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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
THE CREDIT STORE, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-029-6990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3401 North Louise Avenue
Sioux Falls, South Dakota 57107
(Address of principal executive offices) (zip code)
(800) 240-1855
(Issuer's telephone number, including area code)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None None
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $0.001
(Title of Class)
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ITEM 1 - BUSINESS
The Credit Store, Inc. is a technology based, financial services
company that provides credit card products to consumers who may otherwise fail
to qualify for a traditional unsecured bank credit card. The Company reaches
these consumers by acquiring portfolios of non-performing consumer receivables
and offering a new credit card to those consumers who agree to pay all or a
portion of the outstanding amount due on their debt and who meet the Company's
underwriting guidelines. The new card is issued with an initial balance and
credit line equal to the agreed repayment amount. After the consumers have made
a certain number of on-time payments on their outstanding credit card balance,
the Company seeks to sell or securitize the credit card receivables generated by
this business strategy. The Company offers other forms of settlement to those
consumers who do not accept the credit card offer.
GENERAL DEVELOPMENT OF BUSINESS
The Company was incorporated in 1972 in Utah as Valley West Development
Corporation, changed its corporate domicile to Delaware in 1995, and changed its
name to Credit Store, Inc. on October 8, 1996. Prior to October 8, 1996, the
Company discontinued operations of its prior line of business, which was
unrelated to its current operations. On December 4, 1996, the Company acquired
from Taxter One LLC ("Taxter") all the capital stock of Service One Holdings
Inc. ("Holdings"). At the time of the acquisition, Holdings' sole asset was the
capital stock of Service One International Corporation ("SOIC"), which had been
engaged since January 1996 in the business of acquiring non-performing consumer
debt portfolios, and the marketing and servicing of credit cards, generated from
these portfolios. From 1982 through December 1995, SOIC had been a marketer and
servicer of secured credit cards for a South Dakota bank under a contractual
arrangement which expired in December 1995. Following the acquisition of
Holdings, the Company engaged directly, and through SOIC and its affiliates, in
the acquisition of non-performing consumer debt and the marketing and servicing
of credit cards generated from these portfolios. In February 1998, Holdings and
Credit Store Mortgage, Inc., a wholly-owned subsidiary of the Company, were each
merged into the Company. In March 1998, SOIC was merged into the Company and the
Company's name was changed to The Credit Store, Inc.
NARRATIVE DESCRIPTION OF BUSINESS
The Company is primarily in the business of providing credit card
products to consumers who may otherwise fail to qualify for a traditional
unsecured bank credit card. The Company primarily focuses on consumers who have
previously defaulted on a debt and reaches these consumers by acquiring their
defaulted debt. The Company acquires these defaulted accounts in large
portfolios typically from the original lender for a nominal percentage of the
face amount of the debt, ranging from 0.50% to 3.00% of the receivable balance.
Through its direct mail and telemarketing operations, the Company locates and
offers a new credit card to those consumers who agree to pay all or a portion of
the outstanding amount due on their debt and who meet the Company's underwriting
guidelines. The new card is issued with an initial balance and credit line equal
to the agreed repayment amount. The Company's objective is to sell and/or
securitize these receivables at a price in excess of the Company's investment in
the receivables.
Under the Company's marketing approach, consumers are offered an
opportunity to settle their debt, typically at a discount, to transfer the
settled amount to a newly issued unsecured MasterCard(R) or Visa(R) credit card,
and to begin establishing a positive credit history by making timely and
consistent payments on the newly issued credit card. After making principal
payments on the transferred balance, the consumer can begin using the credit
card for new purchases or cash advances and may be granted increased credit
limits over time based on their
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payment performance. The Company's credit card offer is attractive to those
consumers contacted by the Company, who given the nonperforming status of their
debt, are typically receiving few or no solicitations from traditional credit
card companies. Many of these consumers cannot easily obtain an unsecured credit
card, want to improve their credit standing or have experienced the negative
aspects of not having access to the credit card payment system for travel and
the daily purchase of goods and services. The Company's approach differs from
traditional credit card companies that compete for new customers through mass
marketing and direct mail campaigns on the basis of interest rates, fees, and
services offered.
INDUSTRY OVERVIEW
The Company operates in the consumer finance industry, competing with
issuers of revolving credit products and other buyers of non-performing consumer
debt.
The United States Federal Reserve reported that American consumers owed
an aggregate of $1.36 trillion of debt at the end of August 1999, exclusive of
home mortgages, and that the size of the revolving credit market in the United
States was in excess of $581 billion as of the end of August 1999, up from $383
billion at the end of 1994. The United States Federal Reserve also reported that
pools of securitized revolving credit assets totaled $309 billion at the end of
August 1999, up from $96 billion at the end of 1994. The Company believes that
the purchasing convenience associated with unsecured credit cards has driven the
growth of credit cards and has made them the preferred consumer credit vehicle.
In addition, the Company believes that the purchase of consumer goods and
services over the Internet will continue to fuel the demand for credit cards.
The Company also believes that the relative liquidity and predictability of
these assets has fostered the widespread acceptance of revolving credit
securitizations by investors.
While traditional banking organizations have enjoyed significant
advantages in consumer lending compared to non-bank providers of consumer loans,
greater access to capital and the emergence of securitization markets, coupled
with technological advances, has allowed non-banks to compete effectively with
banks in this arena. The Company believes that future success in the credit card
industry will continue to be experienced primarily by highly focused
organizations that are adept at using information and technology to market their
products and manage risk within their portfolios, as such organizations will be
able to quickly access a large number of potential accounts while screening out
potentially bad accounts.
Credit card issuers make credit cards available to their clients in a
variety of ways. Many issuers offer cards as a convenience to existing clients,
a strategy to create greater affinity and client loyalty. This is generally the
case with credit cards offered by department stores, who offer private label
credit cards, as well as smaller banks and credit unions. In contrast, the
larger credit card issuers who control the vast majority of the market use mass
mailing of credit card offers to consumers as the most cost-effective means of
achieving the growth rates they seek. Often this process is accomplished by
obtaining a list of names of individuals who meet the issuer's credit guidelines
from one of the national credit bureaus. The Company sources its customers by
purchasing charged-off consumer debt from banks and finance companies and
believes that the purchase of charged-off debt is an efficient means to source
new credit card customers in its target market.
The Company sources its new customers from the portfolios of
non-performing consumer debt that it acquires. The Company believes that the
market for buying and selling non-performing consumer debt portfolios has
expanded due to a steadily increasing volume of charged-off consumer debt
coupled with a shift by originating institutions toward selling their portfolios
of non-performing consumer loans. Historically, originating institutions had
relied upon large internal collection staffs for their initial collection
efforts and outside collection agencies for accounts delinquent more than 180
days. As buyers emerged to purchase non-performing debt, originating
institutions have increasingly sold these portfolios for cash. Institutions will
usually sell accounts when the market prices exceed the net present value of
retaining and working the accounts. In deciding whether to sell accounts,
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sellers also evaluate the potential return on investment of reinvesting the cash
proceeds from portfolio sales in the core operations of originating and
servicing new loans.
According to the Debt Sales Directory, published by Faulkner & Gray, a
leading receivables management publisher, the sales volume of charged-off debt
by initial credit grantors has grown from $2.5 billion in 1990, to $18.5 billion
in 1998, to an estimated $22.5 billion in 1999. These numbers exclude resale
volume, which is also significant in size. Sellers have developed a variety of
ways to sell non-performing receivables. Some originating institutions pursue
auction type sales by constructing a portfolio of receivables and seeking bids
from specially invited competing parties. This approach has resulted in an
increase in the number of receivables portfolios offered for sale by account
brokers. Other means of selling receivables include privately negotiated direct
sales when the originating institution contacts known, reputable purchasers and
the terms of sale are negotiated. Originating institutions have also entered
into "forward flow" sales contracts. The contracts require an originating
institution to sell some or all of its receivables that meet specified criteria,
such as balance size and elapsed time since delinquency, to a single purchaser
during a specified period of time for an agreed upon price.
BUSINESS OPERATIONS
The Company's operations integrate the following disciplines: (1)
portfolio acquisitions; (2) marketing and card origination; (3) customer service
and collections; and (4) receivables sales and securitizations.
PORTFOLIO ACQUISITIONS:
The Company acquires non-performing credit card receivables, consumer
installment loans, and automobile deficiencies on a nationwide basis, from a
wide range of originating institutions, including banks and finance companies.
Through November 30, 1999, the Company has acquired in excess of $3.6 billion in
receivables. These portfolios have been purchased by the Company for prices
typically ranging from 0.50% to 3.00% of the receivable balance. A typical
portfolio contains between 5,000 and 150,000 consumer accounts that have been
typically charged-off by the original lending institution and have passed
through various stages of collection efforts. The size of each account has
typically ranged between $1,000 and $6,000, with an average balance since the
Company began purchasing non-performing portfolios of approximately $2,100.
The consumer debt and credit card industries generally categorize
delinquent and charged-off accounts into three groups: primary, secondary and
tertiary. Primary accounts are typically 120 to 270 days past due and are in the
process of being placed with collection agencies or collection attorneys for the
first time. Secondary accounts are 270 to 360 days past due and may have already
been placed with one collection agency. Tertiary accounts have already been
placed unsuccessfully with more than two collection agencies. The Company
acquires primarily tertiary accounts.
The Company has also purchased "bankruptcy" and "out of statute"
accounts. A "bankruptcy account" is one with respect to which the debtor has
filed a bankruptcy petition and may have had their debt discharged. The Company
is not presently offering credit cards to bankruptcy accounts. An "out of
statute" account is one with respect to which the statute of limitations for
collection of the debt has expired. Debt that is "out of statute" will not be
enforced by a court of law. Accordingly, the likelihood of recoveries from such
accounts is lower than on accounts that are currently enforceable by a court of
law.
The Company continually seeks new and continuing sources of
non-performing portfolios for purchase. Once such portfolios are located, an
acquisition team is responsible for coordinating due diligence, stratifying and
analyzing the portfolio characteristics, projecting conversions to new credit
cards and the total cash collections on the accounts. The acquisition team is
also responsible for preparing bid proposals for review and approval by
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senior management, processing and tracking the bids, documenting and closing the
purchase, and coordinating the receipt of account documentation and media for
acquired portfolios.
The Company uses its proprietary analytical methodology and database to
evaluate a potential portfolio purchase. The Company has developed a large and
valuable database of performance characteristics from the over $3 billion of
receivables it has purchased since inception that enables it to predict future
portfolio performance. This methodology and database comprise the model which
the Company uses to analyze and price the potential portfolio purchase. The
Company believes that its methodology permits it to accurately price portfolio
purchases so it may realize an appropriate return on capital from its new credit
card originations and the subsequent cash flows generated from these new credit
cards.
MARKETING AND CARD ORIGINATION:
MARKETING STRATEGY. Once a portfolio acquisition is completed, the
receivables and accounts in an acquired portfolio are processed by the Company's
marketing and card origination departments. The Company believes that its
consumer friendly and hands-on approach to the consumer is a key component of
its business strategy. Many of the receivables acquired by the Company represent
obligations of individuals who have, in the past several years, experienced some
life-altering event, such as divorce, career displacement or major medical
illness, and have recovered or currently are recovering financially from their
setback. Potential customers are contacted through direct mail and by telephone
and offered the opportunity to settle their debt and obtain an unsecured credit
card which can be used to make new purchases. A customer who accepts the
Company's offer, and meets the Company's underwriting guidelines, is issued a
new unsecured credit card by one of the Company's unaffiliated issuing banks.
The card has an outstanding balance and credit limit equal to the amount agreed
upon by the customer to settle his outstanding debt. As the customer makes
principal payments on the outstanding balance, the customer frees up his credit
limit for new purchases. In addition, the Company may increase the credit limit
for customers who make a certain number of payments on the settled amount. The
Company reports the payment history on the credit card to the major credit
bureaus. The Company believes that its credit card product provides its
customers with an opportunity to establish a positive payment history on their
credit record by making timely and consistent payments on their new credit card.
The Company believes its credit card product affords it more
flexibility in working with the consumer than the originating institution or
third-party collection agency who are simply attempting to recover all or a
portion of the amount owed on an account. Factors that contribute to this
increased flexibility include: (i) the Company is able to settle the account
with the consumer at an amount that fits within the consumer's budget because
the Company acquired the account at a typical range of 0.50% to 3.00% of the
actual outstanding balance; (ii) the Company offers a new unsecured credit card
which has utility to the consumer due to its revolving nature; (iii) the Company
is not limited by many of the cultural and regulatory constraints that influence
account resolution decisions of banks, savings and loan and other financial
institutions; and (iv) the Company is not bound by the limited time periods to
resolve receivables faced by third-party collection agencies.
CARD ORIGINATION. In the Company's experience, much of the account
information contained in the portfolios it acquires is stale. Accordingly, once
a particular portfolio has been purchased, a "scrubbing" process begins.
Scrubbing describes the process of electronically updating phone numbers and
addresses on each account purchased and searching for bankrupt and deceased
accounts. Scrubbing is done pursuant to an agreement with a third party that
specializes in locating consumers with little or no credit history. The Company
has also developed proprietary models which allow it to focus on accounts with
the best marketing potential. The Company believes that using third-party
scrubbing services produces quality results and allows it to efficiently focus
its resources on marketing and servicing its customers. Contemporaneously with
the initial scrubbing, the Company conducts an
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analysis to determine which accounts in the acquired portfolio should be
returned to the seller because they do not meet the criteria established for
each account under the terms of the portfolio acquisition agreement. Although
the terms of each portfolio acquisition agreement differ, examples of accounts
that may be returned under the typical portfolio acquisition agreement include
debts paid off prior to the Company's acquisition, debts in which the consumer
filed bankruptcy prior to the Company's acquisition and debts in which the
consumer was deceased prior to the Company's acquisition. Typically, the
agreement with the seller of the portfolio allows the Company to return such
non-qualifying accounts in the portfolio for a specified period of time, which
is generally between 120 and 180 days from the date of purchase. Under the
typical portfolio acquisition agreement, the seller either replaces a returned
account or refunds the portion of the purchase price attributable to the
account.
Once the portfolio has been scrubbed, the Company uses both direct mail
and phone contact to market the credit card product. The Company operates a
25,000 square foot direct mail and account file storage center (the "Mail
Center") in Sioux Falls, South Dakota. The Mail Center is equipped with
high-speed printing, folding, inserting, zip sorting and mailing equipment
capable of sending 100,000 pieces per day. Having its direct mail operations
in-house allows the Company to manage high quality direct mail campaigns in a
cost-effective manner. The Mail Center is linked electronically with the
Company's operation center, allowing the Mail Center to receive database
information to print and mail specific mail campaigns. The Company also
maintains a trained telemarketing sales force that operates from the Company's
Sioux Falls, South Dakota headquarters. The group is supported by a
state-of-the-art auto-dialer, which enables telemarketers to effectively manage
their large inventory of accounts. The Company employs approximately 70
telemarketers (35 per shift) which results in 100,000 to 150,000 production
hours annually. This enables the Company to maximize calling efficiency and
customer contact capabilities. The Company currently has space and system
capacity to significantly expand its telemarketing staff. The auto-dialer
enhances productivity via high-speed dialing coupled with a screening process to
detect no-answers, nonexistent numbers and answering machines. This technology
allows sales agents to concentrate their efforts on actual customers. Phone
numbers are loaded into the auto-dialer and cleared during each shift of sales
agents to ensure all numbers have been called. In addition to outbound
telemarketing calls, the Company receives incoming calls that are prompted by
mailings. Incoming calls are routed directly to the telemarketing department
where sales agents service the inquiry.
The telemarketing agents are trained to understand the customer base,
keeping in mind that the individual has experienced collection efforts employed
by several agencies. The Company believes the utility of an unsecured credit
card often is a major benefit to this segment of consumers because they may not
qualify for a traditional unsecured account. The Company also believes that an
important feature of its program is the opportunity to settle an old account and
to gain the opportunity to establish a positive payment history on one's credit
record by making timely and consistent payments on a new credit card.
The table below summarizes the Company's standard credit card program as
currently offered:
Initial Credit Line: Settlement Amount
Annual Fee: $0 the 1st year; $35 annual thereafter
Interest Rate: 18.9% or 19.9%
Grace Period: 25 Days
Late Fee: $10.00
Over Limit Fee: $10.00
Cash Advance Fee: Greater of 2% or $2.00
Minimum Payment: Greater of 3% or $10.00
For any customer who does not wish to maintain a new credit card
account but who agrees to settle his previously charged-off debt account, the
Company has established a non-card resolutions department whereby the customer
can make an installment or lump sum payment to settle his obligation.
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The Company also offers the convenience of an Automatic Payment Program
("APP") to its customers, whereby the customer authorizes the Company to
withdraw from the customer's bank account the monthly minimum credit card
payment. Approximately 18% of the Company's customers are currently using APP.
Accounts on APP have a lower incidence of delinquency than those accounts that
are not on APP.
Applicants who meet defined underwriting or exception criteria and
satisfy all verification standards are notified of acceptance into the program
and issued a card. Although the initial credit limit of the credit card is fully
utilized when issued, an applicant regains availability of credit on the card as
and to the extent the applicant makes principal payments. The applicant may also
earn additional credit by establishing a positive payment history with the
Company. Applicants failing to meet the defined underwriting or exception
criteria or to satisfy all verification standards are notified of denial in
accordance with the Equal Credit Opportunity Act. Such applicants are offered
installment and lump sum payment options to settle their debt. Historically,
over 95% of the applicants have qualified for the credit card.
Once a customer has accepted the offer and has cleared the underwriting
process, the relevant data is transmitted to First Data Resources, Inc. ("FDR")
to establish the new account on FDR's credit card processing system. The Company
has arranged, through two unaffiliated banks, to issue the credit cards and for
FDR to provide certain cardholder services including data processing, card
issuance, monthly customer statement processing, and customer correspondence.
FDR is a subsidiary of First Data Corporation, a provider of information
processing and related services, including cardholder processing and merchant
processing, for major financial institutions throughout the United States. The
Company believes that outsourcing these services to FDR gives the Company
certain operational efficiencies and the flexibility to handle additional
growth.
CUSTOMER SERVICE AND COLLECTIONS:
The Company believes that in order to maximize the customer's payment
performance, it is imperative to have a sophisticated, highly structured
hands-on approach to educating and servicing the customers and addressing
situations that would result in default without attention and assistance from
the Company. The front-end servicing group, the customer service group, and the
back-end servicing group are key components of the Company's credit card
servicing and collections functions.
The front-end servicing group conducts, among other services, the
Company's "Welcome Aboard" program by verifying that the customer has received
the credit card and that the customer thoroughly understands the program and how
to use the credit card. In addition, the front-end servicing group places calls
to customers at other critical junctures, including approximately ten days prior
to the first payment due date and at various other specified times if a customer
becomes delinquent in his payments. The front-end servicing group also pursues
all first payment defaults and handles the majority of inbound collection calls.
These calls are a part of the Company's educational approach with customers that
stresses the importance and benefits of making timely and consistent payments.
The customer service group handles calls from customers regarding their
accounts, including balance inquiries, billing inquires and disputes, requests
for replacement cards, requests for temporary credit line increases and requests
for evidence of account activity. Customer service representatives counsel the
customer on use of the card and continue the process of instilling the
importance and benefits of making timely and consistent payments.
The back-end servicing group is responsible for collection of
delinquent credit card accounts in a prompt, professional and thorough manner in
order to reduce net credit losses. The Company uses state of the art predictive
and power dialing technology to maximize collector productivity, and heavily
emphasizes the "instant payment" products such as Western Union Quick Collect.
Collection calls are prioritized based on models developed by the Company for
their specific customer base. The Company maintains a strict reage policy which
allows accounts to
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be reaged if the cardholder displays a desire to correct the status of the
account as well as an ability to continue making monthly payments on the
account. The Company has systemic restrictions in place which prevent customer
service representatives from performing unauthorized reaging of accounts. In an
effort to maximize cash flow, the settlement of an account may be negotiated in
cases where the Company has determined that the account is destined to become a
charge-off and there is no potential to retain the customer. Accounts are
charged off and taken as a loss either after formal notification of bankruptcy
or when they become contractually 120 days past due. Accounts identified as
fraud losses are immediately reserved for and charged off no later than 90 days
after the last activity. Charged-off accounts are referred to the Company's
Resolutions Department for further recovery efforts.
FINANCINGS, RECEIVABLE SALES, AND SECURITIZATIONS:
An important piece of the Company's business strategy is to securitize
seasoned receivables and/or sell receivables to third parties for cash, thereby
realizing an economic gain in an amount equal to the excess of the cash proceeds
from the sale or securitization over the Company's cost basis in the
receivables. To date, the Company has considered an account available to sell or
securitize when the consumer has made eight or more on-time payments on the
consumer's outstanding credit card balance.
The Company has significant ongoing cash needs to fund its operations
and to fund the purchase of non-performing consumer debt portfolios. The
Company's ability to sell or securitize the receivables and/or finance these
receivables on-balance sheet is critical to the future and growth of the
business. In order to sell or securitize its receivables, the Company maintains
a detailed database concerning the status and performance of each of the
receivables in its portfolio. Maintaining this database is necessary for the
Company to provide historical performance information to potential lenders and
purchasers of its receivables. Potential lenders and purchasers assess the
Company's portfolio of receivables according to a variety of factors including
monthly repayment rates by the cardholders and annualized default rates.
During the fiscal year ended May 31, 1999, the Company sold
approximately $7.0 million in credit card receivables to an unaffiliated bank
for $5 million. In addition, the Company completed three securitizations of
seasoned credit card receivables ("Receivables") with a principal balance of
approximately $20.4 million with three unconsolidated wholly-owned qualified
special purpose entities ("SPE's"). All credit cards sold in these transactions
were current with a minimum of eight consecutive payments made on each account.
The SPE's financed the purchase of the Receivables by issuing a series of senior
beneficial interests to an investment bank totaling approximately $13 million.
The Company sold the Receivables to the SPE's for approximately $17.3 million.
The difference between the sales price and debt proceeds was accounted for as a
capital contribution by the Company. In November 1999, the Company sold its
retained interest in the three SPE's to the senior beneficial interest holder
for approximately $8.6 million in cash. Subsequent to the stock sale, the
Receivables owned by the SPE's were sold to an unaffiliated credit card bank by
the investment bank that now held 100% of the beneficial interests. The Company
intends to securitize receivables in the capital markets and sell receivables to
unaffiliated credit card banks in the ordinary course of business.
The Company also maintains a senior secured revolving credit line with
Coast Business Credit, a division of Southern Pacific Bank. The credit line was
established in May 1998 for $5 million and was subsequently increased to $10
million in June 1999 and to $15 million in December 1999. The line of credit
expires in June 2001 and is secured by substantially all of the Company's
assets. Borrowings under the credit line are based on a formula which is
dependent primarily upon the performance and seasoning of the Company's credit
card receivables.
The Company has also received secured financing from a related party,
JLB of Nevada, Inc., which is subordinated to the Company's senior secured
revolving credit line. See "Item 7 - Certain Relationships and Related
Transactions." The principal amount outstanding of these subordinated notes,
excluding accrued interest, totaled $10,009,042 at May 31, 1997, $27,674,940 at
May 31, 1998 and $17,674,940 at May 31, 1999.
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In October 1999, the Company established a $17.5 million secured
revolving credit line with General Electric Capital Corporation to finance the
acquisition of non-performing consumer debt portfolios. The borrower is a
bankruptcy remote special purpose entity, Credit Store Capital, Corp. ("CSCC"),
established by the Company for this transaction. Borrowings are non-recourse to
the Company and based on the age of the non-performing consumer debt portfolios
acquired by the Company coupled with contracts that CSCC enters into to resell
portfolios to other debt buyers. The transfer of receivables to CSCC by the
Company does not qualify for sale treatment under SFAS 125. CSCC will be fully
consolidated with the Company's financial results.
COMPETITIVE CONDITIONS
The Company experiences competition in all segments of its business
operations. The Company competes with a wide range of third-party collection
companies and other financial services companies seeking to purchase portfolios
of non-performing consumer debt and with traditional collection companies
seeking consignments of such debt for collection. The Company also competes with
companies that provide financing to consumers that have previously defaulted on
a debt obligation. As more buyers enter the market to purchase portfolios of
non-performing consumer debt, the price for the purchase of such portfolios may
increase and the Company's business strategy may become less profitable or
viable. Some of these competitors may have substantially greater personnel and
financial resources than the Company. The Company believes it competes
effectively based on what it believes are superior information technology
capabilities, which enable it to evaluate and purchase receivables more
effectively than some of its competitors. Further, the Company believes it
differentiates itself from most of its competitors through its innovative credit
card program, which allows the consumer to resolve a prior obligation in a
positive manner.
The Company anticipates that additional competitors will seek to enter
its niche within the financial services market. Because of the high costs in
developing and servicing a credit card program and the high costs of acquiring
non-performing consumer debt, the Company believes that new competitors will
likely be large, established finance companies.
GOVERNMENT REGULATION
The Company's collection practices, business operations and credit card
receivables are subject to numerous federal and state consumer protection laws
and regulations imposing licensing and other requirements with respect to
purchasing, collecting, making and enforcing consumer loans. The Company
conducts periodic compliance reviews and, if necessary, implements procedures to
bring the Company into compliance with all applicable state and federal
regulatory requirements. The failure to comply with such statutes or regulations
could have a material adverse effect on the Company's results of operations or
financial condition.
The Fair Debt Collection Practices Act (FDCPA) and comparable state
statutes establish specific guidelines and procedures that 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 material adverse effect on the
Company.
As a purchaser of consumer receivables, the Company may acquire certain
receivables subject to legitimate claims, defenses or rights of offset on the
part of the consumer. As a result, the Company may not be able to collect
certain receivables it has purchased. For example, the Company, as previously
described, acquires "out of statute" accounts which are subject to a statute of
limitations defense, and may also acquire some credit card accounts
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where customers cannot be held liable for, or their liability may be limited
with respect to, charges to a credit card account that were a result of an
unauthorized use of a credit card.
The relationship of a customer and a credit card issuer is extensively
regulated by federal and state consumer protection and related laws and
regulations. While the Company itself is not a credit card issuer, because many
of its receivables are originated through credit card transactions, certain of
the Company's operations are affected by such laws and regulations. Significant
laws include the Federal Truth-In-Lending Act, the Fair Credit Billing Act, the
Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Electronic
Funds Transfer Act (and the Federal Reserve Board's regulations which relate to
these Acts), as well as comparable statutes in those states in which customers
reside or in which the originating institutions are located. State laws may also
limit the interest rate and the fees that a credit card issuer or other consumer
lender may impose on its customers. Among other things, the laws and regulations
applicable to credit card issuers impose disclosure requirements when a credit
card account is advertised, when it is applied for and when it is opened, at the
end of monthly billing cycles and at year end. Federal law requires credit card
issuers to disclose to consumers the interest rates, fees, grace periods and
balance calculation methods associated with their credit card accounts, among
other things. In addition, customers are entitled under current laws to have
payments and credits applied to their credit card accounts promptly, to receive
prescribed notices and to require billing errors to be resolved promptly. In
addition, some laws prohibit certain discriminatory practices in connection with
the extension of credit. Failure by the originating institutions or the Company
to comply with applicable statutes, rules and regulations could create claims
and/or rights of offset by the customers which could have a material adverse
effect on the Company.
Changes in any such laws or regulations, or in the interpretation or
application thereof, could have a material adverse effect on the Company.
Various proposals which could affect the Company's business have been introduced
in Congress in recent years, including, among others, proposals relating to
imposing a statutory cap on credit card interest rates, substantially revising
the laws governing consumer bankruptcy, limiting the use of social security
numbers, permitting affiliations between banks and commercial, insurance or
securities firms, and other regulatory restructuring proposals. There have also
been proposals in state legislatures in recent years to restrict telemarketing
activities, impose statutory caps on consumer interest rates, limit the use of
social security numbers and expand consumer protection laws. It is impossible to
determine whether any of these proposals will become law and, if so, what impact
they will have on the Company.
Due to the consumer-oriented nature of the collections and credit card
industry, there is a risk that the Company or other industry participants may be
named as defendants in litigation involving alleged violations of federal and
state laws and regulations, including consumer protection laws and consumer law
torts, including fraud. A significant judgment against the Company or within the
industry in connection with any such litigation could have a material adverse
effect on the Company's results of operations or financial condition. See "Item
8 - Legal Proceedings."
EMPLOYEES
As of November 30, 1999, the Company had 314 employees. No employee
group is covered under a collective bargaining agreement. The Company conducts
on-site training in all facets of its business and does not anticipate
difficulties in hiring from the local market. The Company believes its
relationship with its employees is good.
TECHNOLOGY AND SYSTEMS
10
<PAGE> 11
The Company utilizes a variety of management information and
telecommunications systems to enhance productivity in all areas of its business.
The Company utilizes the latest technology in its operations and employs
multiple levels of backup to minimize the risk of systemic breakdown.
The Company implemented a new proprietary credit card origination and
servicing system ("NOCS") in fiscal year 1999 which, among other advances, made
the Company Year 2000 compliant. NOCS puts all aspects of the Company's
operation on a seamless platform from the time a new portfolio is purchased
until an account is converted to a new credit card and set up on the First Data
Resources ("FDR") credit card servicing platform. NOCS includes specialized
applications for telesales, underwriting, non-card collections, payment
processing, account scrubbing, portfolio stratification, and customer service.
The overall computing platform is client-server, Windows NT/SQL based,
and is scaleable to accommodate the Company's growth plans. The Company employs
the latest technology in telephony, including a predictive auto-dialer and voice
recognition technology. The telephony platform is capable of supporting in
excess of 2000 workstations and the Company believes it is easily expandable to
accommodate the Company's growth plans.
The Company uses FDR as its third party processor of credit card data
and merchant interchange. FDR also processes and mails the monthly cardholder
statements. FDR, the largest card processor in the world, provides these
services to major financial institutions throughout the United States.
The Company uses image-based technology and processing to minimize
paper flow wherever possible. The Company has also invested in the latest
electronic data warehousing technologies to support its data mining strategies.
The Company believes data warehousing gives it a distinct competitive advantage
in the portfolio analysis and acquisitions aspect of its business. In addition,
the Company believes data warehousing will give it an advantage in the
securitization markets through its ability to provide a sophisticated level of
performance detail to investors.
IMPACT OF THE YEAR 2000 COMPUTER PROBLEM
OVERVIEW. The Year 2000 issue arises out of potential problems with
computer systems or any equipment with computer chips that use dates where the
date has been stored as just two digits (e.g., 98 for 1998). On January 1, 2000,
any clock or date recording mechanism, including date sensitive software, which
uses only two digits to represent the year, might have recognized a date using
00 as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations and cause a disruption of operations, including,
among other things, a temporary inability to process transactions, send letters
and statements or engage in similar activities.
STATE OF READINESS. The Company believes it has replaced or modified
all of its material computer systems and business applications software so that
its computer systems will properly utilize dates beyond December 31, 1999 and
does not believe that any further material expenditures will be necessary to
make these systems Year 2000 compliant. The Company created a Year 2000 Project
Team which identified all internal systems and third party vendors and evaluated
them as critical or non-critical. The team then evaluated and addressed all
systems and any Year 2000 issues applicable to each system. Throughout this
process, comprehensive Year 2000 information was documented and saved.
Most of the Company's major vendors are large institutions, which the
Company believes either are or will become Year 2000 compliant due to the
regulated nature of their businesses and the size and financial strength of
11
<PAGE> 12
these businesses. To date, the Company has been able to convert data received
from lenders and other third parties rendering it Year 2000 compliant and
expects that it will continue to be able to do so in the future.
The Company believes that its most critical outside vendor is FDR,
which provides services to the Company, including data processing, card
issuance, monthly customer statement processing and customer correspondence. The
Company believes that FDR applied substantial time and resources into its Year
2000 compliance efforts. FDR has certified to the Company that all FDR systems
are Year 2000 compliant. As of February 22, 2000 the Company has experienced no
vendor related Year 2000 issues.
COSTS. To date, the Company has incurred less than $100,000 in
third-party expenses as a result of the Company's Year 2000 compliance efforts.
The Company believes it has replaced or modified all of its critical computer
systems and business applications software in the normal course of its business
expansion and that its computer systems are currently Year 2000 compliant. The
Company used in-house programmers for most of the modifications and did not
separately account for the costs of making these systems Year 2000 compliant.
Year 2000 issues with third-party processing vendors were addressed internally
between the Company and each specific vendor. The Company currently does not
expect to incur additional expenses for Year 2000 efforts. The Company has not
experienced any adverse systems or vendor effects of the Year 2000 issue and,
therefore, the Company's business, operating results, and financial position
were not impacted negatively as of February 22, 2000.
WORST-CASE SCENARIO. The Company believes that its worst-case scenario
is that its outside vendors (such as FDR) are not Year 2000 compliant due to
unforeseen or unexpected problems with their systems that their Year 2000
testing did not discover and that there are errors and/or delays in processing
or billing the credit card accounts. Since FDR services all of the Companies
credit card receivables, any Year 2000 problem at FDR could cause a material
disruption in the Company's business. Management believes that the cost of any
such disruption would have a material adverse effect on the Company's results
and financial condition.
RISKS. The Company has not experienced and is not currently aware of
any internal Year 2000 compliance problem that could reasonably be expected to
have a material adverse effect on the Company's business, operating results or
financial condition. However, the Company may discover unanticipated Year 2000
compliance problems in the Company's computer infrastructure that will require
substantial revisions or replacements. In addition, third-party software,
hardware, or services incorporated into our material systems or other systems
upon which we rely may need to be revised or replaced. Such revisions and
replacements could be time consuming and expensive.
The computer systems of governmental agencies, utility companies,
third-party service providers and others outside of our control may not be Year
2000 compliant. The failure by such entities to achieve timely Year 2000
compliance could result in a systemic failure beyond our control, such as
prolonged telecommunications or electrical failures. If a protracted disruption
in electrical power or telecommunications services were to occur, the Company's
collection and marketing efforts, and therefore its operations, could be
materially adversely affected.
CONTINGENCY PLAN. The Company has contingency plans that include, in
the event of computer hardware or software non-compliance, identification and
replacement of critical products as appropriate. In the event of vendor-related
Year 2000 problems, alternate vendors who have the ability to provide similar
products or services have been identified. The Year 2000 project team will
continue to test, monitor, evaluate, and address any Year 2000 issues that may
arise in the future.
12
<PAGE> 13
THIRD-PARTY SERVICING
At November 30, 1999, the Company serviced approximately 20,000
accounts subject to third party servicing agreements. The Company intends to
concentrate on servicing its own accounts and accounts that it has either
securitized or sold to third party investors.
ITEM 2 - FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The following selected financial data presented below should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto. The selected statement of operations data with respect to the years
ended December 31, 1994 and 1995 and the period from January 1, 1996 to October
8, 1996 and the selected balance sheet data at December 31, 1994 and 1995 and at
October 8, 1996 are derived from the audited financial statements of the
Company's predecessor, SOIC. The statement of operations data with respect to
the years ended May 31, 1997, 1998 and 1999 and the balance sheet data at May
31, 1997, 1998 and 1999 are derived from, and are qualified by reference to, the
Company's audited financial statements included elsewhere herein. The
consolidated financial statements for the years ended May 31, 1998 and 1999 were
audited by Grant Thornton, LLP, independent auditors, and the consolidated
financial statements for the year ended May 31, 1997 were audited by Tanner &
Co., independent auditors. The selected financial data as of November 30, 1998
and 1999 for the six months then ended were derived from the Company's unaudited
consolidated financial statements included elsewhere herein and, in the opinion
of management, includes all material adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
condition and results of operations for such periods. Operating results for the
six months ended November 30, 1999 are not necessarily indicative of results
that may be expected for the remainder of the fiscal year ending May 31, 2000.
The following financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below.
<TABLE>
<CAPTION>
PREDECESSOR(1) COMPANY
------------------------------------------------------------------------------------------------------
JANUARY 1,
FOR THE YEAR ENDED 1996 TO FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31 OCTOBER 8, MAY 31 ENDED NOVEMBER 30
----------------------- ---------------------------------------- -------------------------
1994 1995 1996 1997 1998 1999 1998 1999
----------- ----------- ----------- ------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS
DATA:
Income from credit
card receivables* $ 971,174 $ 3,951,602 $ 6,438,460 $ 3,029,342 $ 4,961,764
Revenue in excess of
cost recovered* 3,934 8,042,255 21,852,316 10,156,697 9,905,257
Gain on sale of - - 11,851,080 5,649,418 6,336,221
portfolios*
Servicing fees and
other income $ 9,052,306 $ 6,528,503 $ 2,078,506 1,601,228 1,292,596 1,564,356 1,013,632 1,346,061
----------- ----------- ------------ ------------ ----------- ------------ ------------ ------------
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
PREDECESSOR(1) COMPANY
------------------------------------------------------------------------------------------------------
JANUARY 1,
FOR THE YEAR ENDED 1996 TO FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31 OCTOBER 8, MAY 31 ENDED NOVEMBER 30
----------------------- ---------------------------------------- -------------------------
1994 1995 1996 1997 1998 1999 1998 1999
----------- ----------- ----------- ------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue 9,052,306 6,258,503 2,078,506 2,576,336 13,286,453 41,706,212 19,849,089 22,549,303
Provision for losses - - - 1,494,001 6,483,736 4,607,081 2,559,044 3,737,867
----------- ----------- ------------ ------------ ------------- ------------ ------------ ------------
Net revenue 9,052,306 6,258,503 2,078,506 1,082,335 6,802,717 37,099,131 17,290,045 18,811,436
Net income (loss) 2,242,672 2,727,711 (1,512,488) (14,246,259) (29,151,330) 3,633,697 418,864 493,625
Comprehensive
income (loss)* (14,246,259) (29,151,330) 6,130,845 1,203,212 (2,003,523)
Dividends on
preferred stock* (7,397) (399,996) (1,799,999) (799,999) (1,000,000)
----------- ----------- ----------- ------------- ------------- ------------ ------------ ------------
Net income (loss)
applicable to common
shareholders $2,242,672 $2,727,711 $(1,512,488)$(14,253,656) $(29,551,326) $ 1,833,698 $ (381,135) $ (506,375)
=========== =========== =========== ============= ============= ============ ============ ============
Net income (loss) per
common share, basic
and diluted $ 0.45 $ 0.55 $ (0.30)$ (0.55) $ (0.89) $ 0.05 $ (0.01) $ (0.01)
=========== =========== =========== ============= ============= ============ ============ ============
CONSOLIDATED BALANCE
SHEET DATA:
Cash and restricted cash $ 515,600 $ 279,357 $ 58,162 $ 2,685,581 $ 8,205,071 $4,283,930 $ 3,444,862 $ 5,273,121
Investment in
on-performing
consumer debt, net* 8,352,749 6,125,511 3,227,711 6,022,148 4,415,433
Credit card receivables, 2,566,909 12,919,970 18,631,403 17,164,632 26,020,644
net*
Notes payable - - 1,158,336 428,973 5,902,041 6,086,766 5,775,711 13,649,987
Subordinated notes and
accrued interest-related
party - - 880,000 10,446,043 31,807,322 19,246,595 23,183,213 19,591,152
------------- ------------ ------------ ------------ ------------
Total assets 1,547,899 524,579 2,884,860 24,903,167 40,176,415 45,991,970 41,459,216 50,787,483
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
PREDECESSOR(1) COMPANY
------------------------------------------------------------------------------------------------------
JANUARY 1,
FOR THE YEAR ENDED 1996 TO FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31 OCTOBER 8, MAY 31 ENDED NOVEMBER 30
----------------------- ----------------------------------------- -------------------------
1994 1995 1996 1997 1998 1999 1998 1999
----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total liabilities 784,695 279,960 4,007,145 18,118,396 47,366,530 33,692,311 37,546,119 39,597,298
Total stockholders'
equity (deficit) 763,204 244,619 (1,122,285) 6,784,771 (7,190,115) 12,299,659 3,913,097 11,190,185
SELECTED OPERATING DATA:
Outstanding balance of
non-performing debt
acquired during the $1,067,579,343 $890,634,206 $891,904,454 $627,945,069 $780,374,021
period*
Credit card receivables
owned and managed* 35,709,395 84,830,552 89,149,715 91,477,519 87,734,443
Number of accounts
owned and managed* 26,803 84,351 94,278 88,564 94,733
Total employees, end
of period* 233 292 305 294 314
- - - ---------------------
</TABLE>
* Information not applicable for predecessor company.
(1) The information for the fiscal years ended December 31, 1994 and 1995 and
for the period from January 1, 1996 to October 8, 1996 relates to SOIC, the
Company's predecessor. See "Item 1 -- Business -- General Development of
Business" and Note A of Notes to Consolidated Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following management's discussion and analysis focuses on those
factors that had a material effect on the Company's financial results of
operations and financial condition for fiscal years ended May 31, 1997, 1998 and
1999 and the six months ended November 30, 1998 and 1999. The following
discussion of the Company's financial condition and results of operations should
be read in connection with the Company's consolidated financial statements and
notes thereto appearing elsewhere herein. The following discussion contains
certain forward-looking statements that involve risk and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, risks and uncertainties related to the need for additional funds,
the rapid growth of the operations and the ability of the Company to operate
profitably after the initial growth period is completed. For a more extensive
discussion of such risks and uncertainties, see "Cautionary Statements and
Factors that may Affect Future Results" below.
15
<PAGE> 16
OVERVIEW
The Credit Store, Inc. is a technology based, financial services
company that provides credit card products to consumers who may otherwise fail
to qualify for a traditional unsecured bank credit card. The Company reaches
these consumers by acquiring portfolios of non-performing consumer receivables
and offering a new credit card to those consumers who agree to pay all or a
portion of the outstanding amount due on their debt and who meet the Company's
underwriting guidelines. The new card is issued with an initial balance and
credit line equal to the agreed repayment amount. After the consumers have made
a certain number of on-time payments on their outstanding credit card balance,
the Company seeks to finance, sell, or securitize the credit card receivables
generated by this business strategy. The Company offers other forms of
settlement to those consumers who do not accept the credit card offer.
The Company was incorporated in 1972 in Utah as Valley West Development
Corporation, changed its corporate domicile to Delaware in 1995, and changed its
name to Credit Store, Inc. on October 8, 1996. Prior to October 8, 1996, the
Company discontinued operations of its prior line of business, which was
unrelated to its current operations. On December 4, 1996, the Company acquired
from Taxter, all the capital stock of Holdings. At the time of the acquisition,
Holdings' sole asset was the capital stock of SOIC, which had been engaged since
January 1996 in the business of acquiring non-performing consumer debt
portfolios, and the marketing and servicing of credit cards generated from these
portfolios. From 1982 through December 1995, SOIC had been a marketer and
servicer of secured credit cards for a South Dakota bank under a contractual
arrangement which expired in December 1995. Following the acquisition of
Holdings, the Company engaged directly, and through SOIC and its affiliates, in
the acquisition of non-performing consumer debt and the marketing and servicing
of credit cards generated from these portfolios. In February 1998, Holdings and
Credit Store Mortgage, Inc., a wholly owned subsidiary of the Company, were each
merged into the Company and the Company's name was changed to The Credit Store,
Inc. As a result of the above, and because the Company had no operations during
the period from May 31, 1996 to October 8,1996, the operations for the period
ended May 31, 1997 are not comparable to any prior period, including the period
immediately prior to the acquisition when the predecessor was owned and managed
by different groups. Further, the operations of the Company's predecessor, SOIC,
did not include many of the activities currently engaged in by the Company.
ACCOUNTING.
INVESTMENTS IN NON-PERFORMING CONSUMER DEBT AND THE IMPACT OF COST
RECOVERY ACCOUNTING. The Company accounts for its investments in non-performing
consumer debt in accordance with the provisions of the American Institute of
Certified Public Accountants' Practice Bulletin 6, "Amortization of Discounts on
Certain Acquired Loans," which prescribes two methods (yield method and cost
recovery method) for amortizing the excess of face value over the purchase price
of acquired portfolios. Under Practice Bulletin 6, a company may use the yield
method of accounting if the company has the experience and data to predict the
amount and timing of collections that will be received from the acquired
portfolio. Under the yield method, the acquirer makes an estimate of the amount
and timing of collections on an acquired portfolio and accretes the discount
into income over the economic life of the acquired portfolio according to an
internal rate of return established for the acquired portfolio. Given the
Company's short history, the Company believes it is required to use the cost
recovery method to account for the acquired portfolios. The Company adopted cost
recovery in fiscal year 1998 and restated fiscal year 1997 to conform to the
cost recovery presentation. Under the cost recovery method, the Company records
the purchase price of a portfolio and any costs directly related to the purchase
as an investment in non-performing consumer debt on the balance sheet. Cash
flows related to the acquired portfolio are applied to reduce the investment on
the balance sheet to zero prior to recognizing revenue from that portfolio. Once
the cost of a portfolio has been recovered, the ensuing cash flow is recorded as
the excess of revenue over cost recovered. The application of cost recovery can
have a material impact on revenue and net income during periods of
16
<PAGE> 17
increasing or decreasing portfolio acquisitions. The Company made significant
investments in portfolio acquisitions during fiscal years 1997 and 1998 totaling
$16.0 million and $14.5 million, respectively. The application of cost of
recovery resulted in decreased revenue during the period, since cash flows from
an acquired portfolio are applied first to reduce the investment in that
portfolio to zero, which takes between 9 and 13 months on the average, depending
upon the performance of the acquired portfolio. During the same period, the
Company expensed, as incurred, all costs associated to market and service the
portfolios which, when, combined with the effects of cost recovery on revenue,
contributed to the large losses experienced in fiscal years 1997 and 1998.
During fiscal year 1999, the majority of the portfolios acquired during the two
preceeding years experienced full cost recovery, leading to a significant
increase in revenue in excess of cost recovered. In addition, portions of the
Company's performing credit card receivables had matured to the point where the
Company was able to sell and securitize certain portfolios at prices well in
excess of the cost bases of those receivables, generating gains on the sale of
those portfolios. The above factors combined to generate net income of $3.6
million in fiscal 1999 compared to a net loss of $29.6 million in fiscal year
1998.
CREDIT CARD RECEIVABLES. The Company records the amounts funded for
new purchases and cash advances, accrued interest on new purchases and cash
advances, and accrued fees, less a provision for losses as net credit card
receivables, on the balance sheet. However, this amount is substantially below
the amount owed to the Company by the cardholder, which amount includes new
purchases and cash advances, accrued interest and fees, along with the remaining
balance of the original settlement amount. For example, at May 31, 1999, the
Company owned $55,184,540 in credit card receivables, while the amount of funded
purchases and cash advances, accrued interest on the purchases and advances, and
accrued fees, were recorded on the Company's balance sheet as $21,879,209. The
difference represents the remaining balance of the original settlement amount on
the Company's portfolio of performing credit card receivables.
SECURITIZATIONS. The Company completed three securitizations of credit
card receivables ("Receivables") with a principal balance of approximately $20.4
million with three unconsolidated wholly-owned qualified special purpose
entities ("SPE's). All credit cards sold in these transactions were current with
a minimum of eight consecutive payments made on each account. The SPE's financed
the purchase of the Receivables by issuing a series of senior beneficial
interests to an investment bank totaling approximately $13 million.
The Company sold the Receivables to the SPE's for approximately $17.3 million.
The difference between the sales price and debt proceeds was accounted for as a
capital contribution by the Company.
Under the provisions of SFAS 125, the securitizations are accounted for
as sales. As a result, the Company recognized a pre-tax gain of approximately $8
million and recorded a retained interest in securitized credit card receivables
at an allocated basis in the amount of approximately $1.3 million based on its
relative fair value. At May 31, 1999, the allocated basis amount was adjusted to
a fair value of approximately $5.1 million, resulting in approximately $3.8
million of unrealized gain on the retained interest in securitized credit card
receivables. The unrealized gain was recorded net of tax of approximately $1.3
million, resulting in approximately $2.5 million as a separate component of
stockholders' equity and a component of Consolidated Statement of Operations and
Comprehensive Income (Loss). In estimating the fair value of the retained
interest, the Company has estimated net cash flows based on the Company's
historical collection results for similar receivables and discounted it using an
appropriate rate.
The retained interest in securitized credit card receivables is treated
as a debt security classified as available-for-sale in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and is
carried at fair value. At the time of securitization, the retained interest is
initially recorded at the basis allocated in accordance with SFAS No. 125. This
original cost basis is adjusted to fair value, which is based on the discounted
anticipated future cash flows on a "cash out" basis, with such adjustment (net
of related deferred
17
<PAGE> 18
income taxes) recorded as a component of other comprehensive income. The cash
out method projects cash collections to be received only after all amounts owed
to investors and lenders have been remitted.
Income on the retained interest is accrued based on the effective
interest rate applied to its original cost basis, adjusted for accrued interest
and principal paydowns. The effective interest rate is the internal rate of
return determined based on the timing and amounts of anticipated future cash
flow projections for the underlying pool of securitized credit card receivables.
The Company monitors impairment of the retained interest based on discounted
anticipated future cash flows of the underlying receivables on a cash out basis
compared to the original cost basis of the retained interest, adjusted for
accrued interest and principal repayments.
In November 1999, the Company sold its retained interest in the SPE's
to the investment bank, who held the senior beneficial interests issued by the
SPE's. Given the limitations placed on the activities of the SPE's and the
general lack of liquidity inherent in the retained interest, the Company
accepted an offer from the investment bank to purchase the retained interest for
approximately $8.6 million in cash resulting in a pretax gain of approximately
$6.5 million.
COMPREHENSIVE INCOME. The Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 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. All items required to be recognized under accounting standards as
components of comprehensive income are required by SFAS No. 130 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. Pursuant to SFAS No. 130, an enterprise must 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 May 31, 1998,
the Company had no sources of other comprehensive income. For the year ended May
31, 1999, the Company's investment in securitizations is classified as available
for sale; and, therefore, 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 tax.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MAY 31, 1999 COMPARED TO FISCAL YEAR ENDED MAY 31,
1998:
REVENUES. Total revenue for the fiscal year ended May 31, 1999 was
$41,706,212, a 214% increase from $13,286,453 during the same period ended May
31, 1998. The increase was primarily due to a combination of increased revenues
from a maturing credit card portfolio, portfolio securitizations and portfolio
sales. Income from credit card receivables increased 63% from $3,951,602 to
$6,438,460 due to an increase in the weighted average credit card receivables
funded. Income from credit card receivables represents interest and fees on new
advances or purchases made by holders of the Company's credit cards on an
accrual basis. Revenue in excess of costs recovered increased 172% from
$8,042,255 to $21,852,316 due to increased cash flow related to acquired
portfolios and the effect of fully recovering the acquisition costs on the
majority of the
18
<PAGE> 19
portfolios acquired during the two previous fiscal years. The Company's
performing credit card receivables had matured to the stage where the Company
achieved the sale or securitization of approximately $27.4 million in
receivables. The Company's portfolio sales and securitizations resulted in an
$11,851,080 gain on sales of portfolios representing the excess of cash proceeds
over the cost basis in those assets. There were no such sales in the previous
fiscal year. Servicing fees and other income increased 21% from $1,292,596 to
$1,564,356 due to a higher average number of accounts under management subject
to a servicing fee. The provision for losses decreased 29% from $6,483,736 to
$4,607,081 based on the experience of a more matured portfolio. The above
combined to produce net revenue of $37,099,131 for the fiscal year ended May 31,
1999, a 445% increase over $6,802,717 recorded for the fiscal year ended May 31,
1998.
EXPENSES. Salaries and employee benefits decreased 6% from $13,268,863
to $12,484,582 based on an average lower number of full-time personnel. Interest
expense decreased 15% from $4,760,905 in fiscal year 1998 to $4,029,491 in
fiscal year 1999 based on a lower average amount of debt outstanding due to the
conversion of $10 million of subordinated debt to preferred stock in May 1998
and the conversion of $10 million of subordinated debt in August 1998 and a
reduction in the interest rate on senior debt. Professional fees decreased 36%
from $4,215,891 in fiscal year 1998 to $2,701,016 in fiscal year 1999 as the
Company moved beyond its startup period requiring fewer outside professional
services. Depreciation and amortization decreased 19% from $3,223,620 in fiscal
year 1998 to $2,614,216 in fiscal year 1999. Fiscal year 1998 included an
$816,667 writedown of existing software systems. Third party card service fees
increased 46% from $3,097,347 in fiscal year 1998 to $4,518,919 in fiscal year
1999, in line with the increase in the average number of accounts under
management. Mail processing fees increased 28% from $1,121,623 in fiscal year
1998 to $1,434,506 in fiscal year 1999 largely in line with increased marketing
campaigns on existing portfolios of non-performing debt. Rental expenses
decreased 7% from $825,517 in fiscal year 1998 to $766,832 in fiscal year 1999.
Royalty expense, pursuant to a mutual business development agreement, increased
644% from $207,238 in fiscal year 1998 to $1,541,944 in fiscal year 1999. The
royalty expense is accrued when new credit card accounts make their third
payment according to the terms of the cardholder agreement. Increased royalty
expense is due to a higher percentage of cards reaching a third payment due to a
more thorough sales process and better account retention in the early months of
a new account. Other operating expenses as a group were stable, increasing 2%
from $5,233,043 in fiscal year 1998 to $5,360,337 in fiscal year 1999.
The above combined for income before taxes of $1,647,288 in fiscal year
1999 compared to a loss before taxes of $29,151,330 in fiscal year 1998. Because
of its losses through fiscal year 1998, the Company established a valuation
allowance for deferred tax assets since recoverability was dependent upon future
profitability. The Company subsequently recognized a tax benefit of $1,986,409
in fiscal year 1999 leading to a net income of $3,633,697 in fiscal year 1999
compared to a net loss of $29,151,330 in fiscal year 1998. The remainder of the
tax benefit is based on expected future income. The Company's realization of
this tax benefit depends upon future profitability of operations. The Company
recorded unrealized gains on its securitizations of $2,497,148, which, after
adding to net income, produces a comprehensive income of $6,130,845. There were
no sources of comprehensive income in fiscal year 1998.
NET INCOME (LOSS). Dividends on preferred stock have accumulated but
have not been declared and are not yet payable. The Company, however, treats the
dividends as declared and payable for the purpose of calculating net income
applicable to common shareholders and earnings per share. Preferred dividends
for fiscal year 1999 increased 350% from $399,996 in fiscal year 1998 to
$1,799,999 due to the previously discussed conversion of debt to Series D and E
Preferred Stock. After the effect of preferred dividends, net income applicable
to common shareholders in fiscal year 1999 was
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$1,833,698 in fiscal year 1999 compared to a net loss applicable to common
shareholders of $29,551,326 for fiscal year 1998.
FISCAL YEAR ENDED MAY 31, 1998 COMPARED TO FISCAL YEAR ENDED MAY 31,
1997:
REVENUES. Total revenue for fiscal year 1998 was $13,286,453, a 303%
increase from $3,294,428 during the same period ended May 31, 1997. The increase
was primarily due to a combination of increased revenues from a growing
portfolios of performing credit card receivables and a full 12 months of
operations compared to just under eight months of operations in fiscal year
1997. Income from credit card receivables increased 307% from $971,174 to
$3,951,602. Revenue in excess of cost recovered was $8,042,255 in fiscal year
1998 compared to $3,934 in fiscal year 1997 due to the startup nature of the
operation in fiscal year 1997. Servicing fees and other income decreased
24% from $1,601,228 to $1,292,596 as the Company de-emphasized servicing for
third parties in order to concentrate on servicing and developing its own
portfolios.
The provision for losses increased 333% from $1,494,001 in fiscal year
1997 to $6,483,736 in fiscal year 1998 as the portfolio of performing credit
card receivables grew and as the volume of funded cardholder charges and cash
advances grew proportionately. This combined to produce net revenue of
$6,802,717 for the fiscal year ended May 31, 1998, a 529% increase over net
revenue of $1,082,335 produced for the fiscal year ended May 31, 1997.
EXPENSES. Salaries and employee benefits increased 120% from $6,154,929
to $13,268,863 due to increased full time personnel and a full 12 months of
operations. Interest expense increased 533% from $751,729 to $4,760,905 based on
a higher level of debt outstanding during fiscal year 1998 versus fiscal year
1997. Professional fees increased 77% from $2,388,274 in fiscal year 1997 to
$4,215,891 in fiscal year 1998 as the Company continued to incur expenses
related to startup. Depreciation and amortization increased 239% from $952,362
in fiscal year 1997 to $3,223,620 in fiscal year 1998 as the Company invested in
equipment and incurred a full year of depreciation related to it. Third party
credit card service fees increased 244% from $899,986 in fiscal year 1997 to
$3,097,347 in fiscal year 1998 due to the increased number of accounts serviced
and a full 12 months of fees experienced in fiscal year 1998. All other expenses
as a group increased 53% from $4,823,026 in fiscal year 1997 to $7,387,421 in
fiscal year 1998 primarily due to the inclusion of a full 12 months of costs in
the period.
NET LOSS. The above factors combined to produce net loss before
preferred dividends of $29,151,330 in fiscal year 1998 compared to a net loss
before preferred dividends of $14,246,259 in fiscal year 1997. After accounting
for preferred dividends of $399,996 in fiscal year 1998 and $7,397 in fiscal
year 1997, the net loss applicable to common shareholders was $29,551,326 in
fiscal year 1998 compared to $14,253,656 in fiscal year 1997.
SIX MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO SIX MONTHS ENDED NOVEMBER
30, 1998:
REVENUES. Total revenue for the six months ended November 30, 1999 was
$22,549,303, a 13.6% increase from $19,849,089 recorded during the six months
ended November 30, 1998. Gains from portfolio sales and retained interests
increased 12.2% from $6,336,221 in the six months ended November 30, 1998 to
$5,049,812 in the six months ended November 30, 1999. The Company sold its
retained interests in securitizations during the second quarter of fiscal year
2000, but conducted no sales in the first quarter of fiscal
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year 2000. The Company recorded gains from portfolio sales and securitizations
in both the first and second quarters of fiscal year 1999. All other revenue
components ("core revenues") increased 14.2% as a group during the first half of
fiscal year 2000. Income from credit card receivables (including interest, fees
and interchange processing fees) increased 43.1% from $3,002,109 in the six
months ended November 30, 1998 to $4,294,788 due to a higher amount of funded
credit card receivables during the period. Revenue in excess of costs recovered
decreased 2.5% from $10,156,697 to $9,905,257, while servicing and all other
income increased from $1,040,865 in the six months ended November 30, 1998 to
$2,013,037 in the six months ended November 30, 1999, primarily due to income
related to previously securitized portfolios. The provision for losses increased
46.1% from $2,559,044 in the six months ended November 30, 1998 to $3,737,867 in
the six months ended November 30, 1999 and increased as a percentage of core
revenue from 18.0% in the six months ended November 30, 1998 to 23.1% in the six
months ended November 30, 1999 due to a higher level of principal funded on the
credit cards, due to the maturing of the portfolio. The above factors combined
for a 8.8% increase in net revenue from $17,290,045 in the six months ended
November 30, 1998 to $18,811,436 in the six months ended November 30, 1999.
EXPENSES. Total operating expenses for the first half of fiscal year
2000 increased less than 0.5% from $16,971,181 in the six months ended November
30, 1998 to $17,031,402 in the six months ended November 30, 1999. Salaries and
employee benefits increased 12.6% from $5,878,047 in the six months ended
November 30, 1998 to $6,615,777 in the six months ended November 30, 1999, but
decreased as a percentage of core revenue from 41.40% in the six months ended
November 30, 1998 to 40.81% in the six months ended November 30, 1999. Interest
expense decreased 3.6% from $2,219,073 to $2,139,454, based on a lower average
amount of debt outstanding. As a percentage of core revenue, interest expense
decreased from 15.6% in the six months ended November 30, 1998 to 13.2% in the
six months ended November 30, 1999. Professional fees declined 9.8% from
$1,229,946 in the six months ended November 30, 1998 to $1,109,517 in the six
months ended November 30, 1999 and as a percentage of core revenue declined from
8.7% in the six months ended November 30, 1998 to 6.8% in the six months ended
November 30, 1999. Depreciation and amortization increased 5.8% from $1,260,364
in the six months ended November 30, 1998 to $1,333,893 in the six months ended
November 30, 1999, but as a percentage of core revenue declined slightly from
8.9% in the six months ended November 30, 1998 to 8.2% in the six months ended
November 30, 1999. Third party card service fees declined 5.3% from $2,123,114
in the six months ended November 30, 1998 to $2,010,651 in the six months ended
November 30, 1999 and as a percent of core revenue declined from 15.0% in the
six months ended November 30, 1998 to 12.4% in the six months ended November 30,
1999 as the Company's cost per account declined. All other
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expenses as a group declined 10.3% from $4,260,637 in the six months ended
November 30, 1998 to $3,822,110 in the six months ended November 30, 1999 due to
more efficient operating systems and declines in per unit costs. The Company
recorded a $1,286,409 tax expense during the first half of fiscal year 2000 as a
result of the gain from sale of the retained interests in its securitizations
versus a $100,000 tax benefit during the first half of fiscal year 1999 related
to the securitization completed during the first half of fiscal year 1999.
NET INCOME (LOSS). Net income before dividends was $493,625 for the
first half of fiscal year 2000 versus net income of $418,864 in the first half
of fiscal year 1999. After providing for preferred dividends of $1,000,000 in
the first half of fiscal year 2000, the net loss applicable to common
shareholders was $506,375, or $(0.01) per common share, versus preferred
dividends of $799,999 and a net loss of $381,135, or $(0.01) per common share,
in the first half of fiscal year 1999.
In the first half of fiscal year 1999 the Company had $784,348 in
unrealized gain, net of tax, on retained interests in securitized credit card
receivables. In the first half of fiscal year 2000 the Company had $1,424,065 of
unrealized gains on its retained interests, net of tax, prior to the sale of the
retained interests. As a result of the sale of the retained interests in the
securitizations, the Company reversed the prior unrealized gains on the retained
interests in securitizations, totaling $3,921,213, which caused a comprehensive
loss of $2,003,523 for the first half of fiscal year 2000 versus comprehensive
income of $1,203,212 during the first six months of fiscal year 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company seeks to maintain an adequate level of liquidity through
active management of assets and liabilities. Because the characteristics of its
assets and liabilities change, liquidity management is a dynamic process
affected significantly by the maturity of the Company's assets and the
seasonality of the credit card business, which places significant demands on
funding new charges and cash advances during certain times of the year,
including the year-end holiday season.
At May 31, 1997, the Company had $2,685,581 of cash and cash
equivalents, compared to $8,205,071 at May 31, 1998 and $4,283,930 at May 31,
1999. The Company maintains restricted cash reserves at its banks to facilitate
the funding of new charges and advances on its customer's credit cards. These
restricted balances were $1,000,000 at May 31, 1997, $1,000,000 at May 31, 1998,
and 750,000 at May 31, 1999. At August 31, 1998, the Company had $5,524,377 in
cash and cash equivalents, of which $1,000,000 was restricted. At August 31,
1999, the Company had $5,273,121 in cash and cash equivalents of which $750,000
was restricted. The Company believes it has sufficient cash and cash equivalents
from its receivables portfolio and credit lines to operate its business over the
next twelve months.
A significant source of liquidity for the Company has been the sale and
securitization of credit card receivables. During the fiscal year ended May 31,
1999, the Company sold approximately $7.0 million in face amount of receivables
to an unaffiliated bank for $5.0 million and raised approximately $13.0 million
from three securitizations of credit card receivables totaling $20.4 million.
During the second quarter of fiscal year 2000, the Company sold its ownership
interests in its three securitization subsidiaries for approximately $8.6
million in cash, realizing a pretax gain of approximately $6.5 million.
The Company also maintains a senior secured revolving credit line with
Coast Business Credit, a division of Southern Pacific Bank. The credit line was
established in April 1998 for $5 million and was subsequently increased to $10
million in June 1999, and to $15 million in December 1999. The line of credit
expires in July 2001 and is secured by substantially all of the Company's
assets. Borrowings under the credit line are based on a formula, which is
dependent primarily upon the performance and maturing of the Company's credit
card receivables. There was $4,957,452 outstanding under the credit line at
November 30, 1999.
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The Company has also received secured financing from a related party,
J.L.B. of Nevada, Inc.,which is subordinated to the senior secured revolving
credit line. The principal amount outstanding on these notes totaled $10,009,042
at May 31, 1997, $27,674,940 at May 31, 1998 and $17,674,940 at May 31, 1999 and
at November 30, 1999. As noted in Item 7, $10 million of the initial debt amount
was converted to Series D preferred stock in May 1998. In August 1998, an
additional $10 million of the initial debt amount was converted to Series E
preferred stock. See "Item 7 - Certain Relationships and Related Transactions."
In October 1999, the Company established a $17.5 million secured
revolving credit line with General Electric Capital Corporation to finance the
acquisition of non-performing consumer debt portfolios. There was $2,547,596
outstanding under the credit line at November 30, 1999. The borrower is a wholly
owned, bankruptcy remote special purpose entity established by the Company for
this transaction. The transfer of receivables to this SPE by the Company does
not qualify for sale treatment under SFAS 125. The SPE will be fully
consolidated with the Company's financial results.
CAPITAL EXPENDITURES AND PORTFOLIO ACQUISITIONS
During fiscal year 1999, the Company invested $8,837,087 to acquire
portfolios of non-performing consumer debt, a decrease of 45% from the
$16,031,225 invested in fiscal year 1998, which was a 11% increase over the
$14,469,333 invested in fiscal year 1997. The decrease in fiscal year 1999 was
due in part to a shortage of acquisition debt available to the Company during
the year. The Company invested $4,469,749 to acquire portfolios of
non-performing consumer debt during the six months ended November 30, 1999, a
decrease of 38.5% from $7,266,887 invested during the six months ended November
30, 1998. The Company also invested $4,085,604 to acquire a portfolio of fully
performing credit card receivables, at a discount.
The Company invested $682,539 in property and equipment during fiscal
year 1999 compared to $4,170,472 in fiscal year 1998 and $10,188,136 in fiscal
year 1997. A majority of the hardware commitments to build the Company's
business platform were made in fiscal years 1997 and 1998. During the first six
months of fiscal year 2000, the Company invested $75,972 in new capital
equipment compared to $394,627 during the first six months of fiscal year 1999.
The Company plans to make continued investments in technology and
non-performing portfolios for the remainder of the fiscal year, the amount of
which will depend on the amount of financing and new capital available for such
investments. The Company believes that its asset securitization programs,
together with the revolving credit facility, long term debt issuance, equity
issuance, and cash flow from operations, will provide adequate liquidity to the
Company for meeting anticipated cash needs, although no assurance can be given
to that effect.
INFLATION
The Company believes that inflation has not had a material impact on
its results of operations for the fiscal years ended May 31, 1997, 1998 and
1999.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's principal market risk is due to changes in interest
rates. These changes affect the Company directly in its lending and borrowing
activities, as well as indirectly as interest rates may impact the payment
performance of the Company's credit card holders.
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To manage the Company's direct risk to market interest rates,
management actively monitors the interest rates and the interest sensitive
components of the Company's balance sheet to minimize the impact changes in
interest rates have on the fair value of assets, net income and cash flow.
Management seeks to minimize the impact of changes in interest rates on the
Company primarily by matching asset and liability repricings.
The Company's credit card receivables earn interest at a fixed annual
percentage rate. The Company's fixed annual percentage rate credit card
receivables have no stated maturity or repricing period. However, the Company
may reprice its credit card receivables upon providing the required prior notice
to the customer, which is generally no more than 60 days. The interest rates on
the Company's liabilities are generally indexed to the prime rate. These
characteristics of the Company's receivables and liabilities expose the Company
to repricing risk, which results from differences between the timing of rate
changes and the timing of cash flows, which could impact net interest income if
liabilities reprice more often than assets. The principal objective of the
Company's asset/liability risk management activities is to monitor and control
the Company's exposure to adverse effects resulting from movements of interest
rates over time. The Company has not entered into derivative transactions to
hedge repricing risk.
CAUTIONARY STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
The business of the Company involves many risks. The following summarizes some
of these risks and uncertainties. If any of the following risks actually occur,
our business, financial condition, operating results or cash flows could be
materially adversely affected. This could cause the market price of the
Company's Common Stock to decline and/or cause the Company to seek additional
financing.
This Registration Statement on Form 10 also contains certain
forward-looking statements that involve risks and uncertainties. These
statements relate to the Company's future plans. objectives, expectations and
intentions. These statements may be identified by the use of words such as
"believes," "expects," "may," "will," "could," "should," "seeks," "pro forma,"
"as adjusted" or "anticipates," and similar expressions. Our actual results
could differ materially from those discussed in these statements. Factors that
could contribute to these differences include those discussed below and
elsewhere in this prospectus.
THE COMPANY MAY NOT GENERATE SUFFICIENT CASH FLOWS FROM ITS RECEIVABLES
TO FUND ITS OPERATIONS. The Company is primarily in the business of providing
credit card products to consumers who have previously defaulted on a debt. Prior
to the Company's acquisition of the receivables, the originating institutions
and intermediary owners, if any, have generally made numerous attempts, using
both in-house and third-party collection agencies,to collect on the
non-performing accounts. The Company acquires the receivables at a discounted
price and believes it can successfully generate cash flows on the new credit
card accounts in excess of its acquisition cost for the receivables. While the
Company believes its knowledge of the market and its ability to collect and
convert non-performing accounts into new credit card accounts enables the
Company to minimize the higher risks inherent in the purchase of non-performing
debt, no assurance can be given that the Company has adequate protection against
these risks. In the event that the conversion of charged-off accounts to credit
card accounts and/or the collection on receivables is less than
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anticipated, or if the new credit card accounts experience higher delinquency
rates or losses than anticipated, the Company may not be able to generate
sufficient cash from its receivables to cover the costs associated with
purchasing the receivables and running its business.
THE COMPANY MAY NOT BE ABLE TO MANAGE ITS GROWTH OR OBTAIN THE
RESOURCES NECESSARY TO ACHIEVE ITS GROWTH PLANS. If the Company cannot manage
its growth, it may experience fluctuations in net income or sustain net losses.
Since inception, the Company has grown rapidly, placing significant demands on
its management, administrative, operational and financial resources. The Company
seeks to continue its growth trends, which could place additional demands on its
resources. Future growth will depend on numerous factors, including the
development of additional relationships with banks willing to issue credit cards
for the Company, the availability of additional non-performing portfolios for
purchase and the availability of financing to purchase these portfolios and
finance its ongoing operations, the ability to sell and securitize the Company's
seasoned credit card receivables, the ability to maintain a high quality of
customer service, and the recruitment, motivation and retention of qualified
personnel.
