 1,600 additional employees, not including
approximately 42,000 square feet of additional space leased, commencing in May
2000. The Company also leases additional space of approximately 27,000 square
feet in Maryland used as a storage facility.
Item 3. 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.
The Company brought a declaratory judgement action against a seller of charged
off receivables asking the US Federal District Court to agree with the Company's
interpretation that the agreement has been terminated pursuant to its terms. The
seller has responded, as anticipated by the Company, by denying that the
agreement has terminated, and is seeking, among other things, liquidated damages
of $600,000 plus legal fees. While it is not possible for the Company to
estimate the potential for loss, if any, the Company will vigorously prosecute
its action against the seller and defend any claims made in the proceeding.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Company's 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.
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High Low
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1998
Third Quarter (from July 29, 1998).. $17.13 $14.50
Fourth Quarter...................... 25.00 12.63
1999
First Quarter....................... 27.25 16.88
Second Quarter...................... 27.75 16.63
Third Quarter....................... 33.81 22.44
Fourth Quarter...................... 23.88 7.69
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On March 22, 2000, approximately 37 holders of record held the Company's
common stock.
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Dividend Policy
The Company has never declared or paid dividends on its common stock. The
Company expects that it will retain future earnings, if any, to finance the
growth and development of its business. Thus, the Company does not intend to
declare or pay dividends on the common stock in the foreseeable future. The
Company's board of directors will determine when to declare and pay dividends
and the amount of any such dividends. The Company's board would be required to
consider the Company's future earnings, results of operations, financial
condition and capital requirements before deciding to declare a dividend. Also,
under Maryland law, the Company is prohibited from paying any dividend unless
after giving effect to the payment of the dividend (i) the Company may continue
to pay its debts in the ordinary course of business, and (ii) the Company's
assets equal or exceed its liabilities plus the preferences of any outstanding
preferred equity securities upon dissolution. The Company's line of credit
facility restricts payments of dividends that would reduce the Company's net
worth below a certain amount. Future credit facilities may have similar or more
stringent restrictions.
Sales of Unregistered Securities
None.
9
<PAGE>
Item 6. Selected Financial Data
The following table sets forth the Company's 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, 1999. The selected financial data for the
years ended December 31, 1995, 1996, 1997, 1998 and 1999 have been derived from
the Company's audited financial statements. The Company's consolidated balance
sheets as of December 31, 1998 and 1999 and the Company's consolidated
statements of earnings, stockholders' equity and comprehensive income and cash
flows for the years ended December 31, 1997, 1998 and 1999 are included
elsewhere in this Annual Report. The selected financial data presented below
should be read in conjunction with our consolidated financial statements and the
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in this Annual Report.
<TABLE>
<CAPTION>
As of and for the Year Ended December 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Statement of Earnings Data:
Revenue:
Income on Finance Receivables ....................................... $ 4,560 $ 5,521 $ 7,246 $ 12,817 $ 70,489
Servicing Fees ...................................................... -- -- 2,580 3,110 5,508
Income on Investment in Securitizations ............................. -- -- -- 533 5,027
Gain on Sale ........................................................ -- -- -- 18,414 --
---------- ---------- ---------- ---------- -----------
Total Revenue ........................................................ 4,560 5,521 9,826 34,874 81,024
Expenses from Operations:
Personnel ........................................................... 1,847 2,618 5,922 11,917 32,715
Communications ...................................................... 404 573 912 1,645 3,903
Rent ................................................................ 240 382 853 1,195 2,870
Other Expenses ...................................................... 624 945 1,095 2,047 9,283
---------- ---------- ---------- ---------- -----------
Total Expenses from Operations ....................................... 3,115 4,518 8,782 16,804 48,771
---------- ---------- ---------- ---------- -----------
Earnings from Operations ............................................. 1,445 1,003 1,044 18,070 32,253
Other Income (Expense) ............................................... (249) (213) (362) (304) (4,360)
---------- ---------- ---------- ---------- -----------
Earnings Before Income Taxes and Extraordinary Loss .................. 1,196 790 682 17,766 27,893
Provision For Income Taxes ........................................... 462 316 226 7,005 10,875
---------- ---------- ---------- ---------- -----------
Earnings Before Extraordinary Loss ................................... 734 474 456 10,761 17,018
Extraordinary Loss (net of taxes) .................................... -- -- -- (566) --
---------- ---------- ---------- ---------- -----------
Net Earnings ......................................................... $ 734 $ 474 $ 456 $ 10,195 $ 17,018
========== ========== ========== ========== ===========
Basic Earnings per Common Share ...................................... $.12 $.08 $.08 $1.49 $1.72
Diluted Earnings per Common Share .................................... $.12 $.08 $.08 $1.48 $1.67
Weighted Average Number of Basic Shares Outstanding .................. 6,000,000 6,000,000 6,000,000 6,827,506 9,907,535
Weighted Average Number of Diluted Shares Outstanding ................ 6,000,000 6,000,000 6,000,000 6,898,870 10,180,900
Other Data:
Weighted Average
Investment in Finance Receivables(1) ................................. $ 1,731 $ 3,198 $ 5,842 $ 13,574 $ 107,200
Collections on Managed Receivables(2) ................................ 4,914 6,252 12,420 20,585 85,846
EBITDA(3) ............................................................ 1,538 1,162 1,268 18,751 34,807
Collections Applied to Principal (Accretion) on Finance Receivables .. 670 832 2,111 (3,413) (13,145)
Cash Flows Provided by (Used in)
Operating Activities ................................................ 982 1,207 1,237 258 25,615
Investing Activities ................................................ (585) (4,188) 1,431 (24,951) (169,619)
Financing Activities ................................................ (138) 2,909 (2,374) 31,830 148,024
Charged-off Balance of Managed Receivables(2) ........................ $ 141,241 $ 386,164 $1,104,574 $2,529,356 $ 4,904,861
Number of Managed Accounts ........................................... 67,643 193,566 580,338 1,265,529 1,977,575
Number of Employees .................................................. 59 124 246 639 1,034
Balance Sheet Data:
Cash and Cash Equivalents ............................................ $ 548 $ 476 $ 770 $ 7,906 $ 11,927
Total Debt ........................................................... -- 3,793 2,106 6,789 111,306
Stockholders' Equity ................................................. $ 1,134 $ 1,608 $ 2,064 $ 46,425 $ 102,337
</TABLE>
10
<PAGE>
- ----------------
(l) Includes all receivables managed by the Company, except for receivables that
are included in the Company's initial and second securitizations, and
represents the average investment balance during the period measured by the
financial statement carrying value of portfolios of receivables 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.
(2) Managed receivables includes receivables that Creditrust owns and
receivables that Creditrust services but does not own, including receivables
in all of Creditrust's securitizations.
(3) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. EBITDA is presented because the Company relies on this
indicator in the management of its business as a key measure of its ability
to derive cash from its investing and financing activities and because the
indicator provides useful information regarding the Company's 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 the Company 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 the Company
computes 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.
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Creditrust is a leading information-based purchaser, collector and manager of
defaulted consumer 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 made net purchases of
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 $0.8 million in 1991, $16.2 million in 1992, $38.4 million in 1993,
$38.8 million in 1994, $49.1 million in 1995, $244.9 million in 1996, $718.4
million in 1997, $1.4 billion in 1998, and $2.2 billion in 1999. Creditrust has
invested since its founding in 1991 through December 31, 1999 $215.0 million to
purchase receivables at a significant discount. At December 31, 1999, the
Company managed 2.0 million accounts with a charged-off amount of over $4.9
billion.
The following table illustrates Creditrust's revenue and collection experience
for the periods indicated:
<TABLE>
<CAPTION>
As of and for the Year Ended
------------------------------------------
December 31,
------------------------------------------
1997 1998 1999
----------- ------------- ------------
(dollars in thousands)
<S> <C> <C> <C>
Revenues:
Income on Finance Receivables ....................................... $ 7,246 $ 12,817 $ 70,489
Servicing Fees ...................................................... 2,580 3,110 5,508
Income on Investment in Securitizations ........................... -- 533 5,027
Gain on Sale ........................................................ -- 18,414 --
---------- ---------- ----------
Total Revenues ........................................................ 9,826 34,874 81,024
---------- ---------- ----------
Collections on Managed Receivables(1) ................................. 12,420 20,585 85,846
Weighted Average Investment in Finance Receivables(2) ................. 5,842 13,574 107,200
Weighted Average Charged-off Balance on Managed
Receivables(1)(3) .................................................... 689,924 1,474,085 3,786,118
Charged-off Balance of Managed Receivables (at end of period)(1)(4) ... $1,104,574 $2,529,356 $4,904,861
</TABLE>
- ----------------
(1) Managed receivables includes receivables that Creditrust owns and
receivables that Creditrust services but does not own, including receivables
in all of Creditrust's securitizations.
(2) Includes all receivables managed by the Company, except for receivables that
are included in the Company's initial and second securitizations, and
represents the average investment balance during the period measured by the
financial statement carrying value of portfolios of receivables 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 managed 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.
(4) Represents the balance of receivables managed by the Company as of the end
of the period measured by balances charged off by the credit grantors.
12
<PAGE>
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 D of Notes to Consolidated 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.
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 changes 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.
In the fourth quarter of 1999, the Company reduced the remaining estimates by
12% to reflect the historical cumulative trend in collections. The effect of the
change in estimate was to reduce earnings by $2.8 million after tax. Total cash
flow for 1999 was unaffected by the change in future estimates. See Note D of
Notes to Consolidated Financial Statements. While the Company believes that its
cash flow models will continue to provide reasonably accurate forecasts of
future collections, changes in collections due to staffing and systems'
capacity, as well as 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.
13
<PAGE>
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 $4.8 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 an aggregate
principal amount of $14.5 million of 6.43% Creditrust Receivables-Backed Notes,
Series 1998-1, which notes are secured by the receivables transferred to SPV2
and a financial guaranty insurance policy. The Company completed its second
securitization in December 1998 (the "Second Securitization"). The Second
Securitization included receivables with a charged-off amount of $956 million
and a carrying value of $28.6 million. The Company transferred the receivables
to Creditrust SPV98-2, LLC ("SPV98-2"), a special purpose finance subsidiary.
SPV98-2 issued an aggregate principal amount of $27.5 million of 8.61%
Creditrust Receivables- Backed Notes, Series 1998-2, which notes are secured by
the receivables transferred to SPV98-2 and a financial guaranty insurance
policy. In August 1999, the Company completed its third securitization of
finance receivables (the "Third Securitization"). The Third Securitization
included receivables with a charged-off amount of $1.1 billion and a carrying
value of $89 million. The Company transferred the receivables to Creditrust
SPV99-1, LLC ("SPV99-1"), a special purpose finance subsidiary. SPV99-1 issued
a aggregate principal amount of $40 million of 9.43% Creditrust Receivables -
Backed Notes, Series 1999-1, which are secured by the receivables transferred to
SPV99-1.
In the three securitizations, 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 an investment in securitizations for the two 1998 securitizations
representing the residual interest in the securitized receivables. The Company
acts as servicer with respect to the receivables included in the three
securitizations, 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.
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 two 1998 securitizations qualified as sales under generally accepted
accounting principles. The Third Securitization qualified as a financing
transaction and the assets and liabilities are maintained in the Company's
consolidated balance sheet. Upon the closing of the Initial Securitization, the
Company: (1) recognized gain on the sale of the owned receivables of $6.0
million, and (2) 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. Upon the closing of the Second
Securitization, the Company: (1) recognized gain on sale of $11.0 million, and
(2) received total cash of $7.3 million, after repayment of associated debt and
the Company's cash used to finance the receivables of $19.5 million in the
aggregate and payment of related transaction costs. Of the $7.3 million in total
cash, $1.6 million was used to fund a reserve account in trust, leaving net cash
of $5.7 million for use in the Company's business. The investment in
securitizations 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. This accrual is a non-cash item included in the statement of
earnings as interest on investment in securitizations and in the balance sheet
as a component of the fair value of the investment in securitizations. Once the
securitization notes are retired, recoveries will be applied to reduce the
carrying amount of the investment in securitizations. The Company records its
investment in securitizations at fair value, and any unrealized gains and
losses, net of the related tax effect, generally are not reflected in earnings
but are recorded as a separate component of stockholders' equity until realized.
The fair value of the Company's investment in securitizations was $31.2 million
at December 31, 1999, which included an unrealized gain of $4.2 million (pre-
tax) or $2.6 million (net of taxes). A decline in the value of the investment in
securitizations which is
14
<PAGE>
larger than any unrealized gain and which is deemed other than temporary would
be charged to earnings and result in the establishment of a new cost basis. See
Notes to Consolidated Financial Statements for additional discussion concerning
the financial statement effects of the securitizations.
In August 1999, the Company borrowed $40 million in an interim financing
through Creditrust SPV99-2, LLC ("SPV99-2"), a wholly owned subsidiary. The loan
is structured similar to a securitization. SPV99-2 issued a note to
institutional investors and used the proceeds to purchase $37.3 million of
receivables. The notes are backed by a parent guarantee from the Company. Unless
this facility is fully retired by May 2000, its terms require a conversion to a
term loan due August 2003. The facility requires all collections to be used for
debt service and requires the Company to use any proceeds from capital markets
transactions or certain asset sales to pay down the debt. The interest rate is
12% per annum, until conversion to a term loan, and 15% thereafter. Upon
conversion, a conversion fee of 3.25% is payable out of the collections on the
receivables, and warrants at market price for 10% of the fully diluted common
stock at the time of conversion will be released from escrow to the lenders. As
of December 31, 1999, the Company had $35.6 million outstanding under this
facility. Interest expense totaled $1.9 million in 1999. See Note I to the
Consolidated Financial Statements.
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 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. In the past the Company has financed certain portfolio purchases
through participation 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. 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.
15
<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>
Year Ended December 31,
-------------------------------------
1997 1998 1999
----------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Income on finance receivables ........................ 73.7% 36.8% 87.0%
Servicing fees ....................................... 26.3 8.9 6.8
Income on investment in securitizations .............. -- 1.5 6.2
Gain on sale ......................................... -- 52.8 --
----- ----- ------
Total Revenue ..................................... 100.0 100.0 100.0
Expenses From Operations:
Personnel ............................................ 60.3 34.2 40.4
Communications ....................................... 9.3 4.7 4.8
Rent and other occupancy ............................. 8.7 3.4 3.5
Other expenses ....................................... 11.1 5.9 11.5
----- ----- ------
Total Expenses From Operations .................... 89.4 48.2 60.2
----- ----- ------
Earnings from Operations ............................... 10.6 51.8 39.8
Other Income (Expense)
Interest and other ................................... 0.1 0.9 1.9
Interest expense ..................................... (3.8) (1.8) (7.3)
----- ----- ------
Earnings before income taxes and extraordinary loss .... 6.9 50.9 34.4
Provision for income taxes ............................. 2.3 20.1 13.4
----- ----- ------
Earnings before extraordinary loss ..................... 4.6 30.8 21.0
Extraordinary loss (net of taxes) ...................... -- (1.6) --
----- ----- ------
Net Earnings ........................................... 4.6 29.2 21.0
===== ===== ======
EBITDA................................................... 12.9 53.8 43.0
Collections applied to principal (accretion)
on receivables......................................... 21.5% (9.8)% (16.2)%
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues. Total revenues increased by $46.1 million, or 132.3%, from $34.9
million for the year ended December 31, 1998 to $81.0 million for the year ended
December 31, 1999. This increase was primarily due to increased income on
finance receivables resulting from receivables purchased during the year.
Income on finance receivables increased by $57.7 million, or 450%, from $12.8
million for the year ended December 31, 1998 to $70.5 million for the year ended
December 31, 1999. This increase was attributable to the purchase of receivables
throughout 1999 with proceeds from the follow-on public offering, SPV 99-2
financing, the Third Securitization, and the Company's Warehouse and revolving
credit facilities. The Company's weighted average investment in receivables
increased by $93.6 million, or 689.7%, from $13.6 million during the year ended
December 31, 1998 to $107.2 million during the year ended December 31, 1999. The
weighted average charged-off balance of the receivables managed by the Company
correspondingly increased by $2.3 billion, or 156.8% from $1.5 billion at
December 31, 1998 to $3.8 billion at December 31, 1999. Collections on managed
receivables increased by $65.2 million, or 317%, from $20.6 million for the year
ended December 31, 1998 to $85.8 million for the year ended December 31, 1999.
The growth in managed collections was higher than the growth in the managed
charged-off balance principally because the Company purchased what it believes
to be more valuable receivables more recently charged-off by the originating
institution. In the fourth quarter of 1999, the Company reduced the remaining
collection estimates by 12% to reflect the historical cumulative trend in
collections. The effect of the change in estimate was to reduce income on
finance receivables in 1999 by $4.6 million, or $2.8 million after tax.
16
<PAGE>
Servicing fees increased by $2.4 million, or 77.1%, from $3.1 million for the
year ended December 31, 1998 to $5.5 million for the year ended December 31,
1999. The increase was due to the receipt of servicing fees for all of 1999
under the Initial Securitization and the Second Securitization, compared to six
months of servicing fees under the Initial Securitization in 1998.
Income on investment in securitizations increased $4.5 million, or 842.2%,
from $534,000 for the year ended December 31, 1998 to $5.0 million for the year
ended December 31, 1999. The income on investment in securitizations increased
because in 1999 the Company recognized income accrued on the Second and Third
Securitizations and the twelve months of income accrued on the Initial
Securitization as compared to six months of income accrued in 1998.
Gain on sale for 1998 included $17.0 million gain on sale resulting from the
Company's Initial and Second Securitizations, an $800,000 gain on sale resulting
from the sale of a portfolio of receivables, and a $658,000 gain on sale
resulting from the resale of a portfolio of receivables repurchased under a
settlement agreement. In this latter transaction, previously deferred income of
$895,000 was recognized against a $237,000 cost of resale. There were no
comparable gain on sale transactions in 1999.
Expenses from Operations. Total expenses from operations, prior to special
charges of $1.7 million, increased by $30.2 million, or 179.9%, from $16.8
million for the year ended December 31, 1998 to $47.0 million for the year ended
December 31, 1999. Operating expenses increased in 1999 primarily as a result
of increased personnel expenses associated with the rapid growth of the
Company's managed receivables base and associated recovery efforts. Included in
operating expenses are special charges of $1.3 million relating to the
termination of a portion of a forward flow agreement and $436,000 for the write
down of deferred costs associated with a terminated capital markets transaction.
Personnel expenses increased by $20.8 million, or 174.5%, from $11.9 million
for the year ended December 31, 1998 to $32.7 million for the year ended
December 31, 1999. Major categories of personnel expense increases included:
(a) recruiting, training and compensation costs associated with the increase in
the number of employees from 639 to 1,034 needed to service the larger volume of
managed receivables, and (b) additional costs for development, installation and
training associated with the Company's expanded information technology systems.
Communications costs increased by $2.3 million, or 137.3%, from $1.6 million
for the year ended December 31, 1998 to $3.9 million for the year ended December
31, 1999. This increase was due to greater use of credit reporting and long
distance telephone services to service the higher volume of managed receivables.
Professional fees increased by $2.0 million, or 200%, from $1.0 million for
the year ended December 31, 1998 to $3.0 million for the year ended December 31,
1999, primarily as a result of increased accounting fees and legal costs,
investor relations expenses, and other consulting fees.
Contingency legal and court costs increased from $349,000 for the year ended
December 31, 1998 to $2.4 million for the year ended December 31, 1999. This
increase is due to the increased volume of receivables purchased in 1999 and the
proportionate share of accounts being collected by attorneys.
Rent and other occupancy costs increased from $1.2 million for the year ended
December 31, 1998 to $2.9 million for the year ended December 31, 1999 as the
Company entered into its third operations center lease in July 1999.
General and administrative expenses increased from $686,000 for the year ended
December 31, 1998 to $2.1 million for the year ended December 31, 1999. These
expenses increased proportionately with the increase in personnel and include
office expenses, travel and entertainment, trustee fees, bank service charges,
repairs and maintenance, and property taxes.
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Earnings from Operations. Earnings from operations increased by $14.2
million, or 78.5%, from $18.1 million for the year ended December 31, 1998 to
$32.3 million for the year ended December 31, 1999. The increase was due to the
growth in income on finance receivables revenue attributable to the high volume
of receivables purchases in 1999, offset by an expected increase in operating
expenses attributable to the Company's growth in recovery efforts.
Other Income (Expense). Other income (expense) increased from an expense of
$304,000 for the year ended December 31, 1998 to an expense of $4.4 million for
the year ended December 31, 1999. This increase resulted from a $1.2 million
increase in interest and other income primarily due to interest earned on short
term cash equivalent investments which were acquired with proceeds from the
follow-on public offering and the Third Securitization offset by an increase in
interest expense of $5.3 million as a result of higher borrowing incurred in
connection with the Third Securitization, interim financing and the credit
facilities.
Earnings Before Income Taxes and Extraordinary Loss. As the result of the
foregoing, earnings before income taxes and extraordinary loss increased from
$17.8 million for the year ended December 31, 1998 to $27.9 million for the year
ended December 31, 1999.
Provision for Income Taxes. Income tax rates were 39% for the years ended
December 31, 1998 and 1999. The Company's effective tax rate may fluctuate as a
result of changes in pre-tax income and nondeductible expenses. Deferred tax
liabilities increased from $11.9 million at December 31, 1998 to $20.1 million
at December 31, 1999.
Net Earnings. Net earnings increased by $6.8 million, or 66.9% from $10.2
million for the year ended December 31, 1998 to $17.0 million for the year ended
December 31, 1999. This increase resulted from the same factors which affected
earnings from operations, along with a $3.9 million increase in tax expense.
EBITDA. EBITDA increased by $16.0 million, or 85.6%, from $18.8 million for
the year ended December 31, 1998 to $34.8 million for the year ended December
31, 1999. EBITDA increased slightly more than earnings from operations due to
growth in interest income and depreciation expense of $1.8 million in 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Total revenues increased by $25.1 million, or 254.9%, from $9.8
million for the year ended December 31, 1997 to $34.9 million for the year ended
December 31, 1998. This increase was largely due to $18.4 million in gain on
sale and increased income on finance receivables resulting from receivables
purchases during the 1998.
Income on finance receivables increased by $5.6 million, or 76.9%, from $7.2
million for the year ended December 31, 1997 to $12.8 million for the year ended
December 31, 1998. This increase was attributable to the purchase of receivables
in the last three quarters of 1998 with proceeds from the sale of the Company's
Subordinated Notes, Series 1998 (the "Subordinated Notes"), the initial public
offering and the Company's credit facilities. The Company's weighted average
investment in receivables increased by $7.8 million, or 132.4%, from $5.8
million during the year ended December 31, 1997 to $13.6 million during the year
ended December 31, 1998. The weighted average charged-off balance of the
receivables managed by the Company correspondingly increased by $784 million, or
113.7% from $690 million at December 31, 1997 to $1.5 billion at December 31,
1998. Collections on managed receivables increased by $8.2 million, or 65.7%,
from $12.4 million for the year ended December 31, 1997 to $20.6 million for the
year ended December 31, 1998. The growth in collections was lower than the
growth in the managed receivables because lower recovery rates are typically
experienced in the early months of ownership of receivables.
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Servicing fees increased by $530,000, or 20.5%, from $2.6 million for the year
ended December 31, 1997 to $3.1 million for the year ended December 31, 1998.
The increase was due to the receipt of servicing fees under the Initial
Securitization. During the last six months of 1997 and the first six months of
1998, the Company received servicing fees associated with certain receivables
which ceased when they were included in the Initial Securitization.
Income on investment in securitizations was $534,000 for the year ended
December 31, 1998. This revenue was associated with the interest accrual on the
Company's investment in securitizations, resulting primarily from the Initial
Securitization.
Gain on sale for 1998 included $17.0 million gain on sale resulting from the
Company's second and fourth quarter 1998 securitizations, an $800,000 gain on
sale in the third quarter of 1998 resulting from the sale of a portfolio of
receivables and a $658,000 gain on sale in the first quarter of 1998 resulting
from the resale of a portfolio of receivables repurchased under a settlement
agreement. In this latter transaction, previously deferred income of $895,000
was recognized against a $237,000 cost of resale.
Expenses from Operations. Total expenses from operations increased by $8.0
million, or 91.4%, from $8.8 million for the year ended December 31, 1997 to
$16.8 million for the year ended December 31, 1998. Operating expenses increased
in 1998 primarily as a result of increased personnel expenses associated with
the rapid growth of the Company's managed receivables base and associated
recovery efforts. The Company's communications and rent expenses also increased
as the Company's managed receivables base grew. Operating expenses as a percent
of revenues decreased to 48.2% of revenues for the year ended December 31, 1998,
as compared to 89.4% of revenues for the year ended December 31, 1997, as the
revenues resulting from gain on sale recognized in 1998 substantially offset
operating expense growth.
Personnel expenses increased by $6.0 million, or 101.2%, from $5.9 million for
the year ended December 31, 1997 to $11.9 million for the year ended December
31, 1998. Major categories of personnel expense increases included: (a)
recruiting, training and compensation costs associated with the increase in the
number of employees from 246 to 639 needed to service the larger volume of
managed receivables, and (b) additional costs for development, installation and
training associated with the Company's expanded information technology systems.
Communications costs increased by $733,000, or 80.5%, from $912,000 for the
year ended December 31, 1997 to $1.6 million for the year ended December 31,
1998. This increase was due to greater use of credit reporting and long distance
telephone services to service the higher volume of managed receivables.
Rent and other occupancy costs increased from $853,000 for the year ended
December 31, 1997 to $1.2 million for the year ended December 31, 1998 as the
Company completed its first full year in a second operations center which opened
in June 1997. The Company will incur additional rent and occupancy expenses in
1999 associated with its third facility.
Other expenses increased from $1.1 million for the year ended December 31,
1997 to $2.0 million for the year ended December 31, 1998, primarily as a result
of increased professional fees, including accounting and legal fees associated
with the Company's capital raising and securitization activities during 1998,
and increases in overall staffing levels. Other expenses for the years ended
December 31, 1997 and 1998 included (a) contingency legal and court costs of
$320,000 and $349,000, respectively, (b) professional fees of $504,000 and $1.0
million, respectively, and (c) general and administrative expenses of $271,000
and $686,000, respectively.
Earnings from Operations. Earnings from operations increased by $17.1
million from $1.0 million for the year ended December 31, 1997 to $18.1 million
for the year ended December 31, 1998. This increase resulted from numerous
factors, particularly the increase in gain on sale and income on finance
receivables, which more than offset the substantial growth in operating costs
associated with the additions to corporate infrastructure to support a
substantially larger base of operations.
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Other Income (Expense). Other income (expense) decreased from an expense of
$362,000 for the year ended December 31, 1997 to an expense of $304,000 for the
year ended December 31, 1998. This decrease resulted from a $298,000 increase in
interest and other income primarily due to interest earned on short term cash
equivalent investments which were acquired with proceeds from the initial public
offering offset by an increase in interest expense of $238,000 as a result of
higher borrowing incurred in connection with the Subordinated Notes and the
credit facilities.
Earnings Before Income Taxes and Extraordinary Loss. As the result of the
foregoing, earnings before income taxes increased from $682,000 for the year
ended December 31, 1997 to $17.8 million for the year ended December 31, 1998.
Provision for Income Taxes. Income tax rates were 33% for the year ended
December 31, 1997 and 39% for the year ended December 31, 1998. The Company's
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 $11.9 million at December 31, 1998, principally due to the
deferred taxes of $10.8 million provided for on the gain on sale related to both
securitizations, which were treated as financing transactions for tax purposes,
and the reversal of a deferred tax benefit of $345,000 on the first quarter
portfolio resale and recognition of deferred income which was previously taxed,
offset by $6.1 million in net operating loss carryforward.
Extraordinary Loss (Net of Taxes). The extraordinary loss of $566,000 (net
of taxes) recognized for the year ended December 31, 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 were incurred in connection with the Subordinated Notes net of
amortization and charged to extraordinary loss.
Net Earnings. Net earnings increased by $9.7 million from $456,000 for the
year ended December 31, 1997 to $10.2 million for the year ended December 31,
1998. This increase resulted from the same factors which affected earnings from
operations, along with a $6.8 million increase in tax expenses and the
extraordinary loss of $556,000 upon repayment of the Subordinated Notes.
EBITDA. EBITDA increased by $17.5 million from $1.3 million for the year
ended December 31, 1997 to $18.8 million for the year ended December 31, 1998.
EBITDA increased slightly more than earnings from operations primarily because
of growth in interest income in 1998.
Financial Condition
Cash and Cash Equivalents. Cash and cash equivalents increased from $7.9
million as of December 31, 1998 to $11.9 million as of December 31, 1999, as a
result of an increase in net cash provided by operating activities and net cash
from financing activities including the follow-on public offering, the interim
financing facility, and the Third Securitization, offset by investing
activities, principally purchases of receivables.
Finance Receivables. Investment in finance receivables increased 598.4% to
$187.9 million, as of December 31, 1999 from $26.9 million as of December 31,
1998. The Company purchased $147.9 million of financed receivables during the
year ended December 31, 1999 with a portion of the net proceeds from the follow-
on public offering, the Second Securitization, the Third Securitization, the
interim financing facility, the borrowings available under the Company's credit
facilities, and other cash on hand. Net accretion on finance receivables of
$13.1 million was recorded for the year ended December 31, 1999 due to the
effects of the accelerated rate of receivables purchases over the latter part of
the year and collection patterns in early months of the collection cycle.
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Investment in Securitizations. Investment in securitizations increased from
$30.3 million at December 31, 1998 to $31.2 million as of December 31, 1999.
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 retained investment in securitizations is accounted for at
fair value. The fair value of the investment in securitizations 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 and 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. This methodology results in an effective total
discount of over 30% applied to the Company's projected recoveries. Interest
income is accrued on the carrying value of the investment in securitizations at
12% per annum for the estimated remaining life of the receivables of
approximately five years. Once the securitization notes are retired, any
collections will be applied to amortize the investment in securitizations
including accrued interest income. The investment in securitizations are
accounted for under the provisions of SFAS 115 as a security available for sale
and marked to market in the stockholders' equity accounts of the Company. As of
December 31, 1998 the amount of fair value over amortized cost is recorded as
unrealized gain in the Company's stockholders' equity accounts. As of December
31, 1999, the fair value of investment in securitizations was $31.2 million and
the unrealized gain was $4.2 million (pre-tax) or $2.6 million (net of taxes).
Unrealized gains may fluctuate based upon changes in the discount rate utilized
by the Company and changes in collection rates.
Property and Equipment. Property and equipment, net, increased 279.6% to
$9.3 million as of December 31, 1999 from $2.5 million as of December 31, 1998
due to $6.8 million in purchases of computer equipment, furniture, leaseholds
primarily due to the opening of the Company's third operations center.
Deferred Costs. Deferred costs increased to $3.1 million as of December 31,
1999 from $475,000 as of December 31, 1998. The deferred costs as of December
31, 1998 represent costs incurred related to the establishment of the revolving
line of credit and warehouse facility. The deferred costs as of December 31,
1999 also represent costs associated with the third securitization and the
interim financing.
Other Assets. Other assets increased to $2.1 million as of December 31, 1999
from $733,000 as of December 31, 1998. Other assets as of December 31, 1999
consisted of a receivable from capital lease commitment, servicing fee
receivable from the initial securitization and the second securitization,
prepaid insurance and deposits. Other assets as of December 31, 1998 consisted
of servicing fee receivable from the initial securitization and the second
securitization, prepaid insurance and deposits.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses
increased 207.5% from $1.6 million at December 31, 1998 to $5.0 million at
December 31, 1999, due to a proportionate increase in operating expenses
primarily associated with increased personnel and related costs.
Notes Payable and Capitalized Lease Obligations. Notes payable increased
from $6.8 million as of December 31, 1998 to $111.3 million as of December 31,
1999. Capitalized lease obligations increased from $1.7 million to $5.2 million
for the same period. The increase in notes payable was attributable to
receivables purchased under the Company's line of credit and warehouse
facilities, the third securitization, and the interim financing facility. The
increase in capitalized lease obligations is due to equipment purchases net of
principal lease payments, principally to build out the third operations center
and new information technology center.
Other Liabilities. Other liabilities increased $1.3 million from $346,000 as
of December 31, 1998 to $1.6 million as of December 31, 1999. Other liabilities
as of December 31, 1999 and 1998 consisted primarily of lease incentives
attributable to the Company's facilities leases. During 1999, the Company
recorded $1.2 million in lease incentives relating to landlord paid tenant
improvements for its third operations center.
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Deferred Tax Liability. The Company's deferred tax liability at December 31,
1999 was $20.1 million compared to $11.9 million as of December 31, 1998. This
increase of $8.2 million was primarily attributable to timing differences for
tax purposes of the income on finance receivables.
Total Stockholders' Equity. Total stockholders' equity increased $55.9
million to $102.3 million at December 31, 1999 from $46.4 million at December
31, 1998 as a result of net income of $17.0 million during year ended December
31, 1999, $42.5 million of additional paid in capital resulting from the
Company's follow-on public offering, $895,000 from issuance common stock from
exercises of warrants and options, reduced by $4.5 million (net of taxes) from
unrealized gains related to the fair value of the Company's investment in
securitizations.
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 have been through equity
offerings, securitizations of finance receivables, borrowings under two credit
facilities and cash flow from operations.
In September 1998, the Company, through Creditrust Funding I, LLC, a wholly
owned consolidated special purpose financing subsidiary, entered into a
securitized receivables acquisition facility (the "Warehouse Facility") with
Banco Santander, New York. Utilizing an indenture and servicing agreement and an
independent trustee, the Company secured an initial $30 million two-year funding
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 securitizations completed in
December 1998 and August 1999, and although not required under the Warehouse
Facility, may securitize additional receivables that are part of this trust
estate, subject to market conditions. All of the designated cash reserves
available after pay off of the Company's Initial and Second Securitizations will
be applied as additional reserves for the Warehouse Facility. The Company's
right to service the receivables funded by the Warehouse Facility automatically
terminates on a monthly basis subject to reappointment by the note insurer.
Generally, the Warehouse Facility provided 95% of the acquisition cost of
receivables purchased and the Company funded 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. The interest
only period ended with February 2000. The Warehouse Facility was amended in
February 2000, requiring the facility to be reduced to $19.0 million by July 10,
2000. Debt service on the Warehouse Facility is interest only during a six month
revolving period and thereafter comprised of all collections from receivables
less a 20% servicing fee. In February 2000, the fee increased to 35% pursuant to
the amended indenture and servicing agreement. These servicing fees are
eliminated in consolidation. There is no availability remaining under this
facility. See Note I to the Consolidated Financial Statements.
In October 1998, the Company entered into a $20.0 million revolving line of
credit with a commercial lender to provide receivables acquisition financing
(the "Line of Credit Facility") with Sunrock Capital Corp., a commercial lender.
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 was based on
prime plus 0.5% or LIBOR plus 2.5% at the option of the Company on each advance.
Effective April 1, 2000, interest is prime plus 2.5%. The facility is secured by
substantially all of the Company's assets, other than receivables in the
Warehouse Facility, the securitizations and the SPV 99-2 facility. Debt service
on the Line of Credit Facility is interest only for six months after a file is
purchased. The interest only period ended with February 2000. After six months,
principal is amortized over twenty-four months. The remaining availability of
$4.1 million is subject to lender approval. See Note I to the Consolidated
Financial Statements.
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On March 19, 1999, the Company commenced a follow-on public offering of 2.4
million shares of common stock at a public offering price of $19.00 per share.
After payment of underwriting discounts and commissions and other offering
expenses, the Company received net proceeds of $42.5 million. The proceeds were
used to purchase additional portfolios and contribute to working capital.
In August 1999, the Company borrowed $40 million in an interim financing
through Creditrust SPV99-2, LLC ("SPV99-2"), a wholly owned subsidiary. The loan
is structured similar to a securitization. SPV99-2 issued a note to
institutional investors and used the proceeds to purchase $37.3 million of
receivables. The notes are backed by a parent guarantee from the Company. Unless
this facility is fully retired by May 2000, its terms require a conversion to a
term loan due August 2003. The facility requires all collections to be used for
debt service and requires the Company to use any proceeds from capital markets
transactions or certain asset sales to pay down the debt. The interest rate is
12% per annum, until conversion to a term loan, and 15% thereafter. Upon
conversion, a conversion fee of 3.25% is payable out of the collections on the
receivables, and warrants at market price for 10% of the fully diluted common
stock at the time of conversion will be released from escrow to the lenders. As
of December 31, 1999, the Company had $35.6 million outstanding under this
facility. Interest expense totaled $1.9 million in 1999. See Note I to the
Consolidated Financial Statements.
On August 29, 1999, the Company completed its third securitization of finance
receivables (the "Third Securitization"). The Third Securitization included
receivables with a charged-off amount of $1.1 billion and a carrying value of
$89 million. The Company transferred the receivables to Creditrust SPV99-1, LLC
("SPV99-1"), a special purpose finance subsidiary. SPV99-1 issued an aggregate
principal amount of $40 million of 9.43% Creditrust Receivables - Backed Notes,
Series 1999-1, which are secured by the receivables transferred to SPV99-1. See
Note I to the Consolidated Financial Statements.
In March 2000, the Company borrowed $648,000 from its Chairman of the Board
and Chief Executive Officer pursuant to a short-term note. The proceeds of the
note were used to pay an obligation of the Company under the Line of Credit
Facility. The note matures on April 16, 2000 and bears interest at 6% per annum,
payable upon maturity.
Creditrust had entered into forward flow contracts with a number of credit
grantors. These contracts obligated Creditrust to make monthly purchases of
receivables portfolios provided they met certain agreed-upon criteria. These
commitments have expired or terminated. The Company does not currently intend to
enter into new forward flow contracts. Instead, the Company will purchase
receivables that meet the Company's criteria when such receivables become
available. See Note M to Consolidated Financial Statements.
The Company is no longer pursuing the $55 million financing as outlined in the
February 2000 term sheet. The Company continues to seek additional financing.
The debt service requirements associated with borrowings under the Company's
credit facilities have significantly increased liquidity requirements. Both the
Line of Credit Facility and the Warehouse Facility interest only periods have
expired and no further borrowings are permitted under the Warehouse Facility and
the Line of Credit Facility is subject to lender approval. The Company's
liquidity has also been adversely impacted by its lower than estimated
collections and higher cost of receivables purchased in 1999 under forward flow
contracts. The Company has experienced difficulty in obtaining financing with
amortization and other terms appropriately matched to the anticipated cash flows
from receivables that would be purchased with the financing. The Company
believes that other receivables purchasers have experienced similar difficulties
in this financial market. The Company anticipates that its operating cash flow
and strategic sales of receivables that occur subsequent to consent by various
lenders will be sufficient to meet its anticipated future operating expenses,
and to service its debt requirements as they become due. However, without
additional financing to buy receivables, the Company will not be able to grow.
An extended period of no further financing would require management to take
steps to reduce operating expenses to stay in line with reducing revenues that
accompany a static receivables base.
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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. 99 for 1999). 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. As of the date of this filing, the Company has not
experienced any significant system failures, miscalculations, or any disruption
of operations including, among other things, a temporary inability to process
transactions, send letters and statements or engage in similar activities.
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, 1998 and
1999.
Risk Factors and Forward-Looking Statements
You should carefully consider the risks described below. If any of the
following risks actually occur, our business, financial condition or results of
future operations could be materially adversely affected. This Annual Report
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in the forward-
looking statements as a result of many factors, including the risks faced by us
described below and elsewhere in this Annual Report.
Growth Rate--We may not be able to maintain our growth rate.
We have rapidly expanded and developed our business during the last two years.
This expansion and development has placed and will continue to place great
demands on our management, administrative, operational and financial resources.
We may not be able to finance this anticipated growth, or manage it effectively,
which would harm our business, results of operations and financial condition,
and our ability to meet our debt service obligations. Inability to manage this
growth could also affect our ability to fulfill our servicing obligations with
respect to various securitized pools of assets for which we act as servicer.
Future growth and development 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;
. maintain quality service to our customers and credit grantors; and
. enhance and maintain our information technology, operational and financial
systems.
Labor Resources--Our growth and profitability depend on adequate labor
resources.
The consumer debt collection business is labor intensive and generally
experiences high rates of personnel turnover. Our business requires us to
recruit and train significant numbers of qualified personnel. If we are unable
to recruit and retain an adequate number of qualified employees, we could be
forced to limit our growth or possibly curtail the collection activities we
perform for ourselves or our subsidiaries, including various securitization
vehicles. If companies in this 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 operations could be adversely
affected.
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Substantial Debt--Our debt levels could limit flexibility in responding to
business developments and result in a competitive disadvantage.
Our level of debt could result in a number of adverse effects, including:
. increasing our vulnerability to a downturn in our business;
. limiting our ability to obtain necessary financing in the future;
. requiring us to dedicate a substantial portion of our cash flows from
operations to pay debt service obligations rather than for other purposes,
such as working capital, purchasing additional portfolios of consumer
receivables or capital expenditures;
. limiting our flexibility to plan for, or react to, changes in our business
and market; and
. making us more highly leveraged than some of our competitors, which may
place us at a competitive disadvantage.
A portion of the debt on Creditrust's balance sheet is non-recourse to
Creditrust. The cash flows on assets associated with some of the debt may be
restricted to servicing the non-recourse debt and may not be available generally
to Creditrust.
Possible Losses--We may generate losses on consumer receivables if we are not
successful at recovering in excess of our purchase and servicing costs.
We purchase, own, and manage 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. If we are unable to obtain
recoveries on the receivables in amounts in excess of the amount paid for the
receivables, we could incur significant losses, which could make it difficult
for us to obtain funds to continue operations or repay debts. Our future
profitability and our ability to finance further purchases of receivables
depends on success in predicting collectibility and cash flows on our
pools of receivables. However, actual recoveries on the receivables may vary as
a result of a variety of factors, including general economic conditions and
other factors beyond our control and may be less than the amount of expected
recoveries.
Reporting Estimates--We use estimates in reporting our results.
We recognize revenue based on estimates of future collections on the pools of
receivables we manage. Although estimates are based on statistical analysis, the
actual amount collected on these pools may not correlate with our historical
statistical experience. We have also engaged in two securitization transactions
that have resulted in gain on sale and the recognition of residual interests,
although we do not intend to structure future transactions to result in gain on
sale income. The accounting for securitizations also relies on estimates.
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. Similarly, we would be required to take a charge to earnings if
there was a decline in the fair value of the residual investment in
securitizations which was larger than any unrealized gain and was deemed other
than temporary.
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Unanticipated future events, including 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 our net earnings for the year ended December 31, 1997 by approximately
$700,000 after taxes from the amount that would have been computed prior to this
change. In the fourth quarter of 1999, the Company reduced the remaining
estimates by 12% to reflect the historical cumulative trend in collections.
While we believe that our cash flow models will continue to provide reasonably
accurate forecasts of future collections, changes in collections due to staffing
and systems' capacity, as well as 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 previous estimates
inaccurate or alter the way we make future estimates.
Receivables Market--We may experience a shortage of available receivables for
purchase.
Our ability to grow and to meet our debt service obligations depends upon the
growth in the level of our operations, which in turn depends upon 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 generally and defaulted consumer debt in
particular and competitive factors affecting potential purchasers and sellers of
portfolios of receivables. Any slowing in the growth of consumer debt or
defaulted consumer debt could constrain the supply of consumer receivables
available at attractive prices. If new competitors enter the business, access to
additional consumer receivables may also become limited. In addition, if
competing buyers raise the prices they are willing to pay for portfolios of
consumer receivables above those we may deem appropriate, we may be unable to
buy these receivables at prices consistent with return targets that would assure
adequate levels of revenues for debt service.
Securitizations--We engage in securitization transactions, which could expose us
to risk.
To date, we have completed four securitization transactions, two of which have
resulted in gain on sale. We intend only to pursue securitization transactions
that will not result in a gain on sale income. Our quarterly financial
statements could be materially affected by any possible future write-down
associated with changes in the fair value of the residual investment in the two
previous securitizations that resulted in gain on sale income. We could also
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. Further, with
regard to two of the Company's securitizations, the Company's right to service
the receivables automatically terminates on a monthly basis subject to
reappointment by the note insurer. The loss of the right to service the
receivables included in the securitizations would have a material adverse effect
on us.
Our Stock Price May Experience Volatility--The market price for our common stock
or other securities may be adversely affected by fluctuations in our quarterly
operating results.
Because of the nature of our business, our quarterly operating results may
fluctuate in the future, which may adversely affect the market price of our
common stock. The reasons our results may fluctuate include:
26
<PAGE>
. The timing and amount of collections on our receivables;
. Any charge to earnings resulting from a decline in value of our residual
investment in securitization or our portfolios;
. Increases in operating expenses associated with the growth of our
operations; and
. Comparison to prior periods when our revenues included significant amounts
of gain on sale.
Control by Principal Stockholder--Joseph K. Rensin owns a substantial amount of
our voting securities and may influence our affairs.
Joseph K. Rensin beneficially owns approximately 50% of our outstanding voting
securities. Accordingly, Mr. Rensin has the ability to influence the outcome of
elections of directors and other matters presented for approval by our
stockholders. Under Maryland law and our charter, owners of a majority of our
outstanding common stock are able to elect all of our directors and approve
significant corporate transactions without the approval of the other
stockholders. As a result, Mr. Rensin will continue to have the ability, either
alone or together with a small percentage of other stockholders, to elect all of
our directors and to control the vote on all matters submitted to a vote of the
holders of our common stock, including any going private transaction, merger,
consolidation or sale of all or substantially all of our assets. We cannot
assure you that the interests of either Mr. Rensin or Creditrust will not
conflict with your interests as a holder of common stock.
Statements made herein and in other written and oral statements of the Company
may include the plans and objectives of management for future operations,
including plans and objectives relating to future growth in the number of
receivables and availability of adequate third-party financing. Any forward-
looking statements are based on current expectations which involve numerous
risks and uncertainties. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive, and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that any of the forward-
looking statements will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or by any other person that the objectives and plans of the Company will
be achieved.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company retains an investment in securitizations with respect to its
securitized receivables which are market risk sensitive financial instruments
held for purposes other than trading; it does not invest in derivative financial
or commodity instruments. This investment exposes the Company to market risk
which may arise in the credit standing of the investment in securitizations and
in interest and discount rates applicable to this investment.
The impact of a 1% increase in the discount rate used by the Company in the
fair value calculations would decrease the fair value reflected on the Company's
balance sheet by $780,000 as of December 31, 1999. There would be no impact on
the Company's future cash flows or net earnings.
27
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data
CREDITRUST CORPORATION
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants ................................................ 29
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1999 .................................... 30
Consolidated Statements of Earnings for the years ended December 31, 1997, 1998 and 1999 ........ 31
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended
December 31, 1997, 1998 and 1999 .............................................................. 32
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 ...... 33
Notes to Consolidated Financial Statements ...................................................... 34
</TABLE>
28
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Creditrust Corporation
We have audited the accompanying consolidated balance sheets of Creditrust
Corporation (the "Company") as of December 31, 1998 and 1999, and the related
consolidated statements of earnings, stockholders' equity and comprehensive
income and cash flows for the years ended December 31, 1997, 1998 and 1999.
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 consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of Creditrust
Corporation as of December 31, 1998 and 1999, and the results of its operations
and its cash flows for the years ended December 31, 1997, 1998 and 1999 in
conformity with generally accepted accounting principles.
Grant Thornton LLP
Vienna, Virginia
February 11, 2000 (except for note S, as to which the date is March 30, 2000)
29
<PAGE>
CREDITRUST CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1999
------------- ---------------
<S> <C> <C>
Assets
Cash and cash equivalents .......................................................... $ 7,906 $ 11,927
Finance receivables held for sale.................................................... -- 3,126
Finance receivables ................................................................ 26,915 184,858
Investment in securitizations ...................................................... 30,269 31,169
Property and equipment ............................................................. 2,449 9,297
Deferred costs ..................................................................... 476 3,111
Other assets......................................................................... 733 2,087
------- --------
Total Assets .................................................................. $68,748 $245,575
======= ========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses .............................................. $ 1,621 $ 4,986
Notes payable ...................................................................... 6,789 111,306
Capitalized lease obligations ...................................................... 1,652 5,208
Deferred tax liability ............................................................. 11,915 20,132
Other liabilities .................................................................. 346 1,606
------- --------
Total Liabilities ............................................................. 22,323 143,238
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, 8,000,000
Shares issued and 7,984,480 outstanding at December 31, 1998 and 10,469,068
Shares issued and 10,453,548 outstanding at December 31, 1999 ........... 80 105
Additional paid-in capital ....................................................... 27,754 71,078
Stock held for benefit plans ..................................................... (269) (269)
Net unrealized gains on available for sale securities ............................ 6,714 2,259
Retained earnings ................................................................ 12,146 29,164
------- --------
Total Stockholders' Equity .................................................... 46,425 102,337
------- --------
Total Liabilities and Stockholders' Equity .................................... $68,748 $245,575
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
30
<PAGE>
CREDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1997 1998 1999
----------------- --------------- -----------------
<S> <C> <C> <C>
Revenue
Income on finance receivables ..................................... $ 7,246 $ 12,817 $ 70,489
Servicing fees .................................................... 2,580 3,110 5,508
Income on investment in securitizations ........................... -- 533 5,027
Gain on sale ...................................................... -- 18,414 --
---------- ---------- -----------
9,826 34,874 81,024
Expenses
Personnel ......................................................... 5,922 11,917 32,715
Communications .................................................... 912 1,645 3,903
Professional fees ................................................. 504 1,012 3,029
Rent and other occupancy .......................................... 853 1,195 2,870
Contingency legal and court costs ................................. 320 349 2,413
General and administrative ........................................ 271 686 2,105
Forward flow termination............................................ -- -- 1,300
Extinguishment of deferred costs.................................... -- -- 436
---------- ---------- -----------
8,782 16,804 48,771
---------- ---------- -----------
Earnings from Operations ............................................ 1,044 18,070 32,253
Other Income (Expense)
Interest and other ................................................ 15 312 1,541
Interest expense .................................................. (377) (616) (5,901)
---------- ---------- -----------
Earnings Before Income Taxes ........................................ 682 17,766 27,893
Provision for Income Taxes .......................................... 226 7,005 10,875
---------- ---------- -----------
Earnings Before Extraordinary Item .................................. 456 10,761 17,018
Extraordinary Item--loss on extinguishment of debt (net of
taxes) ......................................................... -- (566) --
---------- ---------- -----------
Net Earnings ........................................................ $ 456 $ 10,195 $ 17,018
========== ========== ===========
Basic Earnings Per Common Share Before Extraordinary Item ........... $ .08 $ 1.57 $1.72
Extraordinary Item--loss on extinguishment of debt (net of
taxes) ......................................................... -- (.08) --
---------- ---------- -----------
Basic Earnings Per Common Share ..................................... $ .08 $ 1.49 $1.72
---------- ---------- -----------
Weighted-Average Number of Basic Common Shares Outstanding
During the Year .................................................... 6,000,000 6,827,506 9,907,535
========== ========== ===========
Diluted Earnings Per Common Share Before Extraordinary Item ......... $ .08 $ 1.56 $1.67
Extraordinary Item--loss on extinguishment of debt (net of
taxes) ......................................................... -- (.08) --
---------- ---------- -----------
Diluted Earnings Per Common Share ................................... $ .08 $ 1.48 $1.67
========== ========== ===========
Weighted-Average Number of Diluted Common Shares
Outstanding During the Year ........................................ 6,000,000 6,898,870 10,180,900
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
31
<PAGE>
CREDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands, except share data)
<TABLE>
<CAPTION>
Additional Stock Accumulated
Common Stock Paid-in Preferred Stock Held for Other
----------------- Capital --------------- Benefit Comprehensive Retained
Shares Amount Amount Shares Amount Plans Income Earnings Total
------ ------ ------ ------ ------ ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ............. 6,000,000 $60 $ 53 $-- $-- $ -- $ -- $ 1,495 $ 1,608
Net earnings............................. -- -- -- -- -- -- -- 456 456
--------- ------ ------ ------ ------ ----- ------ -------- -------
Balance at December 31, 1997 ........... 6,000,000 60 53 -- -- -- -- 1,951 2,064
Initial public offering ................ 2,000,000 20 27,291 -- -- -- -- -- 27,311
Value of common stock purchase
warrants issued in connection with
subordinated debt financing ........ -- -- 410 -- -- -- -- -- 410
Stock purchased for benefit plans ...... (15,520) -- -- -- -- (269) -- -- (269)
Net earnings ........................... -- -- -- -- -- -- -- 10,195 10,195
Other Comprehensive Income,
unrealized gains on available for
sale securities, net of taxes of
$4,214 ............................. -- -- -- -- -- -- 6,714 -- 6,714
--------
Total Comprehensive Income ............. 16,909
---------- ---- ------- --- ---- ------ ------- ------- --------
Balance at December 31, 1998 ........... 7,984,480 80 27,754 -- -- (269) 6,714 12,146 46,425
Common stock offering.................... 2,400,000 24 42,429 -- -- -- -- -- 42,453
Common stock issued on options and
warrants exercised................... 69,068 1 895 -- -- -- -- -- 896
Net earnings............................. -- -- -- -- -- -- -- 17,018 17,018
Other Comprehensive Income,
decrease in unrealized gains on
available for sale securities,
net of............................... -- -- -- -- -- -- (4,455) -- (4,455)
taxes of $2,288 .................... --------
Total Comprehensive Income ............. 12,563
---------- ---- ------- --- ---- ------ ------- ------- --------
Balance at December 31, 1999............. 10,453,548 $105 $71,078 -- $ -- $(269) $ 2,259 $29,164 $102,337
========== ==== ======= === ==== ====== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
32
<PAGE>
CREDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1997 1998 1999
--------------- -------------- ----------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net earnings ........................................................ $ 456 $ 10,195 $ 17,018
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization .................................... 209 369 1,013
Deferred tax expense ............................................. 471 6,960 10,875
Gain on sale ..................................................... -- (18,414) --
Income on investment in securitization (accretion)................. -- -- (5,027)
Extraordinary item--loss on extinguishment of debt (net of
taxes) .......................................................... -- 566 --
Changes in assets and liabilities:
Increase in other assets ......................................... (197) (517) (1,696)
Increase in accounts payable and accrued expenses ................ 196 968 3,365
Increase (decrease) in other liabilities ......................... 296 (69) 67
Increase (decrease) in current income taxes
payable/receivable .............................................. (194) 200 --
------- -------- ---------
Net Cash and Cash Equivalents Provided by Operating Activities ........ 1,237 258 25,615
------- -------- ---------
Cash Flows from Investing Activities
Collections applied to principal (accretion) on finance
receivables, net ................................................... 2,111 (3,413) (13,145)
Investment in securitizations ....................................... -- (1,934) (2,616)
Purchases of property and equipment ................................. (123) (347) (5,933)
Acquisitions of finance receivables ................................. (557) (58,336) (147,924)
Proceeds from securitizations ....................................... -- 38,517 --
Proceeds from portfolios sold, net .................................. -- 562 --
------- -------- ---------
Net Cash and Cash Equivalents Provided by (Used in) Investing
Activities ........................................................... 1,431 (24,951) (169,618)
------- -------- ---------
Cash Flows from Financing Activities
(Payments on) proceeds from notes payable and other debt, net ....... (1,660) 4,675 104,517
Proceeds from subordinated debt .................................... -- 4,530 --
Payments on subordinated debt ...................................... -- (4,530) --
Net (payments) proceeds on capital lease obligations ............... (179) (357) 3,082
Proceeds from issuance of common stock ............................. -- 27,311 42,453
Common stock purchased for benefit plans ............................ -- (269) --
Proceeds from common stock issued on warrants and options
exercised ......................................................... -- 410 896
Deferred costs ...................................................... (535) 59 (2,924)
------- -------- ---------
Net Cash and Cash Equivalents (Used in) Provided by Financing
Activities............................................................. (2,374) 31,829 148,024
------- -------- ---------
Net Increase in Cash and Cash Equivalents............................... 294 7,136 4,021
Cash and Cash Equivalents at Beginning of Year ........................ 476 770 7,906
------- -------- ---------
Cash and Cash Equivalents at End of Year .............................. $ 770 $ 7,906 $ 11,927
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
33
<PAGE>
CREDITRUST CORPORATION
NOTES TO CONSOLIDATED 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. The Company has 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.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Creditrust Funding I LLC, Creditrust Card
Services Corporation, Creditrust SPV99-1, LLC, Creditrust SPV99-2 Capital, Inc.,
and Creditrust SPV99-2, LLC. All material inter-company accounts and
transactions have been eliminated.
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. The estimated future cash flows of the
portfolios are used to recognize income on finance receivables and to estimate
the fair value of investment in securitizations. 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
could be material (See Note D).
Cash and Cash Equivalents
The Company considers all highly liquid securities purchased with a maturity
of three months or less to be cash equivalents. The Company's two
securitizations that are accounted for as secured borrowings have provisions
which restrict the Company's use of cash. Restricted cash as of December 31,
1998 and 1999 was $900,000 and $3.3 million, respectively.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note B--Summary of Significant Accounting Policies (Continued)
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. Proceeds from the sale of accounts that
are included as part of a static pool are accounted for as collections in the
pool. Collections on replacement accounts received from the originator of the
loans are included as collections in the corresponding static pools. The
discount between the cost of each static pool and the contractual receivable of
the accounts in the static pools is not recorded since the Company expects to
collect a relatively small percentage of each static pool's contractual
receivable balance. Each static pool is initially recorded at cost.
Accrual accounting for each static pool is measured as a unit for the economic
life of the static pool (similar to one loan) for recognition of income on
finance receivables, or collections applied to principal on finance receivables,
and for provision of 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, 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 Fees
Servicing fees are recognized on securitized receivables under the terms of
four indenture and servicing agreements. The Company recognizes as a servicing
fee 20% of collections in the two 1998 gain on sale securitizations. The Company
eliminates in consolidation the servicing fee of 20% of collections in the two
securitizations treated as secured borrowings. In accordance with 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
investment in securitizations (see Note E) as available for sale debt
securities. Such securities are recorded at fair value, and unrealized gains and
losses, net of the related tax effect, are not reflected in earnings but are
recorded as a separate component of stockholders' equity. The investment in
securitizations is estimated to accrue income over the estimated life of the
underlying portfolio of receivables. 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.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note B--Summary of Significant Accounting Policies (Continued)
Deferred Costs
The Company accounts for expenditures, principally legal and accounting fees
in connection with its preparation to sell stock in its public offerings, as
capitalized and deferred until the offering occurs. The costs are netted against
the capital raised in the offerings.
The Company accounts for legal and professional fees in connection with its
securitization efforts as capitalized and deferred until the securitizations are
closed. All transaction costs, including legal and accounting fees, are expensed
when the gain on sale is recognized or amortized for securitizations classified
as secured borrowings, over the note term.
The Company capitalized legal and accounting costs incurred in connection with
its placement of senior subordinated notes in 1998. The costs were allocated
between the financing costs of the notes and the paid-in 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, and with its interim financing facility and secured borrowing
securitization in 1999. The costs are being amortized against income over the
terms of the facilities.
Depreciation/Amortization
Property and equipment, consisting of computer equipment, furniture and
fixtures and leasehold improvements, are stated at cost and
depreciated/amortized 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 SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." The Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
The 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 liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
The 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.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note B--Summary of Significant Accounting Policies (Continued)
Reporting Comprehensive Income
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income," effective for fiscal years beginning after December 15,
1997. The 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. The Statement requires all
items required to be recognized under accounting standards as components of
comprehensive income, to be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. The Statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
For the year ended December 31, 1997, the Company had no material sources of
other comprehensive income. The Company's investment in securitizations is
classified as available for sale, as such, in accordance with SFAS No. 115, the
Company recognizes as other comprehensive income the unrealized gains or losses
for the difference between the amortized cost and estimated fair value net of
income taxes (See Note E).
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.
Public Offerings
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' overallotment option which was subsequently
exercised and closed on September 2, 1998. After payment of underwriting
discounts and commissions and other offering expenses, the Company received net
proceeds of $27.3 million. The proceeds were used to repay the subordinated
notes, purchase additional portfolios and contribute to working capital.
On March 19, 1999, the Company commenced a follow-on public offering of 2.4
million shares of common stock at a public offering price of $19.00 per share.
After payment of underwriting discounts and commissions and other offering
expenses, the Company received net proceeds of $42.5 million. The proceeds were
used to purchase additional portfolios and contribute to working capital.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note B--Summary of Significant Accounting Policies (Continued)
Earnings per Common Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" (EPS).
This 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
computation. Basic EPS excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.
The Company did not have any potentially dilutive items for the year ended
December 31, 1997. The following tables reconciles basic and diluted EPS for the
years ended December 31:
<TABLE>
<CAPTION>
(in thousands, except share data)
1998 Per
Earnings Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
Earnings before extraordinary item ............................. $10,761 $1.57
Extraordinary item--loss on extinguishment of debt
(net of taxes) ................................................ (566) (.08)
------- -----
Net earnings ................................................... 10,195 6,827,506 1.49
Effect of Dilutive Securities
Warrants ....................................................... -- 54,276
Stock options .................................................. -- 17,088
------- ----------
Diluted EPS
Earnings before extraordinary item plus assumed conversions .... 10,761 1.56
Extraordinary item--loss on extinguishment of debt (net of taxes)
plus assumed conversions ................................... (566) (.08)
------- -----
Net earnings plus assumed conversions .......................... $10,195 6,898,870 $1.48
======= ========== =====
<CAPTION>
(in thousands, except share data)
1999 Per
Earnings Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
Net earnings ................................................... $17,018 9,907,535 $1.72
Effect of Dilutive Securities
Warrants ....................................................... -- 193,120
Stock options .................................................. -- 80,245
------- ----------
Diluted EPS
Net earnings plus assumed conversions .......................... $17,018 10,180,900 $1.67
======= ========== =====
</TABLE>
Employee Stock Options
The Company accounts for its employee stock options in accordance with the
intrinsic value-based method of Accounting Principles Board Opinion No. 25 (APB
25). Under this method, if options are priced at or above the quoted market
price on the date of grant, there is no compensation expense recognized by the
Company as a result of the options.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note B--Summary of Significant Accounting Policies (Continued)
Reclassifications
Certain amounts in prior years have been reclassified to conform to the
current year presentation.
Note C--Fair Value of Financial Instruments
The accompanying financial statements include various estimated fair value
information as of December 31, 1998 and 1999, 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.
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 future cash flows. The carrying value of finance
receivables approximates fair value at December 31, 1998 and 1999.
Investment in Securitizations
Investment in securitizations is recorded at estimated fair value based on
discounted future cash flows.
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, 1998 and
1999, the carrying amount of the notes payable approximates fair value.
Note D--Finance Receivables
The Company purchases defaulted consumer receivables at a discount from the
actual principal balance. The following summarizes the change in finance
receivables for the year ended December 31:
<TABLE>
<CAPTION>
(in thousands)
1998 1999
----------------- -----------------
<S> <C> <C>
Balance, at beginning of year ...................................... $ 5,050 $ 26,915
Purchases of finance receivables ................................. 58,336 147,924
Finance receivables held for sale ................................ -- (3,126)
Accretion to principal ............................................ 4,971 23,903
Amortization of principal ......................................... (1,558) (10,758)
Securitization of finance receivables ............................ (39,884) --
-------- ----------
Balance, at end of year ............................................ $ 26,915 $ 184,858
-------- ----------
Unrecorded discount (unaudited) .................................... $448,473 $2,456,535
======== ==========
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note D--Finance Receivables (Continued)
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, 1998 and 1999, no provision for loss has been
recorded.
As of December 31, 1999, the Company had $3.1 million of purchased finance
receivables that have been classified as held for sale. Subsequent to year-end,
all of the finance receivables held for sale were sold for cost and therefore no
gain or loss was recognized.
Changes in Estimates
The Company monitors its projection models with a view towards enhancing
predictability of both the amount and timing of collections. 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 by $700,000 in 1997. In the fourth quarter of 1999, the Company
reduced the remaining estimates by 12% to reflect the historical cumulative
trend in collections. The effect of the change in estimate was to reduce
earnings in 1999 by $2.8 million after tax.
Note E--Investment in Securitizations
Investment in securitizations for the year ended December 31, 1998 and 1999 is
comprised of the following:
<TABLE>
<CAPTION>
(in thousands)
Estimated
Cash Amortized Unrealized Fair
Reserves Cost Gains Value
---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Balance as of January 1, 1998 ........ $ -- $ -- $ -- $ --
Retained interests recorded .......... 2,085 16,874 -- 18,959
Unrealized gains....................... -- -- 10,928 10,928
Income accrued ....................... -- 533 533
Allowed reduction in reserves ........ (151) -- -- (151)
------ ------- ------- -------
Balance as of December 31, 1998 ...... 1,934 17,407 10,928 30,269
Deposits to cash reserves ............ 2,616 -- -- 2,616
Decrease in unrealized gains........... -- -- (6,743) (6,743)
Income accrued ....................... -- 5,027 -- 5,027
------ ------- ------- -------
Balance as of December 31, 1999 ...... $4,550 $22,434 $ 4,185 $31,169
====== ======= ======= =======
</TABLE>
The investment in securitizations accrues interest at 12% per annum. The net
after tax effect of unrealized gains is reflected as a separate component of
stockholders' equity and is included in other comprehensive income. Fair value,
absent actual market quotations for similar securities, was estimated based on
discounted future cash flows.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note F--Property and Equipment
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
(in thousands)
December 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Computer equipment and software ..................... $2,105 $ 7,037
Furniture and fixtures .............................. 955 1,293
Leasehold improvements................................ 120 2,422
------ -------
3,180 10,752
Less accumulated depreciation and amortization ...... (731) (1,455)
------ -------
$2,449 $ 9,297
====== =======
</TABLE>
As of December 31, 1998 and 1999, property and equipment purchased pursuant to
capital leases was $2.2 million and $6.5 million, less accumulated depreciation
of $373,000 and $836,000, respectively.
Note G--Deferred Costs
Deferred costs consist of the following at:
<TABLE>
<CAPTION>
(in thousands)
December 31,
--------------------------
1998 1999
------------ -----------
<S> <C> <C>
Credit facilities ...................... $ 476 $ 697
SPV99-1 Securitization ................. -- 844
SPV99-2 Financing........................ -- 1,570
----- ------
$ 476 $3,111
===== ======
</TABLE>
During 1999, certain legal and accounting costs totaling $436,000 were
expensed in connection with the termination of a capital markets transaction.
Note H--Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following at:
<TABLE>
<CAPTION>
(in thousands)
December 31,
-----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Accounts payable ............................... $ 512 $1,453
Accrued other liabilities ...................... 414 1,550
Accrued salaries, taxes and fringe benefits .... 695 1,983
------ ------
$1,621 $4,986
====== ======
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note I--Notes Payable
Non Recourse Warehouse Facility
In September 1998, the Company established through a wholly owned consolidated
special purpose finance subsidiary, Creditrust Funding I LLC, an initial $30
million revolving warehouse facility for use in acquiring finance receivables.
The warehouse facility carries a floating interest rate of LIBOR plus .65%, 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 solely by a trust estate, primarily consisting of specific consumer
receivables that the Company has absolutely assigned to the special purpose
finance subsidiary, and is non recourse to the parent company and its other
assets. Generally, the warehouse facility provided 95% of the acquisition costs
of receivables purchased, with the Company funding the remaining 5% and a one-
time $900,000 liquidity reserve requirement. The $900,000 reserve account is
included in cash on the balance sheet and restricted as to use until the
warehouse facility is retired. The facility contains financial covenants the
most restrictive of which requires that the Company maintains a net worth of
$20.0 million plus 75% of net earnings. The Company has agreed to apply all of
the designated cash reserves available after pay off of its 1998 securitizations
as additional reserves for the Warehouse.
Pursuant to a December 1999 amendment, the Company's right to service the
receivables funded by the Warehouse Facility automatically terminates on a
monthly basis subject to reappointment by the note insurer. The indenture and
servicing agreement was amended in February 2000, requiring the facility to be
reduced to $19 million by July 10, 2000. Debt service on the Warehouse facility
is interest only during a six month revolving period and thereafter comprised of
all collections from receivables less a 20% servicing fee. The interest only
period ended with February 2000. In February 2000, the fee increased to 35%
pursuant to the amended indenture and servicing agreement. The servicing fees
are eliminated in consolidation.
During 1999, the Company borrowed $55.5 million under the facility and repaid
$30.0 million. Interest expense, trustee fees and guarantee fees aggregated
$109,691 and $1.4 million in 1998 and 1999, respectively. As of December 31,
1999, the amount outstanding was $25.5 million and the carrying value of the
assets included in the Warehouse facility were $27.3 million. As of December
31, 1998, no amounts were outstanding. As of December 31, 1999, the Company had
no available funds under this facility.
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 was based on
prime plus 0.5%, or LIBOR plus 2.5% at the option of the Company on each
advance. Pursuant to an amendment to the loan documents in March 2000, interest
is prime plus 2.5% effective April 1, 2000. The facility is secured by any
receivables purchased under the facility and substantially all the Company's
other assets. Outstanding debt on the line as of December 31, 1998 and 1999 was
$6.8 million and $15.9 million, respectively. Interest expense totaled $97,000
and $1.4 million in 1998 and 1999, respectively. The facility contains financial
covenants the most restrictive of which requires that the Company maintains a
net worth of $30.0 million plus 50% of net earnings. Debt service on the
revolving facility is interest only for six months following the purchase of
receivables. The interest only period ended with February 2000. After six
months, principal is payable over twenty-four months. As of December 31, 1999,
the Company had $4.1 available under the line.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note I--Notes Payable (Continued)
SPV99-2 Financing
In August 1999, the Company borrowed $40 million in an interim financing
through Creditrust SPV99-2, LLC ("SPV99-2"), a wholly owned subsidiary. The loan
is structured similar to a securitization. SPV99-2 issued a note to
institutional investors and used the proceeds to purchase $37.3 million of
receivables. The notes are backed by a parent guarantee from the Company. Unless
this facility is fully retired by May 2000, its terms require a conversion to a
term loan due August 2003. The facility requires all collections to be used for
debt service and requires the Company to use any proceeds from capital markets
transactions or certain asset sales to pay down the debt. The interest rate is
12% per annum, until conversion to a term loan, and 15% thereafter. Upon
conversion, a conversion fee of 3.25% is payable out of the collections on the
receivables, and warrants for 10% of the fully diluted common stock at the time
of conversion will be released from escrow to the lenders. As of December 31,
1999, the Company had $35.6 million outstanding under this facility. Interest
expense totaled $1.9 million in 1999. See Note I to the Consolidated Financial
Statements. As of December 31, 1999, the Company had no funds remaining in this
facility available for use.
Non Recourse SPV 99-1 Securitization Note
In August 1999, the Company issued a $40.0 million asset backed securitization
note through its newly formed special purpose subsidiary Creditrust SPV99-1, LLC
(Series 1999-1). The Note is secured by the receivables pledged to the note
holders and is non-recourse to the parent Company and its other assets. Interest
is payable at 9.43% per annum and the final maturity date of the note is July
2004. Interest expense totaled $1.2 million in 1999. A one-time $2.4 million
liquidity reserve is included in cash on the balance sheet and restricted as to
use until the note is retired. The securitization did not qualify for gain on
sale accounting under generally accepted accounting principles, with the result
that the securitization notes are treated as a secured borrowing and appear as
debt on the consolidated financial statements of the Company. As of December
31, 1999, the Company had $34.3 million outstanding under this facility. Debt
service is paid from all collections on the receivables less a 20% servicing
fee. Servicing fees are eliminated in consolidation.
At December 31, 1999, the Company had, on a consolidated basis, $4.1 million
available under all existing debt facilities to borrow for purchases of finance
receivables, subject to lender approval. None of the available funds can be used
for operating purposes. As of December 31, 1999, required and projected minimum
principal payments payable by the Company were as follows:
<TABLE>
<CAPTION>
Year ending December 31, (in thousands)
------------------------
<S> <C>
2000.................................................. $ 80,424
2001.................................................. 26,217
2002.................................................. 4,665
--------
Total minimum principal payments................... $111,306
========
</TABLE>
The debt service requirements associated with borrowings under the Company's
credit facilities have significantly increased liquidity requirements. Both the
Line of Credit Facility and the Warehouse Facility interest only periods have
expired and no further borrowings are permitted under the Warehouse Facility and
the Line of Credit Facility is subject to lender approval. The Company's
liquidity has also been adversely impacted by its lower than estimated
collections and higher cost of receivables purchased in 1999 under forward flow
contracts. The Company has experienced difficulty in obtaining financing with
amortization and other terms appropriately matched to the anticipated cash flows
from receivables that would be purchased with the financing. The Company
believes that other receivables purchasers have experienced similar difficulties
in this financial market. The Company anticipates that its operating cash flow
and strategic sales of receivables that occur subsequent to consent by various
lenders will be sufficient to meet its anticipated future operating expenses,
and to service its debt requirements as they become due. However, without
additional financing to buy receivables, the Company will not be able to grow.
An extended period of no further financing would require management to take
steps to reduce operating expenses to stay in line with reducing revenues that
accompany a static receivables base.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note J--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 sold consisted of $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 warrants. The effective
interest rate on the subordinated notes based on the allocation is 12.8%. The
Company repaid the subordinated notes at $5.0 million plus accrued interest. The
repayment resulted in the Company's 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.
Note K--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 $1.7 million and $5.2 million as of
December 31, 1998 and 1999, respectively. Interest rates range from 8.7% to
11.4%; and interest expense was $61,000, $133,000 and $251,000 in 1997, 1998 and
1999, respectively.
For the year ended December 31, 1999, future minimum annual lease payments
under capital leases together with their present value are as follows:
<TABLE>
<CAPTION>
As of December 31, (in thousands)
------------------
<S> <C>
2000 .......................................... $2,274
2001 .......................................... 2,078
2002 .......................................... 1,518
2003 .......................................... 30
------
Total minimum lease payments .................. 5,900
Amount representing interest .................. (692)
------
Present value of minimum lease payments ....... $5,208
======
</TABLE>
Note L--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 and the recognition of securitizations as sales under SFAS
No. 125 versus financing transactions for tax reporting.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note L--Income Taxes (Continued)
The provision for income taxes consists of the following for the years ended:
<TABLE>
<CAPTION>
(in thousands) December 31,
--------------------------------------------------
1997 1998 1999
-------------- --------------- ---------------
<S> <C> <C> <C>
Current expense (refund)
Federal .............................................. $(161) $ -- $ --
State ................................................ (39) 45 --
----- ------ -------
(200) 45 --
Deferred
Federal .............................................. 347 5,811 8,904
State ................................................ 79 1,149 1,971
----- ------ -------
426 6,960 10,875
----- ------ -------
Total.................................................... $ 226 $7,005 $10,875
===== ====== =======
</TABLE>
The net deferred tax liability consists of the following as of:
<TABLE>
<CAPTION>
(in thousands) December 31,
---------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Deferred tax assets
Deferred income ...................................... $ 116 $ 599
Net operating loss carryforward ...................... 4,078 17,559
Other ................................................ 44 221
------- -------
Gross deferred tax assets .............................. 4,238 18,379
Deferred tax liabilities
Finance receivables .................................. 400 24,764
Investment in securitizations ........................ 15,445 13,519
Other ................................................ 297 228
------- -------
Gross deferred tax liabilities ......................... 16,152 38,511
------- -------
Net deferred tax liability ............................. $11,915 $20,132
======= =======
</TABLE>
The difference 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>
1997 1998 1999
-------------- --------------- ---------------
<S> <C> <C> <C>
Pretax income .......................................... $ 682 $17,766 $27,893
----- ------- -------
Computed federal income taxes at 34% ................... 232 6,040 9,483
Computed state income taxes, net of federal benefits ... 31 821 1,289
Other taxes not based on income ........................ -- 45 --
Permanent differences .................................. 7 19 28
Other adjustments ...................................... (45) 80 75
----- ------- -------
Income tax expense ..................................... $ 225 $ 7,005 $10,875
===== ======= =======
</TABLE>
The other adjustments to the deferred tax liability is attributable to the
Company's analysis of its prior tax returns compared to the respective deferred
tax liabilities. In 1997, the Company generated a net operating loss of $1.1
million for tax purposes, of which approximately $517,000 was carried back to
prior years resulting in a refund of approximately $200,000. The remaining tax
loss of $582,000 is available to offset future taxable earnings of the Company
and expires on December 31, 2012. Additional net operating tax loss
carryforwards generated after 1997 of approximately $44.9 million begin to
expire on December 31, 2018. Utilization of net operating losses is subject to
annual limitations due to the ownership change limitations provided by the
Internal Revenue Code and similar state provisions. Management does not expect
such limitations, if any, to impact the ultimate utilization of the
carryforwards.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note M--Commitments and Contingencies
Leases
In January 1996, the Company entered into an agreement to lease its current
headquarters and a collection facility. In October 1998, the Company amended the
lease to expand the leased space in return for additional monthly rent. Rent
expense for this lease for the years ended December 31, 1997, 1998 and 1999 was
$210,000, $250,000 and $265,000, respectively.
In September 1997, the Company entered into an agreement to lease additional
office space for an operations center. 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. Rent expense
for this lease for 1997, 1998 and 1999 was $532,000, $405,000 and $406,000,
respectively, including $211,000, $219,000 and $196,000 of amortized lease
incentive, respectively.
In January 1999, the Company entered into a storage facility lease agreement.
The lease began in February 1999 and expires in January 2003. The yearly
commitment pursuant to this lease is $142,000. The Company has an option to
terminate the lease after 24 months, or anytime thereafter, with three months
prior notice. Rent expense for this lease for the year ended December 31, 1999
was $136,000.
In May 1999, the Company entered into a seven-year lease for additional
office space of approximately 94,000 square feet in suburban Baltimore. The
lease term commenced on July 1, 1999 and ends July 31, 2006. The Company was
given an improvement allowance of $1.2 million, which has been recorded as lease
incentive and is amortized over the term of the lease. The lease provides for
the right of first refusal and the right of first offer to lease the remaining
approximately 100,000 square feet of space as it becomes available and a two
year option to purchase the building at a fixed amount. Pursuant to these
rights and under an amendment dated October 1999, the Company leased an
additional 42,000 square feet of the available 100,000 square feet of office
space commencing in May 2000. Rent expense for this lease for the year ended
December 31, 1999 was $697,000.
Future minimum operating lease commitments, net of reimbursements, are as
follows:
<TABLE>
<CAPTION>
Year ending December 31, (in thousands)
------------------------
<S> <C>
2000 ......................... $ 2,891
2001 ......................... 3,224
2002 ......................... 3,330
2003 ......................... 2,509
2004 ......................... 2,571
Thereafter..................... 4,011
-------
$18,536
=======
</TABLE>
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. As of December 31, 1999, all but one forward flow agreement
expired or terminated. In 1999, a charge of $1.3 million was incurred due to a
reduction in the amount of the remaining monthly obligations under the remaining
forward flow contract. The Company's commitment pursuant to the remaining
agreement for 2000 was $2.9 million.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note M--Commitments and Contingencies (Continued)
Litigation
The Company is involved in various litigation arising in the ordinary course
of business. Management believes these items, individually or in aggregate, will
not have a material adverse impact on the Company's financial position, results
of operations or liquidity.
The Company brought a declaratory judgement action against a seller of charged
off receivables asking the US Federal District Court to agree with the Company's
interpretation that the agreement has been terminated pursuant to its terms. The
seller has responded, as anticipated by the Company, by denying that the
agreement has terminated, and is seeking, among other things, liquidated damages
of $600,000 plus legal fees. While it is not possible for the Company to
estimate the potential for loss, if any, the Company will vigorously prosecute
its action against the seller and defend any claims made in the proceeding.
Servicing contracts
Pursuant to the second securitization and the warehouse facility, the Company
receives a fee of 20% and 35%, respectively of the collections of the
receivables. Pursuant to the December 1999 amendments, the Company's right to
service the receivables in the securitizations automatically terminate on a
monthly basis subject to reappointment by the insurer. Additionally, minimum
cumulative collection targets must be met, or the Company's servicing rights may
be terminated.
Note N--Servicing Fees
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 credit card 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 income of 85% of
net collections through February 1998, and thereafter received 60% of net
collections until the bank received a required amount under the contract. The
Company securitized the portfolio in June 1998.
In 1998 the Company completed two securitizations (see Note O). Pursuant to
the securitizations the Company receives a fee of 20% of the collections of the
receivables in the securitizations.
Note O--Gain on Sale--Securitizations
On June 19, 1998, a special purpose finance subsidiary formed by the Company
issued $14.5 million aggregate principal amount of 6.43% Creditrust
Receivables--Backed Notes, Series 1998-1. The notes are secured by a trust
estate consisting substantially of 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 a credit facility and payment
of transaction costs, the Company received cash of $5.8 million, recognized a
gain on sale of $6.0 million and recorded an investment in securitizations of
$4.6 million.
On December 29, 1998, a special purpose finance subsidiary formed by the
Company issued $27.5 million aggregate principal amount of 8.61% Creditrust
Receivables--Backed Notes, Series 1998-2. The notes are secured by a trust
estate consisting substantially of consumer receivables previously owned by the
Company with a carrying value as of December 1998 of approximately $28.6
million. After retirement of a credit facility and payment of transaction costs,
the Company received cash of $7.3 million, recognized a gain on sale of $11.0
million and recorded an investment in securitizations of $14.4 million.
Note P--Gain on Sale--Finance Receivables
In February 1998, the Company sold a portfolio of receivables repurchased
under a settlement agreement. Previously deferred income of $895,000 was
recognized against a $237,000 cost of sale, resulting in gain on sale of
$658,000. 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.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note Q--Stock and Option Plans
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 percent
discount to the fair market value, subject to certain annual limitations. As
permitted by 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. As the plan is non-
compensatory in nature, no compensation expense will be recorded for stock
purchased pursuant to the plan. No shares have been issued 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.
Stock Options Issued
The Company issues options to employees and members of its Board of Directors
based on hiring incentives and merit. The Company has accounted for its options
under APB Opinion No. 25 and related interpretations. The options, which have a
term of 10 years when issued, are granted at various times during the year and
vest based upon individual grant specifications. The exercise price of each
option equals or exceeds the market price of the Company's stock on the date of
grant. No compensation cost has been recognized for employee options. Had
compensation cost for the plan been determined based on the fair value of the
options at the grant dates, consistent with the method in SFAS No. 123, the
Company's net earnings would have been decreased to the pro forma amounts
indicated below for years ended December 31:
<TABLE>
<CAPTION>
(in thousands, except share data) 1998 1999
---------------- ---------------
<S> <C> <C>
Net earnings--as reported ............................... $10,195 $17,018
Net earnings--pro forma ................................. $10,043 $16,596
Net earnings per diluted common share--as reported ...... $ 1.48 $ 1.67
Net earnings per diluted common share--pro forma ........ $ 1.45 $ 1.63
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing method with the following weighted-average
assumptions used for grants as of December 31:
<TABLE>
<CAPTION>
1998 1999
----------------- ----------------
<S> <C> <C>
Expected Volatility ............................... 16.00% 80.00%
Risk-free Rate .................................... 5.15% 5.54%
Expected Lives .................................... 5 Years 5 Years
</TABLE>
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note Q--Stock and Option Plans (Continued)
The following tables depict activity in the plan for the year ended December
31:
<TABLE>
<CAPTION>
1998 1999
Shares Shares
---------------- ----------------
<S> <C> <C>
Options outstanding at beginning of year ..................................... -- 317,338
Granted ................................................................... 381,854 102,862
Exercised ................................................................. -- (30,963)
Forfeited ................................................................. (64,516) (49,856)
Expired ................................................................... -- --
-------- --------
Outstanding at end of year ................................................... 317,338 339,381
Options exercisable at year-end .............................................. 62,500 105,248
Weighted-average fair value per share of options granted during the year ..... $ 4.57 $ 14.83
Weighted-average exercise price .............................................. $ 15.68 $ 21.92
</TABLE>
Note R--Supplemental Cash Flows Information
Supplemental Disclosures of Cash Flows Information
The Company paid the following amounts for interest and income taxes during
the years ended:
<TABLE>
<CAPTION>
(in thousands) December 31,
--------------------------------------------
1997 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
Interest ................................... $ 377 $ 616 $5,155
----- ----- ------
Income taxes ............................... $ 8 $ 3 $ --
----- ----- ------
</TABLE>
Supplemental Disclosures of Non-cash Investing and Financing Activities
The Company financed the following purchases of property and equipment with
capitalized lease obligations and tenant improvement allowances during the years
ended:
<TABLE>
<CAPTION>
(in thousands) December 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Equipment, furniture, and leasehold improvements ....... $1,051 $1,037 $1,651
====== ====== ======
</TABLE>
The Company recorded an unrealized gain on securitizations as follows for the
years ended:
<TABLE>
<CAPTION>
(in thousands) December 31,
-----------------------------------------
1997 1998 1999
------------ ----------- ------------
<S> <C> <C> <C>
Unrealized gains on investment in securitizations ....... $ -- $11,462 $ --
===== ======= =====
</TABLE>
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note S--Related Party Transactions
In October 1999, the Company became aware that a management employee who
subsequently resigned misdirected corporate funds of approximately $500,000 by
submitting an unauthorized check request and then seeking to redirect those
funds through the collection payment stream. Members of senior management
learned that a check in a similar amount was unsuccessfully presented by the
former employee into the collection payment stream. The Chief Executive
Officer sought to recover these funds or have them applied as intended by the
Company. The funds remained under the former employee's control for
approximately seven weeks. During this period, these circumstances were not
reported to the audit committee of the board of directors or our independent
auditors. The Company recovered the full amount of the misappropriated funds. No
improper recording of collections occurred as a result of these activities.
In March 2000, the Company's Chairman and Chief Executive Officer, loaned the
Company $648,000 as a short-term note. The proceeds of the note were used to pay
an obligation of the Company under the Line of Credit Facility. The note matures
on April 16, 2000 and bears interest at the rate of 6% per annum payable at
maturity. The note provided for a two percent commitment fee payable at funding.
During 1999, the Company paid approximately $200,000 in contingent legal fees
on collections of receivables placed with a law firm which employs a director of
the Company.
In December 1999, the Company sold receivables for $4.3 million in proceeds to
a company affiliated with a director of the Company.
Note T - Supplementary Financial Information (Unaudited)
The following tables represent selected quarterly financial information.
<TABLE>
<CAPTION>
Year Ended 1998
(in thousands, except share data)
March 31 June 30 September 30 December 31
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Total Revenues $3,403 $8,401 $4,317 $18,753
Expenses from Operations 2,673 3,285 4,687 6,159
------ ------ ------ -------
Earnings (Loss) from
Operations 730 5,116 (370) 12,594
Earnings (Loss) Before 415 3,038 (114) 7,422
Extraordinary Item
Net Earnings (Loss) $ 415 $3,038 $ (680) $ 7,422
======== ======== ========= =========
Basic Earnings (Loss) Per
Common Share Before $ .07 $ .51 $ (.01) $ .93
Extraordinary Item
Basic Earnings (Loss) Per
Common Share $ .07 $ .51 $ (.09) $ .93
======== ======== ========= =========
Diluted Earnings (Loss) Per
Common Share Before $ .07 $ .51 $ (.01) $ .90
Extraordinary Item
Diluted Earnings (Loss) Per
Common Share $ .07 $ .51 $ (.09) $ .90
======== ======== ========= =========
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note T - Supplementary Financial Information (Unaudited) (Continued)
<TABLE>
<CAPTION>
Year Ended 1999
(in thousands, except share data)
March 31 June 30 September 30 December 31
------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Total Revenues $12,024 $18,418 $24,170 $26,412
Expenses from Operations 7,644 10,139 12,575 18,413
------- ------- ------- -------
Earnings from Operations 4,380 8,279 11,595 7,999
Net Earnings $ 2,430 $ 4,889 $ 6,295 $ 3,404
========= ========= ========= =========
Basic Earnings Per
Common Share $ .29 $ .47 $ .60 $ .33
========= ========= ========= =========
Diluted Earnings Per
Common Share $ .28 $ .46 $ .58 $ .32
========= ========= ========= =========
</TABLE>
51
<PAGE>
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers of Creditrust as of March 22, 2000
The following table sets forth the names of executive officers of the Company,
their positions within the Company and their principal business experience for
the past five years.
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------------- --- -------------------------------------------------
<S> <C> <C>
Joseph K. Rensin ................. 34 Chairman of the Board and Chief Executive Officer
Frederick W. Glassberg/(1)(2)/..... 66 Director
John G. Moran/(1)(2)/.............. 54 Director
Michael S. Witlin.................. 32 Director
Stuart Wolpoff..................... 36 Director
J. Barry Dumser .................. 51 President and Chief Operating Officer
Thomas J. Crotty ................. 50 Vice President, Chief Information Officer
Thomas J. Juranich................. 49 President, Creditrust Bank (in organization)
Jefferson B. Moore ............... 38 Vice President, Acquisitions
Richard J. Palmer ................ 48 Vice President, Chief Financial Officer and Treasurer
</TABLE>
/(1)/ Member of the Audit Committee.
/(2)/ Member of the Compensation Committee.
Joseph K. Rensin, Chairman of the Board and Chief Executive Officer--Mr.
Rensin co-founded Creditrust in 1991 and has served as Chairman of the Board and
Chief Executive Officer since that time and was President through December 1999.
Mr. Rensin was the initial developer of Creditrust's PAT and Mozart systems and
its extensive database, as well as the customer relations approach to
collections and recovery. 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 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 was President of The Moran Group, LTD, which offers management
consulting services to for-profit and not-for-profit organizations, from 1995 to
1998. From 1986 until 1995, Mr. Moran was President of Household Bank, FSB
(Eastern Division).
52
<PAGE>
Michael S. Witlin, Director--Mr. Witlin co-founded Creditrust in 1991, and he
served as Vice President of Creditrust until 1995. From 1995 to 1997, Mr. Witlin
served as a consultant with 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.
Stuart Wolpoff, Director--Mr. Wolpoff has been a director of Creditrust since
1999. Since 1991, Mr. Wolpoff has been executive director of Wolpoff & Abramson
LLP, one of the largest law firms specializing in debt collection. Creditrust
uses this law firm for collection work.
J. Barry Dumser, President and Chief Operating Officer--Mr. Dumser joined
Creditrust in 1997 as its General Counsel and was named President and Chief
Operating Officer in December 1999. From 1995 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 1994 to 1995, Mr. Dumser served as Vice
President and Counsel to Matterhorn Bank Programs, and from 1990 to 1993, 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.
Thomas J. Crotty, Vice President and Chief Information Officer--Mr. Crotty
joined Creditrust in 1999. Prior to joining Creditrust, Mr. Crotty was Vice
President and Chief Information Officer of Commercial Financial Services, Inc.
from 1997 to 1999, served in various senior information technology management
positions with GEICO Insurance Company from 1983 to 1997, and was previously
employed in information technology positions by USAir Group, J.C. Penney, and
GAF. Mr. Crotty has undergraduate and graduate technology management degrees
from the University of Maryland. Commercial Financial Services, Inc. filed for
protection from its creditors under federal bankruptcy laws in December 1998 and
has ceased operations.
Thomas J. Juranich, President Creditrust Bank--(in organization)--Mr. Juranich
joined Creditrust in 1999 to head Creditrust Bank (in organization). Prior to
joining the organization, Mr. Juranich was President of Key Operations Center, a
wholly-owned subsidiary of Key Bank & Trust from 1991 to 1999, where he was
responsible for the profit and loss of the Credit Card Division. From 1986 to
1991 he was First Vice President of Long Island Savings Bank where he served as
head of Branch Operations for a 50-branch network, and managed their Consumer
Lending Division. From 1970 to 1986 Mr. Juranich managed several areas of the
Credit Card Division for Chemical Bank and served as Vice President of
Operations for that division from 1982 to 1984, and as Vice President of Check
Operations from 1984 to 1986.
Jefferson Barnes Moore, Vice President, Acquisitions--Mr. Moore joined
Creditrust in 1997. From 1994 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.
53
<PAGE>
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.
Information regarding the Company's Board of Directors is incorporated by
reference from the text and tables under "Election of Board of Directors" in
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held May 25, 2000 (the "2000 Proxy Statement").
Item 11. Executive Compensation
Information regarding executive compensation is incorporated by reference from
information contained in the text and tables under "Executive Compensation" in
the 2000 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Except as indicated in the 2000 Proxy Statement, the Company knows of no
person who on March 22, 2000 owned beneficially more than 5% of its common
stock.
(b) Information regarding stock ownership is incorporated by reference from
information contained in the text and tables under "Securities Beneficially
Owned" in the 2000 Proxy Statement.
(c) The Company knows of no arrangements the operation of which may at a
subsequent date result in a change of control of the Company.
Item 13. Certain Relationships and Related Transactions
Information regarding certain transactions is incorporated by reference from
information contained in the text under "Certain Transactions" in the 2000
Proxy Statement.
54
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) The following consolidated financial statements of Creditrust
Corporation and its subsidiaries are included in Item 8:
Independent Certified Public Accountants' Report
Consolidated Balance Sheets as of December 31, 1998 and 1999
Consolidated Statements of Earnings for the years ended December 31, 1997,
1998 and 1999
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the years ended December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999
Notes to Consolidated Financial Statements
(a)(2) No financial statement schedules for the years ended December 31, 1997,
1998 and 1999 are required to be filed as part of this Annual Report.
(a)(3) See accompanying Index to Exhibits on page 58.
(b) Reports on Form 8-K.
A Form 8-K was filed on December 10, 1999.
(c) The following is a list of exhibits filed herewith:
<TABLE>
<CAPTION>
Exhibit No. Document
- ----------- ----------------------------------------------------------------------
<S> <C>
10.13(d) Amendment No. 3 to Indenture and Servicing Agreement, dated as of
December 31, 1999, by and among Creditrust Funding I LLC, as issuer,
Norwest Bank Minnesota, National Association, as trustee, and as
backup servicer, Creditrust Corporation, as servicer, and Asset
Guaranty Insurance Company, as note insurer
10.13(e) Amendment No. 4 to Indenture and Servicing Agreement, dated as of
February 29, 2000, by and among Creditrust Funding I LLC, as issuer,
Norwest Bank Minnesota, National Association, as trustee, and as
backup servicer, Creditrust Corporation, as servicer, and Asset
Guaranty Insurance Company, as note insurer
</TABLE>
55
<PAGE>
<TABLE>
<S> <C>
10.14(c) Second Amendment to Credit Agreement, dated as of December 31, 1999
and effective as of January 1, 2000 by and among Creditrust
Corporation, as borrower, and Sunrock Capital Corp., as agent
10.15(c) Amendment No. 2 to Indenture and Servicing Agreement, dated as of
June 1, 1999, by and among Creditrust SPV98-2, LLC, as issuer,
Norwest Bank Minnesota, National Association, as trustee, and as
backup servicer, Creditrust Corporation, as servicer, and Asset
Guaranty Insurance Company, as note insurer
10.15(d) Amendment No. 3 to Indenture and Servicing Agreement, dated as of
December 31, 1999, by and among Creditrust SPV98-2, LLC, as issuer,
Norwest Bank Minnesota, National Association, as trustee, and as
backup servicer, Creditrust Corporation, as servicer, and Asset
Guaranty Insurance Company, as note insurer
10.20 Guarantee and Collateral Agreement dated as of August 2, 1999 among
Creditrust SPV 99-2, LLC, Creditrust SPV 99-2 Capital, Inc., and
Norwest Bank Minnesota, National Association
10.21 Parent Guarantee and Collateral Agreement dated as of August 2, 1999
made by Creditrust Corporation in favor of Norwest Bank Minnesota,
National Association
10.22 Warrant Agreement dated as of August 2, 1999 between Creditrust
Corporation and the Lenders set forth therein
10.23 Equity Registration Rights Agreement dated as of August 2, 1999
between Creditrust Corporation and the Lenders set forth therein
10.24 Stockholders' Agreement dated as of August 2, 1999 among Joseph K.
Rensin, Creditrust Corporation, and the Lenders set forth therein
10.27 Office Lease Agreement dated as of May 14, 1999 between Sterling York
LLC and Creditrust Corporation
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Grant Thornton LLP
27.1 Financial Data Schedule
</TABLE>
(d) The following is a list of financial statements schedules filed herewith:
None.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Baltimore,
State of Maryland, on March 30, 2000.
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 Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------- -------------------------------- -----------------
<S> <C> <C>
/s/ Joseph K. Rensin Chairman of the Board and March 30, 2000
____________________________ Chief Executive Officer
Joseph K. Rensin (Principal Executive Officer)
/s/ J. Barry Dumser President and Chief Operating March 30, 2000
____________________________ Officer
J. Barry Dumser
/s/ Richard J. Palmer Vice President, Chief Financial March 30, 2000
____________________________ Officer and Treasurer
Richard J. Palmer (Principal Financial and
Accounting Officer)
/s/ Frederick W. Glassberg Director March 30, 2000
____________________________
Frederick W. Glassberg
/s/ John G. Moran Director March 30, 2000
____________________________
John G. Moran
/s/ Michael S. Witlin Director March 30, 2000
____________________________
Michael S. Witlin
/s/ Stuart Wolpoff Director March 30, 2000
____________________________
Stuart Wolpoff
</TABLE>
57
<PAGE>
EXHIBIT INDEX
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.**
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.**
58
<PAGE>
10.8 Lease Agreement, dated January 24, 1996, by and between BRIT Limited
Partnership and Oxford Capital Corporation.**
10.9 Lease Agreement, dated January 22, 1997, by and between A&E Partners
and Creditrust Corporation.**
10.10 First Amendment to Lease, dated February 27, 1997, by and between A&E
Partners and Creditrust Corporation.**
10.11(a) 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.**
10.11(b) Amendment No. 1 to Indenture and Servicing Agreement, dated as of
February 16, 1999, by and among Creditrust SPV2, LLC, as issuer,
Norwest Bank Minnesota, National Association, as trustee, and as
backup servicer, Creditrust Corporation, as servicer, and Asset
Guaranty Insurance Company, as note insurer.*
10.12 Limited Liability Company Agreement of Creditrust SPV2, LLC, dated
June 19, 1998.**
10.13(a) 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.***
10.13(b) Amendment No. 1 to Indenture and Servicing Agreement, dated as of
February 16, 1999, by and among Creditrust Funding I LLC, as issuer,
Norwest Bank Minnesota, National Association, as trustee, and as
backup servicer, Creditrust Corporation, as servicer, and Asset
Guaranty Insurance Company, as note insurer.*
10.13(c) Amendment No. 2 to Indenture and Servicing Agreement, dated as of
March 15, 1999, by and among Creditrust Funding I LLC, as issuer,
Norwest Bank Minnesota, National Association, as trustee, and as
backup servicer, Creditrust Corporation, as servicer, and Asset
Guaranty Insurance Company, as note insurer.*
10.13(d) Amendment No. 3 to Indenture and Servicing Agreement, dated as of
December .31, 1999, by and among Creditrust Funding I LLC, as issuer,
Norwest Bank Minnesota, National Association, as trustee, and as
backup servicer, Creditrust Corporation, as servicer, and Asset
Guaranty Insurance Company, as note insurer.+++
10.13(e) Amendment No. 4 to Indenture and Servicing Agreement, dated as of
February 29, 2000 by and among Creditrust Funding I LLC, as issuer,
Norwest Bank Minnesota, National Association, as trustee, and as
backup servicer, Creditrust Corporation, as servicer, and Asset
Guaranty Insurance Company, as note insurer.+++
10.14(a) Credit Agreement, dated as of October 28, 1998, between Creditrust
Corporation, the Lenders party thereto and Sunrock Capital Corp.++
10.14(b) Amendment No. 1 to Credit Agreement dated as of February 12, 1999 and
effective as of October 28, 1998 by and among Creditrust Corporation,
as Borrower, and Sunrock Capital Corp., as agent.*
10.14(c) Second Amendment to Credit Agreement dated as of December 31, 1999 and
effective as of December 31, 1999, by and among Creditrust
Corporation, as Borrower, and Sunrock Capital Corp., as Agent+++
59
<PAGE>
10.15(a) 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.*
10.15(b) Amendment No. 1 to Indenture and Servicing Agreement, dated as of
February 16, 1999, by and among Creditrust SPV98-2, LLC, as issuer,
Norwest Bank Minnesota, National Association, as trustee, and as
backup servicer, Creditrust Corporation, as servicer, and Asset
Guaranty Insurance Company, as note insurer.*
10.15(c) Amendment No. 2 to Indenture and Servicing Agreement, dated as of June
1, 1999, by and among Creditrust SPV98-2, LLC, as issuer, Norwest Bank
Minnesota, National Association, as trustee, and as backup servicer,
Creditrust Corporation, as servicer, and Asset Guaranty Insurance
Company, as note insurer.+++
10.15(d) Amendment No. 3 to Indenture and Servicing Agreement, dated as of
December 31, 1999, by and among Creditrust SPV98-2, LLC, issuer,
Norwest Bank Minnesota, National Association, as trustee, and as
backup servicer, Creditrust Corporation, as servicer, and Asset
Guaranty Insurance Company, as note insurer.+++
10.16 Limited Liability Company Agreement of Creditrust SPV98-2, LLC, dated
as of December 29, 1998.*
10.17 Lease, dated January 11, 1999, by and between Butera Properties, LLC,
as Landlord, and Creditrust Card Services Corporation, as Tenant.*
10.18 Bridge Loan Agreement dated as of August 2, 1999 among dated as of
August 2, 1999 among Creditrust SPV 99-2, LLC, Creditrust SPV 99-2
Capital, Inc., Creditrust Corporation, the Lenders named therein, and
Norwest Bank Minnesota, National Association.++++
10.19 Senior Secured Bridge Note dated August 2, 1999, executed by
Creditrust SPV 99-2, LLC.++++
10.20 Guarantee and Collateral Agreement dated as of August 2, 1999 among
Creditrust SPV 99-2, LLC, Creditrust SPV 99-2 Capital, Inc., and
Norwest Bank Minnesota, National Association.+++
10.21 Parent Guarantee and Collateral Agreement dated as of August 2, 1999
made by Creditrust Corporation in favor of Norwest Bank Minnesota,
National Association.+++
10.22 Warrant Agreement dated as of August 2, 1999 between Creditrust
Corporation and the Lenders set forth therein.+++
10.23 Equity Registration Rights Agreement dated as of August 2, 1999
between Creditrust Corporation and the Lenders set forth therein.+++
10.24 Stockholders' Agreement dated as of August 2, 1999 among Joseph K.
Rensin, Creditrust Corporation, and the Lenders set forth therein.+++
10.25 Indenture and Servicing Agreement, dated as of August 31, 1999, by and
among Creditrust SPV99-1, LLC, Norwest Bank Minnesota, National
Association, and Creditrust Corporation++++
10.26 Limited Liability Company Agreement of Creditrust SPV99-1, LLC, dated
as of August 31, 1999.++++
10.27 Office Lease Agreement dated as of May 14, 1999 between Sterling York
LLC and Creditrust Corporation.+++
21.1 List of Subsidiaries.+++
23.1 Consent of Grant Thornton LLP.+++
27.1 Financial Data Schedule.+++
60
<PAGE>
* Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Reg. No. 333-70845) and incorporated herein by reference.
** 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.
+ Previously filed as an exhibit to the Company's Annual Report on Form10-K
for the year ended December 31, 1998 and incorporated herein by reference.
A portion of the exhibit has been omitted based upon a request for
confidential treatment.
++ Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Reg. No. 333-70845) and incorporated herein by reference. A
portion of this exhibit has been omitted based upon a request for
confidential treatment.
+++ Filed herewith.
++++ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999. A portion of this exhibit
has been omitted based upon a request for confidential treatment.
61
<PAGE>
EXHIBIT 10.13(d)
(Execution Copy)
AMENDMENT NO. 3
TO
INDENTURE AND SERVICING AGREEMENT
(Warehouse Facility)
_____________
CREDITRUST FUNDING I 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 21, 1999
_____________
CREDITRUST WAREHOUSE NOTES, SERIES 1998-A
___________________
<PAGE>
This Amendment No. 3 to Indenture and Servicing Agreement, dated as of
December 21, 1999 (this "Amendment No. 3"), is executed by and among Creditrust
Funding I 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,
individually ("Creditrust") and as servicer (the "Servicer") and Asset Guaranty
Insurance Company, as note insurer (the "Note Insurer").
RECITALS
WHEREAS, the parties hereto have executed and delivered an Indenture and
Servicing Agreement dated as of September 1, 1998, by and among the Issuer, the
Trustee and Backup Servicer, the Servicer and the Note Insurer, as amended by
Amendment No. 1 to Indenture and Servicing Agreement dated as of February 16,
1999, by and among the Issuer, the Trustee and Backup Servicer, the Servicer and
the Note Insurer and by Amendment No. 2 to Indenture and Servicing Agreement
dated as of March 15, 1999, by and among the Issuer, the Trustee and Backup
Servicer, the Servicer and the Note Insurer (collectively, the "Indenture"),
relating to the Issuer's variable rate Creditrust Warehouse Notes, Series 1998-
A;
WHEREAS, the Issuer and the Servicer desire to agree to certain changes in
the Indenture as set forth herein; and,
WHEREAS, the parties hereto have obtained the consent (the "Consent") of
the Noteholders evidencing not less than 66 2/3% of the Voting Interests, and
the Trustee has furnished to the Rating Agency and the Placement Agent written
notification of the substance of this Amendment No. 3 and the Consent.
NOW, THEREFORE, 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; AMENDMENT; TRUSTEE COVENANT
SECTION 1.1. Definitions. Any capitalized term used herein but not
defined herein shall have the meaning ascribed to it in the Indenture.
SECTION 1.2. Reduction in Funding Requests. Notwithstanding anything to
the contrary in the Transaction Documents, the Issuer agrees that, absent the
prior written consent of the Controlling Party (which consent may be withheld in
the exercise of the sole and absolute discretion of the Controlling Party) the
Issuer shall not request and the Noteholders shall not fund any Funding (a)
between January 1 and June 30, 2000, unless after giving effect to such Funding,
the Note Balance is less than Twenty-two Million Dollars ($22,000,000); and (b)
after July 1, 2000, unless after giving effect to such Funding the Note Balance
is less than Fifteen Million Dollars ($15,000,000). Additional conditions to
any Funding are that (a) Issuer must
<PAGE>
provide reasonable documentary support, in form and substance satisfactory to
the Controlling Party, for the Issuer's representation that the Receivables to
be purchased in connection with such Funding satisfy the requirements of Section
2.04(l) of the Indenture, and that such requirements would be satisfied after
the addition of such Receivables to the Trust Estate, and (b) the Controlling
Party gives written notice to the Noteholders that the Controlling Party is
aware of the request for such Funding and that it has no objection to such
Funding taking place, based upon the conditions to such Funding set forth herein
and in the Transaction Documents (it being understood that the additional
condition set forth in this clause (b) shall not imply that the Controlling
Party makes any representation or warranty whatsoever with respect to the
satisfaction of the conditions to such Funding, nor shall it imply any exercise
of any degree of diligence whatsoever in determining whether or not such
conditions have been satisfied) and the Controlling Party agrees to give such
notice if it has no such objection. The Trustee shall have no responsibility to
determine whether any condition precedent to a Funding has occurred, except to
the extent that a Responsible Officer of the Trustee has knowledge that any such
condition has not been satisfied.
SECTION 1.3. Increase to Reserve Account.
(a) The definition of "Required Reserve Amount" in the Indenture is
hereby amended to read as follows:
"Required Reserve Amount" means $900,000 until (a) the date that is
one Business Day after the payment by the "98-1 Indenture Trustee" of the amount
in the "98-1 Reserve Account" to the "98-1 Issuer" and thereafter the Required
Reserve Amount shall be increased by $1,300,000; and (b) the date that is one
Business Day after payment by the "98-2 Indenture Trustee" of the amount in the
"98-2 Reserve Account" to the "98-2 Issuer" and thereafter the Required Reserve
Amount will be increased by $3,250,000. The terms "98-1 Indenture Trustee,"
"98-1 Reserve Account" and "98-1 Issuer" mean the Trustee, the Reserve Account
and the Issuer, respectively, under the Indenture and Servicing Agreement, dated
as of June 1, 1998 among Creditrust SPV2, LLC, as Issuer, the Trustee, the
Servicer and the Note Insurer. The terms "98-2 Indenture Trustee," "98-2
Reserve Account" and "98-2 Issuer" mean the Trustee, the Reserve Account and the
Issuer, respectively under the Indenture and Servicing Agreement dated as of
December 1, 1998 among Creditrust SPV98-2, LLC as Issuer, the Trustee, the
Servicer and the Note Insurer.
(b) Section 4.05 of the Indenture is hereby amended by amending the
second sentence in Section 4.05(a) to read as follows:
"Not later than the first Funding Date, the Issuer shall deposit
Nine hundred thousand Dollars ($900,000) into the Reserve Account; the Issuer
shall deposit an additional One million three hundred thousand Dollars
($1,300,000) into the Reserve Account not later than one Business Day after the
payment by the "98-1 Indenture Trustee" of the amount in the "98-1 Reserve
Account" to the "98-1 Issuer" (as such terms are defined in the definition of
"Required Reserve Amount."); and the Issuer shall deposit an additional Three
Million Two Hundred Fifty Thousand Dollars ($3,250,000) into the Reserve Account
not later than one Business Day after
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<PAGE>
the payment by the "98-2 Indenture Trustee" of the amount in the "98-2 Reserve
Account" to the "98-2 Issuer" (as such terms are defined in the definition of
"Required Reserve Amount".)
SECTION 1.4. Inspection Rights; Successor Servicer.
(a) The Indenture is amended by inserting the following Section 11.11
after the conclusion of Section 11.10 thereof:
"SECTION 11.11 Inspection.
In addition to, and not by way of limitation of, any other rights of
the Controlling Party hereunder or under the other Transaction Documents,
each of the Issuer and the Servicer shall permit the Controlling Party,
or any representative thereof, at its expense and upon prior written
notice to the Issuer or Servicer (as the case may be), to visit and
inspect any of the properties of the Issuer or the Servicer (as the case
may be), to examine all of its books of account, records, reports, and
other papers, to make copies and extracts therefrom and to discuss its
affairs, finances (including liquidity position) and accounts with its
officers, employees, and independent public accountants (and by this
provision each of the Issuer and the Servicer authorizes said accountants
to discuss the finances and affairs of the Issuer or the Servicer), all
at such reasonable times and as often as may be reasonably requested.
All information obtained by the Controlling Party, or its representative,
whether pursuant to this Section 11.11 or otherwise, shall be maintained
by the Controlling Party, or its representative, as applicable, in
confidence and shall not be disclosed to any other Person (other than any
agents, consultants, attorneys or accountants of such Person, any
assignee or participant or potential assignee or participant of such
Person, any rating agency rating the Notes or the indebtedness, claims
paying ability or financial strength of such Person, or any reinsurer or
potential reinsurer of such Person), unless such disclosure is ordered by
a court of applicable jurisdiction."
By executing this Amendment No. 3 below, Creditrust, in its individual capacity,
agrees that in the event it is no longer the Servicer, but only until one year
and one day after the Note Balance has been paid in full, the foregoing Section
11.11 shall apply with equal force to Creditrust in its individual capacity as
if it were the "Servicer" as set forth in the foregoing Section 11.11.
-3-
<PAGE>
(b) SECTIONS 8.02 and 8.03 of the Indenture are hereby amended in
their entirety to read as follows:
"SECTION 8.02 Consequences of a Servicer Default; Other Termination of
Servicing.
(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 (a "Servicing Termination Notice") 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. In addition, the rights and
obligations of the Servicer shall automatically terminate upon the last
day of each calendar month, unless the Servicer is appointed in writing
by the Controlling Party for the successive monthly period. On or after
the receipt by the Servicer of a Servicing Termination Notice, or, if
earlier, upon the automatic termination of the rights and obligations of
the Servicer in accordance with the terms of the next preceding sentence,
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 for such costs and
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<PAGE>
expenses; provided, however, that the amount of such costs and expenses
shall not exceed $75,000 (the amount of such costs and expenses are
referred to herein as the "Transition Fees").
(b) In addition to the 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,
or, if earlier, upon the automatic termination of the rights and
obligations of the Servicer in accordance with the terms of clause (a)
above, 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 Servicing Termination
Notice pursuant to Section 8.02 or tenders its resignation pursuant to
Section 7.05, or, if earlier, on and after the automatic termination of
the rights and obligations of the Servicer in accordance with the terms
of Section 8.02(a) above, 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
-5-
<PAGE>
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.
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
the Receivables as provided in the second sentence following this
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 or the Note Insurer 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."
(c) Section 9.01(c) of the Indenture is hereby amended to read as follows:
(i) (A) prior to the occurrence of a Servicer Default actually known
to a Responsible Officer of the Trustee, if any, and after the
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<PAGE>
curing or waiving of all such Servicer Defaults that may have
occurred, or (B) prior to the occurrence of the automatic termination
of the rights and obligations of the Servicer pursuant to Section
8.02, 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;
(d) Section 9.04(a) of the Indenture is hereby amended to read as follows:
(v) (A) prior to the occurrence of a Servicer Default (actually
known to a Responsible Officer of the Trustee), if any, and after the
curing or waiving of all Servicer Defaults that may have occurred, or
(B) prior to the occurrence of the automatic termination of the rights
and obligations of the Servicer pursuant to Section 8.02, the Trustee
shall not be bound to make any investigation into the facts of matters
stated in any resolution, certificate, statement, instrument, opinion,
report, notice, request, consent, order, approval, bond or other paper
or document, unless requested in writing to do so by the Note Insurer
or the Noteholders evidencing not less than 25% of the Voting
Interests; provided, however, that if the payment within a reasonable
time to the Trustee of the costs, expenses or liabilities likely to be
incurred by it in the making of such investigation is, in the opinion
of the Trustee, not reasonably assured to the 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
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<PAGE>
SECTION 1.5. Sales and Prepayments.
The Indenture is amended by designating Section 10.05 as Section 10.05(a),
and by adding the following as Section 10.05(b):
"(b) The Issuer shall also have the option to partially prepay
the Note Balance on any Business Day which is the last day of a Note
Rate Period, and to obtain a release of the Trustee's security
interest from certain Receivables, in connection with sales from time
to time of such Receivables (the "Sold Receivables"), which sale must
satisfy only the following requirements, notwithstanding anything to
the contrary in the Transaction Documents:
(i) the Controlling Party has given its prior written
consent (which consent shall be based upon its investigation of the
facts and circumstances relating to such sale, which the Servicer and
the Issuer agree to facilitate by way of production of any information
relating to such sale reasonably requested by the Controlling Party,
including without limitation any and all information distributed to
prospective purchasers of such Sold Receivables, the sales price paid
by Creditrust for such Receivables and the identity of such
prospective purchasers, and shall not be unreasonably withheld) to the
terms and conditions of such sale, including but not limited to the
purchase price paid by the purchaser of such Receivables (which amount
shall be deemed to be the Minimum Repayment Amount for the Sold
Receivables, but such amount shall not be deemed to be a Minimum
Repayment Amount for purposes of the definition of Interest Only
Payment Date);
(ii) the Issuer pays to the Note Payment Account pursuant
to Section 4.03 a Prepayment Amount which is not less than the Minimum
Repayment Amount for the Sold Receivables to be released pursuant to
this Section 10.05(b).
The election of the Issuer to partially prepay the Notes pursuant to
this Section 10.05(b) shall be evidenced by delivery to the Trustee
and the Noteholders and the Note Insurer no later than three Business
Days preceding the date on which such prepayment will be effected of
an Officer's Certificate of the Issuer stating the Issuer's intention
to partially prepay the Notes pursuant to this Section 10.05(b),
specifying the Minimum Repayment Amount for the Sold Receivables and
the portion payable to each Noteholder, and identifying the Sold
Receivables and identifying the purchaser
-8-
<PAGE>
of the Sold Receivables. No prepayment premium or penalty is payable
with respect to any such prepayment.
The Trustee shall not have any duty or obligation to monitor the
requirements related to the sale or transfer of the Sold Receivables
and the release of the security interest related thereto and shall
have no liability to any party with regard to such sale, transfer or
release."
SECTION 1.6. Note Balance Reduction.
Section 8.01 of the Indenture is amended by adding the following:
"(o) the Note Balance is more than the following amounts on
the Payment Dates in the following months, after application of
payments on the Notes on such dates: April, 2000: $22,000,000; and
July, 2000: $15,000,000."
SECTION 1.7. Concentration Limit Report.
Section 3.06 of the Indenture is amended by adding the following:
"(c) By the 15th day of each month, beginning January 15,
2000, the Servicer shall deliver to the Trustee and the Note Insurer a
report executed by a Responsible Officer of the Servicer which shall
provide information regarding the Issuer's compliance with the
requirements set forth in Section 2.04(l) (iii) through (x) of the
Indenture, together with such documentary support for such information
as the Servicer is able to reasonably provide."
SECTION 1.8. Trustee Covenant. In accordance with Section 11.01(d) of the
Indenture, the Trustee hereby agrees and covenants to furnish, promptly after
the execution of this Amendment No. 3, written notification of the substance of
this Amendment No. 3 and the Consent to each of the Noteholders.
ARTICLE II
MISCELLANEOUS PROVISIONS
SECTION 2.1. Amendment. This Amendment No. 3 shall only be amended in the
same manner as the Indenture shall be amended.
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<PAGE>
SECTION 2.2. Entire Agreement; Effect. This Amendment No. 3, together
with the Transaction Documents, is intended by the parties to and does
constitute the entire agreement of the parties with respect to the transaction
contemplated hereunder. This Amendment No. 3 supersedes any and all prior
understandings, and it does not alter, amend or waive any of the terms or
provisions of the Indenture except for those terms or provisions expressly
amended hereby.
SECTION 2.3. Governing Law. This Amendment No. 3 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 Amendment No. 3 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 2.4. Severability of Provisions; Counterparts. If any one or more
of the covenants, agreements, provisions or terms of this Amendment No. 3 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 Amendment
No. 3 and shall in no way affect the validity or enforceability of the other
provisions of this Amendment No. 3 or the Notes, or the rights of the
Noteholders. This Amendment No. 3 may be executed simultaneously in any number
of counterparts, each of which shall be deemed to be an original, and all of
which shall constitute but one and the same instrument.
SECTION 2.5. Note Insurer. This Amendment No. 3 is not evidence of any
position by the Note Insurer, affirmative or negative, as to whether action by
the Noteholders, or any other party, is required in addition to the execution of
this Amendment No. 3 by the Note Insurer. No representation is made by the Note
Insurer as to the necessity for or the satisfaction of any additional action or
condition under the Indenture with respect to the amendment thereof. This
Amendment No. 3 does not modify the obligations of the Note Insurer under the
Policy as set forth therein.
SECTION 2.6. Conditions Precedent. This Amendment No. 3 shall become
effective as of December 21, 1999 upon the satisfaction of the following
conditions precedent:
(a) The Note Insurer shall have received:
(i) fully executed counterparts of this Amendment No. 3 (which may be
by facsimile); and
(ii) a favorable supplemental opinion of Piper Marbury Rudnick & Wolfe
LLP, special counsel to the Issuer and the Servicer, covering the
validity, legality and enforceability of this Amendment No. 3 and
certain bankruptcy-remoteness matters, all in form and substance
reasonably satisfactory to the Note Insurer and the Note
Insurer's counsel; and
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<PAGE>
(b) No event or condition has occurred and is continuing, or would result
from the execution, delivery or performance of this Amendment No. 3, that would
constitute an Event of Default or a Servicer Default.
SECTION 2.7. Representations, Warranties and Covenants. Upon the
effectiveness of this Amendment No. 3, each of the Issuer and the Servicer
hereby remakes and reaffirms all covenants, representations and warranties made
by it in the Indenture (except, in each case, to the extent that such covenants,
representations or warranties expressly speak as to another date).
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment No. 3 to be duly
executed by their respective officers as of the day and year first above
written.
CREDITRUST FUNDING I LLC,
as Issuer
By: _______________________________
Joseph K. Rensin
President
CREDITRUST CORPORATION,
as Servicer
By: _______________________________
Joseph K. Rensin
Chairman and
Chief Executive Officer
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, not in its individual capacity,
but solely as Trustee and as Backup Servicer
By: _______________________________
Casey P. Kelly
Corporate Trust Officer
ASSET GUARANTY INSURANCE
COMPANY
By: _______________________________
Bonita Z. Dorland
Senior Vice President
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<PAGE>
CONSENT TO AMENDMENT NO. 3
The undersigned is a Noteholder under a certain Indenture and Servicing
Agreement dated as of September 1, 1998, among Creditrust Funding I 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"), as
amended by Amendment No. 1 to Indenture and Servicing Agreement dated as of
February 16, 1999, by and among the Issuer, the Trustee and Backup Servicer, the
Servicer and the Note Insurer and by Amendment No. 2 to Indenture and Servicing
Agreement dated as of March 15, 1999, by and among the Issuer, the Trustee and
Backup Servicer, the Servicer and the Note Insurer (collectively, the
"Indenture"). Any capitalized term used in this Consent without a definition
shall have the meaning set forth in the Indenture.
The undersigned hereby consents to Amendment No. 3 to the Indenture, a copy
of which is attached to this Consent.
BANCO SANTANDER, S.A.,
New York Branch
By:__________________________________
John Hennessy
Manager of Asset Backed Finance
By:__________________________________
Robert E. Schlegel
Vice President
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<PAGE>
EXHIBIT 10.13(e)
[Execution Copy]
AMENDMENT NO. 4
TO
INDENTURE AND SERVICING AGREEMENT
(Warehouse Facility)
_____________
CREDITRUST FUNDING I 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 February 29, 2000
_____________
CREDITRUST WAREHOUSE NOTES, SERIES 1998-A
___________________
<PAGE>
This Amendment No. 4 to Indenture and Servicing Agreement, dated as of
February 29, 2000 (this "Amendment No. 4"), is executed by and among Creditrust
Funding I 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,
individually ("Creditrust") and as servicer (the "Servicer") and Asset Guaranty
Insurance Company, as note insurer (the "Note Insurer").
RECITALS
WHEREAS, the parties hereto have executed and delivered an Indenture and
Servicing Agreement dated as of September 1, 1998, by and among the Issuer, the
Trustee and Backup Servicer, the Servicer and the Note Insurer, as amended by
Amendment No. 1 to Indenture and Servicing Agreement dated as of February 16,
1999, by and among the Issuer, the Trustee and Backup Servicer, the Servicer and
the Note Insurer, Amendment No. 2 to Indenture and Servicing Agreement dated as
of March 15, 1999, by and among the Issuer, the Trustee and Backup Servicer, the
Servicer and the Note Insurer and Amendment No. 3 to Indenture and Servicing
Agreement dated as of December 21, 1999, by and among the Issuer, the Trustee
and Backup Servicer, the Servicer and the Note Insurer (collectively, the
"Indenture"), relating to the Issuer's variable rate Creditrust Warehouse Notes,
Series 1998-A;
WHEREAS, the Issuer and the Servicer desire to agree to certain changes in
the Indenture as set forth herein; and,
WHEREAS, the parties hereto have obtained the consent (the "Consent") of
the Noteholders evidencing not less than 66 2/3% of the Voting Interests, and
the Trustee has furnished to the Rating Agency and the Placement Agent written
notification of the substance of this Amendment No. 4 and the Consent.
NOW, THEREFORE, 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; AMENDMENTS
SECTION 1.1. Definitions. Any capitalized term used herein but not
defined herein shall have the meaning ascribed to it in the Indenture.
SECTION 1.2. Amendments to Definitions.
(a) The definition of "Servicing Fee" in the Indenture is
hereby amended to delete the reference to "20%" and substitute
therefor a reference to "35%".
<PAGE>
(b) The definition of "Scheduled Termination Date" in the
Indenture is hereby amended in its entirety to read as follows:
"'Scheduled Termination Date' means February 29, 2000."
--------------------------
SECTION 1.3. Note Balance Reduction.
Section 8.01 (o) of the Indenture is hereby amended in its entirety to
read as follows:
"(o) the Note Balance is more than $19,000,000 on the
Payment Date occurring in July, 2000, after application of
payments on the Notes on such date."
ARTICLE II
MISCELLANEOUS PROVISIONS
SECTION 2.1. Amendment. This Amendment No. 4 shall only be amended in the
same manner as the Indenture shall be amended.
SECTION 2.2. Entire Agreement; Effect. This Amendment No. 4, together
with the Transaction Documents, is intended by the parties to and does
constitute the entire agreement of the parties with respect to the transaction
contemplated hereunder. This Amendment No. 4 supersedes any and all prior
understandings, and it does not alter, amend or waive any of the terms or
provisions of the Indenture except for those terms or provisions expressly
amended hereby.
SECTION 2.3. Governing Law. This Amendment No. 4 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 Amendment No. 4 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 2.4. Severability of Provisions; Counterparts. If any one or more
of the covenants, agreements, provisions or terms of this Amendment No. 4 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 Amendment
No. 4 and shall in no way affect the validity or enforceability of the other
provisions of this Amendment No. 4 or the Notes, or the rights of the
Noteholders. This Amendment No. 4 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.
-2-
<PAGE>
SECTION 2.5. Note Insurer. This Amendment No. 4 is not evidence of any
position by the Note Insurer, affirmative or negative, as to whether action by
the Noteholders, or any other party, is required in addition to the execution of
this Amendment No. 4 by the Note Insurer. No representation is made by the Note
Insurer as to the necessity for or the satisfaction of any additional action or
condition under the Indenture with respect to the amendment thereof. This
Amendment No. 4 does not modify the obligations of the Note Insurer under the
Policy as set forth therein.
SECTION 2.6. Conditions Precedent. This Amendment No. 4 shall become
effective as of February 29, 2000 upon the satisfaction of the following
conditions precedent:
(a) The Note Insurer shall have received fully executed counterparts of
this Amendment No. 4 (which may be by facsimile); and
(b) No event or condition has occurred and is continuing, or would result
from the execution, delivery or performance of this Amendment No. 4, that would
constitute an Event of Default or a Servicer Default.
SECTION 2.7. Representations, Warranties and Covenants. Upon the
effectiveness of this Amendment No. 4, each of the Issuer and the Servicer
hereby remakes and reaffirms all covenants, representations and warranties made
by it in the Indenture (except, in each case, to the extent that such covenants,
representations or warranties expressly speak as to another date).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-3-
<PAGE>
[Amendment No. 4 to Indenture - Signature Page]
IN WITNESS WHEREOF, the parties have caused this Amendment No. 4 to be duly
executed by their respective officers as of the day and year first above
written.
CREDITRUST FUNDING I LLC,
as Issuer
By: _______________________________
Joseph K. Rensin
President
CREDITRUST CORPORATION,
as Servicer
By: _______________________________
Joseph K. Rensin
Chairman and
Chief Executive Officer
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, not in its individual capacity,
but solely as Trustee and as Backup Servicer
By: _______________________________
Casey P. Kelly
Corporate Trust Officer
ASSET GUARANTY INSURANCE COMPANY
By: _______________________________
Bonita Z. Dorland
Senior Vice President
<PAGE>
CONSENT TO AMENDMENT NO. 4
The undersigned is a Noteholder under a certain Indenture and Servicing
Agreement dated as of September 1, 1998, among Creditrust Funding I 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"), as
amended by Amendment No. 1 to Indenture and Servicing Agreement dated as of
February 16, 1999, by and among the Issuer, the Trustee and Backup Servicer, the
Servicer and the Note Insurer, Amendment No. 2 to Indenture and Servicing
Agreement dated as of March 15, 1999, by and among the Issuer, the Trustee and
Backup Servicer, the Servicer and the Note Insurer and Amendment No. 3 to
Indenture and Servicing Agreement dated as of December 21, 1999, by and among
the Issuer, the Trustee and Backup Servicer, the Servicer and the Note Insurer
(collectively, the "Indenture"). Any capitalized term used in this Consent
without a definition shall have the meaning set forth in the Indenture.
The undersigned hereby consents to Amendment No. 4 to the Indenture, a copy
of which is attached to this Consent.
BANCO SANTANDER, S.A.,
New York Branch
By:__________________________________
John Hennessy
Manager of Asset Backed Finance
By:__________________________________
Robert E. Schlegel
Vice President
<PAGE>
EXHIBIT 10.14(c)
SECOND AMENDMENT TO CREDIT AGREEMENT
SECOND AMENDMENT TO CREDIT AGREEMENT (this "Second Amendment"), dated as of
----------------
December 30, 1999, among CREDITRUST CORPORATION, (the "Borrower"), the several
--------
Lenders and other financial institutions parties to the Credit Agreement (as
hereinafter defined) (individually a "Lender"; collectively, the "Lenders"), and
------ -------
SUNROCK CAPITAL CORP., as agent (in such capacity, the "Agent").
-----
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrower, the Lenders and the Agent are parties to a Credit
Agreement dated as of October 28, 1998 (as heretofore amended, supplemented or
otherwise modified, the "Credit Agreement");
----------------
WHEREAS, the Borrower has requested that certain modifications be made to
the Credit Agreement and the Agent and the Lenders have agreed to so amend the
Credit Agreement on the terms and subject to the conditions set forth herein,
including converting the revolving line of credit extended to the Borrower
pursuant to the Credit Agreement to a discretionary line of credit;
NOW, THEREFORE, in consideration of the foregoing and for other
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Credit Agreement are used herein as therein defined.
2. Amendments to Credit Agreement.
------------------------------
(a) Subsection 2.1(a) of the Credit Agreement is hereby amended and
restated in full to read:
"(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 earlier of
December 30, 1999 (the "Cut-off 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
<PAGE>
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) The following subsection (c) shall be added to Section 2.1 of the
Credit Agreement:
"(c) On and following the Cut-off Date, any Loans requested to
be made by any Lender shall be made at the sole discretion
of such Lender on such terms and conditions as are
satisfactory to such Lender but in any event subject to the
limitations of the second proviso in subsection 2.1(a). Any
Lender may decline to make such requested Loan."
(c) Subsection 2.5(b) of the Credit Agreement is hereby amended and
restated in full to read:
"(b) The outstanding principal balance of each Borrowing (that
is, the total amount of the Loans made to purchase an Acquired
Eligible Portfolio) made prior to the Cut-off Date which has not
been prepaid in full pursuant to the provisions of subsection 2.9
on or before the date which in the case of a Borrowing prior to
the Cut-Off Date, 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. Notwithstanding the foregoing, the outstanding
principal balance of all Loans shall be due and payable on the
Termination Date."
(d) Subsection 6.2(d) of the Credit Agreement is hereby amended and
restated in full to read:
"(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 $4,750,000 in such Debt and Capital Leases in the
aggregate in fiscal year 1999, or $2,000,000 in the aggregate in
any subsequent 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;"
(e) Subsection 7.1(f) of the Credit Agreement is hereby amended and
restated in full to read:
<PAGE>
"(f) The Borrower, any Subsidiary (other than a Special Purpose
Entity) of the Borrower shall (i) default in the payment of any
amount due under any Debt of the Borrower, or any Subsidiary
(other than a Special Purpose Entity) 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"
3. Representations and Warranties. The Borrower hereby represents and
------------------------------
warrants to the Lenders and the Agent that:
(a) There exists no Default or Event of Default under the Credit
Agreement as amended hereby
(b) The representations and warranties made in the Credit Agreement
are true and correct in all material respects on and as of the date hereof as if
made on and as of the date hereof; and
(c) The execution and delivery of this First Amendment by and on
behalf of the Borrower has been duly authorized by all requisite action on
behalf of the Borrower and this First Amendment constitutes the legal, valid and
binding obligation of the Borrower, enforceable against it 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).
4. Conditions Precedent. The effectiveness of the amendments and waiver
--------------------
set forth herein is subject to the fulfillment, to the satisfaction of the Agent
and its counsel, of the following conditions precedent:
(a) The Borrower shall have delivered to the Agent the following, all
of which shall be in form and substance satisfactory to the Agent and shall be
duly completed and executed:
<PAGE>
(i) This First Amendment; and
(ii) Copies, certified by the Secretary or an Assistant Secretary
of the Borrower of resolutions of the board of directors of the Borrower in
effect on the date hereof authorizing the execution, delivery and performance of
this Second Amendment and the other documents and transactions contemplated
hereby;
(b) The representations and warranties set forth in the Credit
Agreement shall be true and correct in all material respects on and as of the
date hereof.
(c) The Borrower shall have paid to the Agent an additional fee of
$100,000.
5. Ratification; References; No Waiver. Except as expressly amended by
-----------------------------------
this Second Amendment, the Credit Agreement shall continue to be, and shall
remain, unaltered and in full force and effect in accordance with its terms.
All references in the Credit Agreement and the other Loan Documents to the
Credit Agreement shall be to the Credit Agreement as amended by this First
Amendment. This First Amendment does not and shall not be deemed to constitute
a waiver by the Agent or the Lenders of any Default or Event of Default or of
any of the Agent's or the Lenders' other rights or remedies.
6. Release and Indemnity. Recognizing and in consideration of the
---------------------
Lenders' and the Agent's agreement to the amendments set forth herein, the
Borrower hereby waives and releases the Lenders and the Agent and their
officers, attorneys, agents, and employees from any liability, suit, damage,
claim, loss or expense of any kind or nature whatsoever and howsoever arising
that the Borrower ever had or now has against any of them arising out of or
relating to any Lender's or the Agent's acts or omissions with respect to this
First Amendment, the Credit Agreement, the other Loan Documents or any other
matters described or referred to herein or therein. The Borrower further hereby
agrees to indemnify and hold the Agent and the Lenders and their respective
officers, attorneys, agents and employees harmless from any loss, damage,
judgment, liability or expense (including counsel fees) suffered by or rendered
against the Lenders or the Agent or any of them on account of anything arising
out of this First Amendment, the Credit Agreement, the other Loan Documents or
any other document delivered pursuant thereto up to and including the date
hereof; provided that, the Borrower shall not have any obligation hereunder to
-------- ----
any Lender or the Agent with respect to indemnified liabilities arising from the
gross negligence or willful misconduct of such Lender or the Agent.
7. Miscellaneous.
-------------
(a) Expenses. The Borrower agrees to pay all of the Agent's
--------
reasonable out-of-pocket expenses incurred in connection with the preparation,
negotiation and execution of this First Amendment including, without limitation,
the reasonable fees and expenses of Ballard Spahr Andrews & Ingersoll, LLP.
(b) Governing Law. This First Amendment shall be governed by and
-------------
construed in accordance with the laws of the Commonwealth of Pennsylvania.
<PAGE>
(c) Successor and Assigns. The terms and provisions of this First
---------------------
Amendment shall be binding upon and shall inure to the benefit of the Borrower,
the Agent and the Lenders and their respective successors and assigns.
(d) Counterparts. This First Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, and all of which
shall constitute one and the same instrument.
(e) Headings. The headings of any paragraph of this First Amendment
--------
are for convenience only and shall not be used to interpret any provision
hereof.
(f) Modifications. No modification hereof or any agreement referred
-------------
to herein shall be binding or enforceable unless in writing and signed on behalf
of the party against whom enforcement is sought.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment 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: Joseph K. Rensin
----------------
Title: Chairman & CEO
SUNROCK CAPITAL CORP., as Agent and as a
Lender
By: John Erwin
----------
Title: S.V.P.
<PAGE>
EXHIBIT 10.15(C)
AMENDMENT NO. 2
TO
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 June 1, 1999
_____________
CREDITRUST RECEIVABLES-BACKED NOTES, SERIES 1998-2
___________________
<PAGE>
This Amendment No. 2 to Indenture and Servicing Agreement, dated as of June
1, 1999 (this "Amendment No. 2), 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").
RECITALS
WHEREAS, the parties hereto have executed and delivered an Indenture and
Servicing Agreement (the "Indenture") dated as of December 1, 1998, by and among
the Issuer, the Trustee and Backup Servicer, the Servicer and the Note Insurer
in connection with the issuance and sale by the Issuer of the 8.61% Creditrust
Receivables-Backed Notes, Series 1998-2;
WHEREAS, the parties hereto and the Noteholders have agreed that Schedule B
to the Indenture provided for incorrect amounts, and are willing to amend
Schedule B as hereinafter provided;
WHEREAS, the parties hereto have obtained the consent (the "Consent") of
the Noteholders evidencing not less than 66 2/3% of the Voting Interests, and
the Trustee has furnished to the Rating Agency and the Placement Agent written
notification of the substance of this Amendment No. 2 and the Consent.
NOW, THEREFORE, 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; AMENDMENTS; TRUSTEE COVENANT
SECTION 1.1. Definitions. Any capitalized term used herein but not
defined herein shall have the meaning ascribed to it in the Indenture.
-1-
<PAGE>
SECTION 1.2. Schedule B. Schedule B to the Indenture is hereby amended to
read as follows:
SCHEDULE B
Minimum Cumulative Net Proceeds
<TABLE>
<CAPTION>
Quarter Minimum Cumulative
Ending Net Proceeds
------ ------------
<S> <C>
Jun-99 9,099,497
Dec-99 19,673,588
Jun-2000 27,729,564
Dec-2000 34,628,059
Jun-2001 41,118,441
Dec-2001 47,069,915
Jun-2002 52,589,158
Dec-2002 56,258,625
Jun-2003 59,053,246
</TABLE>
SECTION 1.3. Trustee Covenant. In accordance with Section 11.01(d) of the
Indenture, the Trustee hereby agrees and covenants to furnish, promptly after
the execution of this Amendment No. 2, written notification of the substance of
this Amendment No. 2 and the Consent to each of the Noteholders.
ARTICLE II
MISCELLANEOUS PROVISIONS
SECTION 2.1. Amendment. This Amendment No. 2 shall only be amended in the
same manner as the Indenture shall be amended.
SECTION 2.2. Entire Agreement; Effect. This Amendment No. 2, together
with the Transaction Documents, is intended by the parties to and does
constitute the entire agreement of the parties with respect to the transaction
contemplated hereunder. This Amendment No. 2 supersedes any and all prior
understandings, and it does not alter, amend or waive any of the terms or
provisions of the Indenture except for those terms or provisions expressly
amended hereby.
SECTION 2.3. Governing Law. This Amendment No. 2 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 Amendment No.2 shall
be determined in accordance with such laws, including Section 5-2402 of the
General Obligation Law of New York, but otherwise without regard to conflict of
laws provisions.
-2-
<PAGE>
SECTION 2.4. Severability of Provisions; Counterparts. If any one or more
of the covenants, agreements, provisions or terms of this Amendment No. 2 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 Amendment
No. 2 and shall in no way affect the validity or enforceability of the other
provisions of this Amendment No. 2 or the Notes, or the rights of the
Noteholders. This Amendment No. 2 may be executed simultaneously in any number
of counterparts, each of which shall be deemed to be an original, and all of
which shall constitute but one and the same instrument.
SECTION 2.5. Note Insurer. This Amendment No. 2 is not evidence of any
position by the Note Insurer, affirmative or negative, as to whether action by
the Noteholders, or any other party, is required in addition to the execution of
this Amendment No. 2 by the Note Insurer. No representation is made by the Note
Insurer as to the necessity for or the satisfaction of any additional action or
condition under the Indenture with respect to the amendment thereof. This
Amendment No. 2 does not modify the obligations of Note Insurer under the Policy
as set forth therein.
SECTION 2.6. Effective Date. This Amendment No. 2 shall take effect as of
June 1, 1999.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment No. 2 to be duly
executed by their respective officers as of the day and year first above
written.
CREDITRUST SPV98-2, LLC,
as Issuer
By: _______________________________
Joseph K. Rensin
President
CREDITRUST CORPORATION,
as Servicer
By: _______________________________
Joseph K. Rensin
Chairman and
Chief Executive Officer
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, not in its individual capacity,
but solely as Trustee and as Backup Servicer
By: _______________________________
Casey Kelly
Corporate Trust Officer
ASSET GUARANTY INSURANCE
COMPANY
By: _______________________________
Vice President
-4-
<PAGE>
CONSENT TO AMENDMENT No. 2
The undersigned is a Noteholder under a certain Indenture and Servicing
Agreement (the "Indenture") dated as of December 1, 1998, 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"). Any capitalized term used in this Consent without a
definition shall have the meaning set forth in the Indenture.
The undersigned hereby consents to Amendment No. 2 to the Indenture, a copy
of which is attached to this Consent.
METROPOLITAN LIFE INSURANCE COMPANY
By:__________________________________
NATIONAL BANK OF ALASKA
By:__________________________________
ABSF II LLC*
By:__________________________________
*Beneficial owner for TICE & Co.
<PAGE>
EXHIBIT 10.15(d)
This Amendment No. 3 to Indenture and Servicing Agreement, dated as of
December 21, 1999 (this "Amendment No. 3"), 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,
individually ("Creditrust") and as servicer (the "Servicer") and Asset Guaranty
Insurance Company, as note insurer (the "Note Insurer").
RECITALS
WHEREAS, the parties hereto have executed and delivered an Indenture and
Servicing Agreement (the "Indenture") dated as of December 1, 1998, by and among
the Issuer, the Trustee and Backup Servicer, the Servicer and the Note Insurer,
as amended by Amendment No. 1 dated as of February 16, 1999 and Amendment No. 2
dated as of June 1, 1999, in connection with the issuance and sale by the Issuer
of the 8.61% Creditrust Receivables-Backed Notes, Series 1998-2;
WHEREAS, subject to the terms and conditions hereof, the parties hereto and
the Noteholders have agreed to amend the Indenture to make the modifications
provided for herein; and
WHEREAS, the parties hereto have obtained the consent (the "Consent") of
the Noteholders evidencing not less than 66 2/3% of the Voting Interests, and
the Trustee has furnished to the Rating Agency and the Placement Agent written
notification of the substance of this Amendment No. 3 and the Consent.
NOW, THEREFORE, 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; AMENDMENTS; TRUSTEE COVENANT
SECTION 1.1. Definitions. Any capitalized term used herein but not
defined herein shall have the meaning ascribed to it in the Indenture.
SECTION 1.2. Definition of Net Proceeds. Section 1.01 of the Indenture is
hereby amended by changing the definition of Net Proceeds to read in its
entirety as follows:
"Net Proceeds" means (i) 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 and (ii) an amount equal
to seventy percent (70%) of all monies deposited into the Collection
Account in connection with the assignment, sale, transfer or conveyance of
a Receivable by the Issuer in connection with the sale of Receivables
permitted pursuant to Section 1.3 of Amendment No. 3 to this Indenture
-1-
<PAGE>
(each a "Specified Receivable"); provided, however, that solely with
respect to the definition of Servicing Fee in this Section 1.01, monies
described in the foregoing clause (ii) shall not constitute Net Proceeds;
provided, further, however, that solely with respect to the definition of
Available Funds in this Section 1.01, one hundred percent (100%) of the
monies described in the foregoing clause (ii) shall constitute Net
Proceeds. Third-Party Fees and court costs incurred in connection with
collecting a Receivable (other than a Specified 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.
SECTION 1.3. Disposition of Receivables.
Notwithstanding anything to the contrary in this Indenture or in any other
Transaction Document, the assignment, sale, transfer and conveyance of any of
the Receivables identified by the Servicer or the Issuer to the Trustee and the
Controlling Party for sale pursuant to this Section 1.3, including all property
and rights described in Section 2.01(b) of the Indenture which are related to
such Receivables (the "Sold Receivables") shall be permitted to occur under the
Indenture and the other Transaction Documents, provided that the following
conditions are satisfied:
(a) the Controlling Party shall have given its prior written consent to
the terms and conditions of each such sale, including but not limited to the
total purchase price payable by the purchaser of such Receivables (the "Purchase
Price"), which consent shall be based upon its investigation of the facts and
circumstances relating to such sale, which the Servicer and the Issuer agree to
facilitate by way of production of any information relating to such sale
reasonably requested by the Controlling Party, including without limitation any
and all information distributed to prospective purchasers of such Sold
Receivables, the sales price paid by Creditrust for such Receivables and the
identity of such prospective purchasers, and shall not be unreasonably withheld;
(b) In connection with the sale of the Sold Receivables, the Issuer
deposits or causes to be deposited into the Collection Account (for application
in accordance with Sections 4.03(b) and 4.04(b) of the Indenture) an amount
which is not less than the Purchase Price; and
(c) The purchaser of the Sold Receivables has agreed that it has no
recourse to Issuer with respect to the Sold Receivables and that it is
purchasing such Receivables "as is, where is" and without the benefit of any
representation or warranty whatsoever by or on behalf of the Issuer, except as
to Issuer's title to the Sold Receivables and as to the absence of any lien
thereon created by Issuer.