Sustained growth also may require the implementation of enhancements to
the Company's operational and financial systems and may require additional
management, operational and financial resources. There can be no assurance that
the Company will be able to manage its expanding operations effectively or to
maintain its historical level of cash flows from the portfolios it has
purchased, or that it will be able to maintain or accelerate its growth. The
failure of the Company to manage growth could harm the Company's results of
operations or financial condition.
THE COMPANY'S QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND CAUSE ITS
STOCK PRICE TO DECREASE. The timing of portfolio acquisitions along with the
timing of its credit card receivables sales and securitizations can affect the
timing of recorded income and result in periodic fluctuations in the Company's
quarterly operating results, which may adversely affect the market price of its
common stock. The timing of any sale or securitization transaction is affected
by a number of factors beyond the Company's control including market conditions
and the presence of investors and lenders interested in the Company's seasoned
credit card accounts. An account is seasoned when a consumer has made a certain
number of on-time payments on the consumer's outstanding credit card balance.
THE COMPANY'S CASH REQUIREMENTS MAY FLUCTUATE FROM PERIOD TO PERIOD.
The Company may experience seasonal fluctuations in cash requirements due to a
variety of factors beyond the Company's control including the rate at which
customers pay down their credit card balance and the rate at which the customers
make new purchases and cash advances on their accounts. The Company may
experience higher cash requirements during the year-end holiday season and at
other times during the year when customers make new purchases on their credit
cards at a faster rate than they pay their debts.
THE COMPANY HAS INCURRED NET LOSSES AND HAS AN ACCUMULATED DEFICIT. The
Company has incurred substantial net losses and had an accumulated deficit of
approximately $39.9 million at May 31, 1999. There can be no assurance that the
Company will be able to maintain profitability long enough to recover the
accumulated deficit. Significant expenditures have been made to build the
infrastructure necessary to acquire charged-off portfolios, market and create
new credit card accounts from these portfolios, and service the resulting base
of credit card accounts. Results of operations will depend upon numerous factors
including without limitation, costs associated with the purchase of charged-off
consumer debt portfolios and the marketing, origination and servicing of the
Company's credit card receivables, the revenue generated from the Company's
credit card portfolio, the availability of additional financing to purchase
non-performing consumer debt portfolios and finance working capital, the
performance of the Company's receivables,
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the ability to sell and securitize the Company's credit card receivables, and
the market acceptance of the Company's products and services.
THE COMPANY MAY BE UNABLE TO MEET ITS ADDITIONAL FINANCING
REQUIREMENTS. There is no assurance that the Company will be able to meet its
future liquidity requirements. The Company has a substantial ongoing need for
liquidity to finance its operations, and this need is expected to increase along
with the growth in the Company's business. The Company's primary operating cash
requirements include the purchase of non-performing portfolios, the marketing,
servicing and collection of credit cards, and ongoing administrative expenses.
The Company funds its cash requirements through a combination of cash
flow from operations, asset sales and securitizations, loans and other financing
transactions.
In the event additional financing is unavailable to the Company and
additional receivable sales and securitizations are not completed, the Company's
ability to operate its business would be limited and its financial condition,
operating results or cash flows could be materially adversely affected.
THE COMPANY USES ESTIMATES IN ITS ACCOUNTING AND WOULD HAVE TO CHARGE
ITS INCOME IF ACTUAL RESULTS WERE LESS THAN ESTIMATED. The Company uses gain on
sale accounting, pursuant to which the Company records the unrealized gain from
the sale of receivables in securitization transactions as a component of
comprehensive income and as retained interest in securitized receivables on the
balance sheet. The unrealized gain is an estimate based upon management's
assessment of future payment and default rates and other considerations in light
of conditions existing at the time of the estimate. If actual default rates,
with respect to those receivables included in securitizations, are higher than
the Company projected at the time of sale of the receivables, the Company would
be required to record a charge to comprehensive income in future periods which
would also reduce the Company's retained interest on the balance sheet.
LACK OF MATURITY OF THE COMPANY'S CREDIT CARD PORTFOLIO MAY RESULT IN
INCREASED DELINQUENCIES AND DEFAULTS. The average age of a credit card issuer's
portfolio of accounts is an indicator of the stability of delinquency and
default levels of that portfolio; a portfolio of older accounts generally
behaves more predictably than a newly originated portfolio. The majority of the
credit card receivables owned by the Company are less than three years old as of
December 1999. As a result there can be no assurance as to the levels of
delinquencies and defaults, which may affect the Company's earnings through net
charge-offs over time. Any material increases in delinquencies and defaults
above management's expectations would have a material adverse effect on the
Company's results of operations and financial condition.
THE MARKET FOR THE COMPANY'S CREDIT CARD RECEIVABLES IS LIMITED. The
Company's future is highly dependent upon the Company's ability to sell or
securitize its portfolios of credit cards that have been generated from
non-performing debt. Although to date the Company has sold two portfolios and
completed three securitizations, no assurance can be given that any more will be
sold or securitized. While there have been securitizations completed by
companies that purchase non-performing consumer debt portfolios and subsequently
attempt to collect on these accounts, the Company is unaware of any significant
securitization of credit card receivables generated from portfolios of
non-performing debt. The Company believes that the market for receivables of
this nature is limited and that there can be no assurance that any such market
will develop to the stage where the Company can be assured of buyers for it's
securitizations and portfolio sales.
In addition, financial institutions that buy credit card receivables
or invest in securitizations may become subject to increasing regulatory burdens
or requirements that could affect the pricing or the size of the market for
such sales or securitizations. This could negatively affect the Company's
profitability and its ability to securitize or sell its credit card receivable
portfolios.
SECURITIZATIONS EXPOSE THE COMPANY TO VARIOUS RISKS. The Company
completed its first securitzations in fiscal 1999. The transactions resulted in
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recognition of a gain on sale and the recording of the retained interests in the
securitizations for financial reporting purposes. These and future
securitizations reduce income from credit card receivables and revenue in excess
of cost recovered, which reduction is partially offset by the receipt of
servicing income, and the accretion income on the residual investment in the
securitizations. In addition, in accordance with SFAS 115 unrealized holding
gains and losses, net of the related tax effect, are not reflected in earnings
but are recorded as a separate component of comprehensive income until realized.
A decline in the value of an available-for-sale security below cost that is
deemed other than temporary is charged to earnings and results in the
establishment of a new cost basis for the security and, therefore, could have an
adverse effect on the Company's financial position and/or results of operations.
Any downward adjustment in the carrying amount of this or future residual
interests could also have an adverse effect on the market price of the Company's
Common Stock. The Company intends to pursue additional securitizations and
portfolio sales, which will result in fluctuations in the Company's quarterly
income and will affect period-to-period comparisons. There also can be no
assurance that the Company will be able to complete future securitizations or
portfolio sales at all or on terms favorable to it.
ADVERSE PUBLICITY MAY IMPAIR ACCEPTANCE OF THE COMPANY'S PRODUCTS.
Critics of the credit card industry have in the past focused on marketing
practices that they claim encourage consumers to borrow more money than they
should, as well as on pricing practices that they claim are either confusing or
result in prices that are too high. Increased criticism of the industry or
criticism of the Company in the future could hurt client acceptance of the
Company's products or lead to changes in the law or regulatory environment,
either of which would significantly harm the Company's business.
THE COMPANY HAS PLEDGED ALL OF ITS ASSETS WHICH MAY MAKE FUTURE
FINANCING MORE DIFFICULT. On April 30, 1998, to secure its payment and
performance under its senior secured debt financing, the Company granted the
lender a security interest in all of the Company's assets including, among other
things, all receivables, inventory and equipment. The Company had previously
pledged its assets to its major shareholder as collateral for the loans
evidenced by certain shareholder notes. All shareholder notes have been
subordinated to the Company's senior debt lender. By pledging all of its assets
to secure financings, the Company may find it more difficult to secure
additional financing in the future.
THE COMPANY DOES NOT HAVE BACKUP ARRANGEMENTS FOR ALL SERVICES AND
EXISTING ARRANGEMENTS MAY BE INSUFFICIENT. The Company, through the issuing
bank's arrangement with FDR, uses FDR for third-party processing of credit card
data and services. The Company provides credit card data to FDR on a daily basis
and such data is backed up and stored by FDR. In addition, the Company's
marketing data on its purchased portfolios is backed up on a daily basis and is
stored off-site.
While it is currently evaluating a second service center, the Company
does not have a back-up servicer for its portfolio of credit cards, nor does it
have a back-up telemarketer for its marketing programs. In the event of a
disaster or other occurrence that closes the Company's main facility or shuts
down its primary and redundant data connections to FDR, the Company's business
would be interrupted during the period required to repair its data lines and/or
facilities or to relocate to temporary facilities. Such interruption in the
Company's operations could have a material adverse impact on its business and
revenues. The Company is evaluating back-up servicing and marketing solutions
that can seamlessly move servicing and marketing operations to alternative
locations or to third-party service providers in a manner that would minimize
losses in the event of a disaster or other occurrence that affects the Company's
primary facility or data transmission to third parties.
THE COMPANY CANNOT ISSUE ITS OWN CREDIT CARDS AND IT IS RELIANT UPON
CREDIT CARD ISSUERS. The Company is not licensed to nor does it currently have
the ability to independently issue credit cards. Accordingly, the Company is
dependent upon third-party financial institutions to issue credit cards to the
Company's customers. The Company currently has two banks through which cards are
issued. If the
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<PAGE> 28
Company's existing credit card issuers discontinue their agreements with the
Company and the Company were unable to find a new credit card issuer willing to
issue cards to consumers with impaired credit history, the Company would not be
able to operate its business as it is currently conducted. In addition, the
Company may not be able to enter into an agreement with an alternate provider on
terms that the Company considers favorable or in a timely manner without
disruption of the Company's business.
In addition, the third-party financial institutions upon which the
Company relies are subject to extensive governmental regulation. If such
regulators were to impose additional regulations or restrictions on third-party
financial institutions in connection with issuing credit cards, such regulations
or restrictions could impose additional costs or limitations upon the Company's
operations. These costs and/or limitations could reduce the Company's
profitability and adversely affect financial results.
LABOR AVAILABILITY. The credit card industry is labor intensive and
generally experiences a high rate of turnover in personnel. A high turnover rate
among the Company's employees would increase the Company's recruiting and
training costs and could adversely impact the overall recovery of its
receivables. In addition, Sioux Falls, South Dakota experiences a low incidence
of unemployment. If the Company were unable to recruit and retain a sufficient
number of employees, it would be forced to limit its growth or possibly curtail
its operations. Growth in the Company's business will require it to continue to
recruit and train significant numbers of qualified personnel. There can be no
assurance that the Company will be able to hire, train and retain a sufficient
number of qualified employees.
THE COMPANY MAY NOT BE ABLE TO ACQUIRE ENOUGH RECEIVABLES ON FAVORABLE
TERMS TO OPERATE PROFITABLY. To obtain additional credit card customers, the
Company depends on the continued availability of non-performing portfolios that
meet its requirements. Any decrease in availability of receivables or any
increase in the cost of receivables could reduce the Company's profitability and
liquidity and have a material adverse affect on the Company's results of
operations or financial condition.The availability of portfolios of receivables
for future purchase at prices favorable to the Company depends on a number of
factors outside of the control of the Company, including the continuation of the
current growth trend in credit card and consumer installment debt. Curtailment
of that trend could result in less credit being extended by lending institutions
and consequently fewer receivables available for purchase at prices that conform
to the Company's strategy for profitable collection. In addition, to the extent
consumers with negative credit history have less difficulty in obtaining credit,
especially obtaining unsecured credit cards, there may be less consumer demand
for the Company's product. The possible entry of new competitors (including
competitors that historically have focused on the acquisition of different asset
types) may adversely affect the Company's access to portfolios. The Company's
access to receivables portfolios may also be adversely affected if traditional
credit card lenders rehabilitate their own non-performing credit card
receivables. In addition, overly aggressive pricing by competitors could have
the effect of raising the cost of portfolios of receivables above those that
conform to the Company's pricing models.
FLUCTUATIONS IN ECONOMIC CONDITIONS COULD ADVERSELY AFFECT THE
COMPANY'S BUSINESS. During strong economic cycles, available credit, including
consumer credit, generally increases and payment delinquencies and defaults
generally decrease. During periods of economic slowdown and recession, such
delinquencies and defaults generally increase. No assurances can be given that
the Company's credit card losses and delinquencies would not worsen in a weak
economic cycle. Significant increases in credit card losses would weaken the
financial condition of the Company.
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<PAGE> 29
THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY ANTICIPATE, INVEST IN OR
ADOPT TECHNOLOGICAL ADVANCES WITHIN ITS INDUSTRY. The Company's success is
dependent in large part on its continued investment in sophisticated
telecommunications and computer systems, including predictive dialers, automated
call distribution systems and digital switching equipment. The Company has
invested significantly in technology in an effort to remain competitive and
anticipates that it will be necessary to continue to do so. Moreover, computer
and telecommunications technologies are evolving rapidly and are characterized
by short product life cycles, which require the Company to anticipate and stay
current with technological developments. There can be no assurance that the
Company will be successful in anticipating, managing or adopting such
technological changes on a timely basis or that the Company will have the
capital resources available to invest in new technologies.
THE COMPANY IS DEVELOPING NEW PRODUCTS AND SERVICES WHICH MAY NOT BE
SUCCESSFUL. While the Company may, from time to time, develop additional
products and services, there can be no assurance that such products and services
will be completed or successfully marketed and implemented. Consumer preferences
for credit card and credit related products are difficult to predict,
specifically where consumers have experienced past credit difficulties. There
can be no assurance that the products and services introduced by the Company
will be accepted by credit card holders, or that the Company's methodology for
restructuring past consumer debt delinquency will be accepted by the consumer.
Failure to obtain significant customer satisfaction or market share for the
Company's products and services would have a material adverse effect on the
Company's operations and financial condition.
LACK OF LIQUIDITY OF COMMON STOCK. The Company's Common Stock currently
trades on the NASDAQ OTC Bulletin Board under the symbol "PLCR." While a number
of registered broker-dealers are currently making a market in the Company's
Common Stock, there can be no assurance that an active public market for the
Company's Common Stock will be sustained. Accordingly, investors may not be able
to sell their Common Stock should they desire to do so, or may be able to do so
only at lower than desired prices. While no prediction can be made as to the
effect, if any, that future sales of shares of the Company's Common Stock, or
the availability of additional shares for future sales, will have on the market
price of the Common Stock prevailing from time to time, sales of substantial
amounts of Common Stock or the perception that such sales could occur, would
likely adversely affect the market price for the Common Stock.
THE COMPANY IS DEPENDENT ON ITS KEY PERSONNEL. The Company is dependent
upon the continued contributions of its officers and other key employees. The
loss of the services of one or more of our executive officers or key employees
could disrupt the Company's operations. The Company has entered into employment
agreements with Martin J. Burke, its Chief Executive Officer and Chairman of the
Board of Directors, Kevin T. Riordan, its President and Chief Operating Officer,
Michael J. Philippe, its Executive Vice President and Chief Financial Officer,
and Richard S. Angel, its Executive Vice President and General Counsel. The loss
of the services of any such individual or the services of certain other officers
or key employees would cause the Company to incur costs for recruiting
replacements, could result in the loss of the valuable expertise and business
relationships, and could have a material adverse effect on the Company's
business and prospects. See "Item 5 - Directors and Executive Officers."
THE COMPANY'S MAJOR SHAREHOLDERS ARE RELATED AND HAVE THE ABILITY TO
CONTROL SHAREHOLDER ACTIONS. Jay L. Botchman, a director of the Company, has
control over the Company's affairs through his ability to elect the Company's
directors and determine the outcome of votes by the Company's stockholders on
corporate matters, including mergers, sales of all or substantially all of the
Company's assets, charter amendments and other matters subject to stockholder
approval. Mr. Botchman is the principal stockholder of Taxter and owns all of
the outstanding capital stock of J.L.B. of Nevada, Inc. ("JLB"). Mr. Botchman,
individually and through his control of Taxter and JLB, beneficially owns all of
the preferred stock of the Company. The terms of the
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<PAGE> 30
preferred stock of the Company contain preferential rights for the holders of
preferred stock, including preferential dividends and voting rights. As of
December 15, 1999, Taxter owned approximately 45.1% of the Common Stock of the
Company and controlled approximately 87.86% of the voting power of the Company's
shares primarily as a result of its ownership of 1,200,000 shares of the
Company's Series A Preferred Stock. Under the provisions of the Company's
Certificate of Incorporation, the outstanding shares of Series A Preferred Stock
represent 80% of all votes entitled to be voted at any meeting of the
Shareholders of the Company, subject to dilution to the extent capital stock of
the Company is subsequently issued. Currently, the shares of the Series A
Preferred Stock represent approximately 77.88% of all votes entitled to be voted
at any meeting of the stockholders of the Company. Accordingly, Mr. Botchman, as
managing member of Taxter, is in a position to elect all of the directors of the
Company and direct stockholder approval upon all issues to be voted upon by the
stockholders of the Company, thereby controlling the Company. If Mr. Botchman
were to cease to be the managing member of Taxter for any reason, Martin J.
Burke, the Company's Chief Executive Officer, would become the managing member
of Taxter pursuant to the terms of the Taxter Operating Agreement. For
additional information regarding Mr. Botchman's ownership interests in the
Company, see "Item 4 - Security Ownership of Certain Beneficial Owners and
Management." See "Item 11 - Description of Securities to be Registered;
Preferred Stock" for more information on the rights and preferences of the
preferred stock of the Company.
PROPRIETARY RIGHTS; SUBSTANTIAL DEPENDENCE UPON PROPRIETARY
INFORMATION. The Company is the owner of certain proprietary data and analytical
computer programs, methods and related know-how for stratifying and analyzing
characteristics of non-performing receivable portfolios, projecting conversions
to new credit cards and the total cash collections, and predicting cardholder
payment performance that are important to the Company's operations and
profitability. The Company currently relies upon a combination of
confidentiality agreements,contract provisions and trade secret laws to protect
its proprietary rights. Although the Company intends to protect its rights
vigorously, there can be no assurance that the Company will be successful in
protecting its proprietary rights.
FAILURE TO COMPLY WITH CONSUMER AND DEBTOR PROTECTION LAWS AND
REGULATIONS COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS. The Company's
collection practices, business operations and credit card receivables are
subject to numerous federal and state consumer protection laws and regulations
imposing licensing and other requirements with respect to purchasing,
collecting, making and enforcing consumer loans. The Company conducts periodic
compliance reviews and, if necessary, implements procedures to bring the Company
into compliance with all applicable state and federal regulatory requirements.
Failure by the Company to comply with such statutes or regulations could have a
material adverse effect on the Company's results of operations or financial
condition. In addition, due to the consumer-oriented nature of the collections
and credit card industry, there is a risk that the Company or other industry
participants may be named as defendants in litigation involving alleged
violations of federal and state laws and regulations, including consumer
protection laws, and consumer law torts, including fraud. A significant judgment
against the Company or within the industry in connection with any such
litigation could have a material adverse effect on the Company's results of
operations or financial condition. See "Item 1 - Business; Government
Regulation."
RISKS ASSOCIATED WITH PENDING LITIGATION. The Company is currently
named as a defendant in five class action lawsuits. A significant judgment
against the Company in one or more of the lawsuits could subject the Company to
a monetary judgment and/or require the Company to modify its methods of
operation, either of which could have a material adverse effect on the Company's
results of operations or financial condition. See "Item 8 - Legal Proceedings."
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<PAGE> 31
THE COMPANY HAS ACCUMULATED CASH DIVIDENDS. The Company has accumulated
approximately $2.6 million in undeclared and unpaid dividends on its preferred
stock. Although the Board of Directors has not declared, and therefore not paid,
such dividends to date, the Company may be called on to pay such dividends in
the future, assuming it has the legal capacity to do so under Delaware law. To
the extent such preferred stock remains outstanding, additional cash dividends
will accumulate. If the Company is required to pay out such cash dividends, such
payments would limit the amount of cash available to use in other operations and
may, therefore, decrease the cash liquidity of the Company. Such a decrease in
liquidity may require the Company to seek additional financing if the Company's
operations are not sufficient to fund its cash needs. See "Description of
Capital Stock--Preferred Stock."
THE COMPANY CAN ISSUE PREFERRED STOCK WITHOUT SHAREHOLDER APPROVAL
WHICH COULD DILUTE AND REDUCE THE VALUE OF THE COMPANY'S STOCK . The Company's
Certificate of Incorporation authorizes the issuance of "blank check" preferred
stock with such designations, rights and preferences as may be determined from
time to time by the Company's Board of Directors. Accordingly, the Board of
Directors is empowered, without stockholder approval, to issue preferred stock
with dividend, liquidation, conversion, voting or other rights which could
adversely affect the relative voting power or other rights of the holders of the
Company's Common Stock or reduce the market value of the Common Stock. In the
event of additional issuances, the preferred stock may be used, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company and could prevent stockholders from receiving a premium
for their shares in the event of a third party tender offer or change of control
transaction. There can be no assurance that the Company will not issue
additional shares of preferred stock in the future. When the Company issues
additional preferred stock, the issuance may have a dilutive effect upon the
holders of the Company's Common Stock.
ANTI-TAKEOVER PROVISIONS IN THE COMPANY'S CHARTER DOCUMENTS AND STATE
LAW MAY INHIBIT BENEFICIAL CHANGES OF CONTROL. The Company's charter documents
and Delaware law contain provisions that could make it more difficult for a
third party to acquire the Company, even if such a change of control would be
beneficial to the Company's stockholders. For example:
- - - -- the Company's board of directors has the power to issue shares of preferred
stock and set the related terms without stockholder approval;
- - - -- the Company is restricted in its ability to enter into business combinations
with interested stockholders; and
- - - -- the ability of stockholders to call a special meeting is limited.
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<PAGE> 32
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS. The Company's
Certificate of Incorporation contains provisions limiting the liability of
directors of the Company for monetary damages to the fullest extent permissible
under Delaware law. This is intended to eliminate the personal liability of a
director for monetary damages in an action brought by or in the right of the
Company for breach of a director's duties to the Company or its stockholders
except in certain limited circumstances. In addition, the By-laws of the Company
contain provisions requiring the Company to indemnify directors, officers,
employees and agents of the Company serving at the request of the Company
against expenses, judgments (including derivative actions), fines and amounts
paid in settlement. This indemnification is limited to actions taken in good
faith in the reasonable belief that the conduct was lawful and in or not opposed
to the best interests of the Company. The By-laws of the Company provide for the
indemnification of directors and officers in connection with civil, criminal,
administrative or investigative proceedings when acting in their capacities as
agents for the Company. The foregoing provisions may reduce the likelihood of
derivative litigation against directors and officers and may discourage or deter
stockholders or management from suing directors or officers for breaches of
their duties to the Company, even though such an action, if successful, might
otherwise benefit the Company and its stockholders.
EXERCISE OF OUTSTANDING OPTIONS COULD CAUSE EXPENSE TO THE COMPANY AND
DILUTE STOCKHOLDERS. As of February 1, 2000 Company had granted options to
purchase 10,910,747 shares of Common Stock pursuant to stock option and
warrant agreements entered into by the Company with certain individuals
associated with the Company. While 5,417,000 of such options are not
immediately exercisable, any exercise could cause immediate and substantial
dilution. Certain of the shares subject to these options give the holder the
right to demand that the Company to file a registration statement at the
Company's expense under the Securities Act of 1933, as amended, covering the
shares. Exercise of such rights could involve substantial expense to the
Company.
SHARES OF THE COMPANY'S COMMON STOCK ELIGIBLE FOR FUTURE SALE IN THE
PUBLIC MARKET COULD CAUSE THE COMPANY'S STOCK PRICE TO DECREASE OR LIMIT ITS
ABILITY TO RAISE CAPITAL. If one or more of the Company's stockholders sell
substantial amounts of the Company's Common Stock, the market price of the
Common Stock could drop. These sales could make it difficult for the Company to
raise funds through offerings of Common Stock or depress the stock price at a
time when the Company needs to raise capital. As of February 1, 2000, the
Company had 34,761,965 shares of Common Stock issued and outstanding, all of
which are available for sale in the public market subject to the volume and
other selling limitations of Rule 144 ("Rule 144") of the Securities Act of
1933, as amended (the "Securities Act").In addition, certain holders of options
or warrants to purchase Common Stock and certain holders of preferred stock of
the Company that is convertible into Common Stock have the right to demand that
the Company register such shares of Common Stock (8,157,500 shares of Common
Stock in the aggregate) under the Securities Act.
RISK OF LOW-PRICED SECURITIES. The Securities Enforcement and Penny
Stock Reform Act of 1990 requires additional disclosure relating to the market
for penny stocks in connection with trades in any stock defined as a penny
stock. Securities Exchange Commission regulations generally define a penny stock
to be an equity
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<PAGE> 33
security that has a market price of less than $5.00 per share, subject to
certain exceptions. As the Company does not currently satisfy the requirements
to comply with any exception, the regulations require the delivery, prior to
certain transactions involving the Company's Common Stock, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
Transactions that meet the requirements of Regulation D under the Securities Act
or transactions with an issuer not involving a public offering pursuant to
Section 4(2) of the Securities Act are exempt from the disclosure schedule
delivery requirements.
Since the Company is subject to the penny stock regulations cited
above, trading in the Company's securities is covered by Rule 15g-9 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") for
non-NASDAQ and non-national securities exchange listed securities. Under such
rule, broker/dealers who recommend such securities to persons other than
established customers and accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to a transaction prior to sale.
The effect of theses regulations may decrease the liquidity in the
market for the Company's Common Stock because of the additional costs and
burdens imposed.
ITEM 3 - PROPERTIES
The Company's headquarters consist of a 30,000 square foot leased
facility in Sioux Falls, South Dakota. The lease expires on September 30, 2011.
The Company owns an additional 5 acres of undeveloped property adjacent to this
site that can be utilized for expansion purposes.
The Company's Mail Center consists of a 25,000 square foot leased
facility in Sioux Falls, South Dakota. The lease was amended on November 18,
1997 to extend the terms of the lease for two years commencing on March 1, 1998
and ending on February 28, 2000.
ITEM 4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock and Preferred Stock as of
December 15, 1999, based upon the most recent information available to the
Company for (i) each person known by the Company who owns beneficially more than
five percent of any class of capital stock of the Company, (ii) each of the
Company's directors, (iii) the Company's Chief Executive Officer and each of the
four other most highly compensated executive officers (the "Named Executive
Officers") and (iv) all officers and directors of the Company as a group. Except
as set forth below, each stockholder's address is c/o the Company, 3401 North
Louise Avenue, Sioux Falls, South Dakota 57107.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK (1)
------------ -------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
OF SHARES OF SHARES OF SHARES OF SHARES
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Principal Shareholders:
Taxter One LLC 15,678,000 45.1% 2,000,000(2) 100%(2)
565 Taxter Road
Elmsford, NY 10523
</TABLE>
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<PAGE> 34
<TABLE>
<S> <C> <C> <C> <C>
J.L.B. of Nevada, Inc. 6,650,000(3) 16.1% 20,000(4) 100%(4)
1500 E. Tropicana Ave.
Suite 100
Las Vegas, NV 89119
Michael Lauer 8,252,500(5) 23.7% -- --
Directors and Named Executive
Officers:
Martin J. Burke 1,000,000(6) 2.8% -- --
Kevin T. Riordan 815,000(7) 2.3% -- --
Michael J. Philippe 355,334(8) 1.0% -- --
Richard S. Angel 250,000(9) * -- --
Cynthia D. Hassoun 50,000(10) * -- --
Jay L. Botchman(11) 22,328,000(3) 53.9% 2,025,000(11) 100%(11)
Barry E. Breeman 75,000(12) * -- --
J. Richard Budd, III 91,300(13) * -- --
Geoffrey A. Thompson 95,000(14) * -- --
All directors and executive officers as 25,125,234(15) 57.2% 2,025,000(11) 100%(11)
a group
</TABLE>
- - - ----------------
* Less than 1%
(1) The Company currently has outstanding 1,200,000 shares of Series A
Preferred Stock, 80,000 shares of Series B Preferred Stock, 5,000
shares of Series C Preferred Stock, 10,000 shares of Series D Preferred
Stock, and 10,000 shares of Series E Preferred Stock, all of which are
owned by one of Jay L. Botchman, a director of the Company, Taxter and
JLB all of which and are under the control of Mr. Botchman. See "Item
11--Description of Securities to be Registered; Preferred Stock."
(2) Consists of 1,200,000 shares of Series A Preferred Stock and 800,000
shares of Series B Preferred Stock held by Taxter.
(3) Includes 3,800,000 shares of Common Stock issuable upon conversion of
10,000 shares of Series D Preferred Stock held by JLB and 2,850,000
shares of Common Stock issuable upon conversion of 10,000 shares of
Series E Preferred Stock held by JLB.
(4) Consists of 10,000 Series D Preferred Stock and 10,000 Series E
Preferred Stock held by JLB.
(5) Consists of 2,987,500 shares of Common Stock owned by Lancer Partners,
L.P., 4,730,000 shares of Common Stock owned by Lancer Offshore, Inc.,
and 535,000 shares of Common Stock owned by Michael Lauer. Mr. Lauer
is the investment manager for Lancer Partners, L.P. and Lancer
Offshore, Inc. and has the authority to vote and dispose of all shares
of Common Stock owned by these entities.
(6) Consists of 1,000,000 shares issuable upon the exercise of options
exercisable at a price of $2.00 per share.
(7) Includes shares issuable upon the exercise of options exercisable in
the following amounts and prices: 300,000 shares at $2.00 per share,
100,000 shares at $2.70 per share, and 200,000 shares at $2.40 per
share. Includes 215,000 shares owned by Mr. Riordan's wife, of which
shares Mr. Riordan disclaims beneficial ownership.
(8) Includes shares issuable upon the exercise of options exercisable in
the following amounts and prices: 50,000 shares at $2.00 per share,
100,000 shares at $2.70 per share, and 200,000 shares at $2.40 per
share.
(9) Includes shares issuable upon the exercise of options exercisable in
the following amounts and prices: 50,000 shares at $2.00 per share,
100,000 shares at $2.70 per share, and 100,000 shares at $2.40 per
share.
(10) Consists of 250,000 shares issuable upon the exercise of options
exercisable at a price of $2.00 per share.
(11) Includes 5,000 shares of Series C Preferred Stock held of record by
Jay L. Botchman, 1,200,000 shares of Series A Preferred Stock and
800,000 shares of Series B Preferred Stock held of record by Taxter and
the 10,000 shares of Series D Preferred Stock and 10,000 shares of
Series E Preferred Stock held of record by JLB. Mr. Botchman owns
approximately 99.95% of the membership interests in Taxter and owns
100% of the outstanding capital stock of JLB.
(12) Consists of 75,000 shares issuable upon the exercise of options
exercisable at a price of $2.00 per share.
(13) Includes 75,000 shares issuable upon the exercise of options
exercisable at a price of $2.00 per share.
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<PAGE> 35
(14) Includes 75,000 shares issuable upon the exercise of options
exercisable at a price of $2.19 per share.
(15) Includes 65,000 shares issuable upon the exercise of options in
addition to those shares set forth in footnote 3 and footnotes 6
through 14. Also includes 500 shares owned by William Buriak's wife.
ITEM 5 - DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors, executive officers and key employees are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Martin J. Burke, III 41 Chairman of the Board of Directors and Chief Executive
Officer
Kevin T. Riordan 47 President and Chief Operating Officer
Michael J. Philippe 41 Executive Vice President, Chief Financial Officer and
Treasurer
Richard S. Angel 41 Executive Vice President and General Counsel
William Buriak 45 Senior Vice President and Chief Information Officer
Cynthia D. Hassoun 49 Senior Vice President and Corporate Secretary
Michael L. Neher 35 Senior Vice President
Jonathan Pike 38 Senior Vice President
Patrick Steffl 33 Senior Vice President
Jay L. Botchman 67 Director
Barry Breeman 50 Director
J. Richard Budd, III 47 Director
Geoffrey Thompson 59 Director
</TABLE>
Each director of the Company holds office until the next annual meeting
of the stockholders, or until his successor is elected and qualified. The
Company's By-laws provide for not less than one director. The By-laws permit the
Board of Directors to fill any vacancy on the Board. Officers serve at the
discretion of the Board of Directors.
The principal occupation and business experience of each officer,
director and key employee of the Company is as follows:
MARTIN J. BURKE, III. Mr. Burke has been the Chief Executive Officer of
the Company since October 1996. Mr. Burke has served as the Chairman of the
Board of Directors of the Company since May 1998, prior to which he had been
Vice-Chairman of the Board of Directors. From March 1995 through September 1996,
Mr. Burke was the Chairman of American Home Credit, a company engaged in the
financing of sub-prime debt. During 1994, Mr. Burke sat on the Board of the
corporate finance subsidiary of G & L Realty, a R.E.I.T. specializing in medical
offices and nursing homes. From November 1983 through May 1998, Mr. Burke was
Chief Executive Officer and principal owner of The Martin Burke Company, a
company engaged in structuring and arranging financing for sophisticated real
estate transactions and start-up corporations.
KEVIN T. RIORDAN. Mr. Riordan has been the President and Chief
Operating Officer of the Company since April 1997. From February 1995 to March
1997, Mr. Riordan served as President and Chief Executive Officer of Long Beach
Acceptance Corp., a subsidiary of Long Beach Mortgage Corp. From February 1985
to February 1995, Mr. Riordan was President and Chief Executive Officer of
Alliance Funding Company and its successor in interest Alliance Funding Company,
a division of Superior Bank FSB. Prior to 1985, Mr. Riordan acted as Senior Vice
President of American Funding, a national consumer mortgage company.
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<PAGE> 36
MICHAEL J. PHILIPPE. In June 1999, Mr. Philippe was elected Executive
Vice President, Chief Financial Officer and Treasurer of the Company. Mr.
Philippe joined the Company in June 1997 as Vice President of Finance and became
Chief Financial Officer in September 1997. The prior 13 years, Mr. Philippe
served as a Vice President and Manager for The Sumitomo Bank, Ltd. and its
predecessors.
RICHARD S. ANGEL. Mr. Angel joined the Company in August 1997 as Vice
President, Secretary and Corporate Counsel. In June 1999, Mr. Angel was elected
Executive Vice President and General Counsel of the Company. From January 1992
to August 1997, Mr. Angel was a shareholder in the law firm of Buchalter, Nemer,
Fields & Younger in Los Angeles, California. From May 1985 to December 1991 he
was an associate with such firm.
WILLIAM G. BURIAK. Mr. Buriak joined the Company as Chief Information
Officer July 1999. From November 1996 to July 1999, Mr. Buriak was Director of
Management Information Services and Director of Business Office Operations for
CCDM, a non-profit healthcare system in Perth Amboy, New Jersey. From June 1986
to November 1996, Mr. Buriak was Assistant Vice President at Beneficial Finance
Corporation in Peapack, New Jersey.
CYNTHIA D. HASSOUN. Ms. Hassoun joined the Company in October 1997 as
Chief Coordinating Officer. In April 1999, Ms. Hassoun was elected Corporate
Secretary of the Company and she was elected Senior Vice President of the
Company in June 1999. From April 1997 to September 1997, Ms. Hassoun served as a
consultant to the Company. From January 1992 to November 1996, Ms. Hassoun was
Vice President of Customer Service for Superior Bank FSB, a savings bank.
MICHAEL L. NEHER. Mr. Neher joined the Company as Senior Vice President
responsible for Non-Card Resolutions and Portfolio Divestitures in November
1999. From September 1998 to October 1999, Mr. Neher was the Assistant Vice
President for Outsourcing-Card Services/Consumer Products of the Atlanta Georgia
operation of the Bank of Hawaii. From December 1995 to September 1998, he was
the Regional Sales Manager for Primus Automotive Financial Services, Atlanta,
Georgia. From June 1993 to November 1995, Mr. Neher served as the Business Line
Supervisor, Collections and Recovery-Consumer Loans for Ocwen Federal Bank &
Trust FSB, West Palm Beach, Florida.
JONATHAN L. PIKE. Mr. Pike has been the Sr. Vice President of
Operations for the Company since August 1999. From November 1997 to July 1999,
Mr. Pike served as Vice President of Credit Risk for Stage Stores in Houston,
Texas. From August 1992 until November 1997, Mr. Pike served as Director of
Strategic Marketing and Director of Risk Management for First Data Corporation
in Omaha, Nebraska.
PATRICK STEFFL. Mr. Steffl was elected Senior Vice President of the
Company in June 1999. Prior to joining the Company in August 1997 as Vice
President of Marketing, Mr. Steffl had been with Fingerhut Companies, Inc. in
Minnetonka, Minnesota since 1989, managing mail and telemarketing media of six
phone centers throughout the country.
JAY L. BOTCHMAN. Mr. Botchman has been a director of the Company since
October 1996. From October 1996 through May 1998, Mr. Botchman served as the
Chairman of the Board of Directors of the Company. Mr. Botchman also serves as
the Chairman and majority owner of Taxter. For more than the past five years,
Mr. Botchman has been the owner of J.L.B. Equities, Inc. and JLB, both of which
are investment and commercial finance companies. In addition, Mr. Botchman acts
as a consultant to various entities in the consumer finance business.
BARRY E. BREEMAN. Mr. Breeman joined the Board of Directors in
September 1998. Since April 1998, Mr. Breeman has been Vice Chairman and Chief
Investment Officer of Manley-Berenson Realty & Development, LLC. From January
1991 to the present, Mr. Breeman has been the managing member of Cambridge Real
Estate
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<PAGE> 37
Services, LLC, a real estate investment banking services business. From January
1980 to December 1991, he was President, Chief Executive Officer and a director
of Carnegie Realty Holdings Corp. and its subsidiaries.
J. RICHARD BUDD, III. Mr. Budd joined the Board of Directors in
September 1998. Mr. Budd served as Senior Vice President of Metallurg, Inc., an
international specialty metals producer, from January 1996 to October 1998. From
July 1994 to January 1996, Mr. Budd served as Vice President and Director of
Cityscape Corp and from 1992 to 1994, Mr. Budd worked as a consultant with the
consulting firm of Zolfo Cooper LLC. Prior to 1992, Mr. Budd was Executive Vice
President of European American Bank and President and Chief Executive of Euram
Management, Inc., a subsidiary of ABN AMRO Bank NV, a foreign bank holding
company.
GEOFFREY A. THOMPSON. Mr. Thompson joined the Board of Directors in
April 1999. Mr. Thompson retired from Marine Midland Bank, Inc., Buffalo, New
York in October 1992, where he had served as President and Chief Executive
Officer. Mr. Thompson currently serves on the board of directors of Magnavision
Corp., a provider of private cable (wireless compatible communication) to
colleges, hospitals and nursing homes. In addition, he serves on the boards of
three privately-held corporations and four not-for-profit corporations.
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<PAGE> 38
ITEM 6 - EXECUTIVE COMPENSATION
The following summary compensation table sets forth information
concerning the annual compensation paid by the Company to the Named Executive
Officers for services rendered during the fiscal years ended May 31, 1999, May
31, 1998 and May 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------
ANNUAL COMPENSATION NUMBER OF
------------------- SECURITIES
FISCAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS OPTION (#)
- - - --------------------------- ------- ------ ----- ----------
<S> <C> <C> <C> <C>
Martin J. Burke, III 1999 $60,000.00 -- --
Chairman of the Board 1998 62,518.48 -- 1,000,000
and Chief Executive Officer 1997 29,999.97 -- --
Kevin Riordan 1999 $305,769.20 -- 100,000
President and Chief 1998 305,968.06 -- 300,000
Operating Officer 1997 39,230.78 $2,000,000 --
Michael J. Philippe
Executive Vice President, 1999 $184,951.60 $5,000 100,000
Chief Financial Officer and 1998 161,233.76 -- 100,000
Treasurer 1997 -- -- --
Richard S. Angel 1999 $220,154.00 -- 100,000
Executive Vice President 1998 153,989.12 -- 100,000
and General Counsel 1997 -- -- --
Cynthia D. Hassoun 1999 $152,884.90 -- --
Senior Vice President and 1998 92,223.15 $50,000 75,000
Corporate Secretary 1997 -- -- --
</TABLE>
- - - ---------------------
(1) The Named Executive Officers commenced their employment with the Company as
follows: Mr. Burke, October 1996; Mr. Riordan, April 1997; Mr. Philippe,
June 1997; Mr. Angel, August 1997; Ms. Hassoun, October 1997.
CREDIT CARD FOR OFFICERS
Mr. Burke has a personal credit card from the Company that he uses for
personal purposes. The terms of the credit card impose interest at the rate of
18.9% APR, with a minimum monthly payment equal to 3.0% of the outstanding
balance. The credit limit on the card is $450,000. As of May 31, 1999, the
balance due on the credit card was $442,094.14.
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<PAGE> 39
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options to the Named Executive Officers for the Company's fiscal year ended May
31, 1999. These grants are also reflected in the Summary Compensation Table,
above.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED PRICE APPRECIATION FOR
UNDERLYING TO OPTION TERM(2)
OPTIONS EMPLOYEES EXERCISE EXPIRATION --------------
NAME GRANTED(1) IN YEAR PRICE DATE 5% 10%
- - - ---- ---------- ------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Kevin Riordan 100,000 13% $2.70 August 9, 2003 $36,000 $117,000
Michael J. Philippe 100,000 13% $2.70 August 9, 2003 $36,000 $117,000
Richard S. Angel 100,000 13% $2.70 August 9, 2003 $36,000 $117,000
</TABLE>
- - - ------------------
(1) Option granted to the Company's 1997 Stock Option Plan, as amended. See
"Stock Option Plan."
(2) Potential realized values shown above represent the potential gains based
upon compound price appreciation of 5% and 10% from the date of grant
through the full option term. The actual value realized, if any, on stock
option exercises will be dependent upon overall market conditions and the
future performance of the Company and its Common Stock. There is no
assurance that the actual value will approximate the amounts reflected in
this table.
The following table summarizes option exercises by the Named Executive
Officers of the Company during fiscal 1999 and the value of unexercised stock
options as of May 31, 1999.
AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ON VALUE -------------------------------- ------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - - --------------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Martin J. Burke 0 0 1,000,000 0 $562,000 0
Kevin Riordan 0 0 400,000 0 $168,600 0
Michael J. Philippe 0 0 125,000 75,000 $14,050 $42,150
Richard S. Angel 0 0 125,000 75,000 $14,050 $42,150
Cynthia D. Hassoun 0 0 25,000 50,000 $14,050 $28,100
</TABLE>
- - - ---------------------
(1) Value is based on the per share closing price of the Company's Common Stock
on May 28, 1999, the last trading day of fiscal 1999, which was $2.562.
39
<PAGE> 40
STOCK OPTION PLAN
In March 1997, the Board of Directors adopted and the stockholders
approved the Company's 1997 Stock Option Plan. The Board of Directors and the
stockholders approved an amendment to the 1997 Stock Option Plan in December
1997 (as amended, the "Amended 1997 Stock Option Plan"). The Amended 1997 Stock
Option Plan provides for the grant of (i) options that are intended to qualify
as incentive stock options ("Incentive Stock Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to
employees and (ii) options not intended to so qualify ("Nonqualified Stock
Options") to employees (including directors and officers who are employees of
the Company), directors and consultants. The total number of shares of Common
Stock for which options may be granted under the Amended 1997 Stock Option Plan
is 4,000,000 shares. As of May 31, 1999, the Company had granted options to
purchase 2,871,500 shares of Common Stock under the Amended 1997 Stock Option
Plan. The term of each option granted pursuant to the Amended 1997 Stock Option
Plan shall be established by the Board of Directors, or a committee of the Board
of Directors, in its sole discretion; provided, however, that the maximum term
of each Incentive Stock Option granted pursuant to the Amended 1997 Stock Option
Plan is ten years. Options shall become exercisable at such times and in such
installments as the Board of Directors, or a committee of the Board of
Directors, shall provide in the terms of each individual option. The exercise
price per share of these options shall be determined by the Board of Directors,
in their sole discretion, as set forth in the applicable option contract;
provided, however, that the exercise price of an Incentive Stock Option shall
not be less than the fair market value of the Common Stock subject to such
option on the date of grant; and further provided, that if, at the time an
Incentive Stock Option is granted, the optionee owns (or is deemed to own under
Section 424(d) of the Code) stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company, of any of its subsidiaries
or of a parent entity, the exercise price of such Incentive Stock Option shall
not be less than 110% of the fair market value of the Common Stock subject to
such Incentive Stock Option on the date of grant.
The Amended 1997 Stock Option Plan is administered by the Board of
Directors or a committee of the Board of Directors, which determines the terms
of options granted, including the exercise price, the number of shares subject
to the option and the terms and conditions of exercise. No option granted under
the Amended 1997 Stock Option Plan is transferable by the optionee other than by
will or the laws of descent and distribution, and each option is exercisable
during the lifetime of the optionee only by such optionee.
OTHER OPTIONS
On December 4, 1996, Taxter entered into a First Amended Stock Option
Agreement with one of the sellers of the Holdings stock (the "Selling Entities")
and the assignee of the other Selling Entity (the "Amended Option Holders")
canceling an original Stock Option Agreement between the Company and the Selling
Entities. Each of the Amended Option Holders, their assignees or designees have
the option (the "Option") to purchase from Taxter 4,000,000 shares of Common
Stock of the Company and 400,000 shares of Series B Preferred Stock of the
Company, exercisable in full by the Amended Option Holders, their assignees or
designees, at any one time commencing October 8, 1999 and terminating on October
9, 2000, for an aggregate purchase price of $500,000. The Option immediately
terminates if, at any time prior to the Amended Option Holders exercising their
Options, Taxter tenders to each of the Amended Option Holders $50,000,000. In
the agreement, Taxter agreed to various transfer restrictions, and the Amended
Option Holders received certain registration rights.
COMPENSATION OF DIRECTORS
Directors J. Richard Budd, III, Barry E. Breeman and Geoffrey A.
Thompson each receive $50,000 as annual compensation for their services as
directors of the Company. In addition, Mr. Budd and Mr. Breeman were each
granted options to purchase 75,000 shares with an exercise price of $2.00 per
share. Mr. Thompson received
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<PAGE> 41
options to purchase 75,000 shares an exercise price of $2.19 per share. Martin
Burke, who is Chairman of the Board of Directors and the Chief Executive Officer
of the Company, does not receive compensation for his services as a director,
but does receive compensation for his services as Chief Executive Officer. Jay
Botchman does not receive compensation for his services as a director. The Board
of Directors may authorize the payment of compensation to directors for their
attendance at regular and special meetings of the Board of Directors and for
attendance at meetings of committees of the Board of Directors as is customary
for similar companies. Directors are reimbursed for their reasonable
out-of-pocket expenses incurred in connection with their duties as directors or
officers of the Company.
EMPLOYMENT AGREEMENTS
On March 27, 1997 the Company entered into a five year employment
agreement with Martin Burke, the Company's Chief Executive Officer. Under the
terms of the employment agreement, Mr. Burke will receive an annual base salary
of $60,000 for each year of his employment subject to annual review by the Board
of Directors. In addition, Mr. Burke has the right to receive under the terms of
the employment agreement (i) 1.5% of the annual net earnings of the Company
before taxes as reflected on the Company's certified financial statements, and
(ii) options to purchase 1,000,000 shares of the Company's Common Stock at a
purchase price of $2.00 per share for a period of five years commencing March
27, 1997. The employment agreement also entitles Mr. Burke to all employee
benefit plans such as medical and dental coverage, life insurance, pension and
profit-sharing plans, that may be maintained by the Company. Under the terms of
the employment agreement, employment terminates upon death or total disability
of Mr. Burke and may be terminated by the Company for cause (such as misconduct,
disregard of instructions from the Board, commission of certain crimes or acts
or a material breach of the terms of the employment agreement.) The employment
agreement contains a change in control provision that provides Mr. Burke with
the right to terminate his employment within 60 days of the date of a change in
control and have such termination treated as a termination without cause meaning
that Mr. Burke shall have the right to continue to be compensated through the
term of the employment agreement. For purposes of the employment agreement, a
change of control is deemed to have occurred at such time as either (a) Taxter
owns directly or indirectly less than 10% of the Common Stock of the Company and
less than 50% of each other outstanding class of securities the majority vote of
which is required for shareholder action, or (b) Jay Botchman owns less than 50%
of the membership interest in Taxter. The employment agreement also contains
certain customary terms regarding proprietary information, confidentiality, and
the surrender of records upon termination. A copy of the employment agreement
has been filed as an exhibit hereto.
On April 1, 1997, the Company entered into a five year employment
agreement with Kevin Riordan, the Company's President and Chief Operating
Officer. Under the terms of the employment agreement, Mr. Riordan receives an
annual base salary of $300,000 for each year of his employment subject to annual
review by the Board of Directors of the Company. In addition to the base salary,
the Company agreed to pay Mr. Riordan a signing bonus of $2,000,000.
Additionally, he was granted options to purchase 300,000 shares of the Company's
Common Stock at an exercise price of $2.00 per share. Such options are
exercisable commencing April 1, 1999, and shall expire on the earlier of March
31, 2002, or the termination of Mr. Riordan's employment with the Company. The
employment agreement also entitles Mr. Riordan to all employee benefit plans
such as medical and dental coverage, life insurance, pension and profit-sharing
plans, that may be maintained by the Company. Under the employment agreement,
employment terminates upon death or total disability of Mr. Riordan and may be
terminated by the Company for cause (such as misconduct, disregard of
instructions from the Board of Directors, commission of certain crimes or acts
or a material breach of the terms of the employment agreement.) The employment
agreement also contains certain customary terms regarding proprietary
information, confidentiality, and the surrender of records upon termination.
A copy of the employment agreement has been filed as an exhibit hereto.
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<PAGE> 42
On June 17, 1997, the Company entered into an employment agreement with
Michael J. Philippe, the Company's Chief Financial Officer and an Executive Vice
President, which was amended effective June 1, 1999 to extend the term of the
agreement to June 20, 2002. Under the terms of the employment agreement, as
amended, Mr. Philippe receives an annual base salary of $210,000 subject to
annual review by the Board of Directors. In addition, Mr. Philippe received
under the terms of the employment agreement options to purchase 100,000 shares
of the Company's Common Stock at a purchase price of $2.00 per share. The
options to purchase the shares vest as follows: (i) 25,000 option shares on
December 15, 1997, which have vested, (ii) 25,000 option shares on June 17,
1999, which have vested, and (iii) 50,000 option shares on June 17, 2000. The
options are exercisable, according to their vesting schedules, for a period of
five years from the date they were granted. The employment agreement also
entitles Mr. Philippe to all employee benefit plans such as medical and dental
coverage, life insurance, pension and profit-sharing plans, that may be
maintained by the Company. Under the terms of the employment agreement,
employment terminates upon death or total disability of Mr. Philippe and may be
terminated by the Company for cause (such as misconduct, disregard of
instructions from the Board of Directors, commission of certain crimes or acts
or a material breach of the terms of the employment agreement.) The employment
agreement contains a change in control provision that provides Mr. Philippe with
the right to terminate his employment within 60 days of the date of a change in
control and have such termination treated as a termination without cause,
meaning that Mr. Philippe shall have the right to continue to be compensated
through the term of the employment agreement. For purposes of the employment
agreement, a change of control is deemed to have occurred at such time as either
(a) Taxter owns directly or indirectly less than 10% of the Common Stock of the
Company and less than 50% of each other outstanding class of securities the
majority vote of which is required for shareholder action, or (b) Jay Botchman
owns less than 50% of the membership interests in Taxter. The employment
agreement also contains certain customary terms regarding proprietary
information, confidentiality, and the surrender of records upon termination. A
copy of the employment agreement has been filed as an exhibit.
On August 1, 1997, the Company entered into an employment agreement
with Richard S. Angel, the Company's General Counsel and an Executive Vice
President, which was amended effective June 1, 1999 to extend the term of the
agreement to September 30, 2000. Under the terms of the employment agreement, as
amended, Mr. Angel receives an annual base salary of $240,000 per year subject
to annual review by the Board of Directors. In addition, Mr. Angel received
under the terms of the employment agreement options to purchase 100,000 shares
of the Company's Common Stock at a purchase price of $2.00 per share. The
options to purchase the option shares vest as follows: (i) 25,000 option shares
on December 15, 1997, which have (ii) 25,000 option shares on July 31, 1999,
which have vested, and (iii) 50,000 option shares on July 31, 2000. The options
are exercisable, according to their vesting schedules, for a period of five
years from the date they were granted. The employment agreement also entitles
Mr. Angel to all employee benefit plans such as medical and dental coverage,
life insurance, pension and profit-sharing plans, that may be maintained by the
Company. Under the terms of the employment agreement, employment terminates upon
death or total disability of Mr. Angel and may be terminated by the Company for
cause (such as misconduct, disregard of instructions from the Board of
Directors, commission of certain crimes or acts or a material breach of the
terms of the employment agreement.) The employment agreement contains a change
in control provision that provides Mr. Angel with the right to terminate his
employment within 60 days of the date of a change in control and have such
termination treated as a termination without cause, meaning that Mr. Angel shall
have the right to continue to be compensated through the term of the employment
agreement. For purposes of the employment agreement, a change of control is
deemed to have occurred at such time as either (a) Taxter owns directly or
indirectly less than 10% of the Common Stock of the Company and less than 50% of
each other outstanding class of securities the majority vote of which is
required for shareholder action, or (b) Jay Botchman owns less than 50% of the
membership interests in Taxter. The employment agreement also contains certain
customary terms regarding proprietary information, confidentiality, and the
surrender of records upon termination. A copy of the employment agreement has
been filed as an exhibit hereto.
On October 15, 1997, the Company entered into a three-year agreement
with Cynthia Hassoun, the Corporate Secretary and a Senior Vice President. Under
the terms of the agreement, Ms. Hassoun receives an annual base salary of
$150,000. In addition, Ms. Hassoun received a $50,000 signing bonus,
compensation for all
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<PAGE> 43
relocation expenses and 75,000 stock options. Under the terms of the agreement,
25,000 of Ms. Hassoun's stock options vest on October 15 of the years 1998, 1999
and 2000. The exercise price of all of the options is $2.00 per share. The
letter agreement also entitles Ms. Hassoun to all employee benefit plans, such
as medical and dental coverage, life insurance, and pension and profit-sharing
plans, that may be maintained by the Company.
ITEM 7 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal year 1998, the Company issued subordinated promissory
notes to JLB, a corporation wholly-owned by Jay L. Botchman, a director of the
Company, totaling $40,000,000 which are payable on demand and bear interest at
the rate of 12% per annum. $30,000,000 of the new notes were issued in exchange
for outstanding notes totaling $11,518,042 which carried an interest rate of 12%
per annum and $18,481,958 in new debt. Interest expense on these notes was
$2,307,467 and $3,635,891 for the years ended May 31, 1999 and 1998,
respectively. On May 29, 1999, JLB forgave $5,000,000 of interest on these
subordinated notes in return for warrants to purchase 4,000,000 shares of the
Company's Common Stock (described below) and for the Company's assumption of the
payment obligations under personal property lease agreements of certain entities
owned substantially by JLB. JLB had previously guaranteed the payment of these
obligations on behalf of the entities. On the date of the assumption of the
obligations, the fair value of the obligations was $1.7 million. Accrued
interest related to subordinated notes payable to JLB was approximately $1.3
million and $4.0 million, respectively, at May 31, 1999 and 1998.
On February 27, 1998, the Company issued a subordinated promissory note
payable to Mr. Botchman in the amount of $350,000 payable on demand with
interest of 12% per annum. Interest expense for the year ended May 31, 1999 and
May 31, 1998 was $42,583 and $10,733. This note was issued per an agreement
dated February 27, 1998 between Mr. Botchman and the Company. As part of the
terms of the agreement, the Company agreed to purchase an interest in certain
investment securities, owned by Mr. Botchman, of a subprime mortgage banking
company. The mortgage company had subsequent financial difficulties and ceased
operations. The Company wrote off this investment and a receivable due from this
company of approximately $189,000 during the fiscal year ended May 31, 1998.
As of May 31, 1999, the Company, through its wholly-owned subsidiary,
American Credit Alliance, Inc., has an $880,000 note payable to JLB with an
interest rate of 10% per annum. Interest expense for the year ended May 31, 1999
and May 31, 1998 was $89,222, and $85,195, respectively. American Credit
Alliance, Inc. is the managing member and owns 50% of the membership interests
in Dakota Card Fund II, LLC, an entity that owns performing credit card
receivables.
The Company made a series of investments, during the period May 1997
through December 1997, amounting to $508,600, in a subprime mortgage banking
company affiliated with JLB. Due in large part to the severe downturn in the
subprime mortgage banking industry, the Company wrote off its investment in this
company in the amount of $508,600 at May 31, 1998 in addition to a receivable of
$183,000 from the same company, as there was substantial doubt regarding this
company's ability to continue as a going concern.
The Series A Preferred Stock and Series B Preferred Stock were each
issued at $1.00 per share (for a total of $2,000.00) for all of Taxter's shares
of Holdings. See "Item 1 - Business; General Development of Business." The
Series A Preferred Stock, as a class, has 80% of the voting rights in the
Company. The Series B Preferred Stock has one vote per share. The Series A
Preferred Stock and the Series B Preferred Stock each has a liquidation
preference of $1.00 per share and each earns cumulative dividends at a rate of
5% per annum. After five years, (i) the Series A Preferred Stock and the Series
B Preferred Stock will be redeemable at the option of the Company, and (ii) the
Series B Preferred Stock will be convertible at the option of the holder into
Series A Preferred Stock on a share-for-share basis.
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<PAGE> 44
On December 31, 1996, the Company issued 5,000 shares of Series C
Preferred Stock to Mr. Botchman for $5,000,000 consideration. The Series C
Preferred Stock earns cumulative dividends at 6% per annum. The shares also have
liquidation preference of $1,000 per share. The Series A and B Preferred Stock
rank senior to the Series C Preferred Stock with respect to dividend and
liquidation rights.
On May 29, 1998, the Company issued 10,000 shares of Series D Preferred
Stock to JLB in exchange for the cancellation of the outstanding principal
amount of the $10,000,000 promissory note dated August 1, 1997 payable by the
Company to JLB. The Series D Preferred Stock is non-voting and earns a dividend
of 8% per annum payable annually on December 31. The shares have a par value of
$0.001 per share and a stated value of $1,000 per share. The shares have a
liquidation preference of $1,000 per share. The Series D Preferred Stock ranks
senior to the Series A, B and C with respect to dividend and liquidation rights.
Each share of Series D Preferred Stock is convertible into 380 shares of Common
Stock. The agreement between the Company and JLB with respect to the issuance of
the Series D Preferred Stock grants JLB piggyback registration rights for any
Common Stock issuable upon conversion of the shares of Series D Preferred Stock.
On August 31, 1998, the Company issued 10,000 shares of Series E
Preferred Stock at a price of $1,000 per share to JLB in exchange for JLB
agreeing to cancel the $10,000,000 principal outstanding under a subordinated
promissory note dated August 1, 1997. The holder of Series E Preferred Stock is
entitled to dividends at a rate of 8% of stated value per annum payable in cash
commencing on December 31, 1998. Each share of Series E Preferred Stock is
convertible into 285 shares of Common Stock. The agreement between the Company
and JLB with respect to the issuance of the Series E Preferred Stock grants JLB
piggyback registration rights for any Common Stock issuable upon conversion of
the shares of Series E Preferred Stock.
As of May 31, 1999 and May 31, 1998, accumulated but undeclared and
unpaid preferred dividends on preferred stock amounted to approximately $2.2 and
$0.4 million respectively. Such dividends continue to accumulate under the
preferred stock instruments but to date have not been declared or paid by the
Board of Directors and, accordingly, remain outstanding obligations of the
Company.
Taxter, an entity in which Mr. Botchman is a managing member, as part of
the purchase price of acquiring Holdings, granted the former owners of Holdings
a future interest in Holdings in the form of an identical option to each former
owner of Holdings to purchase 2,000 shares of Holdings from Taxter for $500,000.
Following the acquisition of Holdings by the Company, these options were amended
to enable each of the former owners of Holdings to purchase 4,000,000 shares of
the Company's Common Stock and 400,000 shares of the Company's Series B
Preferred Stock for $500,000.
On May 29, 1999, the Board of Directors granted JLB a warrant to
purchase up to 4,000,000 shares of the Common Stock of the Company. The warrant
is exercisable one year after the grant date at an exercise price of $3.25 per
share and expires May 29, 2004.
ITEM 8 - LEGAL PROCEEDINGS
The Company, in the ordinary course of business, receives notices of
consumer complaints from regulatory agencies and reviews these complaints in
accordance with internal policy.
On October 24, 1996, the Company, SOIC and certain former officers and
directors of SOIC were sued in the United States District Court for the Northern
District of Illinois in an action entitled Louis G. Apostol, as Administrator
for the Estate of Curtis Kim v. M. Reza Fayazi, et al. This action was brought
as a class action on behalf of persons purportedly solicited to voluntarily
repay debt that had been discharged in bankruptcy to open credit card accounts.
The complaint alleged that these practices violated the bankruptcy code, various
consumer protection statutes, including the Fair Debt Collection Practices Act,
the Truth in Lending Act, the Colorado
44
<PAGE> 45
Uniform Consumer Credit Code, the Illinois Consumer Fraud Act and RICO.
Plaintiffs also asserted common law theories of recovery. The district court
dismissed all bankruptcy-related claims on the grounds that they should be
asserted in the bankruptcy court. On November 9, 1998, a complaint was filed in
the United States Bankruptcy Court for the Northern District of Illinois. The
complaints seek (i) monetary damages, (ii) declaratory judgments that the
agreements reached with plaintiffs have no legal effect, (iii) criminal
contempt, (iv) injunctive relief to prohibit defendants from purchasing or
selling debts that have been discharged in bankruptcy and to rescind any such
agreements, and to require cessation of collection efforts and the removal of
debts from credit reports.
On May 14, 1998, the Company was sued in the United States District
Court for the District of Rhode Island in an action entitled McGlynn v. The
Credit Store, Inc., et al. The action is brought as a class action on behalf of
persons who allegedly were solicited to voluntarily repay debt that had been
discharged in bankruptcy. The complaint alleges that inducing repayment of
discharged debt violates the Bankruptcy Code, and the Fair Debt Collection
Practices Act. The complaint also contains a common law theory of recovery. The
complaints seek (i) monetary damages, (ii) a declaratory judgment that the
agreements reached with plaintiffs have no legal effect, (iii) criminal
contempt, and (iv) injunctive relief to preclude defendants from purchasing or
selling debts that have been discharged in bankruptcy.
On June 1, 1998, the Company was sued in the United States District
Court for the Northern District of Illinois in an action entitled Le v. The
Credit Store, Inc., et al. The action is brought as a class action on behalf of
certain persons who were allegedly part of a portfolio of consumer debt
purchased by the Company. The complaint alleges that these people were sent
letters by the Company attempting to collect debts previously discharged in
bankruptcy and that these actions violate the Fair Debt Collection Practices
Act. The complaint seeks monetary damages.
On May 27, 1999, the Company was sued in the United States District
Court for the District of Florida in an action entitled McIntyre v. Credit Store
Inc. The action is brought as a class action on behalf of certain persons to
whom the Company sent written communications and alleges that such
communications violate the Fair Debt Collection Practices Act and statutory
provisions of Florida and South Dakota law. On May 21, 1999, the Company was
sued in the United States District Court for the District of Arizona in an
action entitled Bingham v. The Credit Store, Inc. The action is brought as a
class action on behalf of certain persons to whom the Company sent written
communications and alleges that such communications violate the Fair Debt
Collection Practices Act. Both complaints seek monetary damages and declaratory
judgments that the Company's mailers violate statutory provisions.
The Company does not believe that these suits will have a material
adverse effect on the consolidated financial position of the Company, nor on the
results of operations.
ITEM 9 - MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is presently traded on the Over the Counter
Bulletin Board under trading symbol "PLCR". The quotations are inter-dealer
prices without retail mark-ups, mark-downs or commissions and may not represent
actual transactions.
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The high and low bid prices for the Company's Common Stock for each
quarter for the past three years were as follows:
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
1997 First Quarter $ N/A $ N/A
Second Quarter 13 3/4 4 1/2
Third Quarter 12 5 3/4
Fourth Quarter 9 1/4 5 1/4
1998 First Quarter $ 9 3/8 $ 5 3/4
Second Quarter 7 5/8 2 7/8
Third Quarter 3 3/4 1 1/2
Fourth Quarter 2 15/16 1 9/32
1999 First Quarter $ 3 7/8 $ 1 7/8
Second Quarter 2 3/4 1 3/4
Third Quarter 2 15/16 1 7/8
Fourth Quarter 2 5/8 1 15/16
2000 First Quarter $ 3 17/32 $ 2 13/32
Second Quarter $ 5 7/15 $ 2 9/16
Third Quarter (as of 2/18/00) $ 5 1/4 $ 3 15/16
</TABLE>
As of December 15, 1999, there were 949 holders of record of the
Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock and
does not anticipate paying cash dividends in the foreseeable future. The Company
anticipates that it will follow a policy of retaining earnings, if any, to
finance the expansion and development of the Company. The Board of Directors of
the Company will review its dividend policy from time to time to determine the
feasibility and desirability of paying dividends, after giving consideration to
the Company's results of operations, financial condition, capital requirements
and such other factors as the Board of Directors deems relevant.
Each issued and outstanding share of Series A Preferred Stock and
Series B Preferred Stock will be entitled, as and when declared by the Board of
Directors, to receive, out of any assets at the time legally available therefor,
dividends at the rate of $.05 per share, per annum. Such dividends on the Series
A and Series B Preferred Stock are prior in preference to any outstanding shares
of Common Stock or of Preferred Stock, other than Series D and Series E
Preferred Stock.
Subject to the right of the holders of the Series B Preferred Stock to
receive a preferential dividend, the holders of shares of Series C Preferred
Stock will be entitled, as and when declared by the Board of Directors, to
receive, out of any assets at the time legally available therefor, dividends at
the rate of 6% per share per annum, payable in cash commencing on December 31,
1997. Such dividends on the Series C Preferred Stock are prior in preference to
any declaration or payment of any distribution on any outstanding shares of
Common Stock or any Preferred Stock which by its terms is junior to Series C
Preferred Stock, but are junior in preference to Series A, Series B, Series D
and Series E Preferred Stock.
The holder of shares of Series D Preferred Stock will be entitled, as
and when declared by the Board of Directors, to receive, out of any assets at
the time legally available therefor, dividends at the rate of 8% per share
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<PAGE> 47
per annum, payable in cash commencing on December 31, 1998 and thereafter on the
last day of December of each year that any such shares are outstanding. Such
dividends on the Series D Preferred Stock are prior in preference to any
declaration or payment of any distribution on any other outstanding shares of
Common Stock or of Preferred Stock, other than Series E Preferred Stock.
The holders of shares of Series E Preferred Stock shall be entitled to
receive, out of any assets at the time legally available therefor and when and
as declared by the Board of Directors of the Company, dividends calculated on
the stated value per share at the rate of 8% per share per annum, payable in
cash commencing on December 31, 1998, and thereafter on the last day of December
of each year that any such shares shall be outstanding. Such dividends on the
Series E Preferred Stock are prior in preference to any declaration or payment
of any distribution on any other outstanding shares of Common Stock or Preferred
Stock.
Other than the foregoing, the Company does not anticipate the
declaration or payment of any dividends in the foreseeable future. There can be
no assurance that cash dividends of any kind will ever be paid.
ITEM 10 - RECENT SALES OF UNREGISTERED SECURITIES
The Company issued the following securities during the prior three
fiscal years without registering the securities under the Securities Act:
Issuance of Capital Stock:
1. On September 12, 1996, the Company issued 20,000,000 shares of Common
Stock to Jay Botchman for aggregate consideration of $20,000. Mr.
Botchman subsequently transferred these shares to Taxter.
2. On December 4, 1996, Taxter exchanged all of its shares of Common Stock
in Service One Holdings for the issuance by the Company of 1,200,000
shares of Series A Preferred Stock and 800,000 shares of Series B
Preferred Stock of the Company to Taxter.
3. On December 31, 1996, the Company issued 5,000 shares of Series C
Preferred Stock to Jay Botchman in exchange for aggregate consideration
of $5,000,000.
4. On February 19, 1997, the Company sold 830,000 shares of Common Stock
to Lancer Partners, L.P., Lancer Offshore Inc., Lancer Voyager Fund,
and Michael Lauer (collectively, the "Lancer Group") for aggregate
consideration of $6,017,500.
5. On March 12, 1997 the Company privately sold 827,500 shares of Common
Stock to the Lancer Group for aggregate consideration of $5,999,375.
6. On January 2, 1998, the Company privately sold 1,250,000 shares of
Common Stock to the Lancer Group for aggregate consideration of
$2,500,000.
7. On February 2, 1998, the Company privately sold 1,250,000 shares of
Common Stock to the Lancer Group for aggregate consideration of
$2,500,000.
8. On May 29, 1998, the Company issued 10,000 shares of Series D Preferred
Stock to JLB in exchange for JLB agreeing to cancel $10,000,000 of the
principal outstanding under the $10,000,000 Subordinated Promissory
Note dated August 1, 1997.
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<PAGE> 48
9. On August 31, 1998, the Company issued 10,000 shares of Series E
Preferred Stock to JLB in exchange for JLB agreeing to cancel
$10,000,000 of the principal outstanding under the $20,000,000
Subordinated Promissory Note dated August 1, 1997.
Grant of Stock Options and Warrants:
1. On March 27, 1997, the Company granted options to purchase 950,000
shares of Common Stock at an exercise price of $5.50 per share to
employees.
2. On December 15, 1997, the Company granted options to purchase 935,500
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.00 per share to employees, granted options to
purchase 1,000,000 shares of Common Stock under the Amended 1997 Stock
Option Plan at an exercise price of $2.00 per share to a director of
the Company and granted options to purchase 600,000 shares of Common
Stock at an exercise price of $2.00 per share to employees.
3. On January 16, 1998, the Company granted options to purchase 170,500
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.50 per share to employees.
4. On April 30, 1998, the Company issued to Coast Business Credit, a
division of Southern Pacific Bank, a warrant to purchase 650,247 shares
of the Common Stock at an exercise price of $2.50. The warrant was
issued in connection with a loan from Coast Business Credit to the
Company.
5. On August 3, 1998, the Company granted options to purchase 10,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $3.00 per share to employees.
6. On August 10, 1998, the Company granted options to purchase 300,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.70 per share to employees.
7. On September 15, 1998, the Company granted options to purchase 10,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.00 per share to employees.