SECTION 1.4. Section 8.01(g) and Schedule B Amendments.
(a) Section 8.01(g) is hereby amended to read as follows:
"(g) On June 30, 1999, then on March 31, 2000, and then on the last
day of each June and December thereafter, the cumulative amount of Net Proceeds
in respect of all
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<PAGE>
Receivables from the Closing Date to such date is less than the amounts
specified in Schedule B;"
(b) Schedule B is hereby amended by deleting the date "December 1999" and
the Minimum Cumulative Net Proceeds amount related thereto, and inserting in
place thereof the date "March 2000" and a Minimum Cumulative Net Proceeds amount
opposite March 2000 of $23,433,027.
SECTION 1.5. Release.
Upon any assignment, sale, transfer or conveyance of the Sold Receivables
by the Issuer in accordance with this Amendment No. 3, receipt by the Trustee in
the Collection Account of an amount at least equal to the Purchase Price, and
upon written instructions from the Issuer to the Trustee ordering the release of
the security interest, 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 Sold Receivables and all monies due or to become
due with respect thereto after the date of the assignment, sale, transfer or
conveyance, and all proceeds thereof, but the Trustee does not release and
expressly reserves its security interest in and to the Purchase Price. 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 1.5. The Trustee shall not have any duty or
obligation to monitor the requirements related to the assignment, sale, transfer
or conveyance of the Sold Receivables and the release of the security interest
related thereto and shall have no liability to any party with regard to such
sale or release.
SECTION 1.6. Inspection Right; Termination of Servicing.
(a) The Indenture is amended by inserting the following Section 11.11
after the conclusion of Section 11.10 thereof:
"Section 11.11. Inspection. In addition to, and not by
way of limitation of, any other rights of the Controlling
Party hereunder or under the other Transaction Documents,
each of the Issuer and the Servicer shall permit the
Controlling Party, or any representative thereof, at its
expense and upon prior written notice to the Issuer or
Servicer (as the case may be), to visit and inspect any of
the properties of the Issuer or the Servicer (as the case
may be), to examine all of its books of account, records,
reports, and other papers, to make copies and extracts
therefrom and to discuss its affairs, finances (including
liquidity position) and accounts with its officers,
employees, and independent public accountants (and by this
provision each of the Issuer and the Servicer authorizes
said accountants to discuss the finances and affairs of the
Issuer or the Servicer), all at such reasonable times and as
often as may be reasonably requested. All information
obtained by the Controlling
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<PAGE>
Party, or its representative, whether pursuant to this
Section 11.11 or otherwise, shall be maintained by the
Controlling Party, or its representative, as applicable, in
confidence and shall not be disclosed to any other Person
(other than any agents, consultants, attorneys or
accountants of such Person, any assignee or participant or
potential assignee or participant of such Person, any rating
agency rating the Notes or the indebtedness, claims paying
ability or financial strength of such Person, or any
reinsurer or potential reinsurer of such Person), unless
such disclosure is ordered by a court of applicable
jurisdiction."
By executing this Amendment No. 3 below, Creditrust, in its individual capacity,
agrees that in the event it is no longer the Servicer, but only until one year
and one day after the Note Balance is paid in full, the foregoing Section 11.11
shall apply with equal force to Creditrust in its individual capacity as if it
were the "Servicer" as set forth in the foregoing Section 11.11.
(b) Sections 8.02 and 8.03 of the Indenture are hereby amended to
read as follows:
"Section 8.02 Consequences of a Servicer Default; Other
Termination of Servicing.
(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 (a "Servicing Termination Notice")
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. In addition, the
rights and obligations of the Servicer shall automatically
terminate upon the last day of each calendar month, unless
the Servicer is appointed in writing by the Controlling
Party for the successive monthly period. On or after the
receipt by the Servicer of a Servicing Termination Notice,
or, if earlier, upon the automatic termination of the rights
and obligations of the Servicer in accordance with the terms
of the next preceding sentence, 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
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<PAGE>
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 for such costs and
expenses; provided, however, that the amount of such costs
and expenses shall not exceed $75,000 (the amount of such
costs and expenses are referred to herein as the "Transition
Fees").
(b) In addition to the 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, or, if earlier, upon the
automatic termination of the rights and obligations of the
Servicer in accordance with the terms of clause (a) above,
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
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<PAGE>
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 Servicing
Termination Notice pursuant to Section 8.02 or tenders its
resignation pursuant to Section 7.05, or, if earlier, on and
after the automatic termination of the rights and
obligations of the Servicer in accordance with the terms of
Section 8.02(a) above, 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
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<PAGE>
consumer receivables as 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 the Receivables as
provided in the second sentence following this 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 or the Note Insurer 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.
(c) Section 9.01(c) of the Indenture is hereby amended to read
as follows:
(i) (A) prior to the occurrence of a Servicer Default
actually known to a Responsible Officer of the Trustee, if
any, and after the curing or waiving of all such Servicer
Defaults that may have occurred, or (B) prior to the
occurrence of the automatic termination of the rights and
obligations of the Servicer pursuant to Section 8.02, 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
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<PAGE>
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;
(d) Section 9.04(a) of the Indenture is hereby amended to read
as follows:
(v) (A) prior to the occurrence of a Servicer Default
(actually known to a Responsible Officer of the Trustee), if
any, and after the curing or waiving of all Servicer
Defaults that may have occurred, or (B) prior to the
occurrence of the automatic termination of the rights and
obligations of the Servicer pursuant to Section 8.02, the
Trustee shall not be bound to make any investigation into
the facts of matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request,
consent, order, approval, bond or other paper or document,
unless requested in writing to do so by the Note Insurer or
the Noteholders evidencing not less than 25% of the Voting
Interests; provided, however, that if the payment within a
reasonable time to the Trustee of the costs, expenses or
liabilities likely to be incurred by it in the making of
such investigation is, in the opinion of the Trustee, not
reasonably assured to the 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
SECTION 1.7. Trustee Covenant. In accordance with Section 11.01(d) of the
Indenture, the Trustee hereby agrees and covenants to furnish, promptly after
the execution of this Amendment No. 3, written notification of the substance of
this Amendment No. 3 and the Consent to each of the Noteholders.
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<PAGE>
ARTICLE II
MISCELLANEOUS PROVISIONS
SECTION 2.1. Amendment. This Amendment No. 3 shall only be amended in the
same manner as the Indenture shall be amended.
SECTION 2.2. Entire Agreement; Effect. This Amendment No. 3, together
with the Transaction Documents, is intended by the parties to and does
constitute the entire agreement of the parties with respect to the transaction
contemplated hereunder. This Amendment No. 3 supersedes any and all prior
understandings concerning the terms hereof, however it does not alter, amend or
waive any of the terms or provisions of the Indenture except for those terms or
provisions expressly amended hereby.
SECTION 2.3. Governing Law. This Amendment No. 3 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 Amendment No. 3 shall
be determined in accordance with such laws, including Section 5-2402 of the
General Obligation Law of New York, but otherwise without regard to conflict of
laws provisions.
SECTION 2.4. Severability of Provisions; Counterparts. If any one or more
of the covenants, agreements, provisions or terms of this Amendment No. 3 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 Amendment
No. 3 and shall in no way affect the validity or enforceability of the other
provisions of this Amendment No. 3 or the Notes, or the rights of the
Noteholders. This Amendment No. 3 may be executed simultaneously in any number
of counterparts, each of which shall be deemed to be an original, and all of
which shall constitute but one and the same instrument.
SECTION 2.5. Note Insurer. This Amendment No. 3 is not evidence of any
position by the Note Insurer, affirmative or negative, as to whether action by
the Noteholders, or any other party, is required in addition to the execution of
this Amendment No. 3 by the Note Insurer. No representation is made by the Note
Insurer as to the necessity for or the satisfaction of any additional action or
condition under the Indenture with respect to the amendment thereof. This
Amendment No. 3 does not modify the obligations of the Note Insurer under the
Policy as set forth therein.
SECTION 2.6. Conditions Precedent. This Amendment No. 3 shall become
effective as of December 21, 1999 upon the satisfaction of the following
conditions precedent:
(a) The Note Insurer shall have received:
(i) fully executed counterparts of this Amendment No. 3 (which may be
by facsimile); and
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<PAGE>
(ii) a favorable supplemental opinion of Piper Marbury Rudnick & Wolfe
LLP, special counsel to the Issuer and the Servicer, covering the
validity, legality and enforceability of this Amendment No. 3 and
certain bankruptcy-remoteness matters, all in form and substance
reasonably satisfactory to the Note Insurer and the Note
Insurer's counsel; and
(b) No event or condition has occurred and is continuing, or would result
from the execution, delivery or performance of this Amendment No. 3, that would
constitute an Event of Default or a Servicer Default.
SECTION 2.7. Representations, Warranties and Covenants. Upon the
effectiveness of this Amendment No. 3, each of the Issuer and the Servicer
hereby remakes and reaffirms all covenants, representations and warranties made
by it in the Indenture (except, in each case, to the extent that such covenants,
representations or warranties expressly speak as to another date).
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment No. 3 to be duly
executed by their respective officers as of the day and year first above
written.
CREDITRUST SPV98-2, LLC,
as Issuer
By: _______________________________________
Joseph K. Rensin
President
CREDITRUST CORPORATION,
as Servicer
By: _______________________________________
Joseph K. Rensin
Chairman and
Chief Executive Officer
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, not in its individual capacity,
but solely as Trustee and as Backup Servicer
By: _______________________________________
Casey P. Kelly
Corporate Trust Officer
ASSET GUARANTY INSURANCE
COMPANY
By: _______________________________________
Bonita Z. Dorland
Senior Vice President
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<PAGE>
CONSENT TO AMENDMENT NO. 3
The undersigned is a Noteholder under a certain Indenture and Servicing
Agreement (the "Indenture") dated as of December 1, 1998, 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"), as amended by Amendment No. 1 dated as of February 16,
1999 and Amendment No. 2 dated as of June 1, 1999. Any capitalized term used in
this Consent without a definition shall have the meaning set forth in the
Indenture.
The undersigned hereby consents to Amendment No. 3 to the Indenture, a copy
of which is attached to this Consent, and in particular the assignment of Sold
Receivables contemplated by Section 1.3 thereof and the release of Sold
Receivables contemplated by Section 1.5 thereof.
METROPOLITAN LIFE INSURANCE COMPANY
By: _______________________________________
Charles Scully
Assistant Vice President
NATIONAL BANK OF ALASKA
By: _______________________________________
Mary H. Wladkowski
Vice President
ABSF II LLC*
By: _______________________________________
Name:
Title:
*Beneficial owner for TICE & Co.
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<PAGE>
(Execution Copy)
AMENDMENT NO. 3
TO
INDENTURE AND SERVICING AGREEMENT
(Series 1998-2)
_____________
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 21, 1999
_____________
CREDITRUST RECEIVABLES-BACKED NOTES, SERIES 1998-2
___________________
<PAGE>
EXHIBIT 10.20
GUARANTEE AND COLLATERAL AGREEMENT
made by
Creditrust SPV99-2, LLC
and
CRDT SPV99-2 Capital, Inc.
in favor of
Norwest Bank Minnesota, National Association,
as Administrative Agent
Dated as of August 2, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. DEFINED TERMS....................................................... 1
1.1. Definitions......................................................... 1
1.2. Other Definitional Provisions....................................... 5
SECTION 2. GUARANTEE OF THE LOANS.............................................. 5
2.1. Guarantee........................................................... 5
2.2. No Subrogation...................................................... 6
2.3. Amendments, etc. with respect to the Borrower Obligations........... 6
2.4. Guarantee Absolute and Unconditional................................ 7
2.5. Reinstatement....................................................... 7
2.6. Payments............................................................ 8
SECTION 3. GRANT OF SECURITY INTEREST.......................................... 8
SECTION 4. REPRESENTATIONS AND WARRANTIES...................................... 9
4.1. Title; No Other Liens............................................... 9
4.2. Perfected First Priority Liens...................................... 9
4.3. Chief Executive Office.............................................. 10
4.4. Inventory and Equipment............................................. 10
4.5. Farm Products....................................................... 10
4.6. Pledged Securities.................................................. 10
4.7. Receivables......................................................... 10
SECTION 5. COVENANTS........................................................... 10
5.1. Covenants in Bridge Loan Agreement.................................. 10
5.2. Delivery of Instruments and Chattel Paper........................... 11
5.3. Maintenance of Insurance............................................ 11
5.4. Payment of Obligations.............................................. 11
5.5. Maintenance of Perfected Security Interest; Further Documentation... 12
5.6. Changes in Locations, Name, etc..................................... 12
5.7. Notices............................................................. 12
5.8. Pledged Securities.................................................. 13
5.9. Receivables......................................................... 14
5.10. Intellectual Property............................................... 14
5.11. Vehicles............................................................ 16
5.12. Blocked Account Agreement........................................... 16
SECTION 6. REMEDIAL PROVISIONS................................................. 17
6.1. Certain Matters Relating to Receivables............................. 17
6.2. Communications with Obligors; Grantor Remains Liable................ 18
6.3. Pledged Stock....................................................... 18
6.4. Proceeds to be Turned Over To Administrative Agent.................. 19
6.5. Application of Proceeds............................................. 20
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
6.6. Code and Other Remedies............................................. 20
6.7. Registration Rights................................................. 21
6.8. Waiver; Deficiency.................................................. 22
SECTION 7. THE ADMINISTRATIVE AGENT............................................ 22
7.1. Administrative Agent's Appointment as Attorney-in-Fact, etc......... 22
7.2. Duty of Administrative Agent........................................ 24
7.3. Execution of Financing Statements................................... 24
7.4. Authority of Administrative Agent................................... 25
SECTION 8. MISCELLANEOUS....................................................... 25
8.1. Amendments in Writing............................................... 25
8.2. Notices............................................................. 25
8.3. No Waiver by Course of Conduct; Cumulative Remedies................. 26
8.4. Enforcement Expenses; Indemnification............................... 26
8.5. Successors and Assigns.............................................. 26
8.6. Set-Off............................................................. 27
8.7. Counterparts........................................................ 27
8.8. Severability........................................................ 27
8.9. Section Headings.................................................... 27
8.10. Integration......................................................... 27
8.11. GOVERNING LAW....................................................... 27
8.12. Submission To Jurisdiction; Waivers................................. 27
8.13. Acknowledgements.................................................... 28
8.14. Releases............................................................ 28
8.15. WAIVER OF JURY TRIAL................................................ 29
</TABLE>
ii
<PAGE>
GUARANTEE AND COLLATERAL AGREEMENT
GUARANTEE AND COLLATERAL AGREEMENT, dated as of August 2, 1999, made
by each of the signatories hereto (each such signatory a "Grantor" and
-------
collectively, the "Grantors"), in favor of Norwest Bank Minnesota, National
--------
Association, as Administrative Agent (in such capacity, the "Administrative
--------------
Agent") for the banks and other financial institutions (the "Lenders") from time
- ----- -------
to time parties to the Bridge Loan Agreement, dated as of August 2, 1999 (as
amended, supplemented or otherwise modified from time to time, the "Bridge Loan
-----------
Agreement"), among Creditrust SPV99-2, LLC, a Delaware limited liability company
- ---------
(the "Borrower"), CRDT SPV99-2 Capital, Inc., a Delaware corporation
--------
("Capital"), as guarantor, Creditrust Corporation, a Maryland corporation (the
-------
"Parent Guarantor"), the Lenders, and Norwest Bank Minnesota, National
- -----------------
Association, as administrative agent (in such capacity, the "Administrative
--------------
Agent").
- -----
W I T N E S S E T H:
-------------------
WHEREAS, pursuant to the Bridge Loan Agreement, the Lenders have
severally agreed to lend to the Borrower $40.0 million upon the terms and
subject to the conditions set forth therein;
WHEREAS, the Borrower is a member of an affiliated group of companies
that includes the other Grantor;
WHEREAS, it is a condition precedent to the obligation of the Lenders
to make their respective loans to the Borrower under the Bridge Loan Agreement
that (i) the Grantors shall have executed and delivered this Agreement to the
Administrative Agent for the ratable benefit of the Lenders and (ii) Capital
shall have entered into the guarantee contained in Section 2 of this Agreement;
NOW, THEREFORE, in consideration of the premises and to induce the
Administrative Agent and the Lenders to enter into the Bridge Loan Agreement and
to induce the Lenders to make their respective loans to the Borrower thereunder,
each Grantor, and Capital as the Guarantor hereunder, hereby agrees with the
Administrative Agent, for the ratable benefit of the Lenders, as follows:
SECTION 1. DEFINED TERMS
1.1. Definitions.
-----------
(a) Unless otherwise defined herein, terms defined in the Bridge Loan
Agreement and used herein shall have the meanings given to them in the Bridge
Loan Agreement, and the following terms which are defined in the Uniform
Commercial Code in effect in the State of New York on the date hereof are used
herein as so defined: Accounts, Chattel Paper, Documents, Equipment, Farm
Products, Instruments, Inventory and Investment Property.
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(b) The following terms shall have the following meanings:
"Agreement": this Guarantee and Collateral Agreement, as the same may
---------
be amended, supplemented or otherwise modified from time to time.
"Borrower Obligations": the collective reference to the unpaid
--------------------
principal of and interest on the Loans and all other obligations and
liabilities of the Borrower (including, without limitation, interest
accruing at the then applicable rate provided in the Bridge Loan Agreement
after the maturity of the Loans and interest accruing at the then
applicable rate provided in the Bridge Loan Agreement after the filing of
any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to the Borrower, whether or not
a claim for post-filing or post-petition interest is allowed in such
proceeding) to the Administrative Agent or any Lender in respect of the
Loans, the Bridge Notes, the Collateral Account or any cash management
arrangements with the Administrative Agent or any Lender, whether direct or
indirect, absolute or contingent, due or to become due, or now existing or
hereafter incurred, which may arise under, out of, or in connection with,
the Bridge Loan Agreement, this Agreement or the other Loan Documents or
any other document made, delivered or given in connection herewith or
therewith, in each case whether on account of principal, interest,
reimbursement obligations, fees, indemnities, costs, expenses or otherwise
(including, without limitation, all fees and disbursements of counsel to
the Administrative Agent and the Lenders that are required to be paid by
the Borrower pursuant to the terms of any of the foregoing agreements).
"Collateral": as defined in Section 3.
----------
"Collateral Account": the collateral account established by the
------------------
Administrative Agent for the ratable benefit of the Lenders as provided in
Section 5.12, 6.1 or 6.4 (including all funds, securities, warrants and
other property therein (whether certificated or uncertificated)).
"Copyright Licenses": any written agreement naming any Grantor as
------------------
licensor or licensee, granting any right under any Copyright, including,
without limitation, the grant of rights to manufacture, distribute, exploit
and sell materials derived from any Copyright.
"Copyrights": (i) all copyrights arising under the laws of the United
----------
States, any other country or any political subdivision thereof, whether
registered or unregistered and whether published or unpublished, all
registrations and recordings thereof, and all applications in connection
therewith, including, without limitation, all registrations, recordings and
applications in the United States Copyright Office, and (ii) the right to
obtain all renewals thereof.
"General Intangibles": all "general intangibles" as such term is
-------------------
defined in Section 9-106 of the Uniform Commercial Code in effect in the
State of New York on the date hereof and, in any event, including, without
limitation, with respect to any Grantor, all contracts, agreements,
instruments and indentures in any form, and portions thereof, to
2
<PAGE>
which such Grantor is a party or under which such Grantor has any right,
title or interest or to which such Grantor or any property of such Grantor
is subject, as the same may from time to time be amended, supplemented or
otherwise modified, including, without limitation, (i) all rights of such
Grantor to receive moneys due and to become due to it thereunder or in
connection therewith, (ii) all rights of such Grantor to damages arising
thereunder and (iii) all rights of such Grantor to perform and to exercise
all remedies thereunder, in each case to the extent the grant by such
Grantor of a security interest pursuant to this Agreement in its right,
title and interest in such contract, agreement, instrument or indenture is
not prohibited by such contract, agreement, instrument or indenture without
the consent of any other party thereto, would not give any other party to
such contract, agreement, instrument or indenture the right to terminate
its obligations thereunder, or is permitted with consent if all necessary
consents to such grant of a security interest have been obtained from the
other parties thereto (it being understood that the foregoing shall not be
deemed to obligate such Grantor to obtain such consents); provided, that
the foregoing limitation shall not affect, limit, restrict or impair the
grant by such Grantor of a security interest pursuant to this Agreement in
any Receivable or any money or other amounts due or to become due under any
such contract, agreement, instrument or indenture.
"Guarantor Obligations": with respect to the Guarantor, all
---------------------
obligations and liabilities of the Guarantor which may arise under or in
connection with this Agreement (including, without limitation, Section 2)
or any other Loan Document, in each case whether on account of guarantee
obligations, reimbursement obligations, fees, indemnities, costs, expenses
or otherwise (including, without limitation, all fees and disbursements of
counsel to the Administrative Agent and the Lenders that are required to be
paid by the Guarantor pursuant to the terms of this Agreement or any other
Loan Document).
"Guarantor": Capital, as a Grantor.
---------
"Intellectual Property": the collective reference to all rights,
---------------------
priorities and privileges relating to intellectual property, whether
arising under United States, multinational or foreign laws or otherwise,
including, without limitation, the Copyrights, the Copyright Licenses, the
Patents, the Patent Licenses, the Trademarks and the Trademark Licenses,
and all rights to sue at law or in equity for any infringement or other
impairment thereof, including the right to receive all proceeds and damages
therefrom.
"Issuers": the collective reference to each issuer of a Pledged
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Security.
"New York UCC": the Uniform Commercial Code as from time to time in
------------
effect in the State of New York.
"Obligations": (i) in the case of the Borrower, the Borrower
-----------
Obligations, and (ii) in the case of Capital, the Guarantor Obligations.
3
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"Patent License": all agreements, whether written or oral, providing
--------------
for the grant by or to any Grantor of any right to manufacture, use or sell
any invention covered in whole or in part by a Patent.
"Patents": (i) all letters patent of the United States, any other
-------
country or any political subdivision thereof, all reissues and extensions
thereof and all goodwill associated therewith, (ii) all applications for
letters patent of the United States or any other country and all divisions,
continuations and continuations-in-part thereof, and (iii) all rights to
obtain any reissues or extensions of the foregoing.
"Pledged Notes": all promissory notes issued to or held by any
-------------
Grantor (other than promissory notes issued in connection with extensions
of trade credit by such Grantor in the ordinary course of business).
"Pledged Securities": the collective reference to the Pledged Notes
------------------
and the Pledged Stock.
"Pledged Stock": the shares of Capital Stock listed on Schedule 1,
------------- ----------
together with any other shares, stock certificates, options or rights of
any nature whatsoever in respect of the Capital Stock of any Person that
may be issued or granted to, or held by, any Grantor while this Agreement
is in effect.
"Proceeds": all "proceeds" as such term is defined in Section 9-
--------
306(1) of the Uniform Commercial Code in effect in the State of New York on
the date hereof and, in any event, shall include, without limitation, all
dividends, interest or other income from the Pledged Securities,
collections thereon or distributions or payments with respect thereto.
"Receivable": any Consumer Receivable and any right to payment for
----------
goods sold or leased or for services rendered, whether or not such right is
evidenced by an Instrument or Chattel Paper and whether or not it has been
earned by performance (including, without limitation, any Account).
"Securities Act": the Securities Act of 1933, as amended.
--------------
"Trademark License": any agreement, whether written or oral,
-----------------
providing for the grant by or to any Grantor of any right to use any
Trademark.
"Trademarks": (i) all trademarks, trade names, corporate names,
----------
company names, business names, fictitious business names, trade styles,
service marks, logos and other source or business identifiers, and all
goodwill associated therewith, now existing or hereafter adopted or
acquired, all registrations and recordings thereof, and all applications in
connection therewith, whether in the United States Patent and Trademark
Office or in any similar office or agency of the United States, any State
thereof or any other country or any political subdivision thereof, or
otherwise, and all common-law rights related thereto.
4
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"Vehicles": all cars, trucks, trailers, construction and earth moving
--------
equipment and other vehicles covered by a certificate of title law of any state.
1.2. Other Definitional Provisions.
-----------------------------
(a) The words "hereof," "herein," "hereto" and "hereunder" and words
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and Section and
Schedule references are to this Agreement unless otherwise specified.
(b) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
(c) Where the context requires, terms relating to the Collateral or
any part thereof, when used in relation to a Grantor, shall refer to such
Grantor's Collateral or the relevant part thereof.
SECTION 2. GUARANTEE OF THE LOANS
2.1. Guarantee.
---------
(a) The Guarantor hereby, jointly and severally with the Parent
Guarantor, unconditionally and irrevocably, guarantees to the Administrative
Agent, for the ratable benefit of the Lenders and their respective successors,
indorsees, transferees and assigns, the prompt and complete payment and
performance by the Borrower when due (whether at the stated maturity, by
acceleration or otherwise) of the Borrower Obligations.
(b) Anything herein or in any other Loan Document to the contrary
notwithstanding, the maximum liability of the Guarantor hereunder and under the
other Loan Documents shall in no event exceed the amount which can be guaranteed
by the Guarantor under applicable federal and state laws relating to the
insolvency of debtors.
(c) The Guarantor agrees that the Borrower Obligations may at any
time and from time to time exceed the amount of the liability of the Guarantor
hereunder without impairing the guarantee contained in this Section 2 or
affecting the rights and remedies of the Administrative Agent or any Lender
hereunder.
(d) The guarantee contained in this Section 2 shall remain in full
force and effect until all the Borrower Obligations and the obligations of the
Guarantor under the guarantee contained in this Section 2 shall have been
satisfied by payment in full and the Commitments shall be terminated,
notwithstanding that from time to time during the term of the Bridge Loan
Agreement the Borrower may be free from any Borrower Obligations.
No payment made by the Borrower, the Guarantor, any other guarantor or
any other Person or received or collected by the Administrative Agent or any
Lender from the Borrower, the Guarantor, any other guarantor or any other Person
by virtue of any action or proceeding or any set-off or appropriation or
application at any time or from time to time in reduction of or in payment of
the Borrower Obligations shall be deemed to modify, reduce,
5
<PAGE>
release or otherwise affect the liability of the Guarantor hereunder which
shall, notwithstanding any such payment (other than any payment made by the
Guarantor in respect of the Borrower Obligations or any payment received or
collected from the Guarantor in respect of the Borrower Obligations), remain
liable for the Borrower Obligations up to the maximum liability of the Guarantor
hereunder until the Borrower Obligations are paid in full, and the Commitments
are terminated.
2.2. No Subrogation.
--------------
Notwithstanding any payment or payments made by the Guarantor
hereunder, or any set-off or application of funds of the Guarantor by the
Administrative Agent or any Lender, the Guarantor shall not be entitled to be
subrogated to any of the rights of the Administrative Agent or any Lender
against the Borrower or any other Guarantor or any collateral security or
guarantee or right of offset held by the Administrative Agent or any Lender for
the payment of the Borrower Obligations, nor shall the Guarantor seek or be
entitled to seek any contribution or reimbursement from the Borrower or the
Parent Guarantor in respect of payments made by the Guarantor hereunder, until
all amounts owing to the Administrative Agent and the Lenders by the Borrower on
account of the Borrower Obligations are paid in full and the Commitments and the
Bridge Loan Agreement are terminated. If any amount shall be paid to the
Guarantor on account of such subrogation rights at any time when all of the
Borrower Obligations shall not have been paid in full, such amount shall be held
by the Guarantor in trust for the Administrative Agent and the Lenders
segregated from other funds of the Guarantor, and shall, forthwith upon receipt
by the Guarantor, be turned over to the Administrative Agent in the exact form
received by the Guarantor (duly indorsed by the Guarantor to the Administrative
Agent, if required), to be applied against the Borrower Obligations, whether
matured or unmatured, in such order as indicated in Section 6.5.
2.3. Amendments, etc. with respect to the Borrower Obligations.
---------------------------------------------------------
The Guarantor shall remain obligated hereunder and the liability of
the Parent Guarantor hereunder shall be and remain in full force and effect
notwithstanding that, without any reservation of rights against the Guarantor
and without notice to or further assent by the Guarantor, any demand for payment
of any of the Borrower Obligations made by the Administrative Agent or any
Lender may be rescinded by the Administrative Agent or such Lender and any of
the Borrower Obligations continued or any payment made by the Borrower or any
other Person and applied to the Borrower Obligations is at any time annulled,
set aside, invalidated, declared to be fraudulent or preferential or otherwise
required to be refunded or repaid, and the Borrower Obligations, or the
liability of any other Person upon or for any part thereof, or any collateral
security or guarantee therefor or right of offset with respect thereto, may,
from time to time, in whole or in part, be renewed, extended, amended, modified,
accelerated, compromised, waived, surrendered or released by the Administrative
Agent or any Lender and the Bridge Loan Agreement and the other Loan Documents
and any other documents executed and delivered in connection therewith may be
amended, modified, supplemented or terminated, in whole or in part, as the
Administrative Agent (or the Majority Lenders or all Lenders, as the case may
be) may deem advisable from time to time, and any collateral security, guarantee
or right of offset at any time held by the Administrative Agent or any Lender
for the payment of the Borrower Obligations may be sold, exchanged, waived,
surrendered or released.
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Neither the Administrative Agent nor any Lender shall have any obligation to
protect, secure, perfect or insure any Lien at any time held by it as security
for the Borrower Obligations or for the guarantee contained in this Section 2 or
any property subject thereto.
2.4. Guarantee Absolute and Unconditional.
------------------------------------
The Guarantor waives any and all notice of the creation, renewal,
extension or accrual of any of the Borrower Obligations and notice of or proof
of reliance by the Administrative Agent or any Lender upon the guarantee
contained in this Section 2 or acceptance of the guarantee contained in this
Section 2; the Borrower Obligations, and any of them, shall conclusively be
deemed to have been created, contracted or incurred, or renewed, extended,
amended or waived, in reliance upon the guarantee contained in this Section 2;
and all dealings between the Borrower and the Guarantor, on the one hand, and
the Administrative Agent and the Lenders, on the other hand, likewise shall be
conclusively presumed to have been had or consummated in reliance upon the
guarantee contained in this Section 2. The Guarantor waives diligence,
presentment, protest, demand for payment and notice of default or nonpayment to
or upon the Borrower or the Guarantor with respect to the Borrower Obligations.
The Guarantor understands and agrees that the guarantee contained in this
Section 2 shall be construed as a continuing, absolute and unconditional
guarantee of payment without regard to (a) the validity or enforceability of the
Bridge Loan Agreement or any other Loan Document, any of the Borrower
Obligations or any other collateral security therefor or guarantee or right of
offset with respect thereto at any time or from time to time held by the
Administrative Agent or any Lender, (b) any defense, set-off or counterclaim
(other than a defense of payment or performance) which may at any time be
available to or be asserted by the Borrower or any other Person against the
Administrative Agent or any Lender, or (c) any other circumstance whatsoever
(with or without notice to or knowledge of the Borrower or the Guarantor), which
constitutes, or might be construed to constitute, an equitable or legal
discharge of the Borrower for the Borrower Obligations, or of the Guarantor
under the guarantee contained in this Section 2, in bankruptcy or in any other
instance. When making any demand hereunder or otherwise pursuing its rights and
remedies hereunder against the Guarantor, the Administrative Agent or any Lender
may, but shall be under no obligation to, make a similar demand on or otherwise
pursue such rights and remedies as it may have against the Borrower or any other
Person or against any collateral security or guarantee for the Borrower
Obligations or any right of offset with respect thereto, and any failure by the
Administrative Agent or any Lender to make any such demand, to pursue such other
rights or remedies or to collect any payments from the Borrower or any other
Person or to realize upon any such collateral security or guarantee or to
exercise any such right of offset, or any release of the Borrower or any other
Person or any such collateral security, guarantee or right of offset, shall not
relieve the Guarantor of any obligation or liability hereunder, and shall not
impair or affect the rights and remedies, whether express, implied or available
as a matter of law, of the Administrative Agent or any Lender against the
Guarantor. For the purposes hereof "demand" shall include the commencement and
continuance of any legal proceedings.
2.5. Reinstatement.
-------------
The guarantee contained in this Section 2 shall continue to be
effective, or be reinstated, as the case may be, if at any time payment, or any
part thereof, of any of the Borrower Obligations is rescinded or must otherwise
be restored or returned by the Administrative Agent
7
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or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of the Borrower or the Guarantor, or upon or as a result of the
appointment of a receiver, intervenor or conservator of, or trustee or similar
officer for, the Borrower or the Guarantor or any substantial part of its
property, or otherwise, all as though such payments had not been made.
2.6. Payments.
--------
The Guarantor hereby guarantees that payments hereunder will be paid
to the Lenders without set-off or counterclaim in Dollars at their offices, the
locations of which are specified in the Bridge Loan Agreement.
2.7. Subordination.
-------------
Any and all rights and claims of the Guarantor against the Borrower or
any of its property, arising by reason of any payment by the Guarantor to the
Administrative Agent pursuant to the provisions of this Agreement shall be
subordinate and subject in right of payment to the prior payment and
satisfaction of all Guarantor Obligations and all other amounts payable under
this Agreement and the other Loan Documents. Any Indebtedness of the Borrower,
now or hereafter held by the Guarantor, is hereby subordinated to all
Indebtedness and obligations guaranteed hereby. Upon the occurrence and during
the continuance of an Event of Default, any such Indebtedness of the Borrower to
the Guarantor shall, if the Administrative Agent so requests, be collected,
enforced, and received by the Guarantor in trust for the Administrative Agent
and held as security for the payment of the Guarantor Obligations, but without
reducing or affecting in any manner the liability of the Guarantor hereunder.
SECTION 3. GRANT OF SECURITY INTEREST
Each Grantor hereby assigns and transfers to the Administrative Agent,
and hereby grants to the Administrative Agent, for the ratable benefit of the
Lenders, a first priority security interest in, all of the following property
now owned or at any time hereafter acquired by such Grantor or in which such
Grantor now has or at any time in the future may acquire any right, title or
interest wherever located and whether now or hereafter existing (collectively,
the "Collateral"), as collateral security for the prompt and complete payment
----------
and performance when due (whether at the stated maturity, by acceleration or
otherwise) of such Grantor's Obligations:
(a) all Accounts;
(b) all Chattel Paper;
(c) all Documents;
(d) all Equipment;
(e) all General Intangibles;
(f) all Instruments;
(g) all Intellectual Property;
8
<PAGE>
(h) all Inventory;
(i) all Receivables
(j) all Pledged Securities;
(k) all Vehicles;
(l) all Investment Property;
(m) all deposit accounts and other bank accounts;
(n) any Collateral Account, all funds held therein and all
certificates and instruments, if any, from time to time representing or
evidencing the Collateral Account
(o) all books and records pertaining to any and all of the foregoing;
and
(p) to the extent not otherwise included, all Proceeds and products
of any and all of the foregoing, including all payments under insurance
(whether or not the Administrative Agent is the loss payee thereof) and all
collateral security and guarantees given by any Person with respect to any
of the foregoing.
SECTION 4. REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter into the
Bridge Loan Agreement and to induce the Lenders to make their respective loans
to the Borrower thereunder, each Grantor hereby represents and warrants to the
Administrative Agent and each Lender that:
4.1. Title; No Other Liens.
---------------------
Except for the security interest granted to the Administrative Agent
for the ratable benefit of the Lenders pursuant to this Agreement and the other
Liens permitted to exist on the Collateral by the Bridge Loan Agreement, such
Grantor holds good and marketable title to each existing item of the Collateral
free and clear of any and all Liens or claims of others. No financing statement
or other public notice with respect to such Grantor's interest in all or any
part of the existing Collateral is on file or of record in any public office,
except such as have been filed in favor of the Administrative Agent, for the
ratable benefit of the Lenders, pursuant to this Agreement or as are permitted
by the Bridge Loan Agreement.
4.2. Perfected First Priority Liens.
------------------------------
The security interests granted pursuant to this Agreement upon
completion of the filings and other actions specified on Schedule 2 (which, in
----------
the case of all filings and other documents referred to on said Schedule, have
been delivered to the Administrative Agent in completed and duly executed form)
(a) will constitute valid, enforceable perfected security interests in all of
the Collateral in favor of the Administrative Agent, for the ratable benefit of
the Lenders, as collateral security for such Grantor's Obligations, and (b) are
prior to all other Liens on the Grantor's interest in the Collateral in
existence on the date hereof.
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<PAGE>
4.3. Chief Executive Office.
----------------------
On the date hereof, such Grantor's jurisdiction of organization, the
location of such Grantor's chief executive office or sole place of business, the
office where it maintains all of its books and records, and all names under
which such Grantor is doing business, including, without limitation, trade
names, division names, and fictitious names, are specified on Schedule 3.
----------
4.4. Inventory and Equipment.
-----------------------
On the date hereof, the Inventory and Equipment (other than mobile
goods) are kept at the locations listed on Schedule 4.
----------
4.5. Farm Products.
-------------
None of the Collateral constitutes, or is the Proceeds of, Farm
Products.
4.6. Pledged Securities.
------------------
(a) The shares of Pledged Stock pledged by such Grantor hereunder
constitute all the issued and outstanding shares of all classes of the Capital
Stock of each Issuer owned by such Grantor.
(b) All the shares of the Pledged Stock have been duly and validly
issued and are fully paid and nonassessable.
(c) Such Grantor is the record and beneficial owner of, and has good
and marketable title to, the Pledged Securities pledged by it hereunder, free of
any and all Liens or options in favor of, or claims of, any other Person, except
the security interest created by this Agreement.
4.7. Receivables.
-----------
(a) No amount payable to such Grantor under or in connection with any
Receivable is evidenced by any Instrument or Chattel Paper which has not been
delivered to the Administrative Agent.
(b) None of the obligors on any Receivables is a Governmental
Authority.
SECTION 5. COVENANTS
Each Grantor covenants and agrees with the Administrative Agent and
the Lenders that, from and after the date of this Agreement until the
Obligations shall have been paid in full and the Commitments shall have
terminated:
5.1. Covenants in Bridge Loan Agreement.
----------------------------------
In the case of the Guarantor, the Guarantor shall take, or shall
refrain from taking, as the case may be, each action that is necessary to be
taken or not taken, as the case may be, so
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that no Default or Event of Default is caused by the failure to take such action
or to refrain from taking such action by the Guarantor.
5.2. Delivery of Instruments and Chattel Paper.
-----------------------------------------
If any amount payable under or in connection with any of the
Collateral shall be or become evidenced by any Instrument or Chattel Paper, such
Instrument or Chattel Paper shall be immediately delivered to the Administrative
Agent, duly indorsed in a manner satisfactory to the Administrative Agent, to be
held as Collateral pursuant to this Agreement.
5.3. Maintenance of Insurance.
------------------------
(a) Such Grantor will maintain, with financially sound and reputable
companies, insurance policies (i) insuring the Inventory, Equipment and Vehicles
(if any) against loss by fire, explosion, theft and such other casualties as may
be reasonably satisfactory to the Administrative Agent and (ii) to the extent
requested by the Administrative Agent, insuring such Grantor, the Administrative
Agent and the Lenders against liability for personal injury and property damage
relating to such Inventory, Equipment and Vehicles, such policies to be in such
form and amounts and having such coverage as may be reasonably satisfactory to
the Administrative Agent and the Lenders.
(b) Each such insurance policy shall (i) provide that no
cancellation, termination, material reduction in amount or material change in
coverage thereof shall be effective until at least 30 days after receipt by the
Administrative Agent of written notice thereof, (ii) name the Administrative
Agent for the ratable benefit of the Lenders as insured party or loss payee,
(iii) if reasonably requested by the Administrative Agent, include a breach of
warranty clause and (iv) be reasonably satisfactory in all other respects to the
Administrative Agent.
(c) The Borrower shall deliver to the Administrative Agent and the
Lenders a report of a reputable insurance broker with respect to such insurance
substantially concurrently with the delivery by the Borrower to the
Administrative Agent of its audited financial statements for each fiscal year
and such supplemental reports with respect thereto as the Administrative Agent
may from time to time reasonably request.
5.4. Payment of Obligations.
----------------------
Such Grantor will pay and discharge or otherwise satisfy at or before
maturity or before they become delinquent, as the case may be, all taxes,
assessments and governmental charges or levies imposed upon the Collateral or in
respect of income or profits therefrom, as well as all claims of any kind
(including, without limitation, claims for labor, materials and supplies)
against or with respect to the Collateral, except that no such charge need be
paid if the amount or validity thereof is currently being contested in good
faith by appropriate proceedings, reserves in conformity with GAAP with respect
thereto have been provided on the books of such Grantor and such proceedings
could not reasonably be expected to result in the sale, forfeiture or loss of
any material portion of the Collateral or any interest therein.
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5.5. Maintenance of Perfected Security Interest; Further Documentation
-----------------------------------------------------------------
(a) Such Grantor shall maintain the security interest created by this
Agreement as a perfected first priority security interest and shall defend such
security interest against the claims and demands of all Persons whomsoever.
(b) Such Grantor, at its expense, will furnish to the Administrative
Agent and the Lenders from time to time statements and schedules further
identifying and describing the Collateral and such other reports in connection
with the Collateral as the Administrative Agent may reasonably request, all in
reasonable detail.
(c) At any time and from time to time, upon the written request of
the Administrative Agent, and at the sole expense of such Grantor, such Grantor
will promptly and duly execute and deliver, and have recorded, such further
statements, assignments, agreements, instruments and documents and take such
further actions as the Administrative Agent may reasonably request for the
purpose of obtaining or preserving the full benefits of this Agreement and of
the rights and powers herein granted, including, without limitation, the filing
of any financing or continuation statements, or amendments thereto, under the
Uniform Commercial Code (or other similar laws) in effect in any jurisdiction
with respect to the security interests created hereby.
5.6. Changes in Locations, Name, etc.
--------------------------------
Such Grantor will not, except upon 15 days' prior written notice to
the Administrative Agent and each Lender and delivery to the Administrative
Agent of (a) all additional executed financing statements, continuation
statements, and other documents reasonably requested by the Administrative Agent
or any Lender to maintain the validity, perfection and priority of the security
interests provided for herein, (b) if applicable, a written supplement to
Schedules 3 and 4 showing any additional location at which Inventory, Equipment
- -----------------
or records shall be kept and (c) an opinion of counsel upon reasonable request
of the Administrative Agent:
(i) permit any Inventory or Equipment to be kept at a location
other than those listed on Schedule 4;
----------
(ii) change the location of its chief executive office, sole
place of business or the office where it maintains all of its books and
records from that referred to in Section 4.3; or
(iii) change its name, identity or corporate structure to such
an extent that any financing statement filed by the Administrative Agent in
connection with this Agreement would become misleading.
5.7. Notices.
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Such Grantor will advise in a written notice to the Administrative
Agent and the Lenders promptly, in reasonable detail, of:
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<PAGE>
(a) any Lien (other than security interests created hereby or Liens
permitted under the Bridge Loan Agreement) on any of the Collateral which would
adversely affect the ability of the Administrative Agent or any Lender to
exercise any of its rights or remedies hereunder or under any Loan Document; and
(b) of the occurrence of any other event which could reasonably be
expected to have a material adverse effect on the aggregate value of the
Collateral or on the validity, perfection or priority of the security interests
created hereby.
5.8. Pledged Securities.
------------------
(a) If such Grantor shall become entitled to receive or shall receive
any stock certificate or other certificates (including, without limitation, any
certificate representing a stock dividend or a distribution in connection with
any reclassification, increase or reduction of capital or any certificate issued
in connection with any reorganization), option or rights in respect of the
Capital Stock of any Issuer, whether in addition to, in substitution of, as a
conversion of, or in exchange for, any shares of the Pledged Stock, or otherwise
in respect thereof, such Grantor shall accept the same as the agent of the
Administrative Agent and the Lenders hold the same in trust for the
Administrative Agent and the Lenders and deliver the same forthwith to the
Administrative Agent in the exact form received, duly indorsed by such Grantor
to the Administrative Agent, if required, together with an undated stock power
covering such certificate duly executed in blank by such Grantor and with, if
the Administrative Agent so requests, signature guaranteed, to be held by the
Administrative Agent, for the ratable benefit of the Lenders subject to the
terms hereof, as additional collateral security for the Obligations. Any sums
paid upon or in respect of the Pledged Securities upon the liquidation or
dissolution of any Issuer shall be paid over to the Administrative Agent to be
held by it hereunder for the ratable benefit of the Lenders as additional
collateral security for the Obligations, and in case any distribution of capital
shall be made on or in respect of the Pledged Securities or any property shall
be distributed upon or with respect to the Pledged Securities pursuant to the
recapitalization or reclassification of the capital of any Issuer or pursuant to
the reorganization thereof, the property so distributed shall, unless otherwise
subject to a perfected security interest in favor of the Administrative Agent
for the ratable benefit of the Lenders, be delivered to the Administrative Agent
to be held by it hereunder as additional collateral security for the
Obligations. If any sums of money or property so paid or distributed in respect
of the Pledged Securities shall be received by such Grantor, such Grantor shall,
until such money or property is paid or delivered to the Administrative Agent,
hold such money or property in trust for the Lenders , segregated from other
funds of such Grantor, as additional collateral security for the Obligations.
(b) Without the prior written consent of the Majority Lenders, such
Grantor will not (i) permit, vote to enable, or take any other action to permit,
any Issuer to issue any stock or other equity securities of any nature or to
issue any other securities convertible into or granting the right to purchase or
exchange for any stock or other equity securities of any nature of any Issuer,
(ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any
option with respect to, the Pledged Securities or
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Proceeds thereof (except pursuant to a transaction expressly permitted by the
Bridge Loan Agreement), (iii) create, incur or permit to exist any Lien or
option in favor of, or any claim of any Person with respect to, any of the
Pledged Securities or Proceeds thereof, or any interest therein, except for the
security interests created by this Agreement or (iv) enter into any agreement or
undertaking restricting the right or ability of such Grantor or the
Administrative Agent to sell, assign or transfer any of the Pledged Securities
or Proceeds thereof.
(c) In the case that such Grantor is an Issuer, the Issuer agrees
that (i) it will be bound by the terms of this Agreement relating to the Pledged
Securities issued by it and will comply with such terms insofar as such terms
are applicable to it, (ii) it will notify the Administrative Agent promptly in
writing of the occurrence of any of the events described in Section 5.8(a) with
respect to the Pledged Securities issued by it and (iii) the terms of Sections
6.3(c) and 6.7 shall apply to it, mutatis mutandis, with respect to all actions
------- --------
that may be required of it pursuant to Section 6.3(c) or 6.7 with respect to the
Pledged Securities issued by it.
5.9. Receivables.
-----------
(a) Except in the case of Consumer Receivables and other than in
the ordinary course of business consistent with the Parent Guarantor's past
practice, such Grantor will not (i) grant any extension of the time of payment
of any Receivable, (ii) compromise or settle any Receivable for less than the
full amount thereof, (iii) release, wholly or partially, any Person liable for
the payment of any Receivable, (iv) allow any credit or discount whatsoever on
any Receivable, (v) amend, supplement or modify any Receivable in any manner
that could adversely affect the value thereof or (vi) fail to exercise promptly
and diligently each and every material right which it may have under each
agreement giving rise to a Receivable (other than any right of termination) that
could adversely affect the value thereof.
(b) Such Grantor will deliver to the Administrative Agent a copy of
each material demand, notice or document received by it that individually
questions or calls into doubt the validity or enforceability of more than 5% of
the aggregate amount of the then outstanding Receivables.
(c) The amounts represented by such Grantor to the Lenders from
time to time as owing to such Grantor in respect of the Receivables will at such
times be accurate.
5.10. Intellectual Property.
---------------------
(a) Such Grantor (either itself or through licensees) will (i)
continue to use each material Trademark on each and every trademark class of
goods applicable to its current line as reflected in its current catalogs,
brochures and price lists in order to maintain such Trademark in full force free
from any claim of abandonment for non-use, (ii) maintain as in the past the
quality of products and services offered under such Trademark, (iii) use such
Trademark with the appropriate notice of registration and all other notices and
legends required by applicable Requirements of Law, (iv) not adopt or use any
mark which is confusingly similar or a colorable imitation of such Trademark
unless the Administrative Agent, for the ratable benefit of the Lenders, shall
obtain a perfected security interest in such mark pursuant to this Agreement,
and (v) not (and not permit any licensee or sublicensee thereof to) do any act
or knowingly omit to do any act whereby such Trademark may become invalidated or
impaired in any way.
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(b) Such Grantor (either itself or through licensees) will not do
any act, or omit to do any act, whereby any material Patent may become
forfeited, abandoned or dedicated to the public.
(c) Such Grantor (either itself or through licensees) (i) will employ
each material Copyright and (ii) will not (and will not permit any licensee or
sublicensee thereof to) do any act or knowingly omit to do any act whereby any
material portion of the Copyrights may become invalidated or otherwise impaired.
Such Grantor will not (either itself or through licensees) do any act whereby
any material portion of the Copyrights may fall into the public domain.
(d) Such Grantor (either itself or through licensees) will not do any
act that knowingly uses any material Intellectual Property to infringe the
intellectual property rights of any other Person.
(e) Such Grantor will notify the Administrative Agent and the Lenders
immediately if it knows, or has reason to know, that any application or
registration relating to any material Intellectual Property may become
forfeited, abandoned or dedicated to the public, or of any adverse determination
or development (including, without limitation, the institution of, or any such
determination or development in, any proceeding in the United States Patent and
Trademark Office, the United States Copyright Office or any court or tribunal in
any country) regarding such Grantor's ownership of, or the validity of, any
material Intellectual Property or such Grantor's right to register the same or
to own and maintain the same.
(f) Whenever such Grantor, either by itself or through any agent,
employee, licensee or designee, shall file an application for the registration
of any Intellectual Property with the United States Patent and Trademark Office,
the United States Copyright Office or any similar office or agency in any other
country or any political subdivision thereof, such Grantor shall report such
filing to the Administrative Agent within five Business Days after the last day
of the fiscal quarter in which such filing occurs. Upon request of the
Administrative Agent, such Grantor shall execute and deliver, and have recorded,
any and all agreements, instruments, documents, and papers as the Administrative
Agent may request to evidence the Administrative Agent's, the Lenders' security
interests in any Copyright, Patent or Trademark and the goodwill and General
Intangibles of such Grantor relating thereto or represented thereby.
(g) Such Grantor will take all reasonable and necessary steps,
including, without limitation, in any proceeding before the United States Patent
and Trademark Office, the United States Copyright Office or any similar office
or agency in any other country or any political subdivision thereof, to maintain
and pursue each application (and to obtain the relevant registration) and to
maintain each registration of the material Intellectual Property, including,
without limitation, filing of applications for renewal, affidavits of use and
affidavits of incontestability.
(h) In the event that any material Intellectual Property is
infringed, misappropriated or diluted by a third party, such Grantor shall (i)
take such actions as such Grantor shall reasonably deem appropriate under the
circumstances to protect such Intellectual Property and (ii) if such
Intellectual Property is of material economic value, promptly notify the
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Administrative Agent after it learns thereof and sue for infringement,
misappropriation or dilution, to seek injunctive relief where appropriate and to
recover any and all damages for such infringement, misappropriation or dilution.
5.11. Vehicles.
--------
(a) No Vehicle shall be removed from the State which has issued the
certificate of title or certificate of ownership, as applicable, therefor for a
period in excess of four months.
(b) With respect to any Vehicles acquired by such Grantor
subsequent to the date hereof, within 30 days after the date of acquisition
thereof, all applications for certificates of title or certificates of
ownership, as applicable, indicating the Administrative Agent's (for the ratable
benefit of the Lenders) first priority security interest in the Vehicle covered
by such certificate, and any other necessary documentation, shall be filed in
each office in each jurisdiction which the Administrative Agent shall deem
advisable to perfect its security interests in the Vehicles.
5.12. Blocked Account and Lock-Box Agreement.
--------------------------------------
Each Grantor covenants that on or prior to August 6, 1999, such
Grantor will enter into a blocked account and lock-box agreement in a form
reasonably acceptable to the Lenders (the "Blocked Account and Lock-Box
----------------------------
Agreement") with the Administrative Agent, the Parent Guarantor and a third
- ---------
party bank (the "Bank") acceptable to the Lenders, pursuant to which a
----
Collateral Account shall be established with the Bank. The Blocked Account and
Lock-Box Agreement shall provide, among other things, that (i) all Proceeds from
Consumer Receivables shall be directly deposited by the payor thereon in the
Collateral Account and all other proceeds from the Collateral securing the
obligations of the Grantors pursuant to this Agreement, and all Net Cash
Proceeds from any Capital Markets Transaction received by either Grantor or the
Parent Guarantor, any of its Subsidiaries or any other direct or indirect parent
holding company of any of the foregoing, and any other amounts received in or
converted into cash solely by either Grantor, shall within one business day of
receipt thereof or conversion thereto be deposited by the Grantors directly in
the Collateral Account, (ii) each Grantor and the Parent Guarantor shall grant
to the Administrative Agent, for the ratable benefit of the Lenders a present
and continuing first priority security interest in (A) the Collateral Account,
all funds held therein and all certificates and instruments, if any, from time
to time representing or evidencing the Collateral Account, (B) all contract
rights, claims and privileges in respect of the Collateral Account and the right
to enforce the same and receive payment thereunder, and (C) all cash, checks,
drafts, bills of exchange, commercial paper of any kind whatsoever, money orders
and other items of value of either Grantor or the Parent Guarantor now or
hereafter paid, deposited, credited, held (whether for collection, provisionally
or otherwise) or otherwise in the possession or under the control of, or in
transit to the Collateral Account or any agent, bailee, or custodian thereof for
deposit in the Collateral Account, and all Proceeds of the foregoing, (iii) the
Collateral Account shall be under the sole dominion and control of the
Administrative Agent for the ratable benefit of the Lenders, subject to
withdrawal by the Administrative Agent for the account of the Lenders as
provided in Section 2.9(e) of the Bridge Loan Agreement and none of the Parent
Guarantor, the Borrower nor Capital nor any Person claiming by, through or under
the
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Parent Guarantor, the Borrower or Capital shall have any rights, title or
interest in, or control over the use of, or any right to withdraw any amount
from, the Collateral Account, (iv) all Proceeds (whether consisting of checks,
notes, drafts, bills of exchange, commercial paper of any kind whatsoever or
other documents) not deposited directly in the Collateral Account by the payor
thereon shall be [promptly deposited by the Parent Guarantor, its Subsidiaries,
the Borrower or Capital in precisely the form received], except for its
endorsement when required, directly in the Collateral Account and, until so
turned over, shall, from the moment received by any Grantor, the Parent
Guarantor or its Subsidiaries until deposited in the Collateral Account, be held
by such Person segregated from other assets and in trust for the Administrative
Agent and the Lenders and shall not be commingled with any other property or
funds of such Person or any other Person. Such Blocked Account and Lock-Box
Agreement shall also contain such other provisions that are customary for
agreements of that kind, and as may be reasonably requested by any Lender.
SECTION 6. REMEDIAL PROVISIONS
6.1. Certain Matters Relating to Receivables.
---------------------------------------
(a) The Administrative Agent, or any designee of the Majority
Lenders, shall have the right to make test verifications of the Receivables in
any manner and through any medium that it reasonably considers advisable, and
each Grantor shall furnish all such assistance and information as the
Administrative Agent or the Majority Lenders may require in connection with such
test verifications. At any time and from time to time, upon the Majority
Lenders' request and at the expense of such Grantor, such Grantor shall cause
independent public accountants or others satisfactory to the Majority Lenders to
furnish to the Administrative Agent reports showing reconciliations, aging and
test verifications of, and trial balances for, the Receivables.
(b) Each Grantor and the Parent Guarantor, as each Grantor's agent
and servicer, shall be fully authorized to collect such Grantor's Receivables,
provided that the Administrative Agent or the Majority Lenders may curtail or
terminate said authority at any time after the occurrence and during the
continuance of an Event of Default. At any time prior to the consummation of the
transactions contemplated by Section 5.12 hereof, any payments of Receivables,
when collected by such Grantor, until deposited pursuant to the Blocked Account
and Lock-Box Agreement, shall be held by such Grantor in trust for the
Administrative Agent and the Lenders segregated from other assets or funds of
such Grantor or any other Person and shall not be commingled with any other
property or funds of such Grantor or any other Person.
(c) At the Administrative Agent's request, each Grantor shall
deliver to the Administrative Agent, with a copy for each Lender, all original
and other documents evidencing, and relating to, the agreements and transactions
which gave rise to the Receivables.
(d) Any Proceeds or other income received by the Administrative
Agent with respect to the balance from time to time on deposit in any Collateral
Account, including any interest or capital gains on investments of amounts on
deposit in such Collateral Account, shall remain, or be deposited, in such
Collateral Account, shall vest in the Administrative Agent, shall constitute
part of the Collateral hereunder and shall not constitute payment of the
Obligations
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until applied thereto as provided in Section 6.5. Each such deposit
of Proceeds of Receivables shall be accompanied by a written report to the
Administrative Agent (with a copy for each Lender) identifying in reasonable
detail the nature and source of the payments included in the deposit.
6.2. Communications with Obligors; Grantor Remains Liable.
----------------------------------------------------
(a) The Administrative Agent in its own name or in the name of
others may at any time after the occurrence and during the continuance of an
Event of Default communicate with obligors under the Receivables to verify with
them to the Majority Lenders' satisfaction the existence, amount and terms of
any Receivables.
(b) Within five business days of the commencement of payment by an
obligor under any Consumer Receivables owned by the Grantors or such obligor's
entry into arrangements with respect to making payment on such Consumer
Receivables, the Grantors shall notify such obligor on such Consumer Receivables
that all amounts paid by such obligor in respect thereof shall be paid directly
into the Collateral Account under the Blocked Account and Lock-Box Agreement and
shall use its best efforts to cause such obligors to do so.
(c) Anything herein to the contrary notwithstanding, each Grantor
shall remain liable under each of the Receivables to observe and perform any
conditions and obligations to be observed and performed by it thereunder, all in
accordance with the terms of any agreement giving rise to such Grantor's
interest therein. The Administrative Agent and any Lender shall not have any
obligation or liability under any Receivable (or any agreement giving rise
thereto) by reason of or arising out of this Agreement or the receipt by the
Administrative Agent or any Lender of any payment relating thereto, nor shall
the Administrative Agent or any Lender be obligated in any manner to perform any
of the obligations of any Grantor under or pursuant to any Receivable (or any
agreement giving rise thereto) to make any payment, to make any inquiry as to
the nature or the sufficiency of any payment received by it or as to the
sufficiency of any performance by any party thereunder, to present or file any
claim, to take any action to enforce any performance or to collect the payment
of any amounts which may have been assigned to it or to which it may be entitled
at any time or times.
6.3. Dividends and Distributions; Voting Rights.
------------------------------------------
(a) Unless an Event of Default shall have occurred and be
continuing and the Administrative Agent shall have given notice to the relevant
Grantor of the Administrative Agent's intent to exercise its corresponding
rights pursuant to Section 6.3(b), each Grantor shall be permitted to receive
all cash dividends paid in respect of the Pledged Stock and all payments made in
respect of the Pledged Notes, in each case paid in the normal course of business
of the relevant Issuer and consistent with past practice, to the extent
permitted in the Bridge Loan Agreement, and to exercise all voting and corporate
rights with respect to the Pledged Securities; provided, however, that no vote
-------- -------
shall be cast or corporate right exercised or other action taken which, in the
Administrative Agent's reasonable judgment, would impair the Collateral or which
would be inconsistent with or result in any violation of any provision of the
Bridge Loan Agreement, this Agreement or any other Loan Document.
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(b) If an Event of Default shall occur and be continuing and the
Administrative Agent shall give notice of its intent to exercise such rights to
the relevant Grantor or Grantors, (i) the Administrative Agent shall have the
right to receive any and all dividends, payments or other Proceeds paid in
respect of the Pledged Securities and make application thereof to the
Obligations in the order set forth in Section 6.5, and (ii) any or all of the
Pledged Securities shall be registered in the name of the Administrative Agent
or its nominee for the ratable benefit of the Lenders, and the Administrative
Agent or its nominee may thereafter exercise on behalf of the Lenders (x) all
voting, corporate and other rights pertaining to such Pledged Securities at any
meeting of shareholders of the relevant Issuer or Issuers or otherwise and (y)
any and all rights of conversion, exchange and subscription and any other
rights, privileges or options pertaining to such Pledged Securities as if it
were the absolute owner thereof (including, without limitation, the right to
exchange at its discretion any and all of the Pledged Securities upon the
merger, consolidation, reorganization, recapitalization or other fundamental
change in the corporate structure of any Issuer, or upon the exercise by any
Grantor or the Administrative Agent of any right, privilege or option pertaining
to such Pledged Securities, and in connection therewith, the right to deposit
and deliver any and all of the Pledged Securities with any committee,
depositary, transfer agent, registrar or other designated agency upon such terms
and conditions as the Administrative Agent may determine), all without liability
except to account for property actually received by it, but the Administrative
Agent shall have no duty to any Grantor to exercise any such right, privilege or
option and shall not be responsible for any failure to do so or delay in so
doing.
(c) Each Grantor hereby authorizes and instructs each Issuer of any
Pledged Securities pledged by such Grantor hereunder to (i) comply with any
instruction received by it from the Administrative Agent in writing that (x)
states that an Event of Default has occurred and is continuing and (y) is
otherwise in accordance with the terms of this Agreement, without any other or
further instructions from such Grantor, and such Grantor agrees that each Issuer
shall be fully protected in so complying, and (ii) unless otherwise expressly
permitted hereby, pay any dividends or other payments with respect to the
Pledged Securities directly to the Administrative Agent for the account of the
Lenders.
(d) Unless an Event of Default shall have occurred and be
continuing, and the Administrative Agent shall have given notice of its intent
to exercise such rights to the relevant Grantor, the Administrative Agent shall
not repledge any Collateral held by the Administrative Agent for the ratable
benefit of the Lenders.
6.4. Proceeds to be Turned Over To Administrative Agent.
--------------------------------------------------
At any time prior to the consummation of the transactions contemplated
by Section 5.12 hereof and in addition to the rights of the Administrative Agent
and the Lenders specified in Section 6.1 with respect to payments of
Receivables, all Proceeds received by any Grantor shall be held by such Grantor
in trust for the Administrative Agent and the Lenders, segregated from other
assets or funds of such Grantor or any other Person and shall not be commingled
with any other property or funds of such Grantor or any other Person, and shall,
forthwith upon receipt by such Grantor, be turned over to the Administrative
Agent in the exact form received by such Grantor (duly endorsed by such Grantor
to the Administrative Agent, if required). All Proceeds received by the
Administrative Agent hereunder shall be held by the Administrative Agent in a
Collateral Account maintained under its sole dominion and control. All Proceeds
while held by the
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Administrative Agent in a Collateral Account (or by such Grantor in trust for
the Administrative Agent and the Lenders shall continue to be held as collateral
security for all the Obligations and shall not constitute payment thereof until
applied as provided in Section 6.5.
6.5. Application of Proceeds.
-----------------------
At such intervals as may be agreed upon by the relevant Grantor and
the Administrative Agent, or, if an Event of Default shall have occurred and be
continuing, as soon as practicable after their receipt, the Administrative Agent
may apply all or any part of Proceeds constituting Collateral, whether or not
held in any Collateral Account, and any proceeds of the guarantee set forth in
Section 2, in payment of the Obligations in the following order:
FIRST: to any unpaid fees and reimbursement or unpaid expenses of the
Administrative Agent incurred in connection with the Bridge Loan Agreement,
the Guarantee and Collateral Agreements and any Related Document;
SECOND: to the payment of all costs, expenses, other fees,
commissions and taxes owing to any Lender under the Bridge Loan Agreement
or;
THIRD: to the indefeasible payment of all accrued interest on the
Loans to the date of such payment or collection;
FOURTH: to the indefeasible payment of the amounts then due and
unpaid under the Bridge Loan Agreement, the Bridge Notes or any other Loan
Document for principal, in respect of which or for the benefit of which
such money has been paid or collected, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Bridge Notes for principal; and
FIFTH: the balance, if any, to the Person lawfully entitled thereto.
6.6. Code and Other Remedies.
-----------------------
If an Event of Default shall occur and be continuing, upon the request
of, and as directed by, the Majority Lenders the Administrative Agent, on behalf
of the Lenders shall exercise, in addition to all other rights and remedies
granted to it in this Agreement, the Bridge Loan Agreement and in any other
instrument or agreement securing, evidencing or relating to the Obligations, all
rights and remedies of a secured party under the New York UCC or any other
applicable law. Without limiting the generality of the foregoing, the
Administrative Agent, without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by applicable law referred to below) to or upon any Grantor, the Parent
Guarantor, any Issuer or any other Person (all and each of which demands,
defenses, advertisements and notices are hereby waived), may in such
circumstances forthwith collect, receive, appropriate and realize upon the
Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give
option or options to purchase, or otherwise dispose of and deliver the
Collateral or any part thereof (or contract to do any of the foregoing), in one
or more parcels at public or private sale or sales, at any exchange, broker's
board or office of the
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Administrative Agent or any Lender or elsewhere upon such terms and conditions
as it may deem advisable and at such prices as it may deem best, for cash or on
credit or for future delivery without assumption of any credit risk. The
Administrative Agent or any Lender shall have the right upon any such public
sale or sales, and, to the extent permitted by law, upon any such private sale
or sales, to purchase the whole or any part of the Collateral so sold, free of
any right or equity of redemption in any Grantor, which right or equity is
hereby waived and released. Each Grantor further agrees, at the Administrative
Agent's request, to assemble the Collateral and make it available to the
Administrative Agent at places which the Administrative Agent shall reasonably
select, whether at such Grantor's premises or elsewhere. The Administrative
Agent shall apply any Proceeds from time to time held by it and the net proceeds
of any action taken by it pursuant to this Section 6.6, after deducting all
reasonable costs and expenses of every kind incurred in connection therewith or
incidental to the care or safekeeping of any of the Collateral or in any way
relating to the Collateral or the rights of the Administrative Agent or the
Lenders hereunder, including, without limitation, reasonable attorneys' fees and
disbursements, to the payment in whole or in part of the Obligations, in
accordance with Section 6.3 and only after such application and after the
payment by the Administrative Agent of any other amount required by any
provision of applicable law, including, without limitation, Section 9-504(l)(c)
of the New York UCC, need the Administrative Agent account for the surplus, if
any, to any Grantor. To the extent permitted by applicable law, each Grantor
waives all claims, damages and demands it may acquire against the Administrative
Agent or any Lender arising out of the exercise by them of any rights or
remedies hereunder. If any notice of a proposed sale or other disposition of
Collateral shall be required by law, such notice shall be deemed reasonable and
proper if given at least 10 days before such sale or other disposition.
6.7. Registration Rights.
-------------------
(a) If the Administrative Agent shall determine to exercise its right
to sell any or all of the Pledged Stock pursuant to Section 6.6, and if in the
opinion of the Administrative Agent it is necessary or advisable to have the
Pledged Stock, or that portion thereof to be sold, registered under the
provisions of the Securities Act, the relevant Grantor will cause the Issuer
thereof to (i) execute and deliver, and cause the directors and officers of such
Issuer to execute and deliver, all such instruments and documents, and do or
cause to be done all such other acts as may be, in the opinion of the
Administrative Agent, necessary or advisable to register the Pledged Stock, or
that portion thereof to be sold, under the provisions of the Securities Act,
(ii) use its best efforts to cause the registration statement relating thereto
to become effective and to remain effective for a period of one year from the
date of the first public offering of the Pledged Stock, or that portion thereof
to be sold, and (iii) make all amendments thereto and/or to the related
prospectus which, in the opinion of the Administrative Agent, are necessary or
advisable, all in conformity with the requirements of the Securities Act and the
rules and regulations of the Securities and Exchange Commission applicable
thereto. Each Grantor agrees to cause such Issuer to comply with the provisions
of the securities or "Blue Sky" laws of any and all jurisdictions which the
Administrative Agent shall designate and to make available to its security
holders, as soon as practicable, an earnings statement (which need not be
audited) which will satisfy the provisions of Section 11(a) of the Securities
Act.
(b) Each Grantor recognizes that the Administrative Agent may be
unable to effect a public sale of any or all the Pledged Stock, by reason of
certain prohibitions contained in
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the Securities Act and applicable state securities laws or otherwise, and may be
compelled to resort to one or more private sales thereof to a restricted group
of purchasers which will be obliged to agree, among other things, to acquire
such securities for their own account for investment and not with a view to the
distribution or resale thereof. Each Grantor acknowledges and agrees that any
such private sale may result in prices and other terms less favorable than if
such sale were a public sale and, notwithstanding such circumstances, agrees
that any such private sale shall be deemed to have been made in a commercially
reasonable manner. The Administrative Agent shall be under no obligation to
delay a sale of any of the Pledged Stock for the period of time necessary to
permit the Issuer thereof to register such securities for public sale under the
Securities Act, or under applicable state securities laws, even if such Issuer
would agree to do so.
(c) Each Grantor agrees to use its best efforts to do or cause to be
done all such other acts as may be necessary to make such sale or sales of all
or any portion of the Pledged Stock pursuant to this Section 6.7 valid and
binding and in compliance with any and all other applicable Requirements of Law.
Each Grantor further agrees that a breach of any of the covenants contained in
this Section 6.7 will cause irreparable injury to the Administrative Agent and
the Lenders, that the Administrative Agent and the Lenders have no adequate
remedy at law in respect of such breach and, as a consequence, that each and
every covenant contained in this Section 6.7 shall be specifically enforceable
against such Grantor, and such Grantor hereby waives and agrees not to assert
any defenses against an action for specific performance of such covenants except
for a defense that no Event of Default has occurred under the Bridge Loan
Agreement.
6.8. Waiver; Deficiency.
------------------
Each Grantor waives and agrees not to assert any rights or privileges
which it may acquire under Section 9-112 of the New York UCC. Each Grantor
shall remain liable for any deficiency if the proceeds of any sale or other
disposition of the Collateral are insufficient to pay its Obligations and the
fees and disbursements of any attorneys employed by the Administrative Agent or
any Lender to collect such deficiency.
6.9. Powers Coupled with an Interest.
-------------------------------
All authorizations and agencies herein contained with respect to the
Collateral constitute irrevocable powers coupled with an interest.
SECTION 7. THE ADMINISTRATIVE AGENT
7.1. Administrative Agent's Appointment as Attorney-in-Fact, etc.
------------------------------------------------------------
(a) Each Grantor hereby irrevocably constitutes and appoints the
Administrative Agent and any officer or agent thereof, with full power of
substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of such Grantor and in the name of
such Grantor or in its own name, for the purpose of carrying out the terms of
this Agreement, to take any and all appropriate action and to execute any and
all documents and instruments which may be necessary or desirable to accomplish
the purposes of this Agreement, and, without limiting the generality of the
foregoing, each Grantor hereby gives
22
<PAGE>
the Administrative Agent the power and right, on behalf of such Grantor, without
notice to or assent by such Grantor, to do any or all of the following:
(i) in the name of such Grantor or its own name, or otherwise,
take possession of and indorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under any
Receivable or with respect to any other Collateral and file any claim or
take any other action or proceeding in any court of law or equity or
otherwise deemed appropriate by the Administrative Agent for the purpose of
collecting any and all such moneys due under any Receivable or with respect
to any other Collateral whenever payable;
(ii) in the case of any Intellectual Property, execute and
deliver, and have recorded, any and all agreements, instruments, documents
and papers as the Administrative Agent may request to evidence the
Administrative Agent's and the Lenders' security interest in such
Intellectual Property and the goodwill and General Intangibles of such
Grantor relating thereto or represented thereby;
(iii) pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral, effect any repairs or any insurance called
for by the terms of this Agreement and pay all or any part of the premiums
therefor and the costs thereof;
(iv) execute, in connection with any sale provided for in
Section 6.6 or 6.7, any indorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral; and
(v) (1) direct any party liable for any payment under any of
the Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Administrative Agent or as the Administrative
Agent shall direct; (2) ask or demand for, collect, and receive payment of
and receipt for, any and all moneys, claims and other amounts due or to
become due at any time in respect of or arising out of any Collateral; (3)
sign and indorse any invoices, freight or express bills, bills of lading,
storage or warehouse receipts, drafts against debtors, assignments,
verifications, notices and other documents in connection with any of the
Collateral; (4) commence and prosecute any suits, actions or proceedings at
law or in equity in any court of competent jurisdiction to collect the
Collateral or any portion thereof and to enforce any other right in respect
of any Collateral; (5) defend any suit, action or proceeding brought
against such Grantor with respect to any Collateral; (6) settle, compromise
or adjust any such suit, action or proceeding and, in connection therewith,
give such discharges or releases as the Administrative Agent may deem
appropriate; (7) assign any Copyright, Patent or Trademark (along with the
goodwill of the business to which any such Copyright, Patent or Trademark
pertains), throughout the world for such term or terms, on such conditions,
and in such manner, as the Administrative Agent shall in its sole
discretion determine; and (8) generally, sell, transfer, pledge and make
any agreement with respect to or otherwise deal with any of the Collateral
as fully and completely as though the Administrative Agent were the
absolute owner thereof for all purposes, and do, at the Administrative
Agent's option and such Grantor's expense, at any time, or from time to
time, all acts and things which the Administrative Agent deems necessary to
protect,
23
<PAGE>
preserve or realize upon the Collateral and the Administrative Agent's and
the Lenders' security interests therein and to effect the intent of this
Agreement, all as fully and effectively as such Grantor might do.
Anything in this Section 7.1(a) to the contrary notwithstanding, the
Administrative Agent agrees that it will not exercise any rights under the power
of attorney provided for in this Section 7.1(a) unless an Event of Default shall
have occurred and be continuing.
(b) If any Grantor fails to perform or comply with any of its
agreements contained herein, the Administrative Agent, at its option, but
without any obligation so to do, may, and, at the request, and as directed by,
of the Majority Lenders, will, perform or comply, or otherwise cause performance
or compliance, with such agreement.
(c) The expenses of the Administrative Agent incurred in connection
with actions undertaken as provided in this Section 7.1, together with interest
thereon at a rate per annum equal to the rate per annum at which interest would
then be payable on past due Loans under the Bridge Loan Agreement, from the date
of payment by the Administrative Agent to the date reimbursed by the relevant
Grantor, shall be payable by such Grantor to the Administrative Agent on demand.
(d) Each Grantor hereby ratifies all that said attorneys shall
lawfully do or cause to be done by virtue hereof. All powers, authorizations and
agencies contained in this Agreement are coupled with an interest and are
irrevocable until this Agreement is terminated and the security interests
created hereby are released.
7.2. Duty of Administrative Agent.
----------------------------
The Administrative Agent's sole duty with respect to the custody,
safekeeping and physical preservation of the Collateral in its possession, under
Section 9-207 of the New York UCC or otherwise, shall be to deal with it in the
same manner as the Administrative Agent deals with similar property for its own
account. The Administrative Agent or any Lender, or any of their respective
officers, directors, employees or agents shall not be liable for failure to
demand, collect or realize upon any of the Collateral or for any delay in doing
so or shall be under any obligation to sell or otherwise dispose of any
Collateral upon the request of such Grantor or any other Person or to take any
other action whatsoever with regard to the Collateral or any part thereof. The
powers conferred on the Administrative Agent and the Lenders hereunder are
solely to protect the Administrative Agent's and the Lenders' interests in the
Collateral and shall not impose any duty upon the Administrative Agent or any
Lender to exercise any such powers. The Administrative Agent and the Lenders
shall be accountable only for amounts that they actually receive as a result of
the exercise of such powers, and neither they nor any of their officers,
directors, employees or agents shall be responsible to any Grantor for any act
or failure to act hereunder, except for their own gross negligence or willful
misconduct.
7.3. Execution of Financing Statements.
---------------------------------
Pursuant to Section 9-402 of the New York UCC and any other applicable
law, each Grantor authorizes the Administrative Agent to file or record
financing statements and other
24
<PAGE>
filing or recording documents or instruments with respect to the Collateral
without the signature of such Grantor in such form and in such offices as the
Administrative Agent reasonably determines appropriate to perfect the security
interests of the Administrative Agent under this Agreement. A photographic or
other reproduction of this Agreement shall be sufficient as a financing
statement or other filing or recording document or instrument for filing or
recording in any jurisdiction.
7.4. Authority of Administrative Agent.
---------------------------------
Each Grantor acknowledges that the rights and responsibilities of the
Administrative Agent under this Agreement with respect to any action taken by
the Administrative Agent or the exercise or non-exercise by the Administrative
Agent of any option, voting right, request, judgment or other right or remedy
provided for herein or resulting or arising out of this Agreement shall, as
between the Administrative Agent and the Lenders, be governed by the Bridge Loan
Agreement and by such other agreements with respect thereto as may exist from
time to time among them, but, as between the Administrative Agent and the
Grantors, the Administrative Agent shall be conclusively presumed to be acting
as agent for the Lenders with full and valid authority so to act or refrain from
acting, and no Grantor shall be under any obligation, or entitlement, to make
any inquiry respecting such authority.
SECTION 8. MISCELLANEOUS
8.1. Amendments in Writing.
---------------------
None of the terms or provisions of this Agreement may be waived,
amended, supplemented or otherwise modified except in accordance with Section
11.3 of the Bridge Loan Agreement.
8.2. Notices.
-------
All notices, requests and demands to or upon the Administrative Agent,
any Lender or each Grantor hereunder shall be effected in the manner provided
for in Section 11.2 of the Bridge Loan Agreement.
8.3. No Waiver by Course of Conduct; Cumulative Remedies.
---------------------------------------------------
None of the Administrative Agent or any Lender shall by any act
(except by a written instrument pursuant to Section 8.1), delay, indulgence,
omission or otherwise be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Default or Event of Default. No failure to exercise,
nor any delay in exercising, on the part of the Administrative Agent or any
Lender, any right, power or privilege hereunder shall operate as a waiver
thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. A waiver by the Administrative Agent or
any Lender of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which the Administrative Agent or such
Lender would otherwise have on any future occasion. The rights and remedies
herein provided are cumulative, may be exercised singly or concurrently and are
not exclusive of any other rights or remedies provided by law.
25
<PAGE>
8.4. Enforcement Expenses; Indemnification.
-------------------------------------
(a) The Guarantor agrees to pay or reimburse each Lender and the
Administrative Agent for all its costs and expenses incurred in collecting
against the Guarantor under the guarantee contained in Section 2 or otherwise
enforcing or preserving any rights under this Agreement and the other Loan
Documents to which the Guarantor is a party, including, without limitation, the
fees and disbursements of counsel (including the allocated fees and expenses of
in-house counsel) to each Lender or of counsel to the Administrative Agent.
(b) The Guarantor agrees to pay, and to save the Administrative Agent
and each Lender harmless from, any and all liabilities with respect to, or
resulting from any delay in paying, any and all stamp, excise, sales or other
taxes which may be payable or determined to be payable with respect to any of
the Collateral or in connection with any of the transactions contemplated by
this Agreement.
(c) The Guarantor agrees to pay, and to save the Administrative Agent
and the Lenders harmless from, any and all 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, performance and administration of this Agreement to the extent the
Borrower would be required to do so pursuant to Section 11.1 of the Bridge Loan
Agreement.
(d) The agreements in this Section shall survive repayment of the
Obligations and all other amounts payable under the Bridge Loan Agreement and
the other Loan Documents.
8.5. Successors and Assigns.
----------------------
This Agreement shall be binding upon the successors and assigns of
each Grantor and shall inure to the benefit of the Administrative Agent and the
Lenders and their successors and assigns; provided that no Grantor may assign,
--------
transfer or delegate any of its rights or obligations under this Agreement
without the prior written consent of the Administrative Agent and the Lenders.
8.6. Set-Off.
-------
Each Grantor hereby irrevocably authorizes the Administrative Agent
and each Lender at any time and from time to time while an Event of Default
shall have occurred and be continuing, without notice to such Grantor or any
other Grantor, any such notice being expressly waived by each Grantor, to set-
off and appropriate and apply 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 the Administrative Agent or such Lender to or for the credit or the
account of such Grantor, or any part thereof in such amounts as the
Administrative Agent or such Lender may elect, against and on account of the
obligations and liabilities of such Grantor to the Administrative Agent or such
Lender hereunder and claims of every nature and description of the
Administrative Agent or such Lender against such Grantor, in any currency,
whether arising hereunder, under the Bridge Loan Agreement, any other Loan
Document or otherwise, as the Administrative Agent or such Lender may elect,
26
<PAGE>
whether or not the Administrative Agent or any Lender has made any demand for
payment and although such obligations, liabilities and claims may be contingent
or unmatured. The Administrative Agent and each Lender shall notify such
Grantor promptly of any such set-off and the application made by the
Administrative Agent or such Lender of the proceeds thereof, provided that the
--------
failure to give such notice shall not affect the validity of such set-off and
application. The rights of the Administrative Agent and each Lender and under
this Section are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which the Administrative Agent or such
Lender may have.
8.7. Counterparts.
------------
This Agreement may be executed by one or more of the parties to this
Agreement on any number of separate counterparts (including by telecopy), and
all of said counterparts taken together shall be deemed to constitute one and
the same instrument.
8.8. 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.
8.9. Section Headings.
----------------
The Section headings used in this Agreement are for convenience of
reference only and are not to affect the construction hereof or be taken into
consideration in the interpretation hereof.
8.10. Integration.
-----------
This Agreement and the other Loan Documents represent the agreement of
each Grantor, the Administrative Agent and the Lenders with respect to the
subject matter hereof and thereof, and there are no promises, undertakings,
representations or warranties by the Administrative Agent or any Lender relative
to subject matter hereof and thereof not expressly set forth or referred to
herein or in the other Loan Documents.
8.11. GOVERNING LAW.
-------------
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
8.12. Submission To Jurisdiction; Waivers.
-----------------------------------
Each Grantor hereby irrevocably and unconditionally:
27
<PAGE>
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to which it
is a party, or for recognition and enforcement of any judgment in respect
thereof, to the non-exclusive general jurisdiction of the Courts of the State of
New York, the courts of the United States of America for the Southern District
of New York, 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 mailing a copy thereof by registered or certified mail (or
any substantially similar form of mail), postage prepaid, to such Grantor at its
address referred to in Section 8.2 or at such other address of which the
Administrative Agent shall have been notified pursuant thereto;
(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; and
(e) waives, to the maximum extent not prohibited by law, any right
it may have to claim or recover in any legal action or proceeding referred to in
this Section any special, exemplary, punitive or consequential damages.
8.13. Acknowledgements.
----------------
Each Grantor hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution
and delivery of this Agreement and the other Loan Documents to which it is a
party;
(b) none of the Administrative Agent or any Lender has any
fiduciary relationship with or duty to any Grantor arising out of or in
connection with this Agreement or any of the other Loan Documents, and the
relationship between the Grantors, on the one hand, and the Administrative Agent
and the Lenders on the other hand, in connection herewith or therewith is solely
that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan
Documents or otherwise exists by virtue of the transactions contemplated hereby
among the Lenders or among the Grantors and the Lenders.
8.14. Releases.
--------
(a) At such time as the Loans and the other Obligations shall have
been indefeasibly and irrevocably paid in full and the Commitments have been
terminated, the Collateral shall be released from the Liens created hereby, and
this Agreement and all obligations (other than those expressly stated to survive
such termination) of the Administrative Agent and the Grantors hereunder shall
terminate, all without delivery of any instrument or performance of any act by
any party, and all rights to the Collateral shall revert to the Grantors.
28
<PAGE>
At the request and sole expense of any Grantor following any such termination,
the Administrative Agent shall deliver to such Grantor any Collateral held by
the Administrative Agent hereunder, and execute and deliver to such Grantor such
documents as such Grantor shall reasonably request to evidence such termination.
(b) If any of the Collateral shall be sold, transferred or
otherwise disposed of by any Grantor in a transaction permitted by the Bridge
Loan Agreement, then the Administrative Agent, at the request and sole expense
of such Grantor, shall execute and deliver to such Grantor all releases or other
documents reasonably necessary or desirable for the release of the Liens created
hereby on such Collateral.
8.15. WAIVER OF JURY TRIAL.
--------------------
EACH GRANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY
JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER
LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
[signature page to follow]
29
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has caused this Guarantee
and Collateral Agreement to be duly executed and delivered as of the date first
above written.
Creditrust SPV99-2, LLC
By Creditrust Corporation, its sole member
By: ______________________________________________
Name:
Title:
CRDT SPV99-2 Capital, Inc.
By: ______________________________________________
Name:
Title:
Acknowledged and Agreed:
Norwest Bank Minnesota, National Association,
as Administrative Agent
By: _________________________________________
Name:
Title:
30
<PAGE>
Schedule 1
----------
DESCRIPTION OF PLEDGED SECURITIES
Pledged Stock:
<TABLE>
<CAPTION>
Issuer Class Of Stock Stock Certificate No. No. Of Shares
- ------------------------- -------------- --------------------- -------------
<S> <C> <C> <C>
CRDT SPV99-2 Capital, Inc. Common [1] [1,000]
</TABLE>
31
<PAGE>
Schedule 2
----------
FILINGS AND OTHER ACTIONS
REQUIRED TO PERFECT SECURITY INTERESTS
Uniform Commercial Code Filings
-------------------------------
UCC-1 financing statements with respect to each Grantor naming such
Grantor as debtor and the Administrative Agent as secured party and identifying
the Collateral as collateral, shall be filed in the office of the Maryland State
Department of Assessments and Taxation and such other UCC filing offices as may
be deemed necessary or advisable by the Lenders, the Parent Guarantor or their
respective counsel.
Actions with Respect to Pledged Stock
-------------------------------------
All certificates representing Pledged Stock set forth on Schedule 1
hereto shall be delivered to the Administrative Agent, duly indorsed by the
relevant Grantor to the Administrative Agent, if required, together with a stock
power covering such certificate duly executed in blank by the relevant Grantor.
32
<PAGE>
Schedule 3
----------
LOCATION OF JURISDICTION OF ORGANIZATION AND CHIEF EXECUTIVE OFFICE
<TABLE>
<CAPTION>
Grantor Jurisdiction of Organization Locations
------- ---------------------------- ---------
<S> <C> <C>
Creditrust SPV99-2, LLC Delaware 7000 Security Boulevard
Baltimore, MD 21244
CRDT SPV99-2 Capital, Inc. Delaware 7000 Security Boulevard
Baltimore, MD 21244
</TABLE>
<PAGE>
Schedule 4
----------
LOCATION OF INVENTORY AND EQUIPMENT
<TABLE>
<CAPTION>
Grantor Location
------- --------
<S> <C>
Creditrust SPV99-2, LLC 7000 Security Boulevard
Baltimore, MD 21244
CRDT SPV99-2 Capital, Inc. 7000 Security Boulevard
Baltimore, MD 21244
</TABLE>
<PAGE>
FORM OF ACKNOWLEDGEMENT AND CONSENT
The undersigned hereby acknowledges receipt of a copy of the Guarantee
and Collateral Agreement dated as of August 2, 1999 (the "Agreement"), made by
---------
the Grantors parties thereto for the benefit of Norwest Bank Minnesota, National
Association, as Administrative Agent for the Lenders. The undersigned agrees
for the benefit of the Administrative Agent and the Lenders as follows:
1. The undersigned will be bound by the terms of the Agreement and
will comply with such terms insofar as such terms are applicable to the
undersigned.
2. The undersigned will notify the Administrative Agent promptly in
writing of the occurrence of any of the events described in Section 5.8(a) of
the Agreement.
3. The terms of Sections 6.3(a) and 6.7 of the Agreement shall
apply to the Lenders undersigned, mutatis mutandis, with respect to all actions
------- --------
that may be required of the Lenders undersigned pursuant to Section 6.3(a) or
6.7 of the Agreement.
4. Capitalized terms herein shall have the meanings set forth in the
Agreement.
CRDT SPV99-2 CAPITAL, INC.
By_________________________________
Title______________________________
Address for Notices:
7000 Security Boulevard
Baltimore, Maryland 21244
<PAGE>
EXHIBIT 10.21
================================================================================
PARENT GUARANTEE AND COLLATERAL AGREEMENT
made by
Creditrust Corporation
in favor of
Norwest Bank Minnesota, National Association
as Administrative Agent
Dated as of August 2, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. DEFINED TERMS.................................................... 2
1.1. Definitions......................................................... 2
1.2. Other Definitional Provisions....................................... 4
SECTION 2. GUARANTEE........................................................ 4
2.1. Guarantee........................................................... 4
2.2. No Subrogation...................................................... 5
2.3. Amendments, etc. with respect to the Borrower Obligations........... 5
2.4. Guarantee Absolute and Unconditional................................ 6
2.5. Reinstatement....................................................... 7
2.6. Payments............................................................ 7
SECTION 3. GRANT OF SECURITY INTEREST....................................... 7
SECTION 4. REPRESENTATIONS AND WARRANTIES................................... 8
4.1. Title; No Other Liens............................................... 8
4.2. Perfected First Priority Liens...................................... 8
4.3. Pledged Stock....................................................... 9
SECTION 5. COVENANTS........................................................ 9
5.1. Covenants in Bridge Loan Agreement.................................. 9
5.2. Payment of Obligations.............................................. 9
5.3. Maintenance of Perfected Security Interest; Further Documentation... 10
5.4. Notices............................................................. 10
5.5. Pledged Stock....................................................... 10
SECTION 6. REMEDIAL PROVISIONS.............................................. 13
6.1. Pledged Stock....................................................... 13
6.2. Proceeds to be Turned Over To Administrative Agent.................. 14
6.3. Application of Proceeds............................................. 14
6.4. Code and Other Remedies............................................. 15
6.5. Registration Rights................................................. 16
6.6. Waiver; Deficiency.................................................. 17
SECTION 7. THE ADMINISTRATIVE AGENT......................................... 17
7.1. Administrative Agent's Appointment as Attorney-in-Fact, etc......... 17
7.2. Duty of Administrative Agent........................................ 18
7.3. Execution of Financing Statements................................... 19
7.4. Authority of Administrative Agent................................... 19
SECTION 8. MISCELLANEOUS.................................................... 19
8.1. Amendments in Writing............................................... 19
8.2. Notices............................................................. 19
8.3. No Waiver by Course of Conduct; Cumulative Remedies................. 19
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
8.4. Enforcement Expenses; Indemnification............................... 20
8.5. Successors and Assigns.............................................. 20
8.6. Set-Off............................................................. 20
8.7. Counterparts........................................................ 21
8.8. Severability........................................................ 21
8.9. Section Headings.................................................... 21
8.10. Integration........................................................ 21
8.11. GOVERNING LAW...................................................... 21
8.12. Submission To Jurisdiction; Waivers................................ 22
8.13. Acknowledgements................................................... 22
8.14. Releases........................................................... 23
8.15. WAIVER OF JURY TRIAL............................................... 23
</TABLE>
ii
<PAGE>
PARENT GUARANTEE AND COLLATERAL AGREEMENT
GUARANTEE AND COLLATERAL AGREEMENT, dated as of August 2, 1999, made
by the signatory hereto (the "Parent Guarantor"), in favor of Norwest Bank
----------------
Minnesota, National Association, as Administrative Agent (in such capacity, the
"Administrative Agent") for the banks and other financial institutions (the
--------------------
"Lenders") from time to time parties to the Bridge Loan Agreement, dated as of
-------
August 2, 1999 (as amended, supplemented or otherwise modified from time to
time, the "Bridge Loan Agreement"), among Creditrust SPV99-2, LLC, a Delaware
---------------------
limited liability company (the "Borrower"), CRDT SPV99-2 Capital, Inc., a
--------
Delaware corporation ("Capital"), the Parent Guarantor, the Lenders and Norwest
-------
Bank Minnesota, National Association, as administrative agent (in such capacity,
the "Administrative Agent").
--------------------
W I T N E S S E T H:
-------------------
WHEREAS, pursuant to the Bridge Loan Agreement, the Lenders have
severally agreed to lend to the Borrower $40.0 million upon the terms and
subject to the conditions set forth therein;
WHEREAS, the Borrower is a member of an affiliated group of companies
that includes the Parent Guarantor;
WHEREAS, the proceeds of the loans under the Bridge Loan Agreement
will be used in part to enable the Borrower to make valuable transfers to the
Parent Guarantor in connection with the operation of their respective
businesses;
WHEREAS, the Borrower and the Parent Guarantor are engaged in related
businesses, and the Parent Guarantor will derive substantial direct and indirect
benefit from the making of the loans under the Bridge Loan Agreement; and
WHEREAS, it is a condition precedent to the obligation of the Lenders
to make their respective loans to the Borrower under the Bridge Loan Agreement
that the Parent Guarantor shall have executed and delivered this Agreement to
the Administrative Agent for the ratable benefit of the Lenders;
NOW, THEREFORE, in consideration of the premises and to induce the
Administrative Agent and the Lenders to enter into the Bridge Loan Agreement and
to induce the Lenders to make their respective loans to the Borrower thereunder,
the Parent Guarantor hereby agrees with the Administrative Agent, for the
ratable benefit of the Lenders, as follows:
1
<PAGE>
SECTION 1. DEFINED TERMS
1.1. Definitions.
-----------
(a) Unless otherwise defined herein, terms defined in the Bridge Loan
Agreement and used herein shall have the meanings given to them in the Bridge
Loan Agreement.
(b) The following terms shall have the following meanings:
"Agreement": this Guarantee and Collateral Agreement, as the same may
---------
be amended, supplemented or otherwise modified from time to time.
"Borrower Obligations": the collective reference to the unpaid
--------------------
principal of and interest on the Loans and all other obligations and
liabilities of the Borrower (including, without limitation, interest
accruing at the then applicable rate provided in the Bridge Loan Agreement
after the maturity of the Loans and interest accruing at the then
applicable rate provided in the Bridge Loan Agreement after the filing of
any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to the Borrower, whether or not
a claim for post-filing or post-petition interest is allowed in such
proceeding) to the Administrative Agent or any Lender in respect of the
Loans, the Bridge Notes, the Collateral Account or any cash management
arrangements with the Administrative Agent or any Lender, whether direct or
indirect, absolute or contingent, due or to become due, or now existing or
hereafter incurred, which may arise under, out of, or in connection with,
the Bridge Loan Agreement, this Agreement or the other Loan Documents or
any other document made, delivered or given in connection herewith or
therewith, in each case whether on account of principal, interest,
reimbursement obligations, fees, indemnities, costs, expenses or otherwise
(including, without limitation, all fees and disbursements of counsel to
the Administrative Agent and the Lenders that are required to be paid by
the Borrower pursuant to the terms of any of the foregoing agreements).
"Collateral": as defined in Section 3.
----------
"Collateral Account": the collateral account established by the
------------------
Administrative Agent for the ratable benefit of the Lenders as provided in
Section 5.6 or 6.2 (including all funds, securities, warrants and other
property therein (whether certificated or uncertificated)).
"Guarantor Obligations": with respect to the Parent Guarantor, all
---------------------
obligations and liabilities of the Parent Guarantor which may arise under
or in connection with this Agreement (including, without limitation,
Section 2) or any other Loan Document, in each case whether on account of
guarantee obligations, reimbursement obligations, fees, indemnities, costs,
expenses or otherwise (including, without limitation, all fees and
disbursements of counsel to the Administrative Agent and the Lenders that
are required to be paid by the Parent Guarantor pursuant to the terms of
this Agreement or any other Loan Document).
2
<PAGE>
"LLC Agreement": the Limited Liability Company Agreement of Borrower,
-------------
as in effect on the date of this Agreement or as amended, modified, supplement
or otherwise restated from time to time hereafter.
"LLC Assets": all assets, whether tangibles or intangible and whether
----------
real, personal or mixed (including, without limitation, all capital and
interests in other Persons), at any time owned by the Borrower or represented by
any interest in the Borrower.
"LLC Interests" means, with respect to the Parent Guarantor, all of
-------------
the Parent Guarantor's right, title and interest in the Borrower (whether or not
comprising part of the Pledged Stock), including without limitation, the Parent
Guarantor's right, title and interest in:
(i) all the capital thereof and its interest in all profits,
losses, LLC Assets and other distributions to which the Parent Guarantor
shall at any time be entitled in respect of its interest in the Borrower;
(ii) all subscriptions, warrants, rights or options of the
Parent Guarantor to acquire any interest in the Borrower;
(iii) all other payments due or to become due to the Parent
Guarantor in respect of its interest in the Borrower, whether under the LLC
Agreement, in respect of the Borrower or otherwise, whether as contractual
obligations, damages, insurance proceeds or otherwise;
(iv) all of its claims, rights, powers, privileges, authority,
options, security interests, liens and remedies, if any, under such LLC
Agreement or at law or otherwise in respect of such LLC Interest,
including, without limitation, all of its rights (including voting rights)
as a member of the Borrower;
(v) all present and future claims, if any, of the Parent
Guarantor against the Borrower under the LLC Agreement for moneys loaned or
advanced, for services rendered or otherwise;
(vi) all of the Parent Guarantor's rights under the LLC
Agreement or at law or otherwise to exercise and enforce every right,
power, remedy, authority, option and privilege of the Parent Guarantor
relating to its interest in the Borrower, including any power to terminate,
cancel or modify the LLC Agreement, to execute any instruments or to take
any instruments or to take any and all other action on behalf and in the
name of the Parent Guarantor in respect of its interest in the Borrower and
the Borrower, to make determinations, to exercise any election (including,
but not limited to, election of remedies) or option or to give or receive
any notice, consent, amendment, waiver or approval, together with full
power and authority to demand, receive, enforce, collect or receipt for any
of the foregoing or for any LLC Asset, to enforce or execute any checks, or
other instruments or orders, to file any claims and to take any action in
connection with any of the foregoing; and
(vii) all other property hereafter delivered in substitution
for, or in addition to, any of the foregoing, all certificates and
instruments representing or evidencing such
3
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other property and all cash, securities, interest, dividends,
distributions, rights and other property at any time and from time to time
received, receivable or otherwise distributed in respect of, or in exchange
for, any or all thereof.
"New York UCC": the Uniform Commercial Code as from time to time in
------------
effect in the State of New York.
"Obligations": (i) in the case of the Borrower, the Borrower
-----------
Obligations, and (ii) in the case of the Parent Guarantor, its Guarantor
Obligations.
"Pledged Stock": the shares, units, interests, participations or
-------------
other equivalents (however designated) listed on Schedule 1, including
----------
without limitation the entire limited liability company interest of the
Parent Guarantor in the Borrower, together with any other shares, stock
certificates, options or rights of any nature whatsoever in respect of the
Capital Stock, shares, units, interests, participations or other
equivalents (however designated) of the Borrower that may be issued or
granted to, or held by, the Parent Guarantor while this Agreement is in
effect.
"Proceeds": all "proceeds" as such term is defined in Section 9-
--------
306(1) of the Uniform Commercial Code in effect in the State of New York on
the date hereof and, in any event, shall include, without limitation, all
dividends, interest or other income from the Pledged Stock including,
without limitation, the LLC Interests, collections thereon or distributions
or payments with respect thereto.
"Securities Act": the Securities Act of 1933, as amended.
--------------
1.2. Other Definitional Provisions.
-----------------------------
(a) The words "hereof," "herein," "hereto" and "hereunder" and words
of similar import when used in this Agreement shall refer to this Agreement
as a whole and not to any particular provision of this Agreement, and
Section and Schedule references are to this Agreement unless otherwise
specified.
(b) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
SECTION 2. GUARANTEE OF THE LOANS
2.1. Guarantee.
---------
(a) The Parent Guarantor hereby, jointly and severally with Capital,
unconditionally and irrevocably, guarantees to the Administrative Agent, for the
ratable benefit of the Lenders and their respective successors, indorsees,
transferees and assigns, the prompt and complete payment and performance by the
Borrower when due (whether at the stated maturity, by acceleration or otherwise)
of the Borrower Obligations.
(b) The Parent Guarantor agrees that the Borrower Obligations may at
any time and from time to time exceed the amount of the liability of the Parent
Guarantor hereunder
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without impairing the guarantee contained in this Section 2 or affecting the
rights and remedies of the Administrative Agent or any Lender hereunder.
(c) The guarantee contained in this Section 2 shall remain in full
force and effect until all the Borrower Obligations and the obligations of the
Parent Guarantor under the guarantee contained in this Section 2 shall have been
satisfied by payment in full and the Commitments shall be terminated,
notwithstanding that from time to time during the term of the Bridge Loan
Agreement the Borrower may be free from any Borrower Obligations.
No payment made by the Borrower, the Parent Guarantor, any other
guarantor or any other Person or received or collected by the Administrative
Agent or any Lender from the Borrower, the Parent Guarantor, any other guarantor
or any other Person by virtue of any action or proceeding or any set-off or
appropriation or application at any time or from time to time in reduction of or
in payment of the Borrower Obligations shall be deemed to modify, reduce,
release or otherwise affect the liability of the Parent Guarantor hereunder
which shall, notwithstanding any such payment (other than any payment made by
the Parent Guarantor in respect of the Borrower Obligations or any payment
received or collected from the Parent Guarantor in respect of the Borrower
Obligations), remain liable for the Borrower Obligations up to the maximum
liability of the Parent Guarantor hereunder until the Borrower Obligations are
paid in full, and the Commitments are terminated.
2.2. No Subrogation.
--------------
Notwithstanding any payment or payments made by the Parent Guarantor
hereunder, or any set-off or application of funds of the Parent Guarantor by the
Administrative Agent or any Lender, the Parent Guarantor shall not be entitled
to be subrogated to any of the rights of the Administrative Agent or any Lender
against the Borrower or any collateral security or guarantee or right of offset
held by the Administrative Agent or any Lender for the payment of the Borrower
Obligations, nor shall the Parent Guarantor seek or be entitled to seek any
contribution or reimbursement from the Borrower in respect of payments made by
the Parent Guarantor hereunder, until all amounts owing to the Administrative
Agent and the Lenders by the Borrower on account of the Borrower Obligations are
paid in full and the Commitments and the Bridge Loan Agreement are terminated.
If any amount shall be paid to the Parent Guarantor on account of such
subrogation rights at any time when all of the Borrower Obligations shall not
have been paid in full, such amount shall be held by the Parent Guarantor in
trust for the Administrative Agent and the Lenders segregated from other funds
of the Parent Guarantor, and shall, forthwith upon receipt by the Parent
Guarantor, be turned over to the Administrative Agent in the exact form received
by the Parent Guarantor (duly indorsed by the Parent Guarantor to the
Administrative Agent, if required), to be applied against the Borrower
Obligations, whether matured or unmatured as provided in Section 6.3.
2.3. Amendments, etc. with respect to the Borrower Obligations.
---------------------------------------------------------
The Parent Guarantor shall remain obligated hereunder and the
liability of the Parent Guarantor hereunder shall be and remain in full force
and effect notwithstanding that, without any reservation of rights against the
Parent Guarantor and without notice to or further assent by the Parent
Guarantor, any demand for payment of any of the Borrower Obligations
5
<PAGE>
made by the Administrative Agent or any Lender may be rescinded by the
Administrative Agent or such Lender and any of the Borrower Obligations
continued or any payment made by the Borrower or any other Person and applied to
the Borrower Obligations is at any time annulled, set aside, invalidated,
declared to be fraudulent or preferential or otherwise required to be refunded
or repaid, and the Borrower Obligations, or the liability of any other Person
upon or for any part thereof, or any collateral security or guarantee therefor
or right of offset with respect thereto, may, from time to time, in whole or in
part, be renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or released by the Administrative Agent or any Lender, and the
Bridge Loan Agreement and the other Loan Documents and any other documents
executed and delivered in connection therewith may be amended, modified,
supplemented or terminated, in whole or in part, as the Administrative Agent (or
the Majority Lenders or all Lenders, as the case may be) may deem advisable from
time to time, and any collateral security, guarantee or right of offset at any
time held by the Administrative Agent or any Lender for the payment of the
Borrower Obligations may be sold, exchanged, waived, surrendered or released.
Neither the Administrative Agent nor any Lender shall have any obligation to
protect, secure, perfect or insure any Lien at any time held by it as security
for the Borrower Obligations or for the guarantee contained in this Section 2 or
any property subject thereto.
2.4. Guarantee Absolute and Unconditional.
------------------------------------
The Parent Guarantor waives any and all notice of the creation,
renewal, extension or accrual of any of the Borrower Obligations and notice of
or proof of reliance by the Administrative Agent or any Lender upon the
guarantee contained in this Section 2 or acceptance of the guarantee contained
in this Section 2; the Borrower Obligations, and any of them, shall conclusively
be deemed to have been created, contracted or incurred, or renewed, extended,
amended or waived, in reliance upon the guarantee contained in this Section 2;
and all dealings between the Borrower and the Parent Guarantor, on the one hand,
and the Administrative Agent and the Lenders, on the other hand, likewise shall
be conclusively presumed to have been had or consummated in reliance upon the
guarantee contained in this Section 2. The Parent Guarantor waives diligence,
presentment, protest, demand for payment and notice of default or nonpayment to
or upon the Borrower or the Parent Guarantor with respect to the Borrower
Obligations. The Parent Guarantor understands and agrees that the guarantee
contained in this Section 2 shall be construed as a continuing, absolute and
unconditional guarantee of payment without regard to (a) the validity or
enforceability of the Bridge Loan Agreement or any other Loan Document, any of
the Borrower Obligations or any other collateral security therefor or guarantee
or right of offset with respect thereto at any time or from time to time held by
the Administrative Agent or any Lender, (b) any defense, set-off or counterclaim
(other than a defense of payment or performance) which may at any time be
available to or be asserted by the Borrower or any other Person against the
Administrative Agent or any Lender, or (c) any other circumstance whatsoever
(with or without notice to or knowledge of the Borrower or the Parent Guarantor)
which constitutes, or might be construed to constitute, an equitable or legal
discharge of the Borrower for the Borrower Obligations, or of the Parent
Guarantor under the guarantee contained in this Section 2, in bankruptcy or in
any other instance. When making any demand hereunder or otherwise pursuing its
rights and remedies hereunder against the Parent Guarantor, the Administrative
Agent or any Lender may, but shall be under no obligation to, make a similar
demand on or otherwise pursue such rights and remedies as it may have against
the Borrower, or
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any other Person or against any collateral security or guarantee for the
Borrower Obligations or any right of offset with respect thereto, and any
failure by the Administrative Agent or any Lender to make any such demand, to
pursue such other rights or remedies or to collect any payments from the
Borrower, or any other Person or to realize upon any such collateral security or
guarantee or to exercise any such right of offset, or any release of the
Borrower, or any other Person or any such collateral security, guarantee or
right of offset, shall not relieve the Parent Guarantor of any obligation or
liability hereunder, and shall not impair or affect the rights and remedies,
whether express, implied or available as a matter of law, of the Administrative
Agent or any Lender against the Parent Guarantor. For the purposes hereof
"demand" shall include the commencement and continuance of any legal
proceedings.
2.5. Reinstatement.
-------------
The guarantee contained in this Section 2 shall continue to be
effective, or be reinstated, as the case may be, if at any time payment, or any
part thereof, of any of the Borrower Obligations is rescinded or must otherwise
be restored or returned by the Administrative Agent or any Lender upon the
insolvency, bankruptcy, dissolution, liquidation or reorganization of the
Borrower or the Parent Guarantor, or upon or as a result of the appointment of a
receiver, intervenor or conservator of, or trustee or similar officer for, the
Borrower or the Parent Guarantor or any substantial part of its property, or
otherwise, all as though such payments had not been made.
2.6. Payments.
--------
The Parent Guarantor hereby guarantees that payments hereunder will be
paid to the Lenders without set-off or counterclaim in Dollars at their offices,
the locations of which are specified in the Bridge Loan Agreement.
2.7. Subordination.
-------------
Any and all rights and claims of the Parent Guarantor against the
Borrower or any of its property, arising by reason of any payment by the Parent
Guarantor to the Administrative Agent pursuant to the provisions of this
Agreement shall be subordinate and subject in right of payment to the prior
payment and satisfaction of all Guarantor Obligations and all other amounts
payable under this Agreement and the other Loan Documents. Any Indebtedness of
the Borrower, now or hereafter held by the Parent Guarantor, is hereby
subordinated to all Indebtedness and obligations guaranteed hereby. Upon the
occurrence and during the continuance of an Event of Default, any such
Indebtedness of the Borrower to the Parent Guarantor shall, if the
Administrative Agent so requests, be collected, enforced, and received by the
Parent Guarantor in trust for the Administrative Agent and held as security for
the payment of the Guarantor Obligations, but without reducing or affecting in
any manner the liability of the Parent Guarantor hereunder.
SECTION 3. GRANT OF SECURITY INTEREST
The Parent Guarantor hereby assigns and transfers to the
Administrative Agent, and hereby grants to the Administrative Agent, for the
ratable benefit of the Lenders a first priority security interest in, all of the
following property now owned or at any time hereafter
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<PAGE>
acquired by the Parent Guarantor or in which the Parent Guarantor now has or at
any time in the future may acquire any right, title or interest (collectively,
the "Collateral"), as collateral security for the prompt and complete payment
----------
and performance when due (whether at the stated maturity, by acceleration or
otherwise) of the Parent Guarantor's Obligations:
(a) all Pledged Stock whether characterized as "general intangibles,"
"securities," "investment property" or otherwise under the New York UCC;
(b) all LLC Interests whether characterized as "general intangibles,"
"securities," "investment property" or otherwise under the New York UCC;
(c) any Collateral Account, all funds held therein and all
certificates and instruments, if any, from time to time representing or
evidencing the Collateral Account; and
(d) to the extent not otherwise included, all Proceeds and products
of any and all of the foregoing and all collateral security and guarantees
given by any Person with respect to any of the foregoing.
3.2. Parent Guarantor Liable. Anything herein to the contrary
-----------------------
notwithstanding, (a) the Parent Guarantor shall remain liable to perform all of
its duties and obligations as the sole member of the Borrower to the same extent
as if this Agreement had not been executed, (b) the exercise by the
Administrative Agent or any Lender of any of its rights hereunder shall not
release the Parent Guarantor from any of its duties or obligations as the sole
member of the Borrower and (c) neither the Administrative Agent nor any Lender
shall have any obligation or liability as a member of the Borrower by reason of
this Agreement.
SECTION 4. REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter into the
Bridge Loan Agreement and to induce the Lenders to make their respective loans
to the Borrower thereunder, the Parent Guarantor hereby represents and warrants
to the Administrative Agent and each Lender that:
4.1. Title; No Other Liens.
---------------------
Except for the security interest granted to the Administrative Agent
for the ratable benefit of the Lenders pursuant to this Agreement, the Parent
Guarantor owns each existing item of the Collateral free and clear of any and
all Liens or claims of others. No financing statement or other public notice
with respect to all or any part of the existing Collateral is on file or of
record in any public office, except such as have been filed in favor of the
Administrative Agent, for the ratable benefit of the Lenders pursuant to this
Agreement.
4.2. Perfected First Priority Liens.
------------------------------
The security interests granted pursuant to this Agreement upon
completion of the filings and other actions specified on Schedule 2 (which in
----------
the case of all filings and other documents referred to on said Schedule, have
been delivered to the Administrative Agent in
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<PAGE>
completed and duly executed form) (a) will constitute valid, enforceable
perfected security interests in all of the Collateral in favor of the
Administrative Agent, for the ratable benefit of the Lenders as collateral
security for the Parent Guarantor's Obligations, and (b) are prior to all other
Liens on the Collateral in existence on the date hereof.
4.3. Pledged Stock; LLC Interests
----------------------------
(a) The shares of Pledged Stock pledged by the Parent Guarantor
hereunder constitute all the issued and outstanding shares of all classes of the
Capital Stock of the Borrower. The LLC Interests pledged by the Parent Guarantor
constitute all of the outstanding ownership interests in which the Parent
Guarantor has any right, title or interest in the Borrower.
(b) All the shares of the Pledged Stock have been duly and validly
issued and are fully paid and nonassessable. All of the LLC Interests have been
duly and validly issued.
(c) The Parent Guarantor is the record and beneficial owner of, and
has good and marketable title to, the Pledged Stock and the LLC Interests
pledged by it hereunder, free of any and all Liens or options in favor of, or
claims of, any other Person, except the security interest created by this
Agreement.
(d) The Parent Guarantor has delivered to the Administrative Agent and
the Lenders true, accurate and complete copies of the LLC Agreement for the
Borrower, which LLC Agreement is currently in full force and effect and has not
been amended or modified.
SECTION 5. COVENANTS
The Parent Guarantor covenants and agrees with the Administrative
Agent, the Lenders that, from and after the date of this Agreement until the
Obligations shall have been paid in full and the Commitments shall have
terminated:
5.1. Covenants in Bridge Loan Agreement.
----------------------------------
The Parent Guarantor shall take and will cause its Subsidiaries to
take, or shall refrain from taking and will cause its Subsidiaries to refrain
from taking, as the case may be, each action that is necessary to be taken or
not taken, as the case may be, so that no Default or Event of Default is caused
by the failure to take such action or to refrain from taking such action by the
Parent Guarantor or any of its Subsidiaries.
5.2. Payment of Obligations.
----------------------
The Parent Guarantor will pay and discharge or otherwise satisfy at or
before maturity or before they become delinquent, as the case may be, all taxes,
assessments and governmental charges or levies imposed upon the Collateral or in
respect of income or profits therefrom, as well as all claims of any kind
(including, without limitation, claims for labor, materials and supplies)
against or with respect to the Collateral, except that no such charge need be
paid if the amount or validity thereof is currently being contested in good
faith by appropriate proceedings, reserves in conformity with GAAP with respect
thereto have been provided on the
9
<PAGE>
books of the Parent Guarantor and such proceedings could not reasonably be
expected to result in the sale, forfeiture or loss of any material portion of
the Collateral or any interest therein.
5.3. Maintenance of Perfected Security Interest; Further
---------------------------------------------------
Documentation.
- -------------
(a) The Parent Guarantor shall maintain the security interest created
by this Agreement as a perfected first priority security interest and shall
defend such security interest against the claims and demands of all Persons
whomsoever.
(b) At any time and from time to time, upon the written request of
the Administrative Agent, and at the sole expense of the Parent Guarantor, the
Parent Guarantor will promptly and duly execute and deliver, and have recorded,
such further statements, assignments, agreements, instruments and documents and
take such further actions as the Administrative Agent may reasonably request for
the purpose of obtaining or preserving the full benefits of this Agreement and
of the rights and powers herein granted, including, without limitation, the
filing of any financing or continuation statements, or amendments thereto, under
the Uniform Commercial Code (or other similar laws) in effect in any
jurisdiction with respect to the security interests created hereby.
5.4. Notices.
-------
The Parent Guarantor will advise in a written notice to the
Administrative Agent and the Lenders promptly, in reasonable detail, of any Lien
(other than security interests created hereby) on any of the Collateral which
would adversely affect the ability of the Administrative Agent or any Lender to
exercise any of its rights or remedies hereunder or under any Loan Document.
5.5. Pledged Stock; LLC Interests.
----------------------------
(a) If the Parent Guarantor shall become entitled to receive or shall
receive any stock certificate or other certificates (including, without
limitation, any certificate representing a stock dividend or a distribution in
connection with any reclassification, increase or reduction of capital or any
certificate issued in connection with any reorganization), option or rights in
respect of the Capital Stock of the Borrower, or in respect of any membership
interest, whether in addition to, in substitution of, as a conversion of, or in
exchange for, any shares of the Pledged Stock, or in respect of the LLC
Interests, or otherwise in respect thereof, the Parent Guarantor shall accept
the same as the agent of the Administrative Agent and the Lenders, hold the same
in trust for the Administrative Agent and the Lenders and deliver the same
forthwith to the Administrative Agent in the exact form received, duly indorsed
by the Parent Guarantor to the Administrative Agent, if required, together with
an undated stock power covering such certificate duly executed in blank by the
Parent Guarantor and with, if the Administrative Agent so requests, signature
guaranteed, to be held by the Administrative Agent for the ratable benefit of
the Lenders, subject to the terms hereof, as additional collateral security for
the Obligations. Any sums paid upon or in respect of the Pledged Stock or LLC
Interests upon the liquidation or dissolution of the Borrower shall be paid over
to the Administrative Agent to be held by it hereunder for the ratable benefit
of the Lenders as additional collateral security for the Obligations, and in
case any distribution of capital shall be made on or in respect of the Pledged
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Stock or LLC Interests or any property shall be distributed upon or with respect
to the Pledged Stock or LLC Interests pursuant to the recapitalization or
reclassification of the capital or membership interests, as the case may be of
the Borrower or pursuant to the reorganization thereof, the property so
distributed shall, unless otherwise subject to a perfected security interest in
favor of the Administrative Agent for the ratable benefit of the Lenders, be
delivered to the Administrative Agent to be held by it hereunder as additional
collateral security for the Obligations. If any sums of money or property so
paid or distributed in respect of the Pledged Stock or LLC Interests shall be
received by the Parent Guarantor, the Parent Guarantor shall, until such money
or property is paid or delivered to the Administrative Agent, hold such money or
property in trust for the Lenders segregated from other funds of the Parent
Guarantor, as additional collateral security for the Obligations.
(b) To the extent any LLC Interest (whether now owned or hereafter
acquired) is uncertificated, the Parent Guarantor shall promptly notify the
Administrative Agent thereof, and shall promptly take all actions required to
perfect the security interest of the Administrative Agent under applicable law
(including, in any event, under the provisions of Articles 8 and 9 of the New
York UCC). The Parent Guarantor further agrees to take such actions as the
Administrative Agent deems necessary or desirable to effect the foregoing and to
permit the Administrative Agent and the Lenders to exercise any of their rights
and remedies hereunder, and agrees to provide an opinion of counsel satisfactory
to the Lenders with respect to any such pledge of uncertificated LLC Interests
promptly upon request of the Majority Lenders.
(c) Without the prior written consent of the Majority Lenders, the
Parent Guarantor will not (i) permit, vote to enable, or take any other action
to permit, the Borrower or any of its Subsidiaries to issue any stock, limited
liability company interests or other equity securities of any nature or to issue
any other securities convertible into or granting the right to purchase or
exchange for any stock, limited liability company interests or other equity
securities of any nature of the Borrower or any of its Subsidiaries, (ii) accept
a surrender of the LLC Agreement or any other operating agreement by any other
party thereto, (iii) consent to any modification, extension or alteration of the
material terms of the LLC Agreement or any other operating agreement, (iv) sell,
assign, transfer, exchange, or otherwise dispose of, or grant any option with
respect to, the Pledged Stock, LLC Interests or Proceeds thereof, (v) create,
incur or permit to exist any Lien or option in favor of, or any claim of any
Person with respect to, any of the Pledged Stock, LLC Interests or Proceeds
thereof, or any interest therein, except for the security interests created by
this Agreement or (vi) enter into any agreement or undertaking restricting the
right or ability of the Parent Guarantor or the Administrative Agent to sell,
assign or transfer any of the Pledged Stock, LLC Interests or Proceeds thereof.
(d) The Parent Guarantor agrees that as a member in the Borrower it
will abide by perform and discharge each every material obligation, covenant and
agreement to be abided by, performed or discharged by the Parent Guarantor as
and when required under the terms of the LLC Agreement, or any other operating
agreements, of the Borrower at no cost or expense to the Administrative Agent
and the Lenders.
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5.6. Blocked Account and Lock-Box Agreement.
--------------------------------------
The Parent Guarantor covenants that on or prior to August 16, 1999,
the Parent Guarantor will enter into a blocked account and lock-box agreement in
a form reasonably acceptable to the Lenders (the "Blocked Account and Lock-Box
----------------------------
Agreement") with the Administrative Agent, the Borrower, Capital and a third
- ---------
party bank (the "Bank") acceptable to the Lenders, pursuant to which a
----
Collateral Account shall be established with the Bank. The Blocked Account and
Lock-Box Agreement shall provide, among other things, that (i) all Proceeds from
Consumer Receivables shall be directly deposited by the payor thereon in the
Collateral Account and all other Proceeds from the collateral securing the
obligations of the Borrower and Capital pursuant to the Guarantee and Collateral
Agreement (as defined in the Bridge Loan Agreement), all Net Cash Proceeds from
any Capital Markets Transaction received by the Borrower, Capital, the Parent
Guarantor or any of its Subsidiaries or other direct or indirect parent holding
company of any of the foregoing, and any other amounts received in or converted
into cash solely by either the Borrower or Capital, shall within one business
day of receipt thereof or conversion thereto be deposited by the Parent
Guarantor, the Borrower or Capital, as applicable, directly in the Collateral
Account, (ii) each of the Parent Guarantor, the Borrower and Capital shall grant
to the Administrative Agent, for the ratable benefit of the Lenders a present
and continuing first priority security interest in (A) the Collateral Account,
all funds held therein and all certificates and instruments, if any, from time
to time representing or evidencing the Collateral Account, (B) all contract
rights, claims and privileges in respect of the Collateral Account and the right
to enforce the same and receive payment thereunder, and (C) all cash, checks,
drafts, bills of exchange, commercial paper of any kind whatsoever, money orders
and other items of value of any of the Parent Guarantor, the Borrower or Capital
now or hereafter paid, deposited, credited, held (whether for collection,
provisionally or otherwise) or otherwise in the possession or under the control
of, or in transit to the Collateral Account or any agent, bailee, or custodian
thereof for deposit in the Collateral Account, and all Proceeds of the
foregoing, (iii) the Collateral Account shall be under the sole dominion and
control of the Administrative Agent for the ratable benefit of the Lenders,
subject to withdrawal by the Administrative Agent for the account of the Lenders
as provided in Section 2.9(e) of the Bridge Loan Agreement, and none of the
Parent Guarantor, the Borrower nor Capital nor any Person claiming by, through
or under the Parent Guarantor, the Borrower or Capital shall have any rights,
title or interest in, or control over the use of, or any right to withdraw any
amount from, the Collateral Account, (iv) all Proceeds (whether consisting of
checks, notes drafts, bills of exchange, commercial paper of any kind
whatsoever, or other documents) not deposited directly in the Collateral Account
by the payor thereon shall be promptly deposited by the Parent Guarantor, its
Subsidiaries, the Borrower or Capital in precisely the form received, except for
its endorsement when required, directly in the Collateral Account and, until so
turned over, shall, from the moment received by any of the Parent Guarantor, its
Subsidiaries, the Borrower or Capital until deposited in the Collateral Account,
be held by such Person segregated from other assets and in trust for the
Administrative Agent and the Lenders and shall not be commingled with any other
property or funds of such Person or any other Person. Such Blocked Account and
Lock-Box Agreement shall also contain such other provisions that are customary
for agreements of that kind, and as may reasonably be requested by any Lender.
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SECTION 6. REMEDIAL PROVISIONS
6.1. Dividends and Distributions; Voting Rights.
------------------------------------------
(a) Unless an Event of Default shall have occurred and be continuing
and the Administrative Agent shall have given notice to the Parent Guarantor of
the Administrative Agent's intent to exercise its corresponding rights pursuant
to Section 6.1(b), the Parent Guarantor shall be permitted to receive all cash
dividends paid in respect of the Pledged Stock, in each case paid in the normal
course of business of the Borrower and consistent with past practice, to the
extent permitted in the Bridge Loan Agreement, and to exercise all voting and
corporate rights with respect to the Pledged Stock; provided, however, that no
-------- -------
vote shall be cast or corporate right exercised or other action taken which, in
the Administrative Agent's reasonable judgment, would impair the Collateral or
which would be inconsistent with or result in any violation of any provision of
the Bridge Loan Agreement, this Agreement or any other Loan Document.
(b) If an Event of Default shall occur and be continuing and the
Administrative Agent shall give notice of its intent to exercise such rights to
the Parent Guarantor, (i) the Administrative Agent shall have the right to
receive any and all dividends, payments or other Proceeds paid in respect of the
Pledged Stock and any and all membership distributions or other Proceeds in
respect of the LLC Interests and make application thereof to the Obligations in
the order set forth in Section 6.3, and (ii) any or all of the Pledged Stock and
LLC Interests represented by instruments shall be registered in the name of the
Administrative Agent or its nominee for the ratable benefit of the Lenders, and
the Administrative Agent or its nominee may thereafter exercise on behalf of the
Lenders (x) all voting, corporate, membership and other rights pertaining to
such Pledged Stock and LLC Interests at any meeting of shareholders or members
of the Borrower or otherwise and (y) any and all rights of conversion, exchange
and subscription and any other rights, privileges or options pertaining to such
Pledged Stock and LLC Interests as if it were the absolute owner thereof
(including, without limitation, the right to exchange at its discretion any and
all of the Pledged Stock and LLC Interests upon the merger, consolidation,
reorganization, recapitalization or other fundamental change in the corporate
structure of the Borrower or upon the exercise by the Parent Guarantor or the
Administrative Agent of any right, privilege or option pertaining to such
Pledged Stock and LLC Interests, and in connection therewith, the right to
deposit and deliver any and all of the Pledged Stock and LLC Interests with any
committee, depositary, transfer agent, registrar or other designated agency upon
such terms and conditions as the Administrative Agent may determine), all
without liability except to account for property actually received by it, but
the Administrative Agent shall have no duty to the Parent Guarantor to exercise
any such right, privilege or option and shall not be responsible for any failure
to do so or delay in so doing.
(c) The Parent Guarantor hereby authorizes and instructs the Borrower
to (i) comply with any instruction received by it from the Administrative Agent
in writing that (x) states that an Event of Default has occurred and is
continuing and (y) is otherwise in accordance with the terms of this Agreement,
without any other or further instructions from the Parent Guarantor, and the
Parent Guarantor agrees that the Borrower shall be fully protected in so
complying, and (ii) unless otherwise expressly permitted hereby, pay any
dividends or other
13
<PAGE>
payments with respect to the Pledged Stock and LLC Interests directly to the
Administrative Agent for the account of the Lenders.
(d) Unless an Event of Default shall have occurred and be continuing
and the Administrative Agent shall have given notice of its intent to exercise
such rights to the Parent Guarantor, the Administrative Agent shall not repledge
any Collateral held by the Administrative Agent for the ratable benefit of the
Lenders.
6.2. Proceeds to be Turned Over To Administrative Agent.
--------------------------------------------------
At any time prior to the consummation of the transactions contemplated
by Section 5.6 hereof, [if an Event of Default shall occur and be
continuing,]/1/ all Proceeds received by the Parent Guarantor shall be held by
the Parent Guarantor in trust for the Administrative Agent and the Lenders
segregated from other assets or funds of the Parent Guarantor or any other
Person and shall not be commingled with any other property or funds of the
Parent Guarantor or any other Person, and shall, forthwith upon receipt by the
Parent Guarantor (and, in any event, within one Business Day), be turned over to
the Administrative Agent in the exact form received by the Parent Guarantor
(duly indorsed by the Parent Guarantor to the Administrative Agent, if
required). All Proceeds received by the Administrative Agent hereunder shall be
held by the Administrative Agent in a Collateral Account maintained under its
sole dominion and control. All Proceeds while held by the Administrative Agent
in a Collateral Account (or by the Parent Guarantor in trust for the
Administrative Agent and the Lenders shall continue to be held as collateral
security for all the Obligations and shall not constitute payment thereof until
applied as provided in Section 6.3.
6.3. Application of Proceeds.
-----------------------
At such intervals as may be agreed upon by the relevant Grantor and
the Administrative Agent, or, if an Event of Default shall have occurred and be
continuing as soon as practicable after their receipt, the Administrative Agent
may apply all or any part of Proceeds constituting Collateral, whether or not
held in any Collateral Account, and any proceeds of the guarantee set forth in
Section 2, in payment of the Obligations in the following order:
FIRST: to any unpaid fees and reimbursement or unpaid expenses of the
Administrative Agent incurred in connection with the Bridge Loan Agreement,
the Guarantee and Collateral Agreements and any Related Document;
SECOND: to the payment of all costs, expenses, other fees,
commissions and taxes owing to any Lender under the Bridge Loan Agreement;
THIRD: to the indefeasible payment of all accrued interest on the
Loans to the date of such payment or collection;
FOURTH: to the indefeasible payment of the amounts then due and
unpaid under the Bridge Loan Agreement, the Bridge Notes or any other Loan
Document for principal,
___________________
/1/ Whipporwill would like to delete this clause.
14
<PAGE>
in respect of which or for the benefit of which such money has been paid or
collected, ratably, without preference or priority of any kind, according
to the amounts due and payable on the Bridge Notes for principal; and
FIFTH: the balance, if any, to the Person lawfully entitled thereto.
6.4. Code and Other Remedies.
-----------------------
If an Event of Default shall occur and be continuing, upon request of,
and as directed by, the Majority Lenders the Administrative Agent, on behalf of
the Lenders, shall exercise, in addition to all other rights and remedies
granted to it in this Agreement, the Bridge Loan Agreement and in any other
instrument or agreement securing, evidencing or relating to the Obligations, all
rights and remedies of a secured party under the New York UCC or any other
applicable law. Without limiting the generality of the foregoing, the
Administrative Agent, without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by applicable law referred to below) to or upon the Parent Guarantor,
the Borrower, any issuer of Pledged Stock or LLC Interests or any other Person
(all and each of which demands, defenses, advertisements and notices are hereby
waived), may in such circumstances forthwith collect, receive, appropriate and
realize upon the Collateral, or any part thereof, and/or may forthwith sell,
assign, give option or options to purchase, or otherwise dispose of and deliver
the Collateral or any part thereof (or contract to do any of the foregoing), in
one or more parcels at public or private sale or sales, at any exchange,
broker's board or office of the Administrative Agent or any Lender or elsewhere
upon such terms and conditions as it may deem advisable and at such prices as it
may deem best, for cash or on credit or for future delivery without assumption
of any credit risk. The Administrative Agent or any Lender shall have the right
upon any such public sale or sales, and, to the extent permitted by law, upon
any such private sale or sales, to purchase the whole or any part of the
Collateral so sold, free of any right or equity of redemption in the Parent
Guarantor, which right or equity is hereby waived and released. The Parent
Guarantor further agrees, at the Administrative Agent's request, to assemble the
Collateral and make it available to the Administrative Agent at places which the
Administrative Agent shall reasonably select, whether at the Parent Guarantor's
premises or elsewhere. The Administrative Agent shall apply any Proceeds from
time to time held by it and the net proceeds of any action taken by it pursuant
to this Section 6.4, after deducting all reasonable costs and expenses of every
kind incurred in connection therewith or incidental to the care or safekeeping
of any of the Collateral or in any way relating to the Collateral or the rights
of the Administrative Agent and the Lenders hereunder, including, without
limitation, reasonable attorneys' fees and disbursements, to the payment in
whole or in part of the Obligations, in accordance with Section 6.3, and only
after such application and after the payment by the Administrative Agent of any
other amount required by any provision of applicable law, including, without
limitation, Section 9-504(l)(c) of the New York UCC, need the Administrative
Agent account for the surplus, if any, to the Parent Guarantor. To the extent
permitted by applicable law, the Parent Guarantor waives all claims, damages and
demands it may acquire against the Administrative Agent or any Lender arising
out of the exercise by them of any rights or remedies hereunder. If any notice
of a proposed sale or other disposition of Collateral shall be required by law,
such notice shall be deemed reasonable and proper if given at least 10 days
before such sale or other disposition.
15
<PAGE>
6.5. Registration Rights.
-------------------
(a) If the Administrative Agent shall determine to exercise its right
to sell any or all of the Pledged Stock pursuant to Section 6.4, and if in the
opinion of the Administrative Agent it is necessary or advisable to have the
Pledged Stock, or that portion thereof to be sold, registered under the
provisions of the Securities Act, the Parent Guarantor will cause the Borrower
to (i) execute and deliver, and cause the directors and officers of the Borrower
to execute and deliver, all such instruments and documents, and do or cause to
be done all such other acts as may be, in the opinion of the Administrative
Agent, necessary or advisable to register the Pledged Stock, or that portion
thereof to be sold, under the provisions of the Securities Act, (ii) use its
best efforts to cause the registration statement relating thereto to become
effective and to remain effective for a period of one year from the date of the
first public offering of the Pledged Stock, or that portion thereof to be sold,
and (iii) make all amendments thereto and/or to the related prospectus which, in
the opinion of the Administrative Agent, are necessary or advisable, all in
conformity with the requirements of the Securities Act and the rules and
regulations of the Securities and Exchange Commission applicable thereto. The
Parent Guarantor agrees to cause the Borrower to comply with the provisions of
the securities or "Blue Sky" laws of any and all jurisdictions which the
Administrative Agent shall designate and to make available to its security
holders, as soon as practicable, an earnings statement (which need not be
audited) which will satisfy the provisions of Section 11(a) of the Securities
Act.
(b) The Parent Guarantor recognizes that the Administrative Agent may
be unable to effect a public sale of any or all the Pledged Stock, by reason of
certain prohibitions contained in the Securities Act and applicable state
securities laws or otherwise, and may be compelled to resort to one or more
private sales thereof to a restricted group of purchasers which will be obliged
to agree, among other things, to acquire such securities for their own account
for investment and not with a view to the distribution or resale thereof. The
Parent Guarantor acknowledges and agrees that any such private sale may result
in prices and other terms less favorable than if such sale were a public sale
and, notwithstanding such circumstances, agrees that any such private sale shall
be deemed to have been made in a commercially reasonable manner. The
Administrative Agent shall be under no obligation to delay a sale of any of the
Pledged Stock for the period of time necessary to permit the Borrower to
register such securities for public sale under the Securities Act, or under
applicable state securities laws, even if the Borrower would agree to do so.
(c) The Parent Guarantor agrees to use its best efforts to do or
cause to be done all such other acts as may be necessary to make such sale or
sales of all or any portion of the Pledged Stock pursuant to this Section 6.5
valid and binding and in compliance with any and all other applicable
Requirements of Law. The Parent Guarantor further agrees that a breach of any of
the covenants contained in this Section 6.5 will cause irreparable injury to the
Administrative Agent and the Lenders, that the Administrative Agent and the
Lenders have no adequate remedy at law in respect of such breach and, as a
consequence, that each and every covenant contained in this Section 6.5 shall be
specifically enforceable against the Parent Guarantor, and the Parent Guarantor
hereby waives and agrees not to assert any defenses against an action for
specific performance of such covenants except for a defense that no Event of
Default has occurred under the Bridge Loan Agreement.
16
<PAGE>
6.6. Waiver; Deficiency.
------------------
The Parent Guarantor waives and agrees not to assert any rights or
privileges which it may acquire under Section 9-112 of the New York UCC. The
Parent Guarantor shall remain liable for any deficiency if the proceeds of any
sale or other disposition of the Collateral are insufficient to pay its
Obligations and the fees and disbursements of any attorneys employed by the
Administrative Agent or any Lender to collect such deficiency.
6.7. Powers Coupled with an Interest.
-------------------------------
All authorizations and agencies herein contained with respect to the
Collateral constitute irrevocable powers coupled with an interest.
SECTION 7. THE ADMINISTRATIVE AGENT
7.1. Administrative Agent's Appointment as Attorney-in-Fact, etc.
------------------------------------------------------------
(a) The Parent Guarantor hereby irrevocably constitutes and appoints
the Administrative Agent and any officer or agent thereof, with full power of
substitution, as its true and lawful attorney-in fact with full irrevocable
power and authority in the place and stead of the Parent Guarantor and in the
name of the Parent Guarantor or in its own name, for the purpose of carrying out
the terms of this Agreement, to take any and all appropriate action and to
execute any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Agreement, and without limiting the
generality of the foregoing, the Parent Guarantor hereby gives the
Administrative Agent the power and right, on behalf of the Parent Guarantor,
without notice to or assent by the Parent Guarantor, to do any or all of the
following:
(i) pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral, effect any repairs or any insurance
called for by the terms of this Agreement and pay all or any part of the
premiums therefor and the costs thereof;
(ii) execute, in connection with any sale provided for in
Section 6.4 or 6.5, any indorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral; and
(iii) (1) direct any party liable for any payment under any of
the Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Administrative Agent or as the Administrative
Agent shall direct; (2) ask or demand for, collect, and receive payment of
and receipt for, any and all moneys, claims and other amounts due or to
become due at any time in respect of or arising out of any Collateral; (3)
commence and prosecute any suits, actions or proceedings at law or in
equity in any court of competent jurisdiction to collect the Collateral or
any portion thereof and to enforce any other right in respect of any
Collateral; (4) defend any suit, action or proceeding brought against the
Parent Guarantor with respect to any Collateral; (5) settle, compromise or
adjust any such suit, action or proceeding and, in connection therewith,
give such discharges or releases as the Administrative Agent may deem
appropriate; and (6) generally, sell, transfer, pledge and make any
agreement with respect to or otherwise deal with any of the Collateral as
fully and completely as though
17
<PAGE>
the Administrative Agent were the absolute owner thereof for all purposes,
and do, at the Administrative Agent's option and the Parent Guarantor's
expense, at any time, or from time to time, all acts and things which the
Administrative Agent deems necessary to protect, preserve or realize upon
the Collateral and the Administrative Agent's and the Lenders' security
interests therein and to effect the intent of this Agreement, all as fully
and effectively as the Parent Guarantor might do.
Anything in this Section 7.1(a) to the contrary notwithstanding, the
Administrative Agent agrees that it will not exercise any rights under the power
of attorney provided for in this Section 7.1(a) unless an Event of Default shall
have occurred and be continuing.
(b) If the Parent Guarantor fails to perform or comply with any of
its agreements contained herein, the Administrative Agent, at its option, but
without any obligation so to do, may, and, at the request of, and as directed
by, the Majority Lenders, will perform or comply, or otherwise cause performance
or compliance, with such agreement.
(c) The expenses of the Administrative Agent incurred in connection
with actions undertaken as provided in this Section 7.1, together with interest
thereon at a rate per annum equal to the rate per annum at which interest would
then be payable on past due Loans under the Bridge Loan Agreement, from the date
of payment by the Administrative Agent to the date reimbursed by the Parent
Guarantor, shall be payable by the Parent Guarantor to the Administrative Agent
on demand.
(d) The Parent Guarantor hereby ratifies all that said attorneys
shall lawfully do or cause to be done by virtue hereof. All powers,
authorizations and agencies contained in this Agreement are coupled with an
interest and are irrevocable until this Agreement is terminated and the security
interests created hereby are released.
7.2. Duty of Administrative Agent.
----------------------------
The Administrative Agent's sole duty with respect to the custody,
safekeeping and physical preservation of the Collateral in its possession, under
Section 9-207 of the New York UCC or otherwise, shall be to deal with it in the
same manner as the Administrative Agent deals with similar property for its own
account. The Administrative Agent or any Lender or any of their respective
officers, directors, employees or agents shall not be liable for failure to
demand, collect or realize upon any of the Collateral or for any delay in doing
so or shall be under any obligation to sell or otherwise dispose of any
Collateral upon the request of the Parent Guarantor or any other Person or to
take any other action whatsoever with regard to the Collateral or any part
thereof. The powers conferred on the Administrative Agent or the Lenders
hereunder are solely to protect the Administrative Agent's and the Lenders'
interests in the Collateral and shall not impose any duty upon the
Administrative Agent or any Lender to exercise any such powers. The
Administrative Agent and the Lenders shall be accountable only for amounts that
they actually receive as a result of the exercise of such powers, and neither
they nor any of their officers, directors, employees or agents shall be
responsible to the Parent Guarantor for any act or failure to act hereunder,
except for their own gross negligence or willful misconduct.
18
<PAGE>
7.3. Execution of Financing Statements.
---------------------------------
Pursuant to Section 9-402 of the New York UCC and any other applicable
law, the Parent Guarantor authorizes the Administrative Agent to file or record
financing statements and other filing or recording documents or instruments with
respect to the Collateral without the signature of the Parent Guarantor in such
form and in such offices as the Administrative Agent reasonably determines
appropriate to perfect the security interests of the Administrative Agent under
this Agreement. A photographic or other reproduction of this Agreement shall be
sufficient as a financing statement or other filing or recording document or
instrument for filing or recording in any jurisdiction.
7.4. Authority of Administrative Agent.
---------------------------------
The Parent Guarantor acknowledges that the rights and responsibilities
of the Administrative Agent under this Agreement with respect to any action
taken by the Administrative Agent or the exercise or non-exercise by the
Administrative Agent of any option, voting right, request, judgment or other
right or remedy provided for herein or resulting or arising out of this
Agreement shall, as between the Administrative Agent and the Lenders be governed
by the Bridge Loan Agreement and by such other agreements with respect thereto
as may exist from time to time among them, but, as between the Administrative
Agent and the Parent Guarantor, the Administrative Agent shall be conclusively
presumed to be acting as agent for the Lenders with full and valid authority so
to act or refrain from acting, and the Parent Guarantor shall be under any
obligation, or entitlement, to make any inquiry respecting such authority.
SECTION 8. MISCELLANEOUS
8.1. Amendments in Writing.
---------------------
None of the terms or provisions of this Agreement may be waived,
amended, supplemented or otherwise modified except in accordance with Section
11.3 of the Bridge Loan Agreement.
8.2. Notices.
-------
All notices, requests and demands to or upon the Administrative Agent,
any Lender or the Parent Guarantor hereunder shall be effected in the manner
provided for in Section 11.2 of the Bridge Loan Agreement.
8.3. No Waiver by Course of Conduct; Cumulative Remedies.
---------------------------------------------------
None of the Administrative Agent or any Lender shall by any act
(except by a written instrument pursuant to Section 8.1), delay, indulgence,
omission or otherwise be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Default or Event of Default. No failure to exercise,
nor any delay in exercising, on the part of the Administrative Agent or any
Lender, any right, power or privilege hereunder shall operate as a waiver
thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. A waiver by the
19
<PAGE>
Administrative Agent or any Lender of any right or remedy hereunder on any one
occasion shall not be construed as a bar to any right or remedy which the
Administrative Agent or such Lender would otherwise have on any future occasion.
The rights and remedies herein provided are cumulative, may be exercised singly
or concurrently and are not exclusive of any other rights or remedies provided
by law.
8.4. Enforcement Expenses; Indemnification.
-------------------------------------
(a) The Parent Guarantor agrees to pay or reimburse each Lender
and the Administrative Agent for all its costs and expenses incurred in
collecting against the Parent Guarantor under the guarantee contained in Section
2 or otherwise enforcing or preserving any rights under this Agreement and the
other Loan Documents, including, without limitation, the fees and disbursements
of counsel (including the allocated fees and expenses of in-house counsel) to
each Lender or of counsel to the Administrative Agent.
(b) The Parent Guarantor agrees to pay, and to save the
Administrative Agent and each Lender harmless from, any and all liabilities with
respect to, or resulting from any delay in paying, any and all stamp, excise,
sales or other taxes which may be payable or determined to be payable with
respect to any of the Collateral or in connection with any of the transactions
contemplated by this Agreement.
(c) The Parent Guarantor agrees to pay, and to save the
Administrative Agent and the Lenders, harmless from, any and all 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, performance and administration of this
Agreement to the extent the Borrower would be required to do so pursuant to
Section 11.1 of the Bridge Loan Agreement.
(d) The agreements in this Section shall survive repayment of
the Obligations and all other amounts payable under the Bridge Loan Agreement
and the other Loan Documents.
8.5. Successors and Assigns.
----------------------
This Agreement shall be binding upon the successors and assigns of the
Parent Guarantor and shall inure to the benefit of the Administrative Agent and
the Lenders and their successors and assigns; provided that the Parent Guarantor
--------
may not assign, transfer or delegate any of its rights or obligations under this
Agreement without the prior written consent of the Administrative Agent and the
Lenders.
8.6. Set-Off.
-------
The Parent Guarantor hereby irrevocably authorizes the Administrative
Agent and each Lender at any time and from time to time while an Event of
Default shall have occurred and be continuing, without notice to the Parent
Guarantor, any such notice being expressly waived by the Parent Guarantor, to
set-off and appropriate and apply 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 the Administrative Agent or
20
<PAGE>
such Lender to or for the credit or the account of the Parent Guarantor, or any
part thereof in such amounts as the Administrative Agent or such Lender may
elect, against and on account of the obligations and liabilities of the Parent
Guarantor to the Administrative Agent or such Lender hereunder and claims of
every nature and description of the Administrative Agent or such Lender against
the Parent Guarantor, in any currency, whether arising hereunder, under the
Bridge Loan Agreement, any other Loan Document or otherwise, as the
Administrative Agent or such Lender may elect, whether or not the Administrative
Agent or any Lender has made any demand for payment and although such
obligations, liabilities and claims may be contingent or unmatured. The
Administrative Agent and each Lender shall notify the Parent Guarantor promptly
of any such set-off and the application made by the Administrative Agent or such
Lender of the proceeds thereof, provided that the failure to give such notice
--------
shall not affect the validity of such set-off and application. The rights of the
Administrative Agent and each Lender under this Section are in addition to other
rights and remedies (including, without limitation, other rights of set-off)
which the Administrative Agent or such Lender.