8. On November 23, 1998, the Company granted options to purchase a total
of 150,000 shares of Common Stock under the Amended 1997 Stock Option
Plan at an exercise price of $2.00 per share to two directors of the
Company.
9. On February 15, 1999, the Company granted options to purchase 13,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.38 per share to employees.
10. On March 17, 1999, the Company granted options to purchase 200,500
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.00 per share to employees.
11. On March 18, 1999, the Company issued a warrant to purchase 1,000,000
shares of Common Stock to Business Transactions Express, Inc. at an
exercise price of $2.00 per share. The warrant was issued in connection
with the execution of a strategic modeling services agreement between
the Company and Business Transactions Express, Inc.
12. On March 22, 1999, the Company granted options to purchase 3,500 shares
of Common Stock under the Amended 1997 Stock Option Plan at an exercise
price of $2.30 per share to employees.
13. On March 29, 1999, the Company granted options to purchase 3,500 shares
of Common Stock under the Amended 1997 Stock Option Plan at an exercise
price of $2.30 per share to employees.
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<PAGE> 49
14. On April 15, 1999, the Company granted options to purchase 75,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.19 per share to a director of the Company.
15. On June 1, 1999, the Company granted options to purchase 503,000 shares
of Common Stock under the Amended 1997 Stock Option Plan at an exercise
price of $2.40 per share to employees.
16. On June 22, 1999, the Company issued a warrant to purchase 4,000,000
shares of Common Stock to JLB at an exercise price of $3.25 per share
issued as partial consideration for JLB's forgiveness of certain
interest owed to JLB by the Company.
17. On July 26, 1999, the Company granted options to purchase 10,000 shares
of Common Stock under the Amended 1997 Stock Option Plan at an exercise
price of $2.88 per share to employees.
18. On August 1, 1999, the Company granted options to purchase 22,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $3.00 per share to employees.
19. On August 3, 1999, the Company granted options to purchase 10,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.97 per share to employees.
20. On August 27, 1999, the Company granted options to purchase 10,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.69 per share to employees.
21. On September 1, 1999, the Company granted options to purchase 1,500
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.75 per share to employees.
22. On September 10, 1999, the Company issued a warrant for 25,000 shares
of Common Stock to Cappello Capital Corp. at an exercise price of $2.56
per share. The warrant was issued in connection with Cappello Capital
Corp. providing financial advisory services to the Company.
23. On September 16, 1999, the Company granted options to purchase 8,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.75 per share to employees.
24. On October 18, 1999, the Company granted options to purchase 2,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $2.75 per share to employees.
25. On October 25, 1999, the Company granted options to purchase 5,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $3.13 per share to employees.
26. On November 8, 1999, the Company granted options to purchase 10,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $3.88 per share to employees.
27. On November 19, 1999, the Company granted options to purchase 310,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $3.44 per share to employees.
28. On November 29, 1999, the Company granted options to purchase 15,000
shares of Common Stock under the Amended 1997 Stock Option Plan at an
exercise price of $5.00 per share to employees.
The sales and issuance described in paragraphs 1-9 under "Issuance of
Capital Stock" and in paragraphs 4, 16 and 22 under "Granted Stock
Options and Warrants"
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<PAGE> 50
above were deemed to be exempt from registration under the Securities Act by
virtue of Rule 4(2), Regulation D promulgated thereunder or Rule 701 of the
Securities Act. Such sales and issuances involved. The sales and issuances under
Rule 4(2) and Regulation D were conducted in a manner to avoid a public
offering. The sales and issuances under Rule 701 were offered and sold either
pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation.
Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. Similar legends were imposed in connection with any
subsequent sales of any of these securities. All recipients either received
adequate information about the Company or had access, through employment or
other relationships, to such information.
ITEM 11 - DESCRIPTION OF SECURITIES TO BE REGISTERED
COMMON STOCK
- - - ------------
The Company is authorized to issue up to 65,000,000 shares of Common
Stock, par value $.001 per share. As of the date of this registration statement
there are 34,761,965 issued and outstanding shares of Common Stock.
Voting, Shareholders' Meetings and Resolutions. Holders of Common Stock
have one vote for each share held on all matters submitted to a vote of
stockholders, but such votes are subject to the voting preference of the holders
of the Series A Preferred Stock. Holders of the Series A Preferred Stock,
regardless of the number of such shares outstanding and as long as at least one
of such shares is outstanding, shall represent 80% of all votes entitled to be
voted at any annual or special meeting of the shareholders of the Company,
subject to dilution by capital stock of the Company issued after the date of
issuance of the Series A Preferred Stock. Holders of Series B Preferred Stock
have one vote on all matters as to which holders of common stock shall be
entitled to vote.
Dividend and Liquidation Rights. Subject to the prior rights of any
series of preferred stock, as described below, which may from time to time be
outstanding, holders of Common Stock are entitled to receive dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor and, upon the liquidation, dissolution or winding up of the Company,
are entitled to share ratably in all assets remaining after payment of
liabilities and payment of accrued dividends and liquidation preferences on the
preferred stock. Holders of Common Stock have no preemptive rights and have no
rights to convert their Common Stock into any other securities.
PREFERRED STOCK
- - - ---------------
The following series of preferred stock are currently issued by the
Company.
SERIES A PREFERRED STOCK
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<PAGE> 51
There are 2,000,000 shares of Series A Preferred Stock, $.001 par value
(the "Series A Preferred Stock") authorized, of which 1,200,000 shares are
issued and outstanding.
DIVIDENDS. Each issued and outstanding share of Series A Preferred
Stock shall be entitled to receive, pari passu with the Series B Preferred
Stock, out of any assets at the time legally available therefor and when and as
declared by the Board of Directors of the Company, dividends at the rate of $.05
per share, per annum. Such dividends accrue on each share of Series A Preferred
Stock from the initial date of issuance thereof whether or not earned or
declared.
VOTING RIGHTS. Except as otherwise required by law or by the
Certificate of Incorporation of the Company, based on the number of shares of
the Company's capital stock outstanding upon the date of issuance, the
outstanding shares of Series A Preferred Stock, regardless of the number of such
shares outstanding and as long as at least one of such shares is outstanding,
shall represent 80% of all votes entitled to be voted at any annual or special
meeting of the shareholders of the Company subject to dilution by subsequently
issued capital stock of the Company. Accordingly, except as to a vote solely for
class matters, the holders of the Company's Series A Preferred Stock effectively
control all matters that may be put to a stockholder vote, including the
election of directors and fundamental corporate changes and, therefore,
effectively control the Company. Currently, the shares of the Series A Preferred
Stock represent approximately 77.88% of all votes entitled to be voted at any
annual or special meeting of the shareholders of the Company. Each share of
Series A Preferred Stock shall represent its proportionate share of the 80%
which is allocated to the outstanding shares of Series A Preferred Stock.
REDEMPTION. At any time after December 31, 2001, the Company may redeem
all or part of the outstanding shares of Series A and Series B Preferred Stock,
treated as one class, at a cash price equal one dollar ($1.00) per share,
together will all unpaid dividends to and including the date of redemption,
provided that the Company provides written notice to the holders of such stock
to be redeemed at least 20 days prior to the date specified for redemption.
LIQUIDATION. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of shares of Series A and
Series B Preferred Stock then outstanding, treated as one class, shall be
entitled to be paid, out of the assets of the Company available for distribution
to its stockholders, whether from capital, surplus or earnings, before any
payment shall be made in respect of the Company's Common Stock or Series C
Preferred Stock, an amount equal to $1.00 per share, plus all unpaid dividends
thereon to the date fixed for distribution.
RANK. The Series A Preferred Stock shall, with respect to dividend
rights and rights on liquidation, winding up and dissolution, (i) rank pari
passu with the Series B Preferred Stock, (ii) rank senior to any of the
Company's Common Stock, the Company's Series C Preferred Stock and any other
class or series of stock of the Company which by its terms shall rank junior to
the Series A Preferred Stock, and (iii) rank junior to the Series D and Series E
Preferred Stock and any other class or series of stock of the Company which by
its terms shall rank senior to the Series A Preferred Stock.
SERIES B PREFERRED STOCK
There are 800,000 shares of Series B Preferred Stock, $.001 par value
(the "Series B Preferred Stock"), of which 800,000 shares are issued and
outstanding.
DIVIDENDS. Each issued and outstanding share of Series B Preferred
Stock shall be entitled to receive, pari passu with the Series A Preferred
Stock, out of any assets at the time legally available therefor and when and as
declared by the Board of Directors of the Company, dividends at the rate of $.05
per share per annum. Such
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dividends accrue on each share of Series B Preferred Stock from the initial date
of issuance thereof whether or not earned or declared.
VOTING RIGHTS. Each outstanding share of Series B Preferred Stock shall
entitle the holder thereof to one vote on all matters as to which holders of
common stock shall be entitled to vote.
REDEMPTION. At any time after December 31, 2001, the Company may redeem
all or part of the outstanding shares of Series A and Series B Preferred Stock,
treated as one class, at a cash price equal one dollar ($1.00) per share,
together will all unpaid dividends to and including the date of redemption,
provided that the Company provides written notice to the holders of such stock
to be redeemed at least 20 days prior to the date specified for redemption.
LIQUIDATION. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of shares of Series A and
Series B Preferred Stock then outstanding, treated as one class, shall be
entitled to be paid, out of the assets of the Company available for distribution
to its stockholders, whether from capital, surplus or earnings, before any
payment shall be made in respect of the Company's Common Stock or Series C
Preferred Stock, an amount equal to $1.00 per share, plus all unpaid dividends
thereon to the date fixed for distribution.
CONVERSION. At any time after December 31, 2001, the holders of
outstanding shares of Series B Preferred Stock, at their option, may convert
said shares, in whole or in part, on a share for share basis, to shares of
Series A Preferred Stock.
RANK. The Series B Preferred Stock shall, with respect to dividend
rights and rights on liquidation, winding up and dissolution, (i) rank pari
passu with the Series A Preferred Stock, (ii) rank senior to any of the
Company's Common Stock, the Company's Series C Preferred Stock and any other
class or series of stock of the Company which by its terms shall rank junior to
the Series A Preferred Stock, and (ii) rank junior to the Series D and Series E
Preferred Stock and any other class or series of stock of the Company which by
its terms shall rank senior to the Series B Preferred Stock.
SERIES C PREFERRED STOCK
There are 5,000 shares of Series C Preferred Stock, $.001 par value
(the "Series C Preferred Stock") of which 5,000 shares are issued and
outstanding.
DIVIDENDS. The holders of shares of Series C Preferred Stock shall be
entitled to receive, out of any assets at the time legally available therefor
and when and as declared by the Board of Directors of the Company, dividends at
the rate of 6% per share per annum, payable in cash commencing on December 31,
1997. Such dividends accrue on each share of Series C Preferred Stock from the
initial date of issuance thereof whether or not earned or declared.
VOTING RIGHTS. The holders of the Series C Preferred Stock shall not
have the right to vote on matters presented to the stockholders of the Company,
except as provided by the General Corporation Law of the State of Delaware.
REDEMPTION. At any time after December 31, 1998, the Company may redeem
all or part of the outstanding shares of the Series C Preferred Stock, at a cash
price equal to $1,000 per share, together with all unpaid dividends to and
including the date of redemption, provided that the Company provides written
notice to the holders of such stock to be redeemed at least 20 days prior to the
date specified for redemption.
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<PAGE> 53
LIQUIDATION. In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the Company, the holders of shares of Series C
Preferred Stock then outstanding, shall be entitled to be paid, out of the
assets of the Company available for distribution, whether from capital, surplus
or earnings, before any payment shall be made in respect of the Company's Common
Stock, an amount equal to $1,000 per share, plus all unpaid dividends thereon to
the date fixed for distribution.
RANK. The Series C Preferred Stock, with respect to dividend rights and
rights on liquidation, winding up and dissolution, (i) ranks senior to any class
of the Company's Common Stock, and any other series of capital stock of the
Company which by its terms ranks junior to the Series C Preferred Stock, and
(ii) ranks junior to the Series A, Series B, Series D and Series E Preferred
Stock, and any other class or series of stock of the Company which by its terms
ranks senior to the Series C Preferred Stock.
SERIES D PREFERRED STOCK
There are 10,000 shares of Series D Preferred Stock, $.001 par value
(the "Series D Preferred Stock") of which 10,000 shares are issued and
outstanding.
DIVIDENDS. The holders of shares of Series D Preferred Stock shall be
entitled to receive, out of any assets at the time legally available therefor
and when and as declared by the Board of Directors of the Company, dividends
calculated on the stated value per share at the rate of 8% per share per annum,
and no more, payable in cash commencing on December 31, 1998, and thereafter on
the last day of December of each year that any such shares shall be outstanding.
Such dividends accrue on each share of Series D Preferred Stock from the initial
date of issuance thereof whether or not earned or declared.
VOTING RIGHTS. Except as otherwise required by law, the holders of
Series D Preferred Stock shall not be entitled to vote upon any matter relating
to the business or affairs of the Company or for any other purpose.
REDEMPTION. The Company may, at the option of the Board of Directors,
redeem all or part of the outstanding shares of the Series D Preferred Stock at
a cash price equal to $1,000 per share, together with all unpaid dividends to
and including the redemption date (the "Series D Redemption Price"); provided,
however, that payment of the Series D Redemption Price shall be made from any
funds of the Company legally available therefor; provided that the Company shall
give written notice by mail, postage prepaid, to the holders of such stock to be
redeemed at least 20 days prior to the date specified for redemption (the
"Series D Redemption Date"); and provided further that such holders may, at any
time prior to the Series D Redemption Date, convert their shares of Series D
Preferred Stock. The holder of any shares of Series D Preferred Stock shall have
the right, at such holder's option, at any time (and from time to time) prior to
May 31, 2001, to convert any of such shares into that number of fully paid and
nonassessable shares of common stock (calculated as to each conversion to the
nearest 1/100th of a share) equal to the Conversion Rate (as defined below)
multiplied by the number of shares of Series D Preferred Stock to be converted.
The "Conversion Rate" per share of Series D Preferred Stock is 380 shares of
Common Stock.
LIQUIDATION. In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the Company, the holders of shares of the Series D
Preferred Stock then outstanding shall be entitled to be paid, out of the assets
of the Company available for distribution to its stockholders, whether from
capital, surplus or earnings, before any payment shall be made in respect of the
Company's Common Stock, an amount equal to $1,000 per share, plus all unpaid
dividends thereon to the date fixed for distribution.
RANK. The Series D Preferred Stock shall, with respect to dividend
rights and rights on liquidation, winding up and dissolution, (i) rank senior to
any of the Company's Common Stock, the Company's Series A, Series B and Series C
Preferred Stock and any other class or series of stock of the Company which by
its terms
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<PAGE> 54
shall rank junior to the Series D Preferred Stock, and (ii) rank junior to the
Series E Preferred Stock and any other class or series of stock of the Company
which by its terms shall rank senior to the Series D Preferred Stock.
SERIES E PREFERRED STOCK
There are 20,000 shares of Series E Preferred Stock, $.001 par value
(the "Series E Preferred Stock") of which 10,000 shares are issued and
outstanding.
DIVIDENDS. The holders of shares of Series E Preferred Stock shall be
entitled to receive, out of any assets at the time legally available therefor
and when and as declared by the Board of Directors of the Company, dividends
calculated on the stated value per share at the rate of 8% per share per annum,
and no more, payable in cash commencing on December 31, 1998, and thereafter on
the last day of December of each year that any such shares shall be outstanding.
Such dividends accrue on each share of Series E Preferred Stock from the initial
date of issuance thereof whether or not earned or declared.
VOTING RIGHTS. Except as otherwise required by law, the holders of
Series E Preferred Stock are not entitled to vote upon any matter relating to
the business or affairs of the Company or for any other purpose.
REDEMPTION. The Company may, at the option of the Board of Directors,
redeem all or part of the outstanding shares of the Series E Preferred Stock at
a cash price equal to $1,000 per share, together with all unpaid dividends to
and including the redemption date (the "Series E Redemption Price"); provided,
however, that payment of the Redemption Price shall be made from any funds of
the Company legally available therefor; provided that the Company shall give
written notice by mail, postage prepaid, to the holders of such stock to be
redeemed at least 20 days prior to the date specified for redemption (the
"Series E Redemption Date"); and provided further that such holders may, at any
time prior to the Series E Redemption Date, convert their shares of Series E
Preferred Stock. The holder of any shares of Series E Preferred Stock shall have
the right, at such holder's option, at any time (and from time to time) prior to
August 31, 2001, to convert any of such shares into that number of fully paid
and nonassessable shares of common stock (calculated as to each conversion to
the nearest 1/100th of a share) equal to the Conversion Rate (as defined below)
multiplied by the number of shares of Series E Preferred Stock to be converted.
The "Conversion Rate" per share of Series E Preferred Stock is 285 shares of
Common Stock.
LIQUIDATION. In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the Company, the holders of shares of the Series E
Preferred Stock then outstanding shall be entitled to be paid, out of the assets
of the Company available for distribution to its stockholders, whether from
capital, surplus or earnings, before any payment shall be made in respect of the
Company's Common Stock, an amount equal to $1,000 per share, plus all unpaid
dividends thereon to the date fixed for distribution.
RANK. The Series E Preferred Stock shall, with respect to dividend
rights and rights on liquidation, winding up and dissolution, (i) rank senior to
any of the Company's Common Stock, the Company's Series A, Series B, Series C
and Series D Preferred Stock and any other class or series of stock of the
Company which by its terms shall rank junior to the Series E Preferred Stock,
and (ii) rank junior to any class or series of stock of the Company which by its
terms shall rank senior to the Series E Preferred Stock.
UNDESIGNATED PREFERRED STOCK
The number of shares constituting the undesignated Preferred Stock (the
"Preferred Stock") is 965,000, $.001 par value. The Preferred Stock may be
issued in one or more series, the terms of which may be determined at
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the time of issuance by the Board of Directors, without further action by
stockholders, and may include voting rights, preferences as to dividends and
liquidation, conversion and redemption rights and sinking fund provisions.
ANTI-TAKEOVER PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). In general, this statute prohibits a publicly
held Delaware corporation from engaging, under certain circumstances, in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder unless (i) prior to the date at which the stockholder became an
interested stockholder, the Board of Directors approved either the business
combination or the transaction in which the person became an interested
stockholder; (ii) the stockholder acquires more than 85% of the outstanding
voting stock of the corporation (excluding shares held by directors who are
officers or held in certain employee stock plans) upon consummation of the
transaction in which the stockholder became an interested stockholder; or (iii)
the business combination is approved by the Board of Directors and by at least
66-2/3% of the outstanding voting stock of the corporation (excluding shares
held by the interested stockholder) at a meeting of stockholders (and not by
written consent) held on or subsequent to the date such stockholder became an
interested stockholder. An "interested stockholder" is a person who, together
with affiliates and associates, owns (or at any time within the prior three
years did own) 15% or more of the corporation's voting stock. Section 203
defines a "business combination" to include, without limitation, mergers,
consolidations, stock sales and asset-based transactions and other transactions
resulting in a financial benefit to the interested stockholder.
ITEM 12 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
LIMITATION ON DIRECTOR's LIABILITY
In accordance with the DGCL, the Company's Certificate of Incorporation
provides that the directors shall not be personally liable to the Company or its
stockholders for monetary damages for breach of duty as a director except (i)
for any breach of the director's duty of loyalty to the Company and its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct, or knowing violation of law; (iii) under Section 174 of
the DGCL, which relates to unlawful payments of dividends and unlawful stock
repurchases and redemptions; or (iv) for any transaction from which the director
derived an improper personal benefit. This provision does not eliminate a
director's fiduciary duties; it merely eliminates the possibility of damage
awards against a director personally which may be occasioned by certain
unintentional breaches (including situations that may involve grossly negligent
business decisions) by the director of those duties. The provision has no effect
on the availability of equitable remedies, such as injunctive relief or
rescission, which might be necessitated by a director's breach of his or her
fiduciary duties. However, equitable remedies may not be available as a
practical matter where transactions (such as merger transactions) have already
been consummated. The inclusion of this provision in the Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefited
the Company and its stockholders.
INDEMNIFICATION
The Certificate of Incorporation provides that the Company shall
indemnify its officers, directors, employees and agents to the fullest extent
permitted by the DGCL. Section 145 of the DGCL provides that the Company may
indemnify any person who was or is a party, or is threatened to be made a party,
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than
55
<PAGE> 56
a "derivative" action by or in the right of the Company) by reason of the fact
that such person is or was a director, officer, employee or agent of the
Company, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the Company, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe was
unlawful. A similar standard of care is applicable in the case of derivative
actions, except that no indemnification shall be made where the person is
adjudged to be liable to the Company, unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which such action was
brought determines that such person is fairly and reasonably entitled to such
indemnity and such expenses.
ITEM 13 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and the report thereon of Grant
Thornton LLP, independent certified public accountants, dated August 16, 1999
are filed as part of this Registration Statement. See Item 15.
ITEM 14 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 8, 1999 the Board of Directors recommended the appointment of
Grant Thornton LLP as the Company's auditors for the year ended May 31, 1998 and
determined not to engage Tanner & Co. ("Tanner") as the Company's auditors for
the year ended May 31, 1998. The Board had previously appointed Tanner as
auditors for the May 31, 1997 financial statements. The reports of Tanner on the
financial statements of the Company for the period ended May 31, 1997 did not
contain any adverse opinion or disclaimer of an opinion and were not qualified
or modified as to uncertainty audit scope or accounting principles. During the
fiscal year in the period ended May 31, 1997, and the subsequent interim periods
preceding the Company's decision, there were no disagreements with Tanner on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure or any reportable events as defined in Item 304 of
Regulation S-K under the Securities Act of 1934.
ITEM 15 - FINANCIAL STATEMENTS AND EXHIBITS
(a) Index to Financial Statements
The Financial Statements required by this item are submitted in a
separate section beginning on page F-1 of this registration statement
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Certified Public Accountants (Grant Thornton LLP) F-2
Report of Independent Certified Public Accountants (Tanner & Company LLP) F-3
Consolidated Balance Sheets F-4 - F-5
Consolidated Statements of Operations and Comprehensive Income (Loss) F-6
Consolidated Statement of Stockholders' Equity (Deficit) F-7 - F-8
Consolidated Statements of Cash Flows F-9 - F-11
</TABLE>
56
<PAGE> 57
Notes to Consolidated Financial Statements F-12 - F-38
(b) Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
3.1 Amended and Restated Certificate of Incorporation
3.2 Amended and Restated By-Laws
4 Specimen certificate representing shares of Common
Stock
10.1 Amended and Restated Lease Agreement dated December
12, 1996 between Service One International Corporation
and Donald A. Dunham, Jr.
10.2 Amendment No. One to the Amended and Restated Lease
Agreement dated June 11, 1997 between Service One
International Corporation and Donald A. Dunham, Jr.
10.3 Amendment No. Two to the Amended and Restated Lease
Agreement dated July 31, 1997 between Service One
International Corporation and Donald A. Dunham, Jr.
10.4 Lease Agreement dated February 28, 1997 between
Service One International Corporation and Eagle
Properties, L.L.C.
10.5 Addendum to Lease Agreement dated November 18, 1997
between Service One International Corporation and
Eagle Properties, L.L.C.
10.6 Mutual Business Development Agreement dated as of
October 8, 1996, between Service One International
Corporation and the O. Pappalimberis Trust
10.7 Amendment dated as of December 16, 1997 to the Mutual
Business Development Agreement dated as of October 8,
1996, such amendment among O. Pappalimberis Trust,
Taxter One LLC, Service One International Corporation,
Eikos Management, LLC and Thesseus International Asset
Fund
10.8 Amendment dated September 1, 1998 to the Mutual
Business Development Agreement dated as of October 8,
1996, as amended, between the Company and Eikos
Management LLC
10.9 Mutual Business Development Agreement dated as of
October 8, 1996, between Service One International
Corporation and Renaissance Trust I
10.10 Strategic Modeling Agreement dated March 18, 1999,
between the Company and Business Transactions Express,
Inc.
</TABLE>
57
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
10.11 Warrant to purchase Common Stock of the Company issued
to JLB on June 22, 1999
10.12 Loan and Security Agreement, dated as of April 30,
1998, between the Company and Coast Business Credit, a
division of Southern Pacific Bank
10.13 First Amendment to Loan and Security Agreement, dated
as of September 30, 1998, between the Company and
Coast Business Credit, a division of Southern Pacific
Bank
10.14 Second Amendment to Loan and Security Agreement, dated
as of December 1, 1998, between the Company and Coast
Business Credit, a division of Southern Pacific Bank
10.15 Amendment Number Two to Loan and Security Agreement,
dated as of April 27, 1999, between the Company and
Coast Business Credit, a division of Southern Pacific
Bank
10.16 Fourth Amendment to Loan and Security Agreement, dated
as of May 27, 1999, between the Company and Coast
Business Credit, a division of Southern Pacific Bank
10.17 Amendment Number Five to Loan and Security Agreement,
dated as of June 25, 1999, between the Company and
Coast Business Credit, a division of Southern Pacific
Bank
10.18 Amendment Number Six to Loan and Security Agreement
Dated as of December 6, 1999 between the Company and
Coast Business Credit, a division of Southern Pacific
Bank
10.19 Security Agreement dated as of August 1, 1997, between
J.L.B. of Nevada, Inc., Credit Store Mortgage, Inc.,
New Beginnings Corp., Consumer Debt Acquisitions,
Inc., Sleepy Hollow Associates, Inc., Service One
Holdings Inc., Service One International Corporation,
American Credit Alliance, Inc., Service One
Receivables Acquisition Corporation, the Company,
Service One Commercial Corporation and Soiland Company
10.20 First Amendment to Security Agreement, dated as of
October 23, 1997 between J.L.B. of Nevada, Inc., the
Company and Credit Store Mortgage, Inc., New
Beginnings Corp., Consumer Debt Acquisitions, Inc.,
Sleepy Hollow Associates, Inc., Service One Holdings,
Inc., Service One International Corporation, Service
One Receivables Acquisition Corporation, the Company,
Service One Commercial Corporation and Soiland Company
</TABLE>
58
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
10.21 Second Amendment to Security Agreement, dated as of
November 21, 1997 between J.L.B. of Nevada, Inc., the
Company, Sleepy Hollow Associates, Inc., Service One
International Corporation, American Credit Alliance,
Inc. and Service One Receivables Acquisition
Corporation
10.22 Credit Agreement Dated as of October 15, 1999 among
Credit Store Capital Corp., the Company, The Lenders
Signatory thereto from time to time, and General
Electric Capital Corporation
10.23 Amended 1997 Stock Option Plan of the Company
10.24 Employment Agreement dated March 27, 1997, between the
Company and Martin Burke
10.25 Letter from Martin Burke dated March 27, 1997,
regarding credit card repayment terms
10.26 Employment Agreement dated April 1, 1997, between the
Company and Kevin Riordan
10.27 Employment Agreement dated June 17, 1997, between the
Company and Michael Philippe
10.28 Amendment to Employment Agreement between Company and
Michael Philippe dated December 15, 1999
10.29 Employment Agreement dated August 1, 1997, between the
Company and Richard Angel
10.30 Amendment to Employment Agreement between Company and
Richard Angel dated December 15, 1999
10.31 Employment Agreement dated October 15, 1997, between
the Company and Cynthia Hassoun
10.32 Bankcard Marketing Agreement between the Company and
Bank of Hoven dated February 9, 1999
</TABLE>
59
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
10.33 Purchase Agreement between Bank of Hoven and the
Company dated February 9, 1999
10.34 Bankcard Marketing Agreement between Service One
International Corporation and First National Bank in
Brookings dated October 2, 1997
10.35 Purchase Agreement between First National Bank in
Brookings and Service One International Corporation
doing business as TCS Services, Inc. dated October 2,
1997
10.36 Amendment to Purchase Agreement by First National Bank
in Brookings and the Company dated August 31, 1998
10.37 Letter Agreement Regarding Bankcard Marketing
Agreement and Purchasing Agreement between the Company
and First National Bank in Brookings dated August 17,
1999
10.38 Agreement Regarding Transfer of Accounts between the
Company and First National Bank in Brookings dated
December 14, 1998
10.39 Subordinated Grid Promissory Note of the Company in
favor of JLB dated August 1, 1997 in the amount of
$20,000,000
10.40 Subordinated Grid Promissory Note of the Company in
favor of JLB dated October 23, 1997 in the amount of
$5,000,000
10.41 Subordinated Grid Promissory Note of the Company in
favor of JLB dated November 21, 1997 in the amount of
$5,000,000
16 Letter re Change in Certifying Accountant from Tanner
& Company
21 List of Subsidiaries
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
27.5 Financial Data Schedule
27.6 Financial Data Schedule
</TABLE>
- - - ------------------------
60
<PAGE> 61
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Company has duly caused this Registration Statement on Form 10 to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE CREDIT STORE, INC.
Dated: February 24, 2000
By /s/ Martin J. Burke, III
-----------------------------------
Martin J. Burke, III
Chief Executive Officer
By /s/ Michael J. Philippe
-----------------------------------
Michael J. Philippe
Chief Financial Officer
61
<PAGE> 62
<TABLE>
<CAPTION>
DESCRIPTION OF DOCUMENT
<S> <C>
3.1 Amended and Restated Certificate of Incorporation
3.2 Amended and Restated By-Laws
4 Specimen certificate representing shares of Common Stock
10.1 Amended and Restated Lease Agreement dated December
12, 1996 between Service One International Corporation
and Donald A. Dunham, Jr.
10.2 Amendment No. One to the Amended and Restated Lease
Agreement dated June 11, 1997 between Service One
International Corporation and Donald A. Dunham, Jr.
10.3 Amendment No. Two to the Amended and Restated Lease
Agreement dated July 31, 1997 between Service One
International Corporation and Donald A. Dunham, Jr.
10.4 Lease Agreement dated February 28, 1997 between
Service One International Corporation and Eagle
Properties, L.L.C.
10.5 Addendum to Lease Agreement dated November 18, 1997
between Service One International Corporation and
Eagle Properties, L.L.C.
10.6 Mutual Business Development Agreement dated as of
October 8, 1996, between Service One International
Corporation and the O. Pappalimberis Trust
10.7 Amendment dated as of December 16, 1997 to the Mutual
Business Development Agreement dated as of October 8,
1996, such amendment among O. Pappalimberis Trust,
Taxter One LLC, Service One International Corporation,
Eikos Management, LLC and Thesseus International Asset
Fund
10.8 Amendment dated September 1, 1998 to the Mutual
Business Development Agreement dated as of October 8,
1996, as amended, between the Company and Eikos
Management LLC
10.9 Mutual Business Development Agreement dated as of
October 8, 1996, between Service One International
Corporation and Renaissance Trust I
10.10 Strategic Modeling Agreement dated March 18, 1999,
between the Company and Business Transactions Express,
Inc.
10.11 Warrant to purchase Common Stock of the Company issued
to JLB on June 22, 1999
</TABLE>
62
<PAGE> 63
<TABLE>
<CAPTION>
DESCRIPTION OF DOCUMENT
<S> <C>
10.12 Loan and Security Agreement, dated as of April 30,
1998, between the Company and Coast Business Credit, a
division of Southern Pacific Bank
10.13 First Amendment to Loan and Security Agreement, dated
as of September 30, 1998, between the Company and
Coast Business Credit, a division of Southern Pacific
Bank
10.14 Second Amendment to Loan and Security Agreement, dated
as of December 1, 1998, between the Company and Coast
Business Credit, a division of Southern Pacific Bank
10.15 Amendment Number Two to Loan and Security Agreement,
dated as of April 27, 1999, between the Company and
Coast Business Credit, a division of Southern Pacific
Bank
10.16 Fourth Amendment to Loan and Security Agreement, dated
as of May 27, 1999, between the Company and Coast
Business Credit, a division of Southern Pacific Bank
10.17 Amendment Number Five to Loan and Security Agreement,
dated as of June 25, 1999, between the Company and
Coast Business Credit, a division of Southern Pacific
Bank
10.18 Amendment Number Six to Loan and Security Agreement
Dated as of December 6, 1999 between the Company and
Coast Business Credit, a division of Southern Pacific
Bank
10.19 Security Agreement dated as of August 1, 1997, between
J.L.B. of Nevada, Inc., Credit Store Mortgage, Inc.,
New Beginnings Corp., Consumer Debt Acquisitions,
Inc., Sleepy Hollow Associates, Inc., Service One
Holdings Inc., Service One International Corporation,
American Credit Alliance, Inc., Service One
Receivables Acquisition Corporation, the Company,
Service One Commercial Corporation and Soiland Company
10.20 First Amendment to Security Agreement, dated as of
October 23, 1997 between J.L.B. of Nevada, Inc., the
Company and Credit Store Mortgage, Inc., New
Beginnings Corp., Consumer Debt Acquisitions, Inc.,
Sleepy Hollow Associates, Inc., Service One Holdings,
Inc., Service One International Corporation, Service
One Receivables Acquisition Corporation, the Company,
Service One Commercial Corporation and Soiland Company
10.21 Second Amendment to Security Agreement, dated as of
November 21, 1997 between J.L.B. of Nevada, Inc., the
Company, Sleepy Hollow Associates, Inc., Service One
International Corporation, American Credit Alliance,
Inc. and Service One Receivables Acquisition
Corporation
</TABLE>
63
<PAGE> 64
<TABLE>
<CAPTION>
DESCRIPTION OF DOCUMENT
<S> <C>
10.22 Credit Agreement Dated as of October 15, 1999 among
Credit Store Capital Corp., the Company, The Lenders
Signatory thereto from time to time, and General
Electric Capital Corporation
10.23 Amended 1997 Stock Option Plan of the Company
10.24 Employment Agreement dated March 27, 1997, between the
Company and Martin Burke
10.25 Letter from Martin Burke dated March 27, 1997,
regarding credit card repayment terms
10.26 Employment Agreement dated April 1, 1997, between the
Company and Kevin Riordan
10.27 Employment Agreement dated June 17, 1997, between the
Company and Michael Philippe
10.28 Amendment to Employment Agreement between Company and
Michael Philippe dated December 15, 1999
10.29 Employment Agreement dated August 1, 1997, between the
Company and Richard Angel
10.30 Amendment to Employment Agreement between Company and
Richard Angel dated December 15, 1999
10.31 Employment Agreement dated October 15, 1997, between
the Company and Cynthia Hassoun
10.32 Bankcard Marketing Agreement between the Company and
Bank of Hoven dated February 9, 1999
10.33 Purchase Agreement between Bank of Hoven and the
Company dated February 9, 1999
10.34 Bankcard Marketing Agreement between Service One
International Corporation and First National Bank in
Brookings dated October 2, 1997
10.35 Purchase Agreement between First National Bank in
Brookings and Service One International Corporation
doing business as TCS Services, Inc. dated October 2,
1997
10.36 Amendment to Purchase Agreement by First National Bank
in Brookings and the Company dated August 31, 1998
</TABLE>
64
<PAGE> 65
<TABLE>
<CAPTION>
DESCRIPTION OF DOCUMENT
<S> <C>
10.37 Letter Agreement Regarding Bankcard Marketing
Agreement and Purchasing Agreement between the Company
and First National Bank in Brookings dated August 17,
1999
10.38 Agreement Regarding Transfer of Accounts between the
Company and First National Bank in Brookings dated
December 14, 1998
10.39 Subordinated Grid Promissory Note of the Company in
favor of JLB dated August 1, 1997 in the amount of
$20,000,000
10.40 Subordinated Grid Promissory Note of the Company in
favor of JLB dated October 23, 1997 in the amount of
$5,000,000
10.41 Subordinated Grid Promissory Note of the Company in
favor of JLB dated November 21, 1997 in the amount of
$5,000,000
16 Letter re Change in Certifying Accountant from Tanner
& Company
21 List of Subsidiaries
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
27.5 Financial Data Schedule
27.6 Financial Data Schedule
</TABLE>
65
<PAGE> 66
I N D E X
Page
----
Report of Independent Certified Public Accountants (GT) F-2
Report of Independent Certified Public Accountants (Tanner) F-3
Consolidated Financial Statements
Consolidated Balance Sheets F-4 - F-5
Consolidated Statements of Operations and Comprehensive
Income (Loss) F-6 - F-7
Consolidated Statement of Stockholders' Equity (Deficit) F-8 - F-9
Consolidated Statements of Cash Flows F-10 - F-12
Notes to Consolidated Financial Statements F-13 - F-43
F-1
<PAGE> 67
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
THE CREDIT STORE, INC.
We have audited the accompanying consolidated balance sheets of The Credit
Store, Inc. (a Delaware corporation) (the "Company") and subsidiaries as of May
31, 1999 and 1998, and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity (deficit) and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Credit Store,
Inc. and subsidiaries as of May 31, 1999 and 1998, and the consolidated results
of their operations and their consolidated cash flows for the year then ended in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
August 16, 1999
F-2
<PAGE> 68
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
THE CREDIT STORE, INC. AND
SERVICE ONE INTERNATIONAL CORPORATION
We have audited the accompanying consolidated statements of operations and
comprehensive income (loss), stockholders' equity (deficit) and cash flows of
The Credit Store, Inc. (a Delaware corporation) (the "Company") and its
subsidiaries and Service One International Corporation ("The Predecessor") for
the year ended May 31, 1997 and the period January 1, 1996 to October 8, 1996,
respectively. These financial statements are the responsibility of the Company's
and the Predecessor'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 consolidated statements of operations,
stockholders' equity (deficit) and cash flows are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated statements of operations, stockholders'
equity (deficits) and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated statements of
operations, stockholders' equity (deficit) and cash flows. We believe that our
audits of the consolidated statements of operations and comprehensive income
(loss), stockholders' equity (deficit) and cash flows provide a reasonable basis
for our opinion.
In our opinion, the consolidated statements of operations and comprehensive
income (loss), stockholders' equity (deficit) and cash flows referred to above
present fairly, in all material respects, the consolidated results of their
operations and the consolidated cash flows of The Credit Store, Inc. and
subsidiaries and the Predecessor for the year ended May 31, 1997 and the period
January 1, 1996 to October 8, 1996, respectively in conformity with generally
accepted accounting principles.
We also audited the adjustments described in Note P to the consolidated
financial statements that were applied to restate the consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year ended May
31, 1997. In our opinion, such adjustments are appropriate and have been
properly applied.
TANNER + CO.
Salt Lake City, Utah
August 1, 1997 except for Note P,
which is dated November 17, 1998
as to the Company, and June 20, 1997
as to the Predecessor
F-3
<PAGE> 69
The Credit Store, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, May 31,
ASSETS 1999 1999 1998
---------------- ------------ ------------
<S> <C> <C> <C>
Cash $ 4,523,121 $ 3,533,930 $ 7,205,071
Restricted cash 750,000 750,000 1,000,000
Accounts and notes receivable, net of allowance
for doubtful accounts of $715,912 at November 30,
1999 and $746,463 and $780,027 at May 31,
1999 and 1998, respectively 3,166,873 1,150,207 492,666
Prepaid expenses 888,105 618,198 444,836
Amounts due from special purpose entities 1,230,700
Investments in consumer debt and credit cards
Investments in nonperforming consumer debt, net
of cost recovery of $39,381,961, $36,109,936
and $24,375,047 at November 30, 1999 and at
May 31, 1999 and 1998, respectively 4,415,433 3,227,711 6,125,511
Credit card receivables, net of provision for
Losses and unearned fees of $ 4,560,236,
$3,247,806 and $3,904,812 at November 30, 1999
and at May 31, 1999 and 1998, respectively 26,020,644 18,631,403 12,919,970
Investment in unconsolidated affiliate 1,646,154 1,612,648 1,287,465
Retained interest in securitized credit card receivables 5,130,372
Property and equipment, net of accumulated depreciation
of $6,432,571, $5,202,266 and $2,795,673 at November 30,
1999, and at May 31, 1999 and 1998, respectively 4,978,278 6,132,612 7,396,616
Goodwill, net of accumulated amortization of $656,058,
$552,470 and $345,294 at November 30, 1999,
and at May 31, 1999 and 1998, respectively 2,451,587 2,555,175 2,762,351
Deferred tax asset 700,000 700,000
Other assets 1,247,288 719,014 541,929
----------- ------------ ------------
Total assets $50,787,483 $45,991,970 $40,176,415
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 70
The Credit Store, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' November 30, May 31,
EQUITY (DEFICIT) 1999 1999 1998
--------------- -------------- --------------
<S> <C> <C> <C>
Liabilities
Accounts payable and accrued expenses $ 2,887,049 $ 3,611,334 $ 4,245,019
Accrued royalties 28,568 702,075 261,667
Notes payable 13,649,987 6,086,766 5,902,041
Capitalized lease obligations 3,440,542 4,045,541 5,150,481
Subordinated notes and accrued interest payable -
related party 19,591,152 19,246,595 31,807,322
----------- ----------- -----------
Total liabilities 39,597,298 33,692,311 47,366,530
----------- ----------- -----------
Stockholders' equity (deficit)
Series A Preferred Stock, $.001 par value; 2,000,000 shares
authorized; 1,200,000 shares issued and outstanding;
stated at liquidation value of $1 per share 1,200,000 1,200,000 1,200,000
Series B Preferred Stock, $.001 par value; 800,000 shares
authorized; 800,000 shares issued and outstanding;
Stated at liquidation value of $1 per share 800,000 800,000 800,000
Series C Preferred Stock; 5,000 shares
authorized; 5,000 shares issued and outstanding;
Stated at liquidation value of $1,000 per share 5,000,000 5,000,000 5,000,000
Series D Preferred Stock, $.001 par value; 10,000 shares,
convertible into 3,800,000 of common stock
Authorized; 10,000 shares issued and outstanding;
Stated at liquidation value of $1,000 per share, 10,000,000 10,000,000 10,000,000
Series E Preferred Stock, $.001 par value; 20,000 shares,
convertible into 5,700,000 shares of common stock
Authorized; 10,000 shares issued and outstanding;
stated at liquidation value of $1,000 per share 10,000,000 10,000,000
Common Stock, $.001 par value; 65,000,000 shares
authorized at November 30, 1999 and 50,000,000 shares
authorized at May 31, 1999 and 1998; 34,761,965 shares
issued and outstanding at November 30, 1999 and at
May 31, 1999 and 1998 34,762 34,762 34,762
Additional paid-in capital 23,564,760 22,670,711 19,311,782
Unrealized gain from retained interest in securitized
receivables, net of tax 2,497,148
Accumulated deficit (39,409,337) (39,902,962) (43,536,659)
----------- ----------- -----------
Total stockholders' equity (deficit) 11,190,185 12,299,659 (7,190,115)
Total liabilities and stockholders' equity (deficit) $ 50,787,483 $ 45,991,970 $ 40,176,415
=========== ========== ===========
</TABLE>
F-5
The accompanying notes are an integral part of these statements.
<PAGE> 71
The Credit Store, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS)
<TABLE>
<CAPTION>
For the six For the years ended
months ended November 30, May 31,
1999 1998 1999 1998
-------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue
Income from credit card receivables $ 4,961,764 $ 3,029,342 $ 6,438,460 $ 3,951,602
Revenue in excess of cost recovered 9,905,257 10,156,697 21,852,316 8,042,255
Gain on sales of portfolios 6,336,221 5,649,418 11,851,080
Servicing fees and other income 1,346,061 1,013,632 1,564,356 1,292,596
----------- ----------- ----------- ------------
Total revenue 22,549,303 19,849,089 41,706,212 13,286,453
Provision for losses 3,737,867 2,559,044 4,607,081 6,483,736
----------- ----------- ----------- ------------
Net revenue 18,811,436 17,290,045 37,099,131 6,802,717
Expenses
Salaries and employee benefits 6,615,777 5,878,047 12,484,582 13,268,863
Interest expense 2,139,454 2,219,073 4,029,491 4,760,905
Professional fees 1,109,517 1,229,946 2,701,016 4,215,891
Depreciation and amortization 1,333,893 1,260,364 2,614,216 3,223,620
Third-party credit card services 2,010,651 2,123,114 4,518,919 3,097,347
Mail processing 475,898 758,960 1,434,506 1,121,623
Telephone 430,298 460,900 838,007 913,757
Occupancy and equipment rental 392,123 399,654 766,832 825,517
Royalty expense 181,493 1,045,895 1,541,944 207,238
Other 2,342,298 1,595,228 4,522,330 4,319,286
--------- ---------- --------- ----------
Total expenses 17,031,402 16,971,181 35,451,843 35,954,047
---------- ---------- ---------- -----------
Income (loss) before income taxes 1,780,034 318,864 1,647,288 (29,151,330)
Income tax benefit (expense) (1,286,409) 100,000 1,986,409 -
----------- ------------ ------------ --------------
Net income (loss) 493,625 418,864 3,633,697 (29,151,330)
Unrealized gain on retained interest
in securitized credit card
receivables, net of tax 1,424,065 784,348 2,497,148
Less: reclassification adjustment for gains
included in net income (3,921,213) - - -
--------- --------- --------- ----------
Comprehensive income (loss) $(2,003,523) $ 1,203,212 $ 6,130,845 $(29,151,330)
========= ========= ========= ==========
The Credit Store, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
<CAPTION>
January 1,
1996 to
October 8,
1996
1997 ("Predecessor")
----------- ---------------
<S> <C> <C>
Revenue
Income from credit card receivables $ 971,174
Revenue in excess of cost recovered 3,934
Gain on sales of portfolios
Servicing fees and other income 1,601,228 $ 2,078,506
------------ ------------
Total revenue 2,576,336 2,078,506
Provision for losses 1,494,001 -
------------ ------------
Net revenue 1,082,335 2,078,506
Expenses
Salaries and employee benefits 6,154,929 1,757,101
Interest expense 751,729 151,906
Professional fees 2,388,274 76,753
Depreciation and amortization 952,362 138,338
Third-party credit card services 899,986 -
Mail processing 527,372 666,889
Telephone 511,131 138,770
Occupancy and equipment rental 349,383 76,283
Royalty expense 1,229,180 -
Other 1,564,248 1,005,234
---------- ---------
Total expenses 15,328,594 4,011,274
----------- ------------
Income (loss) before income taxes (14,246,259) (1,932,768)
Income tax benefit (expense) - 420,280
------------ ------------
Net income (loss) (14,246,259) (1,512,488)
Unrealized gain on retained interest
in securitized credit card
receivables, net of tax
Less: reclassification adjustment for gains
included in net income - -
----------- ------------
Comprehensive income (loss) $(14,246,259) $ (1,512,488)
=========== ============
</TABLE>
F-6
<PAGE> 72
The Credit Store, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS) (CONTINUED)
<TABLE>
<CAPTION>
For the six For the years ended
months ended November 30, May 31,
1999 1998 1999 1998
-------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 493,625 $ 418,864 $ 3,633,697 $(29,151,330)
Dividends on preferred stock (1,000,000) (799,999) (1,799,999) (399,996)
Net income (loss), applicable to ----------- ------------ ----------- ------------
common shareholders $ (506,375) $ (381,135) $ 1,833,698 $(29,551,326)
=========== ============ =========== ===========
Income (loss) per share
Basic and diluted $(.01) $.(01) $.05 $(0.89)
==== ==== === =====
Weighted-average common shares
outstanding
Basic 34,761,965 34,761,965 34,761,965 33,109,781
========== ========== ========== ===========
Diluted 34,761,965 34,761,965 38,436,119 33,109,781
========== ========== ========== ===========
The Credit Store, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS) (CONTINUED)
<CAPTION>
January 1,
1996 to
October 8,
1996
1997 ("Predecessor")
----------- ---------------
<S> <C> <C>
Net income (loss) $(14,246,259) $(1,512,488)
Dividends on preferred stock (7,397) -
----------- ----------
Net income (loss), applicable to
common shareholders $(14,253,656) $(1,512,488)
=========== ==========
Income (loss) per share
Basic and diluted $(.55) $(.30)
==== ====
Weighted-average common shares
outstanding
Basic 25,912,465 5,000,000
=========== ==========
Diluted 25,912,465 5,000,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 73
The Credit Store, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIT)
Periods ended November 30, 1999), and May 31, 1999,
1998 and 1997
<TABLE>
<CAPTION>
Common
Stock -
Common Shares
stock - ($.001 par Series A Series B Series C Series D
shares Value) Preferred Preferred Preferred Preferred
---------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Formation of Predecessor 5,000,000 $ 5,000
========== =======
Net loss
Balance at October 8, 1996 5,000,000 $ 5,000
========== =======
Formation of Company,
October 8, 1996 12,049,965 $12,050 $1,200,000 $800,000 $5,000,000
Net loss
Issuance of common stock 20,157,500 20,158
---------- ------ --------- ------- ---------
Balance at May 31, 1997 32,207,465 32,208 1,200,000 800,000 5,000,000
Net loss
Issuance of Series D Preferred
Stock in exchange for $10 million
subordinated note $10,000,000
Issuance of common stock 2,554,500 2,554
----------- ------- ---------- ---------- ---------- ----------
Balance at May 31, 1998 34,761,965 34,762 1,200,000 800,000 5,000,000 10,000,000
Net income
Unrealized gain on retained interest in
securitization, net of tax
Issuance of Series E Preferred
Stock in exchange for $10 million
subordinated note
Issuance of 4 million warrants in lieu
of payment of accrued interest on
subordinated debt
---------- ------ --------- ------- --------- ----------
Balance at May 31, 1999 34,761,965 34,762 1,200,000 800,000 5,000,000 10,000,000
---------- ------ --------- ------- --------- ----------
Net loss
Unrealized gain on retained interest in
securitized receivables, net of tax
Sale of retained interest in
securitized receivables, net of tax
Issuance of warrants in lieu of
payment for assets acquired
---------- ------ --------- ------- --------- ----------
Balance at November 30, 1999 34,761,965 $34,762 $1,200,000 $800,000 $5,000,000 $10,000,000
========== ====== ========= ======= ========= ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-8
<PAGE> 74
The Credit Store, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (continued)
Periods ended November 30, 1999), and May 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additional Other Total
Series E paid-in Accumulated comprehensive stockholders'
Preferred capital deficit income equity (deficit)
----------- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
Formation of Predecessor $ 385,203 $ 390,203
Net loss $ (1,512,488) (1,512,488)
------------ ------------ ------------
Balance at October 8, 1996 $ 385,203 $ (1,512,488) $ (1,122,285)
============ ============ ============
Formation of Company,
October 8, 1996 $ 121,175 $ (131,673) $ 7,001,552
Net loss (14,246,259) (14,246,259)
Dividends (7,397) (7,397)
Issuance of common stock 14,016,717 14,036,875
------------ ------------ ------------
Balance at May 31, 1997 14,137,892 (14,385,329) 6,784,771
Net loss (29,151,330) (29,151,330)
Issuance of Series D Preferred
Stock in exchange for $10 million
subordinated note 10,000,000
Issuance of common stock 5,173,890 5,176,444
------------ ------------ ------------
Balance at May 31, 1998 19,311,782 (43,536,659) (7,190,115)
Net income 3,633,697 3,633,697
Accretion on retained interest in
securitization, net of tax $ 2,497,148 2,497,148
Issuance of Series E Preferred
Stock in exchange for $10 million
subordinated note $10,000,000 10,000,000
Issuance of 4 million warrants in lieu
of payment of accrued interest on
subordinated debt 3,358,929 3,358,929
----------- ------------ ------------ ----------- ------------
Balance at May 31, 1999 10,000,000 22,670,711 (39,902,962) 2,497,148 12,299,659
----------- ------------ ------------ ----------- ------------
Net income 493,625 493,625
Accretion on retained interest in
securitized receivables, net of tax 1,424,065 1,424,065
Sale of retained interest in
securitized receivables, net of tax (3,921,213) (3,921,213)
Issuance of warrants in lieu of
payment for services 894,049 894,049
----------- ----------- ------------ ----------- ------------
Balance at November 30, 1999 $10,000,000 $23,564,760 $(39,409,337) $ - $ 11,190,185
=========== =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-9
<PAGE> 75
The Credit Store, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the six For the years ended
months ended November 30, May 31,
--------------------------- --------------------------------------------
1999 1998 1999 1998 1997
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) 493,625 418,864 $ 3,633,697 $(29,151,330) $(14,246,259)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities
Provision for credit card losses 3,737,867 2,559,044 4,607,081 6,483,736 1,494,001
Amortization of discount on performing
credit card portfolio (626,110) -- -- -- --
Provision for losses on accounts receivable -- -- 768,860 780,027 199,797
Depreciation and amortization 1,333,893 1,260,364 2,614,216 3,223,620 952,362
Deferred tax benefit 1,286,409 (100,000) (1,986,409) -- --
Gain on sale of interest in affiliates (6,546,767) -- -- -- --
Loss from unconsolidated affiliates (33,506) (210,331) (325,183) (277,159) (1,010,306)
Gain on sale of credit card receivable
portfolios -- (5,649,418) (11,851,080) -- --
Services received for stock issued -- -- -- 176,444 --
(Increase) decrease in
Restricted cash -- 250,000 250,000 -- (1,000,000)
Accounts and notes receivable (2,016,666) (262,356) (1,426,401) (473,436) (999,054)
Receivable from unconsolidated affiliate 1,230,701 (463,601) (1,230,700) -- --
Prepaid expenses (269,907) (11,568) (173,362) (327,177) (117,659)
Accrued interest on funds advanced
on credit cards -- -- 82,488 (263,255) (62,722)
Accrued fees -- -- 291,161 (48,382) (575,225)
Other assets 365,775 (218,027) (177,085) (383,338) (158,591)
Increase (decrease) in
Unearned fees 132,041 219,453 184,551 216,721 --
Accounts payable and accrued expenses (724,285) (425,334) (855,221) 1,801,103 1,683,604
Deferred revenue
Accrued interest payable on subordinated
notes 694,557 1,375,891 2,439,273 3,675,381 457,001
Accrued royalties (673,507) 119,358 661,944 (570,262) 1,526,680
----------- ----------- ------------ ------------ ------------
Net cash used in
operating activities (1,615,880) (1,137,661) (2,492,170) (15,137,307) (11,856,371)
----------- ----------- ------------ ------------ ------------
<CAPTION>
January 1,
1996 to
October 8,
1996
("Predecessor")
---------------
<S> <C>
Cash flows from operating activities
Net income (loss) $ (1,512,488)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities
Provision for credit card losses --
Amortization of discount on performing
credit card portfolio --
Provision for losses on accounts receivable
Depreciation and amortization 138,338
Deferred tax benefit (420,280)
Gain on sale of interest in affiliates --
Loss from unconsolidated affiliates
Gain on sale of credit card receivable --
portfolios --
Services received for stock issued
(Increase) decrease in --
Restricted cash
Accounts and notes receivable (72,069)
Receivable from unconsolidated affiliate --
Prepaid expenses (13,308)
Accrued interest on funds advanced
on credit cards --
Accrued fees --
Other assets
Increase (decrease) in --
Unearned fees
Accounts payable and accrued expenses 670,993
Deferred revenue 166,800
Accrued interest payable on subordinated --
notes --
Accrued royalties ---------------
Net cash used in (1,042,014)
operating activities ---------------
</TABLE>
F-10
<PAGE> 76
The Credit Store, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For the six For the years ended
months ended November 30, May 31,
---------------------------- --------------------------------------------
1999 1998 1999 1998 1997
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities
Collection of funds advanced on credit cards 13,256,832 8,670,071 $ 13,305,543 $ 1,887,306 $ 1,063,729
Cash received on collection of nonperforming
consumer debt 3,272,027 7,380,092 11,734,887 18,258,463 6,116,584
Funds advanced on securitized credit card (2,036,060) (3,758,290) (1,346,815) -- --
receivables
Proceeds from sale of credit card receivable
portfolios -- 8,507,558 17,129,109 -- --
Funds advanced on credit cards (18,517,858) (15,149,800) (29,460,286) (18,629,185) (4,486,692)
Purchase of nonperforming consumer debt
portfolios (4,459,749) (7,276,729) (8,837,087) (16,031,225) (14,469,333)
Proceeds from sale of beneficial interest in 8,643,233 -- -- -- --
affiliates
Purchase of performing consumer debt portfolios (4,085,604)
Development of proprietary software (460,497) (460,497)
Purchase of property and equipment (75,972) (394,627) (682,539) (4,170,472) (10,164,477)
Cash received in purchase of subsidiary -- -- -- -- 58,162
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing
Activities (4,003,151) (2,488,222) 1,382,315 (18,685,113) (21,882,027)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities
Proceeds from debt 8,367,263 1,378,565 576,643 33,240,887 10,794,741
Payments on debt (1,154,042) (1,504,895) (2,032,989) (101,921) (356,726)
Borrowings from sale/leaseback transactions 424,000 25,138 559,713 3,146,275 4,442,520
Payments on capital lease obligations (1,028,999) (789,134) (1,664,653) (1,943,331) (494,983)
Proceeds from issuance of stock -- -- -- 5,000,000 21,036,875
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
Activities 6,608,222 (890,326) (2,561,286) 39,341,910 35,422,427
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 989,191 (4,510,209) (3,671,141) 5,519,490 1,684,029
Cash at beginning of period 3,533,930 7,205,071 7,205,071 1,685,581 1,552
------------ ------------ ------------ ------------ ------------
Cash at end of period 4,523,121 2,694,862 $ 3,533,930 $ 7,205,071 $ 1,685,581
============ ============ ============ ============ ============
<CAPTION>
January 1,
1996 to
October 8,
1996
("Predecessor")
---------------
<S> <C>
Cash flows from investing activities
Collection of funds advanced on credit cards --
Cash received on collection of nonperforming
consumer debt --
Funds advanced on securitized credit card
receivables --
Proceeds from sale of credit card receivable
portfolios $ 1,300,000
Funds advanced on credit cards --
Purchase of nonperforming consumer debt
portfolios --
Proceeds from sale of beneficial interest in
affiliates --
Purchase of performing consumer debt portfolios --
Development of proprietary software --
Purchase of property and equipment (957,720)
Cash received in purchase of subsidiary --
---------------
Net cash provided by (used in) investing
Activities 342,280
---------------
Cash flows from financing activities
Proceeds from debt 1,546,842
Payments on debt (1,068,303)
Borrowings from sale/leaseback transactions --
Payments on capital lease obligations --
Proceeds from issuance of stock --
---------------
Net cash provided by (used in) financing
Activities 478,539
---------------
NET INCREASE (DECREASE) IN CASH (221,195)
Cash at beginning of period 279,357
---------------
Cash at end of period $ 58,162
===============
</TABLE>
F-11
<PAGE> 77
The Credit Store, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
January 1,
For the six For the years ended 1996 to
Months ended November 30, May 31, October 8,
------------------------- -------------------------------------- 1996
1999 1998 1999 1998 1997 ("Predecessor")
---------- ---------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest 1,115,205 843,183 $ 1,592,864 $ 1,006,663 $ 306,691 $ 144,573
Noncash financing activities:
Series E and D preferred stock issued in
exchange for subordinated note 10,000,000 $ 10,000,000 $ 10,000,000
Obligations assumed in lieu of payment of
accrued interest on subordinated debt $ 1,641,071
Issuance of warrants in lieu of payment of
accrued interest on subordinated debt $ 3,358,929
Issuance of warrants in lieu of payment for
assets acquired 894,049
Property and equipment provided with debt $3,754,408
</TABLE>
The accompanying notes are an integral part of these statements.
F-12
<PAGE> 78
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE A - ORGANIZATION
The Credit Store, Inc. is a technology based financial services company
that provides credit card products to consumers who may otherwise fail to
qualify for a traditional unsecured bank credit card. The Company reaches
these consumers by acquiring portfolios of non-performing consumer
receivables and offering a new credit card to those consumers who agree to
pay all or a portion of the outstanding amount due on their debt and who
meet the Company's underwriting guidelines. The new card is issued with an
initial balance and credit line equal to the agreed repayment amount. After
the consumers have made a certain number of on-time payments on their
outstanding credit card balance, the Company seeks to sell or securitize
the credit card receivables generated by this business strategy. The
Company offers other forms of settlement to those consumers who do not
accept the credit card offer.
The Company was incorporated in 1972 in Utah as Valley West Development
Corporation, changed its corporate domicile to Delaware in 1995, and
changed its name to The Credit Store, Inc. on October 8, 1996.
On October 8, 1996, Taxter One LLC ("Taxter") acquired Service One
Holdings, Inc. ("Holdings") from two selling entities ("Selling Entities").
Holdings, through its wholly-owned subsidiary, Service One International
Corporation, Inc. ("SOIC"), engaged in the business of acquiring
non-performing consumer debt portfolios, and the marketing and servicing of
credit cards. SOIC (the "Predecessor") is the predecessor of the Company.
At the time of the acquisition, Holdings owned all of the capital stock of
Service One International Corporation ("SOIC"), its sole asset, which was
engaged in the business of acquiring nonperforming consumer debt
portfolios, and the marketing and servicing of credit cards. On December 4,
1996, the Company acquired all of the capital stock of Holdings from Taxter
for 2,000,000 shares of Series A and B Preferred Stock. The acquisition was
accounted for as a purchase of entities under common control. Holdings
operations were recorded as of October 8, 1996. Following the acquisition
of Holdings, the Company engaged directly, and through SOIC and its
affiliates, in the acquisition of nonperforming consumer debt portfolios
and the marketing and servicing of credit cards. Holdings and SOIC were
merged into the Company in February and March, 1998, respectively. For
accounting purposes, the acquisition of Holdings and SOIC by the Company
has been accounted for as the acquisition of Holdings by the Company. In
connection with the acquisition by Taxter of Holdings (and its subsidiary,
SOIC), the agreements provided, among other obligations, for:
- A cash payment of $2 million by Taxter to the Selling Entities
at closing.
- An option for each of the Selling Entities to acquire 4,000,000
shares of common stock owned by Taxter and 400,000 shares of
Series B Preferred Stock by Taxter.
- Royalty fees of up to $25,000,000 payable to each Selling Entity
by SOIC.
F-13
<PAGE> 79
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE A (CONTINUED)
The excess of the (cash) purchase price over the fair value of the net
assets acquired was allocated to goodwill and amounted to $3.1 million.
The assets acquired and liabilities assumed (in millions) were:
<TABLE>
<S> <C>
Assets acquired $ 2.9
Liabilities assumed $(4.0)
Cash paid $(2.0)
</TABLE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated.
2. Cash and Cash Equivalents
For purposes of the statement of cash flows, cash includes all cash and
investments with original maturities to the Company of three months or
less when purchased except restricted cash. The Company maintains its
cash in bank deposit accounts, which at times may exceed federally
insured limits. The Company classifies as restricted cash $750,000 at
November 30, 1999 and at May 31, 1999 and $1,000,000 at May 31, 1998,
on deposit with a bank in order to facilitate funding of credit card
loans.
3. Investments and Credit Card Receivables
Investments in nonperforming consumer debt consist of portfolios of
consumer debt purchased by the Company, which is recorded at cost, less
cost recovered. Cost is substantially less than the remaining
outstanding balance of these portfolios. To the extent that the cost of
a particular
F-14
<PAGE> 80
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE B (CONTINUED)
portfolio of debt purchased exceeds the estimated amount of cash
expected to be collected, a valuation allowance would be recognized in
the amount of such impairment.
Credit card receivables consist of amounts funded by the Company for
new purchases or advances, accrued interest on new purchases and
advances, and accrued fees, less a provision for losses.
Investment in unconsolidated affiliate represents the Company's 50%
ownership interest in an entity involved in substantially the same
business as the Company and is recorded on the equity method of
accounting.
4. Securitization Accounting
Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," requires an entity to recognize the
financial and servicing assets it controls and the liabilities it has
incurred and to derecognize financial assets when control has been
surrendered. The basis of securitized financial assets is allocated to
the assets sold, the servicing asset or liability and retained interest
based on their relative fair values at the transfer date in determining
the gain on the securitization transaction.
SFAS No. 125 requires an entity to recognize a servicing asset or
servicing liability each time it undertakes an obligation to service
financial assets that have been securitized and amortize it over the
period of estimated net servicing income. Servicing assets or
liabilities are amortized in proportion to and over the period of
estimated net servicing income or loss. The Company received adequate
compensation for the servicing of securitized credit card receivables
and therefore no servicing asset or liability, was recorded.
5. Retained Interest in Securitized Credit Card Receivables
The retained interest in securitized credit card receivables is treated
as a debt security classified as available-for-sale in accordance with
Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"),
"Accounting for Certain Investments in Debt and Equity Securities," and
is carried at fair value. At the time of securitization, the retained
interest is initially recorded at the basis allocated in accordance
with SFAS No. 125. This original cost basis is adjusted to fair value,
which is based on the discounted anticipated future cash flows on a
"cash out" basis, with such adjustment (net of related deferred income
taxes) recorded as a component of other comprehensive income. The cash
out method projects cash collections to be received only after all
amounts owed to investors have been remitted.
F-15
<PAGE> 81
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE B (CONTINUED)
Income on the retained interest is accrued based on the effective
interest rate applied to its original cost basis, adjusted for accrued
interest and principal paydowns. The effective interest rate is the
internal rate of return determined based on the timing and amounts of
anticipated future cash flow projections for the underlying pool of
securitized credit card receivables.
The Company monitors impairment of the retained interest based on
discounted anticipated future cash flows of the underlying receivables
on a cash out basis compared to the original cost basis of the retained
interest, adjusted for accrued interest and principal paydowns. The
discount rate is based on an acceptable rate of return adjusted for
specific risk factors. The retained interest is evaluated for
impairment by management monthly based on current market and cash flow
assumptions applied to the underlying receivables. Provisions for
losses are charged to earnings when it is determined that the retained
interest's original cost basis, adjusted for accrued interest and
principal paydowns, is greater than the present value of expected
future cash flows. No provision for losses was recorded during the six
months ended November 30, 1999 and for the fiscal year ended May 31,
1999.
6. Property and Equipment
Property and equipment are recorded at cost, less accumulated
depreciation and amortization. Depreciation and amortization on capital
leases and property and equipment are determined using the
straight-line method over the estimated useful lives of the assets or
terms of the lease. Expenditures for maintenance and repairs are
expensed when incurred and betterments are capitalized.
7. Goodwill
Goodwill originating from the acquisition of companies acquired in
purchase transactions is being amortized using the straight-line method
over fifteen years.
The Company evaluates the reliability of goodwill based on expectations
of future non-discounted cash flows and operating income related to
purchased businesses.
8. Revenue Recognition
Income from credit cards receivable represents interest and fees on new
advances or purchases made by holders of the Company's credit cards on
an accrual basis.
F-16
<PAGE> 82
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE B (CONTINUED)
For the portfolios of nonperforming consumer debt revenue in excess of
cost recovery is accounted for on a pool basis using the cost recovery
method of accounting in accordance with Practice Bulletin No. 6,
"Amortization of Discounts on Certain Acquired Loans." Under the cost
recovery method of accounting, all cash receipts relating to individual
portfolios of nonperforming consumer debt are applied first to recover
the cost of the portfolios, prior to recognizing any revenue. Cash
receipts in excess of cost of acquired portfolios are then recognized
as revenue.
Servicing revenues are fees related to processing and managing credit
cards for third parties. These revenues are recognized when the related
services are provided.
The Company's policy is to accrue interest and fee income on all credit
card accounts including delinquent accounts, until the account is
charged off. A credit card is contractually delinquent if the minimum
payment is not received on the specified payment due date on the
customers statement.
For performing credit card portfolios purchased, the Company uses
models to estimate the amount and timing of future cash flows. These
models are based on historical cash collection data from performing
receivable portfolios and are used to compute an effective interest
rate for income recognition. For these portfolios the fair value of
credit card receivables is based upon discounted expected cash flows.
The discount rate is based upon an acceptable rate of return adjusted
for specific risk factors inherent in each individual portfolio. The
Company accrues interest on new advances of performing credit card
receivables.
9. Allowance for Loan Losses
The provision for possible credit losses includes current period losses
and an amount which, in the judgment of management, is necessary to
maintain the allowance for possible credit losses at a level that
reflects known and inherent risks in the credit card loan portfolio. In
evaluating the adequacy of the allowance for loan losses, management
considers several factors, including: historical trends of charge-off
activity for each loan portfolio as well as current economic conditions
and the impact that such conditions might have on a borrowers' ability
to repay. Significant changes in these factors could affect the
adequacy of the allowance for loan losses in the near term. Credit card
accounts are generally charged off at the end of the month during which
the loan becomes contractually 120 days past due, with the exception of
bankrupt accounts, which are charged off immediately upon formal
notification of bankruptcy, and accounts of deceased cardholders
without a surviving, contractually liable individual, which are also
charged off immediately upon notification.
F-17
<PAGE> 83
The following table summarizes information about the Company's
allowance for loan losses.
<TABLE>
<CAPTION>
For the six For the years ended
months ended November 30, May 31,
-------------------------- -----------------------------------------
1999 1998 1999 1998 1997
-------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $2,846,533 $ 3,688,091 $ 3,688,091 $ 1,337,081 $ ---
Provision for loan losses 3,737,867 2,559,044 4,607,081 6,483,736 1,494,000
Additional reserve for acquired
portfolios of performing credit
cards 1,027,654
Loans charged-off (3,585,131) (3,295,620) (5,448,639) (4,132,726) (156,919)
---------- ----------- ------------ ----------- ----------
Balance at end of period 4,026,923 2,951,515 2,846,533 3,688,091 1,337,081
</TABLE>
10. Use of 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,
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Significant estimates have been made by management with respect to the
timing and amount of collection of future cash flows from nonperforming
consumer debt and credit card receivables ("Portfolios"). Among other
things, the estimated future cash flows of the Portfolios are used to
F-18
<PAGE> 84
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE B (CONTINUED)
recognize impairment in investment in nonperforming consumer debt,
provision for losses on credit card receivables and fair value of
retained interest in securitized credit card receivables. Actual
results could differ from these estimates, making it reasonably
possible that a change in these estimates could occur within one year.
On a periodic 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.
11. Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
12. Earnings Per Share
Earnings per share are calculated under the provisions of Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share." SFAS No. 128 requires the presentation and disclosure of basic
earnings per share, and, if applicable, diluted earnings per share.
Basic earnings per share is computed by dividing income applicable to
common stockholders by the weighted-average number of common shares
outstanding during the period. Income (loss) applicable to common
stockholders is computed by deducting dividends on preferred stock from
net income or loss. Diluted earnings per share are based on the
weighted-average number of common and common equivalent shares
outstanding. The calculation takes into account the shares that may be
issued upon exercise of stock options, reduced by the shares that may
be repurchased with the funds received from the exercise, based on the
average price during the year. In computing diluted earnings per share,
only potential common shares that are dilutive (those that reduce
earnings per share) are included. Exercise of stock options is not
assumed if the result would be antidilutive, such as when a loss from
continuing operations is reported.