8.7. Counterparts.
------------
This Agreement may be executed by one or more of the parties to this
Agreement on any number of separate counterparts (including by telecopy), and
all of said counterparts taken together shall be deemed to constitute one and
the same instrument.
8.8. 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.
8.9. Section Headings.
----------------
The Section headings used in this Agreement are for convenience of
reference only and are not to affect the construction hereof or be taken into
consideration in the interpretation hereof.
8.10. Integration.
-----------
This Agreement and the other Loan Documents represent the agreement of
the Parent Guarantor, the Administrative Agent and the Lenders with respect to
the subject matter hereof and thereof, and there are no promises, undertakings,
representations or warranties by the Administrative Agent or any Lender relative
to subject matter hereof and thereof not expressly set forth or referred to
herein or in the other Loan Documents.
8.11. GOVERNING LAW.
-------------
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
21
<PAGE>
8.12. Submission To Jurisdiction; Waivers.
-----------------------------------
The Parent Guarantor hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to which it
is a party, or for recognition and enforcement of any judgment in respect
thereof, to the non-exclusive general jurisdiction of the Courts of the State of
New York, the courts of the United States of America for the Southern District
of New York, 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 mailing a copy thereof by registered or certified mail (or
any substantially similar form of mail), postage prepaid, to such Parent
Guarantor at its address referred to in Section 8.2 or at such other address of
which the Administrative Agent shall have been notified pursuant thereto;
(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; and
(e) waives, to the maximum extent not prohibited by law, any right it
may have to claim or recover in any legal action or proceeding referred to in
this Section any special, exemplary, punitive or consequential damages.
8.13. Acknowledgements.
----------------
The Parent Guarantor hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement and the other Loan Documents to which it is a party;
(b) none of the Administrative Agent or any Lender has any fiduciary
relationship with or duty to the Parent Guarantor arising out of or in
connection with this Agreement or any of the other Loan Documents, and the
relationship between the Parent Guarantor, on the one hand, and the
Administrative Agent, and the Lenders, on the other hand, in connection herewith
or therewith is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan Documents
or otherwise exists by virtue of the transactions contemplated hereby among the
Lenders or among the Parent Guarantor and the Lenders.
22
<PAGE>
8.14. Releases.
--------
At such time as the Loans and the other Obligations shall have been
indefeasibly and irrevocably paid in full and the Commitments have been
terminated, the Collateral shall be released from the Liens created hereby, and
this Agreement and all obligations (other than those expressly stated to survive
such termination) of the Administrative Agent and the Parent Guarantor hereunder
shall terminate, all without delivery of any instrument or performance of any
act by any party, and all rights to the Collateral shall revert to the Parent
Guarantor. At the request and sole expense of the Parent Guarantor following
any such termination, the Administrative Agent shall deliver to the Parent
Guarantor any Collateral held by the Administrative Agent hereunder, and execute
and deliver to the Parent Guarantor such documents as the Parent Guarantor shall
reasonably request to evidence such termination.
8.15. WAIVER OF JURY TRIAL.
--------------------
THE PARENT GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES
TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
[Signature page follows]
23
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Guarantee and
Collateral Agreement to be duly executed and delivered as of the date first
above written.
Creditrust Corporation
By: ______________________________
Name:
Title:
Acknowledged and Agreed:
Norwest Bank Minnesota, National Association
as Administrative Agent
By: ______________________________
Name:
Title:
24
<PAGE>
Schedule 1
----------
DESCRIPTION OF PLEDGED STOCK
Pledged Stock:
<TABLE>
<CAPTION>
Issuer Class of Stock Stock Certificate No. No. of Shares
- ----------------------- ----------------- ------------------------- -----------------
<S> <C> <C> <C>
Creditrust SPV99-2,
LLC
</TABLE>
<PAGE>
Schedule 2
----------
FILINGS AND OTHER ACTIONS
REQUIRED TO PERFECT SECURITY INTERESTS
Actions with Respect to Pledged Stock and LLC Interests
-------------------------------------------------------
All certificates representing the Pledged Stock set forth on Schedule
1 hereto shall be delivered to the Administrative Agent, duly indorsed by the
Parent Guarantor to the Administrative Agent, if required, together with a stock
power covering such certificate duly executed in blank by the Parent Guarantor.
UCC-1 financing statements naming the Parent Guarantor as debtor and
the Administrative Agent as secured party and identifying the Pledged Stock and
their Proceeds as collateral, shall be filed in the office of the Maryland State
Department of Assessments and Taxation and such other UCC filing offices as may
be deemed necessary or advisable by the Lenders, the Parent Guarantor or their
respective counsel.
<PAGE>
FORM OF ACKNOWLEDGEMENT AND CONSENT
The undersigned hereby acknowledges receipt of a copy of the
Collateral Agreement, dated as of August 2, 1999 (the "Agreement"), made by the
---------
Parent Guarantor for the benefit of Norwest Bank Minnesota, National
Association, as Administrative Agent for the Lenders. The undersigned agrees
for the benefit of the Administrative Agent and the Lenders as follows:
1. The undersigned will be bound by the terms of the Agreement and
will comply with such terms insofar as such terms are applicable to the
undersigned.
2. The undersigned will notify the Administrative Agent promptly in
writing of the occurrence of any of the events described in Section 5.5(a) of
the Agreement.
3. The terms of Sections 6.1(a) and 6.5 of the Agreement shall
apply to the undersigned, mutatis mutandis, with respect to all actions that may
------- --------
be required of the undersigned pursuant to Section 6.1(a) or 6.5 of the
Agreement.
4. Capitalized terms used herein shall have the meanings set forth
in the Agreement.
CREDITRUST SPV99-2, LLC
By Creditrust Corporation, its sole member
By _________________________________________
Title ______________________________________
Address for Notices:
7000 Security Boulevard
Baltimore, Maryland 21244
<PAGE>
EXHIBIT 10.22
================================================================================
WARRANT AGREEMENT
among
CREDITRUST CORPORATION
and
THE LENDERS SET FORTH ON
THE SIGNATURE PAGES HERETO
Dated as of August 2, 1999
================================================================================
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT (this "Agreement"), dated as of August 2, 1999,
---------
among Creditrust Corporation, a Maryland corporation (the "Company"), and the
-------
lenders set forth on the signature pages hereto (the "Lenders"). Capitalized
-------
terms used herein and not defined herein shall have the meanings specified in
the Bridge Loan Agreement described below.
RECITALS
WHEREAS, the Company, Creditrust SPV99-2, LLC a Delaware limited
liability company (the "Borrower"), CRDT SPV99-2 Capital, Inc., a Delaware
--------
corporation ("Capital"), Norwest Bank Minnesota, National Association, as
-------
administrative agent (the "Administrative Agent"), and the Lenders have entered
--------------------
into a Bridge Loan Agreement, dated as of August 2, 1999 (as amended,
supplemented or otherwise modified, the "Bridge Loan Agreement"), providing for
---------------------
certain bridge loans to be made by the Lenders thereunder to the Borrower (the
"Bridge Loans").
------------
WHEREAS, the Company agrees that if the Bridge Loans remain
outstanding on May 2, 2000, the Lenders will be entitled to receive (on the
terms and conditions set forth in the Escrow Agreement referred to below) common
stock warrants, as hereinafter described (the "Warrants"), to purchase up to 10%
--------
of the fully-diluted common stock, $.01 par value per share (the "Common
------
Stock"), of the Company, after giving effect to the exercise thereof (the Common
Stock or any security substituted for the Common Stock issuable on exercise of
the Warrants being referred to herein as the "Warrant Shares"), at an initial
--------------
exercise price equal to the lower of (x) the average closing price of the Common
Stock on the Nasdaq National Securities Market, for the ten days preceding
August 2, 1999 (the "Closing Date") and (y) the average closing price of the
------------
Common Stock on the Nasdaq National Securities Market, for the ten days
preceding May 2, 2000 (the "Exercise Price");
--------------
WHEREAS, the Company agrees to execute the Warrants and deliver the
Warrants to an escrow agent on the date hereof, and such escrow agent has agreed
to deliver the Warrants to the Lenders in accordance with an escrow agreement,
dated August 2, 1999 (as amended, supplemented or otherwise modified, the
"Escrow Agreement"), among the Company, Capital, the Borrower, the
----------------
Administrative Agent and Norwest Bank Minnesota, National Association, as escrow
agent.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
AGREEMENT
SECTION 1. Warrant Certificates. The certificates evidencing the
--------------------
Warrants (the "Warrant Certificates") to be delivered pursuant to this Agreement
--------------------
shall be substantially in the form set forth in Exhibit A attached hereto.
SECTION 2. Execution of Warrant Certificates. Warrant Certificates
---------------------------------
shall be signed on behalf of the Company by its Chairman of the Board or its
President or a Vice President and by its Secretary or an Assistant Secretary.
Each such signature upon the Warrant
<PAGE>
Certificates may be in the form of a facsimile signature of the present or any
future Chairman of the Board, President, Vice President, Secretary or Assistant
Secretary and may be imprinted or otherwise reproduced on the Warrant
Certificates and for that purpose the Company may adopt.
In case any officer of the Company who shall have signed any of the
Warrant Certificates shall cease to be such officer before the Warrant
Certificates so signed shall have been disposed of by the Company, such Warrant
Certificates nevertheless may be delivered or disposed of as though such person
had not ceased to be such officer of the Company; and any Warrant Certificate
may be signed on behalf of the Company by any person who, at the actual date of
the execution of such Warrant Certificate, shall be a proper officer of the
Company to sign such Warrant Certificate, although at the date of the execution
of this Warrant Agreement any such person was not such officer.
SECTION 3. Registration. The Company shall number and register the
------------
Warrant Certificates in a register as they are issued. The Company may deem and
treat the registered holder(s) of the Warrant Certificates as the absolute
owner(s) thereof (notwithstanding any notation of ownership or other writing
thereon made by anyone), for all purposes, and shall not be affected by any
notice to the contrary. The Company agrees that the Warrants shall be issued
into escrow pursuant to the Escrow Agreement by the Company on the date of this
Agreement and that the terms of this Agreement shall be in full force and effect
with respect to the Warrants issued into escrow, including, without limitation,
the anti-dilution provisions of Section 10 hereof.
SECTION 4. Registration of Transfers and Exchanges. The Company shall
---------------------------------------
from time to time register the transfer of any outstanding Warrant Certificates
in a Warrant register to be maintained by the Company upon surrender thereof
accompanied by a written instrument or instruments of transfer in form
satisfactory to the Company, duly executed by the registered holder or holders
thereof or by the duly appointed legal representative thereof or by a duly
authorized attorney. Upon any such registration of transfer, a new Warrant
Certificate shall be issued to the transferee(s) and the surrendered Warrant
Certificate shall be cancelled and disposed of by the Company.
The Warrant holders agree that prior to any proposed transfer of the
Warrant or the Warrant Shares, if such transfer is not made pursuant to an
effective Registration Statement under the Securities Act of 1933, as amended
(the "Act") will, if requested by the Company, deliver to the Company:
---
(1) an investment covenant reasonably satisfactory to the Company
signed by the proposed transferee;
(2) an agreement by such transferee to the impression of the
restrictive investment legend set forth below on the Warrant or
the Warrant Shares;
(3) an agreement by such transferee that the Company may place a
notation on the stock books of the Company or a "stop transfer
order" with any transfer agent or registrar with respect to the
Warrant Shares;
<PAGE>
(4) an agreement by such transferee to be bound by the provisions of
this Section 4 relating to the transfer of such Warrant or
Warrant Shares; and
(5) an opinion of counsel, reasonably satisfactory in form and
substance to the Company, to the effect that the proposed
transfer of the Warrants or Warrant Shares (as the case may be)
may be made without registration under the Act.
The Warrant holders agree that each certificate representing Warrant
Shares will bear the following legend:
"THE SECURITIES EVIDENCED OR CONSTITUTED HEREBY HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED
UNLESS THE REGISTRATION PROVISIONS OF SAID ACT HAVE BEEN COMPLIED WITH OR UNLESS
THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
Warrant Certificates may be exchanged at the option of the holder(s)
thereof, when surrendered to the Company at its office for another Warrant
Certificate or other Warrant Certificates of like tenor and representing in the
aggregate a like number of Warrants. Warrant Certificates surrendered for
exchange shall be cancelled and disposed of by the Company.
SECTION 5. Warrants; Exercise of Warrants. Subject to the terms of
------------------------------
this Agreement, each Warrant holder shall have the right, which may be exercised
commencing at the opening of business on May 2, 2000 and until 5:00 p.m., New
York City time on August 2, 2004 (the "Expiration Date"), to receive from the
---------------
Company the number of fully paid and nonassessable Warrant Shares that the
holder may at the time be entitled to receive on exercise of such Warrant and
payment of the Exercise Price then in effect for such Warrant Shares. Each
Warrant not exercised prior to 5:00 p.m., New York City time, on the Expiration
Date shall become void and all rights thereunder and all rights in respect
thereof under this agreement shall cease as of such time. No adjustments as to
dividends will be made upon exercise of the Warrants.
A Warrant may be exercised upon surrender to the Company at its office
designated for such purpose (the address of which is set forth in Section 14
hereof) of the certificate or certificates evidencing the Warrants to be
exercised with the form of election to purchase on the reverse thereof duly
filled in and signed, which signature shall be guaranteed by a bank or trust
company having an office or correspondent in the United States or a broker or
dealer which is a member of a registered securities exchange or the National
Association of Securities Dealers, Inc., and upon payment to the Company of the
Exercise Price as adjusted as herein provided, for the number of Warrant Shares
in respect of which such Warrants are then exercised. Payment of the aggregate
Exercise Price shall be made (i) in cash or by certified or official bank check
payable to the order of the Company, (ii) through the surrender of debt or
preferred equity securities of the Company having a principal amount or
liquidation preference,
<PAGE>
as the case may be, equal to the aggregate Exercise Price to be paid (the
Company will pay the accrued interest or dividends on such surrendered debt or
preferred equity securities in cash at the time of surrender notwithstanding the
stated terms thereof), (iii) by tendering Warrants having a fair market value
equal to the Exercise Price or (iv) with any combination of (i), (ii) or (iii).
For purpose of clause (iii) above, the fair market value of the Warrants shall
be determined as follows: (A) to the extent the Common Stock is publicly traded
and listed on the Nasdaq National Securities Market or a national securities
exchange, the fair market value shall be equal to the difference between (1) the
Quoted Price of the Common Stock on the date of exercise and (2) the Exercise
Price; or (B) to the extent the Common Stock is not publicly traded, or
otherwise is not listed on a national securities exchange, the fair market value
shall be equal to the value per Warrant as determined in good faith by the Board
of Directors of the Company pursuant to Section 10(n).
Subject to the provisions of Section 6 hereof, upon such surrender of
Warrants and payment of the Exercise Price the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
holder and in such name or names as the Warrant holder may designate, a
certificate or certificates for the number of full Warrant Shares issuable upon
the exercise of such Warrants together with cash as provided in Section 11;
provided, however, that if any consolidation, merger or lease or sale of assets
is proposed to be effected by the Company as described in subsection (m) of
Section 10 hereof, or a tender offer or an exchange offer for shares of Common
Stock of the Company shall be made, upon such surrender of Warrants and payment
of the Exercise Price as aforesaid, the Company shall, as soon as possible, but
in any event not later than two Business Days thereafter, issue and cause to be
delivered the full number of Warrant Shares issuable upon the exercise of such
Warrants in the manner described in this sentence together with cash as provided
in Section 11. Such certificate or certificates shall be deemed to have been
issued and any person so designated to be named therein shall be deemed to have
become a holder of record of such Warrant Shares as of the date of the surrender
of such Warrants and payment of the Exercise Price.
The Warrants shall be exercisable, at the election of the holders
thereof, either in full or from time to time in part and, in the event that a
certificate evidencing Warrants is exercised in respect of fewer than all of the
Warrant Shares issuable on such exercise at any time prior to the date of
expiration of the Warrants, a new certificate evidencing the remaining Warrant
or Warrants will be issued and delivered pursuant to the provisions of this
Section and of Section 2 hereof. Notwithstanding the foregoing, the holders of
the Warrants may not effect a partial exercise of the Warrants for less than
1,000 Warrant Shares.
All Warrant Certificates surrendered upon exercise of Warrants shall
be cancelled and disposed of by the Company. The Company shall keep copies of
this Agreement and any notices given or received hereunder available for
inspection by the holders during normal business hours at its office.
SECTION 6. Payment of Taxes. The Company will pay all documentary
----------------
stamp taxes attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Company shall not be required
to pay any tax or taxes which may be payable in respect of any transfer involved
in the issue of any Warrant Certificates or any certificates for Warrant Shares
in a name other than that of the registered holder of a Warrant
<PAGE>
Certificate surrendered upon the exercise of a Warrant, and the Company shall
not be required to issue or deliver such Warrant Certificates unless or until
the person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction of
the Company that such tax has been paid.
SECTION 7. Mutilated or Missing Warrant Certificates. In case any of
-----------------------------------------
the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the
Company may in its discretion issue, in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate, or in lieu of and
substitution for the Warrant Certificate lost, stolen or destroyed, a new
Warrant Certificate of like tenor and representing an equivalent number of
Warrants, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction of such Warrant Certificate and
indemnity, if requested, also reasonably satisfactory to it. Applicants for such
substitute Warrant Certificates shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
SECTION 8. Reservation of Warrant Shares. The Company will at all
-----------------------------
times reserve and keep available, free from preemptive rights, out of the
aggregate of its authorized but unissued Common Stock or its authorized and
issued Common Stock held in its treasury, for the purpose of enabling it to
satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the
maximum number of shares of Common Stock which may then be deliverable upon the
exercise of all outstanding Warrants.
The Company or, if appointed, the transfer agent for the Common Stock
(the "Transfer Agent") and every subsequent transfer agent for any shares of the
--------------
Company's capital stock issuable upon the exercise of any of the rights of
purchase represented by the Warrants will be irrevocably authorized and directed
at all times to reserve such number of authorized shares as shall be required
for such purpose. The Company will keep a copy of this Agreement on file with
the Transfer Agent and with every subsequent transfer agent for any shares of
the Company's capital stock issuable upon the exercise of the rights of purchase
represented by the Warrants. The Company will furnish such Transfer Agent a
copy of all notices of adjustments and certificates related thereto, transmitted
to each holder pursuant to Section 13 hereof.
Before taking any action which would cause an adjustment pursuant to
Section 10 hereof to reduce the Exercise Price below the then par value (if any)
of the Warrant Shares, the Company will take any corporate action which may, in
the opinion of its counsel (which may be counsel employed by the Company), be
necessary in order that the Company may validly and legally issue fully paid and
nonassessable Warrant Shares at the Exercise Price as so adjusted.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon issue and payment of the appropriate Exercise
Price, be fully paid, nonassessable, free of preemptive rights and free from all
taxes, liens, charges and security interests with respect to the issue thereof.
SECTION 9. Obtaining Stock Exchange Listings. The Company will from
---------------------------------
time to time take all action which may be necessary so that the Warrant Shares,
immediately upon their issuance upon the exercise of Warrants, will be listed on
the principal securities exchanges
<PAGE>
and markets within the United States of America, if any, on which other shares
of Common Stock are then listed.
SECTION 10. Adjustment of Exercise Price and Number of Warrant Shares
---------------------------------------------------------
Issuable. The Exercise Price and the number of Warrant Shares issuable upon the
- --------
exercise of each Warrant are subject to adjustment from time to time upon the
occurrence of the events enumerated in this Section 10. For purposes of this
Section 10, "Common Stock" means shares now or hereafter authorized of any class
------------
of common stock of the Company and any other stock of the Company, however
designated, that has the right (subject to any prior rights of any class or
series of preferred stock) to participate in any distribution of the assets or
earnings of the Company without limit as to per share amount.
(a) Adjustment for Change in Capital Stock. If the Company:
--------------------------------------
(1) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock;
(2) subdivides its outstanding shares of Common Stock into a greater
number of shares;
(3) combines its outstanding shares of Common Stock into a smaller
number of shares;
(4) makes a distribution on its Common Stock in shares of its capital
stock other than Common Stock or preferred stock; or
(5) issues by reclassification of its Common Stock any shares of its
capital stock;
then the Exercise Price in effect immediately prior to such action shall be
proportionately adjusted so that the holder of any Warrant thereafter exercised
may receive the aggregate number and kind of shares of capital stock of the
Company which he would have owned immediately following such action if such
Warrant had been exercised immediately prior to such action.
The adjustment shall become effective immediately after the record
date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, combination or reclassification.
If after an adjustment a holder of a Warrant upon exercise of it may
receive shares of two or more classes of capital stock of the Company, the
Company shall determine the allocation of the adjusted Exercise Price between
the classes of capital stock. After such allocation, the exercise privilege and
the Exercise Price of each class of capital stock shall thereafter be subject to
adjustment on terms comparable to those applicable to Common Stock in this
Section 10.
Such adjustment shall be made successively whenever any event listed
above shall occur.
<PAGE>
(b) Adjustment for Rights Issue. If the Company distributes any rights,
---------------------------
options or warrants entitling any person to subscribe for Common Stock or
securities convertible into, or exchangeable or exercisable for, Common Stock at
an offering price which is less than the Current Market Price per share on that
record date for such issuance, the Exercise Price shall be adjusted in
accordance with the formula:
N x P
O + -----
M
E' = E x ---------
O + N
where:
E' = the adjusted Exercise Price.
E = the current Exercise Price.
O = the number of shares of Common Stock outstanding on the record date.
N = the number of additional shares of Common Stock offered.
P = the offering price per share of the additional shares.
M = the Current Market Price per share of Common Stock on the record
date.
For purposes of this subsection (b), the "offering price" shall
include the amount initially paid for such rights, options or warrants plus the
amount to be paid upon exercise or conversion of such rights, options or
warrants.
The adjustment shall be made successively whenever any such rights,
options or warrants are issued and shall become effective immediately after the
record date for the determination of stockholders entitled to receive the
rights, options or warrants. If at the end of the period during which such
rights, options or warrants are exercisable, not all rights, options or warrants
shall have been exercised, the Exercise Price shall be immediately readjusted to
what it would have been if "N" in the above formula had been the number of
shares actually issued.
This subsection (b) does not apply to:
(1) rights, options or warrants issued to the Company's employees
under bona fide employment benefit plans adopted by the Board of
Directors and approved by the holders of Common Stock when
required by law, if such rights would otherwise be covered by
this subsection (b) (but only to the extent that the aggregate
number of rights, options or warrants excluded hereby and issued
after the date of this Agreement shall not exceed the right to
subscribe for more than 10% of the Common Stock outstanding on
the date of this Agreement),
(2) rights, options or warrants issued to persons in a bona fide
public offering pursuant to a firm commitment underwriting or
<PAGE>
(3) rights, options or warrants issued to persons who are not
affiliates of the Company in a bona fide private placement
through a placement agent that is a member firm of the NASD
(except to the extent that any discount from the Current Market
Price attributable to restrictions on transferability of such
rights, options or warrants, as determined in good faith by the
Board of Directors pursuant to Section 10(n) and described in a
Board resolution, shall exceed 15%).
(c) Adjustment for Other Distributions. If the Company distributes to all
----------------------------------
holders of its Common Stock any of its assets (including but not limited to
cash), debt securities, preferred stock, or any rights or warrants to purchase
debt securities, preferred stock, assets or other securities of the Company, the
Exercise Price shall be adjusted in accordance with the formula:
M-F
---
E' = E x M
where:
E' = the adjusted Exercise Price.
E = the current Exercise Price.
M = the Current Market Price per share of Common Stock on the record date
mentioned below.
F = the fair market value on the record date of the assets, securities,
rights or warrants applicable to one share of Common Stock. The Board
of Directors shall determine the fair market value pursuant to Section
10(n) based upon the trading prices of publicly traded securities
where applicable.
The adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of stockholders entitled to receive the distribution.
This subsection does not apply to rights, options or warrants referred
to in subsection (b) of this Section 10.
<PAGE>
(d) Adjustment for Common Stock Issue. If the Company issues shares of
---------------------------------
Common Stock for a consideration per share less than the Current Market Price
per share on the date the Company fixes the offering price of such additional
shares, the Exercise Price shall be adjusted in accordance with the formula:
P
-
E' = E x O + M
-------
A
where:
E' = the adjusted Exercise Price.
E = the then current Exercise Price.
O = the number of shares outstanding immediately prior to the issuance of
such additional shares.
P = the aggregate consideration received for the issuance of such
additional shares.
M = the Current Market Price per share on the date of issuance of such
additional shares.
A = the number of shares outstanding immediately after the issuance of
such additional shares.
The adjustment shall be made successively whenever any such issuance
is made, and shall become effective immediately after such issuance.
This subsection (d) does not apply to:
(1) any of the transactions described in subsections (a), (b) and (c)
of this Section 10,
(2) the exercise of warrants or options, or the conversion or
exchange of other securities convertible or exchangeable for
Common Stock,
(3) Common Stock issued upon the exercise of rights or warrants
issued to the holders of Common Stock,
(4) Common Stock issued to the Company's employees under bona fide
employment benefit plans adopted by the Board of Directors and
approved by the holders of Common Stock when required by law, if
such rights would otherwise be covered by this subsection (d)
(but only to the extent that the aggregate shares of Common Stock
excluded hereby and issued after the date of this Agreement shall
not exceed more than 10% of the Common Stock outstanding on the
date of this Agreement),
<PAGE>
(5) Common Stock issued to shareholders of any person that is not
affiliated with the Company which merges into the Company in
proportion to their stock holdings of such person immediately
prior to such merger, upon such merger,
(6) Common Stock issued in a bona fide public offering pursuant to a
firm commitment underwriting, or
(7) Common Stock issued to persons who are not affiliates of the
Company in a bona fide private placement through a placement
agent which is a member firm of the National Association of
Securities Dealers, Inc. (except to the extent that any discount
from the Current Market Price attributable to restrictions on
transferability of the Common Stock, as determined in good faith
by the Board of Directors pursuant to Section 10(n) and described
in a Board resolution, shall exceed 15%).
(e) Adjustment for Convertible Securities Issue. If the Company issues any
-------------------------------------------
securities convertible into or exchangeable for Common Stock (other than
securities issued in transactions described in subsections (b) and (c) of this
Section 10) for a consideration per share of Common Stock initially deliverable
upon conversion or exchange of such securities less than the Current Market
Price per share on the date of issuance of such securities, the Exercise Price
shall be adjusted in accordance with this formula:
P
-
E' = E x O + M
-----
O + D
where:
E' = the adjusted Exercise Price.
E = the then current Exercise Price.
O = the number of shares outstanding immediately prior to the issuance of
such securities.
P = the aggregate consideration received for the issuance of such
securities.
M = the Current Market Price per share on the date of issuance of such
securities.
D = the maximum number of shares deliverable upon conversion or in
exchange for such securities at the initial conversion or exchange
rate.
The adjustment shall be made successively whenever any such issuance
is made, and shall become effective immediately after such issuance.
If all of the Common Stock deliverable upon conversion or exchange of
such securities has not been issued when such securities are no longer
outstanding, then the Exercise
<PAGE>
Price shall promptly be readjusted to the Exercise Price that would then be in
effect had "D" in the above formula been equal to the actual number of shares of
Common Stock issued upon conversion or exchange of such securities.
This subsection (e) does not apply to:
(1) convertible securities issued to shareholders of any person that
is not affiliated with the Company and that merges into the
Company, or with a subsidiary of the Company, in proportion to
their stock holdings of such person immediately prior to such
merger, upon such merger,
(2) convertible securities issued in a bona fide public offering
pursuant to a firm commitment underwriting or
(3) convertible securities issued to persons who are not affiliates
of the Company in a bona fide private placement through a
placement agent which is a member firm of the National
Association of Securities Dealers, Inc. (except to the extent
that any discount from the Current Market Price attributable to
restrictions on transferability of Common Stock issuable upon
conversion, as determined in good faith by the Board of Directors
pursuant to Section 10(n) and described in a Board resolution,
shall exceed 10% of the then Current Market Price).
(f) Current Market Price. In subsections (b), (c), (d) and (e) of this
--------------------
Section 10 the "Current Market Price" per share of Common Stock on any date is
--------------------
the average of the Quoted Prices of the Common Stock for 15 consecutive trading
days commencing 20 trading days before the date in question. The "Quoted Price"
------------
of the Common Stock for any given trading day is the last reported sales price
of the Common Stock for that trading day as reported by Nasdaq National Market
System, or if the Common Stock is listed on a securities exchange, the last
reported sales price of the Common Stock on such exchange, which price shall be
for consolidated trading if applicable to such exchange, or if the sales price
of the Common Stock is not so reported or listed, the last reported bid price of
the Common Stock. In the absence of one or more such quotations, the Board of
Directors of the Company shall determine the Current Market Price pursuant to
Section 10(n) in good faith.
(g) Consideration Received. For purposes of any computation respecting
----------------------
consideration received pursuant to subsections (d) and (e) of this Section 10,
the following shall apply:
(1) in the case of the issuance of shares of Common Stock for cash,
the consideration shall be the amount of such cash, provided that
in no case shall any deduction be made for any commissions,
discounts or other expenses incurred by the Company for any
underwriting of the issue or otherwise in connection therewith;
(2) in the case of the issuance of shares of Common Stock for a
consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair
market value thereof as determined in good faith
<PAGE>
by the Board of Directors pursuant to Section 10(n), based upon
the trading prices of publicly traded securities where
appropriate (irrespective of the accounting treatment thereof),
whose determination shall be conclusive, and described in a Board
resolution;
(3) in the case of the issuance of securities convertible into or
exchangeable for shares, the aggregate consideration received
therefor shall be deemed to be the consideration received by the
Company for the issuance of such securities plus the additional
minimum consideration, if any, to be received by the Company upon
the conversion or exchange thereof (the consideration in each
case to be determined in the same manner as provided in clauses
(1) and (2) of this subsection).
(h) When De Minimis Adjustment May Be Deferred. No adjustment in the
------------------------------------------
Exercise Price need be made unless the adjustment would require an increase or
decrease of at least 1% in the Exercise Price. Any adjustments that are not
made shall be carried forward and taken into account in any subsequent
adjustment.
All calculations under this Section 10(h) shall be made to the nearest
cent or to the nearest 1/1000th of a share, as the case may be.
(i) When No Adjustment Required. In addition to the other exceptions
---------------------------
provided above, (i) no adjustment need be made for a transaction referred to in
subsections (a), (b), (c), (d) or (e) of this Section 10 if Warrant holders are
to participate in the transaction on a basis and with notice that the Board of
Directors determines to be fair and appropriate in light of the basis and notice
on which holders of Common Stock participate in the transaction.
(ii) No adjustment need be made for rights to purchase Common Stock
pursuant to a Company plan for reinvestment of dividends or interest.
(iii) No adjustment need be made for a change in the par value or no
par value of the Common Stock.
(iv) To the extent the Warrants become convertible into cash, no
adjustment need be made thereafter as to the cash. Interest will not accrue on
the cash.
(j) Notice of Adjustment. Whenever the Exercise Price is adjusted, the
--------------------
Company shall provide the notices required by Section 13 hereof.
(k) Voluntary Reduction. The Company from time to time may reduce the
-------------------
Exercise Price by any amount for any period of time if the period is at least 20
days and if the reduction is irrevocable during the period; provided, however,
that in no event may the Exercise Price be less than the par value of a share of
Common Stock.
Whenever the Exercise Price is reduced, the Company shall mail to
Warrant holders a notice of the reduction. The Company shall mail the notice at
least 10 days before the date the reduced Exercise Price takes effect. The
notice shall state the reduced Exercise Price and the period it will be in
effect.
<PAGE>
A reduction of the Exercise Price does not change or adjust the
Exercise Price otherwise in effect for purposes of subsections (a), (b), (c),
(d) and (e) of this Section 10.
(l) Notice with respect to Certain Transactions. If:
-------------------------------------------
(1) the Company takes any action that would require an adjustment in
the Exercise Price pursuant to subsections (a), (b), (c), (d) or
(e) of this Section 10 and if the Company does not arrange for
Warrant holders to participate pursuant to subsection (i) of this
Section 10;
(2) the Company takes any action that would require a supplemental
Warrant Agreement pursuant to subsection (m) of this Section 10;
or
(3) there is a liquidation or dissolution of the Company,
the Company shall mail to Warrant holders a notice stating the proposed record
date for a dividend or distribution or the proposed effective date of a
subdivision, combination, reclassification, consolidation, merger, transfer,
lease, liquidation or dissolution. The Company shall mail the notice at least
15 days before such date. Failure to mail the notice or any defect in it shall
not affect the validity of the transaction.
(m) Reorganization of Company. If the Company consolidates or merges with
-------------------------
or into, or transfers or leases all or substantially all its assets to, any
person, upon consummation of such transaction the Warrants shall automatically
become exercisable for the kind and amount of securities, cash or other assets
which the holder of a Warrant would have owned immediately after the
consolidation, merger, transfer or lease if the holder had exercised the Warrant
immediately before the effective date of the transaction. Concurrently with the
consummation of such transaction, the corporation formed by or surviving any
such consolidation or merger if other than the Company, or the person to which
such sale or conveyance shall have been made, shall enter into a supplemental
Warrant Agreement so providing and further providing for adjustments which shall
be as nearly equivalent as may be practical to the adjustments provided for in
this Section 10. The successor Company shall mail to Warrant holders a notice
describing the supplemental Warrant Agreement.
If the issuer of securities deliverable upon exercise of Warrants
under the supplemental Warrant Agreement is an affiliate of the formed,
surviving, transferee or lessee corporation, that issuer shall join in the
supplemental Warrant Agreement.
If this subsection (m) applies, subsections (a), (b), (c), (d) and (e)
of this Section 10 do not apply.
(n) Company Determination Not Final. Any determination that the Company or
-------------------------------
its Board of Directors must make pursuant to this Agreement shall be made in
good faith and shall be binding on the holders of Warrants, except as set forth
herein. The Company shall give each holder of Warrants written notice of any
such determination by the Company or its Board of Directors. If a majority of
the holders of the Warrants do not agree with any such determination by the
Company or its Board of Directors, such holders may request, in a notice
delivered to the Company not later than 15 days after the date on which the
holders received notice of such
<PAGE>
determination from the Company, that such determination be made, at the cost of
the Company, by an investment banking firm (or, if an investment banking firm is
generally not qualified to render such a determination, an appraisal firm) of
recognized national standing, which determination shall be final and binding on
the Company and the holders of Warrants, absent manifest error.
(o) When Issuance or Payment May Be Deferred. In any case in which this
----------------------------------------
Section 10 shall require that an adjustment in the Exercise Price be made
effective as of a record date for a specified event, the Company may elect to
defer until the occurrence of such event (i) issuing to the holder of any
Warrant exercised after such record date the Warrant Shares and other capital
stock of the Company, if any, issuable upon such exercise over and above the
Warrant Shares and other capital stock of the Company, if any, issuable upon
such exercise on the basis of the Exercise Price and (ii) paying to such holder
any amount in cash in lieu of a fractional share pursuant to Section 11;
provided, however, that the Company shall deliver to such holder a due bill or
other appropriate instrument evidencing such holder's right to receive such
additional Warrant Shares, other capital stock and cash upon the occurrence of
the event requiring such adjustment.
(p) Adjustment in Number of Shares. Upon each adjustment of the Exercise
------------------------------
Price pursuant to this Section 10, each Warrant outstanding prior to the making
of the adjustment in the Exercise Price shall thereafter evidence the right to
receive upon payment of the adjusted Exercise Price that number of shares of
Common Stock (calculated to the nearest hundredth) obtained from the following
formula:
N' = N x E
-
E'
where:
N' = the adjusted number of Warrant Shares issuable upon exercise of a
Warrant by payment of the adjusted Exercise Price.
N = the number or Warrant Shares previously issuable upon exercise of a
Warrant by payment of the Exercise Price prior to adjustment.
E' = the adjusted Exercise Price.
E = the Exercise Price prior to adjustment.
(q) Form of Warrants. Irrespective of any adjustments in the Exercise
----------------
Price or the number or kind of shares purchasable upon the exercise of the
Warrants, Warrants theretofore or thereafter issued may continue to express the
same price and number and kind of shares as are stated in the Warrants initially
issuable pursuant to this Agreement.
SECTION 11. Fractional Interests. The Company shall not be required
--------------------
to issue fractional Warrant Shares on the exercise of Warrants. If more than one
Warrant shall be presented for exercise in full at the same time by the same
holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If
<PAGE>
any fraction of a Warrant Share would, except for the provisions of this Section
11, be issuable on the exercise of any Warrants (or specified portion thereof),
the Company shall pay an amount in cash equal to the fair market value of such
Warrant (as determined in accordance with Section 5 hereof) on the day
immediately preceding the date the Warrant is presented for exercise, multiplied
by such fraction.
SECTION 12. No Dilution or Impairment; Capital and Ownership
------------------------------------------------
Structure. If any event shall occur as to which the provisions of Section 10 are
- ---------
not strictly applicable but the failure to make any adjustment would adversely
affect the purchase rights represented by the Warrants in accordance with the
essential intent and principles of such Section, then, in each such case, the
Company shall appoint an investment banking firm of recognized national standing
that does not have a direct or material indirect financial interest in the
Company or any of its subsidiaries, which has not been, and, at the time it is
called upon to give independent financial advice to the Company, is not (and
none of its directors, officers, employees, affiliates or stockholders are) a
promoter, director or officer of the Company or any of its subsidiaries, which
shall give their opinion upon the adjustment, if any, on a basis consistent with
the essential intent and principles established in Section 10, necessary to
preserve, without dilution, the purchase rights represented by the Warrants.
Upon receipt of such opinion, the Company will promptly mail a copy thereof to
the holders of the Warrants and shall make the adjustments described therein.
The Company will not, by amendment of its certificate of incorporation
or through any consolidation, merger, reorganization, transfer of assets,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of the Warrants,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the holder of the Warrants against dilution or other
impairment. Without limiting the generality of the foregoing, the Company (a)
will take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock on the exercise of the Warrants from time to time outstanding and
(b) will not take any action which results in any adjustment of the Exercise
Price if the total number of Warrant Shares issuable after the action upon the
exercise of all of the Warrants would exceed the total number of shares of
Common Stock then authorized by the Company's certificate of incorporation and
available for the purposes of issue upon such exercise. A consolidation,
merger, reorganization or transfer of assets involving the Company covered by
Section 10(m) shall not be prohibited by or require any adjustment under this
Section 12.
SECTION 13. Notices to Warrant Holders. Upon any adjustment of the
--------------------------
Exercise Price pursuant to Section 10, the Company shall promptly thereafter (i)
cause to be filed with the Company a certificate of the Company's Chief
Financial Officer setting forth the Exercise Price after such adjustment and
setting forth in reasonable detail the method of calculation and the facts upon
which such calculations are based and setting forth the number of Warrant Shares
(or portion thereof) issuable after such adjustment in the Exercise Price, upon
exercise of a Warrant and payment of the adjusted Exercise Price, which
certificate shall be conclusive evidence of the correctness of the matters set
forth therein, and (ii) cause to be given to each of the registered holders of
the Warrant Certificates at his address appearing on the Warrant register
written
<PAGE>
notice of such adjustments by first-class mail, postage prepaid. Where
appropriate, such notice may be given in advance and included as a part of the
notice required to be mailed under the other provisions of this Section 13.
In case:
(a) the Company shall authorize the issuance to all holders of shares
of Common Stock of rights, options or warrants to subscribe for or purchase
shares of Common Stock or of any other subscription rights or warrants; or
(b) the Company shall authorize the distribution to all holders of
shares of Common Stock of evidences of its indebtedness or assets (other
than cash dividends or cash distributions payable out of consolidated
earnings or earned surplus or dividends payable in shares of Common Stock
or distributions referred to in subsection (a) of Section 10 hereof); or
(c) of any consolidation or merger to which the Company is a party
and for which approval of any shareholders of the Company is required, or
of the conveyance or transfer of the properties and assets of the Company
substantially as an entirety, or of any reclassification or change of
Common Stock issuable upon exercise of the Warrants (other than a change in
par value, or from par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination), or a tender offer
or exchange offer for shares of Common Stock; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(e) the Company proposes to take any action (other than actions of
the character described in Section 10(a)) which would require an adjustment
of the Exercise Price pursuant to Section 10;
then the Company shall cause to be given to each of the registered holders of
the Warrant Certificates at his address appearing on the Warrant register, at
least 20 days (or 10 days in any case specified in clauses (a) or (b) above)
prior to the applicable record date hereinafter specified, or promptly in the
case of events for which there is no record date, by first-class mail, postage
prepaid, a written notice stating (i) the date as of which the holders of record
of shares of Common Stock to be entitled to receive any such rights, options,
warrants or distribution are to be determined, or (ii) the initial expiration
date set forth in any tender offer or exchange offer for shares of Common Stock,
or (iii) the date on which any such consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up is expected to become effective or
consummated, and the date as of which it is expected that holders of record of
shares of Common Stock shall be entitled to exchange such shares for securities
or other property, if any, deliverable upon such reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up. The failure to give the notice required by this Section 13 or any defect
therein shall not affect the legality or validity of any distribution, right,
option, warrant, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up, or the vote upon any action. Any notice requirement
under this Section 13 shall be in addition to any notice requirement under
<PAGE>
Section 10(l); provided that the Company may deliver one notice that meets all
of the conditions of Section 10(l) and this Section 13, which notice shall be
deemed to have been delivered pursuant to both such Sections.
Subject to Section 10(n), nothing contained in this Agreement or in
any of the Warrant Certificates shall be construed as conferring upon the
holders thereof the right to vote or to consent or to receive notice as
shareholders in respect of the meetings of shareholders or the election of
Directors of the Company or any other matter, or any rights whatsoever as
shareholders of the Company.
SECTION 14. Notices to Company and Warrant Holder. Any notice or
-------------------------------------
demand authorized by this Agreement to be given or made by the registered holder
of any Warrant Certificate to or on the Company shall be sufficiently given or
made when and if delivered in person or by overnight courier, addressed to the
office of the Company expressly designated by the Company at its office for
purposes of this Agreement (until the Warrant holders are otherwise notified in
accordance with this Section by the Company), as follows:
Creditrust Corporation
7000 Security Boulevard
Baltimore, Maryland 21244
Attention: Chief Financial Officer
With a copy to:
Hogan & Hartson L.L.P.
111 South Calvert Street
Suite 1600
Baltimore, Maryland 21202
Attention: Henry D. Kahn, Esq.
Any notice pursuant to this Agreement to be given by the Company to
the registered holder(s) of any Warrant Certificate shall be sufficiently given
when and if deposited in the mail, first-class or registered, postage prepaid,
addressed (until the Company is otherwise notified in accordance with this
Section by such holder) to such holder at the address appearing on the Warrant
register of the Company.
SECTION 15. Supplements and Amendments. The Company may from time to
--------------------------
time supplement or amend this Agreement without the approval of any holders of
Warrant Certificates in order to cure any ambiguity or to correct or supplement
any provision contained herein which may be defective or inconsistent with any
other provision herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company may deem necessary or desirable
and which shall not in any way adversely affect the interests of the holders of
Warrant Certificates.
<PAGE>
SECTION 16. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company shall bind and inure to the
benefit of its respective successors and assigns hereunder.
SECTION 17. Termination. This Agreement shall terminate at 5:00 p.m.,
-----------
New York City time on August 2, 2004. Notwithstanding the foregoing, this
Agreement will terminate on any earlier date if all Warrants have been
exercised.
SECTION 18. GOVERNING LAW. THIS AGREEMENT AND EACH WARRANT
-------------
CERTIFICATE ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE
LAWS OF THE STATE OF NEW YORK AND FOR ALL PURPOSES SHALL BE CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF SAID STATE.
SECTION 19. Benefits of This Agreement. Nothing in this Agreement
--------------------------
shall be construed to give to any person or corporation other than the Company
and the registered holders of the Warrant Certificates any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company and the registered holders of the
Warrant Certificates.
SECTION 20. Counterparts. This Agreement may be executed in any
------------
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
CREDITRUST CORPORATION
By: ____________________________________
Name:
Title:
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION
By: ____________________________________
Name:
Title:
<PAGE>
EXHIBIT A
Warrant Certificate
THE SECURITIES EVIDENCED OR CONSTITUTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH
SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE
REGISTRATION PROVISIONS OF SAID ACT HAVE BEEN COMPLIED WITH OR UNLESS THE
COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
EXERCISABLE ON OR BEFORE AUGUST 2, 2004
No. _____ Warrants to purchase _______ shares
Warrant Certificate
CREDITRUST CORPORATION
This Warrant Certificate certifies that ______________, or registered
assigns, is the registered holder of Warrants expiring August 2, 2004 (the
"Warrants") to purchase Common Stock, par value $.01 per share (the "Common
-------- ------
Stock"), of Creditrust Corporation, a Maryland corporation (the "Company").
- ----- -------
Each Warrant entitles the holder upon exercise to receive from the Company on or
before 5:00 p.m. New York City Time on August 2, 2004, an amount of fully paid
and nonassessable shares of Common Stock as set forth abovee ( "Warrant Shares")
--------------
at the initial exercise price per share (the "Exercise Price") equal to the
--------------
lower of (x) the average closing price of the Common Stock on the Nasdaq
National Securities Market for the ten days preceding August 2, 1999 and (y) the
average closing price of the Common Stock on the Nasdaq National Securities
Market for the ten days preceeding May 2, 2000, payable in lawful money of the
United States of America upon surrender of this Warrant Certificate and payment
of the Exercise Price at the office of the Company designated for such purpose,
but only subject to the conditions set forth herein and in the Warrant Agreement
referred to on the reverse hereof. The Exercise Price and number of Warrant
Shares issuable upon exercise of the Warrants are subject to adjustment upon the
occurrence of certain events set forth in the Warrant Agreement.
No Warrant may be exercised after 5:00 p.m., New York City Time on
August 2, 2004, and to the extent not exercised by such time such Warrants shall
become void.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof and such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
This Warrant Certificate shall not be valid unless executed by the
Company.
<PAGE>
IN WITNESS WHEREOF, Creditrust Corporation has caused this Warrant
Certificate to be signed by its President and by its Secretary, each by a
facsimile of his signature, and has caused a facsimile of its corporate seal to
be affixed hereunto or imprinted hereon.
Dated:
CREDITRUST CORPORATION
By: ___________________________________
President
By: ___________________________________
Secretary
<PAGE>
[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring August 2, 2004 entitling the holder on
exercise to receive shares of Common Stock, par value $.01 per share, of the
Company (the "Common Stock"), and are issued or to be issued pursuant to a
------------
Warrant Agreement, dated as of August 2, 1999 (the "Warrant Agreement"), duly
-----------------
executed and delivered by the Company, which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants. A copy of the Warrant Agreement may be obtained by the holder
hereof upon written request to the Company.
Warrants may be exercised at any time on or after May 2, 2000. The
holder of Warrants evidenced by this Warrant Certificate may exercise them by
surrendering this Warrant Certificate, with the form of election to purchase set
forth hereon properly completed and executed, together with payment of the
Exercise Price in cash at the office of the Company designated for such purpose.
In the event that upon any exercise of Warrants evidenced hereby the number of
Warrants exercised shall be less than the total number of Warrants evidenced
hereby, there shall be issued to the holder hereof or his assignee a new Warrant
Certificate evidencing the number of Warrants not exercised. No adjustment shall
be made for any dividends on any Common Stock issuable upon exercise of this
Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price set forth on the face hereof may, subject to certain
conditions, be adjusted. If the Exercise Price is adjusted, the Warrant
Agreement provides that the number of shares of Common Stock issuable upon the
exercise of each Warrant shall be adjusted. No fractions of a share of Common
Stock will be issued upon the exercise of any Warrant, but the Company will pay
the cash value thereof determined as provided in the Warrant Agreement.
The holders of the Warrants are entitled to certain registration
rights with respect to the Warrants. Said registration rights are set forth in
full in an Equity Registration Rights Agreement, dated as of August 2, 1999,
among the Company and certain investors named therein. A copy of the Equity
Registration Rights Agreement may be obtained by the holder hereof upon written
request to the Company.
Warrant Certificates, when surrendered at the office of the Company by
the registered holder thereof in person or by legal representative or attorney
duly authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Company a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued to the transferee(s) in
<PAGE>
exchange for this Warrant Certificate, subject to the limitations provided in
the Warrant Agreement, without charge except for any tax or other governmental
charge imposed in connection therewith.
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof, and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.
<PAGE>
[Form of Election to Purchase]
(To Be Executed Upon Exercise Of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive __________ shares of Common
Stock and herewith tenders payment for such shares to the order of CREDITRUST
CORPORATION in the amount of $______ in accordance with the terms hereof. The
undersigned requests that a certificate for such shares be registered in the
name of ________________, whose address is _______________________________ and
that such shares be delivered to ________________ whose address is ___________
______________________. If said number of shares is less than all of the shares
of Common Stock purchasable hereunder, the undersigned requests that a new
Warrant Certificate representing the remaining balance of such shares be
registered in the name of ______________, whose address is
_________________________, and that such Warrant Certificate be delivered to
_________________, whose address is __________________.
Signature:
Date:
Signature Guaranteed:
<PAGE>
TABLE OF CONTENTS*
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. WARRANT CERTIFICATES............................................. 1
SECTION 2. EXECUTION OF WARRANT CERTIFICATES................................ 1
SECTION 3. REGISTRATION..................................................... 2
SECTION 4. REGISTRATION OF TRANSFERS AND EXCHANGES.......................... 2
SECTION 5. WARRANTS; EXERCISE OF WARRANTS................................... 3
SECTION 6. PAYMENT OF TAXES................................................ 4
SECTION 7. MUTILATED OR MISSING WARRANT CERTIFICATES........................ 5
SECTION 8. RESERVATION OF WARRANT SHARES.................................... 5
SECTION 9. OBTAINING STOCK EXCHANGE LISTINGS................................ 5
SECTION 10. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES
ISSUABLE........................................................ 6
SECTION 11. FRACTIONAL INTERESTS............................................ 14
SECTION 12. NO DILUTION OR IMPAIRMENT; CAPITAL AND OWNERSHIP STRUCTURE...... 15
SECTION 13. NOTICES TO WARRANT HOLDERS...................................... 15
SECTION 14. NOTICES TO COMPANY AND WARRANT HOLDER........................... 17
SECTION 15. SUPPLEMENTS AND AMENDMENTS...................................... 17
SECTION 16. SUCCESSORS...................................................... 18
SECTION 17. TERMINATION..................................................... 18
SECTION 18. GOVERNING LAW................................................... 18
SECTION 19. BENEFITS OF THIS AGREEMENT...................................... 18
SECTION 20. COUNTERPARTS.................................................... 18
</TABLE>
__________________
* This Table of Contents does not constitute a part of this Agreement or have
any bearing upon the interpretation of any of its terms or provisions.
<PAGE>
EXECUTION COPY
EXHIBIT 10.23
================================================================================
EQUITY REGISTRATION RIGHTS AGREEMENT
among
CREDITRUST CORPORATION
and
THE LENDERS SET FORTH ON
THE SIGNATURE PAGES HERETO
Dated as of August 2, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. DEFINITIONS..................................................... 1
- ----------------------
SECTION 2. REGISTRATION RIGHTS............................................. 3
2.1. Demand Registration Rights...................................... 3
2.2. Incidental Registration......................................... 5
2.3. Supplements and Amendments...................................... 6
2.4. Restrictions on Public Sale by the Company and Others........... 6
2.5. Underwritten Registrations...................................... 7
2.6. Registration Procedures......................................... 7
2.7. Registration Expenses........................................... 13
2.8. Rule 144........................................................ 14
SECTION 3. INDEMNIFICATION................................................. 14
- --------------------------
3.1. Indemnification by the Company.................................. 14
3.2. Indemnification by Holder of Registrable Securities............. 15
3.3. Conduct of Indemnification Proceeding........................... 15
3.4. Contribution.................................................... 16
3.5. Other Indemnities............................................... 16
SECTION 4. MISCELLANEOUS................................................... 16
- ------------------------
4.1. Remedies........................................................ 16
4.2. No Inconsistent Agreements...................................... 16
4.3. Amendments and Waivers.......................................... 17
4.4. Notices......................................................... 17
4.5. Successors and Assigns.......................................... 17
4.6. Counterparts.................................................... 17
4.7. Headings........................................................ 17
4.8. Governing Law................................................... 18
4.9. Severability.................................................... 18
4.10. Entire Agreement................................................ 18
4.11. Attorneys' Fees................................................. 18
4.12. Securities Held by the Company or Its Subsidiaries.............. 18
Signature Pages............................................................ S-1
</TABLE>
<PAGE>
EQUITY REGISTRATION RIGHTS AGREEMENT
------------------------------------
This Equity Registration Rights Agreement (the "Agreement"), dated as
---------
of August 2, 1999, by and among CREDITRUST CORPORATION, a Maryland corporation
(or any successor, the "Company"), and the lenders whose signatures appear on
-------
the execution pages of this Agreement (each a "Lender" and collectively, the
------
"Lenders").
- --------
This Agreement is entered into in connection with the Bridge Loan
Agreement, dated as of August 2, 1999 (the "Bridge Loan Agreement"), by and
---------------------
among the Company, Creditrust SPV99-2, LLC, a Delaware limited liability company
(the "Borrower"), CRDT SPV99-2 Capital, Inc., ("Capital"), the Lenders and
-------- -------
Norwest Bank Minnesota, National Association, as Administrative Agent (the
"Administrative Agent"). In order to induce the Lenders to enter into the
- ---------------------
Bridge Loan Agreement, the Company has agreed to provide the registration rights
set forth in this Agreement. The execution of this Agreement is required by the
terms of the Bridge Loan Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
-----------
Capitalized terms used herein without definition shall have their
respective meanings set forth in the Bridge Loan Agreement. As used in this
Agreement, the following terms shall have the following meanings:
"Advice" has the meaning set forth in the last paragraph of Section
------
2.6.
"Affiliate" means, with respect to any Person, any other Person (i)
---------
directly or indirectly controlling or controlled by or under direct or indirect
common control with such Person or (ii) directly or indirectly owning or holding
five percent (5%) or more of the equity interest in such Person. For purposes
of this definition, "control" when used with respect to any Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Agreement" has the meaning set forth in the first paragraph of this
---------
Agreement.
"Bridge Loan Agreement" has the meaning set forth in the second
---------------------
paragraph of this Agreement.
"Common Stock" means the Common Stock, par value $.01 per share, of
------------
the Company.
"Company" has the meaning set forth in the first paragraph of this
-------
Agreement.
"DTC" has the meaning set forth in Section 2.6(i) of this Agreement.
---
<PAGE>
"Effectiveness Date" has the meaning set forth in Section 2.1(a) of
------------------
this Agreement.
"Effectiveness Period" has the meaning set forth in Section 2.1(a) of
--------------------
this Agreement.
"Exchange Act" has the meaning set forth in Section 2.6(a) of this
------------
Agreement.
"Exchange Shares" means the shares of Common Stock of the Company
---------------
issuable or issued upon exercise of the Warrants.
"Filing Date" has the meaning set forth in Section 2.1(a) of this
-----------
Agreement.
"Holder" means any holder of a Registrable Security.
------
"Incidental Registration" has the meaning set forth in Section 2.2(a)
-----------------------
of this Agreement.
"Inspectors" has the meaning set forth in Section 2.6(n) of this
----------
Agreement.
"Lender" has the meaning set forth in the first paragraph of this
------
Agreement.
"Lenders" has the meaning set forth in the first paragraph of this
-------
Agreement.
"NASD" has the meaning set forth in Section 2.7 of this Agreement.
----
"Person" means any individual, trustee, corporation, partnership,
------
joint stock company, trust, unincorporated association, union, business
association, firm or other legal entity.
"Prospectus" means the prospectus included in any Registration
----------
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by such Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" means the Exchange Shares and any other
----------------------
securities issued or issuable with respect to the Exchange Shares by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization; provided,
however, that a security ceases to be a Registrable Security when it is no
longer a Transfer Restricted Security.
"Registration Statement" means any registration statement of the
----------------------
Company that covers any of the Registrable Securities pursuant to the provisions
of Section 2.1 of this Agreement, including the Prospectus, amendments and
supplements to such registration
2
<PAGE>
statement, including post-effective amendments, all exhibits, and all material
incorporated by reference or deemed to be incorporated by reference in such
registration statement.
"Rule 144" means Rule 144 under the Securities Act, as such Rule may
--------
be amended from time to time, or any similar rule (other than Rule 144A) or
regulation hereafter adopted by the SEC providing for offers and sales of
securities made in compliance therewith resulting in offers and sales by
subsequent holders of such securities being free of the registration and
prospectus delivery requirements of the Securities Act.
"SEC" means the Securities and Exchange Commission.
---
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations of the SEC promulgated thereunder.
"Transfer Restricted Security" means an Exchange Share until such
----------------------------
Exchange Share (i) has been effectively registered under the Securities Act and
disposed of in accordance with a registration statement filed under the
Securities Act covering it or (ii) is or may be distributed to the public
pursuant to Rule 144 without being subject to volume limitations.
"underwritten registration" or "underwritten offering" means a
------------------------- ---------------------
registration in which securities of the Company (including Registrable
Securities) are sold to an underwriter for reoffering to the public.
"Warrants" means the Common Stock warrants exchangable for up to 10%
--------
of the fully diluted Common Stock of the Company.
"Warrant Agreement" means that certain Warrant Agreement, dated as of
-----------------
July __, 1999, by and among the Company and the Lenders.
SECTION 2. REGISTRATION RIGHTS
-------------------
2.1. Demand Registration Rights. (a) The Company covenants and agrees
--------------------------
with each Holder of Registrable Securities that if on or after May 2, 2000, the
Company at any time receives a written request from Holders of not less than 30%
of the then issued or issuable Registrable Securities, then within 45 days after
receipt of such notice (the 45th day after such notice, the "Filing Date") the
-----------
Company shall use its best efforts to file a Registration Statement and cause
such Registration Statement to become effective under the Securities Act at the
earliest possible date after such notice (such date, the "Effectiveness Date")
------------------
with respect to the offering and sale or other disposition of such Registrable
Securities as such Holders desire to have covered by such Registration
Statement. The Company shall use its best efforts to continuously maintain the
effectiveness of such Registration Statement until the earlier of (i) 270 days
after the effective date of the Registration Statement or (ii) the consummation
of the distribution by the Holders of all of the Registrable Securities covered
by such Registration Statement (the "Effectiveness Period"). The Company shall
not include any securities owned by any other Person other than the Registrable
Securities in any such Registration Statement pursuant to any "piggyback" or
similar registration rights granted by the Company without the consent of the
Holders of a majority of the Registrable Securities to be covered by such
Registration Statement, which consent shall not be unreasonably witheld or
delayed. Each
3
<PAGE>
notice to the Company requesting registration to be effected shall set forth (1)
the number of Registrable Securities to be included; (2) the name of the Holders
of the Registrable Securities and the amount to be sold by such Holders; and (3)
the proposed manner of sale. Within 10 (ten) days after receipt of such notice,
the Company shall notify each Holder of Registrable Securities who is not a
party to the written notice served on the Company (or the transferee(s) of such
Holder) and offer to them the opportunity to include their Registrable
Securities in such registration. A Registration Statement will not count as
complying with the terms hereof unless it is declared effective by the SEC and
remains continuously effective for the Effectiveness Period.
(b) Each Holder of Registrable Securities agrees, if requested by the
managing underwriter or underwriters in an underwritten offering, not to effect
any public sale or distribution of Registrable Securities or of securities of
the Company of the same class, or of securities convertible into or exchangeable
or exercisable for securities of the Company of the same class, as any
securities included in such Registration Statement, including a sale pursuant to
Rule 144 under the Securities Act (except as part of such underwritten
registration), during the 10-day period prior to, and during the 180-day period
beginning on, the closing date of each underwritten offering made pursuant to
such Registration Statement, to the extent timely notified in writing by the
Company or the managing underwriter or underwriters.
(c) The foregoing provisions of Section 2.1(b) shall not apply to any
Holder of Registrable Securities if such Holder is prevented by applicable
statute or regulation from entering into any such agreement; provided, however,
that any such Holder shall undertake, in its request to participate in any such
underwritten offering, not to effect any public sale or distribution of any
applicable class of Registrable Securities commencing on the date of sale of
such applicable class of Registrable Securities unless it has provided 60 days
prior written notice of such sale or distribution to the underwriter or
underwriters.
(d) The Company shall be entitled to include in any Registration
Statement referred to in this Section 2.1 that relates to an underwritten public
offering, securities to be sold by the Company for its own account, except as
and to the extent that, in the opinion of the managing underwriter, such
inclusion would adversely affect the marketing of the Registrable Securities to
be sold.
(e) Notwithstanding anything to the contrary contained herein, no
request may be made under this Section 2.1 within 90 days after the effective
date of the most recent registration statement filed by the Company (other than
registration statements on Form S-4 or S-8).
(f) Notwithstanding the foregoing, (i) the Company's obligation to
file a Registration Statement pursuant to this Section 2.1 and (ii) following
the date on which a Registration Statement pursuant to this Section 2.1 first
becomes effective under the Act, the effectiveness of such Registration
Statement may, in the case of each of (i) and (ii) above, be suspended by the
Company by prior written notice to the Holders for a period not to exceed 30
days in any twelve month period if (x) an event occurs and is continuing as a
result of which the Registration Statement would, in the reasonable good faith
judgment of the Company's Board of Directors, contain an untrue statement of a
material fact or omit to state a material fact necessary
4
<PAGE>
in order to make the statements therein not misleading and (y)(1) the Company's
Board of Directors reasonably determines in good faith that the disclosure of
such event at such time would have a material adverse effect on the business,
operations or prospects of the Company and its subsidiaries, taken as a whole,
or (2) the disclosure otherwise relates to a previously undisclosed pending
material business transaction, the disclosure of which would, in the reasonable
good faith judgment of the Company's Board of Directors, impede the Company's
ability to consummate such transaction.
(g) The Company's obligations under this Section 2.1 are limited to
two occasions only.
2.2. Incidental Registration. (a) If, at any time when Registrable
-----------------------
Securities are outstanding, the Company proposes to register any of its
securities under the Act (other than a registration on Form S-4 or S-8 or any
successor form thereto), whether or not for sale for its own account, and the
registration form to be used therefor may be used for the registration of
Registrable Securities, it will each such time give prompt written notice to all
Holders of Registrable Securities of the Company's intention to do so and, upon
the written request of any such Holder to the Company made within 10 days after
the receipt of any such notice (which request shall specify the Registrable
Securities intended to be disposed of by such Holder and the intended method of
disposition thereof), the Company will use its best efforts to effect the
registration (an "Incidental Registration") under the Act of all Registrable
-----------------------
Securities which the Company has been so requested to register by the Holders
thereof.
(b) Subject to Section 2.2(c), if an Incidental Registration is an
underwritten registration, and the managing underwriters thereof advise the
Company in writing that in their opinion the number of securities requested to
be included in such registration exceeds the number which can be sold in such
offering without adversely affecting the marketability of the offering, the
Company will include in such registration (i) first, the securities the Company
proposes to sell for its own account in such registration, (ii) second, the
Registrable Securities requested to be included in such registration, pro rata
among the Holders of such Registrable Securities on the basis of the number of
shares owned by each such Holder and such beneficiaries and (iii) third, other
securities requested to be included in such registration.
(c) Notwithstanding Section 2.2(b), if an Incidental Registration is
an underwritten secondary registration solely on behalf of holders of the
Company's securities, and the managing underwriters advise the Company in
writing that in their opinion the number of securities requested to be included
in such registration exceeds the number which can be sold in such offering
without adversely affecting the marketability of the offering, the Company will
include in such registration (i) first, the securities requested to be included
therein by the holders requesting such registration, (ii) second, the
Registrable Securities requested to be included in such registration, pro rata
among the Holders of such Registrable Securities on the basis of the number of
shares owned by each such Holder, and (iii) third, other securities requested to
be included in such registration.
(d) The Company's Incidental Registration obligations pursuant to
this Section 2.2 shall not apply to the shelf registration of shares of Common
Stock pursuant to the Registration Rights Agreement, dated as of April 2, 1998,
among the Company, Ferris, Baker
5
<PAGE>
Watts, Incorporated and Boenning & Scattergood, Inc., as placement agents, and
the initial holders of the Company's Senior Subordinated Notes, 1998 Series.
2.3. Supplements and Amendments.
--------------------------
If a Registration Statement ceases to be effective for any reason at
any time during the period for which it is required to be effective under this
Agreement, the Company shall use its best efforts to obtain the prompt
withdrawal of any order suspending the effectiveness thereof and shall in
connection therewith promptly supplement and amend any such Registration
Statement in a manner reasonably and in good faith expected to obtain the
withdrawal of the order suspending the effectiveness thereof, and the Company
shall use its best efforts to cause any such Registration Statement to be
declared effective as soon as practicable after such amendment or supplement and
to keep such Registration Statement continuously effective for a period equal to
the period for which it is required to be effective under this Agreement less
the aggregate number of days during which any predecessor Registration Statement
was previously effective.
The Company shall supplement and amend a Registration Statement if
required by the rules, regulations or instructions applicable to the applicable
registration form for such Registration Statement, if required by the Securities
Act or the SEC, or if reasonably requested by the Holders of a majority of the
Registrable Securities covered by such Registration Statement or by any
underwriter of the Registrable Securities.
2.4. Restrictions on Public Sale by the Company and Others. The
-----------------------------------------------------
Company agrees (i) that it shall not, and that it shall not cause or permit any
of its subsidiaries to, effect any public sale or distribution of any securities
of the same class as any of the Registrable Securities or any securities
convertible into or exchangeable or exercisable for such securities (or any
option or other right for such securities) (except for any securities issued to
officers, directors and/or employees of the Company or its subsidiaries pursuant
to options or agreements entered into with such officers, directors and/or
employees in connection with their employment or pursuant to the Company's stock
option, stock bonus and other stock plans and arrangements for officers,
directors and employees) during the 15-day period prior to, and during the 180-
day period beginning on, the commencement of any underwritten offering of
Registrable Securities that has been scheduled prior to the Company or any of
its subsidiaries publicly announcing its intention to effect any such public
sale or distribution; (ii) that any agreement entered into after the date of
this Agreement pursuant to which the Company (or, if applicable, any subsidiary
of the Company) issues or agrees to issue any securities which have registration
rights shall contain (x) a provision under which the holders of such securities
agree, in the event of an underwritten offering of Registrable Securities, not
to effect any public sale or distribution of any securities of the same class as
any of the Registrable Securities (or any securities convertible into or
exchangeable or exercisable for any such securities), or any option or other
right for such securities, during the periods described in clause (i) of this
Section 2.4, in each case including a sale pursuant to Rule 144 under the
Securities Act (or any similar provision then in effect) and (y) a provision
that effects, upon notice given pursuant to Section 2.1 hereof to the Company
that an underwritten offering of Registrable Securities is to be undertaken, the
lapse of any demand registration rights with respect to any securities of the
Company (or, if applicable, of any subsidiary of the Company) until the
expiration of 90 days after the date of the completion of any such underwritten
offering; (iii) that the Company (and, if applicable, each subsidiary of the
Company) will not after the date hereof enter into any agreement or contract
wherein the holders
7
<PAGE>
of any securities of the Company or of any subsidiary of the Company issued or
to be issued are granted any "piggyback" registration rights with respect to any
registration effected pursuant to Section 2.1 hereof and (iv) that the Company
(and, if applicable, each subsidiary of the Company) will not after the date
hereof enter into any agreement or contract wherein the exercise by any Holder
of its right to an Incidental Registration hereunder would result in a breach
thereof or a default thereunder or would otherwise conflict with any provision
thereof.
2.5. Underwritten Registrations. If any of the Registrable Securities
--------------------------
covered by a Registration Statement filed pursuant to Section 2.1 are to be sold
in an underwritten offering, the investment banker or investment bankers and
manager or managers that will manage the offering will be selected by the
Holders of not less than a majority of the Registrable Securities covered by
such Registration Statement and will be reasonably acceptable to the Company. If
the managing underwriter or underwriters advise the Company and the Holders in
writing that in the opinion of such underwriter or underwriters the amount of
Registrable Securities proposed to be sold in such offering exceeds the amount
of securities that can be sold in such offering, there shall be included in such
underwritten offering the amount of Registrable Securities which in the opinion
of such underwriter or underwriters can be sold, and such amount shall be
allocated pro rata among the Holders of Registrable Securities on the basis of
the number of Registrable Securities requested to be included by each such
Holder and all Holders. The Holders of Registrable Securities sold in any such
offering shall pay all underwriting discounts and commissions of the underwriter
or underwriters pro rata; provided, however, that this Section 2.5 shall not
relieve the Company of its obligations under Section 2.7 hereof.
No Holder of Registrable Securities may participate in any
underwritten registration hereunder unless such Holder (a) agrees to sell such
Holder's Registrable Securities on the basis provided in any underwriting
arrangements approved by the Holders of not less than a majority of the
Registrable Securities and (b) completes and executes all questionnaires, powers
of attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
2.6. Registration Procedures. In connection with any Registration
-----------------------
Statement, the Company shall effect such registrations to permit the offering
and sale of the Registrable Securities in accordance with the intended method or
methods of disposition thereof, and pursuant thereto the Company shall as
expeditiously as possible:
(a) Prepare and file with the SEC as soon as practicable each such
Registration Statement and cause such Registration Statement to become effective
and remain effective as provided herein; provided, however, that before filing
any such Registration Statement or any Prospectus or any amendments or
supplements thereto (including documents that would be incorporated or deemed to
be incorporated therein by reference, including such documents filed under the
Securities Exchange Act of 1934, as amended (the "Exchange Act') that would be
-------------
incorporated therein by reference), the Company shall afford promptly to the
Holders of the Registrable Securities covered by such Registration Statement,
their counsel and the managing underwriter or underwriters, if any, an
opportunity to review copies of all such documents proposed to be filed a
reasonable time prior to the proposed filing thereof and the Company shall give
reasonable consideration in good faith to any comments of such Holders, counsel
and underwriters; provided that the Company may discontinue any registration of
its
7
<PAGE>
securities giving rise to registration rights pursuant to Section 2.2 hereof at
any time prior to the effective date of the registration statement relating
thereto. The Company shall not file any Registration Statement or Prospectus or
any amendments or supplements thereto if the Holders of a majority of the
Registrable Securities covered by such Registration Statement, their counsel, or
the managing underwriter or underwriters, if any, shall reasonably object in
writing.
(b) Prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement as may be necessary to keep such
Registration Statement continuously effective for the time periods prescribed
hereby; cause the related Prospectus to be supplemented by any required
prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
(or any similar provisions then in force) under the Securities Act; and comply
with the provisions of the Securities Act, the Exchange Act and the rules and
regulations of the SEC promulgated thereunder applicable to it with respect to
the disposition of all securities covered by such Registration Statement as so
amended or in such prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities, their counsel and
the managing underwriter or underwriters, if any, promptly, and confirm such
notice in writing, (i) when a Prospectus or any prospectus supplement or post-
effective amendment has been filed, and, with respect to a Registration
Statement or any post-effective amendment, when the same has become effective
(including in such notice a written statement that any Holder may, upon request,
obtain, without charge, one conformed copy of such Registration Statement or
post-effective amendment including financial statements and schedules and
exhibits), (ii) of the issuance by the SEC of any stop order suspending the
effectiveness of such Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus or the initiation or
threatening of any proceedings for that purpose, (iii) if at any time when a
prospectus is required by the Securities Act to be delivered in connection with
sales of the Registrable Securities the representations and warranties of the
Company contained in any agreement (including any underwriting agreement)
contemplated by Section 2.6(m) below, to the knowledge of the Company, cease to
be true and correct in any material respect, (iv) of the receipt by the Company
of any notification with respect to (A) the suspension of the qualification or
exemption from qualification of the Registration Statement or any of the
Registrable Securities covered thereby for offer or sale in any jurisdiction, or
(B) the initiation or threatening of any proceeding for such purpose, (v) of the
happening of any event, the existence of any condition or information becoming
known to the Company that requires the making of any changes in such
Registration Statement, Prospectus or documents so that, in the case of such
Registration Statement, it will conform in all material respects with the
requirements of the Securities Act and it will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading, and that in the case of
the Prospectus, it will conform in all material respects with the requirements
of the Securities Act and it will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and (vi) of the Company's reasonable
determination that a post-effective amendment to such Registration Statement
would be appropriate.
8
<PAGE>
(d) Use every reasonable effort to prevent the issuance of any order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of a Prospectus or suspending the qualification
(or exemption from qualification) of any of the Registrable Securities covered
thereby for sale in any jurisdiction, and, if any such order is issued, to
obtain the withdrawal of any such order at the earliest possible moment.
(e) If requested by the managing underwriter or underwriters, if any,
or the Holders of a majority of the Registrable Securities being sold in
connection with an underwriting offering, (i) promptly incorporate in a
prospectus supplement or post-effective amendment such information as the
managing underwriter or underwriters, if any, or such Holders reasonably request
to be included therein to comply with applicable law and (ii) make all required
filings of such prospectus supplement or such post-effective amendment as soon
as practicable after the Company has received notification of the matters to be
incorporated in such prospectus supplement or post-effective amendment.
(f) Furnish to each Holder of Registrable Securities who so requests
and to counsel for the Holders of Registrable Securities and each managing
underwriter, if any, without charge, upon request, one conformed copy of the
Registration Statement and each post-effective amendment thereto, including
financial statements and schedules, and of all documents incorporated or deemed
to be incorporated therein by reference and all exhibits (including exhibits
incorporated by reference).
(g) Deliver to each Holder of Registrable Securities, their counsel
and each underwriter if any, without charge, as many copies of each Prospectus
(including each form of prospectus) and each amendment or supplement thereto as
such persons may reasonably request but only for so long as the Company is
required to keep such Registration Statement effective; and, subject to the last
paragraph of this Section 2.6, the Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by each of the Holders of
Registrable Securities and the underwriter or underwriters or agents, if any, in
connection with the offering and sale of the Registrable Securities covered by
such Prospectus and any amendment or supplement thereto.
(h) Prior to any offering of Registrable Securities, to use its best
efforts to register or qualify, and cooperate with the Holders of Registrable
Securities, the underwriter or underwriters, if any, and their respective
counsel in connection with the registration or qualification (or exemption from
such registration or qualification) of, such Registrable Securities for offer
and sale under the securities or Blue Sky laws of such jurisdictions within the
United States as may be required to permit the resale thereof by the Holders of
Registrable Securities, or as the managing underwriter or underwriters
reasonably request in writing; provided, however, that where Registrable
Securities are offered other than through an underwritten offering, the Company
agrees to cause its counsel to perform Blue Sky investigations and file
registrations and qualifications required to be filed pursuant to this Section
2.6(h); keep each such registration or qualification (or exemption therefrom)
effective during the period such Registration Statement is required to be
effective hereunder and do any and all other acts or things reasonably necessary
or advisable to enable the disposition in such jurisdictions of the securities
covered thereby; provided, however, that the Company will not be
9
<PAGE>
required to (A) qualify generally to do business in any jurisdiction where it is
not then so qualified, (B) take any action that would subject it to general
service of process in any such jurisdiction where it is not then so subject or
(C) become subject to taxation in any jurisdiction where it is not then so
subject.
(i) Cooperate with the Holders of Registrable Securities and the
managing underwriter or underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold, which certificates shall not bear any restrictive legends whatsoever
and shall be in a form eligible for deposit with The Depository Trust Company
("DTC"); and enable such Registrable Securities to be in such denominations and
- -----
registered in such names as the managing underwriter or underwriters, if any, or
Holders may reasonably request at least two Business Days prior to any sale of
Registrable Securities in a firm commitment underwritten public offering.
(j) Use its best efforts to cause the Registrable Securities covered
by a Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be reasonably necessary to enable
the seller or sellers thereof or the underwriter or underwriters, if any, to
consummate the disposition of such Registrable Securities, except as may be
required solely as a consequence of the nature of such selling Holder's
business, in which case the Company will cooperate in all reasonable respects
with the filing of the Registration Statement and the granting of such
approvals; provided, however, that the Company will not be required to (A)
qualify generally to do business in any jurisdiction where it is not then so
qualified, (B) take any action that would subject it to general service of
process in any such jurisdiction where it is not then so subject or (C) become
subject to taxation in any jurisdiction where it is not then so subject.
(k) Upon the occurrence of any event contemplated by Section
2.6(c)(v) or 2.6(c)(vi) above, as promptly as practicable prepare a supplement
or post-effective amendment to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and, subject to Section 2.6(a) hereof, file such with the
SEC so that, as thereafter delivered to the purchasers of Registrable Securities
being sold thereunder, such Prospectus will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(l) Prior to the effective date of a Registration Statement, (i)
provide the registrar for the Registrable Securities with printed certificates
for such securities in a form eligible for deposit with DTC and (ii) provide a
CUSIP number for such securities.
(m) Enter into an underwriting agreement in form, scope and substance
as is customary in underwritten offerings and take all such other actions as are
reasonably requested by the managing underwriter or underwriters in order to
expedite or facilitate the registration or disposition of such Registrable
Securities in any underwritten offering to be made of the Registrable Securities
in accordance with this Agreement, and in such connection, (i) make such
representations and warranties to the underwriter or underwriters, with respect
to the business of the Company and the subsidiaries of the Company, and the
Registration Statement, Prospectus and documents, if any, incorporated or deemed
to be incorporated by reference therein, in each
10
<PAGE>
case, in form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings, and confirm the same if and when
requested; (ii) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions (in form, scope and substance) shall be reasonably
satisfactory to the managing underwriter or underwriters), addressed to the
underwriter or underwriters covering the matters customarily covered in opinions
requested in underwritten offerings with respect to secondary distributions and
such other matters as may be reasonably requested by underwriters; (iii) use its
best efforts to obtain "cold comfort" letters and updates thereof (which letters
and updates shall be reasonably satisfactory in form, scope and substance to the
managing underwriter or underwriters) from the independent certified public
accountants of the Company (and, if applicable, the subsidiaries of the Company)
and, to the extent reasonably practicable, any other independent certified
public accountants of any subsidiary of the Company or of any business acquired
by the Company for which financial statements and financial data are, or are
required to be, included in the Registration Statement, addressed to each of the
underwriters, such letters to be in customary form and covering matters of the
type customarily covered in "cold comfort" letters in connection with
underwritten offerings; and (iv) if an underwriting agreement is entered into,
the same shall contain indemnification provisions and procedures no less
favorable than those set forth in Section 3 hereof (or such other provisions and
procedures acceptable to Holders of a majority of Registrable Securities covered
by such Registration Statement and the managing underwriter or underwriters or
agents) with respect to all parties to be indemnified pursuant to said Section.
The above shall be done at each closing under such underwriting agreement, or as
and to the extent required thereunder.
(n) Make available for inspection by a representative of the Holders
of Registrable Securities being sold, any underwriter participating in any such
disposition of Registrable Securities, if any, and any attorney or accountant
retained by such representative of the Holders or underwriter (collectively, the
"Inspectors"), at the offices where normally kept, during reasonable business
----------
hours, all pertinent financial and other records, pertinent corporate documents
and properties of the Company and the subsidiaries of the Company, and cause the
officers, directors and employees of the Company and the subsidiaries of the
Company to supply all information in each case reasonably requested by any such
Inspector in connection with such Registration Statement; provided, however,
that any information that is designated in writing by the Company, in good
faith, as confidential at the time of delivery of such information, shall be
kept confidential by such Inspector and not used by such Inspector for any
purpose other than in connection with such Inspector's review of the
Registration Statement for such registration except to the extent (i) disclosure
of such information is required by court or administrative order, (ii)
disclosure of such information, in the written opinion of counsel to such
Inspector (a copy of which is furnished to the Company), is necessary to avoid
or correct a misstatement or omission of a material fact in the Registration
Statement, Prospectus or any supplement or post-effective amendment thereto or
disclosure is otherwise required by law, (iii) disclosure of such information,
in the written opinion of counsel for any such Inspector (a copy of which is
furnished to the Company), is necessary or advisable in connection with any
action, claim, suit or proceeding, directly or indirectly, involving or
potentially involving such Inspector and arising out of, based upon, relating to
or involving this Agreement or any of the transactions contemplated hereby or
arising hereunder, or (iv) such information becomes generally available to the
public other than as a result of a disclosure or failure to safeguard by such
Inspector; without limiting the foregoing, no such information shall be used by
such Inspector as the basis
11
<PAGE>
for any market transactions in securities of the Company or the subsidiaries of
the Company in violation of applicable law. Each selling Holder of such
Registrable Securities agrees that information obtained by it as a result of
such inspections shall be deemed confidential and shall not be used by it as the
basis for any market transactions in the securities of the Company or of any of
its Affiliates unless and until such is made generally available to the public
and such information will not be used by such Holder for any other purpose. Each
selling Holder of such Registrable Securities further agrees that it will, upon
learning that disclosure of such information is sought in a court of competent
jurisdiction, give prompt notice to the Company and allow the Company, at the
Company's expense, to undertake appropriate action to prevent disclosure of the
information deemed confidential.
(o) Comply with all applicable rules and regulations of the SEC and
make generally available to its securityholders earnings statements satisfying
the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder
(or any similar rule promulgated under the Securities Act) no later than forty-
five (45) days after the end of any 12-month period (or ninety (90) days after
the end of any 12-month period if such period is a fiscal year) (i) commencing
at the end of any fiscal quarter in which Registrable Securities are sold to an
underwriter or to underwriters in a firm commitment or best efforts underwritten
offering and (ii) if not sold to an underwriter or to underwriters in such an
offering, commencing on the first day of the first fiscal quarter of the Company
after the effective date of the relevant Registration Statement, which
statements shall cover said 12-month periods.
(p) Use its best efforts to cause all Registrable Securities relating
to such Registration Statement to be listed on each securities exchange, if any,
on which similar securities issued by the Company are then listed.
Each selling Holder of Registrable Securities as to which any
registration is being effected agrees, as a condition to the registration
obligations with respect to such Holder provided herein, to furnish promptly to
the Company such information regarding such selling Holder and the distribution
of such Registrable Securities as the Company may, from time to time, reasonably
request in writing to comply with the Securities Act and other applicable law.
The Company may exclude from such registration the Registrable Securities of any
selling Holder who fails to furnish such information within a reasonable time
after receiving such request. If the identity of a selling Holder of
Registrable Securities is to be disclosed in the Registration Statement, such
seller shall be permitted to include all information regarding such selling
Holder as it shall reasonably request.
Each Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 2.6(c)(ii), 2.6(c)(iv),
2.6(c)(v), or 2.6(c)(vi), such Holder will forthwith discontinue disposition of
such Registrable Securities covered by the Registration Statement or Prospectus
until such Holder's receipt of the copies of the supplemented or amended
Prospectus contemplated by Section 2.6(k), or until it is advised in writing
(the "Advice") by the Company that the use of the applicable prospectus may be
------
resumed, and has received copies of any amendments or supplements thereto, and,
if so directed by the Company, such Holder will deliver to the Company all
copies, other than permanent file copies, then in such Holder's possession, of
the Prospectus covering such Registrable Securities current at the
12
<PAGE>
time of receipt of such notice. In the event the Company shall give any such
notice, the period of time for which a Registration Statement is required
hereunder to be effective shall be extended by the number of days during such
periods from and including the date of the giving of such notice to and
including the date when each selling Holder of Registrable Securities covered by
such Registration Statement shall have received (x) the copies of the
supplemented or amended Prospectus contemplated by Section 2.6(k) or (y) the
Advice.
2.7. Registration Expenses. All fees and expenses incident to the
---------------------
performance of or compliance with the provisions of Section 2 of this Agreement
by the Company shall be borne by the Company whether or not any Registration
Statement is filed or becomes effective, including, without limitation, (i) all
registration and filing fees (including, without limitation, (A) fees with
respect to filings required to be made with the National Association of
Securities Dealers Inc. (the "NASD") in connection with an underwritten offering
----
and (B) fees and expenses of compliance with state securities or Blue Sky laws
(including, without limitation, fees and disbursements of counsel for the
underwriter or underwriters in connection with Blue Sky qualifications of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as provided in
Section 2.6(h)), (ii) printing expenses (including, without limitation, expenses
of printing certificates for Registrable Securities in a form eligible for
deposit with DTC and of printing prospectuses if the printing of prospectuses is
requested by the managing underwriter or underwriters, if any, or, in respect of
Registrable Securities, by the Holders of a majority of Registrable Securities
included in any Registration Statement), (iii) reasonable fees and disbursements
of all independent certified public accountants referred to in Section
2.6(m)(iii) (including, without limitation, the reasonable expenses of any
special audit and "cold comfort" letters required by or incident to such
performance), (iv) the fees and expenses of any "qualified independent
underwriter" or other independent appraiser participating in an offering
pursuant to Schedule E to the By-laws of the NASD, (v) liability insurance under
the Securities Act, if the Company so desires such insurance, (vi) fees and
expenses of all attorneys, advisors, appraisers and other persons retained by
the Company or any subsidiary of the Company, (vii) internal expenses of the
Company and the subsidiaries of the Company (including, without limitation, all
salaries and expenses of officers and employees of the Company and the
subsidiaries of the Company performing legal or accounting duties), (viii) the
expense of any annual audit, (ix) the fees and expenses incurred in connection
with the listing of the securities to be registered on any securities exchange
and (x) the expenses relating to printing, word processing and distributing all
Registration Statements, underwriting agreements, securities sales agreements,
indentures and any other documents necessary in order to comply with this
Agreement. All underwriting discounts and selling commissions applicable to the
sale of the Registrable Securities shall be (1) borne by the participating
sellers in proportion to the number of shares sold by each or (2) by such
participating sellers (including the Company if it shall be a participating
seller) as they may otherwise agree.
In connection with any Registration Statement hereunder or any
amendment thereto, the Company shall reimburse the Holders of the Registrable
Securities being registered in such registration for the reasonable out-of-
pocket expenses of such Holders incurred in connection therewith including,
without limitation, the reasonable fees and disbursements of not more than one
counsel (together with appropriate local counsel) chosen by the Holders of a
majority of the Registrable Securities to be included in such Registration
Statement.
13
<PAGE>
2.8. Rule 144. The Company covenants that it will file the reports
--------
required to be filed by it under the Securities Act and the Exchange Act and the
rules and regulations adopted by the SEC thereunder in a timely manner and, if
at any time the Company is not required to file such reports, it will, upon the
reasonable request of any Holder of Registrable Securities, make publicly
available other information so long as necessary to permit sales pursuant to
Rule 144 and Rule 144A under the Securities Act. The Company further covenants
that it will take such further action as any Holder of Registrable Securities
may reasonably request, all to the extent required from time to time to enable
such Holder to sell Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144
and Rube 144A under the Securities Act, as such Rules may be amended from time
to time, or (b) any similar rule or regulation hereafter adopted by the SEC.
Upon the request of any Holder of Registrable Securities, the Company will
deliver to such Holder a written statement as to whether it has complied with
such information requirements.
SECTION 3. INDEMNIFICATION
---------------
3.1. Indemnification by the Company. The Company agrees to indemnify
------------------------------
and hold harmless each Holder and each Person, if any, who controls any Holder
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act from and against any and all losses, claims, damages and
liabilities, joint or several, to which such Holder or controlling Person may
become subject, under the Securities Act or otherwise, caused by any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement or any Prospectus or any amendment or supplement thereto
or any preliminary prospectus, caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances in which they were
made, not misleading, and will reimburse each Holder for any legal or other
expenses reasonably incurred by such Holder in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company will not be liable insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
furnished in writing to the Company by any Holder expressly for use therein; and
provided further, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage, liability or expense arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission in the Prospectus, if such untrue statement or alleged untrue
statement or omission or alleged omission is corrected in an amendment or
supplement to the Prospectus and the selling Holder of Registrable Securities
thereafter fails to deliver such Prospectus as so amended or supplemented prior
to or concurrently with the sale of Registrable Securities to the person
asserting such loss, claim, damage, or liability after the Company had furnished
such selling Holder with a sufficient number of copies of the same or if the
selling Holder received written notice from the Company of the existence of such
untrue statement or alleged untrue statement or omission or alleged omission and
the selling Holder continued to dispose of Registrable Securities prior to the
time of the receipt of either (A) an amended or supplemented Prospectus which
corrected such untrue statement or omission or (B) a notice from the Company
that the use of the existing Prospectus may be resumed. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of any Holder or any Person controlling such Holder within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act.
14
<PAGE>
3.2. Indemnification by Holder of Registrable Securities. Each Holder
---------------------------------------------------
agrees, severally and not jointly, to indemnify and hold harmless the Company,
the Company's directors, the Company's officers who sign the Registration
Statement and any person controlling the Company to the same extent as the
foregoing indemnity from the Company to each Holder set forth in Section 3.1,
but only with reference to, and in conformity with, information relating to such
Holder furnished in writing by such Holder expressly for use in a Registration
Statement, the Prospectus or any preliminary prospectus, or any amendment or
supplement thereto and will reimburse any legal or other expenses reasonably
incurred by the Company in connection with investigating or defending any such
loss, claim, damage, liability or action as such expenses are incurred. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Company or any such director, officer or Person
controlling the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act and shall survive the transfer
of such securities by such Holder.
3.3. Conduct of Indemnification Proceeding. In case any proceeding
-------------------------------------
(including any governmental investigation) shall be instituted involving any
Person in respect of which indemnity may be sought pursuant to either Section
3.1 or Section 3.2, such Person (the "indemnified party") shall promptly notify
-----------------
the Person against whom such indemnity may be sought (the "indemnifying party")
------------------
in writing; but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
otherwise than as provided above. In case any such proceeding is instituted
against any indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party shall have the right to retain
counsel reasonably satisfactory to such indemnified party to defend against such
proceeding and shall pay the reasonable fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any indemnified party shall
have the right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them or
(iii) the indemnifying party has not retained counsel to defend such proceeding
within a reasonable period of time. It is understood that the indemnifying party
shall not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than one
firm for all such indemnified parties. Such firm shall be designated in writing
by the Holders of a majority of the Registrable Securities included in such
Registration Statement in the case of parties indemnified pursuant to Section
3.1 and by the Company in the case of parties indemnified pursuant to Section
3.2. All fees and expenses which an indemnified party is entitled to receive
from an indemnifying party under this Section 3 shall be reimbursed as they are
incurred. No indemnifying party shall, without prior written consent of the
indemnified party (which shall not be unreasonably withheld or delayed), effect
any settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any claims
that are the subject matter of such action.
15
<PAGE>
3.4. Contribution. If the indemnification provided for in Section
------------
3.1 or Section 3.2 is unavailable as a matter of law to an indemnified party in
respect of any losses, claims, damages or liabilities referred to therein, then
each indemnifying party under either such Section, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities in such proportion as is appropriate to reflect the relative fault
of the Company on the one hand and of the Holders of Registrable Securities
covered by the Registration Statement in question on the other in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities, as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission to
state a material fact relates to information supplied by the Company, or by the
Holders of Registrable Securities covered by the Registration Statement in
question and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Holders agree that it would not be just and
equitable if contribution pursuant to this Section 3 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph of this Section 3.4 shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 3, no Holder
shall be required to contribute any amount in excess of the amount by which the
total price at which the Registrable Securities sold by such Holder and
distributed to the public were offered to the public exceeds the amount of any
damages which such Holder has otherwise been required to pay by reason of such
untrue statement or omission or alleged omission. 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.
3.5. Other Indemnities. The obligations of the Company and of each
-----------------
of the Holders under this Section 3 shall be in addition to any liability which
the Company or which any of the Holders may otherwise have.
SECTION 4. MISCELLANEOUS
-------------
4.1. Remedies. In the event of a breach by the Company of any of its
--------
obligations under this Agreement, each Holder of Registrable Securities, in
addition to being entitled to exercise all rights provided herein or granted by
law, including recovery of damages, will be entitled to specific performance of
its rights under this Agreement. The Company agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a breach by it
of any of the provisions of this Agreement.
4.2. No Inconsistent Agreements. The Company shall not, after the
--------------------------
date of this Agreement, enter into any agreement with respect to any of its
securities that materially adversely affects the rights granted to the Holders
of Registrable Securities in this Agreement or
16
<PAGE>
otherwise conflicts with the provisions hereof. The Company will not enter into
any agreement with respect to any of its securities which will grant to any
Person "piggyback" rights with respect to any Registration Statement filed
pursuant to Section 2.1 of this Agreement.
4.3. Amendments and Waivers. The provisions of this Agreement may
----------------------
not be amended, modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given, unless the Company has obtained the
prior written consent of Holders of at least a majority of the then issued or
issuable Registrable Securities. Notwithstanding the foregoing, a waiver or
consent to depart from the provisions hereof with respect to a matter that
relates exclusively to the rights of Holders of Registrable Securities whose
securities are being sold pursuant to a Registration Statement and that does not
directly or indirectly affect, impair, limit or compromise the rights of other
Holders of Registrable Securities may be given by Holders of at least a majority
of the Registrable Securities being sold by such Holders pursuant to such
Registration Statement; provided, however, that the provisions of this sentence
may not be amended, modified or supplemented except in accordance with the
provisions of the immediately preceding sentence. This Section 4.3 may not be
amended, modified or supplemented, and waivers or consents to departures
therefrom may not be given at any time without the consent of the Company, on
the one hand, and the consent of each of the Holders, on the other hand.
4.4. Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery or next-day air
courier:
(i) If to a Holder of Registrable Securities, at the most current
address given by such Holder to the Company in accordance with the
provisions of this Section 4.4, which address initially is, with respect to
each Holder, the address set forth on the signature page attached hereto;
and
(ii) if to the Company, 7000 Security Boulevard, Baltimore, Maryland
21244, Attention: Chief Financial Officer, with a copy to Hogan & Hartson
L.L.P., 111 South Calvert Street, Suite 1600, Baltimore, Maryland 21202,
Attention: Henry D. Kahn, Esq.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; five business days after
being deposited in the mail, postage prepaid, if mailed; one business day after
being timely delivered to a next-day air courier; and when receipt is
acknowledged by the addressee, if telecopied.
4.5. Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent Holders of Registrable Securities.
4.6. Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same Agreement.
4.7. Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
17
<PAGE>
4.8. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO
CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO
THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF [NEW YORK] IN ANY
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.
4.9. Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
4.10. Entire Agreement. This Agreement, together with the Bridge Loan
----------------
Agreement, is intended by the parties as a final expression of their agreement,
and is intended to be a complete and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject matter contained
herein and therein. This Agreement and the Bridge Loan Agreement supersede all
prior agreements and understandings between the parties with respect to such
subject matter.
4.11. Attorneys' Fees. As between the parties to this Agreement, in
---------------
any action or proceeding brought to enforce any provision of this Agreement, or
where any provision hereof is validly asserted as a defense, the successful
party shall be entitled to recover reasonable attorneys' fees in addition to its
costs and expenses and any other available remedy.
4.12. Securities Held by the Company or Its Subsidiaries. Whenever the
--------------------------------------------------
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
by any of its Subsidiaries shall not be counted in determining whether such
consent or approval was given by the Holders of such required percentage.
4.13. Termination. This Agreement shall terminate upon the earlier of
-----------
(a) the release of the Warrants to the Company pursuant to the terms of the
Escrow Agreement, dated as of August 2, 1999, among the Borrower, Capital, the
Company, the Escrow Agent, the Administrative Agent and the Lenders set forth on
the signature pages thereto and (b) the date upon which the Registrable
Securities are no longer Transfer Restricted Securities.
18
<PAGE>
[Signature page follows]
19
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
CREDITRUST CORPORATION
By:_______________________________________________
Name:
Title:
<PAGE>
U.S. BANCORP INVESTMENTS, INC.
By:_______________________________________________
Name:
Title:
Address:
65 East 55th Street, 22nd Floor
New York, NY 100222
BREAN MURRAY & CO., INC.
By:_______________________________________________
Name:
Title:
Address:
570 Lexington Avenue
New York, NY 10022
WHIPPOORWILL ASSOCIATES, INC.
By:_______________________________________________
Name:
Title:
Address:
11 Martine Avenue
White Plains, NY 10606
<PAGE>
EVEREST CAPITAL
By:_______________________________________________
Name:
Title:
Address:
2601 South Bayshore Dr., Suite 1700
Miami, FL 33133
[New Lender]
By:_______________________________________________
Name:
Title:
Address:
[address]
<PAGE>
EXHIBIT 10.24
STOCKHOLDERS AGREEMENT
This STOCKHOLDERS AGREEMENT (this "Agreement") is entered into as of
---------
August 2, 1999, by and among Joseph K. Rensin ("Rensin"), Creditrust
------
Corporation, a Maryland corporation (the "Company"), the Lenders set forth on
-------
the signature pages hereto (each Lender, together with its successors and
assigns, being a "Tag-Along Investor" and, collectively, the "Tag-Along
------------------ ---------
Investors"). The shares of Common Stock, $0.01 par value per share, of the
- ---------
Company (together with securities convertible or exchangeable therefor, the
"Common Stock") now owned and hereafter acquired by the Tag-Along Investors,
------------
together with any securities exercisable for or convertible into or exchangeable
for shares of Common Stock, are sometimes referred to herein as the "Shares" (it
------
being understood that all securities exercisable for or convertible into or
exchangeable for shares of Common Stock shall be treated on any date as if they
had been exercised, converted or exchanged into Common Stock on that date and
shall be deemed to represent the number of shares of Common Stock that would be
issued upon such exercise, conversion or exchange). Capitalized terms that are
used but not defined herein have the meanings assigned to them in the Bridge
Loan Agreement referred to below.
RECITALS
WHEREAS, the Company, the Administrative Agent, the Borrower, Capital
and the Lenders referred to therein have entered into a Bridge Loan Agreement,
dated as of August 2, 1999 (as amended, restated or otherwise modified from time
to time, the "Bridge Loan Agreement"), providing for certain bridge loans to be
---------------------
made by the Lenders thereunder to the Borrower (the "Bridge Loans").
------------
WHEREAS, the Company has issued warrants to purchase on a fully-
diluted basis 10.0% of its Common Stock in blank to Norwest Bank Minnesota,
National Association, as Escrow Agent under that certain Escrow Agreement, dated
as of August 2, 1999, among Norwest Bank Minnesota, National Association, the
Company, Capital, the Borrower and the Administrative Agent (the "Escrow
------
Agreement") to be held pursuant to the terms of the Escrow Agreement as required
- ---------
by the Bridge Loan Agreement.
WHEREAS, the Tag-Along Investors desire to enter into this Agreement
for the purpose of regulating certain aspects of the Tag-Along Investors'
relationships with regard to each other and the Company in connection with their
ownership of the Shares.
<PAGE>
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the Tag-Along Investors
agree as follows:
Section 1. Tag-Along Right. For purposes of this Agreement, a
---------------
"Covered Transaction" shall mean any sale or contract or series of sales or
-------------------
contracts to sell Common Stock of the Company beneficially owned by Rensin (as
that term is defined in Rule 13d-1 of the Exchange Act) (a) entered into or
consummated by Rensin or an Affiliate or immediate family member of Rensin on or
after the Conversion Date and in which the counterparty is a person other than
(i) an Affiliate of Rensin that assumes all of the obligations of Rensin
hereunder with respect to such shares of Common Stock or (ii) a transferee
pursuant to a transaction entered into by Rensin solely in good faith for estate
planning purposes (the sole beneficiary of such transferee being Rensin or an
immediate family member of Rensin) that assumes all of the obligations of Rensin
hereunder with respect to such shares of Common Stock (a "proposed purchaser")
------------------
and (b) resulting in or contemplating proceeds (whether in cash, securities or
other property) the fair market value of which is at least $15.0 million. With
respect to any Covered Transaction, each Tag-Along Investor shall each have the
right (the "Tag-Along Right") to require the proposed purchaser to purchase
---------------
all or any portion of such Tag-Along Investor's Pro Rata Allocation (as defined
below) of the shares Common Stock proposed to be transferred simultaneously with
consummating the proposed transfer. A Tag-Along Investor's "Pro Rata Allocation"
-------------------
of the number of Shares proposed to be transferred in any proposed transfer
shall equal the total number of shares of Common Stock proposed to be
transferred by Rensin multiplied by a fraction the numerator of which is the
total number of Shares held by such Tag-Along Investor and the denominator of
which is the total number of shares of Common Stock held by Rensin and the Tag-
Along Investors. Any Shares purchased from Tag-Along Investors pursuant to this
Section 1 shall be purchased at the same price per Share and upon the same terms
and conditions as such proposed transfer by Rensin, it being agreed, however,
that such terms and conditions shall not include the making of any
representations and warranties, indemnities or other similar agreements other
than representations and warranties with respect to title of the Shares being
sold and authority to sell such Shares and indemnities related thereto ("Title
-----
Representations"). Rensin shall, not less than 30 nor more than 60 business days
- ---------------
prior to each proposed transfer, notify, or cause to be notified, each Tag-Along
Investor in writing of each such proposed transfer. Such notice (the "Transfer
--------
Notice") shall set forth: (i) the name of the transferor and the number and
- ------
description of shares of Common Stock proposed to be transferred, (ii) the name
and address of the proposed purchaser, (iii) the proposed amount and form of
consideration and terms and conditions of payment offered by such proposed
purchaser, (iv) each Tag-Along Investor's Pro Rata Allocation of the shares of
Common Stock proposed to be transferred and (v) that the proposed purchaser has
been informed of the Tag-Along Right provided for in this Section 1 and has
agreed to purchase shares of Common Stock in accordance with the terms hereof.
Rensin hereby agrees not to transfer any shares of Common Stock, directly or
indirectly, in a manner that would be inconsistent with the essential intent of
this Section 1. For purposes of this Section 1, any transfer of an equity
interest of an entity that was formed for the purpose of acquiring shares of
Common Stock shall be deemed to be a transfer of the shares of Common Stock
owned by such entity.
2
<PAGE>
The Tag-Along Right may be exercised by any Tag-Along Investor within
15 business days following its receipt of the Transfer Notice by delivery of a
written notice to Rensin proposing to sell Shares (the "Tag-Along Notice"). The
----------------
Tag-Along Notice shall state the number of Shares (the "Tag-Along Shares") that
----------------
such Tag-Along Investor proposes to include in such transfer to the proposed
purchaser, which number of Shares shall not exceed such Tag-Along Investor's Pro
Rata Allocation of the shares of Common Stock proposed to be transferred.
Delivery of the Tag-Along Notice by any Tag-Along Investor shall constitute an
agreement by such Tag-Along Investor to sell, on the terms and conditions
specified in the Transfer Notice, the Tag-Along Shares to the proposed purchaser
specified in the Transfer Notice. In the event that the proposed purchaser does
not purchase the Tag-Along Shares from the Tag-Along Investors on the same terms
and conditions as specified in the Transfer Notice, then Rensin shall not be
permitted to sell any shares of Common Stock to the proposed purchaser in the
proposed transfer. If no Tag-Along Notice is received during the 15-business
day period referred to above, Rensin shall have the right thereafter, prior to
the expiration of 30 business days from the date of the Transfer Notice, to
transfer the shares of Common Stock specified in the Transfer Notice (or a
portion thereof) on terms and conditions no more favorable than those stated in
the Transfer Notice and in accordance with the provisions of this Section 1.
Any attempt to transfer any shares of Common Stock in violation of
this Agreement will be null and void, and the Company agrees not to effect any
transfer of Common Stock by Rensin and to instruct the transfer agent for the
Common Stock not to effect any such transfer of Common Stock, until the Company
and the transfer agent have received evidence reasonably satisfactory to it that
the Tag-Along Right, if applicable to such transfer, has been complied with.
Section 2. Miscellaneous.
(a) Legend. Rensin, the Company and the Tag-Along Investors agree
that, on and after the Conversion Date, each certificate representing shares of
Common Stock held by Rensin and the Tag-Along Investors shall bear the following
legend until such time as the same is no longer applicable:
"THE SHARES OF COMMON STOCK OR OTHER SECURITIES REPRESENTED
BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS OF, AND ARE
ENTITLED TO THE BENEFITS SET FORTH IN, A STOCKHOLDERS
AGREEMENT, DATED AUGUST 2, 1999, A COPY OF WHICH IS ON FILE
AT THE OFFICE OF THE COMPANY. THE COMPANY WILL FURNISH A
COPY OF SUCH STOCKHOLDERS AGREEMENT TO THE RECORD HOLDER
HEREOF WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT
ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE."
(b) Successors, Assigns and Transferees. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
legal representatives, heirs, legatees, successors and assigns including any
party to which Rensin or any of his
3
<PAGE>
permitted assigns has transferred or sold shares of Common Stock. Each
transferee of Shares from a Tag-Along Investor shall take such Shares subject to
the same restrictions and entitled to the same benefits as existed in the hands
of the transferor and references herein to a Tag-Along Investor shall include
any such transferee, except that Shares sold to the public pursuant to an
effective registration statement shall no longer be subject to any of the
provisions of this Agreement.
(c) Specific Performance, Etc. Each Tag-Along Investor, in addition
to being entitled to exercise all rights provided herein, in the Company's
Certificate of Incorporation or granted by law, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement.
Rensin and each of the Tag-Along Investors agree that monetary damages would not
be adequate compensation for any loss incurred by reason of a breach of the
provisions of this Agreement and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate.
(d) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF NEW YORK UNLESS THE
MANDATORY LAW OF THE STATE OF MARYLAND APPLIES.
(e) Interpretation. The headings of the sections contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not affect the meaning or interpretation of this
Agreement.
(f) Notices. All notices and other communications provided for or
permitted hereunder shall be in writing and shall be deemed to have been duly
given and received when delivered by overnight courier or hand delivery to the
parties at the following addresses (or at such other address for any party as
shall be specified by like notice, provided that notices of a change of address
shall be effective only upon receipt thereof).
(i) If to the Company or Rensin, at:
Creditrust Corporation
7000 Security Boulevard
Baltimore, Maryland 21244
Attention: Joseph Rensin
with copies to:
Hogan & Hartson L.L.P.
111 South Calvert Street
Suite 1600
Baltimore, Maryland 21202
Attention: Henry D. Kahn, Esq.
(ii) If to a Tag-Along Investor, at:
4
<PAGE>
Its address as shown in the stock register of the Company
with copies to:
Latham & Watkins
885 Third Avenue, Suite 1000
New York, New York 10022
Attention: Gregory A. Ezring, Esq.
(g) Recapitalizations, Exchange, Etc. Affecting the Company's Stock.
The provisions of this Agreement shall apply, to the full extent set forth
herein with respect to the Common Stock, to any and all shares of capital stock
of the Company or any successor or assign of the Company (whether by merger,
consolidation, sale of assets, or otherwise) that may be issued in respect of,
in exchange for, or in substitution of the Common Stock and shall be
appropriately adjusted for any stock dividends, splits, reverse splits,
combinations, recapitalizations and the like occurring after the date hereof.
(h) Inspection and Compliance with Law. Copies of this Agreement
will be available for inspection or copying by any Tag-Along Investor at the
offices of the Company through the Secretary of the Company. The Company shall
take all reasonable action to insure that the provisions of New York Law
relating to agreements similar to this Agreement are promptly complied with.
(i) Counterparts. This Agreement may be executed in one or more
counterparts, by the original parties hereto and any successor in interest, each
of which shall be deemed to be an original and all of which together shall be
deemed to constitute one and the same agreement.
(j) Termination. This Agreement shall terminate and cease to be of
any further force or effect upon the earliest of (i) the fifth anniversary of
the date hereof or (ii) the return to the Company of all Shares (or warrants
therefor) held in escrow pursuant to the Escrow Agreement.
(k) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in any way
impaired thereby.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Stockholders
Agreement as of the date first above written.
Creditrust Corporation
By:_______________________________________
Name:
Title:
Accepted and agreed to:
U.S. Bancorp Investments, Inc.
By:_______________________________________
Name:
Title:
Brean Murray & Co., Inc.
By:_______________________________________
Name:
Title:
Whippoorwill Associates, inc.
By:_______________________________________
Name:
Title:
Everest Capital
By:_______________________________________
Name:
Title:
6
<PAGE>
[new lender]
By:_______________________________________
Name:
Title:
Joseph K. Rensin
By:_______________________________________
Name:
Title:
7
<PAGE>
EXHIBIT 10.27
OFFICE LEASE
by and between
STERLING YORK, LLC
(Landlord)
and
CREDITRUST CORPORATION
(Tenant)
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Sections Page
- -------- ----
<S> <C>
1. DEFINITIONS......................................................... 1
2. PREMISES; MEASUREMENT............................................... 7
3. TERM................................................................ 8
4. RENT; SECURITY DEPOSIT.............................................. 9
5. TAXES............................................................... 13
6. USE OF PREMISES AND COMMON AREAS.................................... 14
7. INSURANCE AND INDEMNIFICATION....................................... 20
8. SERVICES AND UTILITIES.............................................. 24
9. REPAIRS AND MAINTENANCE............................................. 26
10. IMPROVEMENTS........................................................ 28
11. LANDLORD'S RIGHT OF ENTRY........................................... 29
12. DAMAGE OR DESTRUCTION............................................... 30
13. CONDEMNATION........................................................ 31
14. ASSIGNMENT AND SUBLETTING........................................... 32
15. RULES AND REGULATIONS............................................... 33
16. SUBORDINATION AND ATTORNMENT........................................ 34
17. DEFAULTS AND REMEDIES............................................... 35
18. ESTOPPEL CERTIFICATE................................................ 39
19. QUIET ENJOYMENT..................................................... 40
20. NOTICES............................................................. 40
21. GENERAL............................................................. 41
22. FIRST RIGHT TO LEASE................................................ 43
23. Intentionally Deleted............................................... 44
24. RIGHT OF FIRST OFFER................................................ 44
25. PURCHASE OPTION..................................................... 45
26. REFINANCING......................................................... 45
27. LENDER APPROVAL..................................................... 46
</TABLE>
-ii-
<PAGE>
Exhibits
- --------
A Drawing showing location of Premises
B Schedule of Janitorial Services
C Current Rules and Regulations
D Form of Purchase Agreement
E Form of Subordination, Non-Disturbance and Attornment Agreement
F Inspection Period Rights
-iii-
<PAGE>
OFFICE LEASE
------------
THIS LEASE is made on this _______ day of May, 1999 (the "Effective
---
Date"), by and between STERLING YORK, LLC, a Maryland limited liability company
(the "Landlord"), and CREDITRUST CORPORATION, a Maryland corporation (the
"Tenant").
IN CONSIDERATION of the agreements and covenants hereinafter set forth,
Landlord and Tenant mutually agree as follows:
1. DEFINITIONS.
-----------
1.1. As used herein, the following terms shall have the following
meanings:
"Additional Rent" has the meaning given it in subsection 4.2.
"Alterations" has the meaning given it in subsection 10.2.
"Base Operating Costs" means Operating Costs incurred for calendar
year 1999.
"Base Rent" has the meaning given it in subsection 4.1.
"Base Taxes" means Taxes incurred for the Tax Year 1999/2000.
"Building" means the building known as the AAI Building 100 and
located at 10150 York Road in Baltimore County, Maryland.
"Building Service Equipment" means all apparatus, machinery, devices,
fixtures, appurtenances, equipment and personal property now or hereafter
located on the Premises and owned by the Landlord.
"Common Areas" has the meaning given it in subsection 6.5.1.
"Comparable Landlords" means landlords of buildings in Hunt Valley,
Maryland that are comparable to the Building.
"Condemnation" has the meaning given it in subsection 13.1.
"Event of Default" has the meaning given it in subsection 17.1.
"Insurance Premiums" means the aggregate of any and all premiums paid
by the Landlord for hazard, liability, loss-of-rent, workmens' compensation or
similar insurance upon any or all of the Property.
"Landlord" means the Person hereinabove named as such and its
successors and assigns.
-1-
<PAGE>
"Lease Year" means (a) the period commencing on the Rent Commencement
Date (Fifth Floor) and terminating at 11:59 p.m. on the first anniversary of the
last day of the month in which the Rent Commencement Date (Fifth Floor) occurs,
and (b) each successive period of twelve (12) calendar months thereafter during
the Term.
"Liquidated Damages" has the meaning given it in subsection 17.3.
"Mortgage" has the meaning given it in subsection 16.1.
"Mortgagee" has the meaning given it in subsection 16.1.
"Operating Costs" means any and all costs and expenses incurred by the
Landlord for services performed by the Landlord or by others on behalf of the
Landlord with respect to the operation and maintenance of the Building and the
Common Areas located therein and serving or allocable to the Premises,
including, without limitation, all costs and expenses of:
(a) operating, maintaining, repairing, lighting, signing, decorating,
cleaning, removing trash from, painting, striping, controlling of traffic in,
controlling of rodents in, policing and securing the Common Areas (including,
without limitation, the costs of uniforms, equipment, assembly permits,
supplies, materials, alarm and life safety systems, and maintenance and service
agreements);
(b) purchasing and maintaining in full force insurance (including,
without limitation, liability insurance for personal injury, death and property
damage, rent insurance, insurance against fire, theft or other casualties,
extended coverage insurance, workers' compensation insurance covering personnel,
fidelity bonds for personnel, insurance against liability for defamation and
claims of false arrest occurring on or about the Common Areas, and plate glass
insurance);
(c) removing snow, ice, water, litter and debris;
(d) operating, maintaining, repairing and replacing machinery,
furniture, accessories and equipment used in the operation and maintenance of
the Common Areas, and the personal property taxes and other charges incurred in
connection with such machinery, furniture, accessories and equipment;
(e) maintaining and repairing roofs, awnings, paving, curbs,
walkways, sidewalks, drainage pipes, ducts, conduits, grease traps and lighting
fixtures throughout the Common Areas.
(f) planting, replanting and replacing flowers, shrubbery, trees,
grass, planters and general landscape maintenance;
-2-
<PAGE>
(g) providing electricity, heating, ventilation and air conditioning
to the Building and the Common Areas, and operating, maintaining and repairing
any equipment used in connection therewith, including, without limitation, costs
incurred in connection with determining the feasibility of installing,
maintaining, repairing or replacing any facilities, equipment, systems or
devices which are intended to reduce utility expenses of the Building or the
Common Areas;
(h) water and sanitary sewer services and other services, if any,
furnished to the Building for the non-exclusive use of tenants;
(i) janitorial services for the Building;
(j) enforcing any operating agreements pertaining to the Common Areas
or any portions thereof, and any easement and/or rights agreements entered into
by the Landlord for the benefit and use of the Landlord, the Property or tenants
thereof, or any arbitration or judicial actions undertaken with respect to the
same;
(k) maintaining and repairing the Building and Common Areas,
including, without limitation, exhaust systems, sprinkler systems, pumps, fans,
switchgear, loading docks and ramps, freight elevators, escalators, passenger
elevators, stairways, service corridors, delivery passages, utility plants,
transformers, doors, walls, floors, skylights, ceilings, windows and fences;
(l) accounting, audit and management fees (which management fees
shall not exceed four percent (4%) of the yearly rentals for the Building) and
expenses, payroll, payroll taxes, employee benefits and related expenses of all
personnel engaged in the operation, maintenance, security and management of the
Building and Common Areas, including, without limitation, security and
maintenance personnel, secretaries and bookkeepers (including, specifically,
uniforms and working clothes and the cleaning thereof, tools, equipment and
supplies used by such personnel, and the expenses imposed on or allocated to the
Landlord or its agents pursuant to any collective bargaining or other
agreement);
(m) unless otherwise excluded elsewhere in this Lease, the cost and
expense of complying with all federal, state and local laws, orders, regulations
and ordinances applicable to the Property which are now in force, or which may
hereafter be in force, unless attributable to the negligence or misconduct of
Landlord or its employees or agents; and
(n) appealing real property tax assessments of the Building and/or
Common Areas.
Operating Costs shall not include the following:
(a) costs incurred with respect to the installation of leasehold
improvements for tenants in the Building or incurred in renovating or otherwise
improving, decorating, painting, or redecorating vacant space for tenants in the
Building;
-3-
<PAGE>
(b) costs and expenses incurred in connection with negotiations or
disputes with present or prospective tenants of the Building;
(c) costs incurred by the Landlord for the repair of damage to the
Building, to the extent that the Landlord is reimbursed by insurance proceeds;
(d) capital costs except for those that: (i) reduce other Operating
Costs, which shall be amortized over the useful life of the asset with interest,
but only to the extent of the reduction of other Operating Costs, or (ii) are
required under any governmental law or regulation that was not applicable to the
Building at the time it was constructed, amortized on a straight line basis over
the useful life of the asset with interest;
(e) expenses in connection with services or other benefits offered to
other tenants in the Building, but not to the Tenant;
(f) costs of services provided by affiliates of the Landlord, but
only to the extent that such costs exceed the cost of such services rendered by
unaffiliated third parties on a competitive basis;
(g) the Landlord's general corporate overhead and general
administrative expenses;
(h) advertising expenses, including those incurred in the future
leasing of the Building;
(i) acquisition or leasing costs of sculpture, paintings, or works of
art;
(j) interest, principal, points and fees on debts or amortization on
any mortgage or mortgages or any other debt instrument encumbering the Building;
(k) fines or penalties, and interest accrued thereon, incurred as a
result of late payments by the Landlord;
(l) that portion of the wages and salaries, and payroll taxes and
similar governmental charges with respect thereto, of Building management
employees which is in excess of a pro rata portion thereof based upon the time
spent by such personnel in the management of the Building in relation to their
total hours worked;
(m) any income, capital levy, capital stock, succession, transfer
(except as provided in the definition of Taxes), franchise, gift, estate or
inheritance taxes;
(n) any ground lease rental;
-4-
<PAGE>
(o) depreciation, amortization and interest payments, except as
provided herein and except on materials, tools, supplies and vendor-type
equipment purchased by the Landlord to enable the Landlord to supply services
that the Landlord might otherwise contract for with a third party where such
depreciation, amortization and interest payments would otherwise have been
included in the charge for such third party's services, all as determined in
accordance with generally accepted accounting principles, consistently applied,
and when depreciation or amortization is permitted or required, the item shall
be amortized over its reasonably anticipated useful life;
(p) brokerage and leasing commissions;
(q) capital expenditures required by the Landlord's failure to comply
with laws enacted on or before the date the Rent Commencement Date (Fifth
Floor);
(r) costs arising from the Landlord's charitable or political
contributions;
(s) costs arising from condemnation that are not reimbursed by
condemnation awards and that do not otherwise constitute Operating Costs;
(t) costs of a capital nature, including, without limitation, capital
improvements, capital repairs, capital equipment and capital tools, all as
determined in accordance with generally accepted accounting principles,
consistently applied, except as permitted in (d) above;
(u) any bad debt loss, rent loss, or reserves for bad debt or rent
loss;
(v) any management fee in excess of four percent (4%) of the gross
revenues for the Building, excluding parking revenues;
(w) Any cost incurred by Landlord to render the Building systems Y2K
functional;
(x) the Landlord's entertainment expenses and travel expenses, except
for those travel expenses that are necessary, reasonable and incurred in
connection with the Landlord's operation of the Building; and
(y) costs incurred by the Landlord in connection with the Landlord
electing to cause the Operating Costs to be audited by an independent accounting
firm, unless the Landlord also causes the Operating Costs for the Base Year to
be audited, or unless the Tenant requests such audit.
"Operating Year" means each respective calendar year or part thereof
during the Term.
"Original Term" has the meaning given it in subsection 3.1.
-5-
<PAGE>
"Parking Areas" has the meaning given it in subsection 6.5.1.
"Person" means a natural person, a trustee, a corporation, a limited
liability company, a partnership and/or any other form of legal entity.
"Premises" means that certain space having a rentable area of 49,218
square feet, located on the fifth floor of the Building, as more particularly
depicted on Exhibit A-1 and that certain space having a rentable area of 49,543
-----------
square feet, located on the fourth floor of the Building, as more particularly
depicted on Exhibit A-2; provided, that if at any time hereafter any portion of
-----------
the Premises becomes no longer subject to this Lease or any additional space is
added to the Premises, "Premises" shall thereafter mean so much thereof as
remains subject to this Lease.
"Prime Rate" means the highest rate of interest or its equivalent as
is published on the first day of each month in the Wall Street Journal listing
-------------------
of "Money Rates," under the section listing the prime rates.
"Property" means that certain parcel of land shown on Exhibit A,
together with the Building thereon. That portion of such land closest to York
Road may, in the future, be subdivided and developed for retail use, in which
event the Property will be deemed not to include such portion.
"Rent" means all Base Rent and all Additional Rent.
"Rent Commencement Date (Fifth Floor)" has the meaning given to it in
subsection 3.1.
"Rent Commencement Date (Fourth Floor)" has the meaning given to it in
subsection 3.1.
"Rules and Regulations" has the meaning given to it in section 15.
"Tax Year" means the 12-month period beginning July 1 of each year or
such other 12-month period (deemed for the purposes of this Lease to have 365
days) established as a real estate tax year by the taxing authority having
lawful jurisdiction over the Property.
"Taxes" means the aggregate of any and all real property and other
taxes, metropolitan district charges, front-foot benefit assessments, special
assessments and other taxes or public or private assessments or charges levied
against the Property, including but not limited to any such charges imposed
under any private covenants encumbering the title to any or all of the Property,
and regardless of whether any of the same are ordinary or extraordinary,
foreseen or unforeseen, recurring or nonrecurring, or special or general.
-6-
<PAGE>
"Tenant" means the Person hereinabove named as such and its successors
and permitted assigns hereunder.
"Tenant's Proportionate Share" (a) means the percentage assigned to
the Premises for purposes of allocating Operating Costs and Taxes to the
Premises (and the rest of the net rentable spaces within the Building), (b)
represents the approximate and (for purposes of this Lease) hereby agreed upon
proportion which the rentable floor area of the Premises (98,761 square feet)
bears to the aggregate rentable floor area of the Building (185,990 square
feet), and (c) as of the Effective Date shall be 53.10%; provided that the
square footage of the Premises shall be subject to confirmation pursuant to
Section 2 below.
"Tenant's Share of Increased Operating Costs" has the meaning given it
in subsection 4.3.2.
"Tenant's Share of Increased Taxes" has the meaning given it in
subsection 5.1.
"Term" means the Original Term and all renewal terms.
"Termination Damages" has the meaning given it in subsection 17.3.
"Termination Date" has the meaning given it in subsection 3.1.
"Transfer" has the meaning given it in subsection 14.1.
1.2. Other Terms. Any other term to which meaning is expressly given
-----------
in this Lease shall have such meaning.
2. PREMISES; MEASUREMENT . The Landlord hereby leases to the Tenant, and
---------------------
the Tenant hereby leases from the Landlord, the Premises in "AS IS, WHERE IS"
condition (subject, however, to the Landlord's obligations set forth elsewhere
in this Lease), together with the right to use, in common with others, the
Common Areas. Promptly after the completion of the Tenant's improvements, the
Landlord's architect shall certify the rentable area of the Premises using the
Building Owners and Managers Association International "Standard Method for
Measuring Floor Area in Office Buildings." Notwithstanding the foregoing, the
Landlord represents and warrants to the Tenant that on the Effective Date the
Premises will be in compliance with all laws, ordinances, rules, regulations and
other requirements relating to the use, condition and occupancy of the Premises;
provided, however, that the Tenant shall be responsible, at its sole expense,
for making any improvements to the Premises which are necessary to obtain a use
and occupancy permit from the applicable governmental agency. In the event the
applicable governmental agency requires that improvements be made to an area (or
areas) outside of the Premises in order to obtain such use and occupancy permit,
the Landlord and the Tenant shall work together to identify any and all costs
which will be incurred as a result of such improvements and shall endeavor to
agree on an allocation of such costs between the Landlord and the Tenant.
-7-
<PAGE>
3. TERM.
----
3.1. Original Term; Rent Commencement Dates. This Lease shall be for
--------------------------------------
a term (the "Original Term") commencing on the Effective Date and ending at
11:59 p.m. on the seventh (7th) anniversary of the last day of the month in
which the Rent Commencement Date (Fifth Floor) shall occur (which date is
hereinafter referred to as the "Termination Date"). Monthly rent payments for
the portion of the Premises located on the fifth floor shall commence on the
earlier to occur of (a) the date on which the Tenant commences business
operations in the Premises; or (b) July 1, 1999 (the earlier of which dates is
------------
hereinafter referred to as the "Rent Commencement Date (Fifth Floor)"). Monthly
rent payments for the portion of the Premises located on the fourth floor shall
commence on the earlier to occur of (a) the date on which the Tenant commences
business operations in the Premises; or (b) September 1, 1999 (the earlier of
-----------------
which dates is hereinafter referred to as the "Rent Commencement Date (Fourth
Floor)").
3.2. Confirmation of Commencement and Termination. The Landlord and
--------------------------------------------
the Tenant at the Landlord's option and request after (a) the Rent Commencement
Date (Fifth Floor) or (b) the Rent Commencement Date (Fourth Floor) or (c) the
expiration of the Term or any earlier termination of this Lease by action of law
or in any other manner, shall confirm in writing by instrument in recordable
form that, respectively, such rent commencement or such termination has
occurred, setting forth therein, respectively, the applicable Rent Commencement
Date and the Termination Date.
3.3. Intentionally deleted.
---------------------
3.4. Holding Over. If the Tenant continues to occupy the Premises
------------
after the expiration of the Term (as the same may be extended or renewed) or any
earlier termination of this Lease after obtaining the Landlord's express,
written consent thereto, then:
(a) such occupancy (unless the parties hereto otherwise agree in
writing) shall be deemed to be under a month-to-month tenancy, which shall
continue until either party hereto notifies the other in writing, at least one
month before the end of any calendar month, that the notifying party elects to
terminate such tenancy at the end of such calendar month, in which event such
tenancy shall so terminate; but under no circumstances shall holdover continue
for more than 12 months.
(b) anything in this section to the contrary notwithstanding, the
Rent payable for each such monthly period shall equal the sum of (a) one-twelfth
(1/12) of that amount which is equal to 110% of the Base Rent for the Lease Year
during which such expiration of the Term or termination of this Lease occurs,
plus (b) the Additional Rent payable under subsection 4.2; and
(c) except as provided herein, such month-to-month tenancy shall be
on the same terms and subject to the same conditions as those set forth in this
Lease; provided, however, that if the Landlord gives the Tenant, at least sixty
(60) days before the end of any calendar month during such month-to-month
tenancy, written notice (which notice shall not be given to the Tenant before
the end of the first 30-day holdover period) that such terms and
-8-
<PAGE>
conditions (including any thereof relating to the amount and payment of Rent)
shall, after such month, be modified in any manner specified in such notice,
then such tenancy shall, after such month, be upon the said terms and subject to
the said conditions, as so modified.
If the Tenant holds over without the Landlord's consent, then
notwithstanding anything in this Section to the contrary notwithstanding, the
Rent payable for each such monthly period shall equal the sum of: (a) one-
twelfth (1/12) of that amount which is equal to 150% of the Base Rent for the
Lease Year during which such holdover of the Term or termination of this Lease
occurs, plus (b) the Additional Rent payable under subsection 4.2, plus (c) any
consequential damages suffered by Landlord as a result of such holdover.
4. RENT; SECURITY DEPOSIT. As Rent for the Premises, the Tenant shall
----------------------
pay to the Landlord all of the following:
4.1. Base Rent. An annual rent (the "Base Rent") as follows
---------
(calculated at $16.50 per square foot for the first Lease Year with three
percent (3%) annual increases thereafter):
<TABLE>
<CAPTION>
Monthly Installment
Lease Year Base Rent of Base Rent
---------- --------- ------------
<S> <C> <C>
Rent Commencement Date (Fifth
Floor) - Rent Commencement $ 812,097 $ 67,674.75
Date (Fourth Floor)
Rent Commencement Date (Fourth
Floor) - end of Lease Year 1 $1,629,557 $ 135,796.41
2 $1,678,444 $ 139,870.33
3 $1,728,797 $ 144,066.41
4 $1,780,661 $ 148,388.41
5 $1,834,081 $ 152,840.08
6 $1,889,103 $ 157,425.25
7 $1,945,776 $ 162,148.00
</TABLE>
4.2. Additional Rent. Additional rent ("Additional Rent") shall
---------------
include any and all charges or other amounts which the Tenant is obligated to
pay to the Landlord under this Lease, other than the Base Rent, regardless of
whether such charges or amounts are designated as additional rent.
4.3. Operating Costs.
---------------
4.3.1. Computation. Within one hundred twenty (120) days
-----------
after the end of each calendar year during the Term beginning with calendar year
1999, the Landlord shall compute the total of the Operating Costs incurred for
the Building and Common Areas during such calendar year, and the Landlord shall
allocate them to each separate rentable space within the Building in proportion
to the respective operating costs percentages assigned to such spaces; provided
that anything in this subsection 4.3 to the contrary notwithstanding, wherever
the Tenant and/or any other tenant of space within the Property has agreed in
its lease or otherwise to provide any item of such services partially or
entirely at its own expense, or wherever in the
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<PAGE>
Landlord's reasonable judgment any such significant item of expense is not
incurred with respect to or for the benefit of all of the net rentable space
within the Building (including but not limited to any such expense which, by its
nature, is incurred only with respect to those spaces which are occupied), in
allocating the Operating Costs pursuant to this subsection, the Landlord shall
make an appropriate adjustment, using generally accepted accounting principles,
as aforesaid, so as to avoid allocating to the Tenant or to such other tenant
(as the case may be) those Operating Costs covering such services already being
provided by the Tenant or by such other tenant at its own expense, or to avoid
allocating to all of the net rentable space within the Building those Operating
Costs incurred only with respect to a portion thereof, as aforesaid. The Tenant
shall have the right, during normal business hours at the Landlord's offices, to
review the books and records of the Landlord with respect to the calculation of
Operating Costs for the prior Lease Year, at the Tenant's sole expense, provided
(i) the Tenant provides at least fifteen (15) days' advance written notice to
the Landlord of its desire to inspect such books and records, and (ii) such
request is made within ninety (90) days after the Operating Costs Statement is
delivered by the Landlord to the Tenant. If the Tenant does not notify the
Landlord within such 90-day period, then all sums included as Operating Costs
shall be deemed acceptable to the Tenant and thereafter the Tenant shall have no
right to dispute in any manner any sums included within Operating Costs for such
prior Lease Year. The Landlord shall not be permitted to "double recover" any
Operating Costs (i.e., recover more than 100% of Operating Costs) from the
tenants of the Building. Operating Costs shall not include any expenses paid by
any tenant of the Building directly to third parties, or as to which the
Landlord is otherwise reimbursed by any third party, another tenant, or by
insurance proceeds. All assessments which are not specifically charged to the
Tenant because of actions by the Tenant, which can be paid by the Landlord in
installments, shall be paid by the Landlord in the maximum number of
installments permitted by law and shall not be included as Operating Costs
except in the year in which the assessment installment is actually paid. The
Landlord shall not under-manage the Building during the base year or otherwise
operate the Building during the base year in such a manner as to artificially
depress the Base Operating Costs. The Landlord shall not be obligated to cause
the Operating Costs to be audited by an independent accounting firm; provided,
however, if the Tenant requests the Landlord to do so, and agrees to pay the
cost of such audit, then the Landlord shall cause the Operating Costs to be
audited by an independent accounting firm selected by the Tenant. If an audit
shows an overcharge of more than five percent (5%) of the total annual amount of
the Tenant's Share of Increased Operating Costs, then the Landlord shall pay the
costs of such audit. Tenant shall have the right to audit the previous three (3)
years on any category of Operating Costs if an audit discloses that Landlord has
overcharged for that category by more than five percent (5%).
If less than ninety-five percent (95%) of the gross rentable square footage
of the Building is not occupied during the any calendar year, then Operating
Costs for such calendar year shall be "grossed up" to that amount of Operating
Costs that, using reasonable projections, would normally be expected to be
incurred during such calendar year if the Building was 95% occupied; as
determined under generally accepted accounting principles consistently applied.
Landlord shall provide in the computation required by this Section 4.3.1, a
reasonably detailed description of how the Operating Costs were grossed up.
Only those components of expenses that are affected by variations in occupancy
levels shall be grossed up.
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<PAGE>
4.3.2. Payment. For each Operating Year beginning in 2000, the
-------
Tenant shall pay to the Landlord, in the manner provided herein, "Tenant's Share
of Increased Operating Costs" which shall be computed by subtracting the Base
Operating Costs from the Operating Costs for the Operating Year in question, and
multiplying the difference by Tenant's Proportionate Share. The Landlord shall
send to the Tenant an annual statement setting forth the Operating Costs for the
applicable calendar year. Notwithstanding anything to the contrary contained in
this Lease, the Landlord represents that the cumulative annual increase per
Operating Year of the controllable portion of Operating Costs shall not be more
than five percent (5%). By way of example but not of limitation, if the
controllable portion of such costs increases by 4% in the second Lease Year and
3% in the third Lease Year, then the controllable portion of such costs may
increase by no more than 8% in the fourth Lease Year [3 x 5 = 4 + 3 + 8]. In no
event, however, shall the first increase of the controllable portion of such
costs exceed 5%. Non-controllable Operating Costs shall be deemed to include
insurance costs, utility costs, the costs of snow and ice removal and other
similar costs which, under industry custom and practice, are deemed non-
controllable.
4.3.3. Proration. If only part of any calendar year falls
---------
within the Term, the amount computed as Tenant's Share of Increased Operating
Costs for such calendar year under this subsection shall be prorated in
proportion to the portion of such calendar year falling within the Term (but the
expiration of the Term before the end of a calendar year shall not impair the
Tenant's obligation hereunder to pay such prorated portion of Tenant's Share of
Increased Operating Costs for that portion of such calendar year falling within
the Term, which amount shall be paid on demand).
4.3.4. Landlord's Right to Estimate. Anything in this
----------------------------
subsection to the contrary notwithstanding, the Landlord, at its reasonable
discretion, may (a) make, not more than once in any 12-month period, a
reasonable estimate or adjustment of the Additional Rent which may become due
under this subsection for any calendar year in 2000 or later, and (b) require
the Tenant to pay to the Landlord for each calendar month during such year one
twelfth (1/12) of such Additional Rent, at the time and in the manner that the
Tenant is required hereunder to pay the monthly installment of the Base Rent for
such month, all by giving the Tenant written notice thereof, accompanied by a
schedule setting forth in reasonable detail the expenses comprising the
Operating Costs, as so estimated. In such event, the Landlord shall cause the
actual amount of such Additional Rent to be computed and certified to the Tenant
within one hundred twenty (120) days after the end of such calendar year. Any
overpayment or deficiency in the Tenant's payment of Tenant's Proportionate
Share of Operating Costs shall be adjusted between the Landlord and the Tenant;
the Tenant shall pay the Landlord or the Landlord shall credit to the Tenant's
account (or, if such adjustment is at the end of the Term, the Landlord shall
pay to the Tenant), as the case may be, within thirty (30) days after such
notice to the Tenant, such amount necessary to effect such adjustment. The
Landlord's failure to provide such notice within the time prescribed above shall
not relieve the Tenant of any of its obligations hereunder.
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<PAGE>
4.4. When Due and Payable.
--------------------
4.4.1. Base Rent. The Base Rent for any Lease Year shall be
---------
due and payable in twelve (12) consecutive, equal monthly installments, in
advance, on the first (1st) day of each calendar month during such Lease Year.
In addition, the Base Rent for the first full calendar month of the Term shall
be due and payable within three (3) days after the Landlord delivers a fully
executed copy of this Lease to the Tenant. Rent for any partial calendar month
shall be due and payable three (3) days after the applicable Rent Commencement
Date.
4.4.2. Additional Rent. Any Additional Rent accruing to the
---------------
Landlord under this Lease, except as is otherwise set forth herein, shall be due
and payable when the installment of Base Rent next falling due after such
Additional Rent accrues and becomes due and payable.
4.4.3. No Set-Off; Late Payment. Each such payment shall be
------------------------
made promptly when due, without any deduction or setoff whatsoever, and without
demand, failing which the Tenant shall pay to the Landlord as Additional Rent,
after the tenth (10th) day after such payment remains due but unpaid, a late
charge equal to five percent (5%) of such payment which remains due but unpaid.
In addition, any payment that is not paid by the twentieth (20th) day after such
payment is due shall bear interest at the rate of fifteen percent (15%) per
annum from the date due until the date paid. Any payment made by the Tenant to
the Landlord on account of Rent may be credited by the Landlord to the payment
of any Rent then past due before being credited to Rent currently falling due.
Any such payment which is less than the amount of Rent then due shall constitute
a payment made on account thereof, the parties hereto hereby agreeing that the
Landlord's acceptance of such payment (whether or not with or accompanied by an
endorsement or statement that such lesser amount or the Landlord's acceptance
thereof constitutes payment in full of the amount of Rent then due) shall not
alter or impair the Landlord's rights hereunder to be paid all of such amount
then due, or in any other respect.
4.5. Where Payable. The Tenant shall pay the Rent, in lawful currency
-------------
of the United States of America, to the Landlord by delivering or mailing it to
the Landlord's address which is set forth in section 20, to the attention of
Facilities Department, or to such other address or in such other manner as the
Landlord from time to time specifies by written notice to the Tenant.
4.6. Tax on Lease. If federal, state or local law now or hereafter
------------
imposes any tax, assessment, levy or other charge directly or indirectly upon
(a) the Landlord with respect to this Lease or the value thereof, (b) the
Tenant's use or occupancy of the Premises, (c) the Base Rent, Additional Rent or
any other sum payable under this Lease, or (d) this transaction, then the Tenant
shall pay the amount thereof as Additional Rent to the Landlord upon demand,
unless the Tenant is prohibited by law from doing so.
4.7. Security Deposit. [Intentionally Deleted]
----------------
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<PAGE>
5. TAXES.
-----
5.1. Payment. For each Tax Year beginning with the 2000-2001 Tax
-------
Year, the Tenant shall pay to the Landlord, in the manner provided herein,
"Tenant's Share of Increased Taxes" which shall be computed by subtracting the
Base Taxes from the Taxes for the Tax Year in question, and multiplying the
difference by Tenant's Proportionate Share.
5.2. Proration. If only part of any Tax Year falls within the Term,
---------
the amount computed as Tenant's Share of Increased Taxes for such Tax Year under
this subsection shall be prorated in proportion to the portion of such Tax Year
falling within the Term (but the expiration of the Term before the end of a Tax
Year shall not impair the Tenant's obligations hereunder to pay such prorated
portion of Tenant's Share of Increased Taxes for that portion of such Tax Year
falling within the Term, which amount shall be paid on demand).
5.3. Method of Payment. Tenant's Share of Increased Taxes shall be
-----------------
paid by the Tenant in advance, in equal monthly installments in such amounts as
are estimated and billed for each Tax Year by the Landlord at the commencement
of the Term and at the beginning of each successive Tax Year during the Term,
each such installment being due on the first day of each calendar month. If the
Tenant pays Tenant's Share of Increased Taxes in installments, in advance, then
not more than once during any tax year the Landlord may re-estimate Tenant's
Share of Increased Taxes and thereafter adjust the Tenant's monthly installments
payable during the Tax Year to reflect more accurately Tenant's Share of
Increased Taxes. Within one hundred twenty (120) days after the Landlord's
receipt of tax bills for each Tax Year, the Landlord will notify the Tenant of
the amount of Taxes for the Tax Year in question and the amount of Tenant's
Share of Increased Taxes thereof. Any overpayment or deficiency in the Tenant's
payment of Tenant's Share of Increased Taxes for each Tax Year shall be adjusted
between the Landlord and the Tenant; the Tenant shall pay the Landlord or the
Landlord shall credit to the Tenant's account (or, if such adjustment is at the
end of the Term, the Landlord shall pay the Tenant), as the case may be, within
thirty (30) days after such notice to the Tenant, such amount necessary to
effect such adjustment. The Landlord's failure to provide such notice within
the time prescribed above shall not relieve the Tenant of any of its obligations
hereunder.
5.4. Taxes on Rent. In addition to Tenant's Share of Increased Taxes,
-------------
the Tenant shall pay to the appropriate agency any sales, excise and other tax
(not including, however, the Landlord's income taxes) levied, imposed or
assessed by the State of Maryland or any political subdivision thereof or other
taxing authority upon any Rent payable hereunder. The Tenant shall also pay,
prior to the time the same shall become delinquent or payable with penalty, all
taxes imposed on its inventory, furniture, trade fixtures, apparatus, equipment,
leasehold improvements installed by the Tenant or by the Landlord on behalf of
the Tenant and any other property of the Tenant.
5.5. Tenant's Right to Contest Taxes. In the event the Landlord
-------------------------------
elects not to contest any new tax assessment for the Building from time to time,
the Tenant shall have the right to contest the same upon providing fifteen (15)
days' advance notice thereof to the Landlord, provided that such contest will
not impair the Landlord's right, title or interest in and to the Premises or the
Building. In such event, the Tenant shall be responsible for paying all costs
in connection with such contest, and in the event the Taxes are increased as a
result of such contest, the Tenant shall be required to pay that portion of the
increased amount which exceeds the initial assessment upon which the appeal was
based. In the event the Taxes are decreased as a result of such contest, the
Tenant shall have the right to offset against the Tenant's Share of Increased
Taxes next due all reasonable costs incurred by the Tenant in contesting the
applicable tax assessment, provided that such costs shall not exceed the amount
of savings. At the written
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<PAGE>
request of tenants leasing fifty percent (50%) or more of the rentable area of
the Building, the Landlord shall contest in accordance with applicable law any
real property tax assessment applicable to the Building.
6. USE OF PREMISES AND COMMON AREAS.
--------------------------------
6.1. Nature of Use. The Tenant shall use the Premises only for
-------------
general office purposes, and for no other purpose whatsoever.
6.2. Compliance with Law and Covenants. The Tenant, throughout the
---------------------------------
Term and at its sole expense, in its use and possession of the Premises, shall:
(a) comply promptly and fully with (i) all laws, ordinances,
notices, orders, rules, regulations and requirements of all federal, state and
municipal governments and all departments, commissions, boards and officers
thereof, including but not limited to The Americans with Disabilities Act, 42
U.S.C. (S) 12101 et. seq., and the ADA Disability Guidelines promulgated with
respect thereto, and (ii) all requirements (Y) of the National Board of Fire
Underwriters (or any other body now or hereafter constituted exercising similar
functions) which are applicable to any or all of the Premises, or (Z) imposed by
any policy of insurance covering any or all of the Premises and required by
Section 7 to be maintained by the Tenant, all if and to the extent that any of
such requirements relate to any or all of the Premises or to any equipment,
pipes, utilities or other parts of the Property which exclusively serve the
Premises, whether any of the foregoing are foreseen or unforeseen, or are
ordinary or extraordinary.
(b) (without limiting the generality of the foregoing provisions
of this subsection) keep in force throughout the Term all licenses, consents and
permits necessary for the lawful use of the Premises for the purposes herein
provided;
(c) pay when due all personal property taxes, income taxes,
license fees and other taxes assessed, levied or imposed upon the Tenant or any
other person in connection with the operation of its business upon the Premises
or its use thereof in any other manner;
(d) not obstruct, annoy or interfere with the rights of other
tenants; and
(e) not allow the transmission of any loud or objectionable
sounds or noises from the Premises.
With respect to The Americans with Disabilities Act and the ADA Disability
Guidelines thereto, the Tenant shall be responsible for the entire Premises,
including all entry doors and signage (subject, however, to the provisions of
subsection 10.2), and the Landlord shall be responsible for the Building and the
Common Areas. To the extent that any Rule or Regulation promulgated by Landlord
with respect to the Building is inconsistent with Tenant's compliance with
applicable law (e.g., use of "guide dogs" by any employee, agent or visitor of
Tenant to the Premises), Tenant's compliance with applicable law shall take
precedence over compliance with the Rules and Regulations.
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<PAGE>
The Landlord represents, warrants and covenants that, to its actual knowledge,
the Building and the Property comply, as of the Rent Commencement Date (Fifth
Floor), and during the Term hereof (including any renewal term) will comply, in
all respects with all applicable federal, state and local laws, codes, rules,
ordinances, and regulations relating to the design, construction, renovation,
occupancy, use and operation of the Building and the Property including, without
limitation, all such laws and property, ordinances, codes, rules and regulations
regarding accessibility, use and occupancy of the Building and the Property by
handicapped individuals. The Landlord shall bear all costs of compliance with
any such present or future laws, codes, ordinances, rules and regulations with
respect to the Building and the Property, and such costs shall not be included
in the additional rent payable by the Tenant under this Lease or otherwise
imposed on the Tenant.