13. Reporting Comprehensive Income
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income," which is effective for fiscal years beginning
after December 15, 1997. The Statement establishes standards for
reporting
F-19
<PAGE> 85
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE B (CONTINUED)
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 years ended May 31, 1998 and 1997 and for the period January 1,
1996 to October 8, 1996, the Company had no sources of other
comprehensive income. For the year ended May 31, 1999, 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.
14. Reclassification
Certain reclassifications have been made to prior period amounts to
conform to the current period presentation.
15. Interim Period Information
The unaudited consolidated financial statements as of November 30, 1999
and for the six-month periods ended November 30, 1999 and 1998, have
been prepared in accordance with generally accepted accounting
principles for interim financial information and the instruction to
Form 10-Q and do not include all of the information and notes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments consisting of
normal recurring accruals considered necessary for a fair presentation
of the results for the interim period have been included.
16. Sale/Leaseback Transactions
The Company pools certain non-specialized fixed asset acquisitions and
periodically, sells and leases back the pooled assets at their
acquisition costs. There is no gain or loss recognized on these
transactions.
F-20
<PAGE> 86
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE C - INVESTMENTS IN NONPERFORMING CONSUMER DEBT AND CREDIT CARD RECEIVABLES
Investments in Nonperforming Consumer Debt
The Company acquires portfolios of nonperforming consumer installment debt,
credit card receivables, and automobile deficiency debt from originating
financial institutions. These debts are acquired at a substantial discount
from the actual consumer outstanding balance The remaining outstanding
balance of the debt acquired by the Company at November 30, 1999, May 31,
1999 and 1998 was approximately $2.6 billion, $2.0 billion and $1.8
billion, respectively. The Company's objective is to offer the consumer an
opportunity to settle these debts, typically at a discount, and transfer
the settled amount to a newly issued credit card. (See Credit Card
Receivables below.)
Investments in nonperforming consumer debt consist of:
<TABLE>
<CAPTION>
May 31,
NOVEMBER 30, ----------------------------
1999 1999 1998
------------- -------- --------
<S> <C> <C> <C>
Cost of portfolios purchased including capitalized
acquisition costs of $2,322,139, $2,079,897
and $1,504,549 $ 43,797,394 $ 39,337,647 $ 30,500,558
Cost recovered (39,381,961) (36,109,936) (24,375,047)
------------ ------------ ------------
Investment in nonperforming consumer debt $ 4,415,433 $ 3,227,711 $ 6,125,511
============ ============ ============
</TABLE>
Credit Card Receivables
Upon settlement of the debt, a credit card is issued to the consumer with
the opening balance and credit line equal to the settlement amount. The
Company expenses origination costs including direct mail and telemarketing
costs as incurred. The cardholder upon settlement of the debt is issued a
credit card with an opening balance and credit line equal to the settlement
amount. The settlement amount represents the amount actually owed under the
new credit card with the cardholder. The Company does not record a credit
card asset until the cardholder begins to make new charges on the account.
For financial statement purposes the Company records as credit card
receivables, the amount funded on new advances and purchases, accrued
interest on new advances and accrued fees, less provision for losses on
credit card receivables and unearned fees. After making principal payments
on the transferred balance, the customer may use the credit card for new
purchases and cash advances up to their available credit limit, which may
be increased from time to time based on their consecutive payment history.
Total credit card balances in the chart below represent the total amount
owed to the Company by the cardholders. Available credit represents the
amount that the Company would be obligated to fund if the credit cards were
fully utilized by the cardholders.
F-21
<PAGE> 87
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE C (CONTINUED)
<TABLE>
<CAPTION>
May 31,
NOVEMBER 30, ----------------------------
1999 1999 1998
------------- -------- --------
<S> <C> <C> <C>
Total credit card balances $65,828,285 $55,184,540 $74,096,668
=========== =========== ===========
Available credit $ 6,166,332 $ 4,296,364 $ 6,093,820
=========== =========== ===========
Principal funded on new advances and purchases $29,770,385 $21,303,274 $15,875,198
Accrued interest on principal funded 427,448 243,489 325,977
Accrued fees 383,047 332,446 623,607
----------- ----------- -----------
30,580,880 21,879,209 16,824,782
----------- ----------- -----------
Less
Provision for losses on credit card receivables 4,026,923 2,846,533 3,688,091
Unearned fees 533,313 401,273 216,721
------------ ----------- -----------
4,560,236 3,247,806 3,904,812
----------- ----------- -----------
Credit card receivables $26,020,644 $18,631,403 $12,919,970
=========== =========== ===========
</TABLE>
NOTE D - SECURITIZATION AND OTHER GAIN ON CREDIT CARD RECEIVABLE PORTFOLIOS
During the fiscal year ended May 31, 1999, the Company completed three
securitizations of seasoned credit card receivables ("Receivables") of
approximately $20.4 million with three unconsolidated wholly-owned
qualified special purpose entities ("SPE's"). All credit cards sold in
these transactions were current with a minimum of eight payments made on
each account. The SPE's each issued two classes of beneficial interest;
senior debt interest owed to third parties and residual interest. The SPE's
purchased the Receivables from the Company for $17.3 million, which was
funded with the sale of senior debt interest. The remaining $4.3 million
represented residual interest retained by the company
F-22
<PAGE> 88
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE D (CONTINUED)
Two of the SPE's have revolving periods for a specified number of months as
defined by the agreement, during which, after new charges are funded and
fees and interest are paid, excess cash collections can be used by the
SPE's to purchase additional accounts from the Company. The third SPE does
not have a revolving period and uses the excess cash collections to prepay
the senior debt interest. During the amortization period, all cash
collections relating to the senior debt interest in the Receivables are
used to repay principal, after the payment-related servicing fees and
interest are made. All new charges on the sold accounts are either sold to
the SPE or contributed in exchange for a residual interest until such time
as the senior debt interest is paid down. While the senior debt interest is
in place, there are restrictions on payments that can be made by the
Company to certain related parties.
Under the provisions of SFAS No. 125, the securitizations are accounted for
as sales. As a result, the Company recognized a pre-tax gain of
approximately $8 million and recorded a retained interest in securitized
credit card receivables on an allocated basis in the amount of
approximately $1.3 million based on its relative fair value as discussed in
Note B.
- At May 31, 1999, the allocated basis amount was adjusted to a fair
value of approximately $5.1 million, resulting in approximately $3.8
million of unrealized gain on the retained interest in securitized
credit card receivables. The unrealized gain was recorded net of tax of
approximately $1.3 million, resulting in approximately $2.5 million, as
a separate component of stockholders' equity and approximately $2.5
million as a component of the consolidated statement of operations and
comprehensive income (loss), respectively. In estimating the fair value
of the retained interest, the company calculates the present value of
all projected net cash flows from the credit cards reduced by servicing
costs and an annualized default rate of 12%. Further, the net cash flows
after defaults and servicing costs were discounted by an annualized
interest rate of 23%. The discount rate was arrived at by comparison to
the market rate on investments of similar risk and term that are
available for the company to invest in. During November 1999, the
Company sold its residual interest in the three SPE's to the Lender for
approximately $8.6 million, resulting in a pre-tax gain of approximately
$6.5 million.
In accordance with the terms of the securitization, the Company deposited
$962,000 in a spread account with a third-party bank to be used as the
reserve for the benefit of the senior debt interest in the SPE's. This
amount was released to the Company when it sold its residual interest in
the SPE's in November 1999.
As of May 31, 1999, the Company included $1,230,700 in amounts due from
SPE's representing funds advanced with respect to revolving period
requirements and servicing fee income which are paid to the Company on a
monthly basis.
During the year ended May 31, 1999, The Company also sold a portfolio of
receivables with a total credit card balance of $7 million and a carrying
value of $2.25 million for $5 million to an unrelated party without
recourse.
F-23
<PAGE> 89
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
Useful May 31,
life NOVEMBER 30, ----------------------------
(in years) 1999 1999 1998
---------- ------------- -------- --------
<S> <C> <C> <C> <C>
Computer equipment and
Software 3 - 5 $ 6,687,832 $ 6,631,043 $ 6,063,242
Office equipment 5 - 7 2,280,037 2,275,037 2,271,184
Furniture and fixtures 5 - 7 1,197,582 1,183,400 1,105,230
Proprietary software 5 460,497 460,497
Leasehold improvements Life of leases 654,475 654,475 622,207
----------- ----------- -----------
11,280,423 11,204,452 10,061,863
Less accumulated depreciation
and amortization (6,432,571) (5,202,266) (2,795,673)
----------- ------------ -----------
4,847,852 6,002,186 7,266,190
----------- ----------- -----------
Land 130,426 130,426 130,426
----------- ----------- -----------
$ 4,978,278 $ 6,132,612 $ 7,396,616
=========== =========== ===========
</TABLE>
NOTE F - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
May 31,
NOVEMBER 30, ----------------------------
1999 1999 1998
------------- -------- --------
<S> <C> <C> <C>
Note payable - bank $ 4,958,516 $3,644,776 $4,630,890
Note payable - other lenders 8,527,337 2,217,714 944,099
Note payable - previous owner 164,134 224,276 327,052
----------- ---------- ----------
$13,649,987 $6,086,766 $5,902,041
=========== ========== ==========
</TABLE>
F-24
<PAGE> 90
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE F (CONTINUED)
Note Payable - Bank
On April 30, 1998, the Company entered into a financing agreement with a
bank. The revolving line of credit, which may not exceed $5,000,000 or 35%
of the Company's eligible receivables as defined by the agreement, is used
for general working capital purposes. This line is collateralized by
substantially all of the Company's assets. Interest is charged at the prime
rate plus 2.75% per annum. On June 25, 1999, the rate was reduced to prime
rate plus 2.5% per annum and the line of credit increased to $10,000,000.
The agreement is in effect until July 29, 2001. Interest expense for the
six months ended November 30, 1999 and 1998 and for the years ended May 31,
1999 and 1998 was $477,799, $320,986, $617,249 and $27,936, respectively.
Note Payable - Other Lenders
The Company has uncollateralized installment notes with respect to
purchases of nonperforming consumer debt in addition to assuming
installment obligations from the closing of certain affiliated mortgage
companies (see Note L). The notes have various maturity dates through May
2002, with interest rates ranging up to 23.7%. The amount outstanding as of
November 30, 1999, May 31, 1999 and 1998 was $2,979,741, $2,217,714 and
$944,099, respectively. Interest expense for the six months ended November
30, 1999 and 1998, and the years ended May 31, 1999, 1998 and 1997 was
$23,705, $30,178, $65,353, $51,925 and $0, respectively. On October 15,
1999, the Company, through a bankruptcy remote special purpose entity
(SPE), entered into a revolving line of credit ("revolving line") with a
financial institution. The revolving line, which may not exceed
$17,500,000, is non-recourse to the Company and is secured by all assets of
the SPE. The revolving line is used to acquire non-performing consumer debt
portfolios. The Company services the accounts subject to a agreement with
the SPE and purchases all newly originated credit card accounts for a
pre-determined price. The SPE is not a Qualified SPE for accounting
purposes and is fully consolidated with the Company in the accompanying
financial statements. Interest is charged at a floating daily rate and is
equal to the reference rate plus 2.5% per annum. The agreement is in effect
until August 31, 2002. The amount outstanding as of November 30, 1999 was
$2,547,596. Interest expense from October 15, 1999 to November 30, 1999 was
$29,691.
On September 20, 1999, the Company entered into a repurchase agreement with
a bank. Under the agreement the bank purchased credit card receivables from
the Company for a purchase price of $3 million. . The agreement had an
initial repurchase date of December 20, 1999 and was extended by the
Company for an additional 90 days upon payment to the bank of $15,000. For
accounting purposes the repurchase agreement was treated as a $3 million
financing transaction. Interest is charged at a rate of 15% per annum.
Interest expense for the six months ended November 30, 1999 was $88,750.
F-25
<PAGE> 91
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE F (CONTINUED)
Note Payable - Previous Owner
The Company assumed debt of the Selling Entities representing part of their
purchase price of SOIC on January 2, 1996 (see Note K). Under the
agreement, the previous owner is being paid on a 10%, $550,000 note
collateralized by the stock of the Company payable in monthly installments
maturing February 2001. Interest expense for the six months ended November
30, 1999 and 1998, and for the years ended May 31, 1999, 1998 and 1997 and
for the period January 1, 1996 to October 8, 1996 of the "Predecessor" was
$9,973, $15,220, $25,769, $38,310 and $53,299 and $34,982, respectively.
At May 31, 1999, future minimum principal payments for all notes payable
were as follows:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
2000 $1,575,964
2001 612,624
2002 3,898,178
----------
$6,086,766
==========
</TABLE>
NOTE G - CAPITAL LEASES
The Company leases computer equipment, furniture and fixtures under
long-term leases and has the option to purchase the equipment for a nominal
cost at the termination of the lease. Assets under capital leases have been
capitalized at a cost of $6,526,915, $6,526,915 and $6,501,777,
respectively, and have accumulated amortization of $4,432,456, $3,646,314
and $2,000,609, respectively, at November 30, 1999, May 31, 1999 and 1998.
F-26
<PAGE> 92
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE G (CONTINUED)
Future minimum lease payments for capitalized leases are as follows at May
31, 1999:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
2000 $2,521,835
2001 1,429,304
2002 959,866
2003 85,570
----------
4,996,575
Less amount representing interest (951,034)
----------
$4,045,541
==========
</TABLE>
Amortization expense for assets under capital leases for the six months
ended November 30, 1999 and 1998, was $786,142 and $706,221, respectively,
and during fiscal 1999, 1998, 1997 and for the period January 1, 1996 to
October 8, 1996 was $1,645,705, $1,535,029, $126,606 and $69,000,
respectively.
NOTE H - STOCK OPTIONS AND STOCK-BASED COMPENSATION
1. Stock Options
The Board of Directors of the Company approved the Company's 1997 Stock
Option Plan (the "Plan"). The Plan authorizes the grant of stock
options covering 4,000,000 shares of the Company's common stock. In
addition, the Board of Directors has granted stock options outside the
Plan covering a total of 1,550,000 shares of Common Stock. The Board of
Directors has the authority to determine the key employees,
consultants, and directors who shall be granted options as well as the
number of options granted and the nature of each grant. The options
granted under the Plan may be either incentive stock options or
nonqualified stock options.
F-27
<PAGE> 93
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996
to October 8, 1996 ("Predecessor"), and for the six
months ended
November 30, 1999 and 1998
NOTE H (CONTINUED)
Information regarding the stock options is summarized below:
<TABLE>
<CAPTION>
Year ended May 31,
-----------------------------------------------------
1999 1998
----------------------- ---------------------------
June 1, June 1, Weighted- Weighted-
1999 to 1998 to average average
November 30, November 30, Number exercise Number exercise
1999 1998 of options price of options price
------------ ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period 4,346,500 3,656,000 3,656,000 $ 2.93 2,550,000 $5.76
====== =====
Options granted 906,500 460,000 690,500 $ 2.35 3,021,000 (1) 2.45
Options modified/cancelled (1,915,000)(1) 5.93
--------- ---------- --------- ------ ---------- -----
Outstanding at end of period 5,253,000 4,116,000 4,346,500 $ 2.84 3,656,000 $2.93
========= ========== ========= ====== ========== =====
Exercisable at end of period 4,414,060 2,705,000 3,305,500 $ 3.08 2,395,000 $3.39
========= ========== ========= ====== ========== =====
<CAPTION>
Year ended May 31,
1997
------------------------
Weighted-
average
Number exercise
of options price
---------- ----------
<S> <C> <C>
Outstanding at beginning of
period
Options granted 2,550,000 $5.76
Options modified/cancelled
--------- -----
Outstanding at end of period 2,550,000 $5.76
========= =====
Exercisable at end of period
2,550,000 $5.76
========= =====
</TABLE>
(1) On December 15, 1997, the Board of Directors authorized the
modification of stock options c overing an aggregate of 1,915,000
shares of common stock adjusting the exercise price from $6.00 per
share to $2.00 per share. The affected stock option agreements
were cancelled and new options were issued containing identical
provisions other than the exercise price.
F-28
<PAGE> 94
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996
to October 8, 1996 ("Predecessor"), and for the six
months ended
November 30, 1999 and 1998
NOTE H (CONTINUED)
2. Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," which established financial
accounting and reporting standards for stock-based compensation. The
new standard defines a fair value method of accounting for an employee
stock option or similar equity instrument. This statement gives
entities the choice between adopting the fair value method or
continuing to use the intrinsic value method under Accounting
Principles Board ("APB") Opinion No. 25 with footnote disclosures of
the pro forma effects as if the fair value method had been adopted. The
Company has opted for the latter approach. Accordingly, no compensation
expense has been recognized for stock options. Had compensation expense
for the Company's stock options been determined based on the fair value
at the grant date for awards for the six months ended November 30, 1999
and 1998 and for the years ended May 31, 1999, 1998 and 1997 consistent
with the provisions of SFAS No. 123, the Company's results of
operations would be the pro forma amounts indicated below.
<TABLE>
<CAPTION>
For the six For the years ended
months ended November 30, May 31,
--------------------------- ---------------------------------------
1999 1998 1999 1998 1997
--------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Net income (loss) applicable to common
shareholders:
- as reported $(506,375) $ (381,135) $1,833,698 $(29,551,326) $(14,253,656)
- pro forma (1,257,226) (1,398,908) 50,109 (30,214,556) (25,746,656)
Income per share - as reported
Basic and diluted $(.01) $(.01) $.05 $(.89) $(.55)
Income per share - pro forma
Basic and diluted $(.04) $(.02) $.00 $(.91) $(.99)
</TABLE>
F-29
<PAGE> 95
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996
to October 8, 1996 ("Predecessor"), and for the six
months ended
November 30, 1999 and 1998
NOTE H (CONTINUED)
The fair value of each option grant is established on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
For the six For the years ended
months ended November 30, May 31,
-------------------------- ------------------------------------------
1999 1998 1999 1998 1997
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Expected dividend yield $ - $ - $ - $ - $ -
Expected stock price volatility 90% 90% 90% 120% 50%
Expected life of options 5 OR 10 YEARS 5 or 10 years 5 or 10 years 5 or 10 years 5 years
</TABLE>
F-30
<PAGE> 96
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
) November 30, 1999 and 1998
NOTE H (CONTINUED)
The risk-free interest rate used in the valuation of the option grants
ranged from 5.92% to 6.42% and 4.68% to 5.33% for the six months ended
November 30, 1999 and 1998, respectively, 4.80% to 5.47% for the year
ended May 31, 1999, 5.75% to 5.81% for the year ended May 31, 1998, and
was 4.50% for the year ended May 31, 1997, depending on the expiration
date of the options.
The weighted-average fair value of options granted during the six
months ended November 30, 1999 and 1998, was $2.08 and $2.00,
respectively, and during the years ended May 31, 1999, 1998, 1997 was
$1.70, $1.95 and $4.51, respectively. The Company granted stock options
whose weighted-average exercise price and weighted-average fair value
was $2.85 and $2.08, and $2.47 and $2.00, respectively, for the six
months ended November 30, 1999 and 1998 and $2.35 and $1.70,
respectively, for the years ended May 31, 1999 and 1998.
On April 30, 1998, the Company granted warrants to purchase 650,247
shares of the Company's common stock for $2.50 per share to the bank
with which it has a financing agreement. 278,677 of the shares were
exercisable immediately, while the remaining 371,570 were exercisable
on June 25, 1999, when the Company's line of credit increased to $10
million (see Note F). The fair value of the warrants was $1.01 at the
date of grant. For the six months ended November 30, 1999, amortization
expense was $359,648.
On March 18, 1999, the Company granted a five-year warrant to purchase
250,000 shares of the Company's common stock at $2.00 per share to a
vendor that the Company uses. The fair value of the warrant was $.85
per share. For the six months ended November 30, 1999, amortization
expense was $32,212.
F-31
<PAGE> 97
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE H (CONTINUED)
The following table summarizes information about stock options
outstanding at November 30, 1999, and May 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable Options outstanding Options exercisable
----------------------------------- ----------------------- ----------------------------------- ---------------------
Weighted- Weighted-
Number average Number Number average Number
outstanding remaining Weighted- Exercisable Weighted- outstanding remaining Weighted- exercisable Weighted-
Range of at contractual average At average at contractual average at average
exercise November 30, life exercise November 30, exercise May 31, life exercise May 31, exercise
prices 1999 (years) price 1999 price 1999 (years) price 1999 price
---------- --------- ---------- --------- --------- --------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$2.00-$2.50 3,589,500 4.23 $2.09 3,130,060 $2.07 3,086,500 4.68 $2.03 2,050,500 $2.01
2.51- 3.00 373,500 3.86 2.74 331,500 2.71 310,000 4.19 2.71 305,000 2.70
3.01- 5.50 1,290,000 3.37 4.98 952,500 5.50 950,000 3.29 5.50 950,000 5.50
--------- ---------- ---------- ---------
5,253,000 3.99 $2.84 4,414,060 $2.86 4,346,500 4.34 $2.84 3,305,500 $3.08
========= ========= ========= =========
</TABLE>
F-32
<PAGE> 98
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE I - INCOME TAXES
Deferred income tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
For the six For the three
months ended November 30, Months ended August 31,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Deferred tax assets
Net operating loss carryforward $ 16,284,967 $ 397,712 $ 17,287,943 $ 11,993,614
Allowance for doubtful accounts 1,622,951 14,236,334 1,641,743 1,399,914
------------ ------------ ------------ ------------
Total deferred tax assets 17,907,918 14,634,046 18,929,686 13,393,528
Less valuation allowance (13,178,550) (14,534,046) (12,649,447) (13,393,528)
------------ ------------ ------------ ------------
Net deferred tax asset 4,729,368 100,000 6,280,239 -
Deferred tax liabilities
Gain on sales of portfolios (4,029,368) (4,029,268) -
Unrealized gain on retained
interest in securitization (1,550,971) -
------------ ------------ ------------ ------------
Net deferred tax liabilities (4,029,368) (5,580,239) -
------------ ------------ ------------- ------------
Net deferred tax asset $ 700,000 $ 100,000 $ 700,000 $ -
============ ============ ============ ============
<CAPTION>
January 1,
For the years ended 1996 to
May 31, October 8,
---------------------------------------- 1996
1999 1998 1997 ("Predecessor")
----------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
Deferred tax assets
Net operating loss carryforward $ 16,854,132 $ 13,223,300 $ 4,477,728 $ 657,000
Allowance for doubtful accounts 1,221,619 1,519,160 366,000
------------ ------------ -----------
Total deferred tax assets 18,075,751 14,742,460 4,843,728 657,000
Less valuation allowance (12,059,974) (14,742,460) (4,843,728) (237,000)
------------ ------------ ----------- ---------
Net deferred tax asset 6,015,777 - -
Deferred tax liabilities
Gain on sales of portfolios (4,029,368) (420,000)
Unrealized gain on retained
interest in securitization (1,286,409)
------------
Net deferred tax liabilities (5,315,777) -
------------ ------------ ----------- ---------
Net deferred tax asset $ 700,000 $ $ $ -
============ ============ =========== =========
</TABLE>
F-33
<PAGE> 99
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996 to
October 8, 1996 ("Predecessor"), and for the six months ended
November 30, 1999 and 1998
NOTE I (CONTINUED)
The difference between the total income tax benefit and the income tax
expense computed using the applicable Federal income tax rate was as
follows:
<TABLE>
<CAPTION>
January 1,
For the six For the years ended 1996 to
months ended November 30, May 31, October 8,
-------------------------- ---------------------------------------- 1996
1999 1998 1999 1998 1997 ("Predecessor")
---------- ---------- ----------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Computed Federal income
taxes at 34% 605,212 108,414 $ 560,077 $(10,047,450) $(4,843,728) $(657,000)
Increase (release) of
deferred tax asset
valuation allowance 681,197 (208,414) (2,546,486) 10,047,450 4,843,728 236,720
----------- ---------- ----------- ------------ ----------- ---------
Income tax (benefit)/expense $ 1,286,409 $ (100,000) $(1,986,409) $ - $ - $(420,280)
=========== ========== =========== ============ =========== =========
</TABLE>
F-34
<PAGE> 100
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996
to October 8, 1996 ("Predecessor"), and for the six
months ended
November 30, 1999 and 1998
NOTE I (CONTINUED)
At November 30, 1999 and May 31, 1999 the Company has a net operating loss
carryforward available to offset future taxable income of approximately
$49,000,000, $49,500,000 and $43,000,000, respectively, which will begin to
expire in 2012. The benefit of the net operating loss carryforwards is
dependent upon the tax laws in effect at the time the net operating loss
carryforwards are to be utilized and the change of control rules.
The Company has provided a valuation allowance against the net operating
losses and the provision for bad debts. Realization of these assets is
dependent on future taxable income.
NOTE J - EMPLOYEE BENEFIT PLANS
In January 1998, the Company adopted a defined contribution 401(k)
profit-sharing plan for its employees. All employees working at least 1,000
hours per year are eligible to participate in the plan. Employees could
contribute up to 15% of their salary up to $10,000 and $9,500 for the
calendar years 1999 and 1998, respectively. The plan requires the employer
to match 100% of the first 3% of compensation contributed to the plan by
the employees. Employer contributions vest at a rate of 20% per year.
Additional employer contributions are allowable at the discretion of the
Board of Directors. The contributions to this plan by the Company at
November 30, 1999 and 1998, and at May 31, 1999 and 1998 was $169,768,
$153,753, $79,958 and $84,573, respectively.
Prior to January 1998, employees of the Company participated in the defined
contribution profit sharing plan of Service One International Corporation
Employee Savings Plan, a wholly-owned subsidiary of the Company. This plan
contained the same terms and provisions as the Company's current plan
except that the employer contribution was 100% of the first 1% of employee
contributions. Contributions by the Company to this plan were $12,342 and
$7,912 for the years ended May 31, 1998 and 1997, respectively. The assets
of this plan were transferred into the new plan as of January 1, 1998.
NOTE K - MUTUAL BUSINESS DEVELOPMENT AGREEMENTS
The Selling Entities entered into Mutual Business Development Agreements
("Development Agreements") in connection with the sale of Holdings to
Taxter. Pursuant to the terms of the
F-35
<PAGE> 101
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996
to October 8, 1996 ("Predecessor"), and for the six
months ended
November 30, 1999 and 1998
NOTE K (CONTINUED)
Development Agreements, SOIC agreed to pay a base fee of $510,000 to each
Selling Entity (which was paid in its entirety by May 31, 1998) and a
royalty equal to five percent of the balance transfer amount, as defined,
on all converted credit card accounts which: (i) are delivered to a
pre-securitization credit facility, (ii) become a qualifying receivable, or
(iii) meet other specified account age and payment parameters. A qualifying
receivable is defined as any converted account on which the cardholder has
made three consecutive payments within certain time restrictions. In
addition, the Company is required to pay royalties equal to five percent of
all principal cash collections on certain accounts that are not converted
to credit cards. The term of each of the Development Agreements is six
years and the total royalty, if earned, payable to each of the Selling
Entities, after certain deductions and exclusions, shall not exceed
$25,000,000. For the six months ended November 30, 1999 and for the years
ended May 31, 1999, 1998 and 1997, $181,493, $1,541,944, $207,238 and
$1,229,180, respectively, of royalty expenses were incurred with $28,568,
$702,075, and $261,667, payable at November 30, 1999, May 31, 1999 and
1998, respectively, under the Development Agreements. One of the
Development Agreements was amended on September 1, 1998. The amendment
clarifies the amount and timing of payments, gives the Company a buyout
option and alternate royalty payment options, and extends the term of the
agreement to May 31, 2005. The Company, which assumed the obligations of
its predecessor SOIC, assumed SOIC's liabilities under the Development
Agreements.
Taxter, as part of the purchase price of acquiring Holdings, granted the
Selling Entities a future interest in Holdings in the form of an identical
option to each selling entity to purchase 2,000 shares each of Holdings
from Taxter for $500,000. Following the acquisition of Holdings by the
Company, these options were amended to enable the Selling Entities to
purchase 4,000,000 shares each of the Company's common stock and 400,000
shares each of the Company's Series B Preferred Stock for $500,000.
NOTE L - RELATED PARTY TRANSACTIONS
During fiscal year 1998, the Company issued subordinated promissory notes
to JLB of Nevada, Inc. ("JLB"), an entity wholly owned by Jay L. Botchman
("Botchman"), totalling $40,000,000 payable on demand with interest of 12%
per annum. Of the new notes, $30,000,000 was issued in exchange for
outstanding notes totaling $11,518,042 which carried an interest rate of
12% per annum and
F-36
<PAGE> 102
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996
to October 8, 1996 ("Predecessor"), and for the six
months ended
November 30, 1999 and 1998
NOTE L (CONTINUED)
$18,481,958 in new debt. Interest expense on these notes was $2,307,467,
$3,635,891 and $419,942 for the years ended May 31, 1999, 1998 and 1997,
respectively. On May 29, 1999, JLB, in lieu of payment of $5,000,000 of
interest on these subordinated notes, received a warrant to purchase
4,000,000 shares of the Company's common stock with an exercise price of
$3.25 per share, expiring on May 29, 2004 and the Company's assumption of
equipment and related lease obligations from a company affiliated with JLB
in the amount of approximately $1.7 million. The fair value of the warrant
was approximately $3.3 million. Accrued interest related to subordinated
notes payable to JLB was approximately $2.0, $1.3 and $4.0 million,
respectively, at November 30, 1999, May 31, 1999 and 1998. The notes are
secured by substantially all the Company's assets, but subordinated to the
Company's revolving credit line.
On February 27, 1998, the Company issued a subordinated promissory note
payable to Botchman in the amount of $350,000 payable on demand with
interest at 12% per annum. Interest expense for the six months ended
November 30, 1999 and 1998 and for the years ended May 31, 1999 and May 31,
1998 was $18,200, $21,350, $42,583 and $10,733, respectively. This note was
issued per an agreement dated February 27, 1998 between Botchman and the
Company. As part of the terms of the agreement, the Company agreed to
purchase an interest in certain investment securities, owned by Botchman,
of a subprime mortgage banking company. The Company has fully written off
this investment in the amount of $350,000 as of May 31, 1998. In addition,
the Company had a receivable due from this company of approximately
$189,000, which has also been written off as of May 31, 1998.
The Company, through its wholly-owned subsidiary, American Credit Alliance,
Inc., has an $880,000 note payable to JLB with an interest rate of 10% per
annum. American Credit Alliance Inc. is the managing member of Dakota Card
Fund II, LLC ("DCF") and owns 50% of the membership interests in DCF , an
entity that owns performing credit card receivables. Interest expense for
the six months ended November 30, 1999 and 1998 and for the years ended May
31, 1999 and May 31, 1998 was $44,733, $44,733, $89,222 and $85,195,
respectively.
The Company made a series of investments, during the period May 1997
through December 1997, amounting to $508,600 in a subprime mortgage banking
company affiliated with JLB. At May 31, 1998, there was substantial doubt
regarding this company's ability to continue as a going concern. The
Company had fully written off its investment in this company. In addition,
the Company had a receivable due from this company of approximately
$183,000, which has also been written off as of May 31, 1998.
F-37
<PAGE> 103
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996
to October 8, 1996 ("Predecessor"), and for the six
months ended
November 30, 1999 and 1998
NOTE L (CONTINUED)
The Series A and B Preferred Shares were issued at $1.00 per share (total
of $2,000.00) for all of Taxter's shares of Holdings described in Note A.
The Series A Preferred Stock, as a class, has 80% of the voting rights in
the Company. The Series B Preferred Stock has one vote per share. The
shares of Series A and B Preferred Stock have a liquidation preference of
$1.00 per share and will earn cumulative dividends at a rate of 5% per
annum. After five years, (i) the Series A and B Preferred Stock will be
redeemable at the option of the Company, and (ii) while the Series B
Preferred Stock is outstanding will be convertible at the option of the
holder into Series A Preferred Stock on a share-for-share basis.
On December 31, 1996, the Company issued 5,000 shares of Series C Preferred
Stock to Taxter for $5,000,000. The Series C Preferred Stock is non-voting
and will earn cumulative dividends at 6% per annum. The shares have a
liquidation preference of $1,000 per share. The Series A and B Preferred
Stock ranks senior to the Series C with respect to dividend and liquidation
rights.
On May 29, 1998, the Company issued 10,000 shares of Series D Preferred
Stock to JLB in exchange for cancellation of the $10,000,000 Promissory
Note dated August 1, 1997 payable by the Company to JLB. The Series D
Preferred Stock is non-voting and will earn a dividend of 8% per annum
payable annually on December 31. The series has a par value of $.001 per
share and a stated value of $1,000 per share. The shares have a liquidation
preference of $1,000 per share. The Series D Preferred Stock ranks senior
to the Series A, B and C with respect to dividend and liquidation rights.
Each share of Series D Preferred Stock is convertible into 380 shares of
common stock. The agreement grants JLB piggyback registration rights with
respect to the Common Stock issuable upon conversion of the shares of
Series D Preferred Stock.
On August 31, 1998, the Company issued 10,000 shares of Series E Preferred
Stock to JLB in exchange for JLB agreeing to cancel $10,000,000
subordinated promissory note. The Series E Preferred Stock is non-voting
and will earn a dividend of 8% per annum payable annually on December 31.
Each share of Series E Preferred Stock is convertible into 285 shares of
common stock at any time prior to August 31, 2001. The Series E Preferred
Stock ranks senior to the Series A, B, C and D with respect to dividend and
liquidation rights.
As of November 30, 1999, May 31, 1999, 1998 and 1997, accumulated preferred
dividends undeclared and unpaid on preferred stock amounted to
approximately $3.2 million, $2.2 million, $.4 million, and $7,000,
respectively.
F-38
<PAGE> 104
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996
to October 8, 1996 ("Predecessor"), and for the six
months ended
November 30, 1999 and 1998
NOTE M - COMMITMENTS AND CONTINGENCIES
1. Operating Leases
The Company leases certain properties, vehicles and equipment under
noncancelable operating leases. Total lease rentals charged to
operations were approximately $392,123 and $361,936 for the six months
ended November 30, 1999 and 1998, respectively, and $766,832, $776,615,
and $349,383, for the years ended May 31, 1999, 1998 and 1997,
respectively. Future minimum lease payments under the noncancelable
operating leases are as follows at May 31:
Year ending May 31, Amount
- - - ------------------- ------
2000 $ 587,641
2001 361,697
2002 348,533
2003 295,103
2004 285,000
Thereafter 2,272,875
---------
$4,150,849
==========
2. Contingencies and Litigation
The Company, in the ordinary course of business, receives notices of
consumer complaints from regulatory agencies and is named as a
defendant in legal actions filed by those who have been solicited to
participate in its credit card programs. Currently pending against the
Company are: (i) three class actions on behalf of persons solicited by
the Company to open credit card accounts and voluntarily to repay debt
that had been discharged in bankruptcy, and (ii) two class actions
alleging violation of the Fair Debt Collection Practices Act and state
law in connection with mailers sent to prospective customers whose debt
was out-of-statute. The Company is defending itself vigorously in these
lawsuits. The Company does not believe that pending litigation and
regulatory complaints involving the Company will have a material
adverse effect on the consolidated financial position and results of
operations. However, a significant judgment against the Company in one
or more of the lawsuits could subject the Company to a monetary
judgement and/or require the Company to modify its methods of
operation, either of which could have a material adverse effect on the
Company's results of operations or financial condition.
F-39
<PAGE> 105
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996
to October 8, 1996 ("Predecessor"), and for the six
months ended
November 30, 1999 and 1998
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS
The accompanying financial statements include various estimated fair value
information as of May 31, 1999, 1998 and 1997. As required by SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments," such information,
which pertains to the Company's financial instruments, is based on the
requirements set forth in the statement and does not purport to represent
the aggregate net fair value of the Company. None of the Company's
financial instruments are held for trading purposes.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate fair value.
Cash
The carrying amount approximates fair value.
Trade Receivables
The carrying amount approximates fair value.
Investment in Nonperforming Consumer Debt
The Company records investments in nonperforming consumer debt at the cost
of the purchased portfolios, net of costs recovered. As the debt was
purchased at a significant discount, the value of these portfolios may be
significantly higher than presented in these financial statements. It was
not possible to estimate a fair value of these portfolios at May 31, 1998.
However, given the expanded market to trade these portfolios and the
Company's recent experience, the fair value at May 31, 1999 was estimated
using a net present value calculation of the cash flows the Company expects
to generate from these portfolios. The fair value at November 30, 1999 and
May 31, 1999 was approximately $12 million and $14.4 million in comparison
to its carrying value of approximately $2.4 million and $3.2 million,
respectively.
Credit Card Receivables
Credit card loans are originated with an initial interest rate of 18.9%. As
discussed in Note C, the settlement amount of the receivables exceeds the
credit card receivables reflected on the consolidated
F-40
<PAGE> 106
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996
to October 8, 1996 ("Predecessor"), and for the six
months ended
November 30, 1999 and 1998
NOTE N (CONTINUED)
balance sheet. The Company did not feel it was possible to estimate the
fair value of the credit card receivables at May 31, 1998. Fair values at
November 30, 1999 and May 31, 1999 have been established based on a net
present value of the cash flows expected to be generated by the credit
cards for the Company. The Company applied its actual static pool
experience of repayment rates and defaults to estimate fair value. The fair
value at November 30, 1999 and May 31, 1999 was approximately $36.9 million
and $27.5 million in comparison to its carrying value of approximately
$24.5 million and $18.6 million, respectively.
Retained Interest in Securitized Credit Card Receivables
The carrying amount approximates fair value. Fair value is estimated by
discounting anticipated future cash flows using a discount rate based on
specific factors. The anticipated future cash flows are projected on a
"cash out" basis to reflect the restriction of cash flows until the
investors have been fully paid. At May 31, 1999, the carrying value of $5.1
million approximated fair value.
Notes Payable
The carrying amount approximates fair value. Rates currently available to
the Company for debt with similar terms and remaining maturities are used
to estimate the fair value of existing debt.
Subordinated Notes Payable
Due to the related party relationship of these notes, it is not practical
to estimate fair value.
Accounts Payable and Accrued Expenses
The carrying amount approximates fair value.
F-41
<PAGE> 107
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996
to October 8, 1996 ("Predecessor"), and for the six
months ended
November 30, 1999 and 1998
NOTE O - EARNINGS PER SHARE
The weighted-average shares used in computing earnings per share were
34,761,965, 34,761,965, 34,761,965, 33,109,781, 25,912,465 and 5,000,000,
for the six months ended November 30, 1999 and 1998, and for the years
ended May 31, 1999, 1998, and 1997 and for the period January 1, 1996 to
October 8, 1996, respectively.
<TABLE>
<CAPTION>
November 30, May 31,
-------------------------- ----------------------------------------
1999 1998 1999 1998 1997
--------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Basic earnings per share
Income (loss)
Income (loss) available to common
Stockholders $ (506,375) $ (381,135) $ 1,833,698 $(29,551,326) $(14,253,656)
============ ========== =========== =========== ===========
Weighted-average shares
outstanding 34,761,965 34,761,965 34,761,965 33,109,781 25,912,465
============ ========== ========== =========== ==========
Basic earnings (loss) per share $(.01) $(.01) $.05 $(.89) $(.55)
============ ========== ========== =========== ==========
Diluted earnings per share
Income (loss)
Income (loss) available to common
Stockholders $ (506,375) $ (381,135) $1,833,698 $(29,551,326) $(14,253,656)
============ ========== ========== =========== ===========
Weighted-average shares 34,761,965 34,761,965 34,761,965 33,109,781 25,912,465
outstanding
Effective of diluted securities * * 3,674,154 * *
options ------------ ---------- ---------- ----------- -----------
Weighted-average of diluted
shares outstanding 34,761,965 34,761,965 38,436,119 33,109,781 25,912,465
============ ========== ========== ========== ==========
Diluted earnings (loss) per share $(.01) $(.01) $.05 $(.89) $(.55)
============ ========== ========== ========== ===========
<CAPTION>
January 1,
1996 to
October 8,
1996
("Predecessor")
---------------
<S> <C>
Basic earnings per share
Income (loss)
Income (loss) available to common
Stockholders $(1,512,488)
==========
Weighted-average shares
outstanding 5,000,000
==========
Basic earnings (loss) per share $(.30)
==========
Diluted earnings per share
Income (loss)
Income (loss) available to common
Stockholders $(1,512,488)
==========
Weighted-average shares 5,000,000
outstanding
Effective of diluted securities
options *
----------
Weighted-average of diluted
shares outstanding 5,000,000
==========
Diluted earnings (loss) per share $(.30)
==========
</TABLE>
*Antidilutive.
F-42
<PAGE> 108
The Credit Store, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 31, 1999, 1998, 1997 and January 1, 1996
to October 8, 1996 ("Predecessor"), and for
the six months ended November 30, 1999 and
1998
NOTE P - OTHER EXPENSES
The Company includes the following in other expenses:
<TABLE>
<CAPTION>
For the six For the years ended
months ended November 30, May 31,
1999 1998 1999 1998
-------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Financing fees 757,942 126,897 211,864 90,182
Travel, meals, and entertainment 343,738 288,196 591,054 756,157
Insurance 235,967 127,862 379,589 226,268
Technology expense 163,208 73,269 370,185 119,568
Printing 161,226 198,905 403,679 336,980
Repairs, maintenance, and equipment expense 155,578 152,277 350,629 448,831
License, fees, and subscriptions 92,142 53,980 153,840 147,015
Office supplies and utilities 84,206 99,389 176,452 284,693
Training and temporary labor 69,724 101,519 247,508 214,302
Termination/ settlements on servicing agreements 5,890 5,008 1,163,068 511,094
Loss on investments 1,028,600
Miscellaneous expenses 272,677 367,926 474,462 155,596
------- ------- ------- --------
Total Other Expense $2,342,298 $1,595,228 $4,522,330 $4,319,286
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the years ended
May 31,
-------------
January 1,
1996 to
October 8,
1996
1997 ("Predecessor")
-------------- ---------------
<S> <C> <C>
Financing fees 59,284 3,168
Travel, meals, and entertainment 298,397 27,379
Insurance 60,916 754
Technology expense 257,790 5,342
Printing 285,511 270,742
Repairs, maintenance, and equipment expense 253,286 76,449
License, fees, and subscriptions 103,705 49,753
Office supplies and utilities 153,819 64,985
Training and temporary labor 41,388 114,148
Termination/ settlements on servicing agreements
Loss on investments
Miscellaneous expenses 50,152 392,514
------- -------
Total Other Expense $1,564,248 $1,005,234
========== ==========
</TABLE>
F-43
<PAGE> 1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
THE CREDIT STORE, INC.
ARTICLE I
The name of the Corporation shall be The Credit Store, Inc.
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle. The
registered agent of the Corporation at such address is Corporation Service
Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
ARTICLE IV
The total number of shares of stock which this Corporation is
authorized to issue is:
A. Common. 65,000,000 shares of Common Stock having a par
value of $.001 per share;
B. Preferred. 965,000 shares of Preferred Stock having a par
value of $.001 per share and to be issued in such series and to have
such rights, preferences, and designations as determined by the Board
of Directors of the Corporation;
C. Series A Preferred and Series B Preferred. 2,000,000 shares
of Series A Preferred Stock ("Series A") having a par value of $.001
per share and 800,000 shares of Series B Preferred Stock ("Series B")
having a par value of $.001 per share. Each share of Series A and
Series B Preferred Stock shall have the rights, preferences and
designations as set forth below and shall be on a parity with each
other with respect to dividends, redemption and liquidation as
described below and shall be treated as one class except with respect
to voting and conversion rights as further set forth below:
<PAGE> 2
1. Dividends
(a) The holders of shares of Series A and Series B shall be
entitled to receive, out of any assets at the time legally
available therefor and when and as declared by the Board of
Directors, dividends at the rate of five cents ($.05) per
share per annum, and no more, payable in cash commencing on
December 31, 1996, and thereafter on the last day of December
of each year that any such shares shall be outstanding. Such
dividends are prior and in preference to any declaration or
payment of any distribution (as defined in Section C(1)(b) of
this Article) on any other outstanding shares of preferred
stock or the common stock of this Corporation. Such dividends
shall accrue on each share of Series A and Series B from day
to day from the date of initial issuance thereof whether or
not earned or declared so that if such dividends with respect
to any previous dividend period at the rate provided for
herein have not been paid on, or declared and set apart for,
all shares of Series A and Series B at the time outstanding,
the deficiency shall be fully paid on, or declared and set
apart for, such shares before any distribution shall be paid
on, or declared and set apart for any other outstanding shares
of preferred stock or common stock.
(b) For purposes hereof, unless the context otherwise
requires, "distribution" shall mean the transfer of cash or
property without consideration, whether by way of dividend or
otherwise, payable other than in common stock, or the purchase
or redemption of shares of this Corporation (other than
redemptions set forth in Section C(2) of this Article or
repurchases of common stock held by employees or consultants
of this Corporation upon termination of their employment or
services pursuant to agreements providing for such repurchase)
for cash or property, including any such transfer, purchase or
redemption by a subsidiary of this Corporation.
2. Redemption
(a) At any time after December 31, 2001, the Corporation
may, at the option of the Board of Directors, redeem all or
part of the outstanding shares of the Series A and Series B
Preferred Stock at the redemption price set forth in Section
C(2)(b) of this Article, provided that the Corporation shall
give written notice by mail, postage prepaid, to the holders
of such stock to be redeemed at least twenty (20) days prior
to the date specified for redemption (the Redemption Date).
Such notice shall be addressed to each such shareholder at the
address of such holder appearing on the books of the
Corporation or given by such holder to the Corporation for the
purpose of notice, or if no such address appears or is so
given, at the place where the principal office of
-2-
<PAGE> 3
the Corporation is located. Such notice shall state the
Redemption Date, the Redemption Price (as defined in Section
C(2)(b) of this Article), the number of shares of Series A and
Series B Preferred Stock of such holders, treated as one
class, to be redeemed and the date of termination of the right
to convert the shares of Series B Preferred Stock of such
holder to Series A Preferred Stock pursuant to the terms
hereof and shall call upon such holder to surrender to the
Corporation on the Redemption Date at the place designated in
the notice such holder's redeemed stock. On or after the
Redemption Date, each holder of shares of Series A and Series
B Preferred Stock called for redemption shall surrender the
certificate evidencing such shares to the Corporation at the
place designated in such notice and shall thereupon be
entitled to receive payment of the Redemption Price. If less
than all of the outstanding shares of Series A and Series B
Preferred Stock, treated as one class, are to be redeemed,
then the Corporation shall redeem a pro rata portion from each
holder of such stock according to the respective number of
shares of such stock held by such holder.
(b) Subject to the terms of Section C(2)(a) of this
Article, the Series A and Series B Preferred Stock may be
redeemed at a cash price equal to one dollar ($1.00) per
share, together with all unpaid dividends to and including the
Redemption Date (the "Redemption Price"); provided, however,
that payment of the Redemption Price shall be made from any
funds of the Corporation legally available therefor.
(c) From and after the Redemption Date (unless default
shall be made by the Corporation in duly paying the Redemption
Price in which case all the rights of the holders of such
shares shall continue) the holders of the shares of the Series
A and Series B Preferred Stock called for redemption shall
cease to have any rights as stockholders of the Corporation
except the right to receive, without interest, the Redemption
Price thereof upon surrender of certificates representing the
shares of such stock, and such shares shall not thereafter be
transferred (except with the consent of the Corporation) on
the books of the Corporation and shall not be deemed
outstanding for any purpose whatsoever.
(d) There shall be no redemption of any shares of Preferred
Stock of the Corporation where such action would be in
violation of applicable law.
3. Preferences on Liquidation
(a) In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the Corporation,
the holders of shares of
-3-
<PAGE> 4
the Series A and Series B Preferred Stock then outstanding,
treated as one class, shall be entitled to be paid, out of the
assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings,
before any payment shall be made in respect of the
Corporation's common stock, an amount equal to one dollar
($1.00) per share, plus all unpaid dividends thereon to the
date fixed for distribution. After setting apart or paying in
full the preferential amounts due the holders of the Series A
and Series B Preferred Stock, the remaining assets of the
Corporation available for distribution to stockholders, if
any, shall be distributed exclusively to the holders of common
stock, each such issued and outstanding share of common stock
entitling the holder thereof to receive an equal proportion of
said remaining assets. If upon liquidation, dissolution, or
winding up of the Corporation, the assets of the Corporation
available for distribution to its shareholders shall be
insufficient to pay the holders of the Series A and Series B
Preferred Stock the full amounts to which they respectively
shall be entitled, the holders of such stock shall share
ratably in any distribution of assets according to the
respective amounts which would be payable in respect of the
shares held by them upon such distribution if all amounts
payable on or with respect to said shares were paid in full.
The merger or consolidation of the Corporation into or with
another corporation in which the Corporation shall not survive
and the shareholders of the Corporation shall own less than 50
percent of the voting securities of the surviving corporation
or the sale, transfer or lease (but not including a transfer
or lease by pledge or mortgage to a bona fide lender) of all
or substantially all of the assets of the Corporation shall be
deemed to be a liquidation, dissolution or winding up of the
Corporation as those terms are used in this paragraph.
(b) In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the Corporation,
the Corporation shall, within ten (10) days after the date the
Board of Directors approves such action, or within twenty (20)
days prior to any shareholder's meeting called to approve such
action, or within twenty (20) days after the commencement of
any involuntary proceeding, whichever is earlier, give each
holder of shares of Series A and Series B Preferred Stock
initial written notice of the proposed action. Such initial
written notice shall describe the material terms and
conditions of such proposed action, including a description of
the stock, cash, and property to be received by the holders of
shares of Series A and Series B Preferred Stock upon
consummation of the proposed action and the date of delivery
thereof. If any material change in the facts set forth in the
initial notice shall occur, the Corporation shall promptly
give written notice to each holder of shares of Series A and
Series B Preferred Stock of such material change.
-4-
<PAGE> 5
The Corporation shall not consummate any voluntary or
involuntary liquidation, dissolution, or winding up of the
Corporation before the expiration of twenty (20) days after
the mailing of the initial notice or ten (10) days after the
mailing of any subsequent written notice, whichever is later;
provided that any such twenty-day or ten-day period may be
shortened upon the written consent of the holders of a
majority of the outstanding shares of Series A and Series B
Preferred Stock.
(c) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation
which will involve the distribution of assets other than cash,
the Corporation shall promptly engage competent independent
appraisers to determine the value of the assets to be
distributed to the holders of shares of Series A and Series B
Preferred Stock and the holders of shares of common stock (it
being understood that with respect to the valuation of
securities, the Corporation shall engage such appraiser as
shall be approved by the holders of a majority of shares of
the Corporation's outstanding Series A and Series B Preferred
Stock). The Corporation shall, upon receipt of such
appraiser's valuation, give prompt written notice to each
holder of shares of Series A and Series B Preferred Stock of
the appraiser's valuation.
4. Voting Rights
(a) Except as otherwise required by law or by the
certificate of incorporation of the Corporation, based on the
number of shares of the Corporation's capital stock
outstanding upon the date of issuance, the outstanding shares
of Series A Preferred Stock, regardless of the number of such
shares outstanding and as long as at least one of such shares
is outstanding, shall represent eighty percent (80%) of all
votes entitled to be voted at any annual or special meeting of
shareholders of the Corporation or action by written consent
of shareholders. Each outstanding share of the Series A
Preferred Stock shall represent its proportionate share of the
80% which is allocated to the outstanding shares of Series A
Preferred Stock. The 80% vote to which the outstanding shares
of Series A Preferred Stock is entitled shall be subsequently
diluted in voting rights if and to the extent the Corporation
issues other shares of capital stock for value after the date
of initial issuance of shares of Series A Preferred Stock.
(b) Each outstanding share of Series B Preferred Stock
shall entitle the holder thereof to one vote on all matters as
to which holders
-5-
<PAGE> 6
of common stock shall be entitled to vote in addition to the
right to vote upon any matters described herein.
5. Conversion Rights of Series B
At any time after December 31, 2001, the holders of
outstanding shares of Series B Preferred Stock, at their
option, may convert said shares, all or in part, on a share
for share basis, to shares of Series A Preferred Stock by
notifying the Corporation in writing and by surrendering the
certificates representing the Series B Preferred Stock. Said
conversion shall be deemed to be effective on the 20th day
after written notice of conversion has been received by the
Corporation. The shares of Series A Preferred Stock issued in
exchange for the Series B Preferred Stock shall entitle the
holder thereof to the same accrued dividend rights as were in
existence with respect to the converted Series B Preferred
Stock.
6. Negative Covenants
This Corporation will not, by amendment of its certificate
of incorporation or through any reorganization, transfer of
assets, consolidation, merger, 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 to be
observed or performed hereunder by this Corporation, but will
at all times in good faith assist in the carrying out of all
the provisions of this section and in the taking of all such
action as may be necessary or appropriate in order to protect
the rights of the holders of the Series A and Series B
Preferred Stock against impairment.
7. Status
In case any outstanding shares of Series A and Series B
Preferred Stock shall be redeemed or converted, the shares so
redeemed shall be deemed to be permanently canceled and shall
not resume the status of authorized but unissued shares of
Series A and Series B Preferred Stock, respectively.
8. Changes Affecting Series A and Series B
So long as any shares of Series A and Series B Preferred
Stock are outstanding, the Corporation shall not (i) alter or
change any of the powers, preferences, privileges, or rights
of the Series A or Series B Preferred Stock; or (ii) amend the
provisions of this Section C(8); or (iii) create any new class
or series of shares having preferences prior to or being on a
parity with the Series A or Series B Preferred Stock as to
dividends or liquidations; in each case, without first
obtaining the approval by vote or written consent in the
manner provided by law, of the holders of at least a majority
of the total number of
-6-
<PAGE> 7
outstanding shares of each particular series of preferred
stock, both Series A and Series B, each voting separately as
to its own class, as to changes affecting that series, and
together, both Series A and Series B treated as one class.
D. Series C Preferred. 5,000 shares of Series C Preferred
Stock ("Series C") having a par value of $.001 per share with the
rights, preferences and designations set forth below:
1. Dividends.
(a) Subject to the right of the holders of the
Corporation's Series A and Series B Preferred Stock in respect
of dividend rights to receive a preferential dividend, the
holders of shares of Series C Preferred Stock shall be
entitled to receive, out of any assets at the time legally
available therefor and when and as declared by the Board of
Directors, dividends at the rate of six percent (6%) per share
per annum, and no more, payable in cash commencing on December
31, 1997, and thereafter on the last day of December of each
year that any such shares shall be outstanding. Such dividends
on the Series C Preferred Stock are prior and in preference to
any declaration or payment of any distribution (as defined in
Section D(1)(b) of this Article) on any other outstanding
shares of Preferred Stock (other than Series A and Series B
Preferred Stock) or the common stock of this Corporation. Such
dividends shall accrue on each share of Series C Preferred
Stock from day to day from the date of initial issuance
thereof whether or not earned or declared so that if such
dividends with respect to any previous dividend period at the
rate provided for herein have not been paid on, or declared
and set apart for, all shares of Series C Preferred Stock at
the time outstanding, the deficiency shall be fully paid on,
or declared and set apart for, such shares before any
distribution shall be paid on, or declared and set apart for
any other outstanding shares of Preferred Stock (other than
Series A and Series B Preferred Stock) or common stock.
(b) For purposes of this Section D, unless the context
otherwise requires, "distribution" shall mean the transfer of
cash or property without consideration, whether by way of
dividend or otherwise, payable other than in common stock, or
the purchase or redemption of shares of the Corporation (other
than redemptions set forth in Section D(2) of this Article or
repurchases of common stock held by employees or consultants
of the Corporation upon termination of their employment or
services pursuant to agreements providing for such repurchase)
for cash or property, including any such transfer, purchase or
redemption by a subsidiary of the Corporation.
-7-
<PAGE> 8
2. Redemption.
(a) At any time after December 31, 1998, the Corporation
may, at the option of the Board of Directors, redeem all or
part of the outstanding shares of the Series C Preferred Stock
at the redemption price set forth in Section D(2)(b) of this
Article, provided that the Corporation shall give written
notice by mail, postage prepaid, to the holders of such stock
to be redeemed at least twenty (20) days prior to the date
specified for redemption (the "Redemption Date"). Such notice
shall be addressed to each such stockholder at the address of
such holder appearing on the books of the Corporation or given
by such holder to the Corporation for the purpose of notice,
or if no such address appears or is so given, at the place
where the principal office of the Corporation is located. Such
notice shall state the Redemption Date, the Redemption Price
(as defined in Section D(2)(b) below), the number of shares of
Series C Preferred Stock of such holders to be redeemed and
shall call upon such holder to surrender to the Corporation on
the Redemption Date at the place designated in the notice such
holder's redeemed stock. On or after the Redemption Date, each
holder of shares of Series C Preferred Stock called for
redemption shall surrender the certificate evidencing such
shares to the Corporation at the place designated in such
notice and shall thereupon be entitled to receive payment of
the Redemption Price. If less than all of the outstanding
shares of Series C Preferred Stock are to be redeemed, then
the Corporation shall redeem a pro rata portion from each
holder of such stock according to the respective number of
shares of such stock held by such holder.
(b) Subject to the terms of Section D(2)(a) of this
Article, the Series C Preferred Stock may be redeemed at a
cash price equal to one thousand dollars ($1,000.00) per
share, together with all unpaid dividends to and including the
Redemption Date (the "Redemption Price"); provided, however,
that payment of the Redemption Price shall be made from any
funds of the Corporation legally available therefor.
(c) From and after the Redemption Date (unless default
shall be made by the Corporation in duly paying the Redemption
Price in which case all the rights of the holders of such
shares shall continue), the holders of the shares of the
Series C Preferred Stock called for or requesting redemption
shall cease to have any rights as stockholders of the
Corporation, except the right to receive, without interest,
the Redemption Price thereof upon surrender of certificates
representing the shares of such stock, and such shares shall
not thereafter be transferred (except with the consent of the
Corporation) on the books of
-8-
<PAGE> 9
the Corporation and shall not be deemed outstanding for any
purpose whatsoever.
(d) There shall be no redemption of any shares of Series C
Preferred Stock of the Corporation where such action would be
in violation of applicable law.
3. Preferences on Liquidation.
(a) Subject to Section D(7) of this Article, in the event
of any voluntary or involuntary liquidation, dissolution, or
winding up of the Corporation, the holders of shares of the
Series C Preferred Stock then outstanding, shall be entitled
to be paid, out of the assets of the Corporation available for
distribution to its stockholders, whether from capital,
surplus or earnings, before any payment shall be made in
respect of the Corporation's common stock, an amount equal to
one thousand dollars ($1,000.00) per share, plus all unpaid
dividends thereon to the date fixed for distribution. After
setting apart or paying in full the preferential amounts due
the holders of the Series C Preferred Stock, the remaining
assets of the Corporation available for distribution to
stockholders, if any, shall be distributed exclusively to the
holders of common stock, each such issued and outstanding
share of common stock entitling the holder thereof to receive
an equal proportion of said remaining assets. If upon
liquidation, dissolution, or winding up of the Corporation,
the assets of the Corporation available for distribution to
its stockholders shall be insufficient to pay the holders of
the Series C Preferred Stock the full amounts to which they
respectively shall be entitled, the holders of such stock
shall share ratably in any distribution of assets according to
the respective amounts which would be payable in respect of
the shares held by them upon such distribution if all amounts
payable on or with respect to said shares were paid in full.
The merger or consolidation of the Corporation into or with
another corporation in which the Corporation shall not survive
and the shareholders of the Corporation shall own less than
fifty percent (50%) of the voting securities of the surviving
corporation or the sale, transfer or lease (but not including
a transfer or lease by pledge or mortgage to a bona fide
lender) of all or substantially all of the assets of the
Corporation shall be deemed to be a liquidation, dissolution
or winding up of the Corporation as those terms are used in
this paragraph.
(b) In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the Corporation,
the Corporation shall, within ten (10) days after the date the
Board of Directors approves such action, or within twenty (20)
days prior to any stockholder's meeting
-9-
<PAGE> 10
called to approve such action, or within twenty (20) days
after the commencement of any involuntary proceeding,
whichever is earlier, give each holder of shares of Series
C Preferred Stock initial written notice of the proposed
action. Such initial written notice shall describe the
material terms and conditions of such proposed action,
including a description of the stock, cash, and property to
be received by the holders of shares of Series C Preferred
Stock upon consummation of the proposed action and the date
of delivery thereof. If any material change in the facts
set forth in the initial notice shall occur, the
Corporation shall promptly give written notice to each
holder of shares of Series C Preferred Stock of such
material change. The Corporation shall not consummate any
voluntary or involuntary liquidation, dissolution, or
winding up of the Corporation before the expiration of
twenty (20) days after the mailing of the initial notice or
ten (10) days after the mailing of any subsequent written
notice, whichever is later; provided that any such twenty-
day or ten-day period may be shortened upon the written
consent of the holders of a majority of the outstanding
shares of Series C Preferred Stock.
(c) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation
which will involve the distribution of assets other than
cash, the Corporation shall promptly engage competent
independent appraisers to determine the value of the assets
to be distributed to the holders of shares of Series A,
Series B and Series C Preferred Stock and the holders of
shares of common stock (it being understood that with
respect to the valuation of securities, the Corporation
shall engage such appraiser as shall be approved by the
holders of a majority of shares of the Corporation's
outstanding Preferred Stock). The Corporation shall, upon
receipt of such appraiser s valuation, give prompt written
notice to each holder of shares of Series C Preferred Stock
of the appraiser's valuation.
4. Voting Rights.
Except as otherwise required by law, the holders of the
Series C Preferred Stock shall not be entitled to vote upon
any matter relating to the business or affairs of the
Corporation or for any other purpose.
5. Negative Covenants.
The Corporation will not, by amendment of this Certificate
of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, 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 to be
observed or performed hereunder by the Corporation, but will
at all times in
-10-
<PAGE> 11
good faith assist in the carrying out of all the provisions of
this paragraph and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the
holders of the Series C Preferred Stock against impairment.
6. Status.
In case any outstanding shares of Series C Preferred Stock
shall be redeemed, the shares so redeemed shall be deemed to
be permanently canceled and shall not resume the status of
authorized but unissued shares of Series C Preferred Stock.
7. Ranking, Changes Affecting Series C.
(a) The Series C Preferred Stock shall, with respect to
dividend rights and rights on liquidation, winding up and
dissolution, (i) rank senior to any of the Corporation's
common stock and any other class or series of stock of the
Company which by its terms shall rank junior to the Series
C Preferred Stock, and (ii) rank junior to the Company's
Series A and Series B Preferred Stock and any other class
or series of stock of the Company which by its terms shall
rank senior to the Series C Preferred Stock.
(b) So long as any shares of Series C Preferred Stock
are outstanding, the Corporation shall not (i) alter or
change any of the powers preferences, privileges, or rights
of the Series C Preferred Stock; or (ii) amend the
provisions of this Section D(7); or (iii) authorize or
issue any new class or series of shares having preferences
prior to or being on a parity with the Series C Preferred
Stock as to dividends or liquidations; in each case,
without first obtaining the approval by vote or written
consent, in the manner provided by law, of the holders of
at least a majority of the outstanding shares of Series C
Preferred Stock, as to changes affecting the Series C
Preferred Stock.
E. Series D Preferred. 10,000 shares of Series D Preferred
Stock ("Series D") having a par value of $.001 per share and a stated
value of one thousand dollars ($1,000.00) per share (the "Series D
Stated Value"), with the rights, preferences and designations set forth
below:
1. Dividends.
(a) The holders of shares of Series D Preferred Stock
shall be entitled to receive, out of any assets at the time
legally available therefor and when and as declared by the
Board of Directors, dividends
-11-
<PAGE> 12
calculated on the Series D Stated Value per share at the rate
of eight percent (8%) per share per annum, and no more,
payable in cash commencing on December 31, 1998, and
thereafter on the last day of December of each year that any
such shares shall be outstanding. Such dividends on the Series
D Preferred Stock are prior and in preference to any
declaration or payment of any distribution (as defined in
Section E(1)(b) of this Article) on any other outstanding
shares of Preferred Stock or the common stock of this
Corporation. Such dividends shall accrue on each share of
Series D Preferred Stock from day to day from the date of
initial issuance thereof whether or not earned or declared so
that if such dividends with respect to any previous dividend
period at the rate provided for herein have not been paid on,
or declared and set apart for, all shares of Series D
Preferred Stock at the time outstanding, the deficiency shall
be fully paid on, or declared and set apart for, such shares
before any distribution shall be paid on, or declared or set
apart for any other outstanding shares of Preferred Stock or
common stock.
(b) For purposes hereof, unless the context otherwise
requires, "distribution" shall mean the transfer of cash or
property without consideration, whether by way of dividend or
otherwise, payable other than in common stock, or the purchase
or redemption of shares of the Corporation (other than
redemptions set forth in Section E(2) below or repurchases of
common stock held by employees or consultants of the
Corporation upon termination of their employment or services
pursuant to agreements providing for such repurchase) for cash
or property, including any such transfer, purchase or
redemption by a subsidiary of the Corporation.
2. Redemption.
(a) The Corporation may, at the option of the Board of
Directors, redeem all or part of the outstanding shares of the
Series D Preferred Stock at the redemption price set forth in
Section E(2)(b) below, provided that the Corporation shall
give written notice by mail, postage prepaid, to the holders
of such stock to be redeemed at least twenty (20) days prior
to the date specified for redemption (the "Redemption Date")
and provided further that such holders may, at any time prior
to the Redemption Date, convert their shares of Series D
Preferred Stock pursuant to the provisions of Section E(5) of
this Article. Such notice shall be addressed to each such
stockholder at the address of such holder appearing on the
books of the Corporation or given by such holder to the
Corporation for the purpose of notice, or if no such address
appears or is so given, at the place where the principal
office of the Corporation is located. Such notice shall state
the Redemption Date, the Redemption Price (as defined in
Section E(2)(b)
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<PAGE> 13
of this Article), the number of shares of Series D Preferred
Stock of such holders to be redeemed and shall call upon such
holder to surrender to the Corporation on the Redemption Date
at the place designated in the notice such holder's redeemed
stock. On or after the Redemption Date, each holder of shares
of Series D Preferred Stock called for redemption shall
surrender the certificate evidencing such shares to the
Corporation at the place designated in such notice and shall
thereupon be entitled to receive payment of the Redemption
Price. If less than all of the outstanding shares of Series D
Preferred Stock are to be redeemed, then the Corporation shall
redeem a pro rata portion from each holder of such stock
according to the respective number of shares of such stock
held by such holder.
(b) Subject to the terms of Section E(2)(a) above, the
Series D Preferred Stock may be redeemed at a cash price equal
to one thousand dollars ($1,000.00) per share, together with
all unpaid dividends to and including the Redemption Date (the
"Redemption Price"); provided, however, that payment of the
Redemption Price shall be made from any funds of the
Corporation legally available therefor.
(c) From and after the Redemption Date (unless default
shall be made by the Corporation in duly paying the Redemption
Price in which case all the rights of the holders of such
shares shall continue), the holders of the shares of the
Series D Preferred Stock called for or requesting redemption
shall cease to have any rights as stockholders of the
Corporation, except the right to receive, without interest,
the Redemption Price thereof upon surrender of certificates
representing the shares of such stock, and such shares shall
not thereafter be transferred (except with the consent of the
Corporation) on the books of the Corporation and shall not be
deemed outstanding for any purpose whatsoever.
(d) There be no redemption of any shares of Series D
Preferred Stock of the Corporation where such action would be
in violation of applicable law.
3. Preferences on Liquidation.
(a) Subject to Section E(8) of this Article, in the event
of any voluntary or involuntary liquidation, dissolution, or
winding up of the Corporation, the holders of shares of the
Series D Preferred Stock then outstanding, shall be entitled
to be paid, out of the assets of the Corporation available for
distribution to its stockholders, whether from capital,
surplus or earnings, before any payment shall be made in
respect of the Corporation's common stock, an amount equal to
one
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<PAGE> 14
thousand dollars ($1,000.00) per share, plus all unpaid
dividends thereon to the date fixed for distribution. After
setting apart or paying in full the preferential amounts due
the holders of the Series D Preferred Stock, the remaining
assets of the Corporation available for distribution to
stockholders, if any, shall be distributed first to the holder
of the Corporation's Series A, Series B, and Series C
Preferred Stock in accordance with the liquidation preferences
of each such Series and then to the holders of common stock,
each such issued and outstanding share of common stock
entitling the holder thereof to receive an equal proportion of
said remaining assets. If upon liquidation, dissolution, or
winding up of the Corporation, the assets of the Corporation
available for distribution to its stockholders shall be
insufficient to pay the holders of the Series D Preferred
Stock the full amounts to which they respectively shall be
entitled, the holders of such stock shall share ratably in any
distribution of assets according to the respective amounts
which would be payable in respect of the shares held by them
upon such distribution if all amounts payable on or with
respect to said shares were paid in full. The merger or
consolidation of the Corporation into or with another
corporation in which the Corporation shall not survive and the
stockholders of the Corporation shall own less than fifty
percent (50%) of the voting securities of the surviving
corporation or the sale, transfer or lease (but not including
a transfer or lease by pledge or mortgage to a bona fide
lender) of all or substantially all of the assets of the
Corporation shall be deemed to be a liquidation, dissolution
or winding up of the Corporation as those terms are used in
this paragraph.
(b) In the event of any voluntary or involuntary
liquidation dissolution, or winding up of the Corporation, the
Corporation shall, within ten (10) days after the date the
Board of Directors approves such action, or within twenty (20)
days prior to any stockholder's meeting called to approve such
action, or within twenty (20) days after the commencement of
any involuntary proceeding, whichever is earlier, give each
holder of shares of Series D Preferred Stock initial written
notice of the proposed action. Such initial written notice
shall describe the material terms and conditions of such
proposed action, including a description of the stock, cash
and property to be received by the holders of shares of Series
D Preferred Stock upon consummation of the proposed action and
the date of delivery thereof. If any material change in the
facts set forth in the initial notice shall occur, the
Corporation shall promptly give written notice to each holder
of shares of Series D Preferred Stock of such material change.
The Corporation shall not consummate any voluntary or
involuntary liquidation, dissolution, or winding up of the
Corporation before the expiration of twenty (20) days after
the mailing of the initial notice or ten (10) days
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<PAGE> 15
after the mailing of any subsequent written notice, whichever
is later, provided that any such twenty-day or ten-day period
may be shortened upon the written consent of the holders of a
majority of the outstanding shares of Series D Preferred
Stock.