6.3. Mechanics' Liens.
----------------
6.3.1. Without limiting the generality of the foregoing
provisions of this section, the Tenant shall not create or permit to be created,
and if created shall discharge or have released, any mechanics' or materialmens'
lien arising while this Lease is in effect and affecting any or all of the
Premises, the Building and/or the Property, and the Tenant shall not permit any
other matter or thing whereby the Landlord's estate, right and interest in any
or all of the Premises, the Building and/or the Property might be impaired. The
Tenant shall defend, indemnify and hold harmless the Landlord against and from
any and all liability, claim of liability or expense (including but not limited
to that of reasonable attorneys' fees) incurred by the Landlord on account of
any such lien or claim, provided the Landlord has not caused or contributed to
such liability, claim or expense.
6.3.2. If the Tenant fails to discharge or bond against any such
lien within fifteen (15) days after it first becomes effective against any of
the Premises, the Building and/or the Property, then, in addition to any other
right or remedy held by the Landlord on account thereof, the Landlord may (a)
discharge it by paying the amount claimed to be due or by deposit or bonding
proceedings, and/or (b) in any such event compel the prosecution of any action
for the foreclosure of any such lien by the lienor and pay the amount of any
judgment in favor of the lienor with interest, costs and allowances. The Tenant
shall reimburse the Landlord for any amount paid by the Landlord to discharge
any such lien and all expenses incurred by the Landlord in connection therewith,
together with interest thereon at the Prime Rate plus two percent (2%) per annum
from the respective dates of the Landlord's making such payments or incurring
such expenses (all of which shall constitute Additional Rent).
6.3.3. Nothing in this Lease shall be deemed in any way (a) to
constitute the Landlord's consent or request, express or implied, that any
contractor, subcontractor, laborer or materialman provide any labor or materials
for any alteration, addition, improvement or repair to any or all of the
Premises, the Building and/or the Property, or (b) to give the Tenant any right,
power or authority to contract for or permit to be furnished any service or
materials, if doing so would give rise to the filing of any mechanics' or
materialmens' lien against any or all of the Premises, the Building and/or the
Property, or the Landlord's estate or interest therein, or (c) to
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<PAGE>
evidence the Landlord's consent that the Premises, the Building and/or the
Property be subjected to any such lien.
6.4. Signs. Tenant shall have the exclusive right to signage on and in
-----
front of the Building and in the lobby, except for a Building directory which
shall contain the names of all Building tenants. Any signage erected by the
Tenant shall be at the Tenant's sole cost. Plans for the proposed signage shall
be submitted by the Tenant to the Landlord prior to installation for Landlord's
review and approval which shall not be unreasonably withheld. This exclusive
right of signage expires if any other Tenant in the Building occupies two or
more full floors in the Building.
6.5. Easement.
--------
6.5.1. Grant of Easement. The Landlord hereby grants to the
-----------------
Tenant a non-exclusive easement to use (and to permit its officers, directors,
agents, employees and invitees to use), in the course of conducting business at
the Premises, those areas and facilities of the Property which may be designated
by the Landlord from time to time as common areas (portions of which may from
time to time be relocated and/or reconfigured by the Landlord in its sole
discretion so long as reasonable access to and from the Premises is maintained)
(the "Common Areas"), which Common Areas include footways, sidewalks, Parking
Areas, lobbies, elevators, stairwells, corridors, restrooms and certain exterior
areas on the Property, subject, however, to the Rules and Regulations. "Parking
Areas" shall mean those portions of the Common Areas which from time to time are
designated by the Landlord for the parking of automobiles and other automotive
vehicles while engaged in business upon the Premises (other than while being
used to make deliveries to and from the Premises). The Landlord will accommodate
the Tenant's schedule for all installations, moves and relocations into and out
of the Premises and the Building, including access to lobbies, elevators, stairs
and the like. The Tenant shall have access to the Premises 24 hours per day, 365
days per year.
6.5.2. Non-Exclusive License. Such license shall be exercised in
---------------------
common with the exercise thereof by the Landlord, the other tenants or occupants
of the Property, and their respective officers, directors, agents, employees and
invitees.
6.5.3. Parking Areas; Changes. The Landlord reserves the right
----------------------
to change the entrances, exits, traffic lanes, boundaries and locations of the
Parking Areas. All Parking Areas and facilities which may be furnished by the
Landlord in or near the Property, including any employee parking areas,
truckways, loading docks, pedestrian sidewalks and ramps, landscaped areas and
other areas and improvements which may be provided by the Landlord for the
Tenant's exclusive use or for general use, in common with other tenants, their
officers, agents, employees and visitors, shall at all times be subject to the
Landlord's exclusive control and management, and the Landlord shall have the
right from time to time to establish, modify and enforce reasonable rules and
regulations with respect thereto. The Landlord shall have the right to (a)
police the Common Areas, (b) establish and from time to time to change the level
of parking surfaces, (c) close all or any portion of the Common Areas to such
extent as, in the opinion of the Landlord's counsel, may be legally sufficient
to prevent a dedication thereof or the
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<PAGE>
accrual of any rights to any person or to the public therein, (d) close
temporarily all or any portion of the Parking Areas, (e) discourage non-tenant
parking (provided, however, that the Landlord at all times will provide
sufficient visitor parking for the Building), and (f) do and perform such other
acts in and to the Common Areas as, in the use of good business judgment, the
Landlord determines to be advisable with a view to the improvement of the
convenience and use thereof by tenants, their officers, agents, employees and
visitors. The Tenant shall cause its officers, agents and employees to park
their automobiles only in such areas as the Landlord from time to time may
designate by written notice to the Tenant as employee parking areas, and the
Tenant shall not use or permit the use of any of the Common Areas in any manner
which will obstruct the driveways or throughways serving the Parking Areas or
any other portion of the Common Areas allocated for the use of others. Employees
of the Tenant shall not keep parked vehicles on the Parking Areas overnight
unless such employees are working at night or are traveling on business. At all
times the Landlord shall provide parking to the Tenant on an unreserved basis
equal to Tenant's Proportionate Share of the parking provided to all tenants of
the Building; provided, however, that the parking so provided to the Tenant
shall include 31 reserved covered spaces in the Building.
6.5.4. Alterations. The Landlord reserves the right at any time
-----------
and from time to time (i) to change or alter the location, layout, nature or
arrangement of the Common Areas or any portion thereof, including but not
limited to the arrangement and/or location of entrances, passageways, doors,
corridors, stairs, lavatories, elevators, parking areas, and other public areas
of the Building, and (ii) to construct additional improvements on the Property
and make alterations thereof or additions thereto and build additional stories
on or in any such buildings adjoining the same; provided, however, that no such
change or alteration shall deprive the Tenant of access to the Premises or
unreasonably interfere with the Tenant's use of the Premises.
6.5.5. Use of Common Areas.
-------------------
(a) The Landlord shall at all times have full and
exclusive control, management and direction of the Common Areas. Without
limiting the generality of the foregoing, the Landlord shall have the right to
maintain and operate lighting facilities on all of the Common Areas and to
police the Common Areas.
(b) The Tenant shall maintain in a neat and clean
condition that area designated by the Landlord as the refuse collection area,
and shall not place or maintain anywhere within the Property, other than within
the area which may be designated by Landlord from time to time as such refuse
collection area, any trash, garbage or other items, except as may otherwise be
expressly permitted by this Lease.
(c) In its use of the Common Areas, the Tenant shall not
take, or permit its agents, employees, invitees, visitors and guests to take,
any of the following actions:
(i) the parking or storage of automobiles, or other
automotive vehicles anywhere within the Property if such vehicles lack current,
valid license plates, or other than in the Parking Areas (and the individual
parking spaces from time to time
-17-
<PAGE>
designated therein), or anywhere within the Property if the body, windows or
other exterior portions of such vehicles are in an obvious state of damage or
disrepair;
(ii) the performance of any body work, maintenance or
other repairs to vehicles, or the painting of any vehicle, anywhere within the
Premises or the rest of the Property; or
(iii)the parking or storage of any trucks or vans
weighing over three-quarters (3/4) of one ton, except for purposes of temporary
loading and unloading.
6.6. Liability of Landlord and Tenant. Except in the event, but
--------------------------------
only to the extent, of the Landlord's negligence or willful misconduct, the
Landlord and its agents and employees shall not be liable to the Tenant or any
other person whatsoever (a) for any injury to person or damage to property
caused by any defect in or failure of equipment, pipes, wiring or broken glass,
or the backing up of any drains, or by gas, water, steam, electricity or oil
leaking, escaping or flowing into the Premises, or (b) for any loss or damage
that may be occasioned by or through the acts or omissions of any other tenant
of the Property or of any other person whatsoever. The obligations of the
Tenant under this Lease do not constitute personal obligations of the individual
officers and employees of the Tenant. The liability of the Tenant and each of
its successors for any default by the Tenant (or its successors) under the terms
of this Lease shall be limited to such claims and causes of action which accrue
during the Tenant's and each of its successors' respective occupancy of the
Premises.
6.7. Floor Load. The Tenant shall not place a load upon any
----------
floor of the Premises exceeding 100 pounds per square foot. The Landlord
reserves the right to prescribe the weight and position of all safes and other
heavy equipment, and to prescribe the reinforcing necessary, if any, which in
the opinion of the Landlord may be required under the circumstances, such
reinforcing to be at the Tenant's sole expense. Business machines and
mechanical equipment shall be placed and maintained by the Tenant in settings
sufficient in the Landlord's judgment to absorb and prevent vibration and noise,
and the Tenant shall, at its sole expense, take such steps as the Landlord may
direct to remedy any such condition.
6.8 Intentionally deleted.
6.9. Hazardous Materials.
-------------------
(a) The Tenant warrants and agrees that the Tenant shall not
cause or permit any Hazardous Material to be brought upon, kept or used in or
about the Premises by the Tenant, its agents, employees, contractors or
invitees. If the Tenant breaches the obligations stated in the preceding
sentence, then the Tenant shall indemnify, defend and hold the Landlord harmless
from and against any and all claims, judgments, damages, penalties, fines,
costs, liabilities or losses (including, without limitation, diminution in value
of the Premises, the Building and the Property generally, damages for the loss
or restriction on use of rentable or usable space or of any amenity of the
Building or the Property generally, damages from any adverse impact on marketing
of space in the Building, and sums paid in settlement of claims,
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<PAGE>
attorneys' fees, consultant fees and expert fees) which arise during or after
the Term as a result of such contamination in excess of any applicable insurance
coverage. This indemnification of the Landlord by the Tenant includes, without
limitation, costs incurred in connection with any investigation of site
conditions or any cleanup, remedial, removal or restoration work required by any
governmental authority because of Hazardous Material present in the soil or
ground water or under the Premises or the Property generally. As used herein (i)
"Environmental Laws" means the Clean Air Act, the Resource Conservation Recovery
Act of 1976, the Hazardous Material Transportation Act, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Resource
Conservation and Recovery Act, the Toxic Substances Control Act, the
Occupational Safety and Health Act, the Consumer Product Safety Act, the Clean
Water Act, the Federal Water Pollution Control Act, the National Environmental
Policy Act, Md. Nat. Res. Code Ann., Title 8, and Md. Env. Code Ann., Title 7,
as each of the foregoing shall be amended from time to time, and any similar or
successor laws, federal, state or local, or any rules or regulations promulgated
thereunder; and (ii) "Hazardous Materials" means and includes asbestos; "oil,
petroleum products and their by-products;" "hazardous substances;" "hazardous
wastes" or "toxic substances," as those terms are used in Environmental Laws; or
any substances or materials listed as hazardous or toxic in the United States
Department of Transportation, or by the Environmental Protection Agency or any
successor agency under any Environmental Laws.
(b) The Landlord represents and warrants to the Tenant that, to
its actual knowledge, the Building has been constructed in full compliance with
all Environmental Laws, and that on the date of this Lease the Building and the
Property are in full compliance with all Environmental Laws. The Landlord also
represents and warrants to the Tenant that, to its actual knowledge, the
Premises, the Building and the Property have been constructed to contain no
fireproofing or other insulating materials which contain asbestos. The Landlord
hereby agrees to indemnify, defend and hold the Tenant, and its officers,
employees and agents, harmless from any claim or liability relative to (1)
injury, loss, accident or damage to any person or property, or (2) from any
direct loss or damage, including with respect to the items described in (1) or
(2) any judgments, penalties, fines, costs, attorneys', consulting or expert
fees, site investigation or cleanup costs, to the extent arising from:
(i) the cleanup of any Hazardous Materials and resulting
liability therefrom in, on, under or about the Building which existed prior to
the Rent Commencement Date (Fifth Floor) or are subsequently brought into the
Building by the Landlord or its employees, agents, contractors or licensees; and
(ii) the violation of any Environmental Laws by the Landlord
or its employees, agents, contractors or licensees, and the resulting liability
therefrom that may affect the Premises or the Building which existed prior to
the Rent Commencement Date (Fifth Floor), or is otherwise caused by the acts or
omissions of the Landlord or the Landlord's employees, agents, contractors or
licensees.
The provisions of this paragraph shall survive the expiration or earlier
termination of this Lease. This paragraph is not intended to and shall not
relieve any insurance carrier of its obligations under policies required to be
carried by the Landlord pursuant to the provisions of this Lease, to
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the extent that such policies cover (or if carried as required, would have
covered) the losses, damages and/or claims which are subject hereof.
7. INSURANCE AND INDEMNIFICATION.
-----------------------------
7.1. Insurance. At all times from and after the earlier of (i) the
---------
entry by the Tenant into the Premises, and (ii) the Rent Commencement Date
(Fifth Floor), the Tenant shall take out and keep in full force and effect, at
its expense:
(a) commercial general liability insurance, including Blanket
Contractual Liability, Broad Form Property Damage, Completed Operations/Products
Liability, Personal Injury Liability, Premises Medical Payments, Interest of
Employees as additional insureds and Broad Form General Liability Endorsement,
with a combined single limit of not less than Three Million Dollars ($3,000,000)
per occurrence;
(b) special form property insurance (including but not limited
to burglary and theft insurance and plate glass insurance) written at full
replacement cost value and with replacement cost endorsement in an amount not
less than One Million Dollars ($1,000,000.00) covering all of Tenant's property,
including, without limitation, inventory, trade fixtures, floor coverings,
furniture, electronic data processing equipment and any other property removable
by Tenant under the provisions of this Lease, except for improvements which are
part of the Landlord's Work;
(c) worker's compensation or similar insurance in form and
amounts required by law; and
(d) such other insurance in such types and amounts as Landlord
may reasonably require and as are then being required by Comparable Landlords.
7.2. Tenant's Contractor's Insurance. The Tenant shall require any
-------------------------------
contractor of the Tenant performing work in, on or about the Premises to take
out and keep in full force and effect, at no expense to the Landlord:
(a) commercial general liability insurance, including
Contractor's Liability coverage, Blanket Contractual Liability coverage, Broad
Form Property Damage Endorsement, Contractor's Protective Liability, Completed
Operations/Products Liability (Completed Operations/Products Liability coverage
to be provided for at least one (1) year after final completion of work),
Personal Injury, Premises Medical Payments, Interest of Employees as additional
insureds, Incidental Medical Malpractice and Broad Form General Liability
Endorsement, in an amount not less than One Million Dollars ($1,000,000)
combined single limit per occurrence and Two Million Dollars ($2,000,000) in the
aggregate;
(b) comprehensive automobile liability insurance, with a
combined single limit of not less than One Million Dollars ($1,000,000) covering
all owned, non-owned or hired automobiles to be used by the contractor;
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(c) worker's compensation or similar insurance in form and
amounts required by law; and
(d) employers liability coverage, including All States
Endorsement, in an amount not less than One Million Dollars ($1,000,000).
7.3. Policy Requirements.
-------------------
7.3.1. The company or companies writing any insurance which
the Tenant is required to take out and maintain or cause to be taken out or
maintained pursuant to subsections 7.1 and/or 7.2, as well as the form of such
insurance, shall at all times be subject to the Landlord's approval, and any
such company or companies shall be licensed to do business in the State of
Maryland and have a rating of at least A- or better and a financial size rating
of XII or larger from Best's Key Rating Guide and Supplemental Service (or
------------------------------------------------
comparable rating from a comparable insurance rating service). Public liability
and all-risk casualty insurance policies evidencing such insurance shall include
the Landlord and its designees (including any Mortgagee) as additional insureds,
shall be primary and noncontributory, and shall also contain a provision by
which the insurer agrees that such policy shall not be cancelled, reduced,
terminated or not renewed except after thirty (30) days' advance written notice
to the Landlord. All such policies, or certificates thereof, shall be deposited
with the Landlord promptly upon commencement of the Tenant's obligation to
procure the same.
7.3.2. The Landlord and the Tenant agree that on January 1 of
the third (3rd) full calendar year during the Term and on January 1 of every
third (3rd) calendar year thereafter, the Landlord will have the right to
request commercially reasonable changes in the character and/or amounts of
insurance required to be carried by the Tenant pursuant to the provisions of
this section 7, and the Tenant shall comply with any requested change in
character and/or amount within thirty (30) days after the Landlord's request
therefor.
7.4. Indemnities by Tenant and Landlord.
----------------------------------
7.4.1. Notwithstanding any policy or policies of insurance
required of the Tenant, but subject to the provisions of subsection 7.8, the
Tenant, for itself and its successors and assigns, to the extent permitted by
law, shall defend, indemnify and hold harmless the Landlord, the Landlord's
agents, and any Mortgagee against and from any and all liability or claims of
liability by any person asserted against or incurred by the Landlord and/or such
agent or Mortgagee in connection with (i) the use, occupancy, conduct, operation
or management of the Premises by the Tenant or any of its agents, contractors,
servants, employees, licensees, concessionaires, suppliers, materialmen or
invitees during the Term; (ii) any work or thing whatsoever done or not done on
the Premises during the Term (except any work or thing done or required to be
done by the Landlord); (iii) any breach or default in performing any of the
obligations under the provisions of this Lease and/or applicable law by the
Tenant or any of its agents, contractors, servants, employees, licensees,
suppliers, materialmen or invitees during the Term, unless performed by the
Landlord or its agents; (iv) any negligent, intentionally tortious
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act or omission by the Tenant or any of its agents, contractors, servants,
employees, licensees, concessionaires, suppliers, materialmen or invitees during
the Term; or (v) except for any work or thing required to be done by the
Landlord and of which the Tenant has notified the Landlord that the Landlord has
failed to do such work or thing, any injury to or death of any person or any
damage to any property occurring upon the Premises (whether or not such event
results from a condition existing on the Premises), and from and against all
reasonable costs, expenses and liabilities incurred in connection with any
claim, action, demand, suit at law, in equity or before any administrative
tribunal, arising in whole or in part by reason of any of the foregoing
(including, by way of example rather than of limitation, the fees of attorneys,
investigators and experts), all regardless of whether such claim, action or
proceeding is asserted before or after the expiration of the Term or any earlier
termination of this Lease.
7.4.2. If any such claim, action or proceeding is brought
against the Landlord and/or any agent or Mortgagee, the Tenant, if requested by
the Landlord or such agent or Mortgagee, and at the Tenant's expense, promptly
shall resist or defend such claim, action or proceeding or cause it to be
resisted or defended by an insurer.
7.4.3. Subject to the provisions of subsection 7.8, the
Landlord hereby agrees for itself and its successors and assigns to indemnify
and save the Tenant harmless from and against any liability or claims of
liability arising solely out of the negligence or intentional acts and omissions
of the Landlord, its agents or employees.
7.4.4. Notwithstanding any other provisions of this Lease, the
Tenant shall not be required to indemnify and hold the Landlord harmless from
any such loss, cost, liability, damage and expense to any person or property
(including but not limited to penalties, fines and actual attorneys' fees and
costs) resulting from the negligent acts or omissions or the willful misconduct
of the Landlord or those of its agents, contractors, servants, employees or
licensees, in connection with the Landlord's activities on the Premises or the
Building, and, subject to the provisions of subsection 7.8, the Landlord hereby
so indemnifies, defends and saves the Tenant and any of the Tenant's affiliates
occupying the Premises harmless from any such loss, costs, liability, damage and
expense (including but not limited to penalties, fines and actual attorneys'
fees and costs) arising in connection with or out of such negligent acts or
omissions or such willful misconduct. In case of any action or proceeding
brought by reason of any such claim, the Landlord, upon notice from the Tenant,
hereby agrees, subject to the provisions of subsection 7.8, to defend the same
at the Landlord's expense. Further, the Tenant's agreement to indemnify and hold
the Landlord harmless pursuant to this Lease and the agreement by the Landlord
to indemnify and hold the Tenant harmless are not intended to and shall not
relieve any insurance carrier of its obligations under policies required to be
carried by the Landlord or the Tenant, respectively, pursuant to the provisions
of this Lease, to the extent that such policies cover the results of such
negligence or omissions or such willful misconduct. If either party breaches
this Lease by its failure to carry required insurance, such failure shall
automatically be deemed to be the covenant and agreement by the Landlord or the
Tenant, respectively, to self-insure such required coverage. Each party's
indemnification obligations under this Lease shall not be limited to the amount
of insurance coverage carried by such party hereunder.
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7.5. Landlord Not Responsible for Acts of Others. Unless due to the
-------------------------------------------
negligence or fault of the Landlord, the Landlord shall not be responsible or
liable to the Tenant, or to those claiming by, through or under the Tenant, for
any loss or damage which may be occasioned by or through the acts or omissions
of persons occupying or using space adjoining the Premises or any part of the
premises adjacent to or connecting with the Premises or any other part of the
Building or the Property, or for any loss or damage resulting to the Tenant (or
those claiming by, through or under the Tenant) or its or their property, from
(a) the breaking, bursting, stoppage or leaking of electrical cable and/or
wires, or water, gas, sewer or steam pipes, (b) falling plaster, or (c)
dampness, water, rain or snow in any part of the Building. Except as otherwise
set forth in this Lease, the Tenant agrees to use and occupy the Premises, and
to use such other portions of the Property as the Tenant is herein given the
right to use, at the Tenant's own risk.
7.6. Landlord's Insurance. During the Term, the Landlord shall
--------------------
maintain, in amounts comparable to those maintained by Comparable Landlords, (a)
insurance on the Property against loss or damage by fire and all of the hazards
included in the extended coverage endorsement, (b) comprehensive liability and
property damage insurance with respect to the Common Areas, against claims for
personal injury or death, or property damage suffered by others occurring in, on
or about the Property, and (c) any other insurance, in such form and in such
amounts as are deemed reasonable by the Landlord and as are maintained by
Comparable Landlords, including, without limitation, rent continuation and
business interruption insurance, theft insurance and workers' compensation, and
boiler and machinery insurance. The costs and expenses of any and all insurance
carried by the Landlord pursuant to the provisions of this subsection 6.6 shall
be deemed a part of Operating Costs.
7.7. Increase in Insurance Premiums. The Tenant shall not do or suffer
------------------------------
to be done, or keep or suffer to be kept, anything in, upon or about the
Premises, the Building or the Property which will contravene the Landlord's
policies of hazard or liability insurance or which will prevent the Landlord
from procuring such policies from companies acceptable to the Landlord. If
anything done, omitted to be done, or suffered by the Tenant to be kept in, upon
or about the Premises, the Building or the Property shall cause the rate of fire
or other insurance on the Premises, the Building or the Property to be increased
beyond the minimum rate from time to time applicable to the Premises or to any
such other property for the use or uses made thereof, the Tenant shall pay to
the Landlord, as Additional Rent, the amount of any such increase upon the
Landlord's demand therefor.
7.8. Waiver of Right of Recovery. To the extent that any loss or
---------------------------
damage to the Premises, the Building the Property, any building, structure or
other tangible property, or resulting loss of income, or losses under workers'
compensation laws and benefits, are covered by insurance, neither party shall be
liable to the other party or to any insurance company insuring the other party
(by way of subrogation or otherwise), even though such loss or damage might have
been occasioned by the negligence of such party, its agents or employees. In
the event that such waiver of subrogation shall not be available to either party
except through the payment of additional premium therefor, the party requesting
the waiver shall pay such additional premium.
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8. SERVICES AND UTILITIES. The Landlord shall provide the following
----------------------
services and utilities on all days except Saturdays, Sundays, and federal and
state holidays, unless otherwise stated below:
(a) nightly janitorial services Monday through Friday in and about the
Premises, which shall include those services set forth on Exhibit B;
---------
(b) intentionally omitted;
(c) when necessary during normal business hours, chilled water and hot
water for central heating (at a temperature not lower than 68 degrees F when the
outside dry bulb temperature is not lower than 32 degrees F) and air
conditioning (at a temperature not higher than 76 degrees F when the outside dry
bulb temperature is not higher than 95 degrees F;
(d) at least two (2) elevators at all times (if the Building contains
an elevator), to be used in common with other tenants;
(e) restroom facilities and necessary lavatory supplies, including hot
and cold running water at the points of supply, as provided for general use of
all tenants in the Building; and
(f) window washing at least two times per year.
With respect to subsection (c) above, "normal business hours" shall be
deemed to mean the periods from7:30 a.m. until 6:30 p.m. on business days
(Monday through Friday) and from 8:00 a.m. until 1:00 p.m. on Saturdays. The
following additional provisions shall apply to electrical and heating,
ventilation and air conditioning services to the Premises:
Electrical Service. The Landlord shall install, at Tenant's expense,
------------------
submeters to measure the electrical service supplied to the Premises. The Tenant
shall pay to the Landlord as Additional Rent, within ten (10) days after
Landlord's delivery of an invoice therefor with a copy of the utility bill, the
cost of such submetered electrical service at the actual rates (including taxes
and associated charges) assessed by the public utility serving the Building.
Such invoices from Landlord shall be rendered not more often than monthly.
HVAC Costs. Notwithstanding that Landlord shall provide chilled water
----------
and hot water to the Premises during normal business hours (as defined above)
for central air conditioning and heating purposes ("HVAC Service") pursuant to
Subsection (c) above, Landlord and Tenant acknowledge that the HVAC Service to
the Premises is supplied by chiller/boiler equipment which supplies HVAC Service
to both the Premises and to other premises in the Building (collectively, the
"HVAC Service Area"). The HVAC Service shall not include the cost of electrical
service to operate the air handlers located in the Premises; which cost of
electrical service shall be paid solely by Tenant pursuant to the foregoing
provisions of this Section 8. The Landlord shall install, at Tenant's sole cost,
such submeters as are necessary to measure the cost of electricity used to
generate the HVAC Service (the "HVAC Cost"). The Tenant shall pay to the
Landlord as Additional Rent, within ten (10) days after Landlord's delivery of
an invoice therefor, Tenant's Proportionate Share of the HVAC Cost at the actual
rates (including taxes and associated charges) charged by the public utility
serving the Building.
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After Hours HVAC Costs. The Tenant shall have the right to obtain HVAC
----------------------
Service at times other than during normal business hours provided the Tenant
notifies the Landlord of its desire therefor a reasonable time before such
service is needed. The Tenant shall pay to the Landlord as Additional Rent,
within ten (10) days after Landlord's delivery of an invoice therefor, Tenant's
proportionate share (as hereinafter defined) of the HVAC Cost of such after
hours service at the actual rates (including taxes and associated charges)
charged by the public utility serving the Building. For purposes of this
subsection only, "Tenant's proportionate share" shall be computed by multiplying
the HVAC Cost for after hour service for the period in question by a fraction,
the numerator of which shall be the rentable area of the Premises, and the
denominator of which shall be the aggregate of: (a) the rentable area of the
Premises; (b) the rentable area of any other tenant of space in the HVAC Service
Area which has requested after hours HVAC Service for the period in question;
and (c) the rentable square footage of any other tenant of space in the HVAC
Service Area (regardless of whether the tenant of such space has formally
requested after hours HVAC Service) which employs an after hours work shift of
employees for the period in question which numbers twenty percent (20%) or more
of the number of employees employed by such tenant during normal business hours
for the period in question.
Monitoring. The Landlord shall employ, at Tenant's expense, an
----------
independent monitoring company, which company and its attendant costs must be
reasonably acceptable to Tenant, which shall monitor the HVAC Costs and which
shall allocate the same between normal business hours and after hours based upon
the submeters installed in accordance with the foregoing provisions.
Except as otherwise set forth in this Lease, any failure by the
Landlord to furnish any of the foregoing services or utilities, resulting from
circumstances beyond the Landlord's reasonable control or from interruption of
such services due to repairs or maintenance, shall not render the Landlord
liable in any respect for damages to either person or property, nor be construed
as an eviction of the Tenant, nor cause an abatement of rent hereunder, nor
relieve the Tenant from any of its obligations hereunder. If any public utility
or governmental body shall require the Landlord or the Tenant to restrict the
consumption of any utility or reduce any service for the Premises or the
Building, the Landlord and the Tenant shall comply with such requirements,
whether or not the services and utilities referred to in this Section 8 are
thereby reduced or otherwise affected, without any liability on the part of the
Landlord to the Tenant or any other person or any reduction or adjustment in
rent payable hereunder. The Landlord and its agents shall be permitted
reasonable access to the Premises for the purpose of installing and servicing
systems within the Premises deemed necessary by the Landlord to provide the
services and utilities referred to in this section 8 to the Tenant and other
tenants in the Building.
The Tenant shall not install or use on the Premises any electrical
equipment, appliance or machine which requires electrical energy in excess of
six (6) watts per square foot without first obtaining the Landlord's consent,
which consent may be withheld in the Landlord's sole discretion. If the
Landlord does consent to the installation of any such equipment, appliance or
machine requiring electrical energy in excess of six (6) watts per square foot,
then the Tenant shall pay any and all additional costs incurred by the Landlord
as a result of the use of the same.
Landlord shall not be liable in damages or otherwise if any utilities
become unavailable from any public utility company, public authority or any
other person or entity
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(including Landlord) supplying or distributing such utility, or for any
interruption in any utility service caused by the making of any necessary
repairs or improvements, or by any cause beyond Landlord's reasonable control.
In the event the Premises are untenantable or the Tenant is prevented
from using and does not use the Premises or any portion thereof for six (6)
consecutive business days or ten (10) business days in any thirty (30) day
period ("Eligibility Period"), as a result of any failure of the Landlord to
provide services or access (except in the event of a casualty including, but not
limited to, fire, flood, heavy rain, hail, earthquake, explosion, war, riot, and
the like) to the Premises, then Rent shall be abated or reduced, as the case may
be, during the period which the Premises (or a portion thereof) are untenantable
as a result of the foregoing, in the proportion that the rentable area of the
untenantable portion of the Premises bears to the total rentable area of the
Premises. However, in the event that, as a result of the foregoing, a portion
of the Premises is untenantable or the Tenant is prevented from conducting its
business for a period of time exceeding the Eligibility Period, and the
remaining portion of the Premises is not sufficient to allow the Tenant to
effectively conduct its business herein, then during the period in which the
Tenant is so prevented from effectively conducting its business therein, Rent
for the entire Premises shall be abated; provided, however, if Tenant reoccupies
and conducts its business from any portion of the Premises during such period,
Rent allocable to such reoccupied portion, based on the proportion that the
rentable area of such reoccupied portion bears to the total rentable area of the
Premises, shall be payable by the Tenant from the date such business operations
commence. Notwithstanding any provision of this paragraph to the contrary, if
fifty percent (50%) or more of the Premises is untenantable for more than
seventy (70) consecutive business days after notice thereof by the Tenant to the
Landlord due to the Landlord's failure to provide services to the Premises and
within ten (10) days after the end of such 70 business-day period the Landlord
fails to provide the Tenant with a good faith, reasonable assurance that such
services will be restored within one (1) month after the date of the Tenant's
notice of such loss of services, the Tenant may terminate this Lease upon ten
(10) days' notice to the Landlord, given at any time within ninety (90) days
following the Tenant's notice of such loss of service. In the event that this
Lease is not canceled and the Landlord fails to restore the Premises to a
tenantable condition within such one-month period, the Tenant may cancel this
Lease upon thirty (30) days' advance written notice to the Landlord.
9. REPAIRS AND MAINTENANCE.
-----------------------
9.1. Landlord's Duty to Maintain Structure. The Landlord shall
-------------------------------------
maintain or cause to be maintained in good and safe operating condition,
consistent with comparable office buildings in Hunt Valley, Maryland, the
structure of the Building, the plumbing, electrical, mechanical and HVAC systems
of the Building, the Common Areas and the remainder of the Property, and shall
be responsible for structural repairs to the exterior walls, load bearing
elements, foundations, roofs, structural columns and structural floors with
respect thereto, and the Landlord shall make all required repairs thereto,
provided, however, that if the necessity for such repairs shall have arisen from
the willful misconduct of the Tenant, its agents, officers, employees, invitees
or contractors, or by any wrongful use of the Premises by the Tenant, then the
Landlord may collect the cost of such repairs, as Additional Rent, upon demand.
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9.2. Tenant's Duty to Maintain Premises.
----------------------------------
9.2.1. Except as provided in subsection 9.1, the Tenant shall
keep and maintain the Premises and all fixtures, equipment, light fixtures and
bulbs, doors (including, but not limited to, entrance doors, patio doors and
balcony doors), door hardware, carpeting, floor and wall tiles, window and door
glass, security systems, ventilation fans, window and door treatments
(including, but not limited to, blinds, shades, screens and curtains), plumbing
fixtures and drains, ceiling tiles and grids, counters, shelving, light
switches, base cove and moldings, locks, bathroom and kitchen equipment and
appliances (including, but not limited to, tissue dispensers, handrails,
mirrors, cabinets, disposals, dishwashers, sinks, faucets, drinking fountains
and water purifiers) located therein in a good, safe and clean condition
consistent with the operation of comparable office buildings in Hunt Valley,
Maryland, and in compliance with all legal requirements with respect thereto.
Except as provided in subsection 9.1, all injury, breakage and damage to the
Premises (and to any other part of the Building and/or the Property, if caused
by any willful misconduct of the Tenant, its agents, concessionaires, officers,
employees, licensees, invitees or contractors) shall be repaired or replaced by
the Tenant at its expense. Upon request by the Tenant, Landlord shall repair or
maintain any of the items listed in this subsection 9.2.1, and the Tenant shall
pay all costs and expenses in connection with the Landlord's repair or
maintenance services, including, but not limited to, wages, materials and
mileage reimbursement.
9.2.2. Subject to Landlord's obligation to provide the
services described in Section 8, the Tenant shall keep the Premises in a neat,
clean and orderly appearance to a standard of cleanliness reasonably
satisfactory to the Landlord. The Tenant shall use commercially reasonable
efforts to maintain the Premises free of all pests. The Tenant shall (a)
surrender the Premises at the expiration of the Term or at such other time as
the Tenant may vacate the Premises in as good condition as when received, except
for (i) ordinary wear and tear, (ii) damage by casualty (other than such damage
by casualty which is caused, by the willful misconduct of the Tenant, its
agents, officers, employees or contractors and which is not wholly covered by
the Landlord's hazard insurance policy), or (iii) acts of God, and (b) take care
not to overload the electrical wiring serving the Premises or located within the
Premises.
9.3. Tenant's Self-Help. If the Tenant provides notice to the
------------------
Landlord of an event or circumstance which requires the action of the Landlord
in accordance with the terms of this Lease, and the Landlord fails to commence
such action within a reasonable period of time, given the circumstances, after
the receipt of such notice, but in no event earlier than twenty (20) days after
receipt of such notice, then the Tenant may, after giving the Landlord a second
notice and ten (10) days to cure (except in an emergency in which no second
notice is necessary), proceed to take the required action, and if such action
was required under the terms of this Lease to be taken by the Landlord, the
Tenant shall be entitled to prompt reimbursement by the Landlord for the
Tenant's costs and expenses in taking such action. In the event the Tenant
takes such action, and such work will affect the Building's life safety system,
heating, ventilation and air conditioning systems or elevator systems, the
Tenant shall use only those contractors used by the Landlord in the Building for
work on such systems. The Tenant may proceed to claim a default by the Landlord
or, if elected by either the Landlord or the Tenant, the matter shall
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proceed to resolution by the selection of an arbitrator (in accordance with
subsection 17.6) to resolve the dispute.
10. IMPROVEMENTS.
------------
10.1. By Tenant. The Landlord will pay the Tenant for the cost of
---------
the Tenant Improvements up to an amount equal to the product obtained by
multiplying the number of square feet in the Premises by $12.50 per square foot
-----
(the "Allowance"). For example, if the Premises contained 98,761 square feet,
------
the Landlord will pay the Tenant the sum of $1,234,512.50. If the costs of
------------
these improvements exceed the Allowance, it is the Tenant's responsibility to
pay for those costs. The Landlord's Mortgagee shall have the right to inspect
the construction of the Tenant Improvements at such stages of completion as said
Mortgagee deems appropriate. Within thirty (30) days after the Tenant completes
the construction of Tenant Improvements, Tenant shall submit to the Landlord:
(a) a written representation that all bills for labor and materials with respect
to all work done in connection with the Tenant Improvements have been paid in
full; and (b) copies of paid receipts and, if requested, lien waivers for such
labor and materials, and thereafter, within five (5) days after receipt thereof
from Landlord's Mortgagee, the Landlord shall send to the Tenant a check made
payable to the order of the Tenant in the amount equal to the documented cost of
the Tenant Improvements up to the amount of the Allowance. Notwithstanding the
foregoing, failure of the Mortgagee to fund the Allowance shall not relieve
Landlord from its obligation to pay the Allowance to Tenant. The Tenant will
obtain Landlord's approval of such improvements as set forth in subsection 10.3
below. Notwithstanding anything to the contrary contained in this Lease, the
Landlord shall not be required to make any initial improvements to the Premises.
Notwithstanding anything to the contrary contained in this Lease, the Tenant
shall make a list of all doors, partitions, fixtures and other usable equipment
that it will not be using in the Premises, and shall provide such list to the
Landlord before the Rent Commencement Date (Fifth Floor). The Landlord shall
have the right, but not the obligation, to keep and remove any or all of such
items, which shall then be deemed to be the property of the Landlord. Any such
items that the Landlord elects not to possess shall belong to the Tenant, and
the Tenant shall be responsible for properly disposing of the same.
10.2. Lobby Renovations. Tenant shall have the right to renovate the
-----------------
Building lobby at its sole cost. Plans for the proposed lobby renovation shall
be submitted by the Tenant to the Landlord prior to construction for Landlord's
review and approval which shall not be unreasonably withheld. All such
renovations shall be conducted in a manner designed to minimize interference
with the activities of other tenants in the Building. Tenant shall be permitted
to provide a lobby attendant at its sole cost. Tenant shall have the right to
solicit voluntary proportionate contributions from the other tenants of the
Building.
10.3. Landlord Approval. The Tenant shall not make any alteration,
-----------------
improvement or addition (collectively "Alterations") to the Premises without
first (a) presenting to the Landlord plans and specifications therefor and
obtaining the Landlord's written consent thereto (which shall not, in the case
of (i) non-structural interior Alterations, or (ii) Alterations which would not
affect any electrical, mechanical, plumbing or other Building systems, be
unreasonably withheld so long as such Alterations will not violate applicable
law or the
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provisions of this Lease, or impair the value of the Premises, the Building or
the rest of the Property or be visible from the exterior of the Building) and
(b) obtaining any and all governmental permits or approvals for such
Alterations, which are required by applicable law; provided, that (i) any and
all contractors or workmen performing such Alterations must first be approved by
the Landlord, which approval shall not be unreasonably withheld or delayed, (ii)
all work is performed in a good and workmanlike manner in compliance with all
applicable codes, rules, regulations and ordinances, and (iii) if the Landlord,
upon approving the plans and specifications for the Alterations, advises the
Tenant in writing that the Alterations must be removed later, the Tenant shall
restore the Premises to its condition immediately before such Alterations were
made, by not later than the date on which the Tenant vacates the Premises or the
Termination Date, whichever is earlier. Notwithstanding the foregoing sentence
to the contrary, the Tenant shall not be required to obtain the consent of the
Landlord with respect to any Alterations whose costs will not exceed $15,000 in
the aggregate. The Tenant, at its own expense, shall repair promptly any damage
to the Building caused by bringing therein any property for its use, or by the
installation or removal of such property, regardless of fault or by whom such
damage is caused. As a condition for approving any Alterations on the Premises
by the Tenant, the Landlord shall have the right to require the Tenant, or the
Tenant's contractor, to furnish a bond in an amount equal to the estimated cost
of construction with a corporate surety approved by the Landlord for (i)
completion of the construction and (ii) indemnification of the Landlord and the
Tenant, as their interests may appear, against liens for labor and materials,
which bond shall be furnished before any work has begun or any materials are
delivered.
10.4. Acceptance of Possession. The Tenant shall for all purposes of
------------------------
this Lease be deemed to have accepted the Premises and the Building and to have
acknowledged them to be in the condition called for hereunder except with
respect to those defects of which the Tenant notifies the Landlord within sixty
(60) days after the Rent Commencement Date (Fifth Floor).
10.5. Fixtures. Any and all improvements, repairs, alterations and
--------
all other property attached to, used in connection with or otherwise installed
within the Premises by the Landlord or the Tenant shall become the Landlord's
property, without payment therefor by the Landlord, immediately on the
completion of their installation; provided that any machinery, equipment or
fixtures installed by the Tenant and used in the conduct of the Tenant's trade
or business (rather than to service the Premises, the Building or the Property
generally) and not part of the Building Service Equipment shall remain the
Tenant's property; but further provided that if any leasehold improvements made
by the Tenant replaced any part of the Premises, such leasehold improvements
that replaced any part of the Premises shall be and remain the Landlord's
property.
11. LANDLORD'S RIGHT OF ENTRY. The Landlord and its authorized
-------------------------
representatives shall be entitled to enter the Premises at any reasonable time
during the Tenant's usual business hours, after giving the Tenant at least
twenty-four (24) hours' oral or written notice thereof, (a) to inspect the
Premises, (b) to exhibit the Premises (i) to any existing or prospective
purchaser or Mortgagee thereof, or (ii) during the final six (6) months of the
Term, to any prospective tenant thereof, provided that in doing so the Landlord
and each such invitee observes all reasonable safety standards and procedures
which the Tenant may require, and (c) to
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make any repair thereto and/or to take any other action therein which the
Landlord is permitted to take by this Lease or applicable law (provided, that in
any situation in which, due to an emergency or otherwise, the Landlord
reasonably believes the physical condition of the Premises, the Building or any
part of the Property would be unreasonably jeopardized unless the Landlord were
to take such action immediately, the Landlord shall not be required to give such
notice to the Tenant and may enter the same at any time). Nothing in this
section shall be deemed to impose any duty on the Landlord to make any such
repair or take any such action, and the Landlord's performance thereof shall not
constitute a waiver of the Landlord's right hereunder to have the Tenant perform
such work. Except as otherwise specifically set forth in this Lease, the
Landlord shall not in any event be liable to the Tenant for any inconvenience,
annoyance, disturbance, loss of business or other damage sustained by the Tenant
by reason of the making of such repairs, the taking of such action or the
bringing of materials, supplies and equipment upon the Premises during the
course thereof, and the Tenant's obligations under this Lease shall not be
affected thereby.
12. DAMAGE OR DESTRUCTION.
---------------------
12.1. Landlord's Option to Terminate. If during the Term either
------------------------------
the Premises or any portion of the Building are substantially (meaning more than
33% of the floor area of either) damaged or destroyed by fire or other casualty,
the Landlord shall have the option (which it may exercise by giving written
notice thereof to the Tenant within ninety (90) days after the date on which
such damage or destruction occurs) to terminate this Lease as of the date
specified in such notice (which date shall not be earlier than the thirtieth
(30th) day after such notice is given). On such termination, the Tenant shall
pay to the Landlord all Base Rent, Additional Rent and other sums and charges
payable by the Tenant hereunder and accrued through such date (as justly
apportioned to the date of such termination). If the Landlord does not terminate
this Lease pursuant to this section, the Landlord shall notify Tenant in writing
of the reasonably anticipated date of restoration completion and shall restore
the Premises as soon thereafter as is reasonably possible to their condition on
the date of completion of the Landlord's work, taking into account any delay
experienced by the Landlord in recovering the proceeds of any insurance policy
payable on account of such damage or destruction and in obtaining any necessary
permits. Until the Premises are so repaired, the Base Rent (and each installment
thereof) and the Additional Rent shall abate in proportion to the floor area of
so much, if any, of the Premises as is rendered substantially unusable by the
Tenant by such damage or destruction.
12.2. No Termination of Lease. Except as is otherwise expressly
-----------------------
permitted by subsection 12.1, no total or partial (meaning less than 33% of the
floor area) damage to or destruction of any or all of the Premises shall entitle
either party hereto to surrender or terminate this Lease, or shall relieve the
Tenant from its liability hereunder to pay the Base Rent, any Additional Rent
and all other sums and charges which are otherwise payable by the Tenant
hereunder, or from any of its other obligations hereunder, and the Tenant hereby
waives any right now or hereafter conferred upon it by statute or otherwise, on
account of any such damage or destruction, to surrender this Lease, to quit or
surrender any or all of the Premises, or to have any suspension, diminution,
abatement or reduction of the Base Rent or any Additional Rent or other sum
payable by the Tenant hereunder.
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12.3. Tenant's Option to Terminate. If during the Term the Premises
----------------------------
or Building are damaged or destroyed and the same (a) cannot reasonably be
repaired within six (6) months after the date of casualty or (b) is not in fact
repaired within six (6) months after the date of the casualty, the Tenant shall
have the right to terminate this Lease by notifying the Landlord thereof within
thirty (30) days after Landlord's notice to Tenant of the date of anticipated
completion in case of clause (a) or within thirty (30) days after the expiration
of such six-month period in the case of clause (b), in which event this Lease
shall terminate at the end of the month after which such termination notice was
given and the Tenant shall pay all Rent through the date of termination.
13. CONDEMNATION.
------------
13.1. Termination of Lease. If any or all of the Premises and/or of
--------------------
that portion of the Property underlying the Premises is taken by the exercise of
any power of eminent domain or is conveyed to or at the direction of any
governmental entity under a threat of any such taking (each of which is herein
referred to as a "Condemnation"), this Lease shall terminate on the date on
which the title to so much of the Premises as is the subject of such
Condemnation vests in the condemning authority, unless the parties hereto
otherwise agree in writing. If all or any substantial portion of the Building or
the Property is taken or conveyed in a Condemnation, the Landlord shall be
entitled, by giving written notice thereof to the Tenant, to terminate this
Lease on the date on which the title to so much thereof as is the subject of
such Condemnation vests in the condemning authority. If this Lease is not
terminated pursuant to this subsection, the Landlord shall restore any of the
Premises damaged by such Condemnation substantially to its condition immediately
before such Condemnation, within six (6) months after the Landlord's receipt of
the proceeds of such Condemnation as is reasonably possible under the
circumstances.
13.2. Condemnation Proceeds. Regardless of whether this Lease is
---------------------
terminated under this section, the Tenant shall have no right in any such
Condemnation to make any claim on account thereof against the condemning
authority, except that the Tenant may make a separate claim for the Tenant's
moving expenses and the value of the Tenant's trade fixtures, provided that such
claim does not reduce the sums otherwise payable by the condemning authority to
the Landlord. Except as aforesaid, the Tenant hereby (a) waives all claims
which it may have against the Landlord or such condemning authority by virtue of
such Condemnation, and (b) assigns to the Landlord all such claims (including
but not limited to all claims for leasehold damages or diminution in value of
the Tenant's leasehold interest hereunder). Notwithstanding the foregoing to
the contrary, the Tenant may file a separate claim for moving expenses,
increased rental costs and the like.
13.3. Effect on Rent. If this Lease is terminated under this
--------------
section, any Base Rent, any Additional Rent and all other sums and charges
required to paid by the Tenant hereunder shall be apportioned and paid to the
date of such termination. If this Lease is not so terminated in the event of a
Condemnation, the Base Rent (and each installment thereof) and the Additional
Rent shall be abated from the date on which the title to so much, if any, of the
Premises as is the subject of such Condemnation vests in the condemning
authority, through the Termination Date, in proportion to the floor area of such
portion of the Premises as is the subject
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of such Condemnation. If this Lease is not so terminated in the event of a
Condemnation, but Tenant's use of the Premises is denied in whole or part during
a period of restoration, then until the Tenant is permitted full use of such
portion of the Premises the Base Rent (and each installment thereof) and the
Additional Rent shall abate in proportion to the floor area of so much, if any,
of the Premises as is rendered substantially unusable by the Tenant by such
restoration activity.
13.4. No Termination of Lease. Except as otherwise expressly
-----------------------
provided in this section, no total or partial Condemnation shall entitle either
party hereto to surrender or terminate this Lease, or shall relieve the Tenant
from its liability hereunder to pay in full the Base Rent, any Additional Rent
and all other sums and charges which are otherwise payable by the Tenant
hereunder, or from any of its other obligations hereunder.
14. ASSIGNMENT AND SUBLETTING.
-------------------------
14.1. Landlord's Consent Required. The Tenant shall not assign
---------------------------
this Lease, in whole or in part, nor sublet all or any part of the Premises, nor
license concessions or lease departments therein, nor otherwise permit any other
person to occupy or use any portion of the Premises (collectively, a
"Transfer"), without in each instance first obtaining the written consent of the
Landlord, which consent may be withheld in Landlord's sole discretion. This
prohibition includes any subletting or assignment which would otherwise occur by
operation of law, merger, consolidation, reorganization, transfer or other
change of the Tenant's corporate or proprietary structure, or an assignment or
subletting to or by a receiver or trustee in any federal or state bankruptcy,
insolvency or other similar proceedings. Consent by the Landlord to any
assignment, subletting, licensing or other transfer shall not (i) constitute a
waiver of the requirement for such consent to any subsequent assignment,
subletting, licensing or other Transfer, or (ii) relieve the Tenant from its
duties, responsibilities and obligations under this Lease. Notwithstanding
anything to the contrary in subsections 14.1 or 14.2, the Landlord shall not
unreasonably withhold its consent to a Transfer provided that (i) such assignee
or sublessee continues to operate the business in the Premises in accordance
with the permitted use and pursuant to all of the terms and provisions of this
Lease, (ii) the Tenant continues to remain liable for the performance of all of
the Tenant's obligations under this Lease, including the payment of Rent, and
(iii) the Tenant is not in default (beyond applicable cure periods, if any) of
any of the terms or provisions of this Lease on the effective date of such
assignment or subletting. Notwithstanding any provision of this Lease to the
contrary, the Tenant shall have the right to assign all or any portion of the
Premises to (i) an entity resulting from a merger or a consolidation with the
Tenant or any organization purchasing substantially all of the Tenant's assets,
(ii) any entity succeeding to substantially all of the business and assets of
the Tenant, or (iii) any corporation which controls, is controlled by, or is
under common control with, the Tenant ((i), (ii) and (iii) hereafter referred to
as "Affiliate Assignee(s)"), without first obtaining the Landlord's consent;
provided, however, the Tenant shall continue to remain liable for all of the
tenant's obligations under this Lease; and provided, further, the Tenant shall
give the Landlord prompt notice of any such assignment. No assignment to an
Affiliate Assignee shall relieve the Tenant from any obligation under this Lease
if Tenant is the surviving entity or otherwise continues to exist.
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14.2. Intentionally Deleted.
14.3. Acceptance of Rent from Transferee. The acceptance by the
----------------------------------
Landlord of the payment of Rent from any person following any act, assignment or
other Transfer prohibited by this section shall not constitute a consent to such
act, assignment or other Transfer, nor shall the same be deemed to be a waiver
of any right or remedy of the Landlord's hereunder.
14.4. Conditions of Consent.
---------------------
14.4.1. If the Tenant receives consent to a Transfer under
subsection 14.1 above, then, in addition to any other terms and conditions
imposed by the Landlord in the giving of such consent, the Tenant and the
transferee shall execute and deliver, on demand, an agreement prepared by the
Landlord providing that the transferee shall be directly bound to the Landlord
to perform all obligations of the Tenant hereunder; acknowledging and agreeing
that there shall be no subsequent Transfer of this Lease or of the Premises or
of any interest therein without the prior consent of the Landlord pursuant to
subsection 14.1 above; acknowledging that the Tenant as originally named herein
shall remain fully liable for all obligations of the tenant hereunder, including
the obligation to pay all Rent provided herein.
14.4.2. All reasonable costs incurred by the Landlord in
connection with any request for consent to a Transfer (which shall not exceed
$500), including costs of investigation and the fees of the Landlord's counsel,
shall be paid by the Tenant on demand as a further condition of any consent
which may be given.
14.5. Profits from Use or Transfer.
----------------------------
14.5.1. Neither the Tenant nor any other person having an
interest in the use, occupancy or other utilization of space in the Premises
shall enter into any lease, sublease, license, concession or other Transfer
which provides for rent or other payment for such use, occupancy or utilization
based in whole or in part on the net income or profits derived from the
Premises, and any such purported lease, sublease, license, concession or other
Transfer shall be absolutely void and ineffective as a conveyance or creation of
any right or interest in the possession, use, occupancy or utilization of any
part of the Premises.
14.5.2. The Tenant agrees that in the event of a sublet,
assignment, or license, the Tenant shall pay the Landlord, within ten (10) days
after receipt thereof, fifty percent (50%) of the excess of (i) all amounts
received by the Tenant or payable to the Tenant in connection with or arising
out of such Transfer, after the Tenant has deducted all of its reasonable
expenses related to such Transfer, over (ii) all amounts otherwise payable by
the Tenant to the Landlord pursuant to this Lease.
15. RULES AND REGULATIONS. The Landlord shall have the right to
---------------------
prescribe, at its sole discretion, reasonable rules and regulations (the "Rules
and Regulations") having uniform applicability to all tenants of the Property
(subject to their respective leases) and governing their use and enjoyment of
the Property; provided, that the Rules and Regulations
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shall not unreasonably interfere with the Tenant's use and enjoyment of the
Premises in accordance with this Lease for the purposes listed in subsection
6.1. The Rules and Regulations may govern, without limitation, the use of sound
apparatus, noise or vibrations emanating from machinery or equipment, obnoxious
fumes and/or odors, the parking of vehicles, lighting and storage and disposal
of trash and garbage. The Tenant shall adhere to the Rules and Regulations and
shall cause its agents, employees, invitees, visitors and guests to do so. A
copy of the Rules and Regulations in effect on the date hereof is attached
hereto as Exhibit C. The Landlord shall have the right to amend the Rules and
---------
Regulations from time to time, provided that any such amendments do not impose
any additional costs to the Tenant, increase any existing costs to the Tenant,
or interfere with the Tenant's use and enjoyment of the Premises. The Landlord
shall enforce the Rules and Regulations in a nondiscriminatory manner.
16. SUBORDINATION AND ATTORNMENT.
----------------------------
16.1. Subordination.
16.1.1. Unless a Mortgagee otherwise shall elect as
provided in subsection 16.2, the Tenant's rights under this Lease are and shall
remain subject and subordinate to the operation and effect of any mortgage, deed
of trust or other security instrument constituting a lien upon the Premises,
and/or the Property, whether the same shall be in existence on the date hereof
or created hereafter (any such lease, mortgage, deed of trust or other security
instrument being referred to herein as a "Mortgage," and the party or parties
having the benefit of the same, whether as beneficiary, trustee or noteholder,
being referred to hereinafter collectively as "Mortgagee"). The Tenant's
acknowledgment and agreement of subordination as provided for in this section is
self-operative and no further instrument of subordination shall be required;
however, the Tenant shall execute, within ten (10) business days after request
therefor, a document providing for such further assurance thereof and for such
other matters as may be requested from time to time by the Landlord or any
Mortgagee, which matters may include, without limitation, an additional ten (10)
day cure period for the Mortgagee after receiving written notice of the
Landlord's default hereunder, and a prohibition on further lease amendments
without the Mortgagee's prior written consent; provided that Tenant shall have
no obligation to enter into any agreement that otherwise changes any material
terms or conditions of this Lease.
16.1.2. The Landlord hereby directs the Tenant, upon (i)
the occurrence of any event of default by the Landlord, as mortgagor under any
Mortgage, (ii) the receipt by the Tenant of a notice of the occurrence of such
event of default under such Mortgage from the Landlord or such Mortgagee, and
(iii) a direction by the Mortgagee under such Mortgage to the Tenant to pay all
Rent thereafter to such Mortgagee, to make such payment to such Mortgagee, and
the Landlord agrees that in the event that the Tenant makes such payments to
such Mortgagee, as aforesaid, the Tenant shall not be liable to the Landlord for
the same. The Tenant shall be entitled to rely on such notice from the Mortgagee
without any obligation by the Tenant to investigate the accuracy of any
information contained in such notice.
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16.2. Mortgagee's Unilateral Subordination. If a Mortgagee shall
------------------------------------
so elect by notice to the Tenant or by the recording of a unilateral declaration
of subordination, this Lease and the Tenant's rights hereunder shall be superior
and prior in right to the Mortgage of which such Mortgagee has the benefit, with
the same force and effect as if this Lease had been executed, delivered and
recorded prior to the execution, delivery and recording of such Mortgage,
subject, nevertheless, to such conditions as may be set forth in any such notice
or declaration and the terms of this Lease.
16.3. Attornment. If any Person shall succeed to all or any part
----------
of the Landlord's interest in the Premises, whether by purchase, foreclosure,
deed in lieu of foreclosure, power of sale, termination of lease or otherwise,
and if such successor-in-interest requests in writing or requires, the Tenant
shall attorn to such successor-in-interest and shall execute within ten (10)
business days after receipt thereof an agreement in confirmation of such
attornment in a form as may be reasonably requested by such successor-in-
interest. Failure to respond within such (10) business day period shall be
deemed to be a confirmation by the Tenant of the facts and matters set forth
therein.
16.4. Non-Disturbance. The Landlord hereby agrees that the
---------------
Landlord shall use best efforts to provide the Tenant within forty-five (45)
days after the execution of this Lease with commercially reasonable non-
disturbance agreements from any ground lessors, mortgage holders or lien holders
of the Landlord now in existence in the form attached to this Lease as Exhibit
E. In addition, the Landlord will provide the Tenant with such agreements as
soon as reasonably possible from ground lessors, mortgage holders or lien
holders of the Landlord who later come into existence during the Term.
Subordination of this Lease to any Mortgage pursuant to subsection 16.1 is
conditioned upon Tenant's receipt of a non-disturbance agreement in
substantially the form attached to this Lease as Exhibit E. The Landlord agrees
that the non-disturbance agreements to be provided hereunder shall not
materially change or adversely affect the Tenant's rights under this Lease.
17. DEFAULTS AND REMEDIES.
---------------------
17.1. "Event of Default" Defined. Any one or more of the following
-------------------------
events shall constitute a default under the terms of this Lease ("Event of
Default"):
(a) the failure of the Tenant to pay any Rent or other sum
of money due hereunder to the Landlord or any other person within ten (10) days
after the same is due; provided, however, that the first two (2) such failures
to pay in any 12-month period shall not be an Event of Default until the
Landlord has given the Tenant ten (10) days' advance notice (which may be in the
form of a late notice) of the same and the Tenant fails to pay such Rent within
such 10-day period;
(b) the sale of the Tenant's interest in the Premises under
attachment, execution or similar legal process without the Landlord's prior
written approval;
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(c) the filing of a petition proposing the adjudication of
the Tenant as a bankrupt or insolvent, or the reorganization of the Tenant, or
an arrangement by the Tenant with its creditors, whether pursuant to the Federal
Bankruptcy Act or any similar federal or state proceeding, unless such petition
is filed by a party other than the Tenant and is withdrawn or dismissed within
sixty (60) days after the date of its filing;
(d) the admission in writing by the Tenant of its inability
to pay its debts when due;
(e) the appointment of a receiver or trustee for the
business or property of the Tenant, unless such appointment is vacated within
sixty (60) days of its entry;
(f) the making by the Tenant of an assignment for the
benefit of its creditors; or
(g) a default by the Tenant in the performance or
observance of any covenant or agreement of this Lease to be performed or
observed by the Tenant (other than as set forth in clauses (a) through (f)
above), which default is not cured within thirty (30) days after the giving of
written notice thereof by the Landlord, unless such default is of such nature
that it cannot be cured within such 30-day period, in which event an Event of
Default shall not be deemed to have occurred if the Tenant institutes a cure
within the 30-day period and thereafter diligently and continuously prosecutes
the curing of the same until completion; provided, however, that if the Tenant
defaults in the performance of any such covenant or agreement more than two (2)
times during the Term, then notwithstanding that such defaults have each been
cured by the Tenant, any further defaults shall be deemed an Event of Default
without the ability to cure.
17.2. Landlord's Remedies. Upon the occurrence of an Event of
-------------------
Default, the Landlord, without notice to the Tenant in any instance (except
where expressly provided for below), may do any one or more of the following:
(a) perform, on behalf and at the expense of the Tenant,
any obligation of the Tenant under this Lease which the Tenant has failed to
perform beyond any applicable grace or cure periods and of which the Landlord
shall have given the Tenant notice (except in an emergency situation in which no
notice is required), the cost of which performance by the Landlord, together
with interest thereon at the rate of fifteen percent (15%) per annum from the
date of such expenditure, shall be deemed Additional Rent and shall be payable
by the Tenant to the Landlord as otherwise set forth herein;
(b) elect to terminate this Lease and the tenancy created
hereby by giving notice of such election to the Tenant without any right on the
part of the Tenant to save the forfeiture by payment of any sum due or by other
performance of condition, term, agreement or covenant broken, or elect to
terminate the Tenant's possessory rights and all other rights of the Tenant
without terminating this Lease, and in either event, at any time thereafter
without notice or demand and without any liability whatsoever, lawfully re-enter
the Premises by summary
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proceedings or otherwise, and lawfully remove the Tenant and all other persons
and property from the Premises, and store such property in a public warehouse or
elsewhere at the cost and for the account of the Tenant without the Landlord
being deemed guilty of trespass or becoming liable for any loss or damage
occasioned thereby;
(c) accelerate the Rent and any other charges, whether or
not stated to be Additional Rent, for the entire balance of the Term, or any
part of such Rent, and any costs, whether chargeable to the Landlord or the
Tenant, as if by the terms of this Lease the balance of the Rent and other
charges and expenses were on that date payable in advance, in which event this
Lease shall not be terminated;
(d) cause an attorney for the Landlord to proceed in any
competent court for judgment in ejectment against the Tenant and all persons
claiming under the Tenant for the recovery by the Landlord of possession of the
Premises, and if for any reason after such action has been commenced it is
canceled or suspended and possession of the Premises remains in or is restored
to the Tenant, the Landlord shall have the right upon any subsequent default or
upon the expiration or termination of this Lease, or any renewal or extension
hereof, to bring one or more actions to recover possession of the Premises; and
(e) exercise any other legal and/or equitable right or
remedy which it may have at law or in equity, including rights of specific
performance and/or injunctive relief, where appropriate.
In any action for possession of the Premises or for monetary
damages, including Termination Damages, or for the recovery of Rent due for the
balance of the Term, the Landlord may cause to be filed in such action an
affidavit setting forth the facts necessary to authorize the entry of judgment.
If a true copy of this Lease (and of the truth of the copy, such affidavit shall
be sufficient proof) must be filed in such action, it shall not be necessary to
file the original, notwithstanding any law, rule of court, custom or practice to
the contrary.
17.3. Damages.
-------
(a) If this Lease is terminated by the Landlord pursuant to
subsection 17.2, the Tenant nevertheless shall remain liable for any Rent and
damages which may be due or sustained prior to such termination, as well as all
reasonable costs, fees and expenses, including, without limitation, sheriffs' or
other officers' commissions whether chargeable to the Landlord or the Tenant,
watchmen's wages, brokers' and attorneys' fees, and repair and renovation costs
incurred by the Landlord in pursuit of its remedies hereunder, and/or in
connection with any bankruptcy proceedings of the Tenant, and/or in connection
with renting the Premises to others from time to time (all such Rent, damages,
costs, fees and expenses being referred to herein as "Termination Damages"). At
the election of the Landlord, Termination Damages shall be an amount equal to
either:
(i) the Rent which, but for the termination of this
Lease, would have become due during the remainder of the Term, less the amount
or amounts of rent, if any, which the Landlord receives during such period from
others to whom the Premises may be
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rented (other than any additional rent received by the Landlord as a result of
any failure of such other person to perform any of its obligations to the
Landlord), in which case Termination Damages shall be computed and payable in
monthly installments, in advance, on the first business day of each calendar
month following the termination of this Lease and shall continue until the date
on which the Term would have expired but for such termination, and any action or
suit brought to collect any such Termination Damages for any month shall not in
any manner prejudice the right of the Landlord to collect any Termination
Damages for any subsequent months by similar proceeding; or
(ii) the present worth (as of the date of such
termination) of the Rent which, but for the termination of this Lease, would
have become due during the remainder of the Term, less the fair rental value of
the Premises, as determined by an independent real estate appraiser or broker
selected by the Landlord, in which case such Termination Damages shall be
payable to the Landlord in one lump sum on demand, and shall bear interest at
the rate of fifteen percent (15%) per annum from the date of such default.
"Present worth" shall be computed by discounting such amount to present worth at
a rate equal to one percentage point above the discount rate then in effect at
the Federal Reserve Bank of Richmond.
(b) Notwithstanding anything to the contrary set forth in
this subsection 17.3, in the event (i) the Landlord must initiate legal action
to enforce any one or more of the provisions of this Lease against the Tenant,
its successors or assigns, or (ii) the Landlord must consult with and/or engage
an attorney(s) in order (A) to enforce any one or more of the provisions of this
Lease against the Tenant, its successors or assigns, or (B) in connection with
any bankruptcy proceeding of the Tenant, whether or not such consultation and/or
engagement results in the initiation of any judicial action or termination of
this Lease, then and in any of such events, the Tenant, its successors and
assigns, undertakes and agrees to pay any and all reasonable costs incurred by
the Landlord in connection therewith, including, by way of illustration and not
of limitation, all reasonable attorneys' fees (inclusive of consultation fees,
research costs and correspondence fees), court costs (if awarded post-judgment)
and any similar professional fees or costs associated therewith.
17.4. Waiver of Jury Trial. Each party hereto hereby waives any
--------------------
right which it may otherwise have at law or in equity to a trial by jury in
connection with any suit or proceeding at law or in equity brought by the other
against the waiving party or which otherwise relates to this lease, as a result
of an event of default or otherwise.
17.5. Default by Landlord. In the event that the Landlord shall
-------------------
fail to observe or perform any of the express covenants or provisions of this
Lease to be observed or performed by the Landlord, and such failure shall
continue for a period of thirty (30) days after written notice thereof from the
Tenant to the Landlord, then the Landlord shall be in default of this Lease;
provided, however, if the nature of the Landlord's failure is such that more
than thirty (30) days are reasonably required for its cure, then the Landlord
shall not be deemed to be in default if the Landlord shall diligently commence
such cure within said thirty (30) day period and thereafter diligently prosecute
such cure to completion. Except as otherwise expressly stated to the contrary in
this Lease, in the event of a default of this Lease by the Landlord, the Tenant
shall
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have the right to commence an action at law or in equity to force the Landlord
to comply with its obligations hereunder. The Tenant shall not, however, have
the right except as otherwise provided in this Lease, to withhold or offset Rent
or to terminate this Lease.
17.6. Arbitration. All claims and disputes asserting a breach of
-----------
this Lease and matters in question concerning this Lease shall be decided by
arbitration, either before a neutral mediator agreeable to the parties or by
arbitration in accordance with the Construction Industry Arbitration Rules of
the American Arbitration Association then in effect unless the parties mutually
agree otherwise. This agreement to arbitrate shall be specifically enforceable
under the prevailing arbitration law by a federal or state court sitting in the
location of the arbitration. Notice of demand for arbitration shall be in
writing to the other party to this Lease. The demand for arbitration shall be
made within a reasonable time after written notice of the claim or dispute has
been given. The location of the arbitration proceedings shall be at a mutually
agreed upon location in Baltimore County, Maryland. The award rendered by the
arbitrator shall be final (and such award shall be the sole and exclusive remedy
of the parties in connection with the claim or dispute) and judgment may be
entered upon it in accordance with the applicable law in any court having
jurisdiction over the location of the arbitration. The arbitrator shall award
reasonable attorneys' fees and costs to the prevailing party. Notwithstanding
this agreement to arbitrate all claims and disputes hereunder, the Landlord may
initiate and prosecute court action for the limited purposes of seeking a
warrant of restitution (in connection with a failure to pay rent action or
otherwise), or ex parte, temporary or preliminary injunctive relief. All
-- -----
information relating to or disclosed by any party in connection with such
arbitration shall be treated by the parties, their representatives and the
arbitrator as proprietary business information, and shall not be disclosed to
anyone not involved with the arbitration without first obtaining the prior
approval of the party furnishing such information.
18. ESTOPPEL CERTIFICATE. The Tenant shall, without charge, at any time
--------------------
and from time to time, within fifteen (15) business days after receipt of
request therefor from the Landlord, execute, acknowledge and deliver to the
Landlord, and to such Mortgagee or other party as may be designated by the
Landlord, a written estoppel certificate in form and substance as may be
requested from time to time by the Landlord, the other party or any Mortgagee,
certifying to the other party, any Mortgagee, any purchaser of Landlord's
interest in all or any part of the Property, or any other person or entity
designated by the other party, as of the date of such estoppel certificate, the
following: (a) whether the Tenant is in possession of the Property; (b) whether
this Lease is in full force and effect; (c) whether there are any amendments to
this Lease, and if so, specifying such amendments; (d) whether to Tenant's
knowledge there are any then-existing setoffs or defenses against the
enforcement of any rights hereunder, and if so, specifying such matters in
detail; (e) the dates, if any, to which any rent or other sums due hereunder
have been paid in advance and the amount of any security deposit held by the
Landlord; (f) that the Tenant has no knowledge of any then-existing defaults of
the Landlord under this Lease, or if there are such defaults, specifying them in
detail; (g) that the Tenant has no knowledge of any event having occurred that
authorized the termination of this Lease by the Tenant, or if such event has
occurred, specifying it in detail; (h) the address to which notices to the
Tenant should be sent; and (i) any and all other matters reasonably requested by
the Landlord, any Mortgagee and/or any other person or entity designated by the
Landlord, so long
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as such certification does not impose any additional obligations on the Tenant
or decrease the Tenant's use and enjoyment of the Premises. Any such estoppel
certificate may be relied upon by the person or entity to whom it is directed or
by any other person or entity who could reasonably be expected to rely on it in
the normal course of business. The failure of the Tenant to execute, acknowledge
and deliver such a certificate in accordance with this section within twenty
(20) business days after a request therefor by the Landlord shall constitute an
acknowledgment by the Tenant, which may be relied on by any person or entity who
would be entitled to rely upon any such certificate, that such certificate as
submitted by the requesting party to the other party is true and correct, and
the requesting party is hereby authorized to so certify.
19. QUIET ENJOYMENT. The Landlord hereby warrants that, so long as all of
---------------
the Tenant's obligations hereunder are timely performed, the Tenant will have
during the Term quiet and peaceful possession of the Premises and enjoyment of
such rights as the Tenant may hold hereunder to use the Common Areas, except if
and to the extent that such possession and use are terminated pursuant to this
Lease. The Tenant hereby acknowledges that it has examined the Premises and the
Common Areas, and the present uses and nonuses thereof, if any, and that it
accepts each of them in its present condition or state (except as otherwise
provided in this Lease), without restriction, representation, covenant or
warranty, express or implied, in fact or at law, by the Landlord or any other
person, and without recourse to the Landlord, as to the title thereto, any
encumbrances thereon, any appurtenances thereto, the nature, condition or
usability thereof, or the uses to which any or all of the Premises may be put.
The Landlord represents that it has good and marketable title to the Property.
20. NOTICES. Except as may be otherwise provided in this Lease, any
-------
notice, demand, consent, approval, request or other communication or document to
be provided hereunder to the Landlord or the Tenant (a) shall be in writing, and
(b) shall be deemed to have been provided (i) two (2) days following the date
sent as certified mail in the United States mails, postage prepaid, return
receipt requested, (ii) on the business day following the date it is deposited
prior to the close of business with FedEx or another national courier service or
(iii) on the date of hand delivery (if such party's receipt thereof is
acknowledged in writing), in each case to the address of such party set forth
hereinbelow or to such other address as such party may designate from time to
time by notice to each other party hereto.
If to the Landlord, notice shall be sent to:
Sterling York, Inc.
c/o Jeffrey Perelman, Esquire
Suite 370, Dundee Road
Northbrook, Illinois 60062
with a copy to:
Robert P. Legg, Esquire
Neuberger, Quinn, Gielen, Rubin & Gibber, P.A.
One South Street, 27th Floor
Baltimore, Maryland 21202
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If to the Tenant, notice shall be sent to:
Creditrust Corporation
7000 Security Boulevard
Baltimore, Maryland 21244
Attn: J. Barry Dumser, Esq.
with a copy to:
Steven D. Shattuck, Esq.
Piper & Marbury L.L.P.
36 South Charles Street
Baltimore, Maryland 21201
21. GENERAL.
-------
21.1. Effectiveness. This Lease shall become effective on and only
-------------
on its execution and delivery by each party hereto.
21.2. Complete Understanding. This Lease and any exhibits hereto
----------------------
represents the complete understanding between the parties hereto as to the
subject matter hereof, and supersedes all prior negotiations, representations,
guaranties, warranties, promises, statements and agreements, either written or
oral, between the parties hereto as to the same.
21.3. Amendment. This Lease may be amended by and only by an
---------
instrument executed and delivered by each party hereto.
21.4. Waiver. No party hereto shall be deemed to have waived the
------
exercise of any right which it holds hereunder unless such waiver is made
expressly and in writing (and, without limiting the generality of the foregoing,
no delay or omission by any party hereto in exercising any such right shall be
deemed a waiver of its future exercise). No such waiver made in any instance
involving the exercise of any such right shall be deemed a waiver as to any
other such instance or any other such right. Without limiting the generality of
the foregoing provisions of this subsection, the Landlord's receipt or
acceptance of any Base Rent, Additional Rent or other sum from the Tenant or any
other person shall not be deemed a waiver of the Landlord's right to enforce any
of its rights hereunder on account of any default by the Tenant in performing
its obligations hereunder.
21.5. Applicable Law. This Lease shall be given effect and
--------------
construed by application of the laws of Maryland, and any action or proceeding
arising hereunder shall be brought in the courts of Maryland; provided, however,
that if any such action or proceeding arises under the Constitution, laws or
treaties of the United States of America, or if there is a diversity of
citizenship between the parties thereto, so that it is to be brought in a United
States District Court, it may be brought only in the United States District
Court for Maryland or any successor federal court having original jurisdiction.
21.6. Commissions. The parties hereto hereby acknowledge and agree
-----------
that, in connection with the leasing of the Premises hereunder, they have used
the services of Miller Corporate Real Estate Services. Any and all commissions
due such brokers shall be paid by the
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Landlord in accordance with the terms and conditions set forth in a separate
written agreement or agreements between the Landlord and Miller Corporate Real
Estate Services. Subject to the foregoing, each party hereto hereby represents
and warrants to the other that, in connection with such leasing, the party so
representing and warranting has not dealt with any other real estate broker,
agent or finder, and there is no other commission, charge or other compensation
due on account thereof. Each party hereto shall indemnify and hold harmless the
other against and from any inaccuracy in such party's representation.
21.7. Landlord's Liability. No Person holding the Landlord's
--------------------
interest hereunder (whether or not such Person is named as the "Landlord"
herein) shall have any liability hereunder after such Person ceases to hold such
interest, except for any such liability accruing while such Person holds such
interest. No Mortgagee not in possession of the Premises shall have any
liability hereunder that arises before the Mortgagee is in possession of the
Premises. Neither the Landlord nor any principal of the Landlord, whether
disclosed or undisclosed, shall have any personal liability under this Lease.
If the Landlord defaults in performing any of its obligations hereunder or
otherwise, the Tenant shall look solely to the Landlord's equity, interest and
rights in the Property to satisfy the Tenant's remedies on account thereof. In
the event the Tenant obtains a judgment against the Landlord, the Tenant may
offset the amount of such judgment against any and all Rent due hereunder.
21.8. Disclaimer of Partnership Status. Nothing in this Lease
--------------------------------
shall be deemed in any way to create between the parties hereto any relationship
of partnership, joint venture or association, and the parties hereto hereby
disclaim the existence of any such relationship.
21.9. Remedies Cumulative. No reference to any specific right or
-------------------
remedy shall preclude the Landlord from exercising any other right or from
having any other remedy or from maintaining any action to which it may otherwise
be entitled at law or in equity. No failure by the Landlord to insist upon the
strict performance of any agreement, term, covenant or condition hereof, or to
exercise any right or remedy consequent upon a breach thereof, and no acceptance
of full or partial Rent during the continuance of any such breach, shall
constitute a waiver of any such breach, agreement, term, covenant or condition.
No waiver by the Landlord of any breach by the Tenant under this Lease or of any
breach by any other tenant under any other lease of any portion of the Building
shall affect or alter this Lease in any way whatsoever.
21.10. Severability. No determination by any court, governmental or
------------
administrative body or agency or otherwise that any provision of this Lease or
any amendment hereof is invalid or unenforceable in any instance shall affect
the validity or enforceability of (a) any other provision hereof, or (b) such
provision in any circumstance not controlled by such determination. Each such
provision shall remain valid and enforceable to the fullest extent allowed by,
and shall be construed wherever possible as being consistent with, applicable
law.
21.11. Authority. If either party is a corporation, partnership,
---------
limited liability company or similar entity, the person executing this Lease on
behalf of the executing party represents and warrants that (a) it is duly
organized and validly existing and (b) this Lease (i) has been authorized by all
necessary parties, (ii) is validly executed by an authorized officer or agent
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of the executing party and (iii) is binding upon and enforceable against the
executing party in accordance with its terms.
21.12. Joint and Several Liability. If the Tenant shall be one or
---------------------------
more corporations or other entities, whether or not operating as a partnership
or joint venture, then each such corporation, entity, joint venturer or partner
shall be deemed to be both jointly and severally liable for the payment of the
entire Rent and other payments specified herein.
21.13. Recordation. Neither this Lease, nor any amendment to this
-----------
Lease, nor any memorandum, affidavit or other item with respect thereto shall be
recorded by the Tenant or by anyone acting through, under or on behalf of the
Tenant, and the recording thereof in violation of this provision shall be deemed
an Event of Default. If Landlord elects to record this Lease, Landlord shall do
so at Landlord's sole cost and expense, which cost may not be included in
Operating Costs.
21.14. Time of Essence. Time shall be of the essence with respect
---------------
to the performance of the parties' obligations under this Lease.
21.15. Interpretation. The Landlord and the Tenant hereby agree
--------------
that both parties were equally influential in negotiating this Lease, and each
had the opportunity to seek the advice of legal counsel prior to the execution
of this Lease. Therefore, the Landlord and the Tenant agree that no presumption
should arise construing this Lease more unfavorably against any one party.
21.16. Headings. The headings of the sections, subsections,
--------
paragraphs and subparagraphs hereof are provided herein for and only for
convenience of reference and shall not be considered in construing their
contents.
21.17. Construction. As used herein, all references made (a) in the
------------
neuter, masculine or feminine gender shall be deemed to have been made in all
such genders; (b) in the singular or plural number shall be deemed to have been
made, respectively, in the plural or singular number as well; and (c) to any
section, subsection, paragraph or subparagraph shall be deemed, unless otherwise
expressly indicated, to have been made to such section, subsection, paragraph or
subparagraph of this Lease.
21.18. Exhibits. Each writing or drawing referred to herein as
--------
being attached hereto as a schedule, an exhibit or otherwise designated herein
as a schedule or an exhibit hereto is hereby made a part hereof.
21.19. Y2K Compliance. Any and all computerized Building systems
--------------
that provide services to the Premises pursuant to Section 8 shall be able to
accurately process date data (including but not limited to, calculating,
comparing, and sequencing) from, into, and between the twentieth and twenty-
first centuries, including leap year calculations.
22. FIRST RIGHT TO LEASE. Provided that an Event of Default shall not then
be outstanding, during the first thirty-six (36) full calendar months after the
Rent Commencement
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Date (Fifth Floor) the Tenant shall have the First Right to Lease the Lucent
space located on the second floor of the Building and containing approximately
41,000 square feet of rentable area (the "Lucent Space"), if the Lucent Space
becomes available to lease during said 36 month period as a result of the actual
or anticipated termination or expiration of the Lucent lease. Landlord shall
provide written notice to Tenant of Landlord's interest in leasing the Lucent
Space. Tenant shall have five (5) business days from the date of its receipt of
the notice from the Landlord to inform the Landlord, in writing, of its intent
to lease the Lucent space. In the event the Tenant exercises its First Right to
Lease the Lucent Space, then Landlord shall deliver the Lucent Space to Tenant
in "AS-IS" condition within five (5) calendar days after the later to occur of:
(a) the date of Landlord's receipt of Tenant's notice of exercise; or (b) the
date Lucent vacates the Lucent Space ("Lucent Space Commencement Date"). Upon
delivery by Landlord to Tenant the Lucent Space shall be deemed to be part of
the Premises and to be leased to Tenant on all the same terms and conditions as
are set forth in this Lease, except that the Base Rent per square foot shall be
at the then current annual rate paid by Tenant, and Tenant, in accordance with
the terms of Section 10 herein, shall be given a $12.50 per square foot Tenant
Improvement Allowance, subject to reduction in accordance with the following
schedule: Tenant Improvement Allowance equals $12.50 per rentable square foot to
be reduced by $.15 per square foot per month beginning on the Rent Commencement
Date (Fifth Floor). For example: in the thirteenth (13/th/) month after the Rent
Commencement Date (Fifth Floor), the Tenant Improvement Allowance shall be
calculated as follows: $12.50 - ($.15 per month x 12 months = $1.80 reduction) =
$10.70 per square foot for Tenant Improvement Allowance for Lucent Space. The
rent commencement date for the Lucent Space shall be sixty (60) calendar days
after the Lucent Space Commencement Date. The Tenant's Proportionate Share shall
be recalculated as of the rent commencement date for the Lucent Space to take
into account the square footage of the Lucent Space.
23. Intentionally Deleted.
---------------------
24. RIGHT OF FIRST OFFER. During the period from Rent Commencement Date
--------------------
(Fifth Floor) through the expiration of the Term, provided that an Event of
Default shall not be outstanding, the Tenant shall have the right of first offer
with respect to any rentable space in the Building that is not covered by
Section 22 of this Lease and is not otherwise subject to the rights of renewal
or expansion of other tenants in the Building (the "Expansion Space"). The
Landlord shall give notice to the Tenant when the Landlord is ready to market
any portion of the Expansion Space (the "Notice"). The Notice shall set forth
the amount of space to be offered, the location of such space on the third floor
and the per-square-foot rental rate then being quoted; which terms shall be
comparable to those generally being offered in the market for substantially
similar office space in the Hunt Valley area. Within ten (10) business days
after Tenant's receipt of the Notice, the Tenant shall notify the Landlord in
writing whether it desires to lease the Expansion Space on the terms offered by
the Landlord. If the Tenant elects not to lease the Expansion Space, the
Landlord shall be free to lease such space to another tenant or third party. In
the event that the Tenant exercises its right of first offer for the Expansion
Space, then Landlord shall deliver the Expansion Space to Tenant in "AS-IS"
condition within five (5) calendar days after the date of Landlord's receipt of
Tenant's notice of exercise ("Expansion Space Commencement Date"). Upon delivery
by Landlord to Tenant the Expansion Space
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shall be deemed to be part of the Premises and to be leased to Tenant on all the
same terms and conditions as are set forth in this Lease, except: (I) unless
otherwise agreed by the Landlord and the Tenant, per-square-foot rental rate set
forth in the Notice shall be the per-square-foot rental rate for the Expansion
Space, (ii) The Tenant Improvement Allowance set forth in the Notice shall be
the per-square foot Tenant Improvement Allowance for the Expansion Space, (iii)
the term for the Expansion Space shall be the term set forth in the Notice, and
(iv) the Tenant's Proportionate Share shall be increased to account for the
amount of the Expansion Space leased by the Tenant as of the rent commencement
date for the Expansion Space. The rent commencement date for the Expansion Space
shall be forty-five (45) calendar days after the Expansion Space Commencement
Date. If the Tenant exercises its right of first offer with respect to the
Expansion Space, the parties promptly shall enter into an appropriate amendment
to this Lease.
25. PURCHASE OPTION. During the first twenty-four (24) months of the Term
---------------
the Tenant shall have the option to purchase ("Purchase Option") the Building,
together with the land on which it is situated and all appurtenances thereto,
for the sum of Twenty-two Million Dollars ($22,000,000). At any time prior to
the expiration of 548 days after the Effective Date, Tenant may exercise the
Inspection Period rights set forth in Exhibit F attached to this Lease. If the
Tenant desires to exercise the Purchase Option, then it will notify the Landlord
of such exercise in writing on or before the expiration of 548 days after the
Effective Date and shall within ten (10) business days thereafter enter into a
purchase agreement in substantially the form attached hereto as Exhibit D, which
shall provide for a closing date of not greater than the expiration of the
twenty-fourth (24th) month after the Effective Date. The Landlord's obligation
to consummate the sale shall be conditioned on the Tenant either: (i) assuming
the Landlord's then existing financing covering the purchased Property; or (ii)
paying the termination or prepayment fee (including yield maintenance) required
under Landlord's then existing financing covering the purchased Property; and in
the event neither alternative is performed by Tenant, then Tenant's Purchase
Option shall expire and be of no further force or effect. At Tenant's sole
election, the sale of the Property may be converted into a sale of all of the
member interests in the Landlord. In such event, the purchase agreement attached
hereto as Exhibit D shall be modified as appropriate to reflect a sale of member
interests, rather than a sale of a real property interest. If the Landlord is
unable to effectuate a sale of all member interests due to a refusal of one of
more of the members to sell their interest(s), then in such event the Landlord
shall pay one hundred percent (100%) of all transfer and recordation taxes
required in connection with a sale of the real property interest in the
Property. If the sale is converted to a member interest sale, then the parties
shall execute such additional documents at closing as may be necessary to assure
that all profits and losses associated with the Landlord's ownership of the
Property prior to closing shall be appropriately allocated or paid to Landlord
post-closing; including, without limitation all claims for past due rent,
regardless of whether reduced to judgment, which are outstanding as of the
closing date.
26. REFINANCING. During the 548 day option period set forth in Section
-----------
25, the Landlord shall have the right, at its sole option, to refinance
Landlord's current financing covering the Property, subject to the following
terms and conditions:
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26.1 In connection with any such refinancing (the "Proposed
Refinancing"), Landlord shall use reasonable efforts to obtain loan terms which
would be favorable to the Tenant if it elected to exercise the purchase option
set forth in Section 25 above, including an assumption fee of not more than one
percent (1%) of the principal balance and no prepayment premium or penalty or
yield maintenance requirement.
26.2 Notwithstanding the foregoing provisions, the Landlord shall
not consummate any Proposed Refinancing until: (first) Landlord has provided the
Tenant with three (3) separate written term sheets for the Proposed Refinancing
(the "Term Sheets"); and (second) Tenant has elected, at its sole election, one
of the following options, which election shall be made by Tenant in writing
("Tenant's Notice") within ten (10) business days after Tenant's receipt of the
Term Sheets:
26.2.1 Tenant's Notice may advise the Landlord not to
consummate the Proposed Refinancing on the terms set forth in any of the Term
Sheets. In such event, Tenant's Notice shall be deemed to constitute an exercise
of the Purchase Option on the terms set forth in Section 25 above, except as
follows: (a) Tenant shall have sixty (60) days after the delivery of the
Tenant's Notice within which to exercise the Inspection Rights set forth in
Exhibit F attached to this Lease; and (b) the closing of the sale of the
- ---------
Property, or members interests, as the case may be, shall occur within thirty
(30) days after the expiration of said 60 day period; or
26.2.2 Tenant's Notice may advise the Landlord that
Tenant shall act as Landlord's lender and shall fund the refinancing of the
Property on the terms set forth in one of the Term Sheets (the "Tenant
Refinancing"). In such event, the Tenant Refinancing shall be closed within
sixty (60) days after the delivery of the Tenant's Notice. If the Tenant fails
to fund the Tenant Refinancing within said 60 days, then the Tenant's Purchase
Option shall be null and void and of no further force or effect; or
26.2.3 Tenant's Notice may advise the Landlord that
Tenant does not elect either of the options set forth in Subsections 26.2.1 or
26.2.2. In such event, the Landlord shall thereafter have the right to
consummate the Proposed Refinancing on the terms set forth in one of the Term
Sheets. If the Landlord consummates the Proposed Refinancing, and if Tenant
thereafter exercises its Purchase Option set forth in Section 25, above, then,
in accordance with Section 25(i) and (ii), Tenant shall be solely responsible
for the payment of any assumption, termination or prepayment fee (including
yield maintenance) required by the loan documents executed by the Landlord in
connection with the consummation of the Proposed Refinancing.
27. LENDER APPROVAL. This Lease, regardless of whether it shall have
---------------
been executed by the Landlord, shall be subject to the review and approval of
the holder of the current Mortgage encumbering the Building. If such approval is
denied by said holder, then this Lease shall be null and void and of no further
force or effect. Notwithstanding anything in this Lease to the contrary, Tenant
shall have no obligation to commence any Tenant Improvements to the Premises
until the current Mortgagee has provided Tenant written notice that the
Mortgagee has approved the Lease. If the Mortgagee does not approve the Lease
within fourteen (14) days after the Effective Date, the date set forth in
Section 3.1(b) shall be extended day for day for each day after such 14-day
period until the Mortgagee's approval is received.
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IN WITNESS WHEREOF, each party hereto has executed and ensealed this Lease,
or caused it to be executed and ensealed on its behalf by its duly authorized
representatives, on the date first above written.
WITNESS or ATTEST: LANDLORD:
--------
STERLING YORK, LLC
___________________ By: ___________________(SEAL)
Name:___________________
Title:__________________
WITNESS or ATTEST: TENANT:
------
CREDITRUST CORPORATION
___________________ By:_____________________(SEAL)
Name: Joseph K. Rensin
Title:Chairman and CEO
This Lease must be executed for the Tenant, if a corporation, by the president
or vice president and be attested by the secretary or assistant secretary,
unless the bylaws or a resolution of the board of directors shall provide that
other officers are authorized to execute this Lease, in which event, a certified
copy of the bylaws or resolutions, as the case may be, must be furnished to the
Landlord. The Tenant's corporate seal must be affixed hereto.
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ACKNOWLEDGMENT OF LANDLORD
--------------------------
STATE OF MARYLAND )
) to wit:
COUNTY OF _________)
I HEREBY CERTIFY that on this _______ day of _________, 1999, before me,
the subscriber, a Notary Public of the State aforesaid, personally appeared
________________, who acknowledged himself to be the __________________ of
STERLING YORK, LLC, a Maryland corporation, and that he, as such
_________________, being authorized so to do, executed the foregoing instrument
for the purposes therein contained by signing the name of said corporation by
himself as such __________________.
IN WITNESS WHEREOF, I have hereunto set my hand and Notarial Seal.
___________________________________
Notary Public
My Commission Expires:
______________________
ACKNOWLEDGMENT OF TENANT
------------------------
STATE OF MARYLAND )
) to wit:
COUNTY OF _________)
I HEREBY CERTIFY that on this _______ day of ___________, 1999, before me,
the subscriber, a Notary Public of the State aforesaid, personally appeared
________________, who acknowledged himself to be the __________________ of
CREDITRUST CORPORATION, a Maryland corporation, and that he, as such
_________________, being authorized so to do, executed the foregoing instrument
for the purposes therein contained by signing the name of said corporation by
himself as such __________________.
IN WITNESS WHEREOF, I have hereunto set my hand and Notarial Seal.
___________________________________
Notary Public
My Commission Expires:
______________________
-48-
<PAGE>
EXHIBIT A
---------
Drawing showing the Property and the location of the Premises
<PAGE>
EXHIBIT B
---------
Schedule of Janitorial Services
<PAGE>
EXHIBIT C
---------
Current Rules and Regulations
-----------------------------
1. The sidewalks, passages and stairways shall not be obstructed by the
Tenant or used by the Tenant for any purpose other than ingress and egress from
and to the Tenant's premises. The Landlord shall in all cases retain the right
to control or prevent access thereto by any person whose presence, in the
Landlord's judgment, would be prejudicial to the safety, peace, character or
reputation of the Property or of any tenant of the Property.
2. The toilet rooms, water closets, sinks, faucets, plumbing and other
service apparatus of any kind shall not be used by the Tenant for any purpose
other than those for which they were installed, and no sweepings, rubbish, rags,
ashes, chemicals or other refuse or injurious substances shall be placed therein
or used in connection therewith by the Tenant, or left by the Tenant in the
lobbies, passages, elevators or stairways of the Building. The expense of any
breakage, stoppage or damage to such sinks, toilets and the like shall be borne
by the tenant who, or whose employees, contractors or invitees, caused it.
3. No skylight, window, door or transom of the Building shall be covered
or obstructed by the Tenant, and no window shade, blind, curtain, screen, storm
window, awning or other material shall be installed or placed on any window or
in any window space, except as approved in writing by the Landlord. If the
Landlord has installed or hereafter installs any shade, blind or curtain in the
Premises, the Tenant shall not remove it without first obtaining the Landlord's
written consent thereto.
4. No sign, lettering, insignia, advertisement, notice or other thing
shall be inscribed, painted, installed, erected or placed in any portion of the
Premises which may be seen from outside the Building, or on any window, window
space or other part of the exterior or interior of the Building, unless first
approved in writing by the Landlord. Names on suite entrances may be provided
by and only by the Landlord and at the Tenant's expense, using in each instance
lettering of a design and in a form consistent with the other lettering in the
Building, and first approved in writing by the Landlord. The Tenant shall not
erect any stand, booth or showcase or other article or matter in or upon the
Premises, the Building and/or the Property without first obtaining the
Landlord's written consent thereto.
5. Without first obtaining the advance written consent of the Landlord,
the Tenant shall not place any other or additional lock upon any door within the
Premises or elsewhere upon the Property, and the Tenant shall surrender all keys
for all such locks at the end of the Term. The Landlord shall provide the
Tenant with a sufficient number of keys to the Premises when the Tenant assumes
possession thereof.
<PAGE>
6. The Tenant shall not do or permit to be done anything which obstructs
or interferes with the rights of any other tenant of the Property. No bird,
fish or animal shall be brought into or kept in or about the Premises, the
Building and/or the Property.
7. If the Tenant desires to install signaling, telegraphic, telephonic,
protective alarm or other wires, apparatus or devices within the Premises, the
Landlord and the Tenant shall agree on where and how they are to be installed
and, except as so agreed upon, no installation, boring or cutting shall be
permitted. The Landlord shall have the right (a) to prevent or interrupt the
transmission of excessive, dangerous or annoying current of electricity or
otherwise into or through the Premises, the Building and/or the Property, (b) to
require compliance with such reasonable rules as the Landlord may establish
relating thereto, and (c) in the event of noncompliance with such requirements
or rules, do whatever it considers necessary to remove the danger, annoyance or
electrical interference with apparatus in any part of the Building and/or the
Property. Each wire installed by the Tenant must be clearly tagged at each
distributing board and junction box and elsewhere where required by the
Landlord, with the number of the office to which such wire leads and the purpose
for which it is used, together with the name of the Tenant or other concern, if
any, operating or using it.
8. A directory may be provided by the Landlord on the ground floor of the
Building or elsewhere within the Property, on which the Tenant's name may be
placed.
9. The Landlord shall in no event be responsible for admitting or
excluding any person from the Premises. In case of invasion, hostile attack,
insurrection, mob violence, riot, public excitement or other commotion,
explosion, fire or any casualty, the Landlord shall have the right to bar or
limit access to the Property to protect the safety of occupants of the Property,
or any property within the Property.
10. The use of any area within the Property as sleeping quarters is
strictly prohibited at all times.
11. The Tenant shall keep the windows and doors of the Premises (including
those opening on corridors and all doors between rooms entitled to receive
heating or air conditioning service and rooms not entitled to receive such
service) closed while the heating or air-conditioning system is operating, in
order to minimize the energy used by, and to conserve the effectiveness of, such
systems. The Tenant shall comply with all reasonable rules and regulations from
time to time promulgated by the Landlord with respect to such systems or their
use.
12. The Landlord shall have the right to prescribe the weight and position
of inventory and of other heavy equipment or fixtures, which shall, if
considered necessary by the Landlord, stand on plank strips to distribute their
weight. Any and all damage or injury to the Property arising out of the Tenant's
equipment being on the Property shall be repaired by the Tenant at its expense.
The Tenant shall not install or operate any machinery whose installation or
operation may affect the structure of the Building without first obtaining the
Landlord's written consent thereto, and the Tenant shall not install any other
equipment of any kind or nature whatsoever which may necessitate any change,
replacement or addition to, or in the use
-52-
<PAGE>
of, the water system, the heating system, the plumbing system, the air-
conditioning system or the electrical system of the Premises, the Building or
the Property without first obtaining the Landlord's written consent thereto.
Business machines and mechanical equipment belonging to the Tenant which cause
noise or vibration that may be transmitted to the structure of the Building, any
other buildings on the Property, or any space therein to such a degree as to be
objectionable to the Landlord or to any tenant, shall be installed and
maintained by the Tenant, at its expense, on vibration eliminators or other
devices sufficient to eliminate such noise and vibration. The Tenant shall
remove promptly from any sidewalks and other areas on the Property any of the
Tenant's furniture, equipment, inventory or other material delivered or
deposited there.
13. The Tenant shall not place or permit its agents, employees or invitees
to place any thing or material on the roof or in the gutters and downspouts of
the Building or cut, drive nails into or otherwise penetrate the roof, without
first obtaining the Landlord's written consent thereto. The Tenant shall be
responsible for any damage to the roof caused by its employees or contractors.
The Tenant shall indemnify the Landlord and hold the Landlord harmless against
expenses incurred to correct any damage to the roof resulting from the Tenant's
violation of this rule, as well as any consequential damages to the Landlord or
any other tenant of the Property. The Landlord shall repair damage to the roof
caused by the Tenant's acts, omissions or negligence and the Tenant shall
reimburse the Landlord for all expenses incurred in making such repairs. The
Landlord or its agents may enter the Premises at all reasonable hours to make
such roof repairs. If the Landlord makes any expenditure or incurs any
obligation for the payment of money in connection therewith, including but not
limited to attorneys' fees in instituting, prosecuting or defending any action
or proceeding, such sums paid or obligations incurred, with interest at the
Prime Rate plus two percent (2%) per annum, and costs, shall be deemed to be
Additional Rent and shall be paid by the Tenant to the Landlord within five (5)
days after rendition of any bill or statement to the Tenant therefor. The
Tenant shall not place mechanical or other equipment on the roof without the
Landlord's prior written consent, which shall be conditioned in part upon the
Landlord's approval of the Tenant's plans and specifications for such
installations. The costs of any roof improvements made pursuant hereto shall be
borne by the Tenant.
14. The Landlord reserves the right to institute energy management
procedures when necessary.
15. intentionally deleted.
16. The Landlord shall have the right to rescind, suspend or modify these
Rules and Regulations and to promulgate such other rules or regulations as, in
the Landlord's reasonable judgment, are from time to time needed for the safety,
care, maintenance, operation and cleanliness of the Building or the Property, or
for the preservation of good order therein. The Rules and Regulations as
revised shall not diminish the Tenant's use or enjoyment of the Premises. Upon
the Tenant's having been given notice of the taking of any such any action, the
Rules and Regulations as so rescinded, suspended, modified or promulgated shall
have the same force and effect as if in effect at the time at which the
Tenant's lease was entered into (except
-53-
<PAGE>
that nothing in the Rules and Regulations shall be deemed in any way to alter or
impair any provision of such lease).
17. Nothing in these Rules and Regulations shall give any tenant any right
or claim against the Landlord or any other person if the Landlord does not
enforce any of them against any other tenant or person (whether or not the
Landlord has the right to enforce them against such tenant or person), and no
such nonenforcement with respect to any tenant shall constitute a waiver of the
right to enforce them as to the Tenant or any other tenant or person.
18. In any instance in which the Landlord's prior consent or approval is
required, the Landlord shall have the right to withhold or condition such
consent or approval in its reasonable discretion.
19. No Tenant shall make, or permit to be made, any unseemly or disturbing
noises (whether by the use of any musical instruments, radio, television or
other audio device) or allow any unsavory odors to emanate from its space, nor
shall any tenant annoy, disturb or interfere with other tenants or occupants of
the Building or neighboring buildings.
20. Each tenant, before closing and leaving its premises at any time,
shall see that all entrance doors are locked and that all electrical appliances
are turned off. Suite and entrance doors shall remain closed at all times.
21. Canvassing, soliciting, and peddling in the Building are prohibited.
22. There shall not be used in the Building by any Tenant or their agents
or contractors, in the delivery or receipt of merchandise, freight or other
matter, any hand trucks or other means of conveyance, except those equipped with
rubber tires, rubber side guards, and such other safeguards as Landlord may
require.
23. No vending machines shall be permitted to be placed or installed in
any part of the Building or Premises by any Tenant without prior written consent
of Landlord. Landlord reserves the right to place or install vending machines
in any of the common areas of the Building.
24. No plumbing or electrical fixtures shall be installed by any Tenant
without the prior written consent of the Landlord.
25. Bicycles, motorcycles or any other type of vehicle shall not be
brought into the lobby or elevators of the Building or into the premises of any
Tenant.
26. Tenant will refer all contractors, contractor's representatives and
installation technicians, rendering any services on or to the Premises for
Tenant, to Landlord for Landlord's approval and supervision before performance
of any service. This provision shall apply to all work performed in the
Building, including installation of telephones, telegraph equipment, electrical
devices and attachments and any installation of any nature affecting floors,
walls, woodwork, trim, windows, ceilings, equipment or any other physical
portion of the Building.
-54-
<PAGE>
Such approval, if given, shall in no way make Landlord a party to any contract
between Tenant and any such contractor, and Landlord shall have no liability
therefor.
27. Violations of these Rules and Regulations, or any amendments thereof
or additions thereto, may, at the Landlord's option upon advance written notice
to the Tenant, constitute a default of this Lease.
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<PAGE>
EXHIBIT D
FORM OF PURCHASE AGREEMENT
REAL ESTATE PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (the "Agreement") is made as of the __th day
of __________, _____ (the "Effective Date"), by and between STERLING YORK, LLC
(hereinafter called the "Seller"); and CREDITRUST CORPORATION (the "Buyer").
1. SALE AGREEMENT; PROPERTY. The Seller agrees to sell to the Buyer and the
------------------------
Buyer agrees to purchase from the Seller, on the terms hereinafter stated, the
property commonly known as the AAI Building 100, located at 10150 York Road in
Baltimore County, Maryland (the "Property"), more particularly described as
follows:
1.1 Real Property. All of the real property described on Exhibit "A"
------------- -----------
attached hereto as a part hereof, together with the buildings,
improvements and fixtures located thereon, and all and singular the
rights and appurtenances pertaining thereto, including any right,
title and interest of Seller in and to any adjacent streets, alleys,
rights-of-way and easements.
1.2 Tangible Personal Property. All tangible personal property located
----------------------------
on the aforesaid real property and used in the ownership, operation or
maintenance thereof.
1.3 Intangible Personal Property. All intangible personal property used
------------------------------
in connection with the ownership, operation or maintenance of the
aforesaid real property, all contract rights, insurance policies,
tenant deposits, documents of title and business records.
2. PURCHASE PRICE. The purchase price to be paid by Buyer to Seller for
--------------
the Property shall be Twenty-Two Million and No/100ths Dollars ($22,000,000).
At closing the Buyer will pay to the Seller the purchase price, subject to
adjustment as hereinafter provided, in immediately available U.S. funds.
3. TITLE. Within ten (10) days after the date of last execution hereof, Buyer
-----
shall obtain a preliminary binder for an ALTA Form B Owner's Title Insurance
Policy; which shall show Seller to be owner of fee simple marketable title to
the real property, subject only to the matters set forth on Exhibit "B" attached
-----------
hereto as a part hereof. The Buyer shall have ten (10) days from receipt of
said binder to provide the Seller with a letter setting forth all of Buyer's
objections to Seller's title to the real property and the Seller shall have ten
(10) days after receipt
<PAGE>
of such letter to correct the defects in title objected to by Buyer; provided
that monetary encumbrances may be removed by the Seller on the Closing Date. In
the event title cannot be cured within such period, Buyer shall have the option
to either waive the uncured title objections; or terminate this Agreement.
4. TIME AND PLACE OF CLOSING. The closing will occur not later than
-------------------------
_________________ [the date that is 24 months after the effective date of the
Lease between Seller, as landlord, and Buyer, as tenant, for approximately
98,761 square feet of the Property] (the "Closing Date"); or such earlier date
as may be specified by Buyer in its sole discretion; after satisfaction by
Seller of Buyer's title objections. The closing shall take place at such place
as shall be agreed to in writing by Buyer and Seller.
5. SELLER'S DELIVERIES AT CLOSING. At Closing Seller shall deliver to Buyer
------------------------------
the following:
5.1 Deed. A duly-executed and acknowledged Deed in the form attached
----
hereto as Exhibit "C" conveying to the Buyer marketable fee simple
----------
title to all of the real property portion of the Property free of all
liens and encumbrances and defects in title except those approved by
Buyer pursuant to paragraph 3 above.
5.2 Inventory. An inventory of the tangible personal property portion of
---------
the Property certified by the Seller to be true and correct as of the
date of Closing.
5.3 Bill of Sale. A Bill of Sale in the form attached hereto as Exhibit
------------ -------
"D" conveying to the Buyer the tangible and intangible personal
---
property portion of the Property, duly executed by Seller.
5.4 Assignment/Assumption. An Assignment and Assumption of Leases in the
---------------------
form attached hereto as Exhibit "E" duly executed by Seller, and
-----------
acknowledged.
5.5 Tenant Estoppels. If requested by Buyer, an estoppel letter from
-----------------
each tenant of the Property in the form attached hereto as Exhibit
-------
"F".
---
5.6 Tenant Security Deposits. All security deposits made by tenants of
------------------------
the Property which have not been applied by Seller.
5.7 Evidence of Authority. Evidence of the Seller's authority to execute
---------------------
this Agreement and consummate the transactions contemplated hereby.
5.8 Leases and Contracts. The originals of the leases and other contracts
--------------------
affecting the Property.
5.9 Certificate. Certificate duly executed by the Seller attaching
-----------
thereto a rent roll, list of service and other contracts and the
inventory of tangible personal property and stating that the
attachments are true and correct.
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<PAGE>
5.10 Lien Affidavit. Affidavit executed by Seller in form acceptable to
--------------
the title company to the effect that the Property is free from claims
for mechanics' materialmen's and laborers' liens.
5.11 Guaranties and Warranties. Originals of all guaranties and
-------------------------
warranties from builders, subcontractors, manufacturers, and the like
relating to the construction and equipping of the building and other
improvements.
5.12 Non-Foreign Affidavit. An affidavit from Seller confirming that the
---------------------
Seller is not a "foreign person" as defined in Section 1445 of the
IRC and Section 1.1445-2T(b)(20) of the Regulations, as amended.
6. BUYER'S DELIVERIES AT CLOSING. At closing, Buyer shall deliver to Seller
-----------------------------
the following:
7.1 Cash. The cash portion of the purchase price.
----
7.2 Assignment/Assumption. A copy of the Assignment and Assumption of
---------------------
Leases in the form of Exhibit "E", duly executed by Buyer and
-----------
acknowledged.
7. CLOSING COSTS. The closing costs of this transaction shall be allocated as
-------------
follows:
BUYER SELLER
----- ------
Seller's attorney's fees X
X Buyer's attorney's fees
X Title
X Survey
X Owner's title insurance premium
X Transfer and Recordation Taxes
X Recording fees
X Sales tax
X Closing fee, if any (split 50/50) X
8. SELLER'S WARRANTIES. The Property is being bought by the Buyer in its
-------------------
present "AS IS" physical and economic condition after examination by Buyer.
Buyer is relying solely
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<PAGE>
upon such examination with reference to the condition, character, size and
economics of the Property. Buyer hereby represents that it is not relying upon
any warranties, promises, guaranties or representations made by Seller or anyone
acting or claiming to act on behalf of Seller in purchasing the Property.
9. PRORATIONS AND ADJUSTMENTS. The following prorations and adjustments will
--------------------------
be made as of the Closing Date, with the Seller to have the last day:
9.1 Rents. Only rents actually collected on or before the Closing Date
-----
shall be prorated at closing. Delinquent rents shall remain the
property of Seller. Buyer shall have no obligation to enforce
collection of such delinquent rents, but shall be obligated to pay
such rents over to Seller if and when collected. Buyer shall be
obligated to attribute the first rents received from any tenant less
than thirty (30) days delinquent as of the Closing Date to the
delinquent rental account; as to other delinquent tenants, Buyer shall
be obligated to attribute said rents to the delinquent account only if
the rent is paid in full, including delinquencies, or if the rent is
so designated by the tenant.
9.2 Accounts Payable. All sums due for accounts payable which were owing
----------------
or incurred on behalf of the Property prior to the Closing Date will
be paid by the Seller and the Seller agrees to indemnify, defend and
hold the Buyer harmless with respect thereto. The Buyer will furnish
to the Seller any bills for such period received after the Closing
Date for payment and the Buyer will have no further obligation with
respect thereto. All accounts payable incurred by the Buyer on or
after the Closing Date will be paid by the Buyer and the Buyer agrees
to indemnify, defend and hold the Seller harmless with respect
thereto.
9.3 Employment Contracts. Seller represents that the Buyer shall have the
--------------------
right to terminate any management and other employment contracts
affecting the Property as of the Closing Date and Seller shall pay all
wages, accrued vacation and fringe benefits and other sums owing to
any terminated employee or managing agent and shall indemnify, defend
and hold the Buyer harmless with respect thereto.
9.4. Utilities. All utilities shall be prorated unless the Seller elects
---------
to arrange for meters to be read on the Closing Date. Any and all
utility deposits made by Seller shall remain the property of Seller
and Buyer shall acquire no rights with respect thereto. Prior to the
Closing Date, Buyer shall make its own arrangements with any and all
utility companies for continuation of service to the Property
including the making of any deposits required by such utility
companies.
9.5 Property Taxes. All real and personal property taxes, ad valorum
--------------
taxes and special assessments, if any, whether payable in installments
or not, will be prorated based on the assessed valuation and tax rate
available on the Closing Date.
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<PAGE>
10. CASUALTY LOSS. Risk of loss by fire or other casualty shall be on Seller
-------------
until consummation of the Sale on the Closing Date. Until such Closing, Seller
shall keep the Property insured against loss due to fire, lightning and extended
coverage perils. In the event of damage to or destruction of all or any part of
the Property prior to the Closing Date, it is agreed as follows:
10.1 Damage. If the amount of the casualty loss is not more than One
------
Hundred Thousand Dollars ($100,000.00), this Agreement will continue.
All insurance proceeds collectible by reason of such damage will be
absolutely payable to Buyer and the purchase price will be reduced by
the amount of Seller's insurance policy deductible.
10.2 Destruction. If the amount of the casualty loss is greater than the
-----------
amount set forth in the preceding subparagraph and cannot be repaired
or restored by the Closing Date, Buyer may elect to: (a) terminate
this Agreement, in which event the parties hereto shall be relieved
of all obligations hereunder; or (b) continue this Agreement in force
and close on the Closing Date, in which event Seller shall transfer
to Buyer on the Closing Date all right, title and interest in and to
the insurance proceeds due as a result of the damage or destruction
and the purchase price will be reduced by the amount of Seller's
insurance policy deductible. Buyer's election of the foregoing
alternatives shall be made within ten (10) days after receipt of
notice of such damage or destruction by written notice of such
election to Seller.
11. COVENANT TO OPERATE. Pending closing the Seller agrees to maintain,
-------------------
repair, manage and operate the Property in a businesslike manner in accordance
with quality management practices and agrees that the Seller will not allow any
waste or dissipation of the Property to occur or remove any of the Property.
Specifically, Seller will not: (i) enter into any lease or modify any existing
lease or grant any rental concession to future or existing tenants without
Buyer's consent; or (ii) enter into any service or maintenance contracts which
will obligate Buyer.
12. EMINENT DOMAIN. In the event any eminent domain proceedings shall be
--------------
commenced with respect to the Property prior to the Closing Date or in the event
the Buyer shall be advised by any agency having eminent domain powers that a
condemnation of all or any portion of the Property is contemplated, the Buyer,
at its option, may: (a) terminate this Agreement, in which event Buyer and the
parties shall be relieved of all obligations hereunder; or (ii) continue this
Agreement in force, in which event any condemnation proceeds received by the
Seller prior to the Closing Date shall be paid over to the Buyer on the Closing
Date.
13. POSSESSION. Subject to the rights of tenants, possession of the Property
----------
will be delivered to the Buyer on the Closing Date.
14. BROKERAGE. Buyer and Seller each hereby agree to indemnify, defend and
---------
hold the other harmless of and from any claim, loss or damage arising out of
any compensation due or
-60-
<PAGE>
alleged to be due to a broker claiming employment from the other party. Seller
agrees to indemnify, defend and hold Buyer harmless of and from any claim, loss
or damage arising out of any compensation due or alleged to be due to any party
as a leasing or management fee.
15. DEFAULT AND REMEDIES. In the event of default in the performance or
--------------------
observance of any of the covenants of this Agreement, it is agreed as follows:
15.1 Buyer's Default - Seller's Remedy. In the event the Buyer shall fail
---------------------------------
to perform the Buyer's obligations hereunder, except as excused by
the Seller's default, the Seller shall make written demand on the
Buyer for such performance and, if the Buyer fails to comply with
such written demand within ten (10) days after receipt thereof, the
Seller shall have the option to waive such default or to terminate
this Agreement by written notice to Buyer, and on such termination
the Seller shall be entitled to receive $5,000.00, plus any costs
payable to Seller's lender as a result of its activities in
connection with the sale, as liquidated damages and not as a penalty;
it being specifically agreed by the parties that the actual damages
to the Seller as a result of the Buyer's failure to perform under
this Agreement are difficult or impossible to ascertain. On such
termination and receipt of said funds by Seller, the parties shall be
discharged from any further obligations and liabilities hereunder.
15.2 Seller's Default - Buyer's Remedy. In the event that the Seller
---------------------------------
shall fail to perform the Seller's obligations hereunder, except as
excused by the Buyer's default, the Buyer shall make written demand
upon the Seller for performance and if the Seller fails to comply
with such written demand within ten (10) days after receipt thereof,
the Buyer shall have the option to: (a) seek specific performance,
(b) waive such default; or (c) terminate this Agreement.
16. NOTICE. All notices herein required or permitted shall be in writing and
------
any notice or other communication required or permitted hereunder shall be given
by personal delivery or overnight courier or be sent by registered or certified
mail, postage prepaid1 addressed as follows:
TO THE SELLER: Sterling York, Inc.
c/o Jeffrey Perelman, Esquire
Suite 370, Dundee Road
Northbrook, IL 60062
TO THE BUYER:
Notice shall be deemed given on the earlier of (i) actual receipt or (ii) three
(3) business days after mailing.
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<PAGE>
17. MISCELLANEOUS. It is further agreed as follows:
-------------
17.1 Time. Time is of the essence of this Agreement.
----
17.2 Entire Agreement. This is the entire contract between the parties
----------------
and neither party shall be bound by any verbal representation
altering the terms of this contract.
17.3 Warranties. The provisions of paragraph above limiting the remedies
----------
of the Buyer and the Seller shall not apply to any action brought by
either party after closing to enforce any indemnification described
in this Agreement.
17.4 Amendment and Waiver. This Agreement may be amended at any time, but
--------------------
only by an instrument in writing executed by Buyer and Seller. Either
party hereto may waive any requirement to be performed by the other,
provided that such waiver shall be in writing and executed by the
party waiving the requirement.
17.5 Choice of Law. It is the intention of the Buyer and the Seller that
-------------
the laws of the State of Maryland shall govern the validity of this
Agreement, the construction of its terms and the interpretation of
the rights and duties of the parties.
17.6 Assignment. The rights of the Buyer under this Agreement can be
----------
assigned in whole or in part without the prior written consent of the
Seller.
17.7 Partial Invalidity. If any provisions of this Agreement shall be
------------------
held to be void or unenforceable for any reason, said provision shall
be deemed modified so as to constitute a provision conforming as
nearly as possible to said void or unenforceable provision while
still remaining valid and enforceable, and the remaining terms or
provisions hereof shall not be affected thereby.
17.8 Litigation Expense. In the event either party hereto commences
------------------
litigation against the other to enforce its rights hereunder, the
prevailing party in such litigation shall be entitled to recover from
the other its reasonable attorney's fees and expenses incidental to
such litigation.
17.9 Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of the undersigned and their respective successors and
assigns.
17.10 Authority. Each party for itself, its heirs, personal
---------
representatives, successors and assigns hereby represents and
warrants that it has the full capacity and authority to enter into,
execute, deliver and perform this Agreement, and that such execution,
delivery and performance does not violate any contractual or other
obligation by which it is bound.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
ATTEST: "SELLER"
STERLING YORK, LLC
By:________________________ By: ___________________________(SEAL)
_____________________, Manager
WITNESS: "BUYER"
CREDITRUST CORPORATION
By:________________________ By: ___________________________(SEAL)
Name: _______________________
Title: ______________________
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<PAGE>
EXHIBIT A
PROPERTY DESCRIPTION
<PAGE>
EXHIBIT C
SPECIAL WARRANTY DEED
THIS DEED, made this _____ day of _______________, _____, by and
between STERLING YORK, LLC (the "Grantor"); and CREDITRUST CORPORATION, a
Maryland corporation, whose address is
_____________________________________________(the "Grantee").
W I T N E S S E T H:
That for and in consideration of the sum of Ten ($10.00) Dollar cash
in hand paid and other good and valuable considerations, the receipt of which is
hereby acknowledged, the Grantor hereby grants and conveys with general warranty
and, save as hereinafter set out, with covenants of special warranty and further
assurances, unto the Grantee , its personal representatives, heirs and assigns,
in fee simple, the property located in Baltimore County, Maryland and more
particularly described in Exhibit A.
SEE EXHIBIT "A" ATTACHED HERETO AS A PART HEREOF
- ------------------------------------------------
The improvements thereon being known as ___________.
Being the same property located in the Deed dated _______________,
19___, and recorded among the Land Records of Baltimore County in Liber ___,
Folio ___ from ___________ to the Grantor.
Together with all improvements thereupon, and the rights, alleys,
ways, waters, easements, privileges, appurtenances and advantages belonging or
appertaining thereto.
To have and to hold the property hereby conveyed unto the Grantee, its
personal representatives, heirs and assigns, in fee simple, forever.
This conveyance is made subject to the conditions, restrictions,
easements and reservations of record, if any, affecting the aforesaid property
and constituting constructive notice which are specifically identified on
Exhibit "B" attached hereto as a part hereof.
- -----------
WITNESS the following signatures and seals:
<PAGE>
WITNESS: STERLING YORK, LLC
By: _________________________ By: _________________________(SEAL)
Name: ____________________
Manager
-66-
<PAGE>
STATE OF MARYLAND
CITY OF ____________
I hereby certify that before me, a Notary Public of the State and
County/City aforesaid, on this _____ day of ____________________, ____,
personally appeared _________________________, as Manager of Sterling York, LLC,
known to me (or satisfactory proven) to be the person whose name is subscribed
to the within Deed, acknowledged that he executed the same for the purposes
therein contained and in my presence signed and sealed the same.
My Commission Expires: _______________
(SEAL)
___________________________________
NOTARY PUBLIC
This instrument has been prepared by ___________________, an attorney,
under such attorney's supervision, or by one of the parties named in this
instrument.
___________________________________
-67-
<PAGE>
EXHIBIT D
BILL OF SALE
FOR VALUE RECEIVED, STERLING YORK, LLC, a Maryland corporation, ("Seller")
sells, assigns, transfers and sets over to CREDITRUST CORPORATION, a
_____________________ ("Buyer"), the following described personal property:
All of the furniture, fixtures, equipment, interior
appliances, machines, apparatus, supplies and personal
property, of every nature and description, and all
replacements thereof now owned by Seller in their present,
"as is" condition, with all faults and defects and located
in or on the real estate commonly known as
"__________________________"; which real estate is described
on Exhibit A attached hereto and made a part hereof,
---------
excepting therefrom any furniture, furnishings, and articles
of personal property belonging to tenants occupying the
improvements situated on said real estate.
Seller hereby represents and warrants to Buyer that Seller is the absolute
owner of said property, that Seller has not sold, assigned, transferred or set
over said property to any other person or entity, that said property is free and
clear of all liens, charges and encumbrances, that Seller has full right, power
and authority to sell said personal property and to make this Bill of Sale, and
that there are no taxes or other charges currently due and owing which could
give rise to a lien or charge on such property.
IN WITNESS WHEREOF, Seller has executed this Bill of Sale on this _____ day
of _______________, _____.
WITNESS: STERLING YORK, LLC
By:______________________ By:_______________________(SEAL)
Name: _________________
Manager
<PAGE>
STATE OF MARYLAND
CITY OF ____________
I hereby certify that before me, a Notary Public of the State and
County/City aforesaid, on this _____ day of ____________________, ____,
personally appeared _________________________, as Manager of Sterling York, LLC,
known to me (or satisfactory proven) to be the person whose name is subscribed
to the within Bill of Sale, acknowledged that he executed the same for the
purposes therein contained and in my presence signed and sealed the same.
My Commission Expires: _______________
(SEAL)
___________________________________
NOTARY PUBLIC
-69-
<PAGE>
EXHIBIT E
ASSIGNMENT OF LEASES
STATE OF MARYLAND (S)
(S) KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF __________ (S)
STERLING YORK, LLC, a _____________________ ("Assignor"), whose mailing
address is 31 Light Street, Suite 200, Baltimore, Maryland 21202, in
consideration of the sum of Ten Dollars ($10) in hand paid and other good and
valuable consideration, the receipt of which is hereby acknowledged, hereby
assigns, transfers, sets over and conveys to CREDITRUST CORPORATION, a Maryland
corporation ("Assignee"), all of Assignor's right, title and interest in and to
all leases ("Leases"), including any and all security deposits made by tenants
pursuant to said Leases, affecting the real property legally described on
Exhibit A attached hereto.
- ---------
Assignor represents and warrants to Assignee that Assignor is the absolute
owner of all of the landlord's right, title, and interest in and to the Leases
and that such right, title, and interest is free of any lien or charge and is
not subject to any other assignment, transfer, or hypothecation.
Assignor hereby agrees to indemnify Assignee against and hold Assignee
harmless from any and all cost, liability, loss, damage or expense, including,
without limitation, reasonable attorney's fees, originating prior to the date
hereof and arising out of the lessor's obligations under the Leases.
IN WITNESS WHEREOF, Assignor has executed this Assignment this _____ day of
_______________, _____.
WITNESS: STERLING YORK, LLC
By:______________________ By:_______________________(SEAL)
Name: _________________
Manager
<PAGE>
STATE OF MARYLAND
CITY OF ___________
I hereby certify that before me, a Notary Public of the State and
County/City aforesaid, on this _____ day of ____________________, ____,
personally appeared _________________________, as Manager of Sterling York, LLC,
known to me (or satisfactory proven) to be the person whose name is subscribed
to the within Assignment of Leases, acknowledged that he executed the same for
the purposes therein contained and in my presence signed and sealed the same.
My Commission Expires: _______________
(SEAL)
___________________________________
NOTARY PUBLIC
-71-
<PAGE>
ASSUMPTION
Assignee has executed this Assignment of Leases to acknowledge its
assumption of the Leases. Assignee hereby agrees to indemnify and defend
Assignor against and hold Assignor harmless from any and all cost, liability,
loss, damage or expense, including, without limitation, reasonable attorneys'
fees, originating from and after the date hereof and arising out of the lessor's
obligations under the Leases.
IN WITNESS WHEREOF, this Assumption has been executed this _____ day of
_______________, _____.
"ASSIGNEE"
CREDITRUST CORPORATION
By:_____________________________(SEAL)
Name:________________________
Title:_______________________
STATE OF MARYLAND (S)
COUNTY OF ______________ (S)
The foregoing instrument was acknowledged before me this _____ day of
_______________, _____, by ____________________, the Chairman and CEO of
CREDITRUST CORPORATION.
___________________________________
NOTARY PUBLIC, STATE OF MARYLAND
(SEAL)
My commission expires: _____________
-72-
<PAGE>
EXHIBIT F
TENANT ESTOPPEL CERTIFICATE
---------------------------
Tenant: _______________________________________________________________________
Suite No.: ________________________ Square Feet Occupied: _____________________
Date of Lease: _____________________ Date Term Expires: _______________________
Current Monthly Rental: _________________________ (includes $____________
in tenant improvements amortization).
Commencement Date for Payment of Rent: _________________________________________
Security Deposit: $_____________________________________________________________
Renewal Options: ______________________________________________________________
The undersigned hereby certifies to ____________________, a
___________________ ("Purchaser"), that: (i) it is currently in and has
accepted full and complete possession of the premises indicated above, which are
located in the building known locally as the, ___________________ located at
____________________, pursuant to a written lease bearing the date indicated
above (the "Lease"); (ii) the foregoing information concerning the Lease is true
and correct; and (iii) the Lease is currently in full force and effect and has
not been modified or amended since the date of its original execution except as
noted below. In addition, the undersigned further certifies that:
1. As of the date hereof, no landlord or tenant default is
continuing under the terms of the Lease, and no event has occurred which with
notice or the passage of time or both would constitute a landlord or tenant
default thereunder.
2. The premises covered by the Lease are in good condition and
repair, and all obligations on the part of the landlord under the terms of the
Lease heretofore accrued and performable have been fully performed to the
satisfaction of the undersigned.
3. The security deposit heretofore delivered by the undersigned
pursuant to the terms of the Lease has not been refunded or, to the knowledge of
the undersigned, applied in any manner.
4. No monthly rental has been prepaid (except for a prepayment of
the current month's rental), and no other sums (including amounts for the
payment of property taxes
<PAGE>
and common area maintenance charges) owing by the undersigned under the terms of
the Lease are past-due.
5. No rental abatement or other concessions have been granted to the
undersigned except as set forth in or specifically called for by the Lease.
6. The undersigned has not assigned its rights under the Lease or
sublet all or any part of the premises covered thereby.
7. The undersigned has no claim or right of offset against the
present owner of the premises (or its predecessors in interest) by reason of the
non-performance of any obligation on its part to be performed as the landlord
under the Lease, or otherwise.
It is understood that Purchaser will rely on the statements herein in
connection with its purchase of the property of which the premises covered by
the Lease forms a part, and Purchaser is entitled to rely hereon in connection
therewith. In addition, the undersigned acknowledges that all notices required
or permitted to be given to the landlord under the terms of the Lease are to be
given to 7125 Columbia Gateway Drive, Columbia, Maryland 21046-2199, Attention:
Cary Luskin.
All rental payments due under the terms of the Lease are to be made as
provided for in a supplemental notice to be delivered to you by Purchaser.
Lease Amendments:
_____________________________
_____________________________
_____________________________
____________________________________
By:_________________________________
Please print or type below
-74-
<PAGE>
CERTIFICATION OF NONFOREIGN STATUS
Escrow File No.: __________
Section 1445 of the Internal Revenue Code provides that a transferee
(buyer) of a U.S. real property interest must withhold tax if the transferor
(seller) is a foreign person. To inform the transferee that withholding of tax
is not required upon the undersigned's disposition of a U.S. real property
interest, the undersigned does hereby certify the following:
1. The undersigned is not a nonresident alien for purposes of U.S. income
taxation.
2. The undersigned's U.S. taxpayer identifying number is _______________
(Social Security Number or Tax I.D. Number).
3. The undersigned's address is:
______________________________________________________________________
______________________________________________________________________
The undersigned does understand that this certification may be disclosed to
the Internal Revenue Service by the transferee and that any false statement made
here could be punished by fine, imprisonment, or both.
Under penalties of perjury, the undersigned does hereby declare that the
undersigned has examined this certification and, to the best of the
undersigned's knowledge and belief, it is true, correct, and complete.
Sterling York, LLC
Dated: __________________ By:________________________________
<PAGE>
EXHIBIT E
FORM OF SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT
SUBORDINATON, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT
------------------------
NOTICE TO TENANT: THE SUBORDINATON PROVIDED FOR IN THIS AGREEMENT RESULTS IN
YOUR LEASEHOLD ESTATE IN THE PROPERTY BECOMING SUBJECT TO AND OF LOWER PRIORITY
THAN THE SECURITY INTEREST IN THE PROPERTY CREATED BY SOME OTHER OR LATER
INSTRUMENT.
THIS AGREEMENT, made as of this ______ day of _____________, 1999, by and
between STERLING YORK, LLC, a Maryland limited liability company ("Landlord"),
CREDITRUST CORPORATION, a Maryland corporation, Tenant under the hereinafter
described lease ("Tenant"), and ____________________________, a Delaware limited
liability company ("Lender"), the owner and holder of the mortgage hereinafter
described. Landlord, Tenant and Lender are sometimes collectively referred to
herein as the "Parties."
WITNESSETH:
WHEREAS, Lender is the present owner and holder of (a) a certain Mortgage,
Security Agreement and Fixture Financing Statement (as heretofore and
hereinafter amended, the "Mortgage") dated ______________, in the principal sum
of $_____________, given by Sterling York, LLC, a Delaware limited liability
company in favor of Lender, recorded _______________, with the Land Records of
Baltimore County, Maryland in Liber _____, folio _____, as Document No. _______,
covering certain real property (the "Property") located in Baltimore County,
Maryland, more particularly described in attached Exhibit A, to secure a loan
(the "Loan") evidenced by a promissory note (the "Note") dated of even date
therewith, payable to Lender or order; and
WHEREAS, Landlord and Tenant have entered into a lease dated __________
(the "Lease") covering a portion of the Property (such portion further described
in the Lease and hereinafter referred to as the "Premises"), for the term and
upon the terms and conditions therein set forth; and
WHEREAS, the Parties desire to expressly subordinate the Lease to the lien
of the Mortgage; and
WHEREAS, Tenant has requested that Lender agree not to disturb the peaceful
and quiet possession or right of possession of the Premises by Tenant.
<PAGE>
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties hereby agree as follows:
1. Landlord and Tenant declare and agree that each hereby subordinates
the priority and superiority of the Lease, the leasehold interests and estates
created thereby, and the rights, privileges and powers of the Tenant and
Landlord thereunder, in favor of the Mortgage, and that the Lease, the leasehold
interests and estates created thereby, and the rights, privileges and powers of
the Tenant and Landlord thereunder, be and the same are hereby, and with full
knowledge and understanding of the effect of such subordination, unconditionally
(subject only to the terms and conditions of this Agreement) made subject and
subordinate to the lien and charge of the Mortgage to all terms, conditions and
provisions of the Mortgage, to all advances made or to be made thereunder, to
any renewals, extensions, modifications or replacements of the Mortgage, and to
the rights, privileges and powers of the Lender thereunder, and shall hereafter
be junior and inferior to the lien and charge of the Mortgage.
2. The Parties declare and agree that this Agreement shall supersede, to
the extent inconsistent herewith, the provisions of the Lease relating to the
subordination of the Lease and the leasehold interests and estates created
thereby to the lien or charge of the Mortgage.
3. In the event Lender, its successors or assigns or any other purchaser
at a foreclosure sale or sale under private power contained in the Mortgage
succeeds to the interest of Landlord under the Lease by reason of any
foreclosure of the Mortgage or the acceptance by Lender of a deed in lieu of
foreclosure, or by any other manner (the "Succession"), then:
a. Lender agrees that it shall not disturb Tenant's peaceful and
quiet possession of the Premises, nor shall the Lease or its appurtenances
be extinguished, terminated or affected thereby, nor shall Lender join
Tenant as a party in any action or proceeding against Landlord; provided,
the Tenant shall not be in default beyond any applicable cure periods and
continuing at the time Lender takes possession or takes title to the
Property, under any of the terms, covenants or conditions of the Lease or
of this Agreement on Tenant's part to be observed or performed as would
entitle Landlord to terminate the Lease or would cause, without any further
action of Landlord, the termination of the Lease or would entitle Landlord
to dispossess tenant thereunder.
b. Tenant shall be bound to Lender, its successors or assigns or such
other purchaser under all of the terms, covenants and conditions of the
Lease for the remaining balance of the term of the Lease, with the same,
force and effect as if Lender, its successors or assigns or such other
purchaser were the Landlord under such Lease, and Lender shall be bound to
the Tenant under all of the provisions of the Lease, and Tenant shall from
and after the date Lender acquires the interest of Landlord or comes into
possession of or acquires title to the Premises, have the same remedies
against Lender for the breach of any agreement contained in the Lease that
the tenant might have had under the Lease against Landlord. Tenant does
hereby agree to attorn to Lender, its successors or assigns or such other
purchaser as its Landlord, such attornment to be effective and
<PAGE>
self-operative without the execution of any further instruments on the part
of any of the Parties, immediately upon Lender, its successors or assigns
or such other purchaser succeeding to the interest of Landlord under the
Lease; provided, however, that Tenant agrees to execute and deliver to
Lender, its successors or assigns or such other purchaser any instrument
reasonably requested by such party to evidence such attornment.
c. Tenant shall be under no obligation to pay rent to Lender until
Tenant receives written notice from Lender stating that Lender is entitled
to receive the rents under the Lease directly form Tenant. Landlord, by
its execution hereof, hereby authorizes Tenant to accept such direction
from Lender and to pay the rents directly to Lender and waives all claims
against Tenant for any sums so paid at Lender's direction. Landlord
specifically agrees that Tenant may conclusively rely upon any written
notice Tenant receives from Lender notwithstanding any claims by Landlord
contesting the validity of any term or condition of such notice, including
any default claimed by Lender, and Tenant shall have no duty to inquire
into the validity or appropriateness of any such notice.
d. Subject to the observance and performance by Tenant of all of the
terms, covenants and conditions of the Lease on the part of the Tenant to
be observed and performed, Lender, its successors or assigns or such other
purchaser shall recognize the leasehold estate of Tenant under all of the
terms, covenants and conditions of the Lease for the remaining balance of
the term with the same force and effect as if Lender, its successors or
assigns or such other purchaser were the landlord under the Lease,
provided, however, that Lender, its successors or assigns or such other
purchaser shall not be (i) liable for any act or omission of Landlord under
the Lease, except to the extent that Lender continues such action or
omission after Lender succeeds to the interest of Landlord, (ii) subject to
any offsets or defenses which Tenant may be entitled to assert against
Landlord, (iii) bound by any payment of rent or additional rent by Tenant
to Landlord for more then thirty (30) days in advance of the due date under
the Lease, (iv) liable or responsible for or with respect to the retention,
application and/or return to Tenant of any security deposit paid to
Landlord, whether or not still held by Landlord, unless and until Lender or
such other purchaser has actually received for its own account as landlord
the full amount of such security deposit, (v) bound by any provision in the
Lease which obligates the landlord to erect or complete any building or to
perform any construction work or to make any improvements to the Premises
or to expand or rehabilitate any existing improvements or except as
expressly provided in the Lease to restore any improvements following any
casualty or taking, except for repair and maintenance obligations as
provided in the Lease, (vi) bound by any amendment or modification of the
Lease made without the written consent of Lender, its successors or assigns
or such other purchaser, (vii) bound by any notice of termination,
cancellation or surrender not provided for in the Lease without Lender's
prior written consent thereto, (viii) bound by any assignment of the Lease
or sublet of the Premises other than an assignment or sublet made in
accordance with the provisions of the Lease, or (ix) personally liable
under the Lease, and Lender's liability under the Lease shall be limited to
the ownership interest of Lender in Premises.
-78-
<PAGE>
e. Lender acknowledges that the Loan proceeds are available to pay
for the Tenant Improvement Allowance, as set forth in the Lease. If
Lender, its successors or assigns or such other purchaser becomes the
landlord under the Lease by Succession, Lender shall advance the Loan
proceeds directly to Tenant; provided that Tenant has completed the Tenant
Improvements, has submitted to Lender the supporting documentation required
by the Lease, and Lender has not previously advanced such moneys under the
Loan to the Landlord.
4. The agreements contained herein shall run with the land and shall be
binding upon and inure to the benefit of the respective heirs, administrators,
executors, legal representatives, successors and assigns of the Parties.
5. Tenant hereby agrees that, in the event Tenant notifies Landlord of a
default on the part of Landlord under the Lease, Tenant shall concurrently send
a copy of such notice to Lender, at the address set forth in Paragraph 6 below,
by certified or registered mail, postage prepaid, return receipt requested.
Tenant agrees that notwithstanding any other provision of the Lease, Tenant
shall not terminate the Lease by reason of any default by Landlord unless Lender
has received the foregoing notice and has failed to cure such default within
thirty (30) days of the date of receipt of such notice, or if the default cannot
reasonably be cured within such thirty (30) day period, within such longer
period of time as is reasonably necessary for Lender to obtain possession of the
Property and to cure such default.
6. The address of Lender for all purposes hereunder, unless changed by
Lender giving written notice to Tenant, shall be as follows:
_______________________________
_______________________________
_______________________________
_______________________________
_______________________________
_______________________________
7. The address of Tenant for all purposes hereunder, unless changed by
Tenant giving written notice to Lender, shall be as follows:
Creditrust Corporation
7000 Security Boulevard
Baltimore, Maryland 21244
Attention: J. Barry Dumser, Esquire
8. This Agreement may be executed in any number of counterparts, each of
which, when so executed and when delivered, shall be an original, but all of
such counterparts shall together constitute but one and the same instrument.
-79-
<PAGE>
IN WITNESS OF THE ABOVE, the undersigned Parties have executed this
instrument as of the day and year first above written.
NOTICE: THE SUBORDINATION PROVIDED FOR IN THIS AGREEMENT RESULTS IN YOUR
LEASEHOLD ESTATE IN THE PROPERTY BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN
THE SECURITY INTEREST IN THE PROPERTY CREATED BY SOME OTHER OR LATER
INSTRUMENT.
LANDLORD:
STERLING YORK, LLC,
a Maryland limited liability company
By:_________________________________________
Title:_______________________________________
TENANT:
CREDITRUST CORPORATION
a Maryland corporation
By:_________________________________________
Title:_______________________________________
LENDER:
_______________________________
a ______________________________
By:_________________________________________
Title:_______________________________________
-80-
<PAGE>
STATE OF ___________________ )
) ss
COUNTY OF _________________ )
This instrument was acknowledged before me on the _____ day of
______________, 1999, by ____________________, the Managing Member of Managing
Member of Sterling York, LLC, a Maryland corporation, who acknowledged the same
as their free act and deed on behalf of the company.
__________________________________
a Notary Public
My Commission Expires: __________
-81-
<PAGE>
EXHIBIT F
INSPECTION PERIOD RIGHTS
At any time before or concurrently with Tenant's election to exercise its
Purchase Option pursuant to Section 25 of the Lease so long as Tenant makes such
election at least sixty (60) days before the end of 548 days after the Effective
Date, Tenant shall have a period of sixty (60) days ("Inspection Period") to
examine the Property, the rent roll, the tenant leases, the service agreements,
the Landlord's title policy, other records of Landlord or its property manager
related to the ownership and operation of the Property, and to cause a survey
and environmental study to be completed, including without limitation causing
test bores to be drilled, and such other inspections as Tenant, in its
discretion, may determine. If Tenant completes its inspection of the Property
before entering into the Purchase Agreement and Tenant elects not to purchase
the Property, Tenant may so notify Landlord in writing, and neither party shall
have any further rights or obligations under Section 25 of the Lease. If Tenant
enters into the Purchase Agreement before Tenant completes its inspection of the
Property, a provision substantially in the form of this Exhibit F shall be
---------
included in the Purchase Agreement. Thereafter, if Tenant elects not to
purchase the Property, Tenant shall have the right, by written notice delivered
to Landlord prior to the expiration of the Inspection Period, to terminate the
Purchase Agreement in which event the Purchase Agreement shall be and become
null and void. Tenant acknowledges that regardless of the commencement date of
the Inspection Period, the Inspection Period shall not extend past 548 days
after the Effective Date.
Any physical inspection of the Property by Tenant shall be subject to all
of the following:
(i) Tenant shall give Landlord at least one (1) Business Day
telephonic notice of its intention to inspect the Property or conduct any
sampling or testing.
(ii) If Tenant obtains a Phase I environmental report of the
Property, Tenant shall cause a copy of such report to be delivered to Landlord
at the time of issuance to Tenant. If Tenant desires to conduct any
environmental sampling or testing at the Property, Tenant shall first provide
Landlord with the proposed study plan therefor ("Plan"). The Plan is subject to
the approval of Landlord, which shall be granted or denied within five (5) days
of receipt of the Plan and which approval shall not be unreasonably withheld or
conditioned and no environmental sampling or testing shall be performed until
the Plan therefor has been approved by Landlord. Tenant agrees that Landlord, at
Landlord's expense may have a representative present at any inspection, sampling
or testing, including, but not limited to, an environmental engineer or
consultant designated by Landlord (in connection with any environmental sampling
or testing conducted by Tenant in accordance with this Exhibit F). At Landlord's
---------
request, any sampling or testing by Tenant's environmental consultant shall be
conducted in a manner so as to provide "split" samples or data to Landlord's
environmental consultant.
-82-
<PAGE>
(iii) Tenant shall maintain adequate liability insurance coverage for
its employees, agents and representatives inspecting the Property or conducting
sampling or testing and prior going on to the Property will provide Landlord
with written evidence of same.
(iv) Any such inspections, sampling and testing shall be at Tenant's
sole cost and expense, and Tenant agrees to keep the Property free and clear of
any liens that may arise as a result of such inspections, sampling and testing.
(v) Tenant shall restore promptly any physical damage caused by the
inspection, sampling or testing of the Property to the condition which existed
prior to the inspection, sampling or testing.
(vi) Tenant shall provide Landlord with copies of written sampling
test results and reports prepared by third parties, but otherwise Tenant and its
employees, agents and representatives shall keep all such information, sampling
and test results and reports obtained or developed during or as a result of such
inspection strictly confidential, except as required by law or in connection
with Tenant's debt or equity financing for the acquisition.
(vii) Tenant hereby indemnifies and agrees to defend, and hold
Landlord and its partners and each of their advisors, beneficiaries, agents,
employees, representatives, tenants and affiliates harmless from and against all
loss, cost, liability, lien, damage or expense, including reasonable attorneys'
fees and costs made, sustained, suffered or incurred against or by Landlord and
its partners and each of their advisors, beneficiaries, agents, employees,
representatives, tenants and affiliates and attributable to or arising out of a
breach of the foregoing agreements by Tenant in connection with any such
inspection, sampling or testing; provided, however, that in no event shall the
foregoing indemnity be construed to apply to any responsibility for any
contaminants that may be located on the Property or for any other existing
conditions that do not comply with Environmental Laws.
-83-
<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 Deleware
Creditrust SPV99-1, LLC Deleware
Creditrust SPV99-2, LLC Deleware
Creditrust Card Services Corporation Maryland
Creditrust SPV99-2 Capital, Inc. Deleware
</TABLE>
<PAGE>
Exhibit 23.1
Creditrust Corporation
Consent of Independent Certified Public Accountants
We have issued our report dated February 11, 2000, accompanying the consolidated
financial statements included in the Annual Report of Creditrust Corporation on
Form 10-K for the year ended December 31, 1999. We hereby consent to the
incorporation by reference of said report in the Registration Statement of
Creditrust Corporation on Form S-8 (File No. 333-70863) filed with the
Commission on January 20, 1999.
/S/ GRANT THORNTON LLP
______________________
Vienna, Virginia
February 11, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,927
<SECURITIES> 31,169
<RECEIVABLES> 187,984
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 9,297
<DEPRECIATION> 1,208
<TOTAL-ASSETS> 245,575
<CURRENT-LIABILITIES> 4,986
<BONDS> 0
0
0
<COMMON> 105
<OTHER-SE> 102,232
<TOTAL-LIABILITY-AND-EQUITY> 245,575
<SALES> 0
<TOTAL-REVENUES> 81,024
<CGS> 0
<TOTAL-COSTS> 48,771
<OTHER-EXPENSES> (1,541)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,901
<INCOME-PRETAX> 27,893
<INCOME-TAX> 10,875
<INCOME-CONTINUING> 17,018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,018
<EPS-BASIC> 1.72
<EPS-DILUTED> 1.67
</TABLE>