(c) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation
which will involve the distribution of assets other than cash,
the Corporation shall promptly engage competent independent
appraisers to determine the value of the assets to be
distributed to the holders of shares of Series A, Series B,
Series C, and Series D Preferred Stock and the holders of
shares of common stock (it being understood that with respect
to the valuation of securities, the Corporation shall engage
such appraiser as shall be approved by the holders of a
majority of shares of the Corporation's outstanding Preferred
Stock). The Corporation shall, upon receipt of such
appraiser's valuation, give prompt written notice to each
holder of shares of Series D Preferred Stock of the
appraiser's valuation.
4. Voting Rights.
Except as otherwise required by law, the holders of the
Series D Preferred Stock shall not be entitled to vote upon any matter
relating to the business or affairs of the Corporation or for any other
purpose.
5. Conversion.
(a) Subject to and upon compliance with the provisions of
Section E(5)(b) below, the holder of any shares of Series D
Preferred Stock shall have the right, at such holder's option,
at any time (and from time to time) prior to May 31, 2001, to
convert any of such shares into that number of fully paid and
nonassessable shares of common stock (calculated as to each
conversion to the nearest 1/100th of a share) equal to the
Conversion Rate (as defined below) multiplied by the number of
shares of Series D Preferred Stock to be converted pursuant to
this Section E(5)(a) by surrendering the certificate or
certificates representing shares to be converted in the manner
provided in Section E(5)(b) below. The "Conversion Rate" per
share of Series D Preferred Stock shall be Three Hundred
Eighty (380) shares of common stock for each share of Series D
Preferred Stock. If for any reason the Corporation has not
paid any portion of the unpaid accrued or declared dividends
on the shares of Series D Preferred Stock being converted,
such dividends shall be converted into an additional number of
shares of common stock determined by dividing the amount of
the unpaid dividends by 2.625.
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<PAGE> 16
(b) (i) In order to exercise the optional conversion
privilege pursuant to Section E(5)(a) above, the holder of
each share to be converted shall deliver to the Corporation
during regular business hours, at the principal office of
the Corporation or at such other place as may be designated
by the Corporation, the certificate or certificates
representing the shares to be converted, duly endorsed or
assigned in blank (or to the Corporation if so requested),
accompanied by written notice stating that the holder
elects to convert such shares. Unless the shares of common
stock issuable upon conversion are to be issued in the same
name as the name in which the shares of Series D Preferred
Stock are registered, each share surrendered for conversion
shall be accompanied by an instrument of transfer, in form
satisfactory to the Corporation, duly executed by the
holder or such holder's duly authorized attorney and by
funds in an amount sufficient to pay any transfer or
similar tax.
(ii) As promptly as practicable after the surrender by
a holder of the certificate or certificates representing
shares in accordance with this Section E(5)(b), the
Corporation shall issue and shall deliver to the holder a
certificate or certificates for the number of full shares
of common stock issuable upon the conversion of those
shares in accordance with the provisions of this Section
E(5), and a certificate representing any shares of Series D
Preferred Stock that were represented by the certificate or
certificates surrendered to the Corporation in connection
with such conversion but were not converted. Any fractional
interest in respect of a share of common stock arising out
of such conversion shall be settled as provided in Section
E(5)(c) below. The Corporation shall pay all expenses,
taxes (other than stock transfer taxes) and other charges
required to be paid by the Corporation in order to issue
the shares of common stock pursuant to this Section (5)(b).
(iii) Conversion shall be deemed to have been effected
with respect to conversion pursuant to Section E(5)(a)
above, on the date on which all of the conditions specified
in Section E(5)(b)(i) above have been satisfied (the
"Series D Conversion Date"), and the person or persons in
whose name or names any certificate or certificates for
shares of common stock shall be issuable upon such
conversion shall be deemed to have become the holder or
holders of record of the shares of common stock represented
by those certificates on the Series D Conversion Date,
unless the stock transfer books of the Corporation shall be
closed on the Series D Conversion Date, in which case such
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<PAGE> 17
person or persons shall be deemed to have become such
holder or holders of record at the close of business on the
next succeeding day on which such stock transfer books are
open. All shares of common stock delivered upon conversion
of the shares of Series D Preferred Stock will upon
delivery be duly and validly issued and fully paid and
nonassessable, and not subject to any preemptive rights.
Upon the surrender of certificates representing shares of
Series D Preferred Stock to be converted, such shares no
longer shall be deemed to be outstanding and all rights of
a holder with respect to the shares surrendered for
conversion shall immediately terminate except the right to
receive the common stock as provided herein.
(c) No fractional shares or securities representing
fractional shares of common stock shall be issued upon
conversion of the shares of Series D Preferred Stock. Any
fractional interest in a share of common stock resulting from
conversion of a share shall be paid in cash (computed to the
nearest cent) based upon the fair market value of a share of
common stock on the Series D Conversion Date, as determined in
good faith by the Board of Directors in the exercise of its
reasonable business judgment.
(d) In the event the outstanding shares of common stock
shall be split, subdivided, combined or consolidated, by
reclassification or otherwise, into a greater or lesser number
of shares of common stock, and in the event that the
Corporation shall issue shares of common stock by way of a
stock dividend or other distribution to the holders of common
stock, the number of shares of common stock into which each
issued and outstanding share of Series D Preferred Stock shall
be convertible immediately prior to such split, subdivision,
stock dividend, combination or consolidation shall,
concurrently with the effectiveness of such split,
subdivision, stock dividend, combination or consolidation be
increased or decreased proportionately.
(e) Subject to the notice requirements of this Section
E(5)(e), if the Corporation shall be a party to any
transaction that involves any consolidation or merger of the
Corporation with or into another corporation, or any sale of
all or substantially all of the assets of the Corporation to
another corporation, and which is effected in such a way that
the holders of common stock shall be entitled to receive cash,
stock, securities or other assets with respect to or in
exchange for common stock, then the right to convert the
shares of Series D Preferred Stock shall terminate at the
close of business on the date as of which the holders of
common stock of record shall be entitled to exchange their
shares of common stock for cash, securities or other
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<PAGE> 18
assets deliverable upon such consolidation, merger or sale of
all or substantially all of the assets of the Corporation. In
case the Corporation shall enter into any agreement or
understanding or the Board of Directors shall adopt any
resolution authorizing or proposing any transaction of the
type described in this Section E(5)(e), then in any such event
the Corporation promptly shall cause to be mailed, by
registered or certified mail, postage prepaid, to the holders
of shares of Series D Preferred Stock at each such holder's
last address appearing on the records of the Corporation,
twenty (20) days prior to the date on which the Corporation
closes its books or takes a record for determining rights to
vote with respect to any consolidation, merger or sale, a
notice of such agreement, understanding or resolution stating
the expected record date for determining holders of common
stock entitled to exchange their shares with respect to a
transaction described in this Section E(5)(e); provided,
however, that the Corporation shall not be liable or
responsible if the actual dates of any such events shall be
different from the expected dates set forth in such notice.
(f) The Corporation shall at all times reserve and keep
available out of its authorized and unissued common stock,
solely for the purpose of effecting the conversion of shares
of Series D Preferred Stock, such number of shares of common
stock as shall from time to time be sufficient to effect the
conversion of all then outstanding shares of Series D
Preferred Stock. The Corporation shall, from time to time,
subject to and in accordance with applicable law, increase the
authorized shares of common stock if at any time the number of
authorized shares of common stock remaining unissued shall not
be sufficient to permit the conversion at such time of all
then outstanding shares of Series D Preferred Stock.
6. Negative Covenants.
The Corporation will not, by amendment of the Certificate of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, 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 to be observed or performed hereunder
by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section E(6) and in the
taking of all such action as may be necessary or appropriate in order
to protect the rights of the holders of the Series D Preferred Stock
against impairment.
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<PAGE> 19
7. Status.
In case any outstanding shares of Series D Preferred Stock
shall be redeemed, the shares so redeemed shall be deemed to
be permanently canceled and shall not resume the status of
authorized but unissued shares of Series D Preferred Stock.
8. Ranking: Changes Affecting Series D.
(a) The Series D Preferred Stock shall, with respect to
dividend rights and rights on liquidation, winding up and
dissolution, (i) rank senior to any of the Corporation's
common stock, the Company's Series A, Series B and Series C
Preferred Stock and any other class or series of stock of
the Company which by its terms shall rank junior to the
Series D Preferred Stock, and (ii) rank junior to any class
or series of stock of the Company which by its terms shall
rank senior to the Series D Preferred Stock.
(b) So long as any shares of Series D Preferred Stock
are outstanding, the Corporation shall not (i) alter or
change any of the powers, preferences, privileges, or
rights of the Series D Preferred Stock; or (ii) amend the
provisions of this Section E(8); or (iii) authorize or
issue any new class or series of shares having preferences
prior to or being on a parity with the Series D Preferred
Stock as to dividends or liquidations; in each case,
without first obtaining the approval by vote or written
consent, in the manner provided by law, of the holders of
at least a majority of the outstanding shares of Series D
Preferred Stock, as to changes affecting the Series D
Preferred Stock.
F. Series E Preferred. 20,000 shares of Series E Preferred
Stock ("Series E") having a par value of $.001 per share and a stated
value of one thousand dollars ($1,000.00) per share (the "Series E
Stated Value"), with the rights, preferences and designations set forth
below:
1. Dividends.
(a) The holders of shares of Series E Preferred Stock shall
be entitled to receive, out of any assets at the time legally
available therefor and when and as declared by the Board of
Directors, dividends calculated on the Series E Stated Value
per share at the rate of eight percent (8%) per share per
annum, and no more, payable in cash commencing on December 31,
1998, and thereafter on the last day of December of each year
that any such shares shall be outstanding. Such dividends on
the Series E Preferred Stock are prior and in preference to
any declaration or payment of any distribution (as defined in
Section
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<PAGE> 20
F(1)(b) of this Article) on any other outstanding shares of
Preferred Stock or the common stock of this Corporation. Such
dividends shall accrue on each share of Series E Preferred
Stock from day to day from the date of initial issuance
thereof whether or not earned or declared so that if such
dividends with respect to any previous dividend period at the
rate provided for herein have not been paid on, or declared
and set apart for, all shares of Series E Preferred Stock at
the time outstanding, the deficiency shall be fully paid on,
or declared and set apart for, such shares before any
distribution shall be paid on, or declared or set apart for
any other outstanding shares of Preferred Stock or common
stock.
(b) For purposes hereof, unless the context otherwise
requires, "distribution" shall mean the transfer of cash or
property without consideration, whether by way of dividend or
otherwise, payable other than in common stock, or the purchase
or redemption of shares of the Corporation (other than
redemptions set forth in Section F(2) below or repurchases of
common stock held by employees or consultants of the
Corporation upon termination of their employment or services
pursuant to agreements providing for such repurchase) for cash
or property, including any such transfer, purchase or
redemption by a subsidiary of the Corporation.
2. Redemption.
(a) The Corporation may, at the option of the Board of
Directors, redeem all or part of the outstanding shares of the
Series E Preferred Stock at the redemption price set forth in
Section F(2)(b) below, provided that the Corporation shall
give written notice by mail, postage prepaid, to the holders
of such stock to be redeemed at least twenty (20) days prior
to the date specified for redemption (the "Redemption Date")
and provided further that such holders may, at any time prior
to the Redemption Date, convert their shares of Series E
Preferred Stock pursuant to the provisions of Section F(5) of
this Article. Such notice shall be addressed to each such
stockholder at the address of such holder appearing on the
books of the Corporation or given by such holder to the
Corporation for the purpose of notice, or if no such address
appears or is so given, at the place where the principal
office of the Corporation is located. Such notice shall state
the Redemption Date, the Redemption Price (as defined in
Section F(2)(b) below), the number of shares of Series E
Preferred Stock of such holders to be redeemed and shall call
upon such holder to surrender to the Corporation on the
Redemption Date at the place designated in the notice such
holder's redeemed stock. On or after the Redemption Date, each
holder of shares of Series E Preferred Stock called for
redemption shall surrender the certificate evidencing such
shares to the Corporation
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<PAGE> 21
at the place designated in such notice and shall thereupon be
entitled to receive payment of the Redemption Price. If less
than all of the outstanding shares of Series E Preferred Stock
are to be redeemed, then the Corporation shall redeem a pro
rata portion from each holder of such stock according to the
respective number of shares of such stock held by such holder.
(b) Subject to the terms of Section F(2)(a) above, the
Series E Preferred Stock may be redeemed at a cash price equal
to one thousand dollars ($1,000.00) per share, together with
all unpaid dividends to and including the Redemption Date
(with respect to the Series E Preferred Stock, the "Redemption
Price"); provided, however, that payment of the Redemption
Price shall be made from any funds of the Corporation legally
available therefor.
(c) From and after the Redemption Date (unless default
shall be made by the Corporation in duly paying the Redemption
Price in which case all the rights of the holders of such
shares shall continue), the holders of the shares of the
Series E Preferred Stock called for or requesting redemption
shall cease to have any rights as stockholders of the
Corporation, except the right to receive, without interest,
the Redemption Price thereof upon surrender of certificates
representing the shares of such stock, and such shares shall
not thereafter be transferred (except with the consent of the
Corporation) on the books of the Corporation and shall not be
deemed outstanding for any purpose whatsoever.
(d) There shall be no redemption of any shares of Series E
Preferred Stock of the Corporation where such action would be
in violation of applicable law.
3. Preferences on Liquidation.
(a) Subject to Section F(8) of this Article, in the event
of any voluntary or involuntary liquidation, dissolution, or
winding up of the Corporation, the holders of shares of the
Series E Preferred Stock then outstanding, shall be entitled
to be paid, out of the assets of the Corporation available for
distribution to its stockholders, whether from capital,
surplus or earnings, before any payment shall be made in
respect of the Corporation's common stock, an amount equal to
one thousand dollars ($1,000.00) per share, plus all unpaid
dividends thereon to the date fixed for distribution. After
setting apart or paying in full the preferential amounts due
the holders of the Series E Preferred Stock, the remaining
assets of the Corporation available for distribution to
stockholders, if any, shall be distributed first to the holder
of the
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<PAGE> 22
Corporation's Series A, Series B, Series C and Series D
Preferred Stock in accordance with the liquidation preferences
of each such Series and then to the holders of common stock,
each such issued and outstanding share of common stock
entitling the holder thereof to receive an equal proportion of
said remaining assets. If upon liquidation, dissolution, or
winding up of the Corporation, the assets of the Corporation
available for distribution to its stockholders shall be
insufficient to pay the holders of the Series E Preferred
Stock the full amounts to which they respectively shall be
entitled, the holders of such stock shall share ratably in any
distribution of assets according to the respective amounts
which would be payable in respect of the shares held by them
upon such distribution if all amounts payable on or with
respect to said shares were paid in full. The merger or
consolidation of the Corporation into or with another
corporation in which the Corporation shall not survive and the
stockholders of the Corporation shall own less than fifty
percent (50%) of the voting securities of the surviving
corporation or the sale, transfer or lease (but not including
a transfer or lease by pledge or mortgage to a bona fide
lender) of all or substantially all of the assets of the
Corporation shall be deemed to be a liquidation, dissolution
or winding up of the Corporation as those terms are used in
this paragraph.
(b) In the event of any voluntary or involuntary
liquidation dissolution, or winding up of the Corporation, the
Corporation shall, within ten (10) days after the date the
Board of Directors approves such action, or within twenty (20)
days prior to any stockholder's meeting called to approve such
action, or within twenty (20) days after the commencement of
any involuntary proceeding, whichever is earlier, give each
holder of shares of Series E Preferred Stock initial written
notice of the proposed action. Such initial written notice
shall describe the material terms and conditions of such
proposed action, including a description of the stock, cash
and property to be received by the holders of shares of Series
E Preferred Stock upon consummation of the proposed action and
the date of delivery thereof. If any material change in the
facts set forth in the initial notice shall occur, the
Corporation shall promptly give written notice to each holder
of shares of Series E Preferred Stock of such material change.
The Corporation shall not consummate any voluntary or
involuntary liquidation, dissolution, or winding up of the
Corporation before the expiration of twenty (20) days after
the mailing of the initial notice or ten (10) days after the
mailing of any subsequent written notice, whichever is later,
provided that any such twenty-day or ten-day period may be
shortened upon the written consent of the holders of a
majority of the outstanding shares of Series E Preferred
Stock.
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<PAGE> 23
(c) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation
which will involve the distribution of assets other than
cash, the Corporation shall promptly engage competent
independent appraisers to determine the value of the assets
to be distributed to the holders of shares of Series A,
Series B, Series C, Series D and Series E Preferred Stock
and the holders of shares of common stock (it being
understood that with respect to the valuation of
securities, the Corporation shall engage such appraiser as
shall be approved by the holders of a majority of shares of
the Corporation's outstanding Preferred Stock). The
Corporation shall, upon receipt of such appraiser's
valuation, give prompt written notice to each holder of
shares of Series E Preferred Stock of the appraiser's
valuation.
4. Voting Rights.
Except as otherwise required by law, the holders of the
Series E Preferred Stock shall not be entitled to vote upon
any matter relating to the business or affairs of the
Corporation or for any other purpose.
5. Conversion.
(a) Subject to and upon compliance with the provisions
of Section F(5)(b) below, the holder of any shares of
Series E Preferred Stock shall have the right, at such
holder's option, at any time (and from time to time) prior
to August 31, 2001, to convert any of such shares into that
number of fully paid and nonassessable shares of common
stock (calculated as to each conversion to the nearest
1/100th of a share) equal to the Conversion Rate (as
defined below) multiplied by the number of shares of Series
E Preferred Stock to be converted pursuant to this Section
F(5)(a) by surrendering the certificate or certificates
representing shares to be converted in the manner provided
in Section F(5)(b) below. The "Conversion Rate" per share
of Series E Preferred Stock shall be Two Hundred
Eighty-Five (285) shares of common stock for each share of
Series E Preferred Stock. If for any reason the Corporation
has not paid any portion of the unpaid accrued or declared
dividends on the shares of Series E Preferred Stock being
converted, such dividends shall be converted into an
additional number of shares of common stock determined by
dividing the amount of the unpaid dividends by 3.5.
(b) (i) In order to exercise the optional
conversion privilege pursuant to Section F(5)(a) above,
the holder of each share to be converted shall deliver
to the Corporation during regular business hours, at the
principal office of the Corporation
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<PAGE> 24
or at such other place as may be designated by the
Corporation, the certificate or certificates representing
the shares to be converted, duly endorsed or assigned in
blank (or to the Corporation if so requested), accompanied
by written notice stating that the holder elects to convert
such shares. Unless the shares of common stock issuable
upon conversion are to be issued in the same name as the
name in which the shares of Series E Preferred Stock are
registered, each share surrendered for conversion shall be
accompanied by an instrument of transfer, in form
satisfactory to the Corporation, duly executed by the
holder or such holder's duly authorized attorney and by
funds in an amount sufficient to pay any transfer or
similar tax.
(ii) As promptly as practicable after the surrender by a
holder of the certificate or certificates representing
shares in accordance with this Section F(5)(b), the
Corporation shall issue and shall deliver to the holder a
certificate or certificates for the number of full shares
of common stock issuable upon the conversion of those
shares in accordance with the provisions of this Section
F(5), and a certificate representing any shares of Series E
Preferred Stock that were represented by the certificate or
certificates surrendered to the Corporation in connection
with such conversion but were not converted. Any fractional
interest in respect of a share of common stock arising out
of such conversion shall be settled as provided in Section
F(5)(c) below. The Corporation shall pay all expenses,
taxes (other than stock transfer taxes) and other charges
required to be paid by the Corporation in order to issue
the shares of common stock pursuant to this Section
F(5)(b).
(iii) Conversion shall be deemed to have been effected
with respect to conversion pursuant to Section F(5)(a)
above, on the date on which all of the conditions specified
in Section F(5)(b)(i) above have been satisfied (the
"Series E Conversion Date"), and the person or persons in
whose name or names any certificate or certificates for
shares of common stock shall be issuable upon such
conversion shall be deemed to have become the holder or
holders of record of the shares of common stock represented
by those certificates on the Series E Conversion Date,
unless the stock transfer books of the Corporation shall be
closed on the Series E Conversion Date, in which case such
person or persons shall be deemed to have become such
holder or holders of record at the close of business on the
next succeeding day on which such stock transfer books are
open. All shares of common stock delivered upon conversion
of the
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<PAGE> 25
shares of Series E Preferred Stock will upon delivery be
duly and validly issued and fully paid and nonassessable,
and not subject to any preemptive rights. Upon the
surrender of certificates representing shares of Series E
Preferred Stock to be converted, such shares no longer
shall be deemed to be outstanding and all rights of a
holder with respect to the shares surrendered for
conversion shall immediately terminate except the right to
receive the common stock as provided herein.
(c) No fractional shares or securities representing
fractional shares of common stock shall be issued upon
conversion of the shares of Series E Preferred Stock. Any
fractional interest in a share of common stock resulting from
conversion of a share shall be paid in cash (computed to the
nearest cent) based upon the fair market value of a share of
common stock on the Series E Conversion Date, as determined in
good faith by the Board of Directors in the exercise of its
reasonable business judgment.
(d) In the event the outstanding shares of common stock
shall be split, subdivided, combined or consolidated, by
reclassification or otherwise, into a greater or lesser number
of shares of common stock, and in the event that the
Corporation shall issue shares of common stock by way of a
stock dividend or other distribution to the holders of common
stock, the number of shares of common stock into which each
issued and outstanding share of Series E Preferred Stock shall
be convertible immediately prior to such split, subdivision,
stock dividend, combination or consolidation shall,
concurrently with the effectiveness of such split,
subdivision, stock dividend, combination or consolidation be
increased or decreased proportionately.
(e) Subject to the notice requirements of this Section
F(5)(e), if the Corporation shall be a party to any
transaction that involves any consolidation or merger of the
Corporation with or into another corporation, or any sale of
all or substantially all of the assets of the Corporation to
another corporation, and which is effected in such a way that
the holders of common stock shall be entitled to receive cash,
stock, securities or other assets with respect to or in
exchange for common stock, then the right to convert the
shares of Series E Preferred Stock shall terminate at the
close of business on the date as of which the holders of
common stock of record shall be entitled to exchange their
shares of common stock for cash, securities or other assets
deliverable upon such consolidation, merger or sale of all or
substantially all of the assets of the Corporation. In case
the Corporation shall enter into any agreement or
understanding or the Board of Directors shall adopt any
resolution authorizing or proposing
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any transaction of the type described in this Section
F(5)(e), then in any such event the Corporation promptly
shall cause to be mailed, by registered or certified mail,
postage prepaid, to the holders of shares of Series E
Preferred Stock at each such holder's last address
appearing on the records of the Corporation, twenty (20)
days prior to the date on which the Corporation closes its
books or takes a record for determining rights to vote with
respect to any consolidation, merger or sale, a notice of
such agreement, understanding or resolution stating the
expected record date for determining holders of common
stock entitled to exchange their shares with respect to a
transaction described in this Section F(5)(e); provided,
however, that the Corporation shall not be liable or
responsible if the actual dates of any such events shall be
different from the expected dates set forth in such notice.
(f) The Corporation shall at all times reserve and keep
available out of its authorized and unissued common stock,
solely for the purpose of effecting the conversion of
shares of Series E Preferred Stock, such number of shares
of common stock as shall from time to time be sufficient to
effect the conversion of all then outstanding shares of
Series E Preferred Stock. The Corporation shall, from time
to time, subject to and in accordance with applicable law,
increase the authorized shares of common stock if at any
time the number of authorized shares of common stock
remaining unissued shall not be sufficient to permit the
conversion at such time of all then outstanding shares of
Series E Preferred Stock.
6. Negative Covenants.
The Corporation will not, by amendment of the Certificate
of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, 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 to be
observed or performed hereunder by the Corporation, but will
at all times in good faith assist in the carrying out of all
the provisions of this Section and in the taking of all such
action as may be necessary or appropriate in order to protect
the rights of the holders of the Series E Preferred Stock
against impairment.
7. Status.
In case any outstanding shares of Series E Preferred Stock
shall be redeemed, the shares so redeemed shall be deemed to
be permanently canceled and shall not resume the status of
authorized but unissued shares of Series E Preferred Stock.
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8. Ranking: Changes Affecting Series E.
(a) The Series E Preferred Stock shall, with respect to
dividend rights and rights on liquidation, winding up and
dissolution, (i) rank senior to any of the Corporation's
common stock, the Company's Series A, Series B, Series C and
Series D Preferred Stock and any other class or series of
stock of the Company which by its terms shall rank junior to
the Series E Preferred Stock, and (ii) rank junior to any
class or series of stock of the Company which by its terms
shall rank senior to the Series E Preferred Stock.
(b) So long as any shares of Series E Preferred Stock are
outstanding, the Corporation shall not (i) alter or change any
of the powers, preferences, privileges, or rights of the
Series E Preferred Stock; or (ii) amend the provisions of this
Section F(8); or (iii) authorize or issue any new class or
series of shares having preferences prior to or being on a
parity with the Series E Preferred Stock as to dividends or
liquidations; in each case, without first obtaining the
approval by vote or written consent, in the manner provided by
law, of the holders of at least a majority of the outstanding
shares of Series E Preferred Stock as to changes affecting the
Series E Preferred Stock.
ARTICLE V
The Board of Directors shall have the power to adopt, amend or repeal
the by-laws.
ARTICLE VI
No director shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director. Notwithstanding the foregoing sentence, a director shall
be liable to the extent provided by applicable law, (i) for breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit. No amendment to or repeal of this Article Sixth shall
apply to or have any effect on the liability or alleged liability of any
director of the Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment.
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AMENDED AND RESTATED
BY-LAWS
OF
THE CREDIT STORE, INC.
I. OFFICES
Section 1.01. Registered Office. The Corporation shall maintain a
registered office and registered agent within the State of Delaware at such
place within such State as may be designated from time to time by the Board of
Directors of the Corporation.
Section 1.02. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
II. STOCKHOLDERS
Section 2.01. Place of Meetings. Meetings of stockholders may be held
at the principal executive office of the Corporation or at such other place as
may be designated by the Board of Directors or the chief executive officer of
the Corporation.
Section 2.02. Annual Meetings. An annual meeting of stockholders shall
be held in each calendar year for the election of directors on such date and at
such time as shall be designated from time to time by the Board of Directors.
Any other proper business may be transacted at the annual meeting, provided that
such business is specified in the notice of meeting.
Section 2.03. Special Meetings. Unless otherwise specifically provided
by law or the Certificate of Incorporation, a special meeting of stockholders,
for any purpose or purposes, may be called only by the Chairman or the President
and shall be called by either such officer upon the written request of a
majority of the Board of Directors or by a committee of the Board of Directors
which has been duly designated by the Board of Directors, and whose powers and
authority, as expressly provided in a resolution of the Board of Directors,
include the power to call such meetings. Such request shall state the purpose or
purposes of the proposed meeting. If the authorized officers fail to cause such
meeting to be called within thirty (30) days after receipt of such request and
held within ninety (90) days after receipt of such request, the directors making
the request may call the meeting by giving notice as provided in these By-Laws
at the expense of the Corporation. Business transacted at any special meeting
shall be limited to the purposes stated in the notice of the meeting.
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Section 2.04. Notice of Meetings. A written notice stating the place,
date and hour of the meeting and, in the case of a special meeting, the purpose
or purposes for which the meeting is called, shall be personally delivered or
mailed, postage prepaid, not less then ten (10) nor more than sixty (60) days
before the date of such meeting to each stockholder of record of the Corporation
entitled to vote at such meeting at the stockholder's mailing address shown upon
the records of the Corporation. Service of notice is complete upon mailing.
Section 2.05. Waiver of Notice. Notice of any annual or special meeting
may be waived either before, at or after such meeting in a writing signed by the
person or persons entitled to the notice. Attendance of a person at a meeting
shall constitute a waiver of notice of such meeting, except when the person
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transacting of any business because the meeting is not lawfully
called or convened.
Section 2.06. Quorum. At each meeting of stockholders, except where
otherwise provided by law or the Certificate of Incorporation or these By-Laws,
the holders of a majority of the outstanding capital stock entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum. If a quorum is once present at the meeting, the stockholders may
continue to transact business until adjournment notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
Section 2.07. Adjourned Meetings. The stockholders present, though less
than a quorum, may, by majority vote, adjourn the meeting from time to time to a
later day or hour or to another place. If the adjournment is for more than
thirty (30) days, or if after adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting. Otherwise, notice of any
adjourned meeting need not be given if the time and place thereof are announced
at the meeting at which the adjournment is taken. At an adjourned meeting at
which a quorum is present or represented by proxy, any business may be
transacted which might have been transacted at the meeting as originally
convened.
Section 2.08. Voting. Unless otherwise provided in the Certificate of
Incorporation, each stockholder entitled to vote at any meeting of stockholders
shall have one vote for each share of stock having voting power upon the matter
in question which is held by such stockholder and registered in the
stockholder's name on the books of the Corporation as of the applicable record
date. All elections of directors shall be conducted by written ballot, unless
the Certificate of Incorporation otherwise provides. The vote upon any other
question before a meeting need not be by written ballot, and need not be
conducted by inspectors, unless otherwise determined by the Board of Directors
or the officer presiding at the meeting. At all meetings of stockholders for the
election of directors a plurality of the votes cast shall be sufficient to elect
such directors. All other elections and questions at a meeting shall be decided
by a majority vote of the number of shares entitled to vote represented at the
meeting at the time of the vote except where otherwise required by statute, the
Certificate of Incorporation or these By-Laws.
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Section 2.09. Proxies. Each stockholder entitled to vote at a meeting
of stockholders may authorize another person or persons to act for him or her by
proxy by an instrument executed in writing. If any such instrument designates
two or more persons to act as proxies, a majority of such persons present at the
meeting, or, if only one shall be present, then that one, shall have and may
exercise all of the powers conferred by such written instrument upon all of the
persons so designated unless the instrument shall otherwise provide.
Section 2.10. Fixing Date for Determination of Stockholders of Record.
(a) In order that the Corporation may determine the stockholders
entitled (i) to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or (ii) to express consent to corporate action in writing
without a meeting, or (iii) to receive payment of any dividend or other
distribution or allotment of any rights, or to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
shall be (X) not more than sixty (60) nor less than ten (10) days before the
date of any such meeting; (Y) not more than ten (10) days after the date upon
which the resolution fixing the record date for any written action is adopted by
the Board of Directors; and (Z) not more than sixty (60) days prior to any other
action.
(b) If no record date is fixed:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close
of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held.
(ii) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when
no prior action by the Board of Directors is necessary, shall be the
first day on which a written consent signed by a stockholder is
delivered to the Corporation.
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board
of Directors adopts the resolution relating thereto.
(c) A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
Section 2.11. Action by Written Consent of Stockholders.
(a) Unless otherwise restricted by the Certificate of Incorporation,
any action required or permitted to be taken at any annual or special meeting of
the stockholders may be
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taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted, and shall be delivered to the
Corporation by delivery to its registered office in the State of Delaware, to
the principal place of business of the Corporation or to the officer or agent of
the Corporation having custody of the minute book of the Corporation. Prompt
notice of the taking of the corporate action without a meeting by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing.
(b) Every written consent shall bear the date of signature of each
stockholder who signs the consent and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated consent delivered in the manner required by Section 2.11(a)
to the Corporation, written consents signed by a sufficient number of holders to
take action are delivered to the Corporation as required by Section 2.11(a).
Section 2.12. Stockholder List. The officer who has charge of the stock
ledger shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list of stockholders or
the books of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
III. BOARD OF DIRECTORS
Section 3.01. General Powers; Organization. The business of the
Corporation shall be managed by or under the direction of its Board of
Directors, which may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-Laws directed or required to be exercised or done
by the stockholders. The Board of Directors may annually elect a Chairman of the
Board from among its members who shall preside at its meetings, or in his or her
absence the President shall so preside, or in his or her absence a chairman
chosen at the meeting shall so preside. The Secretary shall act as secretary of
the meeting, but in his or her absence the chairman of the meeting may appoint
any person to act as secretary of the meeting. Any meeting of the Board of
Directors may be held within or without the State of Delaware.
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Section 3.02. Number, Qualification and Term of Office. The number of
directors constituting the Board of Directors shall be fixed from time to time
by resolution of the Board of Directors; provided, however, that such number
shall be no less than one or such other minimum number as is required by law.
The directors shall be elected at the annual meeting of the stockholders, except
as provided in Section 3.03 of these By-Laws, and each director elected shall
hold office until his or her successor is elected and qualified. Any director
may resign at any time upon giving written notice to the Corporation. Directors
need not be stockholders.
Section 3.03. Vacancies. Vacancies (whether existing or to take effect
at a future date), and newly created directorships resulting from any increase
in the authorized number of directors, may be filled by a majority of the
directors then in office, in their sole discretion and whether or not
constituting less than a quorum, and the directors so chosen shall hold office
until the next election of directors and until their successors are duly elected
and qualified, or until their earlier resignation, retirement or removal.
Section 3.04. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place as may be designated
from time to time by the Board of Directors.
Section 3.05. Special Meetings. Special meetings of the Board of
Directors may be called from time to time by the Chairman, if any, or the
President, and, upon request by any two directors, shall be called by the
Chairman or the President.
Section 3.06. Notice of Special Meetings. Notice of each special
meeting of the Board of Directors stating the place, date and hour of the
meeting shall be given to each director by mail not less than forty-eight (48)
hours, or personally or by telephone, telegram, telex or cable not less than
twenty-four (24) hours, before the date and hour of the meeting.
Section 3.07. Waiver of Notice. Notice of any meeting of the Board of
Directors may be waived either before, at, or after such meeting in a writing
signed by each director or directors to whom the notice was not duly given.
Attendance of a director at a meeting shall constitute a waiver of notice of
such meeting, except when the director attends the meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
Section 3.08. Quorum. Unless otherwise specifically provided by law,
the Certificate of Incorporation or these By-Laws, at all meetings of the Board
of Directors, a majority of the total number of directors shall constitute a
quorum for the transaction of business, and the vote of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors. If a quorum shall not be present at any meeting of the
Board of Directors, the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
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Section 3.09. Committees of Directors.
(a) The Board of Directors may, by resolution adopted by a majority of
the total number of directors, designate one or more committees, each committee
to consist of one or more of the directors of the Corporation and to have such
name as may be determined by the Board of Directors. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
(b) Any committee, to the extent allowed by law and provided in the
resolution designating the committee, may exercise the powers of the Board of
Directors in the management of the business and affairs of the Corporation and
may authorize the corporate seal, if any, to be affixed to all papers that may
require it.
(c) Each committee shall keep regular minutes of its proceedings and
report the same to the Board of Directors when required. Unless the Board of
Directors otherwise provides, each committee may make, alter and repeal rules
for the conduct of its business. In the absence of such rules each committee
shall conduct its business in the same manner as the Board of Directors conducts
it business pursuant to these By-Laws.
Section 3.10. Conference Communications. Directors may participate in
any meeting of the Board of Directors, or of any duly constituted committee
thereof, by means of a conference telephone conversation or other comparable
method of communication by which all persons participating in the meeting can
hear and communicate to each other. For the purpose of establishing a quorum and
taking any action at the meeting, such directors participating pursuant to this
Section 3.10 shall be deemed present in person at the meeting; and the place of
the meeting shall be the place of origination of the conference telephone
conversation or other comparable method of communication.
Section 3.11. Action by Written Consent of Directors. Any action
required or permitted to be taken at a meeting of the Board of Directors or any
committee thereof may be taken without a meeting if all directors or committee
members consent thereto in writing and the writing or writings are filed with
the minutes of proceedings of the Board of Directors or the committee.
Section 3.12. Compensation. The Board of Directors shall have the
authority to fix the compensation of directors. Nothing herein shall preclude
any director from serving this Corporation in any other capacity and receiving
compensation therefor.
IV. OFFICERS
Section 4.01. Number. The Board of Directors shall elect a President, a
Secretary and a Treasurer, and it may, if it so determines, elect a Chairman of
the Board from among its members. The Board of Directors may also choose one or
more Vice-Presidents, one or more Assistant Secretaries, one or more Assistant
Treasurers or any other officers or agents
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as the Board of Directors by a majority vote of the total number of directors
may designate. Any person may hold two or more offices.
Section 4.02. Election, Term of Office and Qualifications. The Board of
Directors shall elect the officers of the Corporation, who shall hold their
offices for such terms and shall exercise such powers and perform such duties
not inconsistent with these By-Laws as shall be determined from time to time by
the Board of Directors. All officers of the Corporation shall hold their offices
until their respective successors are elected and qualified, or until their
respective offices are eliminated by vote of the majority of all directors, or
until their earlier resignation, retirement or removal. Officers may be, but
need not be, directors. Any officer may resign at any time upon written notice
to the Corporation.
Section 4.03. Compensation. The salaries of the officers of the
Corporation shall be fixed from time to time by the Board of Directors or by the
chief executive officer if authorized by the Board of Directors.
Section 4.04. Removal and Vacancies. Any officer may be removed from
office, with or without cause, by a majority vote of the total number of
directors, but such removal shall be without prejudice to the contract rights of
such officer, if any, with the Corporation. Any vacancy occurring in any office
of the Corporation may be filled by the Board of Directors.
Section 4.05. Chief Executive Officer. The Board of Directors shall
designate the Chairman or the President as the chief executive officer of the
Corporation. If there be no Chairman, the President shall be the chief executive
officer. The chief executive officer shall have the general powers and duties of
management and supervision usually vested in and imposed upon the chief
executive officer of a corporation. The chief executive officer shall preside at
all meetings of the stockholders.
Section 4.06. Chairman of the Board. The Chairman, if one is elected,
shall preside at all meetings of the Board of Directors. During the absence or
disability of the President, the Chairman shall exercise all the powers and
discharge all the duties of the President.
Section 4.07. President. The President, subject to the control of the
Board of Directors and the Chairman (if the Chairman is the chief executive
officer of the Corporation), shall have general supervision of the business of
the Corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect. During the absence or disability of the
Chairman or if there be no Chairman, the President shall preside at all meetings
of the Board of Directors.
Section 4.08. Vice-Presidents. During the absence or disability of the
Chairman and the President, the Vice-President (or in the event there be more
than one Vice-President, the Vice-Presidents in the order designated by the
Board of Directors or, in the absence of any
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designation, in the order they were first elected as Vice-Presidents) shall
perform the duties and have the authority of the President.
Section 4.09. Secretary. The Secretary shall keep the minutes of the
meetings of the stockholders, the Board of Directors and any committees in a
book to be kept for that purpose, and shall maintain the stock ledger and
prepare the stockholder list as required by these By-Laws. The Secretary shall
duly give notice of all meetings of the stockholders, special meetings of the
Board of Directors and meetings of its committees, if any.
Section 4.10. Treasurer. The Treasurer shall keep accurate accounts of
all moneys of the Corporation received or disbursed. He or she shall deposit all
moneys, drafts and checks in the name of and to the credit of the Corporation in
such banks and depositories as a majority of the whole Board of Directors shall
from time to time designate. The Treasurer shall have power to endorse for
deposit all notes, checks and drafts received by the Corporation. He or she
shall disburse the funds of the Corporation as ordered by the Board of
Directors, making proper vouchers therefor. The Treasurer shall render to the
Board of Directors or the chief executive officer of the Corporation, whenever
required, an account of all his or her transactions as Treasurer and of the
financial condition of the Corporation.
Section 4.11. Authority and Other Duties. All officers of the
Corporation shall be subject to the supervision and direction of the Board of
Directors and, in addition to the foregoing authority and duties, all officers
of the Corporation shall respectively have such authority and perform such other
duties in the management of the business of the Corporation as may be designated
from time to time by the Board of Directors. Unless prohibited by a resolution
approved by the affirmative vote of a majority of the directors present, an
officer elected or appointed by the Board may, without the approval of the
Board, delegate some or all of the duties and powers of his or her office to
other persons.
V. INDEMNIFICATION
Section 5.01 Indemnification. The Corporation shall indemnify such
persons, for such expenses and liabilities, in such manner, under such
circumstances, and to such extent, as required or permitted by subsections (a)
through (e) of Section 145 of the Delaware General Corporation Law, as amended
from time to time.
Section 5.02 Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted against
and incurred by such person in or arising from that capacity, whether or not the
Corporation would otherwise be required or permitted to indemnify the person
against the liability. The Company shall not be obligated under these By-Laws to
make any payment in connection with any claim made against any person if and to
the extent that such person has actually received payment therefor under any
insurance policy or policies.
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Section 5.03. Good Faith Defined, Etc. For purposes of any
determination of whether a person is entitled to indemnification, such person
shall be deemed to have acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Corporation, or,
with respect to any criminal action or proceeding, to have had no reasonable
cause to believe his or her conduct was unlawful, if such person relied on the
records or books of account of the Corporation or other enterprise, or on
information supplied to him or her by the officers of the Corporation or other
enterprise, or on information or records given or reports made to the
Corporation or other enterprise by an independent certified public accountant or
by an appraiser or other expert selected with reasonable care by the Corporation
or other enterprise. The term "other enterprise" as used in this Section 5.03
shall mean any enterprise other than the Corporation, including any corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise as
to which such person is or was serving at the request of the Corporation as a
director, officer, employee or trustee. The provisions of this Section 5.03
shall not be deemed to be exclusive or to limit in any way the circumstances in
which a person may be deemed to have met the applicable standard of conduct set
forth in Section 145 of the Delaware General Corporation Law, as amended from
time to time.
Section 5.04. Right to Indemnification Upon Application; Procedure Upon
Application; Etc.
(a) Any indemnification under these By-Laws shall be made no later than
forty-five (45) days after receipt by the Corporation of the written request of
the director, officer, employee or trustee or former director, officer, employee
or trustee unless a determination is made within said 45-day period in
accordance with Section 5.03 that such person has not met the applicable
standard of conduct.
(b) The right to indemnification or expense advances under these
By-Laws shall be enforceable by the director, officer, employee or trustee or
former director, officer, employee or trustee in any court of competent
jurisdiction. Neither the absence of any prior determination that
indemnification is proper in the circumstances, nor a prior determination that
indemnification is not proper in the circumstances, shall be a defense to the
action or create a presumption that the director, officer, employee or trustee
or former director, officer, employee or trustee has not met the applicable
standard of conduct. The expenses (including attorneys' fees and expenses)
incurred by the director, officer, employee or trustee or former director,
officer, employee or trustee in connection with successfully establishing his or
her right to indemnification, in whole or in part, in any such action (or in any
action or claim brought by him or her to recover under any insurance policy or
policies referred to in Section 5.02) shall also be indemnified by the
Corporation.
(c) If any person is entitled under any provision of these By-Laws to
indemnification by the Corporation for some or a portion of expenses, judgments,
fines, penalties or amounts paid in settlement incurred by him or her, but not,
however, for the total amount thereof, the Corporation shall nevertheless
indemnify such person for the portion of such expenses, judgments, fines,
penalties and amounts to which he or she is entitled.
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<PAGE> 10
Section 5.05. Certain Persons Not Entitled to Indemnification.
Notwithstanding any other provision of these By-Laws, no person shall be
entitled to indemnification or expense advances under these By-Laws with respect
to any action, suit, proceeding or claim brought or made by him or her against
the Corporation, other than an action, suit, proceeding or claim seeking, or
defending such person's right to, indemnification and/or expense advances
pursuant to these By-Laws or otherwise.
Section 5.06. Non-Exclusivity and Survival of Indemnification. Except
as otherwise provided in Section 5.05, but notwithstanding any other provision
of these By-Laws, it is the policy of the Corporation that indemnification and
expense advances shall be made to the fullest extent permitted by law, and,
accordingly, in the event of any change in law, by legislation or otherwise,
permitting greater indemnification and/or expense advances, the provisions of
these By-Laws shall be construed so as to require such greater indemnification
and/or expense advances. The provisions of these By-Laws shall not be deemed to
preclude the indemnification of any person whom the Corporation has the power to
indemnify under the provisions of the General Corporation Law of the State of
Delaware or otherwise. All rights to indemnification and advancement of expenses
under these By-Laws shall be deemed to be provided by a contract between the
Corporation and the director, officer, employee or trustee who serves in such
capacity at any time while these By-Laws are in effect. Any repeal or
modification of the indemnification provisions of these By-Laws shall not affect
any rights or obligations then existing.
Section 5.07. Successors; Meaning of "Corporation". The indemnification
provisions of these By-Laws shall be binding upon and enforceable against any
direct or indirect successor by purchase, merger, consolidation or otherwise to
all or substantially all of the business and/or assets of the Corporation. For
purposes of these By-Laws, but subject to the provisions of any agreement
relating to any merger or consolidation of the kind referred to in clause (a)
below or of any agreement relating to the acquisition of any corporation of the
kind referred to in clause (b) below, references to "the Corporation" shall
include (a) any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger with the Corporation which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers and employees, so that any person who is or
was a director, officer or employee of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or trustee of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, shall stand in the same
position under the provisions of these By-Laws with respect to the Corporation
as he or she would have with respect to such constituent corporation if its
separate existence had continued; and (b) any corporation of which at least a
majority of the voting power (as represented by its outstanding stock having
voting power generally in the election of directors) is owned directly or
indirectly by the Corporation.
Section 5.08. Severability. The indemnification provisions of these
By-Laws shall be severable in the event that any provision hereof (including any
provision within a single section, subsection, clause, paragraph or sentence) is
held invalid, void or otherwise unenforceable on any ground by any court of
competent jurisdiction. In the event of any such
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<PAGE> 11
holding, the remaining indemnification provisions of these By-Laws shall
continue in effect and be enforceable to the fullest extent permitted by law.
VI. STOCK
Section 6.01. Certificates for Stock. Every holder of stock in the
Corporation shall be entitled to a certificate, to be in such form as shall be
prescribed by the Board of Directors, certifying the number of shares owned by
him or her. The certificates for such shares shall be numbered in the order in
which they shall be issued and shall be signed in the name of the Corporation by
the Chairman, the President or a Vice-President, and by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary, and the seal of
the Corporation, if any, shall be affixed thereto.
Section 6.02. Issuance of Stock. The Board of Directors is authorized
to cause to be issued stock of the Corporation up to the full amount authorized
by the Certificate of Incorporation in such amounts and for such consideration
as may be determined by the Board of Directors. No shares shall be allotted
except in consideration of cash, labor, personal property, or real property, or
leases thereof, or of an amount transferred from surplus to stated capital upon
a stock dividend. At the time of such allotment of stock, the Board of Directors
shall state its determination of the fair value to the Corporation in monetary
terms of any consideration other than cash for which shares are allotted. The
amount of consideration to be received in cash or otherwise shall not be less
than the par value of the shares so allotted. Stock so issued shall be fully
paid and nonassessable. Treasury shares may be disposed of by the Corporation
for such consideration as may be fixed by the Board of Directors, if the
Certificate of Incorporation so provides.
Section 6.03. Partly Paid Stock. The Corporation may issue the whole or
any part of its stock as partly paid and subject to call for the remainder of
the consideration to be paid therefor. Upon the face or back of each certificate
issued to represent any such partly paid stock, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
The Board of Directors may, from time to time, demand payment in respect of each
share of stock not fully paid, of such sum of money as the necessities of the
business may, in the judgment of the Board of Directors, require, not exceeding
in the whole the balance remaining unpaid on such stock, and such sum so
demanded shall be paid to the Corporation at such times and by such installments
as the directors shall direct.
Section 6.04. Registered Stockholders. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
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<PAGE> 12
Section 6.05. Transfer of Stock. Transfers of stock on the books of the
Corporation may be authorized only by the stockholder named in the certificate,
the stockholder's legal representative or the stockholder's duly authorized
attorney-in-fact and upon surrender of the certificate or the certificates for
such stock. Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
No new certificate or certificates shall be issued in exchange for any existing
certificate until such certificate shall have been so cancelled, except in cases
provided for in Section 6.06.
Section 6.06. Lost, Stolen or Destroyed Certificates. Any stockholder
claiming a certificate for stock to be lost, stolen or destroyed shall make an
affidavit of that fact in such form as the Corporation may require and shall, if
the Corporation so requires, give the Corporation a bond of indemnity in form,
in an amount, and with one or more sureties satisfactory to the Corporation, to
indemnify the Corporation against any claims which may be made against it on
account of the alleged loss, theft or destruction of the certificate or issuance
of such new certificate. A new certificate may then be issued in the same tenor
and for the same number of shares as the one claimed to have been lost, stolen
or destroyed.
Section 6.07. Facsimile Signatures. Whenever any certificate is
countersigned by a transfer agent or by a registrar other than the Corporation
or one of its employees, then the signatures of the officers or agents of the
Corporation may be facsimiles. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed on any such
certificate shall cease to be such officer, transfer agent or registrar before
such certificate is issued, it nevertheless may be issued by the Corporation as
though the person who signed such certificate or whose facsimile signature or
signatures had been placed thereon were such officer, transfer agent or
registrar at the date of issue.
VII. MISCELLANEOUS
Section 7.01. Dividends. The Board of Directors may declare at any
regular or special meeting dividends from the Corporation's surplus, or if there
be none, out of its net profits for the current fiscal year and/or the preceding
fiscal year, in such amounts as in their opinion the condition of the affairs of
the Corporation shall render it advisable, unless otherwise restricted by law.
Dividends may be paid in cash, in property or in shares of capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation.
Section 7.02. Interested Directors and Officers. No contract or
transaction between the Corporation and one or more of its directors or
officers, or between the Corporation and any other corporation, partnership,
association, or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for that reason, or solely because the director or officer is
present at or participates in the meeting of the Board or committee thereof
which authorizes the contract or transaction, or solely because his, her or
their votes are counted for such purpose, if: (a) the
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<PAGE> 13
material facts as to his or her relationship or interest and as to the contract
or transaction are disclosed or are known to the Board of Directors or the
committee, and the Board of Directors or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (b) the material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (c) the contract or
transaction is fair as to the Corporation as of the time it is authorized,
approved or ratified, by the Board of Directors, a committee thereof, or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
Section 7.03. Voting Securities Held by the Corporation. Unless
otherwise ordered by the Board of Directors, powers of attorney, proxies,
waivers of notice of meeting, consents and other instruments relating to
securities owned by the Corporation may be executed in the name of and on behalf
of the Corporation by the Chairman or the President, and either such officer
may, in the name of and on behalf of the Corporation, take all such action as
such officer may deem advisable to vote in person or by proxy at any meeting of
security holders of other corporations in which the Corporation may hold
securities, and at any such meeting such officer shall possess and may exercise
any and all rights and powers incident to the ownership of such securities that
the Corporation might have possessed and exercised if it had been present. The
Board of Directors may from time to time confer like powers upon any other
person or persons.
Section 7.04. Execution of Instruments.
(a) All deeds, mortgages, bonds, checks, contracts and other
instruments pertaining to the business and affairs of the Corporation shall be
signed on behalf of the Corporation by the Chairman, or the President, or any
Vice President, or by such other person or persons as may be designated from
time to time by the Board of Directors.
(b) If a document must be executed by persons holding different offices
or functions and one person holds such offices or exercises such functions, that
person may execute the document in more than one capacity if the document
indicates each such capacity.
Section 7.05. Advances. The Corporation may, without a vote of the
directors, advance money to its directors, officers or employees to cover
expenses that can reasonably be anticipated to be incurred by them in the
performance of their duties and for which they would be entitled to
reimbursement in the absence of an advance.
Section 7.06. Fiscal Year. The fiscal year end of the Corporation shall
be May 31 or such other date as may be fixed from time to time by resolution of
the Board of Directors.
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<PAGE> 14
Section 7.07. Corporate Seal. The corporate seal, if one is adopted by
the Board of Directors, shall be circular in form and shall have inscribed
thereon the name of the Corporation, the word "Delaware" and the words
"Corporate Seal." The seal may be used by causing it or a facsimile thereof to
be impressed or affixed or reproduced or otherwise placed on any document
requiring it.
Section 7.08. Power to Amend. These By-Laws may be altered, amended or
repealed or new By-Laws may be adopted by the stockholders or by the Board of
Directors, if such power is conferred upon the Board of Directors by the
Certificate of Incorporation, at any regular meeting of the stockholders or of
the Board of Directors, or at any special meeting of the stockholders or of the
Board of Directors if notice of such alteration, amendment, repeal or adoption
of new By-Laws be contained in the notice of such special meeting. If the power
to adopt, amend or repeal these By-Laws is conferred upon the Board of Directors
by the Certificate of Incorporation it shall not divest or limit the power of
the stockholders to adopt, amend or repeal these By-Laws.
14
<PAGE> 1
INCORPORATED UNDER THE LAWS OF THE
STATE OF DELAWARE
SHARES
CUSIP NO. 22539C 10 7
THE CREDIT STORE, INC.
50,000,000 AUTHORIZED SHARES $.001 PAR VALUE NON-ASSESSABLE
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
Shares of THE CREDIT STORE, INC. Common Stock
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney surrender of this Certificate properly endorsed.
This Certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated
COUNTERSIGNED AND REGISTERED
COLONIAL STOCK TRANSFER
THE CREDIT STORE, INC. Salt Lake City, Utah 84111
BY AUTHORIZED SIGNATURE
CORPORATE
SEAL
DELAWARE
SECRETARY PRESIDENT
<PAGE> 1
AMENDED AND RESTATED LEASE AGREEMENT
THIS AMENDED AND RESTATED LEASE AGREEMENT, made and entered
into on this 12th day of December, 1996, by and between Donald A. Dunham, Jr.,
(hereinafter referred to as "Landlord") and Service One International
Corporation, a Delaware corporation, having its principal place of business in
Sioux Falls, South Dakota, (hereinafter collectively referred to as "Tenant").
WHEREAS, Landlord and Tenant have entered into a Net Lease Agreement on
September 23, 1996; and
WHEREAS, the Landlord and Tenant now hereby agree to amend such Lease
Agreement by entering into this Amended and Restated Lease Agreement dated this
12th day of December, 1996.
ARTICLE 1.
LEASED PREMISES
a. Description of Premises. Landlord hereby leases and demises to Tenant
and Tenant hereby accepts and leases from Landlord, on the terms and
conditions hereinafter set forth, that certain real property and
building, fixtures, and other related improvements located in Minnehaha
County, South Dakota, on land which is more particularly described as
follows:
Lot A, Tract 1, Tickman Addition to Sioux Falls, Minnehaha
County, South Dakota,
also known as 3401 North Louise Avenue, Sioux Falls, South
Dakota.
and hereinafter in this Lease called the "Premises". The Premises
consist of an area of approximately 149,410 square feet with an
existing building located thereon of approximately 15,200 square feet
("Initial Building"). As set out in paragraph 1(c), Landlord shall
construct an additional building on the Premises consisting of a
building of 15,000 square feet ("Additional Building").
b. Quiet Enjoyment. Landlord covenants and agrees that so long as Tenant
is not in default under the terms of this Lease, Tenant shall have
quiet and peaceful possession of the Premises and shall enjoy all of
the rights granted without interference.
c. Construction of Additional Building. Landlord shall erect on the
Premises a 15,000 square foot building ("Additional Building") except
such portions thereof as Tenant is to furnish as hereinafter set out.
The Additional Building shall be built in accordance with plans and
specifications (the "Plans and Specifications") as agreed to by the
parties hereto. The Plans and Specifications are hereby incorporated
herein by reference as Exhibit A. Landlord's completion of its portion
of the construction of the Additional Building shall
<PAGE> 2
be on or before the date set forth in the Plans and Specifications and
such construction shall be done in a good and workmanlike manner in
full compliance with the building laws and ordinances applicable
thereto, in order to receive a certificate of occupancy, and in
compliance with all other governmental laws, or ordinances, regulations
and requirements. Any delay in the completion of the Additional
Building thereof shall defer the payment obligation for the Additional
Building as set forth in paragraph 3.(a) Tenant shall furnish and
install the equipment, machinery, and furnishings at its own expense
and in accordance with the Plans and Specifications. Such equipment,
machinery, and furnishings shall be furnished and installed by Tenant
as soon as can reasonably be done after the Additional Building has
been completed by Landlord. All Tenant's work shall be done in a good
and workmanlike manner and in accordance with all city building codes.
Landlord is under no obligation to make any structural or other
alterations, decoration, additions or improvements in or to the
Premises except as expressly set forth in the Plans and Specifications.
Tenant shall have the right to make changes from time to time in the
Plans and Specifications by submitting to Landlord revised plans and
specifications (herein called the "Revisions"). Upon timely receipt of
any Revisions, Landlord shall submit the Revisions for Performance to
the contractors performing the trade or trades involved in the
Revisions, and if so requested by Tenant, obtain proposed Bids from
those contractors before embarking on such performance. The cost of any
Revisions shall be included in the Base Rent as agreed to by the
Landlord and Tenant. Landlord shall have the right to reject any
Revisions which would delay the Additional Building Rent Commencement
Date of this Lease unless, in conjunction therewith, Tenant agrees to
pay rental for the Additional Building of the date the Additional
Building Rent Commencement Date would have occurred but for the
completion of the Revisions.
d. Preparation of Premises. Tenant shall take and accept the Premises,
including the Initial Building in its "as is" condition. "As is" shall
mean in tenantable condition so that the lights, front and rear doors,
HVAC, plumbing and water heater are in working or operating condition.
Taking of possession of the Initial Building by Tenant shall be
conclusive evidence that the Initial Building, was, on that date, in
good, clean and tenantable condition as represented by Landlord. Tenant
acknowledges that, except as provided herein, no representations as to
the repair of the Premises or Initial Building or promises to alter,
remodel or improve the Premises or Initial Building have been made by
Landlord.
e. Signs. Tenant shall be allowed to install exterior signage, containing
Tenant's name and logo on the exterior of the Premises as well as a
free standing exterior sign at the entrance to the Premises, such
signage not to exceed the Premises allowable signage per code or
ordinance. All exterior signage shall comply with local codes and
ordinances and be approved by Landlord, which approval shall not be
unreasonably withheld or delayed. It is understood that Tenant will pay
for the signage and that Landlord, if requested, will use its best
effort to assist Tenant in securing required approvals, provided Tenant
will promptly reimburse Landlord for any monies expended for this
purpose.
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<PAGE> 3
ARTICLE 2.
TERM
The Initial term of this Lease shall be for a period of Fifteen (15) years
commencing on September 23, 1996 ("Commencement Date") and ending September 30,
2011.
ARTICLE 3.
RENT
a. Base Rent. Until such time as the Additional Building is completed and
delivered to the Tenant, Tenant covenants and agrees to pay to
Landlord, Base Rent of $11,875.00 per month for the Premises, including
the Initial Building. If the Lease Commencement Date is not on the
first of the month, the Base Rent for the first month shall be
prorated. At the time of the completion of the Additional Building
("Completion Date"), Tenant covenants and agrees to pay to Landlord, at
Landlord's address specified herein or at such place as may be
designated by Landlord from time to time without any prior demand
therefor, and without any deduction or offset whatsoever, an annual
Base Rent of $285,000 from the Completion Date to September 30, 2006,
of which Tenant shall pay to Landlord, monthly, in advance on the first
day of each and every month an amount equal to Twenty Three Thousand
Seven Hundred Fifty and no/100ths ($23,750.00). If the completion of
the Additional Premises is not completed on the first of the month, the
first month's Base Rent subsequent to the Completion Date shall be
prorated.
For the purposes of this Lease, the Completion Date shall be defined as
such date three weeks from the date the Landlord has completed all of
the work required by Landlord as set out in the Plans and
Specifications which will allow a temporary certificate of occupancy to
be issued by the city upon completion of Tenant's work under the Plans
and Specifications, and the Additional Building has been delivered to
the Tenant, or the date Tenant commences operation in the Additional
Building, whichever occurs first.
b. Base Rent Adjustment. Beginning October 1, 2006, and continuing until
September 30, 2011, the annual Base Rent as set forth in paragraph 3a
will be increased to $327,750, in which Tenant shall pay to Landlord,
monthly, in advance on the first day of each and every month an amount
equal to twenty-seven thousand three hundred twelve and 50/100th
($27,312.50).
c. Additional Rent. Except as otherwise herein provided, and nothing
herein shall require Tenant to make any payments for any liens or
encumbrances or mortgage encumbering the Premises, it is the intent of
Landlord and Tenant that the Base Rent set forth above shall be on a
triple net basis, as that term is used and understood in connection
with the leasing of real property. Accordingly, as additional rental
hereunder, Tenant shall pay, directly to the appropriate authorities,
during the term of this Lease, subject to proration to the date of
commencement and termination of the term hereof, all taxes,
installments of special assessments, gross receipts taxes and taxes on
rentals (other than income taxes)
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<PAGE> 4
relating to the Premises; the costs of heating, cooling, utilities;
insurance (including but not limited to liability insurance and fire
and casualty insurance with rental abatement endorsement, boiler and
pressure vessel insurance; and owners protective liability insurance),
security, snow removal, landscaping, janitorial and cleaning services;
fees for professional services; charges under maintenance and service
contracts; all supplies purchased for use in the Premises; maintenance
and repair costs as hereinafter set forth; any equipment rental,
altering, maintaining and repairing the Premises, and any other
expenses or charges of any kind, general or special, foreseen or
unforeseen, of any nature whatsoever, which during the term of this
Lease shall be levied, assessed or imposed by any governmental
authority upon or with respect to, or incurred in connection with, the
possession, occupation, operation, alteration, maintenance, repair and
use of the Premises, it being intended that this Lease shall result in
a rental to be paid to Landlord without additional cost to Landlord or
diminution or offset thereto in the monthly base amount specified in
Article 3(a) above.
ARTICLE 4.
TAXES, ASSESSMENTS AND UTILITIES
a. Taxes and Assessments. Tenant covenants and agrees to pay and
discharge, directly to the appropriate Governmental authorities, as
additional rental hereunder, at least ten (10) days before delinquency
thereof and before any penalties or interest shall accrue thereof, all
taxes of any kind, general or special, foreseen or unforeseen, of any
nature whatsoever, and installments thereof which may be taxed,
charged, levied, assessed or imposed from and after the commencement of
the term hereof upon all or any portion of, or in relation to the
Premises, including the improvements at any time situated or erected
thereof, and all personal property and equipment at any time contained
therein.
b. Tenant's Right to Contest Validity. Landlord agrees that Tenant shall
have the right, in Tenant's or Landlord's name, but at Tenant's sole
cost and expense, to contest the validity of any tax or assessment by
appropriate proceedings, timely instituted, provided that (a) Tenant
gives Landlord written notice of Tenant's intention to do so at least
twenty (20) days prior to the delinquency thereof and (b) Tenant
diligently prosecutes any such contest, at all times effectively stays
or prevents any official or judicial sale of the Premises, under
execution or otherwise, pays any final judgment enforcing any tax or
assessment so contested, and promptly procures and records satisfaction
thereof. Landlord shall, if requested by Tenant, cooperate with Tenant
in any such proceedings; provided, however, that Landlord shall not be
liable for any expenses whatsoever in connection therewith, and Tenant
shall protect and indemnify Landlord against all loss, cost, expense,
attorney's fees or damages resulting therefrom.
c. Other Taxes. If at any time during the term of this Lease under the
laws of the United States, the State of South Dakota or any political
subdivision thereof in which the Premises are situated, a tax or excise
on rent or any other tax, however described, is
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<PAGE> 5
levied or assessed by any political body against Landlord on account of
rentals payable to Landlord hereunder, such tax or excise shall
likewise be paid by Tenant.
d. Utilities. Tenant shall pay or cause to be paid all charges for water,
gas, sewer, electricity, light, heat, air conditioning, power,
telephone or other service of any kind whatsoever submitted, rendered
or supplied in connection with the Premises, and shall contract for the
same in Tenant's own name.
ARTICLE 5.
USE OF PREMISES
a. Restrictions on Use. The Premises are leased to Tenant for the purpose
of Tenant conducting its financial/credit card processing operations or
for any other lawful purpose. Tenant waives any and all rights to
terminate this Lease for any reason due to frustration of the intended
use or purposes thereof. Tenant shall not do anything in or about the
Premises which will in any way tend to increase insurance rates for the
Premises. Tenant agrees to pay as additional rent any increase in
premiums for insurance against loss by fire or extended coverage risks
resulting from the business carried on in the Premises by Tenant.
Tenant shall not suffer or permit any waste of the Premises during the
term of this Lease.
b. Hazardous Waste. Tenant shall not install, use, generate, store or
dispose of in or about the Premises any hazardous substance, toxic
chemical, pollutant or other material regulated by the Comprehensive
Environmental Response, Compensation and Liability Act of 1985 or in
any South Dakota statute, rule, or regulation or any similar law or
regulation (including without limitation any material containing
asbestos or PCB) without Landlord's written approval of each such
substance. Landlord shall not unreasonably withhold its approval of use
by Tenant of immaterial quantities of such substances customarily used
in its business operations, so long as Tenant uses such substances in
accordance with applicable laws. Tenant shall indemnify, defend and
hold Landlord harmless from and against any claim, damage or expense
arising out of Tenant's installation, use, generation, storage, or
disposal of any such substance, regardless of whether Landlord has
approved the activity.
Landlord represents that, prior to the Commencement Date, to the best
of its knowledge, there has been no installation, use, generation,
storage or disposal of in or about the Premises any hazardous
substance, toxic chemical, pollutant or other material regulated by the
Comprehensive Environmental Response, Compensation and Liability Act of
1985 or in any South Dakota statute, rule, or regulation or any similar
law or regulation (including without limitation any material containing
asbestos or PCB). Landlord shall indemnify, defend and hold Tenant
harmless from and against any claim, damage or expense arising out of
such prior installation, use, generation, storage, or disposal of any
such substance of which Landlord had knowledge.
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<PAGE> 6
c. Subsequent to the completion of the Additional Premises, Landlord shall
provide a minimum of 181 parking spaces adjacent to the Premises as
shown on the site plan attached as Exhibit B.
ARTICLE 6.
MAINTENANCE, REPAIRS AND ALTERATIONS
a. Maintenance and Repairs. The Premises and every part thereof shall be,
at the Commencement Date, in good order, condition and repair. Landlord
at its cost shall be responsible for the repair and replacement of all
of the structural elements and exterior surfaces of the Premises
including roof, roof membrane and roof covering, walls, concrete slab,
footings, electrical and plumbing exterior to the building, heating,
ventilating and air conditioning system at Landlord's sole expense as
and when necessary. Tenant shall maintain the heating, ventilation and
air conditioning and maintain, repair and replace interior walls,
interior ceiling, painting, floor coverings, plate glass and doors at
Tenant's sole expense. Tenant shall, at its own cost and expense,
provide and maintain landscaping, if any, on the Premises. Tenant
agrees to keep and maintain the Premises and the fixtures and equipment
therein in first class, properly functioning, safe, orderly and
sanitary condition, will suffer no waste or injury thereto, and will at
the expiration or other termination of the Term of this Lease,
surrender the same with all improvements in the same order and
condition in which they were on the Commencement Date, or in such
better condition as they may hereafter be put, ordinary wear and tear
and casualty damage to the extent covered by insurance excepted. All
alterations, decorations, additions or improvements in or to the
Premises made by Tenant shall become the property of Landlord upon
expiration of the term and shall remain upon and be surrendered with
the Premises as a part thereof without disturbance or injury, unless
Landlord requires specific items thereof to be removed by Tenant at
Tenant's sole expense, in which event Tenant shall do so prior to the
expiration of the term at its expense, and shall repair any damage
caused thereby. Notwithstanding the foregoing, if Tenant is not in
default in the performance of any of its obligations under this Lease,
if any and all damage resulting therefrom be repaired, and Tenant shall
post such security with respect thereto as Landlord may reasonably
request, Tenant shall have the right to remove, during the last 90 days
of the term of this Lease, all movable furniture, equipment,
furnishings or trade fixtures installed in the Premises at the direct
expense of Tenant, provided the same is completed with no damage to the
Premises.
b. Alteration. Subject to the prior written consent of Landlord, which
shall not be unreasonably withheld, Tenant shall have the right to make
such additions, alterations, changes or improvements to the Premises as
Tenant shall deem necessary or desirable; provided, however, that no
such addition, alteration, change or improvement shall be made which
will weaken the structural strength of, lessen the value of, interfere
with or make inoperable, any portion of the Premises or appurtenances
thereto or change the architectural appearance of the Premises. All
additions, alterations, changes and improvements shall be made in a
workmanlike manner, in full compliance with all
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building laws and ordinances applicable thereto, and when permitted to
be made shall become a part of the Premises and shall be surrendered as
a part of the Premises upon the termination of this Lease.
c. Non-Liability of Landlord. Landlord shall not be obligated to maintain
nor to make any repairs or replacements of any kind, nature or
description whatsoever to the Premises, except as provided specifically
herein, and Tenant expressly waives all rights to make repairs at
Landlord's expense under any law now or hereinafter enacted.
d. Tenant Self-Help. If Landlord shall default in the performance or
observance of any agreement or condition in this Lease contained on its
part to be performed or observed, and if Landlord shall not cure such
default within ten (10) days after notice from Tenant specifying the
default (or, if said default is not reasonably capable of cure within
ten (10) days, shall not within said period commence to cure such
default and thereafter prosecute the curing of such default to
completion with due diligence), Tenant may at its option, without
waiving any claim for damages for breach of agreement, at any time
thereafter cure such default for the account of Landlord, and any
amount paid or any contractual liability incurred by Tenant in so doing
shall be deemed paid or incurred for the account of Landlord, and
Landlord agrees to reimburse Tenant therefor or save Tenant harmless
therefrom; provided that Tenant may cure any such default as aforesaid
prior to the expiration of said waiting period, but after said notice
to Landlord if the curing of such default prior to the expiration of
said waiting period, is reasonably necessary to protect the Premises or
Tenant's interest therein to prevent injury or damage to persons or
property, or to enable Tenant to conduct its business in the Premises.
If Landlord shall fail to reimburse Tenant upon demand for any amount
paid for the account of Landlord hereunder or for any other sum payable
to Tenant pursuant to this Lease, said amount plus interest thereon at
an annual rate of 2% in excess of the Prime Rate of Norwest Bank
Minneapolis N.A., but in no event greater than the maximum legal rate
of interest, from the date of demand upon Landlord for payment, may be
deducted by Tenant from the next or any succeeding payments of Base
Rent or any additional rent or other sum due hereunder. Notwithstanding
anything to the contrary contained in this Lease, in the case of
emergency, notices required pursuant to this Article may be given
orally, or in any other reasonably due and sufficient manner having
regard to the emergency and the attending circumstances. If any such
notice shall not be given in the manner described in Article 20 hereof,
then, as soon thereafter as may be practicable, such notice shall be
followed-up by notice given in the manner described in said Article.
The addresses provided in Article 20 for notices to a party may be
changed by the party receiving, such notice by written notice to the
other party.
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ARTICLE 7.
LANDLORD'S ACCESS TO PREMISES
a. Inspection of Premises by Landlord. Tenant agrees to permit Landlord
and the authorized representatives of Landlord to enter the Premises at
all reasonable times during usual business hours for the purposes of:
(a) inspecting same, (b) making such repairs or reconstruction to the
Premises permitted to be made by Landlord, and (c) performing any work
therein which may be necessary by reason of Tenant's default under the
terms of this Lease, (d) decorating, remodeling, repairing, altering,
or otherwise preparing the Premises for reoccupancy at any time after
Tenant abandons the Premises for a continuous period of thirty (30)
days, provided that Tenant shall not be considered to have abandoned
the Premises so long as the Premises are kept in clean and orderly
fashion and rent is paid in accordance with the terms hereof, and (e)
entering the Premises without notice for emergency purposes. For said
purposes, Landlord shall have the right to possess pass keys to the
Premises. Nothing herein contained shall imply any duty on the part of
Landlord to do any such work which, under the provisions of this Lease,
Tenant is required to perform, and the performance thereof by Landlord
shall not constitute waiver of Tenant's default in failing to perform
the same. Landlord may, during, the performance of any work on the
Premises, keep and store upon the parking area of or within the
Premises all necessary materials, tools and equipment. Landlord shall
not in any event be liable for any reasonable inconvenience, annoyance,
disturbance, loss of business or other damage sustained by Tenant
during the making of repairs or the performance of any work on the
Premises, or on account of bringing materials, supplies, and equipment
into or through the Premises during the course thereof. In the event
Landlord makes any repairs or maintenance which Tenant has failed to do
or perform, the cost thereof shall constitute additional rent and shall
be paid to Landlord with the next installment of the monthly Base Rent
due hereunder.
b. Right to Exhibit Premises. Landlord is hereby given the right during
usual business hours to enter the Premises and to exhibit the same for
the purpose of sale or mortgage, and during the last six (6) months of
the term of this Lease, or any extension thereof, to exhibit the same
to any prospective Tenant.
ARTICLE 8.
MECHANIC'S LIENS
Tenant shall not suffer or permit any mechanic's liens to be filed
against the Premises or any part thereof by reason of work, labor, services, or
materials supplied or claimed to have been supplied to Tenant or anyone holding
the Premises or any part thereof through or under Tenant. If any such mechanic's
liens shall at any time be filed against the Premises, Tenant shall cause the
same to be discharged of record within sixty (60) days after the date of filing
the same. If Tenant shall fail to discharge such mechanic's lien within such
period, then, in addition to any other right or remedy of Landlord, Landlord
may, but shall not be obligated to, discharge the same either by paying the
amount claimed to be due or by procuring the discharge of such lien
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by deposit in court or by giving security or in such other manner as is or may
be prescribed by law. Any amount paid by Landlord for any of the aforesaid
purposes, and all reasonable legal and other expenses of Landlord, including
reasonable attorneys' fees, in or about procuring the discharge of such lien,
with all necessary disbursements in connection therewith, with interest thereon
at the rate of eighteen percent (18%) per annum from the date of payment shall
be repaid by Tenant to Landlord on demand, and if not so paid shall become due
and payable by Tenant as additional rent with the next succeeding installment of
monthly base rent which shall become due after such demand. Nothing herein
contained shall imply any consent or agreement on the part of Landlord to
subject Landlord's estate to liability under any mechanic's lien law.
ARTICLE 9.
COMPLIANCE WITH LAWS
a. Generally. Tenant shall through the term, at Tenant's sole cost and
expense, promptly comply with all laws and ordinances, and the orders,
rules, regulations and requirements of all Federal, State and municipal
governments and appropriate departments, commissions, boards and
offices thereof, foreseen or unforeseen, existing or hereafter
constituted, ordinary as well as extraordinary, which may be applicable
to the Premises, or the use or manner of use of the Premises; provided,
however, that in any event any such law, ordinance, order, rule or
regulation requires structural repairs or alterations to the Premises,
such repairs or alterations shall be at the expense of Landlord as
provided in Article 6(a) herein. Tenant will likewise observe and
comply with the requirements of all policies of public liability, fire
and all other policies of insurance at any time in force with respect
to the building and improvements on the Premises and the personal
Property thereof.
b. License. Tenant shall obtain all appropriate licenses required from all
Federal, State, and municipal governments, if any, needed to operate
its business on the Premises and Tenant shall be responsible to
maintain such licenses, as long as the Lease is in effect.
c. Non-Compliance. Landlord agrees that if at any time or times any
governmental authorities or insurance rating bureaus having
jurisdiction shall complain that the Premises or the Buildings were not
constructed in compliance with any law, ordinance or regulation of any
governmental authority or insurance rating bureau having jurisdiction
and shall request compliance, then Landlord shall, upon receipt of
notice of such complaint, cause such repairs, alterations or other work
to be done so as to bring about the compliance requested. If by reason
of such failure of compliance or by reason of such repairs, alterations
or other work done by Landlord, Tenant shall be deprived of the use and
enjoyment of the whole or any part of the Premises, all base rent and
other sums payable hereunder shall abate on a per diem basis in
proportion to said deprivation. If at any time during the term of this
Lease, any person claiming a prior right to Tenant or any governmental
authority shall cause an injunction to be entered against Tenant
restricting Tenants using or enjoying the Premises or any rights of
Tenant under this Lease, and if said injunction shall not be dismissed
within sixty (60) days after Tenant shall give
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Landlord notice thereof, then Tenant, without waiving any other rights
Tenant may have against Landlord on account thereof (including, without
limitation, the right to an abatement of all rent payable hereunder so
long as said injunction shall remain in effect), may terminate this
Lease by giving Landlord notice thereof.
ARTICLE 10.
INDEMNIFICATION OF LANDLORD
Tenant agrees to indemnify and hold harmless Landlord against and from
any and all claims by or on behalf of any person, arising from the conduct or
management of, or from any work or thing whatsoever done, in and on the Premises
and will further indemnify and save Landlord harmless against any and from any
and all claims arising during the term of this Lease from any condition of any
street, curb, or sidewalk adjoining the Premises, or of any vaults, passageways
or space therein or appurtenant thereto, or arising from any breach or default
on the part of Tenant in performance of any covenant or agreement on the part of
Tenant to be performed, pursuant to this Lease, or arising from any act or
negligence of Tenant or any other occupant of the Premises, or any part thereof,
or of its or their agents, contractors, servants, employees or licensees, or
arising from any accident, injury or damage whatsoever caused to any person or
property occurring during the term of this Lease in or about the Premises, or
upon or under the sidewalks and the land adjacent thereto, and from and against
all judgments, costs, expenses and liabilities incurred in or about any such
claim or action or proceeding brought therein except as such claims or
liabilities are the result of the negligence of the Landlord, and in case any
action or proceeding be brought against Landlord by reason of any such claim,
Tenant upon notice from Landlord covenants to resist or defend such action or
proceeding by counsel reasonably satisfactory to Landlord.
ARTICLE 11.
INSURANCE
a. Fire and Extended Coverage. Tenant shall, as additional rent, at its
sole cost and expense, keep the Premises, including all improvements,
personal property, fixtures and equipment on, in or appurtenant to the
Premises at the commencement of the term and thereafter erected thereon
or therein, including all alterations, rebuildings, replacements,
changes, additions and improvements, fully insured for replacement
value which the parties agree is $2,500,000.00 at the inception of this
Lease, for the benefit of Landlord and Tenant as their respective
interests may appear, against loss or damage by fire and those perils
included from time to time in the standard form of extended coverage
insurance endorsement. All such insurance shall be in amounts at all
times sufficient to prevent Landlord or Tenant from becoming a
co-insured under the terms of the applicable policy. These insurance
provisions shall in no way limit or modify any of the obligations of
Tenant under any provision of this Lease to restore the Premises. Such
insurance shall expressly provide that any losses thereunder shall be
adjusted with Landlord and Tenant pursuant to a standard clause,
without contribution, if obtainable, and Landlord and Tenant, as their
respective interests may appear, but the proceeds of such insurance
shall
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<PAGE> 11
be used for the repair, replacement or restoration of the Premises, as
provided by Article 12.
b. Liability Insurance. Tenant shall also, at its sole cost and expense,
but for the benefit of Landlord and Tenant, maintain comprehensive
general liability insurance against claims for personal injury, death
or property damage occurring upon, in or about the Premises, which
insurance shall afford protection of not less than Three million five
hundred thousand dollars ($3,500,000) with respect to injury, or death
to a single person, of not less than Three million five hundred
thousand dollars ($3,500,000) with respect to injuries or death from
any one accident, and of not less than Two million five hundred
thousand dollars ($2,500,000) with respect to property damage.
c. General Requirements. All policies of insurance maintained by Tenant in
accordance with this Article 11 shall be subject to and governed by the
following:
i. All policies of insurance shall provide that any loss
shall be payable in the event that, and
notwithstanding, any act or omission of Tenant might
otherwise result in a forfeiture or reduction of said
insurance and shall contain a waiver of any right to
subrogation.
ii. All policies of insurance and the form thereof shall
be subject to approval in writing by Landlord. A
certificate of insurance shall be delivered to
Landlord at the commencement of the term and renewal
certificates policies shall be delivered to Landlord
not less than ten (10) days prior to the expiration
of any then current policy. Landlord shall be named
as an additional insured.
iii. It is the intention of the parties that Tenant shall
take out, maintain in force and at all times pay for
and deliver to Landlord all of the policies of
insurance hereinabove referred to at such times and
in such manner so that Landlord shall at all times
during the term be in possession of paid up policies
which are in full force and effect.
iv. Each such policy shall provide that it may not be
canceled, non-renewed, or materially modified as to
the interest of Landlord, except upon thirty (30)
days' prior written notice from the insurance company
to Landlord.
v. Tenant shall not violate or permit any occupant of
the Premises to violate any of the conditions or
provisions of any such policy.
vi. Tenant and Landlord shall cooperate in connection
with the collection of any insurance monies that may
be due in the event of loss, but at the sole expense
of Tenant, and Tenant shall execute and deliver to
Landlord such
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<PAGE> 12
proof of loss and other instruments as may be
required for the purpose of obtaining the recovery of
any such insurance monies.
vii. The premiums of all transferable insurance policies
in force at the termination of the term shall be
apportioned as between Landlord and Tenant in such
manner that Landlord shall reimburse Tenant for that
portion of the aggregate premiums unearned on all
such policies in force at the expiration of the term.
d. Waiver of Claims and Subrogation. Notwithstanding any other provisions
in this Lease to the contrary, Landlord and Tenant hereby release one
another from any and all liability or responsibility (to the other or
anyone claiming through or under them by way of subrogation or
otherwise) for any loss or damage covered by property insurance or
coverable by a customary policy of the insurance required by Article
11(a) or Article 11(b) (whichever is applicable), even if such loss or
damage shall have been caused by the fault or negligence of the other
party, or anyone for whom such party may be responsible.
ARTICLE 12.
DESTRUCTION
a. Partial or Total Destruction. In the event that the Premises shall be
damaged during the initial term of this Lease or at any time during an
extended term of this Lease so that fifty (50%) percent of the usable
space of the Premises shall be rendered unusable, Landlord shall have
the option of terminating this Lease unless Tenant agrees to continue
to pay the rent set forth in the Lease and agrees to restore the
Premises with the insurance proceeds. Regardless of whether such damage
is due to the fault, negligence, act or omission of Tenant, its
employees, agents or servants, licensees or invitees, Tenant shall also
have the option of terminating this Lease if there are insurance
proceeds available for the benefit of the Landlord. Upon termination by
either party, Landlord shall retain the right to receive payments under
the business interruption insurance as provided for in Article 11
herein for the balance of the term of this Lease Agreement. In the
event of a total or partial destruction of the Premises or any portion
thereof during the term of this Lease by any cause or risk including
those covered by any policy of insurance referred to in Article 11
above, Tenant shall give to Landlord prompt notice thereof and Tenant,
as long as it continues to pay the rent set forth in the Lease, shall
notwithstanding the foregoing, have the option, at its sole cost and
expense, whether or not insurance proceeds shall be sufficient for that
purpose, and regardless of the amount of any such destruction, to
forthwith repair, replace and rebuild the same at least to the extent
of the value thereof existing immediately prior to such occurrence,
provided such repairs, replacement or rebuilding can be done in
accordance with then existing laws and regulations. All such repairs,
replacement or rebuilding shall be performed in a good and workmanlike
manner and in compliance with all then existing laws and regulations,
and Landlord shall in no event be called upon to repair, replace or
rebuild the Premises or any portion thereof.
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b. Notice to Landlord. At least ten (10) days before the commencement of
such repairs, replacement or rebuilding, Tenant shall notify Landlord
of its intention to commence the same.
c. Application of Insurance Proceeds. For the purpose of payment toward
the cost of such repairs, replacement or rebuilding from time to time
(but not more frequently than once in each month), Landlord shall make
available and pay all net sums received under insurance policies
covering such loss, as provided in Article 11 above either: (a) to the
parties whom Tenant may employ to repair, replace, or rebuild same as
such repairs, replacements, or rebuilding shall progress, or (b) to
Tenant if Tenant shall make or pay for such repairs, replacements, or
building. In either case, Landlord shall pay said insurance proceeds
periodically as work and materials are actually incorporated in the
Premises. If the net amount of such insurance proceeds shall be
insufficient for the purpose of effecting repairs, replacement or
rebuilding of all such damaged or destroyed improvements, Tenant shall
pay the additional sums required, and if the amount of such insurance
proceeds shall be in excess of the cost thereof, the excess shall be
paid to and be retained by Tenant. If the Lease is terminated by either
Landlord or Tenant, the insurance proceeds shall be subject to the
rights of the holder of any mortgage to which this Lease is or shall be
subject and subordinate.
d. Rights of Landlord. Upon receiving notification from Tenant, if the
work of repairing, replacing, or rebuilding such damaged or destroyed
building, improvements, furniture or equipment or construction of a new
building shall not be commenced within a reasonable time from the date
of any such loss, destruction or damage, or after commencement thereof
shall not be expeditiously proceeded with to completion and Tenant has
ceased paying rent under the terms of the Lease. Landlord shall have
the right to cancel and terminate this Lease by giving to Tenant not
less than thirty (30) days' notice of intention to do so.
ARTICLE 13.
CONDEMNATION
a. Condemnation Defined. The term "condemnation", as used in this Lease,
shall mean the exercise of the power of eminent domain by any person,
entity, body, agency or authority, or private purchase in lieu of
eminent domain, and the date of condemnation shall mean the day on
which the actual physical taking of possession pursuant to the exercise
of said power of eminent domain, or private purchase in lieu thereof,
occurs or the date of settlement or compromise of the claims of the
parties hereto during the pendency of this exercise of said power,
whichever occurs first, and property is deemed "condemned" on said
date.
b. Landlord's Right to Collect Proceeds. In the event the Premises or any
part thereof shall be taken in condemnation proceedings, Landlord shall
be entitled to collect the entire award made in any such proceedings
without deduction therefrom for any estate hereby
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vested in or owned by Tenant subject to Tenant's rights as hereinafter
set forth. Tenant agrees to execute any and all further documents that
may be required in order to facilitate collection by Landlord of any
and all such awards. Tenant and any person or entity, having an
interest in Tenant's share of the award, in cooperation with Landlord,
shall have the right to participate in any condemnation proceedings or
agreement as aforesaid for the purpose of protecting Tenant's interests
hereunder.
c. Total Taking. If at any time during the term of the Lease the whole or
substantially all of the Premises shall be so taken or condemned, this
Lease shall terminate and expire on the date upon which title shall
vest in the condemning authority, and the rent provided to be paid by
Tenant shall be apportioned and paid to such date. For the purposes of
this Section, "substantially all of the Premises" shall be deemed to
have been taken if the portion of the Premises not so taken, and taking
into consideration the amount of the net award available for such
purposes, cannot be so repaired or rebuilt as to constitute a complete,
rentable structure suitable for continuing the use to which Tenant was
putting the Premises prior to such taking and capable of producing a
proportionately fair and reasonable net annual income after payment of
all operating expenses thereof, the net rent, as the same may be
reduced as a result of such taking, additional rent and all other
charges payable hereunder, and after performance of all covenants,
agreements, terms and provisions herein and by laws provided to be
performed and paid by Tenant.
d. Distribution of Award. In the event of a taking, which shall result in
the termination of this Lease, the rights of Landlord and Tenant in any
award shall be as follows and in the following order of priority:
i. There shall first be paid to the holder of any
mortgage on the Premises (regardless of whether this
Lease is or shall be subject and subordinate to said
mortgage) the unpaid balance of principal and
interest due on such mortgage.
ii. Landlord shall then retain that part of the award
attributable to the land and improvements (reduced by
any payment to a mortgagee under (a) above), and
consequential and severance damages for the value of
Landlord's interest in the remaining term of this
Lease.
iii. Tenant shall be entitled to receive the balance of
the award, if any.
e. Partial Taking. In the event of a partial taking which shall not result
in the termination of this Lease, Landlord shall promptly proceed to
repair, rebuild or restore the remainder of any building on the
premises affected thereby to a complete and self-contained
architectural unit, for the purposes and uses to which Tenant was
putting the Premises before the taking. However, if the aforementioned
taking renders the Premises unsuitable for Tenant's use, Tenant may
terminate this Lease as of the date when Tenant is required to yield
possession.
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ARTICLE 14.
ASSIGNMENT AND SUBLETTING
a. Prohibition Against Assignment. Subject to 14.b. below, Tenant shall
not assign, hypothecate or pledge this Lease or sublet the whole of the
Premises either voluntarily or by operation of law without the prior
written consent of Landlord; and such consent shall not be unreasonably
withheld. Any such assignment or subletting not provided for below,
without Landlord's prior written consent shall be void and, at
Landlord's option, shall terminate this Lease. Any assignment or
transfer of this Lease shall not be effective unless the assignee or
transferee shall, at the time of such assignment or transfer, assume in
writing all the terms, covenants and conditions of this Lease
thereafter to be performed by the Tenant, and shall agree in writing to
be bound thereby. Tenant specifically understands and agrees that any
assignment or sublease shall in no way release (unless by written
agreement with Landlord) the Tenant from any of its obligations and
covenants under this Lease, nor should said assignment or sublease be
construed or taken as a waiver of any of Landlord's rights or remedies
hereunder against or as relating to Tenant. In order for Landlord to
consider an assignment or sublease, Tenant shall provide the following:
i. Tenant shall give Landlord a twenty (20) day prior
written notice of its desire to assign or sublet,
which notice shall include reliable information,
including but not limited to, the name of the
proposed assignee or sublessee, its financial
responsibility evidenced by financial statements
and/or credit reports, a description of its business
activities and specific terms as to the assignment or
sublease agreement including rental, term and the
date said assignment or sublease is to take effect.
Tenant shall comply with all reasonable requests of
Landlord for additional information.
ii. Provided Landlord submits a preliminary approval of
such assignment or sublet, such consent shall be
conditioned upon the delivery to the Landlord within
ten (10) days after such preliminary approval of two
executed copies of the assignment which shall include
an assumption by the assignee, from and after the
effective date of the assignment of the performance
and observance of the covenants and conditions of
this Lease contained on Tenant's part to be performed
and observed, or should a sublease be involved, two
executed copies of the sublease agreement which shall
include an agreement on the part of the subtenant to
be obligated, from and after the effective date of
the sublease, to the performance and observance of
the covenants and conditions of this Lease contained
on Tenant's part to be performed and. observed.
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b. Permitted Assignments.
i. The provisions of this Articles shall not be deemed
to prohibit (1) transfers of stock among existing
stockholders or among spouses, children or
grandchildren of existing stockholders or inter vivos
or testamentary transfers to trusts established for
the benefit of such persons, (2) a public offering of
the stock of Tenant, (3) the transfer of outstanding
stock which are traded on a recognized securities
exchange or (4) a transfer of all of Tenant's stock
to any one person or entity.
ii. Tenant may assign this lease or sublease the entire
demised premises to a parent, affiliate or wholly
owned subsidiary of Tenant or to any entity with
which or into which Tenant may consolidate or merge
or to whom all or substantially all of the assets of
Tenant are sold or transferred.
c. Landlord Assignment. Landlord may assign his interest in this Net Lease
Agreement without the consent of the Tenant.
ARTICLE 15.
SECURITY INTEREST
Purchase Money Security Interest. Landlord's lien and security interest
is and shall remain subject and subordinate to any lien securing bona
fide purchase money financing of any of the property in question in
favor of a party unaffiliated with Tenant. Landlord shall not have any
lien for performance of any obligations of Tenant upon any fixtures,
machinery or equipment, or goods, wares or merchandise or other
personal property, and Landlord hereby expressly waives the provisions
of any law giving to it such a lien. Landlord agrees that if any lender
to which Tenant shall grant a security interest in the aforesaid
fixtures, machinery, equipment, goods, wares, merchandise and/or other
personal property shall request that Landlord confirm that it has
waived any lien which Landlord may have thereupon by operation of law
for the performance of any obligations of Tenant hereunder, Landlord
shall promptly execute and deliver to Tenant any instrument so
requested of it.
ARTICLE 16.
EVENTS OF DEFAULT: REMEDIES
a. Events of Default. Each of the following events shall be a default
hereunder by Tenant and a breach of this Lease:
i. If Tenant shall file a petition in bankruptcy or
insolvency or for reorganization or arrangement under
the bankruptcy laws of the United States or any
insolvency act of any state or shall voluntarily take
advantage
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of any such law or act by answer or otherwise or
shall be dissolved or shall make an assignment for
the benefit of creditors.
ii. If involuntary proceedings under any such bankruptcy
law or insolvency act shall be instituted against
Tenant or if a receiver or trustee shall be appointed
for all or substantially all of the property of
Tenant, and such proceedings shall not be dismissed
or such receivership or trusteeship vacated within
sixty (60) days after institution or appointment.
iii. If Tenant shall fall to pay Landlord any rent or
additional rent as and when the same shall become due
and payable and shall not make such payment within
five (5) days after notice thereof.
iv. If Tenant shall vacate or abandon the Premises.
v. If this Lease or the estate of Tenant hereunder shall
be transferred to or shall pay to or evolve upon any
other person or party, except in a manner permitted
under Article 14 hereof.
vi. If Tenant shall make an assignment for the benefit of
creditors or shall apply for or consent to the
appointment of a receiver for itself or any of its
property.
vii. If Tenant shall fail to keep, observe or perform any
of the other covenants and agreements herein
contained to be kept, observed and performed by
Tenant, and such failure, relative to a condition
which poses a risk of imminent harm to persons or
property shall continue for ten (10) days or sooner
if such condition requires immediate remedial action,
after notice thereof in writing to Tenant by
Landlord, or relative to a nonhazardous condition
which shall continue for thirty (30) days after
notice thereof in writing, to Tenant by Landlord,
provided, however, should remedial activity on the
part of Tenant reasonably require a period in excess
of the said period provided, Tenant shall not be
considered to have committed an event of default
provided it diligently pursues said remedial activity
for a reasonable period of time as may be required as
long as it diligently pursues such remedial activity.
b. Remedies. Upon the occurrence and continuance of Tenant's Event of
Default for failure to pay Rental when due, Landlord shall give Tenant
ten (10) days' written notice that Tenant's Event of Default has
occurred, specifying Tenant's Event of Default and the action required
necessary to cure Tenant's Event of Default. Upon the occurrence and
continuance of Tenant's Event of Default other than the failure to pay
Rent when due, Landlord shall give Tenant thirty (30) days' written
notice of Tenant's Event of Default, specifying Tenant's Event of
Default and the action required to cure Tenant's Event of
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Default. If Tenant fails to cure Tenant's Event of Default within the
time provided to cure, Landlord may resort to any and all legal
remedies or combination of legal remedies which Landlord may desire to
assert including but not limited to Landlord re-entering the Premises
by any lawful means, and removing all persons and chattels therefrom
and Landlord shall not be liable for damages or otherwise by reason of
re-entry or termination. Notwithstanding such termination, the
liability of Tenant for the rent provided for hereinabove shall not be
extinguished for the balance of the term remaining after said
termination.
Should termination of Tenant's estate occur as herein provided, or
should Landlord take possession pursuant to legal proceedings or
pursuant to any notice provided by law, it may either terminate this
lease or it may from time to time without terminating this Lease, make
such alterations and repairs as may be necessary in order to relet the
premises, and relet said premises or any part thereof for such term or
terms (which may be for a term extending beyond the term of this lease)
and at such rental or rentals and upon such other terms and conditions
as reletting, all rentals received by Landlord from such reletting,
shall be applied, first, to the payment of any indebtedness other than
rent due hereunder from Tenant to Landlord; second, to the payment of
any costs and expenses of such reletting including, brokerage fees and
attorneys' fees and of costs of such alterations and repairs; third, to
the payment of rent due and unpaid hereunder, and the residue, if any,
shall be held by Landlord and applied in payment of future rent as the
same may become due and payable hereunder.
If such rentals received from such reletting during any month be less
than that to be paid during that month by Tenant hereunder, Tenant
shall pay any such deficiency to Landlord. Such deficiency shall be
calculated and paid monthly. No such re-entry or taking possession of
said premises by Landlord shall be construed as an election on its part
to terminate this lease unless a written notice of such intention be
given to Tenant or unless the termination thereof be decreed by a court
of competent jurisdiction.
Notwithstanding any such reletting without termination, Landlord may at
any time thereafter elect to terminate this lease for such previous
breach. Should Landlord at any time terminate this lease for any
breach, in addition to any other remedies it may have, it may recover
from Tenant all damages it may incur by reason of such breach,
including the worth at the time of such termination of the excess, if
any, of the amount of rent and charges equivalent to rent reserved in
this lease for the remainder of the stated term over the then
reasonable rental value of the Premises for the remainder of the stated
term, all of which amounts shall be immediately due and payable from
Tenant to Landlord. In determining the rent which would be payable by
Tenant hereunder, subsequent to default, the rent for the unexpired
term shall be equal to the base monthly rent, for each remaining month
plus Tenant's share of taxes, insurance, and maintenance from the
commencement of the term to the time of default. Upon termination of
the Lease, Tenant shall surrender possession and vacate the Premises
immediately, and deliver possession thereof to Landlord.
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<PAGE> 19
c. Cure of Default. If Tenant defaults in the making of any payment, or in
the doing of any act herein required to be made or done by Tenant, or
does or suffers any act prohibited herein, then Landlord may, but shall
not be required to, make such payment or do such act, or correct any
damage caused by such prohibited act and to enter the Premises as
appropriate in connection therewith, and the amount of the expense
thereof, if made or done so by Landlord, with interest thereon at the
Interest Rate (as hereinafter defined) from the date paid by Landlord,
shall be paid by Tenant to Landlord and shall constitute additional
rent hereunder due and payable with the next monthly installment of
rent; but the making of such payment or the doing of such act by
Landlord shall not operate to cure such default or to estop Landlord
from the pursuit of any remedy of which Landlord would otherwise be
entitled.
d. Landlord's Default. Should Landlord be in default under the terms of
this lease, Landlord shall have reasonable and adequate time in which
to cure the same after written notice to Landlord by Tenant.
e. Waiver of Redemption. Tenant hereby expressly waives, to the full
extent waivable, any and all rights or redemption granted by or under
any present or future laws in the event of Tenant being evicted or
dispossessed for any cause, or in the event of Landlord obtaining
possession of the Premises, by reason of the violation of Tenant of any
of the covenants or conditions of this lease, or otherwise.
f. Remedies Cumulative. No remedy herein or otherwise conferred upon or
reserved to Landlord or Tenant shall be considered to exclude or
suspend any other remedy, but the same shall be cumulative and shall be
in addition to every other remedy given hereunder now or hereafter
existing at law or by statute and every power and remedy given by this
Lease to Landlord or Tenant may be exercised from time to time and as
often as occasion may arise or may be deemed expedient. No delay or
admission of Landlord or Tenant to exercise any right or power arising
from any event of default shall impair any such right or power or shall
be construed to be a waiver of any such event of default or
acquiescence therein.
g. Miscellaneous. If any installment of rent is not paid by Tenant within
five days after the same becomes due and payable: (i) a late charge in
the amount of $100.00 shall become immediately due and payable as
compensation to Landlord for administrative costs; and (ii) the unpaid
balance due Landlord shall bear interest at the Interest Rate from the
date such installment became due and payable to the date of payment
thereof by Tenant, and such interest shall constitute additional rent
hereunder which shall be immediately due and payable. The "Interest
Rate" as used herein means four (4) points over the rate of interest
publicly announced from time to time by Norwest Bank Minneapolis N.A.
as its "prime rate", "base rate" or "reference rate", (or if more than
one exist, whichever is highest) each change in the interest rate
hereunder to become effective on the date the corresponding change in
such prime rate becomes effective.
-19-
<PAGE> 20
ARTICLE 17.
SURRENDER OF PREMISES
Tenant shall, upon the expiration or earlier termination of this Lease,
peaceably vacate and surrender the Premises to Landlord In good order, condition
and repair. reasonable wear and tear excepted. Tenant shall leave the Premises
and appurtenances thereto free and clear of rubbish and broom clean.
ARTICLE 18.
SUBORDINATION
a. Definition of Mortgage. For the purposes of this Article, the term
"Mortgage" shall mean at any time, any mortgage of record now or
hereafter placed against the Premises, any increase, amendment,
extension, refinancing or recasting of a Mortgage and, in the case of a
sale or lease and leaseback by Landlord of all or any part of the
Premises, the lease creating the leaseback. For the purposes hereof, a
Mortgage shall be deemed to continue in effect after foreclosure
thereof and during the period of redemption therefrom.
b. Subordination of Lease. As long as there is an executed Subordination,
Non-Disturbance and Attornment Agreement between the Landlord, Tenant
and any Mortgagee, this Lease is subject and subordinate to the lien of
any Mortgage which may now or hereafter encumber the Premises or any
development of which the Premises is a part. In confirmation of such
subordination., Tenant shall, at Landlord's request from time to time,
promptly execute any certificate or other document requested by the
holder of the Mortgage. Tenant agrees that in the event that any
proceedings are brought for the foreclosure of any Mortgage, Tenant
shall immediately and automatically attorn to the purchaser at such
foreclosure sale, as Landlord under this Lease, and Tenant waives the
provisions of any statute or rule of law, nor or hereafter in effect,
which may give or purport to give Tenant any right to terminate or
otherwise adversely affect this Lease or the obligations of Tenant
hereunder in the event that any such foreclosure proceeding is
prosecuted or completed. Neither the holder of the Mortgage (whether it
acquires title by foreclosure or by deed in lieu thereof) nor any
purchaser at foreclosure sale shall be liable for any act or omission
of Landlord, subject to any offsets or defenses which Tenant might have
against Landlord or bound by any prepayment by Tenant of more than one
month's installment of Base Rent and additional rent or by any
modification of this Lease made subsequent to the granting of the
Mortgage.
ARTICLE 19.
CERTIFICATES BY TENANT AND LANDLORD
a. Certificate by Tenant. Tenant shall, at any time and from time to time,
upon not less than twenty (20) days' prior notice by Landlord, execute
and acknowledge to Landlord a statement in writing certifying that this
Lease is unmodified and in full force and effect (or if there shall
have been modifications that the Lease is in full force and effect as
-20-
<PAGE> 21
modified and stating the modifications), and the dates to which the
base rent and the additional rent have been paid, and stating whether
or not to the best knowledge of the signer of such certificate,
Landlord is in default in keeping, observing or performing any term,
covenant, agreement, provision, condition or limitation contained in
this Lease, and, if in default, specifying each such default of which
the signer may have knowledge, it being intended that any such
statement delivered pursuant to this Article 19(a) may be relied upon
by Landlord or any prospective purchaser of the fee or any mortgage
thereto or any assignee of any mortgage upon the fee of the Premises,
but reliance on such certificate may not extend to any default of
Landlord as to which the signer for Tenant shall have had no actual
notice.
b. Certificate by Landlord. Landlord shall, at any time and from time to
time, upon not less than twenty (20) days' prior notice by Tenant
execute and acknowledge to Tenant a statement in writing, certifying
that this Lease is unmodified and in full force and effect (or if there
shall have been modifications that the Lease is in full force and
effect as modified and stating the modifications), and the dates to
which the base rent and additional rent have been paid, and stating
whether or not, to the best knowledge of the signer of such
certificate, Tenant is in default in keeping, observing or performing
any term, covenant, agreement, provision, condition, or limitation
contained in this Lease, and if in default, specifying each such
default of which the signer may have knowledge, it being intended that
any such statement delivered pursuant to this Article 19(b) may be
relied upon by any prospective assignee of Tenant's interest in this
Lease, any prospective sublessee of the entire Premises or any
mortgagee of this Lease or of any sublease of the entire Premises, or
any assignee of any mortgage upon the leasehold estate created hereby
or by any sublease, but reliance on such certificate may not extend to
any default of Tenant as to which the signer for Landlord shall have
had no actual knowledge.
ARTICLE 20.
NOTICE
All notices or demands which shall be required or permitted by law or
any provisions of this Lease shall be sent by United States certified mail,
postage prepaid, to the addresses set out below for Landlord and Tenant, and
such notices shall be properly given if directed to those addresses until
notices given in the manner described above to change such address.
To Tenant: Service One International Corporation
3401 North Louise Avenue
Sioux Falls, SD 57107
To Landlord: Donald A. Dunham, Jr.
Commercial Division, Commerce Center
200 North Phillips Avenue, Suite 202
Sioux Falls, SD 57102
-21-
<PAGE> 22
ARTICLE 21.
WAIVER
Failure of Landlord to insist upon the strict performance of any or all
of the terms or conditions herein shall not constitute, nor be construed as, a
waiver of Landlord's right to thereafter enforce any such terms or conditions,
but the same shall continue in full force and effect.
ARTICLE 22.
HOLDING OVER
In the event Tenant shall continue to occupy the Premises after the
expiration of the term hereof, such holding over shall not operate to extend or
renew this Lease, but shall be construed as a tenancy from month to month which
may be terminated by either party upon thirty (30) days, prior written notice.
Such month-to-month tenancy by Tenant shall be subject to all the terms and
provisions of this Lease.
ARTICLE 23.
COVENANTS
a. Covenant of Faithful Performance. It is mutually agreed that this Lease
is made upon and subject to the terms, covenants, and conditions herein
contained, and that Tenant covenants, as a material part of the
consideration for this Lease, to keep and perform each and all of said
terms, covenants and conditions to be kept and performed by it and that
this Lease is made upon the condition of such performance.
b. Provisions Deemed Covenants and Conditions. The parties hereto agree
that all the provisions hereof are to be construed as covenants and
conditions as though the words imparting such covenants and conditions
were used in each instance.
ARTICLE 24.
OPTION TO RENEW
a. Term. Tenant shall have the option to renew this lease upon the
expiration of the initial term for two additional terms of five (5)
years each.
b. Rental Adjustment During Renewal Terms. If Tenant exercises a renewal
option to extend the term of this Lease, the annual Base Rent during
the renewal term shall be equal to the annual Base Rent as in effect at
the end of the initial term plus any increase as determined in
accordance with the provisions of this Section. Annual Base Rent for
the renewal terms shall be based on the percentage of change in the
Consumer Price Index for Urban Wage Earners and Clerical Workers (All
Items Category) (1982-1984 = 100), as published from time to time by
the Bureau of Labor Statistics of the United States
-22-
<PAGE> 23
Department of Labor ("Consumer Price Index"), or if such Index is not
published, a similar index agreed upon by Landlord and Tenant.
The annual Base Rent for the first renewal term shall be calculated by
first determining the percentage change in the Consumer Price Index
between the date occurring sixty (60) days prior to September 21, 1996,
and the date occurring sixty (60) days prior to fifteenth annual
anniversary date of the term. The result, or ten percent (10%),
whichever is less, shall then be applied to the annual Base Rent in
effect immediately prior to the first renewal term. The result of the
calculation, when added to the annual Base Rental in effect immediately
prior to the fifteenth annual anniversary date, shall be the annual
Base Rent for the first renewal term.
The annual Base Rent for the second renewal term shall be calculated by
first determining the percentage change in the Consumer Price Index
between the date occurring sixty (60) days prior to the fifteenth
annual anniversary date of the term and the date occurring sixty (60)
days prior to the twentieth annual anniversary date of the term. The
result, or ten percent (10%), whichever is less, shall then be applied
to the annual Base Rental in effect during the first renewal term. The
result of the calculation, when added to the annual Base Rent in effect
during the first renewal term, shall be the annual Base Rent for the
second renewal term.
c. Notice of Exercise. If Tenant desires to exercise this option to renew
this lease, it shall provide written notice of that fact to Landlord no
later than ninety (90) days prior to the expiration of the initial term
of this lease.
ARTICLE 25.
GENERAL PROVISIONS
a. Captions. The captions of the Articles of this Lease are for
convenience only and are not a part of this Lease, and do not in any
way limit or amplify the terms or provisions of this Lease.
b. Successors and Assigns. Subject to the provisions hereof, this Lease
shall bind and inure to the benefit of the parties hereto and their
respective successors and assigns.
c. Attorney's Fees. In the event either of the parties hereto commences
any action or proceeding against the other under or on account of this
Lease, then and in each such event, the successful party in such action
or proceeding shall be entitled to receive, and the parties hereto
respectively agree to pay, a reasonable attorneys' fee on account of
such action or proceeding.
d. Construction. The language in all parts of this Lease shall be in all
cases construed according to its fair meaning and not strictly for or
against Landlord or Tenant.
-23-
<PAGE> 24
If any term, covenant, condition or provision of this Lease is held by
a court of competent jurisdiction to be invalid. void or unreasonable,
the remainder of the provisions hereof shall remain in full force and
effect and shall in no way be affected, impaired or invalidated
thereby.
The parties intend that the obligations herein of Tenant are the Joint
and several obligations of the corporation and the Guarantors named in
attached Lease Guaranty.
e. Force Majeure. Whenever a period of time is herein provided for either
party to do or perform any act or thing, that party shall not be
liability or responsible for any delays, and applicable periods for
performance shall be extended accordingly, due to strikes, lockouts,
riots, acts of God, shortages of labor or materials, national
emergency, acts of a public enemy, governmental restrictions, laws or
regulations, or any other cause or causes, whether similar or
dissimilar to those enumerated, beyond its reasonable control. The
provisions of this paragraph shall not operate to excuse Tenant from
prompt payment of rent, additional rent or other monetary payments
required by the terms of this Lease.
f. Law Governing. This Lease shall be governed by and construed in
accordance with the laws of the State of South Dakota.
g. Landlord Rules and Regulations. Tenant and its employees shall observe
and comply with any reasonable rules and regulations that Landlord or
Landlord's agents may from time to time adopt for the Premises and that
are applicable to Tenant provided Tenant has received notice of such
rules and regulations pursuant to the notice provisions of Article 20
hereof.
h. Initial Tenant Covenant. Tenant covenants and warrants that it has full
right and lawful authority to enter into this Lease for the full term
herein granted and for any and all extensions herein provided.
i. Entire Agreement. This Lease, together with any written modifications
or amendments hereto, hereinafter entered into, shall constitute the
entire agreement between the parties relative to the subject matter
hereof and shall supersede any prior agreements or understandings,
whether written or oral, which the parties may have had relating to the
subject matter hereof. No subsequent alteration, amendment, change or
addition to this Lease shall be binding upon Landlord or Tenant unless
reduced to writing and signed by them. Tenant shall not record this
Lease without Landlord's written consent.
j. Counterparts. This Lease may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
k. Consent of Landlord. Wherever in this Lease the consent of Landlord is
required, it is agreed that such consent will not be unreasonably
withheld and will be promptly
-24-
<PAGE> 25
considered, and in the event Landlord does not refuse to grant such
consent in writing within thirty (30) days after request by Tenant
thereof, the same shall be deemed to have been given.
l. Tenant Financial Statements. On an annual basis, Tenant hereby agrees
to provide to Landlord a copy of its audited financial statements.
m. Brokerage Commission. Landlord will pay the brokerage commission payable in
connection with this Lease.
IN WITNESS WHEREOF, the parties hereto have executed this Net Lease
Agreement as of the day and year first above written.
LANDLORD TENANT
/s/ Donald A. Dunham, Jr. Service One International Corporation
----------------------------
Donald A. Dunham, Jr.
By /s/ Martin Burke
----------------------------
Its President
------------------------
-25-
<PAGE> 26
Exhibit A
The Plans and Specifications as identified in paragraph 1(c)
of the Amended and Restated Lease Agreement are entitled "A
Dunham Development Project -- Service One Addition" and
consist of 15 pages with such pages being identified as
follows:
Sheet Index
Civil Engineering Drawing
Cl Site Plan/Landscaping - 09/05/96
Architectural Drawings
T1 Title Page - 10/01/96
Al Floor Plan - 10/01/96
A2 Schedules/Details - 12/02/96
A3 Exterior Elevations - 10/01/96
A4 Wall Sections - 10/01/96
A5 Wall Sections - 10/01/96
Structural Drawings
S1 Foundation Plan - 9/10/96
S2 Foundation Details - 9/10/96
S3 Roof Framing Plan - 9/19/96
S4 Roof Framing Details - 9/19/96
E1 Electrical Lighting - 11/7/96
E2 Power & Signal - 11/7/96
M1 HVAC - 10/2/96
M2 Plumbing - 10/2/96
-26-
<PAGE> 1
AMENDMENT NO. ONE
TO AMENDED AND RESTATED LEASE AGREEMENT
BETWEEN SERVICE ONE INTERNATIONAL CORPORATION
AND DONALD A. DUNHAM, JR.
THIS AMENDMENT NO. ONE to the AMENDED AND RESTATED LEASE AGREEMENT, by and
between Donald A. Dunham, Jr. ("Landlord") and Service One International
Corporation, ("Tenant"), this 11 day of June, 1997.
W I T N E S S E T H:
WHEREAS, the Landlord and Tenant have previously executed an Amended and
Restated Lease Agreement dated ______, 1996; and
WHEREAS, subsequent to the execution of such Amended and Restated Lease
Agreement, Tenant has requested Landlord to provide certain improvements to the
facilities and to construct a parking lot for use by Tenant; and
WHEREAS, Tenant has agreed to pay to Landlord an initial cash payment of
$25,000 for such services provided by Landlord; and
WHEREAS, Tenant has further agreed to pay the remaining costs of such
services as additional rent under the Amended and Restated Lease Agreement; and
WHEREAS, the Landlord and Tenant now desire to amend the Amended and
Restated Lease Agreement to reflect the additional rent payments as agreed upon
by the Landlord and Tenant.
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is hereby agreed as follows:
1. Landlord and Tenant hereby agree to amend the Amended and Restated Lease
Agreement by adding the following new paragraph to ARTICLE 3 to read as follows:
d. Additional Rent for Improvements. Tenant covenants and agrees to pay to
Landlord, as additional base rent at Landlord's address as specified and
designated by Landlord from time to time, without any prior notice
therefrom, a monthly additional rent of $5,051.66 commencing on August 1,
1997. This additional monthly rent shall be paid in advance on the first of
each and every month beginning August 1, 1997, and shall terminate on July
31, 2002. Tenant also hereby agrees to execute a Corporate Guaranty for the
Promissory Note to be executed by Landlord to secure financing for the
tenant improvements requested by Tenant.
2. All the provisions of the Amended and Restated Lease Agreement are
hereby ratified and affirmed.
<PAGE> 2
Dated in Sioux Falls, South Dakota, this 11th day of June, 1997.
LANDLORD TENANT
/s/ Donald A. Dunham, Jr. Service One International Corporation
- - - ----------------------------------
Donald A. Dunham, Jr.
By [Illegible]
----------------------------------
Its President
STATE OF SOUTH DAKOTA )
:ss
COUNTY OF MINNEHAHA )
On the 16 day of June, 1997, before me, the undersigned officer, personally
appeared Donald A. Dunham, Jr. who acknowledged himself to be the President of
Dunham Property management, Inc., a corporation, and that as such President,
being authorized so to do, executed the foregoing instrument for the purpose
therein contained, by signing the name of the corporation by himself as
President.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ [Illegible]
-----------------------------------
Notary Public - South Dakota
My Commission Expires: May 23, 2002
------------
STATE OF SOUTH DAKOTA )
:ss
COUNTY OF MINNEHAHA )
On the 11th the day of June, 1997, before, the undersigned officer,
personally appeared Kevin Riordan, who acknowledged himself to be the Authorized
Agent of Service One International Corporation, a corporation, and that as such
Authorized Agent, being authorized so to do, executed the foregoing instrument
for the purpose therein contained, by signing the name of the corporation by
himself as Authorized Agent.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Nancy Batson
-----------------------------------
Notary Public - South Dakota
My Commission Expires: 21 January 2000
---------------
<PAGE> 1
AMENDMENT NO. TWO
TO AMENDED AND RESTATED LEASE AGREEMENT
BETWEEN SERVICE ONE INTERNATIONAL CORPORATION
AND DONALD A. DUNHAM, JR.
THIS AMENDMENT NO. TWO to the AMENDED AND RESTATED LEASE AGREEMENT, by
and between Donald A. Dunham, Jr. ("Landlord") and Service One International
Corporation, ("Tenant"), is entered into this 31st day of July, 1997.
W I T N E S S E T H:
WHEREAS, the Landlord and Tenant have previously executed an Amended
and Restated Lease Agreement dated December 12, 1996; and
WHEREAS, subsequent to the execution of such Amended and Restated Lease
Agreement, Landlord and Tenant entered into Amendment No. 1 to the Amended and
Restated Lease Agreement dated June 11, 1997, whereby Tenant agreed to pay
Additional Base Rent to Landlord in that Landlord would provide certain
improvements to the Property and whereby Tenant agreed to guaranty the
Landlord's promissory note ("Note"); and
WHEREAS, subsequent to the execution of such Amended and Restated Lease
Agreement, Landlord has agreed to assign his interest in the Amended and
Restated Lease and any subsequent amendments, thereto, to Sioux Falls Financial
Services, L.L.C; and
WHEREAS, Tenant is not required to consent to such assignment pursuant
to paragraph 14c of the Amended and Restated Lease Agreement; and
WHEREAS, the Landlord and Tenant now desire to amend the Amended and
Restated Lease Agreement to reflect the Landlord as being Sioux Falls Financial
Services, L.L.C.
("New Landlord").
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is hereby agreed as follows:
1. Donald A. Dunham, Jr., has assigned the Amended and Restated Lease
Agreement to Sioux Falls Financial Services, L.L.C. Tenant hereby consents to
the assignment from Landlord to New Landlord.
2. Landlord and Tenant hereby agree to amend the Amended and Restated
Lease by adding a new paragraph n to Article 25 to the Lease.
25(n) Landlord and Tenant hereby agree that Landlord shall be
liable for any Additional Base Rent that has been paid to
Landlord by Tenant but has not been paid on Landlord's Note
and that Tenant may deduct and set off such amounts from
future payments
<PAGE> 2
of Base Rent and Additional Base Rent due under the Lease.
Landlord shall provide to Tenant copies of any default notices
Landlord has received on its Note and Tenant reserves the
right to make Additional Base Rent payments directly to the
holder of the Note, if Landlord is in default under the terms
of the Note.
3. All the provisions of the Amended and Restated Lease Agreement are
hereby ratified and affirmed.
Dated in Sioux Falls, South Dakota, this 31st day of July, 1997.
LANDLORD TENANT
/s/ Donald A. Dunham, Jr. Service One International Corporation
- - - -------------------------------
Donald A. Dunham, Jr.
By /s/ R. M. D. Pasquale
---------------------------------
Its Chief Financial Officer
---------------------------------
NEW LANDLORD
Sioux Falls Financial Services, L.L.C.
By [Illegible]
---------------------------------
Its Managing [Illegible]
---------------------------------
STATE OF SOUTH DAKOTA )
:ss
COUNTY OF MINNEHAHA )
On the 6th day of August, 1997, before me, the undersigned officer,
personally appeared Donald A. Dunham, Jr. who acknowledged himself to be the
President of Dunham Property management, Inc., a corporation, and that as such
President, being authorized so to do, executed the foregoing instrument for the
purpose therein contained, by signing the name of the corporation by himself as
President.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
Craig [Illegible]
---------------------------------
Notary Public - South Dakota
My Commission Expires: May 23, 2002
<PAGE> 3
STATE OF SOUTH DAKOTA )
:ss
COUNTY OF MINNEHAHA )
On the 6th day of August, 1997, before me, the undersigned officer,
personally appeared Ron D. Pasquale, who acknowledged himself to be the
Authorized Agent of Service One International Corporation, a corporation, and
that as such Authorized Agent, being authorized so to do, executed the foregoing
instrument for the purpose therein contained, by signing the name of the
corporation by himself as Authorized Agent.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ [Illegible]
---------------------------------
Notary Public - South Dakota
My Commission Expires: May 23, 2002
STATE OF SOUTH DAKOTA )
:ss
COUNTY OF MINNEHAHA )
On the 6th day of August, 1997, before me, the undersigned officer,
personally appeared Donald A. Dunham, Jr. who acknowledged himself to be the
Authorized Agent of Sioux Falls Financial Services, L.L.C, A South Dakota
limited liability company, and that as such Authorized Agent, being authorized
so to do, executed the foregoing instrument for the purpose therein contained,
by signing the name of the corporation by himself as Authorized Agent.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ [Illegible]
---------------------------------
Notary Public - South Dakota
My Commission Expires: May 23, 2002
<PAGE> 1
LEASE AGREEMENT
THIS LEASE AGREEMENT (this "Lease") is made and entered into this 28th
day of February, 1997, by and between EAGLE PROPERTIES, L.L.C. a South Dakota
limited liability company ("Landlord"), and SERVICE ONE INTERNATIONAL
CORPORATION ("Tenant").
In consideration of the mutual covenants, agreements and undertakings
specified herein, and intending to be legally bound, the parties agree as
follows:
1. DEMISED PREMISES. Landlord hereby leases to Tenant, and Tenant
hereby leases from Landlord, those certain described premises (the "Leased
Premises") which are described on Exhibit A attached hereto, containing
approximately 24,767 square feet. The parties acknowledge that Exhibit A also
describes: (a) the building of which the Leased Premises forms a part (the
"Building"); (b) the real property owned by Landlord upon which the Building is
situated (the "Property"); and (c) those portions of the Building which are
intended for common use by the Landlord and all other tenants of the Building
(the "Common Areas"). The address of the leased premises is 400 South Sycamore
Avenue, Sioux Falls, South Dakota 57110.
2. TERM OF LEASE/RENEWAL OPTION. The term of this Lease shall be for a
period of approximately one (1) years commencing on February 7, 1997, and ending
on February 28, 1998, unless sooner terminated as provided herein.
3. ACCEPTANCE. Except as otherwise specified in this Lease, Tenant
shall take and accept the Leased Premises in its "AS IS" condition. For these
purposes, "AS IS" shall mean that the Leased Premises are in tenantable
condition so that the lights, front and rear doors, HVAC, plumbing and water
and sewer service are in good working order and operating condition. The taking
of possession of the Leased Premises by Tenant shall be conclusive evidence that
Tenant has examined the Leased Premises to Tenant's satisfaction and that the
Leased Premises were, on that day, in good, clean and tenantable condition.
Other than as specified in this Lease, Tenant acknowledges that no
representations as to the repair of the Leased Premises or promises to alter,
remodel or improve the Leased Premises have been made by Landlord.
<PAGE> 2
4. DELAY OF OCCUPANCY. In the event the Leased Premises are not ready
for occupancy or in the event Landlord is for any reason whatsoever unable to
deliver possession of the Leased Premises by the commencement date of this
Lease, Landlord shall not be liable nor responsible for any claims, damages or
liabilities in connection therewith or by reason thereof, and this Lease shall
remain in full force and effect; provided, however, that Tenant shall not be
liable for rent until Landlord delivers possession of the Leased Premises to
Tenant; provided further, however, that the term of this Lease shall not be
extended by any such delay in the commencement of the term of this Lease.
5. ACCESS BY TENANT. Prior to the commencement of the initial term of
this Lease, Tenant shall have the right of access to the Leased Premises for the
purpose of installing Tenant's leasehold improvements thereon or therein,
provided that such installation otherwise conforms with the terms of this Lease
and does not interfere with construction by Landlord and its agents, servants,
and employees.
6. IMPROVEMENTS. Landlord shall, at Landlord's sole cost and expense,
be responsible to complete those improvements to the Leased Premises, the
Common Area and the Building which are specified on Exhibit B attached hereto.
Landlord shall cause such improvements to be constructed in a good and
workmanlike manner, using only new and first class materials and components, all
in accordance with applicable codes, orders, rules, regulations, laws and
ordinances.
7. RENT. Tenant shall pay to Landlord, as minimum gross rent for the
Leased Premises during the entire initial one (1) year term of this Lease, SEVEN
THOUSAND TWO HUNDRED TWENTY THREE DOLLARS AND SEVENTY ONE CENTS ($7,223.71)
each, in advance, on or before the first day of each and every month at the
office of Landlord, or at such other place as Landlord may from time to time
designate. Rent for any partial month at the beginning or end of the term of
this Lease shall be equitably prorated and shall be payable on the commencement
date of this Lease or at the end of the term of this Lease, as the case may be.
All rental and other sums payable hereunder by Tenant which are not
paid when due shall bear interest from the due date thereof to the date of
payment at the rate of eighteen percent (18%) per annum. In addition, Tenant
shall pay Landlord a TWENTY-FIVE DOLLAR ($25.00) service charge for all monthly
minimum rent payments not paid by the tenth (10th) day of the month for which
they are payable. Tenant understands that such charge is a service charge to
cover extra
<PAGE> 3
expense incurred by Landlord in collecting and handling delinquent payments.
8. UTILITIES. Tenant shall be responsible for and shall pay all costs
and expenses incurred with respect to all electricity furnished to the Leased
Premises, together with any and all taxes thereon. Landlord shall be responsible
for and shall pay all costs of heating gas, water and sewer furnished to the
leased premises. Landlord shall not be liable in damages or otherwise to Tenant
or anyone claiming through Tenant if the furnishing by Landlord or any other
supplier of any utilities or other services to the Leased Premises shall be
interrupted or impaired by fire, repairs, accident, or by any other causes
beyond Landlord's control.
9. TAXES. Landlord shall be responsible for and shall pay all real
estate taxes imposed against and assessments levied upon the Leased Premises.
10. HVAC MAINTENANCE AND REPAIR. Landlord shall provide all
maintenance and repairs (both major and minor) to the major systems of the
Properly (including heating, plumbing, mechanical, ventilating, air conditioning
and electrical) and ordinary maintenance and repair of the exterior of the
Building.
11. INSURANCE. Landlord shall provide casualty and extended coverage
insurance for the Building for its full insurable value. Such policy or
policies may contain such other terms and conditions as Landlord deems
appropriate. Tenant shall provide casualty and extended coverage insurance for
any furniture, fixtures, equipment and other items of personal or business
property brought upon the Leased Premises by Tenant for their full insurable
values.
12. COMMON AREA MAINTENANCE. Landlord shall provide all services
required to manage, maintain, repair and operate the Common Areas, including,
but not limited to, the cost of snow removal, garbage collection, exterior
painting, traffic regulations, routine maintenance of and minor repairs to
paving, curbs, sidewalks, landscaping, drainage and lighting facilities.
13. USE OF LEASED PREMISES. The Leased Premises shall be used and
occupied by Tenant solely for the purpose of carrying on Tenant's principal
business operations. Tenant agrees to operate such business at all times in
compliance with all applicable laws, ordinances and governmental regulations.
The Leased Premises shall not be left vacant, but shall at all times be
occupied, maintained and operated
<PAGE> 4
by Tenant for the purpose described herein. Tenant shall store in the Leased
Premises only such goods, wares and merchandise as Tenant intends to use in or
that relate to the normal day-to-day operations of its business.
Tenant shall not, without Landlord's prior written consent, obstruct
the Common Areas or use the same for business or display purposes; nor abuse
the Building, or any other improvements, fixtures or personal property
appurtenant thereto; nor use plumbing for any purpose other than that for which
constructed; nor make or permit any noise or odor on a continuous basis which is
objectionable to the public, to other tenants of the Building, or to the
Landlord; nor create, maintain or permit a nuisance thereon; nor do any act
intending to injure the reputation of the Landlord; nor, without Landlord's
prior written consent, place or permit any radio or television antenna,
loudspeaker or sound amplifier or any other phonographs or other similar devices
outside of the Leased Premises; nor any other place where the same may be seen
or heard outside of the Leased Premises; nor permit any blinking or flashing
light to emit from the Leased Premises.
14. MAINTENANCE AND REPAIR. Landlord shall, at Landlord's expense,
during the entire term of this Lease Agreement, keep the foundations and
exterior walls and roof of the Building in good condition and repair, except
that in the event such repairs are necessitated by or the result from the act or
negligence of the Tenant, its agents, servants and employees, then Tenant shall
be responsible to place such foundations and exterior walls in good condition
and repair. Tenant shall be responsible for the maintenance of and shall, at its
own expense, make all necessary repairs and replacements to the Leased Premises
and to the window glass, fixtures and all other appliances, equipment and
appurtenances thereto, or which are brought upon the Leased Premises in
furtherance of Tenant's purpose under this Lease. All such repairs and
replacements shall be made promptly and when necessary. If Tenant fails to make
any such repairs or replacements, Landlord may, but shall not be required to,
make such repairs and replacements for Tenant's account, and the expense
thereof shall constitute and be collectible as additional rent under the terms
of this Lease. Tenant shall also be responsible for all custodial services
furnished to the Leased Premises.
15. LESSEE'S ALTERATIONS; TRADE FIXTURES AND ADDITIONS. Tenant shall not
make substantial alterations in or additions to the Leased Premises, or make
any contract therefore, without
<PAGE> 5
procuring Landlord's prior written consent. In considering whether to give its
consent, Landlord may request plans and drawings for such alterations, changes,
or repairs, and may also require that sufficient bond be posted to protect the
Leased Premises against the filing of any mechanic's liens or similar
encumbrances. All alterations, additions or improvements (other than Tenant's
separate office or trade fixtures) which may be made or installed by either
Landlord or Tenant upon the Leased Premises shall become the property of
Landlord and shall remain upon and be surrendered with the Leased Premises as a
part thereof, without disturbance, molestation or injury, upon the termination
of this Lease. If, prior to the termination of this Lease, or within fifteen
(15) days thereafter, Landlord so directs by written notice, Tenant shall
promptly remove the additions, improvements, trade fixtures, and installations
which were placed upon the Leased Premises by Tenant, and shall promptly restore
the walls, ceilings, floor, or whatever, to their original condition. The leased
premises are a "smoke free facility". Tenant shall agree to take all reasonable
efforts to enforce this smoking ban with it's employees and guests.
16. RULES AND REGULATIONS. Tenant shall not perform any acts or
carry on any practices which may injure the Leased Premises, the building, or
the Property, or be a nuisance or a menace thereto, or to the public, or to the
other tenants of the Building. Tenant shall keep the Leased Premises, including
any area appurtenant thereto, clean and free from rubbish and dirt at all times
and shall store all trash at the location and in the manner designated by
Landlord. Landlord may establish additional reasonable rules and regulations to
which Tenant agrees to conform.
17. SIGNS. Tenant shall not erect or install any exterior window or
door sign, advertising media or window lettering or placards or other signs, or
install any interior window or door signs, advertising media or window or door
lettering or placards or other signs without first obtaining Landlord's prior
written consent. Tenant shall not install any exterior light or plumbing
fixtures, shades or awnings, or make any exterior decoration changes to the
facade of the Leased Premises without Landlord's prior written consent. Use of
the roof of the Building is reserved to Landlord. Landlord shall provide Tenant
with the right too use a building sign panel on Landlord's existing Tower sign.
The cost of the sign panel installation and rental shall be borne by the Tenant.
The annual cost of the tower sign shall be $360.00 payable to the Landlord. (See
Exhibit C)
<PAGE> 6
18. LIABILITY INSURANCE OF TENANT. Tenant shall, at its own expense,
maintain in effect bodily injury and liability insurance, naming Landlord as a
named or additional insured, in connection with the use of the Leased Premises,
in an amount of not less than $1,000,000.00 for injury to or the death of any
one person in any one accident or occurrence. Insurance required of Tenant
hereunder shall be placed with financially responsible insurance companies duly
authorized to do business in the State of South Dakota. Tenant shall deliver to
Landlord copies of any policies required hereunder, or certificates evidencing
the existence and amounts of such insurance required hereunder, with loss
payable clauses satisfactory to Landlord.
19. INSPECTION AND ENTRY BY LANDLORD. Landlord shall have the right to
enter the Leased Premises at reasonable hours to examine the same for structural
damage and for the purpose of making such repairs or alterations as may be
necessary for the safety and preservation of the Leased Premises, so long as
such examination does not interfere with Tenant's normal business operations or
with the Tenant's furnishings, equipment, books and records. Except in
emergencies, Landlord shall give Tenant three (3) days notice before making any
repair or alteration.
20. EMINENT DOMAIN. In the event the entire Leased Premises are taken
by an exercise of the power of eminent domain, or if such part of the Leased
Premises is taken so as to render the remainder of the Leased Premises unfit for
the purpose for which it is rented, then this Lease shall terminate as of the
date possession is taken by the condemnor. Tenant understands and agrees that it
shall not be entitled to any payments from Landlord due to such taking.
21. DAMAGE OR DESTRUCTION OF THE LEASED PREMISES. In the event the
Leased Premises are destroyed by fire, explosion, windstorm or other casualty,
or shall be so damaged by fire, explosion, windstorm or other casualty as to be
unfit for occupancy, and Landlord fails to exercise its right to terminate this
Lease as set forth hereafter, then Landlord shall promptly repair and restore
the Leased Premises to at least as good a condition as existed immediately prior
to such destruction or damage. In the event such destruction or damage renders
the Leased Premises wholly or partially untenantable: (i) rent and all other
charges payable by Tenant under this Lease shall be abated or equitably
apportioned from and after the date of the destruction or damage until such time
as Tenant resumes full possession of the Leased Premises; (ii) Landlord shall,
provided at least seventy-five percent (75%) of the Leased Premises is
untenantable, have
<PAGE> 7
the right to terminate this Lease, effective as of the time of the destruction
or damage, by written notice to Tenant within fifteen (15) days after the date
of the destruction or damage; and (iii) Tenant shall have the right to terminate
this Lease, effective as of the time of the destruction or damage, by written
notice to Landlord if Landlord fails to repair and restore the Leased Premises
with reasonable dispatch or, even if repair or restoration is proceeding with
reasonable dispatch, if such repair or restoration is not completed within 120
days after the date of the destruction or damage.
22. ASSIGNMENT AND SUBLETTING. Tenant shall not voluntarily or
involuntarily by operation of law assign, transfer, mortgage, sublet or
otherwise transfer or encumber all or any part of Tenant's interest in this
Lease without first obtaining the written consent of Landlord.
23. QUIET ENJOYMENT. Landlord agrees that upon Tenant's compliance with
all of the terms and conditions of this Lease, Tenant shall peacefully and
quietly have, hold and enjoy the Leased Premises for the entire term of this
Lease.
24. DEFAULTS. The occurrence of any one or more of the following events
shall constitute a material default and broach of this Lease by Tenant:
a. The failure by Tenant to make any payment of rent or any
other payment required to be made by Tenant hereunder, as and when due,
where such failure shall continue for a period of five (5) days after
the due date thereof;
b. The failure by Tenant to observe or perform any other
covenant, condition or provision of this Lease to be observed or
performed by Tenant, which such failure shall continue for a period of
fifteen (15) days after written notice thereof from Landlord to Tenant;
provided, however, that if the nature of Tenant's default is such that
more than fifteen (15) days are reasonably required for its cure, then
the Tenant shall not be deemed to be in default if Tenant commences
such cure within said fifteen (15) day period and thereafter diligently
pursues such cure to completion; or
C. (i) The making by Tenant of any general assignment or
general arrangement for the benefit of creditors; (ii) the filing by or
against Tenant of a petition to have Tenant adjudged bankrupt or a
petition
<PAGE> 8
for reorganization or arrangement under any law relating to bankruptcy
(unless, in case of a petition filed against Tenant, the same is
dismissed within thirty (30) days); (iii) the appointment of a trustee
or receiver to take possession of substantially all of Tenant's assets
located at the Leased Premises, or of Tenant's interest in this Lease,
where possession is not restored to Tenant within thirty (30) days; or
(iv) the attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the Leased Premises, or
of Tenant's interest in this Lease, where such seizure is not
discharged within thirty (30) days.
25. REMEDIES. In the event of any material default or breach by Tenant,
Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy
which Landlord may have by reason of such default or breach:
a. Immediately re-enter and remove all persons and property from
the Leased Premises, storing said property in a public warehouse or
elsewhere at Tenant's expense, without liability on the part of the
Landlord.
b. Should Landlord elect to re-enter as herein provided, or should
Landlord take possession pursuant to legal proceedings or pursuant to
any notice provided for by law, Landlord may either terminate this
Lease or Landlord may, from time to time, without terminating this
Lease, re-let the Leased Premises, or any part thereof, for the account
of the Tenant, either in Landlord's name or otherwise, upon such terms
and conditions and for such period (whether longer than the balance of
the term hereof or not) as Landlord may deem advisable, either with or
without any equipment or fixtures that may be situated thereon or
therein, in which event the rents received on any such re-letting
during the balance of the term of this Lease or any part thereof shall
be first applied to the expenses of re-letting and collecting,
including necessary renovation and alteration of the Leased Premises
and reasonable attorney's fees and any real estate commission
actually paid, and, thereafter, toward payment of all sums due or to
become due to Landlord hereunder, and if a sufficient sum shall not be
thus realized to pay such rent and other charges, Tenant shall pay to
Landlord monthly any deficiency, and Landlord may sue therefor as each
monthly deficiency shall arise. Such monthly deficiencies shall be
paid punctually when due, as herein provided, notwithstanding the fact
that Landlord may
<PAGE> 9
thereafter receive monthly rental in excess of the monthly payments
herein specified during subsequent months. No re-entry or taking
possession of the Leased Premises shall terminate this Lease unless
written notice of such intention is given to Tenant. Unpaid
installments of rent or other sums shall bear interest at the rates
specified in this Lease.
c. Collect by suit or otherwise each installment of rent or other
sum as it becomes due, or enforce by suit or otherwise any covenant or
condition or term of this Lease required to be performed by Tenant; or
d. Terminate this Lease, in which event Tenant agrees to
immediately surrender possession of the Leased Premises and to pay
Landlord all damages Landlord may incur by reason of Tenant's default,
including the cost of recovering possession of the Leased Premises, and
including the worth at the time of such termination of the excess, if
any, of the amount of rent and charges equivalent to the rent reserved
in this Lease for the remainder of the stated term over the then
reasonable rental value of the Leased Premises for the remainder of
said lease term.
26. LANDLORD'S LIEN. Landlord shall have a valid and subsisting lien
for the payment of all rents and for all other charges and other sums to be paid
by Tenant, upon Tenant's goods, wares, equipment, signs, fixtures, furniture and
other personal property situated on or about the Leased Premises, and such
property shall not be removed therefrom without the consent of Landlord until
all arrearages in rent, as well as any and all other sums of money then due,
shall have first been paid and discharged. Upon Tenant's default, Landlord may
commence foreclosure proceedings upon this lien obtained hereunder as provided
by applicable law, in addition to other remedies provided herein or by law.
27. INDEMNITY. Tenant agrees to indemnify and hold Landlord harmless
against any and all claims, demands, damages, costs, and expenses, including
reasonable attorneys' fees, arising from the conduct or management of the
business conducted by Tenant on the Leased Premises, or from any breach or
default on the part of Tenant in the performance of any covenant or agreement on
the part of Tenant to be performed pursuant to the terms of this Lease, or from
any act or negligence of Tenant, its agents, contractors, servants, employees or
licensees, in or about the Leased Premises, the Building, or the Property.
Landlord shall not be liable and Tenant waives all claims for damage to person
or property
<PAGE> 10
sustained by Tenant or Tenant's employees, agents, servants, contractors,
invitees and customers resulting form any of the foregoing.
28. WAIVER OF SUBROGATION. Landlord and Tenant hereby agree that
neither shall be liable to the other for loss arising out of damage to or
destruction of the Leased Premises or the contents thereof, when such loss is
caused by any of the perils included within the standard form of fire and
extended coverage insurance. The terms of this Section 28 shall be binding
whether or not such damage or destruction shall be caused by the negligence of
either Landlord or Tenant, or their agents, servants or employees. Landlord and
Tenant agree to sign any and all documents reasonably necessary to implement
the provisions of this Section 28.
29. SURRENDER. At the expiration of the term of this Lease, Tenant
shall quit and surrender the Leased Premises in as good a state and condition as
reasonable wear and tear permits, damage by the elements, fire and other
casualty excepted. Any holding over by Tenant shall not operate, except by
written agreement to the contrary, to extend or renew this Lease, and no tenancy
of any duration shall be created thereby.
30. EXECUTION OF LEASE BY LANDLORD AND TENANT'S EXECUTION. The
submission of this document for examination and negotiation does not constitute
an offer to lease, or a reservation of, or option for, the Leased Premises, and
this document becomes effective and binding only upon the execution and
delivery hereof by both Landlord and Tenant. All negotiations, considerations,
representations and understandings between Landlord and Tenant are incorporated
herein and may be modified or altered only by an agreement in writing between
Landlord and Tenant, and no act or omission of any employee or agent of Landlord
or of Landlord's broker shall alter, change, or modify any of the provisions
hereof.
31. TENANT'S CONFLICTS. Tenant hereby covenants, warrants and
represents that by executing this Lease and that by occupying the Leased
Premises under this Lease, Tenant is not violating, has not violated, and will
not be violating, any restrictive covenant or agreement contained in any other
lease or contract affecting the Tenant or any affiliate or associate or any
other person or entity with whom or with which Tenant is related or connected
financially or otherwise.
<PAGE> 11
32. ACCEPTANCE OF PAYMENT. No payment by Tenant, or receipt by Landlord
of a lesser amount than the amount then due under this Lease stall be deemed to
be other than a payment on account of the earliest portion thereof due, nor
shall any endorsement or statement on any check or any letter accompanying any
check or payment be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance due or pursue any other remedy provided in this Lease.
33. SEVERABILITY. The unenforceability of any provision contained in
this Lease shall not affect or impair the validity of any other provision of
this Lease.
34. RIGHT TO REPAIR. Notwithstanding anything contained herein to the
contrary, Landlord shall have the right to install, maintain, use, repair and
replace pipes, ducts, conduits and wires leading through the Leased Premises and
serving other parts of the Building, so long as the same does not materially
interfere with the Tenant's use of the Leased Premises.
35. INCORPORATION OF EXHIBITS. All Exhibits referred
to herein and attached hereto are hereby incorporated herein by reference and
are construed as a part of this Lease.
36. GOVERNING LAW/JURISDICTION AND VENUE. This Lease and all disputes
arising hereunder shall be governed by the laws of the State of South Dakota.
The parties hereby consent to the personal jurisdiction of the federal and
state courts in the State of South Dakota, waive any argument that such forum is
not convenient, and agree that any litigation relating to this Lease or the
subject matter hereof shall be venued in either the Circuit Court in Minnehaha
County, South Dakota or the Federal District Court, District of South Dakota,
Southern Division.
37. BINDING EFFECTS/BENEFIT. The covenants, agreements and conditions
set forth in this Lease shall extend to and shall be binding upon and shall
inure to the benefit of the parties and their respective legal representatives,
successors, heirs and assigns.
38. RELATIONSHIP OF PARTIES. Nothing contained herein shall be deemed
or construed as creating the relationship of principal and agent, or of
partnership, or of joint venture, between the parties.
<PAGE> 12
39. CUMULATIVE REMEDIES AND NON-WAIVER. The various rights and remedies
contained in this Lease shall not be considered as exclusive of any other right
or remedy, but shall be construed as cumulative and shall be in addition to
every other right or remedy now or hereafter existing at law, in equity, or by
statute. No delay in or omission of the right to exercise any power by either
party shall impair any such right or power, or shall be construed as a waiver of
any default or as acquiescence therein, one or more waivers of any covenant,
term or condition of this Lease by either party shall not be construed by the
other party as a waiver of a subsequent breach of the same covenant, term or
condition. The consent or approval by either party to, or of any act by, the
other party, of a nature requiring consent or approval, shall not be deemed to
waive or render unnecessary required consent or approval of any subsequent
similar act.
40. HEADINGS. The headings used herein are for convenience only and do
not define, limit or construe the contents hereof.
41. RECORDING OF LEASE. Tenant shall hot record this Lease without the
written consent of Landlord.
42. CONSENTS. The parties agree that whenever provision is made herein
for securing the written consent, permission or approval of either party, that
such written consent, permission or approval shall not be unreasonably withheld
or delayed.
43. HAZARDOUS WASTE. During the entire term of this Lease, and during
and renewal or extension hereof, Tenant covenants that Tenant shall comply with
all present and future environmental laws, ordinances, rules and regulations,
whether governmental or otherwise. Tenant shall not permit the generation,
creation, treatment, incorporation, discharge, disposal, escape, release or
threat of release of any "hazardous substance" (as defined under any applicable
federal, state or local law) or "contaminant" (as defined under any applicable
federal, state or local law) above, upon, under, within, or from the Leased
Premises. Tenant covenants that Tenant will, at Tenant's own expense, abate,
remedy, and remove any such hazardous substance or contaminant discovered on the
Leased Premises which was located, generated, created, stored, incorporated,
discharged, disposed of, or released by Tenant, or which contamination was
caused by Tenant. Tenant shall indemnify Landlord, without prior payment being
made by Landlord, against, and shall hold Landlord harmless from, any and all
claims, demands, judgments, penalties, liabilities, costs, damages and expenses,
including court costs and
<PAGE> 13
attorneys' fees, whether prior to trial, at trial or on appeal, and whether
private or mandated by an governmental body, resulting from any breach of the
foregoing covenants, it being the intent of Landlord and Tenant that Landlord
shall have no liability for damage to the environment or natural resources
caused by Tenant during the period of time Tenant is in possession of the Leased
Premises for abatement, removal or clean-up of, or otherwise in respect to any
hazardous substance or contaminant by virtue of the interest of Landlord in the
Leased Premises.
44. NOTICES. Notice to either party for any reason shall be in writing
and shall be deemed to have been fully given if hand delivered or mailed, first
class, postage pre-paid:
To Landlord: With a copy to:
Eagle Properties, L.L.C. Brian J. Bauer
% Steven I. Bechtold Attorney-at-Law
Suite 200 Suite 400
3400 West 49th Street 431 North Phillips Avenue
Sioux Falls, SD 57106 Sioux Falls, SD 57104
To Tenant: With a copy to:
SERVICE ONE CORP. _______________________
c/o Gary Hawthorne _______________________
400 S. Sycamore Avenue _______________________
Sioux Falls, SD
<PAGE> 14
IN WITNESS WHEREOF, the parties have executed this Lease on the date
and year first above written.
LANDLORD: TENANT:
EAGLE PROPERTIES, L.L.C. a SERVICE ONE INTERNATIONAL CORPORATION
South Dakota limited
liability company
By /s/ Steven I. Bechtold By /s/ Gary Hawthorne
----------------------- -------------------------------
GARY HAWTHORNE
As Its Member As Its Executive Vice President
<PAGE> 1
ADDENDUM TO LEASE AGREEMENT
THIS ADDENDUM TO LEASE AGREEMENT (this "Addendum") is made and entered
into this 18th day of November, 1997, by and between EAGLE PROPERTIES, L.L.C., a
South Dakota limited liability company ("Landlord"), and SERVICE ONE
INTERNATIONAL CORPORATION ("Tenant").
RECITALS:
1. Landlord and Tenant are parties to a certain Lease Agreement dated
February 28, 1997, the terms and conditions of which are incorporated herein by
this reference (the "Lease").
2. The Lease concerns the occupancy and use of certain business
premises which are described in the Lease and which are
located at 400 South Sycamore Avenue, Sioux Falls, South Dakota
(the "Leased Premises").
3. Pursuant to this Section 2 of the Lease, the term of the Lease
expires on February 28, 1998, unless sooner terminated as provided therein.
4. The parties have agreed to extend the Lease, as modified herein, for
an additional two (2) year period commencing on March 1, 1998, with additional
options to renew being granted by Landlord to Tenant thereafter.
5. The parties desire to execute and enter into this Addendum for the
purpose of amending and modifying the Lease and to specify the terms and
conditions governing their relationship during the extension period.
AGREEMENT:
In consideration of the recitals set forth above, and in
further consideration of the mutual covenants, promises and undertakings agreed
to by the parties, the sufficiency of which such consideration is hereby
conclusively established, the parties, intending to be legally bound, hereby
agree as follows:
1. TERM. The term of the Lease is hereby extended for a period of two
(2) years commencing on March 1, 1998, and ending on February 28, 2000. All
terms and conditions set forth in the Lease, as amended by this Addendum, shall
continue to apply through the entire extension period.
2. RENEWAL OPTIONS. Upon the expiration of the two (2) year extension
of the Lease as set forth in Section 1 above, and so long as Tenant is not in
default under the terms of the Lease, as modified by this Addendum, Tenant
shall have the right and option to renew this Lease for five (5) consecutive one
(1) year periods commencing
<PAGE> 2
on March 1, 2000. Tenant shall give written notice of its intention to renew, if
at all, no later than six (6) months prior to the expiration of the initial two
(2) year extension of the Lease or no later than three (3) months prior to the
expiration of any one (1) year renewal period, as the case may be. In the event
Tenant exercises its renewal option(s), all terms and conditions set forth in
the Lease, as amended by this Addendum, shall continue to apply through the
entire renewal period(s).
3. RENT. The parties agree that the minimum rent payable by Tenant to
Landlord under Section 7 of the Lease shall be SEVEN THOUSAND TWO HUNDRED
TWENTY-THREE DOLLARS AND SEVENTY-ONE CENTS ($7,223.71) during the first year of
the two (2) year extension of the Lease, and shall be adjusted each year
thereafter to reflect the corresponding increase in the Consumer Price Index
("CPI") as measured from the commencement of the prior extension or renewal
period to the commencement of the then-current extension or renewal period, as
the case may be. For these purposes, CPI shall mean the "ALL ITEMS 1982-84 = 100
FOR ALL URBAN CONSUMERS" as issued by the U.S. Department of Labor. The minimum
rent shall be increased by the same number of percentage points (figured to the
nearest one-tenth percent) as the CPI has increased during the relevant period.
No such adjustment shall reduce the minimum rent below that provided in Section
7 of the Lease.
4. IMPROVEMENTS. Any additional improvements to the Leased Premises
shall be at the sole cost and expense of Tenant, and shall in all other respects
as governed by the terms and conditions of the Lease.
5. NO SMOKING. Tenant understands that the Building (as defined in the
Lease) is a non-smoking facility and that no smoking is permitted either within
the Building or within twenty (20) feet of any door of the Building.
6. COMPLIANCE. Unless otherwise specified herein, all of the terms and
conditions of the Lease shall remain in full force and effect during any
extension and/or renewal period provided for herein. The parties agree that they
shall comply in all respects with all of the terms and conditions of the Lease,
as modified by this Addendum.
7. CONSTRUCTION. Any inconsistency or ambiguity between the terms and
conditions of the Lease and the terms and conditions of this Addendum shall be
resolved solely by reference to this Addendum.
8. FURTHER ASSURANCES. The parties shall undertake to perform any and
all actions and to execute and deliver any and all documents which are required,
necessary, or convenient in order to effectuate the transactions referred to
herein.
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<PAGE> 3
9. BINDING EFFECT/BENEFIT. This Addendum shall be binding upon the
parties hereto and shall be binding upon and inure to the benefit of their
respective legal representatives, successors, heirs and assigns.
10. ENTIRE AGREEMENT. This Addendum constitutes the entire
understanding and agreement of the parties with respect to the transactions
contemplated herein. Each of the parties has caused to be included herein all
representations and warranties which he considered material with respect to the
transactions contemplated herein.
LANDLORD:
EAGLE PROPERTIES, L.L.C., a South
Dakota limited liability company
By /s/ Steven I. Bechtold
-----------------------------------------
As Its Member
TENANT:
SERVICE ONE INTERNATIONAL CORPORATION
By /s/ Cynthia Hassoun
-----------------------------------------
As Its Chief Coordinating Officer
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MUTUAL BUSINESS DEVELOPMENT AGREEMENT
MUTUAL BUSINESS DEVELOPMENT AGREEMENT dated as of October 8, 1996 (the
"Agreement") between Service One International Corporation, a South Dakota
corporation (the "Company"), and the O. Pappalimberis Trust (the "Trust"),
W I T N E S S E T H
WHEREAS, the Company currently is engaged in the business of acquiring,
originating, servicing, securitizing and selling consumer credit card debt
portfolios (the "Business"); and
WHEREAS, to date the Company has conducted its operations solely "in
the U.S." (as that phrase is hereinafter defined); and
WHEREAS, the Company desires to invest or participate in business
ventures or enterprises engaged in the development and conduct of the Business
"outside the U.S." (as that phrase is hereinafter defined); and
WHEREAS, the Company owns certain proprietary analytical computer
programs, operating systems, methods and procedures, and related know-how (the
"System"); and
WHEREAS, the Trust has heretofore owned and controlled companies
engaged in the Business in the U.S. and currently proposes to form and finance a
company (the "Non-U.S. Based Enterprise") that, among its proposed activities,
may develop opportunities or operations that would be useful to conducting the
Business outside the U.S.; and
WHEREAS, the Trust desires that the Non-U.S. Based Enterprise be able
to use the System in the non-U.S. based Business, and the Company is willing to
license the System to the Non-U.S. Based Enterprise for such purpose, on the
terms and subject to the conditions set forth in a Non-exclusive License
Agreement, substantially in the form provided for herein (the "License
Agreement"); and
WHEREAS, the Company desires that the Non-U.S. Based Enterprise
undertake to promote the Company and the System to non-U.S. based financial
institutions and organizations, to thereby enhance the Company's opportunities
to acquire appropriate portfolios from the U.S. affiliates of such non-U.S.
based financial institutions and organizations; and
WHEREAS, the Company and the Trustee desire to compensate and
incentivize each other by providing to the Trust an indirect economic interest
in the Company and by providing to the Company an indirect economic interest in
the Non-U.S. Based Enterprise, both solely as provided in this Agreement; and
<PAGE> 2
WHEREAS, concurrently with this Agreement, the Company is entering into
an agreement (the "Other Agreement") substantively the same as this Agreement
with the Renaissance Trust I (the "Other Trust");
NOW THEREFORE, the parties hereto hereby agree as follows:
1. Business of the Non-U.S. Based Enterprise.
(a) As soon as practicable, and in any event within 120 days after the
date hereof, the Trust shall (i) form and organize the non-U.S. Based Enterprise
(inside or outside the U.S. at the Trust's discretion), (ii) cause such Non-U.S.
Based Enterprise to commence the conduct of forming and organizing its
operations, and (iii) provide at its sole discretion funds or credit to finance
the conduct of its operations. Except as expressly provided elsewhere herein,
the Non-U.S. Based Enterprise shall not, for a period of six years from the date
hereof, conduct any of its operations inside the U.S. with respect to any
Portfolio (as defined below) of which any of the Accounts (as defined below)
included therein are with Persons residing in the United States or Canada ("in
the U.S."). However, the Non-U.S. Based Enterprise may contact any financial
institution or other Person (as defined below) that conducts operations outside
the United States and Canada and may acquire any Portfolio of which none of the
Accounts included therein are with Persons residing in the United States or
Canada ("outside the U.S."). The Non-U.S. Based Enterprise may also securitize a
Portfolio in the U.S.; provided that the Company (or an Affiliate thereof) shall
be given a reasonable right of first refusal and opportunity to effect such
securitization.
(b) The Company engages the Non-U.S. Based Enterprise to represent the
Company in developing opportunities for the Company to acquire appropriate
Portfolios from United States or Canadian based affiliates of non-U.S. based
banks or foreign subsidiaries and/or affiliates of U.S. institutions and other
financial institutions. For this purpose, the Company expressly authorizes the
Non-U.S. Based Enterprise to discuss (subject to appropriate confidentiality
restrictions) with potential clients the benefits and advantages of the System,
the expertise of the Company in the conduct of the operations and other relevant
features of the Company and its personnel. The Company also expressly authorizes
the Non-U.S. Based Enterprise to solicit financing from foreign banks and other
financial institutions for the acquisition by the Company of appropriate
Portfolios.
(c) Any other provision hereof notwithstanding, the Company may engage
in or perform the Services for itself or for its benefit or the benefit of any
other Person (as defined in Subsection 7(r)) or engage any other Person to
perform such Services for the Company.
2. Term. The Agreement shall commence on the date hereof, and subject
to the provisions of Subsection 3(e), continue for the six-year period (the
"Term"), ending at the close of business on October 7, 2002 (the "Termination
Date").
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<PAGE> 3
3. Consideration.
(a) Upon notice to the Company that the Trust has completed the
formation, organization, and initial financing of the Non-U.S. Based Enterprise,
and without regard to any other activity or the success thereof as full
compensation therefor, the Company shall pay the Trust or if the Trust forms a
separate entity (whether or not a corporate entity) the Company shall pay to
such entity:
(i) within four days after the signing of this Agreement and
thereafter prior to or on the fifth day of each of the 11 subsequent calendar
months, a base fee in the amount of $42,500 (net of any amounts of such payment
required to be withheld under applicable law, if any); and, in addition,
(ii) with respect to Net Proceeds upon the Disposition of a
Portfolio (as such terms are defined in Subsection 3(b)) owned by the Company or
any Company Affiliate (as defined in Subsection 7(r)(ii) hereof) at any time
during the Term or a credit card account becoming a Qualifying Receivable (as
defined below) at any time during the Term, an amount equal to 5% of such Net
Proceeds (net of any amounts required to be withheld under applicable law and
regulations); provided that, subject to the provisions of Subsection 3(d) and
3(e), no such payment shall be made if the aggregate amount of the 5% Fee (as
defined below) paid to the Trust hereunder equals $25,000,000. Notwithstanding
the foregoing, if a Portfolio is owned by the Company during the Term, or
Additional Term (as defined below), any Net Proceeds or other collections with
respect to such Portfolio received after the Term or Additional Term shall
nevertheless be treated as having been received during the Term or Additional
Term, as the case may be.
The fees described in paragraphs a) through e) below (referred to
herein collectively as the "5% Fee") shall be earned and, subject to Section
3(c), paid in accordance with the following schedule:
a) Upon the earlier to occur of delivery of the originated
Balance Transfer Amount to a "pre-securitization credit
facility" (warehouse line) or a credit card account becoming a
Qualifying Receivable, an amount equal to 5% of the related
Net Proceeds shall be deemed earned, of which 25% shall be
payable to the Trust.
b) After occurrence of either of the above events, upon the
earlier to occur of delivery of the receivables, as to which a
fee was earned under paragraph a) above, to a securitization
facility (or any other Disposition) or the passage of 11
months from the Credit Card Origination Date, the 75% balance
of the earned, but unpaid, 5% Fee shall be payable to the
Trust.
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<PAGE> 4
c) If an Account does not become a Qualifying Receivable and has
not been delivered to a "pre-securitization credit facility"
(warehouse line), or a securitization facility and Disposition
has not been effected with respect to such Account, no amount
of the 5% Fee shall be earned or paid until the first day of
the 11th month after the Credit Card Origination Date and, on
that date, if the Account is or becomes Current, the full 5%
of the Net Proceeds shall be payable to the Trust with respect
to such Account.
d) If on the first anniversary of the Credit Card Origination
Date of an Account, no amounts have previously been paid to
the Trust with respect to such Account and the Account is not
more than 59 days delinquent, a fee equal to 2 1/2 percent of
the Balance Transfer Amount with respect to such Account shall
be payable to the Trust.
e) With respect to any Subpar Account, as defined below, an
amount equal to 5% of all cash collections shall be payable to
the Trust when received. "Subpar Account" shall mean any
Account, with respect to which cash is received and which did
not result in a Balance Transfer Amount or payment of any fee
hereunder.
(b) For this Purpose:
(i) "Account" means the contractual account between a consumer
credit card account debtor and the issuer of the credit card or its assignee as
creditor of such account, irrespective of whether the account debtor's
obligation was discharged in bankruptcy.
(ii) "Balance Transfer Amount" means any newly established
receivable balance originated or acquired by the Company by way of a credit card
Account, which is not to include new charges on the Account subsequent to the
initial receivable amount. (All computations of the 5% Fee shall be derived
using the Balance Transfer Amount irrespective of whether the cardholder has
paid principal down below the original Balance Transfer Amount or charged more
than the Balance Transfer Amount at the time of any of the 5% payment
obligations.)
(iii) "Base Proceeds" of a Disposition means 20% of the total
Balance Transfer Amount or credit card receivable of a Portfolio pursuant to the
agreements or instruments relating to such Disposition.
(iv) "Credit Card Origination Date" means the recorded date that
the credit card account is booked on the credit card system (FDR or other such
similar system).
(v) "Current" means, with respect to an Account, that there is no
payment which is unpaid more than ten days after the due date.
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<PAGE> 5
(vi) "Disposition" means with respect to a Portfolio any sale,
securitization or other disposition of any interest in a Portfolio (or the
accounts receivable generated upon collection of amounts owed on Accounts
included in the Portfolio) that results in the actual receipt of Proceeds by the
Company or any Company Affiliate.
(vii) "Net Proceeds" of a Disposition means the Proceeds of such
Disposition after deduction of the Base Proceeds of such Disposition.
(viii) "Portfolio" means a group of Accounts acquired or
originated by the Company prior to expiration of the Term, without regard to the
time of any Disposition or other event requiring payment to take place.
(ix) "Proceeds" of a Disposition means eighty percent (80%) of the
newly originated Balance Transfer Amount or credit card receivable.
(x) "Qualifying Receivable" means any Balance Transfer Amount on
which the cardholder has made three consecutive payments, any two of which must
have been made no later than ten days after the payment due date, and any one
payment must not have been made more than 29 days past its scheduled due date.
(c) On or before the tenth day of each month during the Term and, if
applicable, the Additional Term, the Company shall pay to the Trust all amounts
in respect of the 5% Fee which become payable during the immediately preceding
month, by delivery to the Trust of a check in an amount equal to the sum of all
such amounts. Each payment of the 5% Fee shall be accompanied by a certificate
of the Company's chief financial officer setting forth in reasonable detail the
calculation of the 5% Fee.
(d) If at any time, the Company fails to make any payment of the
monthly base fee pursuant to Subsection 3(a)(i) or the 5% Fee pursuant to
Subsection 3(a)(ii) within the time when such payment becomes due pursuant
hereto, interest shall accrue and be payable on the amount of any such payment
not so made at the rate of 15% per annum from the date such payment becomes due
until such amount is paid in full, payment of such interest to be made
concurrently with the payment of the delinquent amount; provided that the
Company shall not be so required to pay any such interest to the extent that the
failure to pay prior to the end of the Term the 5% Fee is based on the Company's
good faith assertion of a set-off of such amount pursuant to Section 6 or a good
faith dispute by the Company with respect to the payment of such amount.
(e) If the Company fails to pay any amount in excess of the "Threshold
Amount" (as hereinafter defined) during any year, in the aggregate of the
monthly base fee or, prior to the expiration of the Term, the 5% Fee required to
be paid by it pursuant to this Section 3, then, the Term shall be extended by a
period equal in duration to the cumulative duration of the period or periods
commencing, in each case, on the date any such amount, which is unpaid, is
finally determined
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<PAGE> 6
to be due under the procedures set forth in Section 3(f) below or is determined
to be payable by a panel in non-binding mediation in accordance with the
procedures set forth on Section 7(g) below (any such determination herein called
a "Determination") and ending on the date such amount (together with interest
thereon determined in accordance with Subsection 3(d)) is paid in full during
which any such amount remains unpaid; provided that in no event shall the Term
extend past the earlier of (A) the second anniversary of the Termination Date or
(B) the date on which all amounts (including amounts payable by reason of this
Subsection 3(e)) are paid in full (such two year or shorter period after the
Termination Date, the "Additional Term"), and the Company shall pay as
additional fees hereunder (but not as a penalty), at the same times and in the
same manner as is provided in clause (ii) of Subsection 3 (a), an amount equal
to one-half of the amount of the 5% Fee that would have been payable with
respect to any Portfolio for which there is a Disposition or any Qualification
with respect to individual credit card amount during such Additional Term had
such Disposition been made during the Term; provided that, with respect to each
Determination, the Term shall not be extended and the Company shall not be so
required to make any such additional payments if the Company deposits in escrow
with a bank or financial institution located in the United States and having
consolidated assets in excess of $500,000,000, amounts of the 5% Fee which are
determined to be payable in such Determination within twenty (20) days after
such Determination is rendered and if the Company makes such deposit in escrow
after such 20 day period, the duration of the extension of the Term and the
requirement to make additional payments shall cease at the time of such deposit.
"Threshold Amount" shall mean one hundred thousand dollars ($100,000.00) during
the first year of this Agreement, two hundred thousand dollars ($200,000.00)
during the second year of this Agreement, three hundred thousand dollars
($300,000.00) during the third year of this Agreement, four hundred thousand
dollars ($400,000.00) during the fourth year of this Agreement, five hundred
thousand dollars ($500,000.00) during the fifth year of this Agreement, and six
hundred thousand dollars ($600,000.00) during the sixth year of this Agreement.
(f) At any time within 90 days after the end of each fiscal year of the
Company ending during the Term or, thereafter, during which the Company makes or
is required to make a payment of the 5% Fee hereunder, the Trust may cause its
regular independent certified public accountants (subject to the Trust and such
accountants entering into appropriate confidentiality agreements with the
Company) to conduct an audit of the accounts of the Company to confirm the
amount of the 5% Fee determined by the Company to be due and payable to the
Trust in accordance with Section 3(a), if any, made during such fiscal year. If
the Trust determines, based on such audit, that the amount of the 5% Fee
determined by the Company in accordance with Section 3(a) requires adjustment,
because such amount was not correctly determined based on proper assumptions,
amounts or calculations, the Trust shall promptly, and in any case within 30
days after completion of the audit, give notice (the "Adjustment Notice") to the
Company to such effect, setting forth therein the amount of the 5% Fee, as
adjusted, and, in reasonable detail, the reasons for such adjustment. If the
Company agrees with the amount of the 5% Fee set forth in the Adjustment Notice,
the Company shall, within 20 days of the giving of the Adjustment Notice, give
written notice to the Trust confirming the amount of the 5% Fee, as so adjusted,
and on the fifth business day following the giving of such notice, the Company
shall pay to the Trust the deficiency in the amount of the 5% Fee in accordance
with the Adjustment Notice, together with interest thereon determined in
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accordance with Subsection 3(d). If, however, the Company disagrees with the
adjustments set forth in the Adjustment Notice, the Company shall, within 20
days of the giving of the Adjustment Notice, give written notice (the "Dispute
Notice") to the Trust to such effect, setting forth therein, in reasonable
detail, the reasons for such objection. In such event, unless the Company and
the Trust promptly resolve such objections and agree upon the determination of
the amount of the 5% Fee (in which case the deficiency, if any, together with
interest thereon determined in accordance with Subsection 3(d), shall be paid
promptly, and in any event within five business days, after the date of such
agreement), the determination of the amount of the 5% Fee shall be promptly
referred to the respective regular independent certified public accountants of
the Company and the Trust, who shall confer and attempt to resolve the
objections as to such determination set forth in or arising as a consequence of
the Adjustment Notice and the Dispute Notice. If, within 15 days after such
referral, such accountants resolve such disputes and determine the amount of the
5% Fee, they shall give written notices to the Company and the Trust to such
effect, setting forth the amount of the 5% Fee as so determined. If they cannot
make such determinations within such 15-day period, such determination shall be
referred to a third independent firm of certified public accountants selected by
the respective accountants, whose determination of such amount shall be final
and binding on the Company and the Trust. Upon the determination of the amount
of the 5% Fee by such accountants, any deficiency, together with interest
thereon determined in accordance with Subsection 3(d), shall be paid promptly,
and in any event within five business days, after the date of such
determination. The fees and expenses of the respective independent certified
public accountants of the Company and the Trust incurred in the determination of
the amount of the 5% Fee as provided herein shall be borne by the Company and
the Trust, respectively. The fees and expenses of a third firm of independent
certified public accountants incurred, if required pursuant to this Section,
shall be borne and promptly paid equally by the Company and the Trust.
(g) No provision of Subsection 3(d), 3(e) or 3(f) is intended or shall
be deemed to preclude the commencement of any Proceeding by the Trust or the
Non-U.S. Based Enterprise to collect any base fee or 5% Fee to which it may be
entitled hereunder or the Company from seeking to recover any overpayment, or
otherwise to restrict the remedies available to either party to enforce its
rights hereunder.
(h) For federal income tax purposes, the Non-U.S. Based Enterprise
shall treat any amount received with respect to each Portfolio as its share of
income from an entity taxed as a partnership described in Subchapter K of the
Internal Revenue Code. The Non-U.S. Based Enterprise shall furnish to the
Company such information as the Company may reasonably require with respect to
its federal income tax obligations regarding the distribution of profits from
the Portfolios.
(i) For federal income tax purposes, the Company shall treat any amount
received with respect to each Portfolio as its share of income from an entity
taxed as a partnership described in Subchapter K of the Internal Revenue Code.
The Company shall furnish to Non-U.S. Based Enterprise such information as
Non-U.S. Based Enterprise may reasonably require with respect to its federal
income tax obligations regarding the distribution of profits from the
Portfolios.
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4. System License. Concurrently herewith, the Company is licensing the
System to the Trust, pursuant to a Non-Exclusive Technology License Agreement
(the "License Agreement"), for use by the Non-U.S. Based Enterprise in
conducting the Business outside the U.S.
5. Right to Participate in Business of the Non-U.S. Based Enterprise.
(a) Each of the Company, Service One Holdings Inc., a Delaware
corporation ("Holdings") and Taxter One LLC, a New York limited liability
company ("Buyer"), shall have an irrevocable and unconditional right (but no
obligation) to acquire an undivided interest in any Portfolio acquired at any
time during the Term by the Non-U.S. Based Enterprise or any Affiliate thereof,
which interest will entitle the Company, Holdings and Buyer to receive in the
aggregate (apportioned among them in accordance with their respective interests
or as they may agree among themselves) a portion of any Proceeds of a
Distribution of such Portfolio by the Non-U.S. Based Enterprise in the same
manner and subject to the same terms and conditions as are applicable to the 5%
Fee, except that the percentage of Net Proceeds payable shall be 10% (instead of
5%), and the proviso to clause (ii) of Subsection 3 (a) shall not apply to such
interest.
(b) The aggregate purchase price for any such interest in a Portfolio
(the "Exercise Price") shall be 6% of the purchase price actually paid or
payable by the Non-U.S. Based Enterprise or an Affiliate thereof for such
Portfolio, such Exercise Price to be payable to the Non-U.S. Based Enterprise at
the same time and in the same manner as the purchase price for the Portfolio is
payable by the Non-U.S. Based Enterprise or an Affiliate thereof.
(c) At least 10 days prior to the closing of the acquisition of a
Portfolio by the Non-U.S. Based Enterprise or an Affiliate thereof, the Non-U.S.
Based Enterprise shall give written notice (the "Acquisition Notice") of such
proposed acquisition to the Company, setting forth therein in reasonable detail
a description of the Portfolio proposed to be acquired and the proposed terms
and condition of such acquisition, including without limitation the expected
closing date, the purchase price for the Portfolio and the seller thereof. The
Company shall give written notice to the Non-U.S. Based Enterprise within 10
days of the receipt of the Acquisition Notice of any intention by the Company,
Holding or Buyer to purchase an interest in such Portfolio as provided in this
Section 5. If the Company, Holding or Buyer so elect to purchase such an
interest and notice thereof is properly given as herein provided, then
concurrently with the acquisition of the Portfolio by the Non-U.S. Based
Enterprise or as soon as practicable thereafter, and in any event within 10
business days after the closing of such acquisition the Company, Holding or
Buyer, as the case may be shall purchase its interest in such Portfolio upon
payment of the Exercise Price.
6. Set-Off. The Company, at its sole discretion, may set-off and retain
the amount of any indemnity payment required to be made by the Trust and the
Other Trust in accordance with Section 11.6 of the Stock Purchase Agreement of
even date herewith (the "Purchase Agreement") by and among the Buyer, the Trust
and the Other Trust or any payment required to be made by the Trust to the
Company pursuant to Section 5 or the License Agreement that is not so made when
due, in each case, from one-half of any payment of the 5% Fee with respect to
any
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<PAGE> 9
Portfolio otherwise required or permitted to be made by the Company hereunder,
after the Trust shall have received 25% of the 5% Fee payable to the Trust with
respect to such Portfolio. The Company agrees that amounts to be set-off and
retained shall be applied equally against (i) payments required (except for the
set-off) to be made to the Trust hereunder and (ii) payments required (except
for the set-off) to be made to the Other Trust and under the Other Agreement.
The Trust may set-off and retain the amount of any payment required to be made
to it by Buyer under the Stock Purchase Agreement or by the Company hereunder
that is not so made when due from any payment required to be made to the Company
by the Trust hereunder or under the License Agreement.
7. Miscellaneous.
(a) Limitation of Authority. No provision hereof shall be deemed to
create any partnership, joint venture or joint enterprise or association between
the parties hereto, or to convey to or invest in either party any right or the
assets or business of the other party hereto or, except as expressly provided in
Section 1, to authorize or to empower either party hereto to act on behalf of,
obligate or bind the other party hereto. Any provision hereof notwithstanding,
the Non-U.S. Based Enterprise is, and is intended to be, an independent
contractor.
(b) Notices. Any notice or demand to or upon either party hereto
required or permitted to be given or made hereunder shall be deemed to have been
duty given or made for all purposes if (i) in writing and sent by (A) messenger
or an overnight courier service against receipt, or (B) certified or registered
mail, postage paid, return receipt requested, or (ii) sent by telegram,
facsimile transmission, telex or similar electronic means, provided that a
written copy thereof is sent on the same day by postage paid first-class mail,
to such party at the following address:
To the Trust at: O. Pappalimberis Trust
c/o Barry Feiner
745 Fifth Avenue
Suite 1701
New York, New York 10151
Fax: (212) 688-3043
To the Company at: 565 Taxter Road
Elmsford, New York 10523
Attn: Jay L. Botchman, President
Fax: (914) 592-1882
With a copy to: Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036-8735
Attn: Melvin Weinberg, Esq.
Fax: (212) 704-6288
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or such other address as either party hereto may at any time, or from time to
time, direct by notice given to the other party in accordance with this Section.
The date of giving or making of any such notice or demand shall be, in the case
of clause (a)(i), the date of the receipt; in the case of clause (a)(ii), five
business days after such notice or demand is sent; and, in the case of clause
(b), the business day next following the date such notice or demand is sent,
provided, however, that any notice regarding a change of address shall be deemed
given when received.
(c) Amendment. Except as otherwise provided herein, no amendment of
this Agreement shall be valid or effective, unless in writing and signed by or
on behalf of all the parties hereto.
(d) Waiver. No course of dealing or omission or delay on the part of
either party hereto in asserting or exercising any right hereunder shall
constitute or operate as a waiver of any such right. No waiver of any provision
hereof shall be effective, unless in writing and signed by or on behalf of the
party to be charged therewith. No waiver shall be deemed a continuing waiver or
waiver in respect of any other or subsequent breach or default, unless expressly
so stated in writing.
(e) Governing Law. This Agreement shall be governed by, and interpreted
and enforced in accordance with, the laws of the State of New York without
regard to principles of choice of law or conflict of laws.
(f) Jurisdiction. Each of the parties hereto hereby irrevocably
consents and submits to the exclusive jurisdiction of the United States District
Court for the Southern District of New York in connection with any Proceeding
(as defined in Subsection 7(r)) arising out of or relating to this Agreement or
the transactions contemplated hereby, waives any objection to venue in such
District (unless such court lacks jurisdiction with respect to such Proceeding,
in which case, each of the parties hereto irrevocably consents and submits to
the jurisdiction of the Supreme Court of the State of New York in connection
with such Proceeding and waives any objection to venue in New York County, State
of New York), and agrees that service of any summons, complaint, notice or other
process relating to such Proceeding may be effected in the manner provided by
clause (i)(B) of Subsection 7(b).
(g) Remedies.
(i) Except as otherwise provided in Subsection 3(f) with respect
to a dispute as to the amount of any payment of the 5% Fee, the parties shall
submit any dispute arising with respect to any provision hereof to non-binding
mediation, prior to commencing any other Proceeding, other than a Proceeding
seeking an injunction or specific performance, in accordance with the procedures
set forth in this clause (i) of Subsection 7(g). Any party asserting any claim
or objection to any action by any other party or otherwise seeking to enforce
any right hereunder (the "claimant") shall give written notice of such claim to
each other party hereto setting forth therein in reasonable detail the factual
basis for such claim, the provisions of this Agreement relating thereto
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<PAGE> 11
and the amount of monetary damages or other relief sought from the other party
hereto (the "respondent"). The respondent shall within 10 days of the giving of
such notice respond to such claim by a written notice accepting or denying such
claim in whole or in part, setting forth therein in reasonable detail the basis
for such response. If the claimant and respondent are unable to resolve such
claim in full within 10 days after the giving of such responsive notice, the
parties shall exchange fists of 10 potential mediators, each of whom shall be a
retired federal judge or state appellate court judge with not less than 10 years
experience in commercial litigation prior to his judicial appointment. The
parties shall select three mediators from such lists as follows:
(A) as they may agree upon any Person on both lists
(B) as they may agree upon any other Person on one or the other of
the lists, or
(C) if the parties are unable to agree on the selection of three
such mediators, as selected by the CPR Institute For Dispute
Resolution ("CPR") from such lists, or if CPR declines to
select any Person from such lists, any other Person, unless
both parties object to such Person.
The mediation proceeding will be held in New York City. No discovery or motion
practice will be permitted. At the mediation proceeding each party shall be
represented by one representative and counsel. Each party shall submit a brief
written statement presenting its position consistent with that set forth in the
claim notice or response notice, as applicable, referred to above, to the
mediation panel and concurrently deliver a copy thereof to the other party, and
each party shall have an opportunity to present direct testimony of witnesses
for up to 10 hours and produce supporting evidence before the mediation panel.
Each party shall also be entitled to present rebuttal testimony of witnesses for
up to 2 hours and produce additional rebuttal evidence. All proceedings shall be
transcribed stenographically and a copy thereof shall be distributed to each
party and each member of the panel. Within two business days after conclusion of
the presentation of testimony and evidence, the panel shall render its decision
in a reasoned opinion by a majority of the panel.
(ii) In the event of any actual or prospective breach or default
by either party hereto, the other party shall be entitled, in addition to any
and all available legal remedies, to equitable relief, including remedies in the
nature of rescission, injunction and specific performance. Except as otherwise
provided in clause (i) of this Subsection 7(g), all remedies hereunder are
cumulative and not exclusive, and nothing herein shall be deemed to prohibit or
limit either party from pursuing any other remedy or relief available at law or
in equity for such actual or prospective breach or default, including the
recovery of damages.
(iii) The party prevailing with respect to any claim or in any
Proceeding to enforce its rights hereunder shall be entitled to reimbursement
from the respondent or defendant party of all reasonable costs, including
reasonable attorneys' fees, and disbursements, incurred by such party in
connection therewith.
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<PAGE> 12
(h) Severability. The provisions hereof are severable and in the event
that any provision of this Agreement shall be determined to be invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions hereof shall not be affected, but shall, subject to the discretion of
such court, remain in full force and effect, and any invalid or unenforceable
provision shall be deemed, without further action on the part of the parties
hereto, amended and limited to the extent necessary to render the same valid and
enforceable.
(i) Further Assurances. Each party hereto shall promptly execute,
deliver, file or record such agreements, instruments, certificates and other
documents and perform such other and further acts as the other party hereto may
reasonably request or as may otherwise be necessary or proper to consummate and
perfect the transactions contemplated hereby.
(j) Assignment.
(i) Subject to the provisions of Subsections 7(j)(ii), (iii) and
(iv), this Agreement and each right, interest and obligation hereunder, may not
be assigned by either party hereto without the prior written consent of the
other party hereto, and any purported assignment without such consent shall be
void and without effect.
(ii) The Company (and each subsequent assignee of the Company)
shall have the right to assign all (but not less than all) of its rights,
interests and obligations hereunder to any other Person who acquires a majority
of the voting capital stock of the Company or all or substantially all of the
assets of the Company (or a subsequent assignee of the Company); provided that
neither the Company nor any subsequent assignor shall be released from any of
its obligations hereunder by reason of any such assignment.
(iii) The covenants, representations, warranties and indemnities
of the Trust under this Agreement, and under any other agreement, instrument,
certificate or document executed and delivered in connection herewith or the
transactions contemplated hereby, may be collaterally assigned to any and all
lenders to the Company or any Affiliate thereof that controls the Company (the
"Lenders"), any and all of whom may enforce their rights and remedies in
connection with any such collateral assignment or realization thereon to the
extent provided in the applicable debt instruments and security agreements or at
law or in equity. Upon receipt of written notice from the Lenders that an "Event
of Default" has occurred pursuant to the applicable indebtedness, the Trust will
tender any payments due under this Agreement to the Lenders in accordance with
the instructions set forth in such notice.
(iv) The Trust and any Permitted Trust Transferee (as hereinafter
defined) may assign this Agreement or any right or interest hereunder to one or
more Persons (each a "Permitted Trust Transferee") that is (A) listed on
Schedule A, (B) any lineal descendant of any Beneficial Owner, (C) any trust of
which each beneficiary is a Beneficial Owner, or a spouse, lineal descendant or
sibling of such Beneficial Owner, (D) any Person in which each equity owner is a
Person described in subclause (A), (B) or (C) of this clause (iv) of Subsection
7(j) or (E) the Non-
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<PAGE> 13
U.S. Based Enterprise. Furthermore, the Trust and any Permitted Trust Transferee
may pledge this Agreement or any right or interest hereunder to secure its
obligations with respect to any indebtedness for borrowed money or other
advances of credit by a bank or other institutional lender, subject, however, to
the prior written consent of the Company, which consent shall not be
unreasonably withheld or delayed. No such assignment (including without
limitation any such pledge with the consent of the Company) shall release the
Trust or any Permitted Trust Transferee assignor from any of its obligations
hereunder.
(k) Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and permitted
assigns. This Agreement is not intended, and shall not be deemed, to create or
confer any right or interest for the benefit of any Person not a party hereto.
(l) Titles and Captions. The titles and captions of the Sections of
this Agreement are for convenience of reference only and do not in any way
define or interpret the intent of the parties or modify or otherwise affect any
of the provisions hereof.
(m) Grammatical Conventions. Whenever the context so requires, each
pronoun or verb used herein shall be construed in the singular or the plural
sense and each capitalized term defined herein and each pronoun used herein
shall be construed in the masculine, feminine or neuter sense.
(n) References. The terms "herein," "hereto," "hereof," "hereby," and
"hereunder," and other terms of similar import, refer to this Agreement as a
whole, and not to any Section or other part hereof.
(o) No Presumptions. Each party hereto acknowledges that it has
participated, with the advice of counsel, in the preparation of this Agreement.
No party hereto is entitled to any presumption with respect to the
interpretation of any provision hereof or the resolution of any alleged
ambiguity herein based on any claim that the other party hereto drafted or
controlled the drafting of this Agreement.
(p) Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original and which together shall constitute one and
the same agreement.
(q) Incorporation by Reference. Exhibit A hereto is an integral part of
this Agreement and is incorporated herein in its entirety by this reference.
(r) Certain Definitions.
(i) "Affiliate" of a Person means another Person (A) directly or
indirectly controlling, controlled by, or under common control with, such Person
(for this purpose, "control" of a Person means the power (whether or not
exercised) to direct the policies, operations
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<PAGE> 14
or activities of such Person by or through the ownership of, or right to vote,
or direct the manner of voting of, securities of such Person, or pursuant to
agreement or law or otherwise) or (B) who is a director or officer of a
corporation, general partner of a partnership, manager of a limited liability
company, trustee of a trust or other Person who exercises managerial authority
with respect to the subject Person; or (C) who owns (or has the discretionary
right to acquire) 10% or more of the equity interests (including without
limitation capital stock or partnership, membership or beneficial interests) of
the subject Person.
(ii) "Company Affiliate" means a Person that is an Affiliate of
the Company by reason of clause (A) of clause (i) of Subsection 7(r).
(iii) "Governmental Authority" means any federal, state, local or
foreign court, arbitration panel, government, governmental authority, agency or
instrumentality of competent jurisdiction, or recognized professional or
industry association or organization that establishes or enforces policies or
standards or otherwise regulates or supervises the services and activities
subject hereto.
(iv) "Person" includes without limitation a natural person,
corporation, joint stock company, limited liability company, partnership, joint
venture, association, trust, Governmental Authority, or any group of the
foregoing acting in concert.
(v) "Proceeding" means any action, suit, investigation, audit or
mediation, arbitration or other proceeding, at law or in equity, before or by
any Governmental Authority.
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<PAGE> 15
(s) Entire Agreement. This Agreement embodies the entire agreement of
the parties hereto with respect to the subject matter hereof and supersedes any
prior agreement, commitment or arrangement relating thereto.
IN WITNESS WHEREOF, the Company and the Trust, by their respective duly
authorized officers, have duly executed this Agreement on the date set forth in
the Preamble hereto.
O. PAPPALIMBERIS TRUST SERVICE ONE INTERNATIONAL
CORPORATION
By: Ionian Trust Company By: /s/ Jay L. Botchman
--------------------
Name: Jay L. Botchman
Title: Chairman
By: /s/ Barry Feiner
-----------------------------------
Barry Feiner, Attorney-in-fact
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<PAGE> 1
AMENDMENTS TO
MUTUAL BUSINESS DEVELOPMENT AGREEMENT,
NON-COMPETITION AGREEMENT
AND
STOCK PURCHASE AGREEMENT
Amendments dated as of December 16, 1997, to (i) the MUTUAL BUSINESS DEVELOPMENT
AGREEMENT dated as of October 8, 1996 (the "MBDA") between Service One
International Corporation (the "Company") and the O. Pappalimberis Trust (the
"Trust" which term shall include the former trustees and agents thereof): (ii)
the NON-COMPETITION AGREEMENT dated as of October 8, 1996 (the "Non-Competition
Agreement") among others, the Company, the Trust, Taxter One LLC ("Taxter"), a
principal owner of the Company, and Jason W. Galaris ("JWG") a beneficiary of
the Trust and (iii) the STOCK PURCHASE AGREEMENT dated as of October 8, 1996
(the "SPA") between among others, Taxter and the Trust.
W I T N E S S E T H:
WHEREAS, in accordance with the terms of the MBDA, the Trust has assigned the
MBDA to Eikos Management LLC ("Eikos"), an Isle of Mann limited liability
company wholly owned by the Trust; and
WHEREAS, Thesseus International Asset Fund, N.V. ("Thesseus") a Netherlands
Antilles corporation organized and controlled by the Trust and JWG, intends to
acquire Eikos and all the right, title and interest in and to the assets (the
"Assets") of limited partnerships known as FAR I and FAR II (the
"Partnerships"), which partnerships currently own portfolios of credit card
receivables being serviced by the Company;
WHEREAS, for the consideration set forth herein and in order to facilitate the
transfer of the assets to Thesseus, the Company and Taxter had agreed as
provided herein to waive and release JWG, the Trust and Thesseus and/or
affiliates thereof from the non-competition restrictions set forth in the MBDA,
the SPA, and the Non-Competition Agreement, and from all other non-competition
restrictions which may be contained in any other agreement executed as of
October 8, 1996, by Taxter, the Company, the Trust, JWG and/or any affiliates
thereof in connection with the sale by the Trust of all of the outstanding
capital stock of Genesis II Corporation to Taxter (all such agreements
hereinafter collectively called the "Agreements").
WHEREAS, as a condition of the aforesaid waiver and release, the parties have
agreed to certain other terms and conditions all as set forth herein;
Page 1 of 4 Pages
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein
contained, and for good and other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, do hereby agree as follows:
1. As qualified by the terms of Section 2 hereof:
(a) The Company hereby releases the Trust and its affiliates, including
but not limited to Eikos and Thesseus, from all non-competition restrictions set
forth in the MBDA including but not limited to the restrictions contained in
Paragraph 1(a) thereof,
(b) Taxter hereby releases the Trust and affiliates, including but not
limited to Eikos and Thesseus, from all non-competition restrictions set forth
in the SPA including but not limited to the restrictions contained in Section 9
thereof.
(c) Taxter and the Company (the "Releasors") hereby release the Trust,
JWG and their respective affiliates, including but not limited to Eikos and
Thesseus, (the "Releasees") from the terms of the Non-Competition Agreement so
that the conditions of the Non-Competition Agreement shall no longer be
applicable to the Releasees; and
(d) The Releasees hereby release the Releases from all other
non-competition restrictions which may be contained in the Agreements.
2. The releases set forth in Section I above (the "Releases"), relate
solely to business operations conducted with respect to the Assets, and may
include minority ownership in any entity received in exchange for the transfer
of the Assets.
3. The Trust, Thesseus and Eikos hereby agree that, in consideration for
the Releases, they shall pay to the Company an aggregate of $1 million which the
Releasors hereby accept as full and complete consideration (the "Consideration")
for the Releases. The Consideration shall be paid at the rate of 25% of the "5%
Fee," as defined in subparagraph 3(a)(ii) of the MBDA, distributed to the Trust
and/or or its assignee, which amount the Company shall deduct from each payment
of the 5% Fee until the Consideration is paid in full.
4. The Trust, Eikos, Thesseus and the Company hereby agree that Paragraph
3(c) of the MBDA is amended as follows:
On March 1, 1998 the Company shall pay to the Trust all amounts in
respect of the 5% Fee which became payable during the period commencing
October 8, 1996 and terminating on the close of business on February
28, 1998. Thereafter, commencing September 1, 1998, on the first day of
each September and March during the Term and, if applicable, the
Additional Term, the Company shall pay to the Trust all amounts in
respect of the 5% Fee which become payable during the immediately
Page 2 of 4 Pages
<PAGE> 3
preceding six months, by delivery to the Trust of a check in an amount
equal to the sum of all such amounts. Each payment of the 5% Fee shall
be accompanied by a certificate of the Company's chief financial
officer setting forth in reasonable detail the calculation of the 5%
Fee.
5. The parties hereto agree that under the terms of the MBDA, the Non-Exclusive
License Agreement between the Trust and the Company, and any other agreement
entered into by the Trust or any of its affiliates in connection with the SPA,
the Trust, the Non-U.S. Based Enterprise (as defined in the MBDA), and any
affiliates of the Trust, including without limitation Eikos and Thesseus, have
the rights to use the "System" only in the condition and state of development in
which it was transferred to the purchasers in connection with the SPA on the
date of the Closing (the "Original System") and that the Company and its
affiliates have no obligation to transfer to any of the Releasees any software
technology, know-how or other information of any kind relating to the System.
The Company and its affiliates acknowledge and agree, however, that the
Releasees retain the unrestricted right to modify, enhance and/or otherwise
change the Original Systems and that the Company and its affiliates shall have
no right to use such modifications, enhancements and/or changes. The Trust, the
Non-U.S. Based Enterprise, and all affiliates thereof, including without
limitation Eikos and Thesseus, shall have no right to use or license any other
proprietary analytical computer programs, operating systems, methods or
procedures developed by the Credit Store, Inc. or any of its affiliates or to
require the Company or any of its affiliates to process or service any
receivables or portfolios of receivables it may acquire or contemplate
acquiring, except as provided in paragraph 8 hereof.
6. On condition that Thesseus acquires the Assets, no later than 180 days after
the date of such acquisitions, JWG, Eikos, Thesseus, and any affiliate thereof
or any transferee of the Assets will cause the servicing of the Assets to be
transferred from the Company to an alternative servicer.
7. Except as provided herein, the MBDA is not changed and remains in full force
and effect.
IN WITNESS WHEREOF, the parties hereto have executed the Agreement as of the
date first set forth above.
O. PAPPALIMBERIS TRUST TAXTER ONE LLC
By: /s/ Barry Feiner By: /s/ Jay L. Botchman
------------------------ --------------------------------
Barry Feiner, Trustee Jay L. Botchman, Managing Member
Page 3 of 4 Pages
<PAGE> 4
SERVICE ONE INTERNATIONAL EIKOS MANAGEMENT, LLC
CORPORATION
By: /s/ [Illegible] /s/ Barry Feiner
--------------------------- -------------------------------------
Name: Name: Barry Feiner
---------------------
Title: Title: Agent
---------------------
/s/ Jason W. Galaris THESSEUS INTERNATIONAL
--------------------------- ASSET FUND
Jason W. Galaris
By: /s/ Barry Feiner
---------------------------------
Name: Barry Feiner
Title: President
Page 4 of 4 Pages
<PAGE> 1
AMENDMENT
TO THE
MUTUAL BUSINESS DEVELOPMENT AGREEMENT
Amendment dated as of September 1, 1998 (the "Amendment") to the MUTUAL
BUSINESS DEVELOPMENT AGREEMENT dated as of October 8, 1996 (the "MBDA"), as
amended, between THE CREDIT STORE, INC. a Delaware corporation (the "Company")
and EIKOS MANAGEMENT LLC, an Isle of Man limited liability company ("Eikos").
W I T N E S S E T H:
WHEREAS, the Company is the successor by merger to Service One
International Corporation ("SOIC"), one original signatory to the MBDA; and
WHEREAS, Eikos, the Non-U.S. Based Enterprise, is the assignee of the
MBDA, as amended, including Sections 3 and 4 of the First Amendment (hereafter
defined) from the O. Pappalimberis Trust (the "Trust"), the other original
signatory to the MBDA and First Amendment; and
WHEREAS, the Company, SOIC, Eikos, the Trust and certain other parties
entered into those certain Amendments to Mutual Business Development Agreement,
Non-Competition Agreement and Stock Purchase Agreement dated as of December 16,
1997 (the "First Amendment") amending, among other things, certain provisions of
the MBDA; and
WHEREAS, the Company desires an option from Eikos to terminate its
interest in the MBDA, and Eikos desires to provide an option to the Company, on
the terms and conditions set forth herein and Eikos desires to extend the term
of the Agreement in the event such option is not exercised; and
WHEREAS, for the considerations set forth herein and in order to
facilitate the method of payment and accounting therefor under the MBDA, the
Company and Eikos have agreed to amend certain of the terms of the MBDA; and
WHEREAS, as a condition of the aforesaid amendment, the parties have
agreed to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, do hereby agree as follows:
<PAGE> 2
1. Section 2 of the MBDA is amended in its entirety to read as follows:
Term. The term of the Agreement ("Term") shall commence on
October 8, 1996 and shall expire at the close of business on May 31,
2005 (the "Termination Date"), provided, however, that if the Company
shall exercise the Option as provided in Subsection 3(c)(v), the
Agreement shall terminate on the earlier of the receipt of Final
Option Payment or the Termination Date.
2. Section 4 of the First Amendment is hereby deleted in its entirety.
3. Sections 3(a) through 3(c) of the MBDA are amended in their entirety to
read as follows:
(a) Upon notice to the Company that the Trust has
completed the formation, organization, and initial financing of the Non-U.S.
Based Enterprise, and without regard to any other activity or the success
thereof, as full compensation therefor, the Company shall pay the Trust or if
the Trust forms a separate entity (whether or not a corporate entity) the
Company shall pay to such entity:
(i) within four days after the signing of
this Agreement and thereafter prior to or on the fifth day of each of the 11
subsequent calendar months, a base fee in the amount of $42,500 (net of any
amounts of such payment required to be withheld under applicable law, if any);
and, in addition,
(ii) with respect to Net Proceeds upon the
Disposition of a Portfolio (as such terms are defined in Subsection 3(b)) owned
by the Company or any Company Affiliate (as defined in Subsection 7(r)(ii)
hereof) at any time during the Term or a credit card account becoming a
Qualifying Receivable (as defined below) at any time during the Term, an amount
equal to 5% of such Net Proceeds (net of any amounts required to be withheld
under applicable law and regulations); provided that, subject to the provisions
of Subsection 3(d) and 3(e), no such payment shall be made if the aggregate
amount of the 5% Fee (as defined below) plus Monthly Payments (as defined below
paid to the Trust hereunder equals $24,000,000 (The parties acknowledge that
this amount was reduced from the $25,000,000 figure that originally appeared in
the MBDA as a result of the Consideration, as that term is defined in the First
Amendment, that is to be deducted from the payment of the 5% Fee.).
Notwithstanding the foregoing, if a Portfolio is owned by the Company during the
Term, or Additional Term (as defined below), any Net Proceeds or other
collections with respect to such Portfolio received after the Term or Additional
Term shall nevertheless be treated as having been received during the Term or
Additional Term, as the case may be.
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<PAGE> 3
The fees described in sections a) through e)
below (referred to herein collectively as the "5% Fee") shall be earned and,
subject to Section 3(c), paid in accordance with the following schedule:
a) Upon the earlier to occur of
delivery of the originated Balance
Transfer Amount to a
"pre-securitization credit
facility" (warehouse line) or a
credit card account becoming a
Qualifying Receivable, an amount
equal to 5% of the related Net
Proceeds shall be deemed earned, of
which 25% shall be payable to the
Trust.
b) After occurrence of either of the
above events, upon the earlier to
occur of delivery of the
receivables, as to which a fee was
earned under section a) above, to a
securitization facility (or any
other Disposition) or the passage
of 11 months from the Credit Card
Origination Date, the 75% balance
of the earned, but unpaid, 5% Fee
shall be payable to the Trust.
c) If following the Credit Card
Origination Date an Account does
not become a Qualifying Receivable
and has not been delivered to a
"pre-securitization credit
facility" (warehouse line), or a
securitization facility and
Disposition has not been effected
with respect to such Account, no
amount of the 5% Fee shall be
earned or paid until the first day
of the 11th month after the Credit
Card Origination Date and, on that
date, if the Account is or becomes
Current, the full 5% of the Net
Proceeds shall be payable to the
Trust with respect to such Account.
d) If on the first anniversary of the
Credit Card Origination Date of an
Account, no amounts have previously
been paid to the Trust with respect
to such Account and the Account is
not more than 59
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<PAGE> 4
days delinquent, a fee equal to
2 1/2 percent of the Balance
Transfer Amount with respect to
such Account shall be payable to
the Trust.
e) With respect to any Subpar Account,
as defined below, an amount equal
to 5% of all cash collections and
profits from resale shall be
payable to the Trust when received.
"Subpar Account" shall mean any
Account, with respect to which cash
or profits from resale is received
and which did not result in a
Balance Transfer Amount or payment
of any fee hereunder. "Cash
collections" as used in this
Subsection (e) shall exclude that
portion of any cash collections
from Subpar Accounts that the
Company is required to pay to
sellers from whom the Company
purchased Accounts, participants or
brokers in which the Company has
neither a direct or indirect
ownership interest. "Profits from
resale" shall be determined by
allocating to each Subpar Account
its pro rata acquisition cost
(purchase price and capitalized
costs of acquisition, including
broker's and attorney's fees and
electronic data scrubbing costs)
based upon the number of Accounts
in the Portfolio with which it was
acquired and subtracting therefrom
its pro rata sales price (sales
price minus broker's and attorney's
fees) based upon the number of
Accounts in the Portfolio with
which it is sold.
(b) For this Purpose:
(i) "Account" means the contractual account
or other agreement between a consumer and the issuer of the credit (including,
but not limited to, credit card, consumer installment and automobile lenders) or
its assignee as creditor of such account, irrespective of whether the account
debtor's obligation was discharged in bankruptcy.
(ii) "Balance Transfer Amount" means any
newly established receivable balance originated or acquired by the Company by
way of
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<PAGE> 5
an Account, which is not to include new charges on the Account subsequent to the
initial receivable amount. Subject to the provisions of the next sentence, all
computations of the 5% Fee shall be derived using the original Balance Transfer
Amount irrespective of whether the cardholder has paid principal down below the
original Balance Transfer Amount or charged more than the Balance Transfer
Amount at the time of any of the 5% Fee payment obligations. If the Company is
obligated with respect to Accounts with a Balance Transfer Amount to pay
proceeds from the sale, financing, securitization or collections thereon to
sellers from whom the Company purchased Accounts, participants or brokers in
which the Company has neither a direct or indirect ownership interest, then the
amount of such payments shall be deducted form the Balance Transfer Amount of
such. Accounts and the amount of marketing, servicing fees or any other income
received from such sellers from whom the Company purchased Accounts or
participants for such Accounts shall be added to the Balance Transfer Amount;
provided, however, that the Balance Transfer Amount shall never exceed the
original Balance Transfer Amount. If payments to or receipt of income from such
sellers from whom the Company purchased Accounts, participants and brokers
occurs after the calculation or payment of the 5% Fee, then the amount of the 5%
Fee shall be recalculated to take account for such payments or income.
(iii) "Base Proceeds" of a Disposition means
20% of the total Balance Transfer Amount of a Portfolio pursuant to the
agreements or instruments relating to such Disposition.
(iv) "Credit Card Origination Date" means
the recorded date that the credit card account is booked on the credit card
system (FDR or other such similar system.
(v) "Current" means, with respect to an
Account, that there is no payment which is unpaid more than ten days after the
due date.
(vi) "Disposition" means with respect to a
Portfolio any sale, securitization or other disposition of any interest in a
Portfolio (or the accounts receivable generated upon collection of amounts owed
on Accounts included in the Portfolio) that results in the actual receipt of
Proceeds by the Company or any Company Affiliate.
(vii) "Net Proceeds" of a Disposition means
the Proceeds of such Disposition after deduction of the Base Proceeds of such
Disposition.
(viii) "Portfolio" means a group of Accounts
acquired or originated by the Company prior to expiration of the Term, without
regard to the time of any Disposition or other event requiring payment to take
place.
-5-
<PAGE> 6
(ix) "Proceeds" of a Disposition means
eighty percent (80%) of the newly originated Balance Transfer Amount or credit
card receivable.
(x) "Qualifying Receivable" means any
Balance Transfer Amount on which the cardholder has made three consecutive
payments, any two of which must have been made no later than ten days after the
payment due date, and any one payment must not have been made more than 29 days
past its scheduled due date.
(c) Payments and Option.
(i) From the date of this Amendment until
May 31, 2005 (at which time the Initial Final Payment, if any, shall be due),
the Company shall not make any payments of the 5% Fee to the Trust. Provided
that the Company has not exercised the Option as provided in Subsection (v)
below, commencing June 1, 1999 and on the first day of each succeeding month
during the Term, the Company shall pay to the Trust or its assignee on account
of the 5% Fee (A) the sum of $75,000 in immediately available funds (the
"Monthly Payment"), and (B) at the option of the Company, $22,500 in immediately
available funds or $25,000 in aggregate principal amount of current credit card
receivables for which at least one payment has been received on each associated
account (the "Deferral Fee"). The payment of the Monthly Payment and the
Deferral Fee shall only become due and payable by the Company upon its receipt
of reasonable resolutions or evidence of entity authority (and individual
authority on behalf of the entity) to execute and deliver this Amendment. As
used herein, "current credit card receivables" shall mean receivables associated
with credit card accounts for which the minimum required payments are not more
than 30 days past the statement due date and not otherwise in default under any
applicable account agreements. Notwithstanding the foregoing, if the Monthly
Payment and Deferral Fee are not timely paid, then the amount of such nonpayment
shall be subject to the provisions of Section 3 (d) below for purposes of
determining if the Company has failed to pay any amount in excess of the
Threshold Amount during any year (measured from June 1 through May 31). For
purposes of Section 3 (d), the Company shall been deemed to have fully and
timely paid all amounts of the 5% Fee required to be paid from October 8, 1996
through June 1, 1998. With respect to credit card receivables delivered to the
Trust as payment of the Deferral Fee or which were delivered prior to the date
of this Amendment as payment of the 5% Fee, the following provisions shall apply
from and after the date of this Amendment:
a) Effective as of the delivery date
of the credit card receivables, the
Trust agrees to assume all
obligations of the Company to
cardholders under the respective
cardholder agreements that
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<PAGE> 7
are to be performed on or after the
delivery date. Such obligations
assumed by the Trust shall include
(a) funding by the Trust of all new
purchases and cash advances on the
credit card accounts made after the
delivery date, and (b) all
liability for cardholder claims for
fraud, refunds, reversals or
charge-backs made with respect to
charges on the credit card accounts
for charges made after the delivery
date. The Trust, on a quarterly
basis, shall place on deposit with
the Company an amount equal to the
contingent liability and reserve
requirements under the Company's
agreements with the issuing bank
for such credit card accounts
("Reserve Deposit"). Except as
specifically provided in this
Agreement, the transfer of the
credit card receivables is made
without recourse to the Company,
and are transferred "as is",
without any representation or
warranty of any kind, nature or
extent. The Company represents and
warrants that as of the delivery
date (i) it has full right to
transfer the credit card accounts
free and clear of any encumbrance,
lien or pledge, (ii) the Balance
Transfer Amount on the Credit Card
Origination Date had not been
discharged in bankruptcy, and (iii)
the obligations represented by the
credit card receivables, are valid,
duly enforceable in accordance with
their terms and are not subject to
any defenses, offsets,
counterclaims or claims for
avoidance, reduction, expungement
or subordination.
b) The Company shall service the
credit cards pursuant to the terms
and provisions set forth in Exhibit
"A" attached hereto. Each time the
total balance of credit card
receivables that
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<PAGE> 8
the Company is servicing for the
Trust (including the balance of
receivables that may have been
transferred to third parties)
equals $500,000 or more
(irrespective of the delinquency
status of the receivables), then
the Trust, at its expense
(including the payment or
reimbursement of system and
conversion fees) shall transfer all
credit cards accounts (including
accounts associated with
receivables that may have been
transferred to third parties or
charged off) to a new third party
issuing bank and servicer within
thirty (30) days following the date
on which such receivables total
$500,000 ("Required Transfer
Date)..The Trust represents and
warrants that from and after the
date of transfer of the credit card
receivables to a third party
issuing bank and servicer, the
credit card receivables, shall be
established, serviced and collected
in compliance in all material
respects with applicable laws,
rules and regulations. As
compensation for its servicing
activities with respect to the
credit card accounts, the Trust
shall pay to the Company a
servicing fee equal to $5.00 per
month per statemented credit card
account, which fee, except as set
forth above, shall be inclusive of
third party fees and expenses in
connection with servicing the
credit card accounts. If, for any
reason whatsoever except to the
extent of actual delays directly
caused by the Company, the credit
card accounts have not been
transferred to a new third party
issuing bank and servicer on or
before the Required Transfer Date,
then the servicing fee shall
increase by fifty cents per card
per month for each month after the
Required Transfer Date until the
date of such transfer to a third
party. The servicing fee shall be
due and payable to the Company each
month within
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<PAGE> 9
fifteen (15) days following the
Company's delivery of an invoice
for such fees. The Company shall be
entitled to deduct (i) such
servicing fees; (ii) shortfalls by
the Trust in funding (a) new
purchases and cash advances, and
(b) fraud, refunds, reversals and
charge-backs; (iii) system and
conversion fees; and (iv) the
Reserve Deposit, from any net
proceeds which may be due to the
Trust from the credit card accounts
and from the Reserve Deposit.
(ii) within ninety (90) days after May 31,
2005, the Company shall pay to the Trust or its assignee, in immediately
available funds, a sum (the "Initial Final Payment") equal to the sum of all
amounts in respect of the 5% Fee accrued during the Term (but in no event shall
amounts so accrued exceed $25,000,000), less (i) the sum of all Monthly Payments
paid during the Term, (ii) less $1,000,000, and (iii) less the amount of the 5%
Fee paid by the Company with respect to periods from October 8, 1996 through
September 1, 1998, as such amount may be adjusted pursuant to the provisions of
Section 5 of this Amendment;
(iii) within ninety (90) days after the
termination date of the Additional Term, if any, the Company shall pay to the
Trust or its assignee, in immediately available funds, a sum (the "Additional
Final Payment") equal to one-half of the 5% Fee in accordance with the
provisions of Section 3(e) of the Agreement;
(iv) Intentionally Omitted.
(v) commencing on December 31, 1998 and
continuing through December 31, 1999, the Company shall have an option (the
"Option") to acquire from Eikos all rights and benefits under the Agreement, as
amended, as follows:
(A) The Company shall pay the sum of
$100,000 to Eikos as the purchase price for the Option (The prior payment of
which is hereby acknowledged by Eikos);
(B) in the event that the Company elects
to exercise the Option, the Company shall deliver, on or before December 31,
1999, written notice to Eikos of its decision to exercise the Option together
with its promissory note (the "Note") in the principal amount of twelve million
dollars, ($12,000,000), bearing interest at a rate of 5.0% per annum from the
date the Option is exercised, payable as follows: seven million dollars
($7,000,000)
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<PAGE> 10
in immediately available funds (the "Initial Option Payment")
within ninety (90) days of delivery of the Note, and, five million dollars
($5,000,000) in immediately available funds (the "Final Option Payment") within
one (1) year of delivery of the Note; and
(C) in the event that the Company shall
exercise the Option pursuant to clause (B) above then, concurrent with the
exercise, the obligation to pay the Monthly Payment and Deferral Fee shall
terminate; provided, however, if the Company shall fail to make either the
Initial Option Payment or the Final Option Payment in a timely manner, Eikos
shall elect, within 90 days following such failure, at its option, to (i) cancel
the Option and revert to payment of the 5% Fee in accordance with this Agreement
(subject to the Company receiving credits against Monthly Payments and Deferral
Fees for the amount of interest paid under the Note and for the Initial Option
Payment, if paid), or (ii) collect on the Note, receive interest at a rate of
fifteen percent (15%) per annum on the unpaid balance of the Note (including
accrued interest thereon), and receive its costs of collection, including
reasonable attorney's fees. Failure by Eikos to make its election within said 90
period, shall be deemed its election to cancel the Option pursuant to Subsection
(i).
4. The second sentence of Section 3 of the First Amendment is hereby amended
in its entirety as follows:
The Consideration shall be, in a single lump sum, (a) deemed paid in
connection with the Final Option Payment if the Option has been
exercised, as such terms are defined in subsection 3(c)(v)(B) of the
MBDA, or (b) deducted from the Initial Final Payment as and when made.
5. On or before June 1, 1999, Eikos, pursuant to the provisions of
Section 3(f) of the Agreement, shall conduct an audit of the 5% Fee due pursuant
to this Agreement from its inception through September 1 1998 ("Audited
Period"). If it is determined that there has been an underpayment for the
Audited Period, then for the next 12 installments of the Deferral Fee due
following such determination, one-twelfth of the amount of the underpayment
shall be added to the Deferral Fee due and payable by the Company. If it is
determined that there has been an overpayment, then for the next 12 installments
of the Deferral Fee due following such determination, one-twelfth of the amount
of the overpayment shall be deducted from the Deferral Fee due and payable by
the Company. If it is determined that there has been an overpayment of more than
$300,000, then the number of installments will be increased from 12 to the
number necessary to properly adjust for the amount of the overpayment. For each
$22,500 of the cash equivalent amount of overpayments or underpayments of the 5%
Fee, an adjustment hereunder of $25,000 in Deferral Fees shall be made. If the
determination has not been made by June 1, 1999, then the Company shall not be
obligated to make the Deferral Fee until the earlier of (i) June 1, 2000, or
(ii) the first day of the month following the month in which the determination
is made
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<PAGE> 11
("Automatic Deductions"). The amount of any Automatic Deductions made shall
be included in the calculation of whether an overpayment or underpayment of the
5% Fee has been made for the period from the inception of this Agreement
through the date of this Amendment. With respect to overpayments and
underpayments for the period governed by this Section 5, the timing for the
payment of such amounts shall be as set forth in this Section without regard to
the timing provisions of Section 3 (f) of the Agreement.
6. Eikos represents and warrants that it is the sole owner of all right, title
and interest in and to: (i) the MBDA and Sections 3 and 4 of the First
Amendment, and the right to receive payments thereunder, and that it has not
transferred or pledged all or any interest in same, and (ii) all credit cards
previously delivered by the Company to Eikos in satisfaction of the Company's
obligations to pay the 5% Fee and that Eikos has not transferred all or any
interest in same.
7. Capitalized terms used herein without being defined shall have the meanings
given to them in the MBDA or First Amendment. The term "Trust" when used in the
MBDA, First Amendment and this Amendment shall mean Eikos. As used in Section 3
above (which modifies Sections 3(a) through 3(c) of the MBDA) the term
"Agreement" shall mean the MBDA, the term "Amendment" shall mean this Amendment,
and the term "date of this Amendment" shall mean the date of this Amendment.
8. Except as otherwise provided herein, the MBDA is not changed and remains in
full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first set forth above.
THE CREDIT STORE, INC., EIKOS MANAGEMENT LLC, an
a Delaware corporation Isle of Man Limited Liability
Company
By Ionian Trust Company
Limited, a Republic of Ireland
Corporation
Its Administrative Member
By: /s/ Martin J. Burke
------------------------------ By: /s/ Derek M. Galanis
Martin J. Burke ------------------------------
Chairman and CEO Derek M. Galanis
President
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<PAGE> 1
MUTUAL BUSINESS DEVELOPMENT AGREEMENT
MUTUAL BUSINESS DEVELOPMENT AGREEMENT dated as of October 8,
1996 (the "Agreement") between Service One International Corporation, a South
Dakota corporation (the "Company"), and the Renaissance Trust I (the "Trust"),
W I T N E S S E T H:
WHEREAS, the Company currently is engaged in the business of
acquiring, originating, servicing, securitizing and selling consumer credit card
debt portfolios (the "Business"); and
WHEREAS, to date the Company has conducted its operations
solely "in the U.S." (as that phrase is hereinafter defined); and
WHEREAS, the Company desires to invest or participate in
business ventures or enterprises engaged in the development and conduct of the
Business "outside the U.S." (as that phrase is hereinafter defined); and
WHEREAS, the Company owns certain proprietary analytical
computer programs, operating systems, methods and procedures, and related
know-how (the "System"); and
WHEREAS, the Trust has heretofore owned and controlled
companies engaged in the Business in the U.S. and currently proposes to form and
finance a company (the "Non-U.S. Based Enterprise") that among its proposed
activities, may develop opportunities or operations that would be useful to
conducting the Business outside the U.S.; and
WHEREAS, the Trust desires that the Non-U.S. Based Enterprise
be able to use the System in the non-U.S. based Business, and the Company is
willing to license the System to the Non-U.S. Based Enterprise for such purpose,
on the terms and subject to the conditions set forth in a Non-exclusive License
Agreement, substantially in the form provided for herein (the "License
Agreement"); and
WHEREAS, the Company desires that the Non-U.S. Based
Enterprise undertake to promote the Company and the System to non-U.S. based
financial institutions and organizations, to thereby enhance the Company's
opportunities to acquire appropriate portfolios from the U.S. affiliates of such
non-U.S. based financial institutions and organizations; and
WHEREAS, the Company and the Trustee desire to compensate and
incentivize each other by providing to the Trust an indirect economic interest
in the Company and by providing to the
<PAGE> 2
Company an indirect economic interest in the Non-U.S. Based Enterprise, both
solely as provided in this Agreement; and
WHEREAS, concurrently with this Agreement, the Company is
entering into an agreement (the "Other Agreement") substantively the same as
this Agreement with the O. Pappalimberis Trust (the "Other Trust");
NOW THEREFORE, the parties hereto hereby agree as follows:
1. Business of the Non-U.S. Based Enterprise.
(a) As soon as practicable, and in any event within
120 days after the date hereof, the Trust shall (i) form and organize the
non-U.S. Based Enterprise (inside or outside the U.S. at the Trust's
discretion), (ii) cause such Non-U.S. Based Enterprise to commence the conduct
of forming and organizing its operations, and (iii) provide at its sole
discretion funds or credit to finance the conduct of its operations. Except as
expressly provided elsewhere herein, the Non-U.S. Based Enterprise shall not,
for a period of six years from the date hereof, conduct any of its operations
inside the U.S. with respect to any Portfolio (as defined below) of which any of
the Accounts (as defined below) included therein are with Persons residing in
the United States or Canada ("in the U.S."). However, the Non-U.S. Based
Enterprise may contact any financial institution or other Person (as defined
below) that conducts operations outside the United States and Canada and may
acquire any Portfolio of which none of the Accounts included therein are with
Persons residing in the United States or Canada ("outside the U.S."). The
Non-U.S. Based Enterprise may also securitize a Portfolio in the U.S.; provided
that the Company (or an Affiliate thereof) shall be given a reasonable right of
first refusal and opportunity to effect such securitization.
(b) The Company engages the Non-U.S. Based Enterprise
to represent the Company in developing opportunities for the Company to acquire
appropriate Portfolios from United States or Canadian based affiliates of
non-U.S. based banks or foreign subsidiaries and/or affiliates of U.S.
institutions and other financial institutions. For this purpose, the Company
expressly authorizes the Non-U.S. Based Enterprise to discuss (subject to
appropriate confidentiality restrictions) with potential clients the benefits
and advantages of the System, the expertise of the Company in the conduct of the
operations and other relevant features of the Company and its personnel. The
Company also expressly authorizes the Non-U.S. Based Enterprise to solicit
financing from foreign banks and other financial institutions for the
acquisition by the Company of appropriate Portfolios.
(c) Any other provision hereof notwithstanding, the
Company may engage in or perform the Services for itself or for its benefit or
the benefit of any other Person (as defined in Subsection 7(r)) or engage any
other Person to perform such Services for the Company.
2. Term. The Agreement shall commence on the date hereof, and
subject to the provisions of Subsection 3(e), continue for the six-year period
(the "Term"), ending at the close of business on October 7, 2002 (the
"Termination Date").
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<PAGE> 3
3. Consideration.
(a) Upon notice to the Company that the Trust has
completed the formation, organization, and initial financing of the Non-U.S.
Based Enterprise, and without regard to any other activity or the success
thereof, as full compensation therefor, the Company shall pay the Trust or if
the Trust forms a separate entity (whether or not a corporate entity) the
Company shall pay to such entity:
(i) within four days after the signing of
this Agreement and thereafter prior to or on the fifth day of each of the 11
subsequent calendar months, a base fee in the amount of $42,500 (net of any
amounts of such payment required to be withheld under applicable law, if any);
and, in addition,
(ii) with respect to Net Proceeds upon the
Disposition of a Portfolio (as such terms are defined in Subsection 3(b)) owned
by the Company or any Company Affiliate (as defined in Subsection 7(r)(ii)
hereof) at any time during the Term or a credit card account becoming a
Qualifying Receivable (as defined below) at any time during the Term, an amount
equal to 5% of such Net Proceeds (net of any amounts required to be withheld
under applicable law and regulations); provided that, subject to the provisions
of Subsection 3(d) and 3(e), no such payment shall be made if the aggregate
amount of the 5% Fee (as defined below) paid to the Trust hereunder equals
$25,000,000. Notwithstanding the foregoing, if a Portfolio is owned by the
Company during the Term, or Additional Term (as defined below), any Net Proceeds
or other collections with respect to such Portfolio received after the Term or
Additional Term shall nevertheless be treated as having been received during the
Term or Additional Term, as the case may be.
The fees described in paragraphs a) through e) below (referred to
herein collectively as the "5% Fee") shall be earned and, subject to Section
3(c), paid in accordance with the following schedule:
a) Upon the earlier to occur of delivery of the originated
Balance Transfer Amount to a "pre-securitization credit
facility" (warehouse line) or a credit card account becoming a
Qualifying Receivable, an amount equal to 5% of the related
Net Proceeds shall be deemed earned, of which 25% shall be
payable to the Trust.
b) After occurrence of either of the above events, upon the
earlier to occur of delivery of the receivables, as to which a
fee was earned under paragraph a) above, to a securitization
facility (or any other Disposition) or the passage of 11
months from the Credit Card Origination Date, the 75% balance
of the earned, but unpaid, 5% Fee shall be payable to the
Trust.
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<PAGE> 4
c) If an Account does not become a Qualifying Receivable and has
not been delivered to a "pre-securitization credit facility"
(warehouse line), or a securitization facility and Disposition
has not been effected with respect to such Account, no amount
of the 5% Fee shall be earned or paid until the first day of
the 11th month after the Credit Card Origination Date and, on
that date, if the Account is or becomes Current, the full 5%
of the Net Proceeds shall be payable to the Trust with respect
to such Account.
d) If on the first anniversary of the Credit Card Origination
Date of an Account, no amounts have previously been paid to
the Trust with respect to such Account and the Account is not
more than 59 days delinquent, a fee equal to 2 1/2 percent of
the Balance Transfer Amount with respect to such Account shall
be payable to the Trust.
e) With respect to any Subpar Account, as defined below, an
amount equal to 5% of all cash collections shall be payable to
the Trust when received. "Subpar Account" shall mean any
Account, with respect to which cash is received and which did
not result in a Balance Transfer Amount or payment of any fee
hereunder.
(b) For this Purpose:
(i) "Account" means the contractual account
between a consumer credit card account debtor and the issuer of the credit card
or its assignee as creditor of such account, irrespective of whether the account
debtor's obligation was discharged in bankruptcy.
(ii) "Balance Transfer Amount" means any
newly established receivable balance originated or acquired by the Company by
way of a credit card Account, which is not to include new charges on the Account
subsequent to the initial receivable amount. (All computations of the 5% Fee
shall be derived using the Balance Transfer Amount irrespective of whether the
cardholder has paid principal down below the original Balance Transfer Amount or
charged more than the Balance Transfer Amount at the time of any of the 5%
payment obligations.)
(iii) "Base Proceeds" of a Disposition means
all Proceeds of a Disposition actually received by or for the account of the
Company or any Company Affiliate until the amount of such Proceeds equals 20% of
the total Balance Transfer Amount or credit card receivable of a Portfolio
pursuant to the agreements or instruments relating to such Disposition.
(iv) "Credit Card Origination Date" means
the recorded date that the credit card account is booked on the credit card
system (FDR or other such similar system).
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<PAGE> 5
(v) "Current" means, with respect to an
Account, that there is no payment which is unpaid more than ten days after the
due date.
(vi) "Disposition" means with respect to a
Portfolio any sale, securitization or other disposition of any interest in a
Portfolio (or the accounts receivable generated upon collection of amounts owed
on Accounts included in the Portfolio) that results in the actual receipt of
Proceeds by the Company or any Company Affiliate.
(vii) "Net Proceeds" of a Disposition means
the Proceeds of such Disposition after deduction of the Base Proceeds of such
Disposition.
(viii) "Portfolio" means a group of Accounts
acquired or originated by the Company prior to expiration of the Term, without
regard to the time of any Disposition or other event requiring payment to take
place.
(ix) "Proceeds" of a Disposition means
eighty percent (80%) of the newly originated Balance Transfer Amount or credit
card receivable.
(x) "Qualifying Receivable" means any
Balance Transfer Amount on which the cardholder has made three consecutive
payments, any two of which must have been made no later than ten days after the
payment due date, and any one payment must not have been made more than 29 days
past its scheduled due date.
(c) On or before the tenth day of each month during
the Term and, if applicable, the Additional Term, the Company shall pay to the
Trust all amounts in respect of the 5% Fee which become payable during the
immediately preceding month, by delivery to the Trust of a check in an amount
equal to the sum of all such amounts. Each payment of the 5% Fee shall be
accompanied by a certificate of the Company's chief financial officer setting
forth in reasonable detail the calculation of the 5% Fee.
(d) If at any time, the Company fails to make any
payment of the monthly base fee pursuant to Subsection 3(a)(i) or the 5% Fee
pursuant to Subsection 3(a)(ii) within the time when such payment becomes due
pursuant hereto, interest shall accrue and be payable on the amount of any such
payment not so made at the rate of 15% per annum from the date such payment
becomes due until such amount is paid in full, payment of such interest to be
made concurrently with the payment of the delinquent amount; provided that the
Company shall not be so required to pay any such interest to the extent that the
failure to pay prior to the end of the Term the 5% Fee is based on the Company's
good faith assertion of a set-off of such amount pursuant to Section 6 or a good
faith dispute by the Company with respect to the payment of such amount.
(e) If the Company fails to pay any amount in excess
of the "Threshold Amount" (as hereinafter defined) during any year, in the
aggregate of the monthly base fee or, prior to the expiration of the Term, the
5% Fee required to be paid by it pursuant to this Section 3, then,
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<PAGE> 6
the Term shall be extended by a period equal in duration to the cumulative
duration of the period or periods commencing, in each case, on the date any such
amount, which is unpaid, is finally determined to be due under the procedures
set forth in Section 3(f) below or is determined to be payable by a panel in
non-binding mediation in accordance with the procedures set forth on Section
7(g) below (any such determination herein called a "Determination") and ending
on the date such amount (together with interest thereon determined in accordance
with Subsection 3 (d)) is paid in full during which any such amount remains
unpaid; provided that in no event shall the Term extend past the earlier of (A)
the second anniversary of the Termination Date or (B) the date on which all
amounts (including amounts payable by reason of this Subsection 3(e)) are paid
in full (such two year or shorter period after the Termination Date, the
"Additional Term"), and the Company shall pay as additional fees hereunder (but
not as a penalty), at the same times and in the same manner as is provided in
clause (ii) of Subsection 3 (a), an amount equal to one-half of the amount of
the 5% Fee that would have been payable with respect to any Portfolio for which
there is a Disposition or any Qualification with respect to individual credit
card amount during such Additional Term had such Disposition been made during
the Term; provided that, with respect to each Determination, the Term shall not
be extended and the Company shall not be so required to make any such additional
payments if the Company deposits in escrow with a bank or financial institution
located in the United States and having consolidated assets in excess of
$500,000,000, amounts of the 5% Fee which are determined to be payable in such
Determination within twenty (20) days after such Determination is rendered and
if the Company makes such deposit in escrow after such 20 day period, the
duration of the extension of the Term and the requirement to make additional
payments shall cease at the time of such deposit. "Threshold Amount" shall mean
one hundred thousand dollars ($100,000.00) during the first year of this
Agreement, two hundred thousand dollars ($200,000.00) during the second year of
this Agreement, three hundred thousand dollars ($300,000.00) during the third
year of this Agreement, four hundred thousand dollars ($400,000.00) during the
fourth year of this Agreement, five hundred thousand dollars ($500,000.00)
during the fifth year of this Agreement, and six hundred thousand dollars
($600,000.00) during the sixth year of this Agreement.
(f) At any time within 90 days after the end of each
fiscal year of the Company ending during the Term or, thereafter, during which
the Company makes or is required to make a payment of the 5% Fee hereunder, the
Trust may cause its regular independent certified public accountants (subject to
the Trust and such accountants entering into appropriate confidentiality
agreements with the Company) to conduct an audit of the accounts of the Company
to confirm the amount of the 5% Fee determined by the Company to be due and
payable to the Trust in accordance with Section 3(a), if any, made during such
fiscal year. If the Trust determines, based on such audit, that the amount of
the 5% Fee determined by the Company in accordance with Section 3(a) requires
adjustment, because such amount was not correctly determined based on proper
assumptions, amounts or calculations, the Trust shall promptly, and in any case
within 30 days after completion of the audit, give notice (the "Adjustment
Notice") to the Company to such effect, setting forth therein the amount of the
5% Fee, as adjusted, and, in reasonable detail, the reasons for such adjustment.
If the Company agrees with the amount of the 5% Fee set forth in the Adjustment
Notice, the Company shall, within 20 days of the giving of the Adjustment
Notice, give written notice to the Trust confirming the amount of the 5% Fee, as
so adjusted, and on the fifth business day following
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<PAGE> 7
the giving of such notice, the Company shall pay to the Trust the deficiency in
the amount of the 5% Fee in accordance with the Adjustment Notice, together with
interest thereon determined in accordance with Subsection 3(d). If, however, the
Company disagrees with the adjustments set forth in the Adjustment Notice, the
Company shall, within 20 days of the giving of the Adjustment Notice, give
written notice (the "Dispute Notice") to the Trust to such effect, setting forth
therein, in reasonable detail, the reasons for such objection. In such event,
unless the Company and the Trust promptly resolve such objections and agree upon
the determination of the amount of the 5% Fee (in which case the deficiency, if
any, together with interest thereon determined in accordance with Subsection
3(d), shall be paid promptly, and in any event within five business days, after
the date of such agreement), the determination of the amount of the 5% Fee shall
be promptly referred to the respective regular independent certified public
accountants of the Company and the Trust, who shall confer and attempt to
resolve the objections as to such determination set forth in or arising as a
consequence of the Adjustment Notice and the Dispute Notice. If, within 15 days
after such referral, such accountants resolve such disputes and determine the
amount of the 5% Fee, they shall give written notices to the Company and the
Trust to such effect, setting forth the amount of the 5% Fee as so determined.
If they cannot make such determinations within such 15-day period, such
determination shall be referred to a third independent firm of certified public
accountants selected by the respective accountants, whose determination of such
amount shall be final and binding on the Company and the Trust. Upon the
determination of the amount of the 5% Fee by such accountants, any deficiency,
together with interest thereon determined in accordance with Subsection 3(d),
shall be paid promptly, and in any event within five business days, after the
date of such determination. The fees and expenses of the respective independent
certified public accountants of the Company and the Trust incurred in the
determination of the amount of the 5% Fee as provided herein shall be borne by
the Company and the Trust, respectively. The fees and expenses of a third firm
of independent certified public accountants incurred, if required pursuant to
this Section, shall be borne and promptly paid equally by the Company and the
Trust.
(g) No provision of Subsection 3(d), 3(e) or 3(f) is
intended or shall be deemed to preclude the commencement of any Proceeding by
the Trust or the Non-U.S. Based Enterprise to collect any base fee or 5% Fee to
which it may be entitled hereunder or the Company from seeking to recover any
overpayment, or otherwise to restrict the remedies available to either party to
enforce its rights hereunder.
(h) For federal income tax purposes, the Non-U.S.
Based Enterprise shall treat any amount received with respect to each Portfolio
as its share of income from an entity taxed as a partnership described in
Subchapter K of the Internal Revenue Code. The Non-U.S. Based Enterprise shall
furnish to the Company such information as the Company may reasonably require
with respect to its federal income tax obligations regarding the distribution of
profits from the Portfolios.
(i) For federal income tax purposes, the Company
shall treat any amount received with respect to each Portfolio as its share of
income from an entity taxed as a partnership described in Subchapter K of the
Internal Revenue Code. The Company shall furnish to Non-U.S.
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<PAGE> 8
Based Enterprise such information as Non-U.S. Based Enterprise may reasonably
require with respect to its federal income tax obligations regarding the
distribution of profits from the Portfolios.
4. System License. Concurrently herewith, the Company is
licensing the System to the Trust, pursuant to a Non-Exclusive Technology
License Agreement (the "License Agreement"), for use by the Non-U.S. Based
Enterprise in conducting the Business outside the U.S.
5. Right to Participate in Business of the Non-U.S. Based
Enterprise.
(a) Each of the Company, Service One Holdings Inc., a
Delaware corporation ("Holdings") and Taxter One LLC, a New York limited
liability company ("Buyer"), shall have an irrevocable and unconditional right
(but no obligation) to acquire an undivided interest in any Portfolio acquired
at any time during the Term by the Non-U.S. Based Enterprise or any Affiliate
thereof, which interest will entitle the Company, Holdings and Buyer to receive
in the aggregate (apportioned among them in accordance with their respective
interests or as they may agree among themselves) a portion of any Proceeds of a
Distribution of such Portfolio by the Non-U.S. Based Enterprise in the same
manner and subject to the same terms and conditions as are applicable to the 5%
Fee, except that the percentage of Net Proceeds payable shall be 10% (instead of
5%), and the proviso to clause (ii) of Subsection 3(a) shall not apply to such
interest.
(b) The aggregate purchase price for any such
interest in a Portfolio (the "Exercise Price") shall be 6% of the purchase price
actually paid or payable by the Non-U.S. Based Enterprise or an Affiliate
thereof for such Portfolio, such Exercise Price to be payable to the Non-U.S.
Based Enterprise at the same time and in the same manner as the purchase price
for the Portfolio is payable by the Non-U.S. Based Enterprise or an Affiliate
thereof.
(c) At least 10 days prior to the closing of the
acquisition of a Portfolio by the Non-U.S. Based Enterprise or an Affiliate
thereof, the Non-U.S. Based Enterprise shall give written notice (the
"Acquisition Notice") of such proposed acquisition to the Company, setting forth
therein in reasonable detail a description of the Portfolio proposed to be
acquired and the proposed terms and condition of such acquisition, including
without limitation the expected closing date, the purchase price for the
Portfolio and the seller thereof. The Company shall give written notice to the
Non-U.S. Based Enterprise within 10 days of the receipt of the Acquisition
Notice of any intention by the Company, Holding or Buyer to purchase an interest
in such Portfolio as provided in this Section 5. If the Company, Holding or
Buyer so elect to purchase such an interest and notice thereof is properly given
as herein provided, then concurrently with the acquisition of the Portfolio by
the Non-U.S. Based Enterprise or as soon as practicable thereafter, and in any
event within 10 business days after the closing of such acquisition the Company,
Holding or Buyer, as the case may be shall purchase its interest in such
Portfolio upon payment of the Exercise Price.
6. Set-Off. The Company, at its sole discretion, may set-off
and retain the amount of any indemnity payment required to be made by the Trust
and the Other Trust in accordance with Section 11.6 of the Stock Purchase
Agreement of even date herewith (the "Purchase
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<PAGE> 9
Agreement") by and among the Buyer, the Trust and the Other Trust or any payment
required to be made by the Trust to the Company pursuant to Section 5 or the
License Agreement that is not so made when due, in each case, from one-half of
any payment of the 5% Fee with respect to any Portfolio otherwise required or
permitted to be made by the Company hereunder, after the Trust shall have
received 25% of the 5% Fee payable to the Trust with respect to such Portfolio.
The Company agrees that amounts to be set-off and retained shall be applied
equally against (i) payments required (except for the set-off) to be made to the
Trust hereunder and (ii) payments required (except for the set-off) to be made
to the Other Trust and under the Other Agreement. The Trust may set-off and
retain the amount of any payment required to be made to it by Buyer under the
Stock Purchase Agreement or by the Company hereunder that is not so made when
due from any payment required to be made to the Company by the Trust hereunder
or under the License Agreement.
7. Miscellaneous.
(a) Limitation of Authority. No provision hereof
shall be deemed to create any partnership, joint venture or joint enterprise or
association between the parties hereto, or to convey to or invest in either
party any right or the assets or business of the other party hereto or, except
as expressly provided in Section 1, to authorize or to empower either party
hereto to act on behalf of, obligate or bind the other party hereto. Any
provision hereof notwithstanding, the Non-U.S. Based Enterprise is, and is
intended to be, an independent contractor.
(b) Notices. Any notice or demand to or upon either
party hereto required or permitted to be given or made hereunder shall be deemed
to have been duly given or made for all purposes if (i) in writing and sent by
(A) messenger or an overnight courier service against receipt, or (B) certified
or registered mail, postage paid, return receipt requested, or (ii) sent by
telegram, facsimile transmission, telex or similar electronic means, provided
that a written copy thereof is sent on the same day by postage paid first-class
mail, to such party at the following address:
To the Trust at: Renaissance Trust I
c/o Skadden, Arps, State, Meagher & Flom
One Rodney Square
7th Floor
Wilmington, Delaware 19801
Attn: Robert B. Pincus, Esq.
Fax: (302) 651-3001
To the Company at: 565 Taxter Road
Elmsford, New York 10523
Attn: Jay L. Botchman, President
Fax: (914) 592-1882
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<PAGE> 10
With a copy to: Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036-8735
Attn: Melvin Weinberg, Esq.
Fax: (212) 704-6288
or such other address as either party hereto may at any time, or from time to
time, direct by notice given to the other party in accordance with this Section.
The date of giving or making of any such notice or demand shall be, in the case
of clause (a)(i), the date of the receipt; in the case of clause (a)(ii), five
business days after such notice or demand is sent; and, in the case of clause
(b), the business day next following the date such notice or demand is sent,
provided, however, that any notice regarding a change of address shall be deemed
given when received.
(c) Amendment. Except as otherwise provided herein,
no amendment of this Agreement shall be valid or effective, unless in writing
and signed by or on behalf of all the parties hereto.
(d) Waiver. No course of dealing or omission or delay
on the part of either party hereto in asserting or exercising any right
hereunder shall constitute or operate as a waiver of any such right. No waiver
of any provision hereof shall be effective, unless in writing and signed by or
on behalf of the party to be charged therewith. No waiver shall be deemed a
continuing waiver or waiver in respect of any other or subsequent breach or
default, unless expressly so stated in writing.
(e) Governing Law. This Agreement shall be governed
by, and interpreted and enforced in accordance with, the laws of the State of
New York without regard to principles of choice of law or conflict of laws.
(f) Jurisdiction. Each of the parties hereto hereby
irrevocably consents and submits to the exclusive jurisdiction of the United
States District Court for the Southern District of New York in connection with
any Proceeding (as defined in Subsection 7(r)) arising out of or relating to
this Agreement or the transactions contemplated hereby, waives any objection to
venue in such District (unless such court lacks jurisdiction with respect to
such Proceeding, in which case, each of the parties hereto irrevocably consents
and submits to the jurisdiction of the Supreme Court of the State of New York in
connection with such Proceeding and waives any objection to venue in New York
County, State of New York), and agrees that service of any summons, complaint,
notice or other process relating to such Proceeding may be effected in the
manner provided by clause (i)(B) of Subsection 7(b).
(g) Remedies.
(i) Except as otherwise provided in
Subsection 3(f) with respect to a dispute as to the amount of any payment of the
5% Fee, the parties shall submit any dispute
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<PAGE> 11
arising with respect to any provision hereof to non-binding mediation, prior to
commencing any other Proceeding, other than a Proceeding seeking an injunction
or specific performance, in accordance with the procedures set forth in this
clause (i) of Subsection 7(g). Any party asserting any claim or objection to any
action by any other party or otherwise seeking to enforce any right hereunder
(the "claimant") shall give written notice of such claim to each other party
hereto setting forth therein in reasonable detail the factual basis for such
claim, the provisions of this Agreement relating thereto and the amount of
monetary damages or other relief sought from the other party hereto (the
"respondent"). The respondent shall within 10 days of the giving of such notice
respond to such claim by a written notice accepting or denying such claim in
whole or in part, setting forth therein in reasonable detail the basis for such
response. If the claimant and respondent are unable to resolve such claim in
full within 10 days after the giving of such responsive notice, the parties
shall exchange lists of 10 potential mediators, each of whom shall be a retired
federal judge or state appellate court judge with not less than 10 years
experience in commercial litigation prior to his judicial appointment. The
parties shall select three mediators from such lists as follows:
(A) as they may agree upon any Person on both lists
(B) as they may agree upon any other Person on one or the
other of the lists, or
(C) if the parties are unable to agree on the selection
of three such mediators, as selected by the CPR
Institute For Dispute Resolution ("CPR") from such
lists, or if CPR declines to select any Person from
such lists, any other Person, unless both parties
object to such Person.
The mediation proceeding will be held in New York City. No discovery or motion
practice will be permitted. At the mediation proceeding each party shall be
represented by one representative and counsel. Each party shall submit a brief
written statement presenting its position consistent with that set forth in the
claim notice or response notice, as applicable, referred to above, to the
mediation panel and concurrently deliver a copy thereof to the other party, and
each party shall have an opportunity to present direct testimony of witnesses
for up to 10 hours and produce supporting evidence before the mediation panel.
Each party shall also be entitled to present rebuttal testimony of witnesses for
up to 2 hours and produce additional rebuttal evidence. All proceedings shall be
transcribed stenographically and a copy thereof shall be distributed to each
party and each member of the panel. Within two business days after conclusion of
the presentation of testimony and evidence, the panel shall render its decision
in a reasoned opinion by a majority of the panel.
(ii) In the event of any actual or
prospective breach or default by either party hereto, the other party shall be
entitled, in addition to any and all available legal remedies, to equitable
relief, including remedies in the nature of rescission, injunction and specific
performance. Except as otherwise provided in clause (i) of this Subsection 7(g),
all remedies hereunder are cumulative and not exclusive, and nothing herein
shall be deemed to prohibit or limit either party from pursuing any other remedy
or relief available at law or in equity for such actual or prospective breach or
default, including the recovery of damages.
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<PAGE> 12
(iii) The party prevailing with respect to
any claim or in any Proceeding to enforce its rights hereunder shall be entitled
to reimbursement from the respondent or defendant party of all reasonable costs,
including reasonable attorneys' fees, and disbursements, incurred by such party
in connection therewith.
(h) Severabillty. The provisions hereof are severable
and in the event that any provision of this Agreement shall be determined to be
invalid or unenforceable in any respect by a court of competent jurisdiction,
the remaining provisions hereof shall not be affected, but shall, subject to the
discretion of such court, remain in full force and effect, and any invalid or
unenforceable provision shall be deemed, without further action on the part of
the parties hereto, amended and limited to the extent necessary to render the
same valid and enforceable.
(i) Further Assurances. Each party hereto shall
promptly execute, deliver, file or record such agreements, instruments,
certificates and other documents and perform such other and further acts as the
other party hereto may reasonably request or as may otherwise be necessary or
proper to consummate and perfect the transactions contemplated hereby.
(j) Assignment.
(i) Subject to the provisions of Subsections
7(j)(ii), (iii) and (iv), this Agreement and each right, interest and obligation
hereunder, may not be assigned by either party hereto without the prior written
consent of the other party hereto, and any purported assignment without such
consent shall be void and without effect.
(ii) The Company (and each subsequent
assignee of the Company) shall have the right to assign all (but not less than
all) of its rights, interests and obligations hereunder to any other Person who
acquires a majority of the voting capital stock of the Company or all or
substantially all of the assets of the Company (or a subsequent assignee of the
Company); provided that neither the Company nor any subsequent assignor shall be
released from any of its obligations hereunder by reason of any such assignment.
(iii) The covenants, representations,
warranties and indemnities of the Trust under this Agreement, and under any
other agreement, instrument, certificate or document executed and delivered in
connection herewith or the transactions contemplated hereby, may be collaterally
assigned to any and all lenders to the Company or any Affiliate thereof that
controls the Company (the "Lenders"), any and all of whom may enforce their
rights and remedies in connection with any such collateral assignment or
realization thereon to the extent provided in the applicable debt instruments
and security agreements or at law or in equity. Upon receipt of written notice
from the Lenders that an "Event of Default" has occurred pursuant to the
applicable indebtedness, the Trust will tender any payments due under this
Agreement to the Lenders in accordance with the instructions set forth in such
notice.
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<PAGE> 13
(iv) The Trust and any Permitted Trust
Transferee (as hereinafter defined) may assign this Agreement or any right or
interest hereunder to one or more Persons (each a "Permitted Trust Transferee")
that is (A) listed on Schedule A, (B) any lineal descendant of any Beneficial
Owner, (C) any trust of which each beneficiary is a Beneficial Owner, or a
spouse, lineal descendant or sibling of such Beneficial Owner, (D) any Person in
which each equity owner is a Person described in subclause (A), (B) or (C) of
this clause (iv) of Subsection 7(j) or (E) the Non-U.S. Based Enterprise.
Furthermore, the Trust and any Permitted Trust Transferee may pledge this
Agreement or any right or interest hereunder to secure its obligations with
respect to any indebtedness for borrowed money or other advances of credit by a
bank or other institutional lender, subject, however, to the prior written
consent of the Company, which consent shall not be unreasonably withheld or
delayed. No such assignment (including without limitation any such pledge with
the consent of the Company) shall release the Trust or any Permitted Trust
Transferee assignor from any of its obligations hereunder.
(k) Binding Effect. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns. This Agreement is not intended, and shall not
be deemed, to create or confer any right or interest for the benefit of any
Person not a party hereto.
(l) Titles and Captions. The titles and captions of
the Sections of this Agreement are for convenience of reference only and do not
in any way define or interpret the intent of the parties or modify or otherwise
affect any of the provisions hereof.
(m) Grammatical Conventions. Whenever the context so
requires, each pronoun or verb used herein shall be construed in the singular or
the plural sense and each capitalized term defined herein and each pronoun used
herein shall be construed in the masculine, feminine or neuter sense.
(n) References. The terms "herein," "hereto,"
"hereof," "hereby," and "hereunder," and other terms of similar import, refer to
this Agreement as a whole, and not to any Section or other part hereof.
(o) No Presumptions. Each party hereto acknowledges
that it has participated, with the advice of counsel, in the preparation of this
Agreement. No party hereto is entitled to any presumption with respect to the
interpretation of any provision hereof or the resolution of any alleged
ambiguity herein based on any claim that the other party hereto drafted or
controlled the drafting of this Agreement.
(p) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original and which together shall
constitute one and the same agreement.
(q) Incorporation by Reference. Exhibit A hereto is
an integral part of this Agreement and is incorporated herein in its entirety by
this reference.
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<PAGE> 14
(r) Certain Definitions.
(i) "Affiliate" of a Person means another
Person (A) directly or indirectly controlling, controlled by, or under common
control with, such Person (for this purpose, "control" of a Person means the
power (whether or not exercised) to direct the policies, operations or
activities of such Person by or through the ownership of, or right to vote, or
direct the manner of voting of, securities of such Person, or pursuant to
agreement or law or otherwise) or (B) who is a director or officer of a
corporation, general partner of a partnership, manager of a limited liability
company, trustee of a trust or other Person who exercises managerial authority
with respect to the subject Person; or (C) who owns (or has the discretionary
right to acquire) 10% or more of the equity interests (including without
limitation capital stock or partnership, membership or beneficial interests) of
the subject Person.
(ii) "Company Affiliate" means a Person that
is an Affiliate of the Company by reason of clause (A) of clause (i) of
Subsection 7(r).
(iii) "Governmental Authority" means any
federal, state, local or foreign court, arbitration panel, government,
governmental authority, agency or instrumentality of competent jurisdiction, or
recognized professional or industry association or organization that establishes
or enforces policies or standards or otherwise regulates or supervises the
services and activities subject hereto.
(iv) "Person" includes without limitation a
natural person, corporation, joint stock company, limited liability company,
partnership, joint venture, association, trust, Governmental Authority, or any
group of the foregoing acting in concert.
(v) "Proceeding" means any action, suit,
investigation, audit or mediation, arbitration or other proceeding, at law or in
equity, before or by any Governmental Authority.
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<PAGE> 15
(s) Entire Agreement. This Agreement embodies the
entire agreement of the parties hereto with respect to the subject matter hereof
and supersedes any prior agreement, commitment or arrangement relating thereto.
IN WITNESS WHEREOF, the Company and the Trust, by their
respective duly authorized officers, have duly executed this Agreement on the
date set forth in the Preamble hereto.
RENAISSANCE TRUST I SERVICE ONE INTERNATIONAL
CORPORATION
By: /s/ Luis Dario Suquilanda By: /s/ Jay L. Botchman
--------------------------------- ---------------------------
Trustee Name: Jay L. Botchman
Luis Dario Suquilanda Title: Chairman
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<PAGE> 1
STRATEGIC MODELING AGREEMENT
This Agreement is entered into as of the 18th day of March,
1999 by and between Business Transactions Express, Inc., a Delaware corporation
("BTE"), and The Credit Store, Inc., a Delaware corporation ("TCS").
1. DEFINITIONS
As used herein, the following terms have the meanings set
forth below:
"BTE Affiliate" means (i) RiskWise International, or (ii) any
person or entity directly or indirectly controlled by BTE or RiskWise
International.
"Data" means the source databases required by the Software
and the Models.
"Data Processing Term" means the period beginning on the date
hereof and ending on the day immediately preceding the second
anniversary hereof.
"FTE" or "Full-Time-Equivalent" means, with respect to any
period, a quantity of work equal, in aggregate, to 8 hours for each
business day during such period.
"Model" means a mathematical model developed or to be
developed pursuant to this Agreement, representing certain business
rules to be applied by TCS and implemented by the Software. The Models
to be provided hereunder shall include the models described in Exhibit
A hereto.
"Modeling Term" means the period beginning on the date hereof
and ending on the day immediately preceding the second anniversary
hereof or, if earlier, the date on which such period is terminated
pursuant to Section 2.7.
"Primary Data" means Data that are obtained by BTE from a
third-party data provider.
"RiskWise International" means RiskWise International, L.L.C.,
a Delaware limited liability company.
"Secondary Data" means Data that are not obtained by BTE from
a third-party data provider, including Data combined by BTE with other
Data or otherwise transformed by BTE prior to its use by the Software
and Models.
"Services" means the services to be provided under Section 2,
including the development of the Models and the Software.
"Software" means the executable computer code to be developed
specifically for TCS pursuant to this Agreement that is used to convert
Primary Data and
<PAGE> 2
Secondary Data to scores using the Models, including all code
implementing the concepts and formulas contained in the Models.
"Software" shall not include any executable computer code developed by
BTE for the purpose of generating Secondary Data through the
manipulation of Primary Data or other Secondary Data or for generating
scores for customers other than TCS.
"Source Code" means, with respect to any computer software,
all uncompiled programmer code with respect thereto, including but not
limited to complete programmer comments, flow charts and other
technical documentation with respect thereto, including (in the case of
Models and the Software implementing such models) technical
descriptions of the logic used in such models and all mathematical
specifications and data transformations used therein, all in sufficient
condition to permit the compilation thereof by TCS to match the
executable code with respect thereto. The Source Code shall include a
descriptive identification of all data used by the Software and Models.
In the case of Secondary Data, such identification shall include a
descriptive identification of the Primary Data from which such
Secondary Data are derived, but the Source Code shall not include any
description of the algorithms by which such Secondary Data is derived
from the Primary Data.
2. SOFTWARE AND MODELING DEVELOPMENT
2.1. Services. During the Modeling Term, BTE will provide such
services to TCS as TCS may reasonably request to build, implement, monitor, test
and update Models and related Software useful in the conduct of TCS's business,
including but not limited to the development of the Models described in Exhibit
A. In each case in Exhibit A where a date is stated by which a Model is to be
developed or a Service completed, BTE shall use its best efforts to develop such
Model or complete such Service by such date. Notwithstanding the foregoing,
except as necessary to meet such deadlines, TCS may not require BTE to provide
more than 1.5 FTEs with respect to any calendar month in the Modeling Term or to
provide more than 5 full days on site at TCS's headquarters in Sioux Falls,
South Dakota with respect to any such month.
2.2. Payment for Services. In consideration of the Services to
be performed under Section 2.1, TCS will pay to BTE (i) on the date hereof,
$20,000, and (ii) on or before the 30th day of each calendar month during the
Modeling Term, the sum of $20,000. The parties agree to evaluate and adjust the
amount of such monthly payment for calendar months after November, 1999. If the
parties, after negotiating in good faith, are unable to agree upon any
adjustment in such amount, the monthly payment will remain at $20,000. BTE shall
pay all expenses incurred by BTE or its employees in providing the Services
under this Section 2, including but not limited to all travel and related
expenses. TCS shall pay separately for all Data provided in accordance with
Section 3.
2.3. Warrants. In further consideration of the Services to be
performed by BTE hereunder, TCS shall issue to BTE its warrant in the form of
Exhibit B hereto.
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<PAGE> 3
2.4. Deliveries. Within two weeks following any change in the
Source Code, and at any time upon request of TCS, BTE will deliver to TCS all
object code and Source Code then in existence with respect to the Software and
Models.
2.5. Acceptance of Models. BTE will notify TCS whenever any
Model is ready for acceptance testing. TCS shall commence acceptance testing
with respect to such Model within 10 days following such notice (or, if delivery
is later than 10 days following said notice, then 10 days following delivery of
the Software implementing such Model to TCS), and shall endeavor to complete
such testing within 30 days following the commencement thereof. TCS shall accept
such Model if it determines through such acceptance testing that the Model
provides a statistically sound method of rank-ordering or scoring credit risks
for such Model's intended purpose in TCS's business and conforms to all
specifications therefor agreed to by BTE and TCS, including but not limited to
any specifications therefor set forth or referenced in Exhibit A. If TCS
determines that any Model has failed such acceptance testing, TCS shall notify
BTE of such failure. Upon receipt of such notice, BTE shall either (i) modify
such Model in order to make it conforming and acceptable to TCS in accordance
with the standard set forth above, or (ii) dispute TCS's determination and
submit the dispute to arbitration in accordance with Section 6.8.
2.6. Ownership. TCS will at all times be the sole owner of the
Software and the Models and all copyrights and other intellectual property
rights with respect thereto. Without limiting the generality of the foregoing,
except as provided in Section 2.8, TCS shall have the full right to exploit the
Software and the Models in any way, including the rights to operate the Software
on one or more computers at TCS's location or elsewhere, to modify the Software
and the Models and to sell or license the Software and the Models to third
parties, and BTE shall have no rights with respect thereto, other than the right
to use such Software and Models to the extent necessary to provide the Services.
BTE shall execute such specific assignments or agreements as TCS may reasonably
request to confirm TCS's ownership of the Software and Models.
2.7. Termination of Modeling Term. TCS may terminate the
Modeling Term at any time after the first anniversary hereof upon 60 days'
written notice to BTE.
2.8. Prohibited Uses of Data. BTE does not intend to be a
"consumer reporting agency" as defined by the Fair Credit Reporting Act, 15
U.S.C. Section 1681 et. seq. ("FCRA"), and BTE and TCS do not intend for a score
or a Model generated under this Agreement, or other information furnished from
or through BTE, to constitute a "consumer report" (as defined in the FCRA)
obtained from BTE. TCS is specifically prohibited from using Models or the
scores derived from the Software and Models, in whole or in part, as a factor in
establishing any consumer's eligibility for credit, insurance or employment
purposes. It is expressly forbidden for TCS to take "adverse action" (as defined
by the FCRA) on any customer request using Models or scores derived from the
Software and Models and any other information furnished by or through BTE.
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<PAGE> 4
3. DATA PROCESSING
3.1. Services. During the Data Processing Term, and for not
less than three years thereafter, BTE will provide TCS, through use of the
Software on any one or more computers owned by or under the control of TCS, with
access to the Data at the prices set forth in this Section 3 (subject to
adjustment following the end of the Data Processing Term as set forth in Section
3.3).
3.2. Cost.
(a) Pre-Purchase Assessment Model. BTE will provide data for a
pre-purchase assessment of potential account purchases at the
cost of $0.04 per account, but not less than $1,000 for each
portfolio of accounts processed.
(b) Post-Purchase Assessment Model. BTE will provide data for a
post-purchase assessment of potential account purchases at the
cost of $0.10 per account, but not less than $1,000 for each
portfolio of accounts processed, plus, in each case, actual
credit bureau costs.
(c) Skip-Tracing Model. BTE will provide skip-tracing services at
the cost of $0.40 per account.
(d) Application Processing and Other Models. BTE will provide Data
required by the Models and the Software at a cost equal to
BTE's own cost for such Data (as reasonably determined by BTE)
plus a margin to be agreed upon by the parties.
3.3. Adjustments. BTE may not increase the prices set forth in
Section 3.2 during the Data Processing Term. Thereafter, BTE may increase such
prices so long as the prices charged are equal to or less than prices charged to
other BTE customers who are similarly situated to TCS (taking into account the
entire relationship with such other customers).
3.4. Escrow. Not more than 30 days after date hereof, the
parties shall enter into an Escrow Agreement (the "Escrow Agreement") in the
form of Exhibit C hereto with Norwest Bank Minnesota, National Association or
another escrow agent acceptable to BTE and TCS. BTE and TCS shall agree to such
changes in the form of the Escrow Agreement as the escrow agent so chosen may
reasonably require. The remedies provided thereunder shall be in addition to all
other remedies available to the parties by law or agreement.
3.5. Right to Escrowed Materials. At any time on or after the
30th day preceding the end of the Data Processing Term and on or before the
third anniversary of the last day of the Data Processing Term, TCS may notify
BTE that it wishes to obtain a license to use the then-current Escrowed
Materials (as defined in the Escrow Agreement). Such notice shall be accompanied
by a License Agreement (the "License Agreement") in the form of Exhibit D, duly
executed by TCS. Not later than the fifth business day following such
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<PAGE> 5
notice, BTE shall deliver to TCS (i) such License Agreement, duly executed by
BTE, and (ii) a complete copy of the then-current Escrowed Materials.
4. REPRESENTATIONS AND WARRANTIES
4.1. Warranties. BTE warrants to TCS as follows:
(a) All Software developed hereunder will perform in accordance
with any specifications therefor agreed to by BTE and TCS.
(b) BTE has the full right to use and provide, and TCS has the
full right to use, any Data in accordance with this Agreement.
Without limiting the generality of the foregoing, neither BTE
nor, to the best of BTE's knowledge, any party from whom such
Data is directly or indirectly obtained shall have obtained
such Data in violation of law.
(c) All Data provided by BTE shall be an accurate representation
of the most current corresponding source data then available
to BTE. BTE has no reason to believe that any such source data
is inaccurate. However, BTE makes no further representation or
warranty regarding the accuracy of any such source data.
(d) BTE will use reasonable care and skill in providing the
Services.
(e) The Software is free from any virus or other routine designed
(i) to permit access or use of the Software by persons not
authorized by TCS, or (ii) to disable, damage or erase the
Software, other programs, hardware or data, except as may be
expressly authorized by TCS.
(f) The use of the Software by TCS in accordance with this
Agreement will not infringe upon any patent, copyright, trade
secret or other proprietary right of any person or entity;
provided, however, that BTE makes no warranty with respect to
any modifications of the Software made by TCS.
4.2. Limitation on Damages. In no event shall monetary damages
in favor of TCS on account of any breach of the warranties set forth in
paragraphs (b) and (c) of Section 4.1 exceed the aggregate amounts paid by TCS
to BTE under Section 2.2 through the date on which such damages are awarded.
4.3. Indemnity Against Infringement Claims. BTE will defend
and indemnify TCS and hold TCS harmless from and against any claim, action,
damages or liability alleging infringement of any patent, copyright, trade
secret or other proprietary right on account of TCS's use of the Models,
Software and Data in accordance with this Agreement except for claims, actions,
damages or liabilities relating to or arising out of TCS's modification of the
Software. TCS shall give prompt written notice of the applicable claim against
it, and shall cooperate with BTE (at BTE's expense) in the defense of such
claim. If a final injunction is
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<PAGE> 6
obtained prohibiting TCS's use of any Models or Software for reasons of
infringement, or if in BTE's reasonable opinion any Model or Software is likely
to become the subject of a claim of infringement, BTE will, at its option and
expense, either (i) procure for TCS the right to continue using such Model or
Software, (ii) replace or modify the same so that it becomes non-infringing
while remaining functionally identical to the infringing Model or Software, or
(iii) if all of the remedies described in clauses (i) and (ii) are impossible or
impractical, refund all amounts paid to it pursuant to Section 2.2.
5. EXCLUSIVITY AND CONFIDENTIALITY
5.1. Exclusivity.
(a) Definitions. As used in this Section 5.1, the following terms
have the meaning set forth below:
"Debt Transfer Activity" means the business
of purchasing defaulted consumer debt and collecting
such debt through credit cards offered to such
consumers.
"Restricted Entity" means any third party
which (i) is engaged primarily in Debt Transfer
Activity, or (ii) converts more than 12,000 customer
accounts to credit card balances in connection with
Debt Transfer Activity in any 12-month period,
including but not limited to any entity determined by
the parties to be a Restricted Entity pursuant to
paragraph (d).
"Restricted Services" means any service
(including consulting and development services and
the licensing of intellectual property) relating in
any way to models, decision strategies or software
for Debt Transfer Activity.
(b) Restricted Services. During the Data Processing Term, BTE will
not provide, and will not permit any BTE Affiliate to provide,
Restricted Services to any party other than TCS.
(c) Restricted Parties. During the Data Processing Term, BTE will
not provide, and will not permit any BTE Affiliate to provide,
any services to any Restricted Entity, whether or not such
services are Restricted Services, except that the foregoing
shall not prohibit BTE or any BTE Affiliate from providing
skip-tracing services for any entity, including but not
limited to any Restricted Entity.
(d) Determination of Restricted Entities. Not less than once in
each calendar quarter, the parties shall confer in an effort
to determine what entities, if any, then constitute Restricted
Entities. Such conference, and the list of entities created
thereby, shall be solely for the administrative convenience of
the
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<PAGE> 7
parties. Advertising, promotional, marketing and other
statements by an entity indicating that its business includes
Debt Transfer Activity shall be a factor that the parties will
consider when determining whether a party is a Restricted
Entity. The fact that an entity has been omitted from the list
of Restricted Entities arising from such conference shall not
be determinative as to whether such entity is in fact a
Restricted Entity.
(e) Termination. BTE may terminate the provisions of this Section
5.1 not more than 60 days after the end of any Contract Year
by notice to TCS if TCS has failed to acquire (directly or
indirectly, by purchase, joint venture, servicing or marketing
participation, third-party contribution or otherwise) at least
1,000,000 consumer debt accounts during such Contract Year. As
used herein, "Contract Year" means a twelve-month period, with
the first such Contract Year commencing on the date hereof and
ending on the day preceding the first anniversary hereof and
with each subsequent Contract Year commencing on the
corresponding subsequent anniversary of the date hereof.
5.2. Non-Competition. During the Data Processing Term and for
a period of three years thereafter, BTE will not, and will not permit any BTE
Affiliate to, (i) engage in the business of targeting credit card offers to
consumers as a means of settling their defaulted consumer debt, or (ii) provide
consulting, modeling or other services to any entity engaged in such business if
such entity grants BTE or any BTE Affiliate any equity interest, participation
or other interest representing a right to 20% or more of such entity's equity or
profits, however measured.
5.3. Confidentiality. As used herein, "Confidential
Information" means any information that either party (the "Receiving Party")
acquires from the other (the "Disclosing Party") regarding the Disclosing
Party's present or future computer hardware and software systems, business
practices, customers, assets or other matters, whether or not such information
is designated or marked as confidential, excluding any information that is
publicly available when provided or thereafter becomes publicly available, other
than by reason of the Receiving Party's breach of this Agreement. The Receiving
Party agrees (i) to hold any Confidential Information of the Disclosing Party in
the strictest confidence, (ii) not to make use of any Confidential Information
of the Disclosing Party other than for the performance of this Agreement, (iii)
to release Confidential Information of the Disclosing Party only to the
Receiving Party's employees who require such material or information to fulfill
the Receiving Party's obligations hereunder and who are bound by an obligation
of confidentiality not less strict than the obligation imposed hereunder upon
the Receiving Party itself, and (iv) not to release or disclose Confidential
Information of the Disclosing Party to any other party at any time, except as
may be specifically agreed upon in this or any other agreement between the
parties, or as required by law. Nothing in this Section 5.3 shall impose any
obligation of confidentiality upon TCS with respect to any Software, Models or
Data provided by BTE under this Agreement. The provisions of this paragraph
shall survive termination of this Agreement.
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<PAGE> 8
6. MISCELLANEOUS
6.1. Notice. All notices and other communications hereunder
shall be in writing and shall be (i) personally delivered, (ii) transmitted by
registered mail, postage prepaid, (iii) sent by Federal Express or similar
expedited delivery service, or (iv) transmitted by telecopy, in each case
addressed to the party to whom notice is being given at the address set forth by
its signature below or at such other address as may hereafter be designated in
writing by that party. All such notices or other communications shall be deemed
to have been given on (i) the date received if delivered personally, (ii) three
business days after the date of posting if delivered by mail, (iii) the date of
receipt, if delivered by Federal Express or similar expedited delivery service,
or (iv) the date of transmission if delivered by telecopy.
6.2. Non-Solicitation of Employees. Without the consent of the
other party, neither party shall solicit or cause to be solicited for employment
any employee of the period for a period of one year after the completion of the
latest work performed hereunder.
6.3. Assignment and Delegation. Neither party may assign its
rights or delegate its obligations under this Agreement without the consent of
the other party; provided, however, that the foregoing shall not prohibit (i)
the assignment by either party of any right to receive payments from the other
party hereunder so long as such assignment is made subject to all offsets and
defenses of the other party to such payments, (ii) the assignment by either
party of all of its rights and obligations hereunder in connection with a sale
of substantially all of the assets of the assigning party, so long as the entity
acquiring such assets has executed and delivered to the parties to this
Agreement such entity's written agreement (satisfactory to the parties to this
Agreement in form and substance) assuming all of the assigning party's
obligations under this Agreement, the Escrow Agreement and (if then in effect)
the License Agreement, or (iii) any acquisition of all of the stock of either
party and/or the statutory merger of either party into any other entity. TCS
specifically consents to the assignment by BTE of all of BTE's rights and
obligations hereunder to RiskWise Solutions, L.L.C., a Delaware limited
liability company, or another directly or indirectly wholly owned subsidiary of
RiskWise International (a "RiskWise Assignee"), so long as (x) such RiskWise
Assignee has executed and delivered to TCS such RiskWise Assignee's written
agreement (satisfactory to TCS in form and substance) assuming all of BTE's
obligations under this Agreement, the Escrow Agreement and (if then in effect)
the License Agreement, and (y) such assignment is made in connection with the
reorganization of BTE into a structure in which such RiskWise Assignee and BTE
are each wholly-owned subsidiaries (directly or indirectly) of a common parent
entity, such RiskWise Assignee acquires substantially all of the present
businesses and employees of BTE, and BTE remains jointly and severally liable
with such RiskWise Assignee for the performance of BTE's obligations hereunder.
6.4. Relationship of Parties. BTE will perform its services
hereunder as an independent contractor. During the performance of such services,
BTE's employees will not be considered employees of TCS. Nothing herein
contained shall be construed to imply a joint venture, partnership or
principal-agent relationship between BTE and TCS, and neither
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<PAGE> 9
party shall have the right, power or authority to obligate or bind the other in
any manner whatsoever except as otherwise agreed to in writing.
6.5. Governing Law; Etc. This Agreement shall be governed by
and construed in accordance with the law of the State of Minnesota. This
Agreement contains the entire agreement between the parties. Time is of the
essence in the performance of this Agreement. In the event of any dispute
arising out of the subject matter of this Agreement, the prevailing party shall
recover, in addition to any other damages assessed, its reasonable attorneys'
fees and other costs and expenses incurred in litigating or otherwise settling
or resolving such dispute. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which counterparts of this Agreement, taken together,
shall constitute but one and the same instrument. For purposes of this
Agreement, facsimile signatures of the parties shall, for all purposes, be
deemed to be original signatures.
6.6. Changes in Law. If (i) as a result of any change in
applicable law, any order or ruling of any judicial or administrative body, or
any change in the principles of the Individual Reference Services Group ("IRSG")
during a period when BTE is a member of the IRSG and has agreed to abide by such
principles, BTE is unable to perform this Agreement as written without violating
applicable law or such principles, or (ii) any court of competent jurisdiction
determines for any reason that the provision of Data by BTE hereunder violates
applicable law, then, if such violation can be corrected by BTE without a
degradation in the Data and Services provided hereunder (for example, by
substituting one provider of Primary Data for another or by modifications to any
Models and Software), BTE shall take such corrective action at no cost to TCS;
provided, however, that (x) any increase in out-of-pocket costs to BTE as a
result of such corrective action (for example, a substitute Primary Data
provider charges more for such data) may be passed through to TCS and (y) if the
Modeling Term has expired, TCS shall pay the costs of any adjustments to the
Models and Software required therefor, determined at BTE's standard hourly
rates. If such violation cannot be so corrected but BTE can continue to provide
some of the Data or Services, BTE shall notify TCS as to the extent to which
such Data and Services can be provided and shall propose a corresponding
adjustment to the price therefor. Within 30 days following such notice, TCS
shall, by notice to BTE, either (a) accept such change in the Data and Services
to be provided hereunder at the adjusted price proposed by BTE, (b) accept such
change in the Data and Services to be provided hereunder but dispute the price
therefor, in which case the parties (or, if the parties are unable to agree, an
arbitrator chosen in accordance with the Commercial Arbitration Rules of the
American Arbitration Association) shall determine a reasonable adjustment in
such price, or (c) reject such change in the Data and Services, in which case
the obligation of BTE to provide further Data and Services under this Agreement
shall be terminated. If the violation is such that BTE is unable to provide any
of the Data or Services, then either party may, upon written notice to the other
party, terminate BTE's obligation to provide further Data and Services under
this Agreement and immediately, without penalty, financial obligation, or
liability of any kind to TCS or any individual or entity working on behalf or in
concert with TCS. In such case, TCS shall remain liable for payment for all
services provided prior to the effective date of such termination.
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<PAGE> 10
6.7. Publicity. Neither party will make any public statement
(including but not limited to any press release) regarding the existence or
terms of this Agreement except to the extent that (i) the other party has
consented to such statement (which consent shall not be unreasonably withheld),
(ii) such statement is necessary for the enforcement of any rights hereunder, or
(iii) such statement is otherwise required by applicable law, so long as (in the
case of any statement governed by this clause (iii)) the parties consult with
each other to the extent reasonably practicable in advance as to the contents
and timing thereof.
6.8. Arbitration. Whenever this Agreement specifies that a
dispute shall be resolved by arbitration, either party may demand arbitration by
sending written notice of such demand to the other party, whereupon the parties
shall submit the dispute for settlement by the decision of a single arbitrator.
Concurrent with the delivery of any such request, the party making such request
shall deliver to the other party a notice setting forth the names of at least
five arbitrators acceptable to the requesting party. The other party may accept
any such arbitrator as the arbitrator for purposes of this paragraph, or may
propose one or more other persons as arbitrators, which proposed names the
requesting party shall promptly accept or reject. If the parties are unable to
agree upon a sole arbitrator, each shall select a neutral arbitrator and the two
neutral arbitrators so selected shall select a third neutral arbitrator, and
such third neutral arbitrator shall hear the dispute. Each arbitrator shall be a
person with at least five years' experience in the computer industry and at
least 3 years' experience in commercial arbitration. Such arbitration shall be
conducted in accordance with the Commercial Arbitration Rules of the American
Arbitration Association. Minneapolis, Minnesota will serve as the place of the
arbitration. Subject to the control of the arbitrators or as the disputants may
otherwise mutually agree, the disputants will have the right to conduct
reasonable discovery for a period of twenty (20) days after the filing of an
answer or other responsive pleading, and the dispute shall be scheduled to
conclude no later than sixty (60) days after filing of the dispute. The
arbitrator may not award punitive damages and may not make any ruling, finding
or award inconsistent with this Agreement, change any term or condition of this
Agreement, or deprive any party of any remedy expressly provided hereunder. Any
arbitration award and order shall be final and binding on the parties. Any
disputant may enter a judgment upon the award rendered by the arbitrator in any
court having jurisdiction over the dispute. All costs of the arbitration
(including but not limited to the arbitrator's expenses and the prevailing
party's reasonable attorney's fees) shall be allocated by the arbitrator. This
Agreement involves interstate commerce and is therefore enforceable as provided
in the Federal Arbitration Act, 9 U.S.C. ss. 1 et seq.
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above-written.
Address: BUSINESS TRANSACTIONS EXPRESS, INC.
1010 West St. Germain St., Suite 300
St. Cloud, Minnesota 56301
Attention: President
Telecopier: 320-253-6886 By /s/ Gordon O. Meyer
-------------------------------
Its President
--------------------------
Address: THE CREDIT STORE, INC.
3401 N. Louise Avenue
Sioux Falls, South Dakota 57107
Attention: President
Telecopier: 605-338-3486
By /s/ Michael J. Philippe
-------------------------------
Its CFO
---------------------------
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<PAGE> 1
WARRANT
TO SUBSCRIBE FOR AND PURCHASE COMMON STOCK OF
THE CREDIT STORE, INC.
THIS CERTIFIES THAT, for value received and subject to the terms and
provisions set forth herein, J.L.B. of Nevada, Inc. (the "Purchaser"), or
registered assigns, is entitled to subscribe for and purchase from The Credit
Store, Inc., a Delaware corporation (the "Company"), at any time from and after
June 30, 2000 to and including June 30, 2004 up to Four Million (4,000,000)
fully paid and nonassessable shares of the Company's Common Stock, par value
$.001 per share (the "Common Stock"), at the price (subject to adjustment as
noted below) of $3.25 per share. The shares which may be acquired upon exercise
of this Warrant are referred to herein as the "Warrant Shares." As used herein,
the term "Holder" means the Purchaser, any party who acquires all or a part of
this Warrant as a permitted transferee of the Purchaser, or any record holder or
holders of the Warrant Shares issued upon exercise, whether in whole or in part,
of the Warrant. This Warrant has been issued in connection with the forgiveness
of certain debt by the Purchaser and other good and valuable consideration.
This Warrant is subject to the following provisions, terms and
conditions:
1. The rights represented by this Warrant may be exercised by the
Holder, in whole or in part, by written notice of exercise delivered to the
Company 20 days prior to the intended date of exercise and by the surrender of
this Warrant at the Company's principal office and upon payment to it by check
of the purchase price for the shares. The shares so purchased will be issued to
the Holder hereof as of the close of business on the date on which this Warrant
is surrendered and payment made for the shares as aforesaid. Certificates for
the shares of stock so purchased will be delivered to the Holder within 15 days
after the rights represented by this Warrant are so exercised, and, unless this
Warrant has expired, a new Warrant representing the number of shares, if any,
with respect to which this Warrant has not been exercised will also be delivered
to the Holder hereof within such time. Notwithstanding the foregoing, however,
the Company will not be required to deliver any certificates for shares of stock
except in accordance with the provisions and subject to the limitations of
paragraph 5 hereof and the restrictive legend set forth below.
2. All shares that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be duly authorized and issued,
fully paid and nonassessable. During the period within which the rights
represented by this Warrant may be exercised, the Company will at all times have
authorized, and reserved for the purpose of issuance or transfer upon exercise
of the subscription rights evidenced by this Warrant, a sufficient number of
shares of its Common Stock to provide for the exercise of this Warrant.
3. The foregoing provisions are, however, subject to the following:
(a) The Warrant purchase price is subject to adjustment from
time to time as provided below. Upon each adjustment of the Warrant purchase
price, the Holder of this Warrant will thereafter be entitled to purchase, at
the Warrant purchase price resulting from the adjustment, the number of shares
obtained by multiplying the Warrant purchase price in effect immediately prior
to the adjustment by the number of shares purchasable pursuant hereto
immediately prior to the adjustment and dividing the product thereof by the
Warrant purchase price resulting from the adjustment.
<PAGE> 2
(b) If the Company at any time subdivides its outstanding shares
of Common Stock into a greater number of shares or declares a dividend payable
in the Common Stock of the Company, then the Warrant purchase price in effect
immediately prior to such subdivision will be proportionately reduced, and
conversely, if the outstanding Common Stock of the Company is combined into a
smaller number of shares, then the Warrant purchase price in effect immediately
prior to such combination will be proportionately increased.
(c) If any capital reorganization or reclassification of the
Company's capital stock, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation is effected in such a way that holders of the Common Stock of the
Company are entitled to receive stock, securities or assets ("Substituted
Property") with respect to or in exchange for such Common Stock, then, as a
condition of the reorganization, reclassification, consolidation, merger or
sale, the Holder hereof will have the right to purchase and receive upon the
basis and upon the terms and conditions specified in this Warrant and in lieu of
the shares immediately theretofore purchasable and receivable upon the exercise
of the rights represented hereby, such Substituted Property as would have been
issued or delivered to the Holder hereof if the Holder hereof had exercised this
Warrant and had received Warrant the shares immediately prior to the
effectiveness of such reorganization, reclassification, consolidation, merger or
sale.
(d) If any other event occurs as to which in the opinion of the
Board of Directors of the Company the provisions of paragraph 3(b) or 3(c)
hereof are not strictly applicable or, if strictly applicable, would not be
adequate to protect the purchase rights of the Holder of this Warrant or of
Common Stock in accordance with the essential intent and purposes of such
provisions, then the Board of Directors will make an appropriate adjustment in
the application of such provisions, in accordance with such essential intent and
principles, so as to protect such purchase rights as aforesaid.
(e) Following any adjustment of the Warrant purchase price,
the Company will give written notice thereof, by first-class mail, postage
prepaid, addressed to the Holder hereof at the address of the Holder as shown on
the books of the Company, which will state the Warrant purchase price resulting
from the adjustment and the increase or decrease, if any, in the number of
shares purchasable at such price upon the exercise of this Warrant, setting
forth in reasonable detail the method of calculation and the facts upon which
the calculation is based.
4. This Warrant does not entitle the Holder hereof to any voting
rights or other rights as a shareholder of the Company.
5. The Holder hereof, by acceptance hereof, represents and warrants
that (a) it is acquiring this Warrant for its own account for investment
purposes only and not with a view to its resale or distribution and (b) it has
no present intention to resell or otherwise dispose of all or any part of this
Warrant. This Warrant has not been registered under the Securities Act of 1933,
as amended (the "Securities Act"), nor any state or foreign securities laws. As
a result, neither this Warrant nor the shares of Common Stock to be issued upon
exercise of this Warrant may be offered for sale, sold, pledged, assigned or
otherwise disposed of, and no transfer of this Warrant or such shares will be
made by the Company or its transfer agent without appropriate registration under
the Securities Act and any applicable state securities laws or an opinion of
counsel acceptable to the Company with respect to the availability of an
exemption from registration. Further, other than pursuant to registration under
the Securities Act and any applicable state securities laws or an opinion of
counsel acceptable to the Company with respect to the availability of or an
exemption from such registration, the Company will not accept the exercise of
this Warrant or issue certificates for shares to be issued upon exercise of this
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<PAGE> 3
Warrant. The Company may also condition such issuance or sale, pledge,
assignment or other disposition on the receipt from the party to whom this
Warrant is to be so transferred or to whom any shares of Common Stock are to be
issued or so transferred of any representations and agreements requested by the
Company in order to permit such issuance or transfer to be made pursuant to
exemptions from registration under federal and applicable state securities laws.
Each certificate representing the Warrant (or any part thereof) and any shares
of Common Stock to be issued upon exercise of this Warrant will be stamped with
appropriate legends setting forth these restrictions on transferability to the
extent then applicable.
6. The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, 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 this
Warrant, but will at all times in good faith assist in the carrying out of all
such items and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder hereof against dilution
or other impairment. Without limiting the generality of the foregoing, the
Company (a) will not increase the par value of any shares of stock receivable on
the exercise of this Warrant above the amount payable therefor on such exercise,
and (b) 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 stock on the exercise of this Warrant.
7. Following the occurrence of:
(a) any taking by the Company of a record of the holders of the
Common Stock of the Company for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right; or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
transfer of all or substantially all of the assets of the Company to or
consolidation or merger of the Company with or into any other entity; or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then and in each such event the Company will give notice to the Holder hereof
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right, (ii) the amount and character of such
dividend, distribution or right, and (iii) the date on which any such
reorganization, reclassification, capitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and the time,
if any, to be fixed, as of which the holders of record of Common Stock (or other
securities) are entitled to exchange their shares of Common Stock (or other
securities) for securities or other property deliverable on such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up
8. No fractional shares of Common Stock will be issued upon the
exercise of this Warrant, but, instead of any fraction of a share that would
otherwise be issuable, the Company will pay a cash adjustment (which may be
effected as a reduction of the amount to be paid by the Holder hereof upon such
exercise) in respect of the fraction in an amount equal to the same fraction of
the market price per share of Common Stock as of the close of business on the
date of the notice required by paragraph 1 above. "Market price" for purposes of
this paragraph 8 means, if the Common Stock is
3
<PAGE> 4
traded on a securities exchange or on the NASDAQ National Market, the closing
price of the Common Stock on the exchange or the NASDAQ National Market, or, if
the Common Stock is otherwise traded in the over-the-counter market, the closing
bid price, in each case on the date prior to the date as of which "market price"
is being determined. If at any time the Common Stock is not traded on an
exchange or the NASDAQ National Market, or otherwise traded in the
over-the-counter market, the "market price" will be deemed to be the fair market
value thereof determined in good faith by the Board of Directors of the Company
as of a date which is within 15 days of the date as of which the determination
is to be made.
9. (a) In addition to and without limiting the rights of the Holder
of this Warrant under the terms of this Warrant, the Holder of this Warrant has
the right (the "Conversion Right") to convert this Warrant or any portion
thereof into shares of Common Stock as provided in this paragraph 9 at any time
or from time to time prior to its expiration. Upon exercise of the Conversion
Right with respect to a particular number of shares (the "Converted Warrant
Shares"), the Company will deliver to the Holder of this Warrant, without
payment by the Holder of any exercise price or any cash or other consideration,
that number of shares of Common Stock equal to the quotient obtained by dividing
the Net Value (as defined below) of the Converted Warrant Shares by the fair
market value (as defined in paragraph (c) below) of a single share of Common
Stock, determined in each case as of the close of business on the Conversion
Date (as defined below). The "Net Value" of the Converted Warrant Shares is
determined by subtracting the aggregate Warrant purchase price of the Converted
Warrant Shares from the aggregate fair market value of the Converted Warrant
Shares. Notwithstanding anything in this paragraph 9 to the contrary, the
Conversion Right may not be exercised with respect to a number of Converted
Warrant Shares having a Net Value below $100. No fractional shares are issuable
upon exercise of the Conversion Right, and if the number of shares to be issued
in accordance with the foregoing formula is other than a whole number, the
Company shall pay to the Holder of this Warrant an amount in cash equal to the
fair market value of the resulting fractional share.
(b) The Conversion Right may be exercised by the Holder of this
Warrant by the surrender of this Warrant at the principal office of the Company
together with a written statement, substantially in the form attached hereto as
Schedule 1, specifying that the Holder thereby intends to exercise the
Conversion Right and indicating the number of shares subject to this Warrant
that are being surrendered (referred to in paragraph (a) above as the Converted
Warrant Shares) in exercise of the Conversion Right. The conversion will be
effective upon receipt by the Company of this Warrant together with the
aforesaid written statement, or on such later date as is specified therein (the
"Conversion Date"), but not later than the expiration date of this Warrant.
Certificates for the shares of Common Stock issuable upon exercise of the
Conversion Right, together with a check in payment of any fractional share and,
in the case of a partial exercise, a new Warrant evidencing the shares remaining
subject to this Warrant, will be issued as of the Conversion Date and will be
delivered to the Holder of this Warrant within 15 days following the Conversion
Date.
(c) For purposes of this paragraph 9, the "fair market value" of
a share of Common Stock as of a particular date shall be its "market price,"
calculated as described in paragraph 8 hereof.
10. The Holder shall have the registration rights described in
Exhibit A hereto.
11. This Warrant is transferable only on the books of the Company by
the Holder hereof in person, or by duly authorized attorney, on surrender of the
Warrant, properly assigned.
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<PAGE> 5
12. Neither this Warrant nor any term hereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against whom enforcement of the change, waiver, discharge or
termination is sought.
13. All questions concerning this Warrant will be governed under the
laws of the State of South Dakota, without giving effect to its choice-of-law
principles.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer and to be dated as of May 29, 1999.
THE CREDIT STORE, INC.
By /s/ Martin Burke
--------------------------------
Its Chief Executive Officer
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD,
PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES
WILL BE MADE BY THE COMPANY OR ITS TRANSFER AGENT IN THE ABSENCE OF REGISTRATION
OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT REGISTRATION IS NOT
REQUIRED.
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<PAGE> 6
SCHEDULE 1
NOTICE OF EXERCISE
FOR WARRANTS
To: THE CREDIT STORE, INC.
The undersigned hereby irrevocably elects to purchase
shares of Common Stock of The Credit Store, Inc. under to the terms of the
attached Warrant, and tenders herewith payment of the purchase price of the
shares in full.
Please issue a certificate or certificates representing the shares in
the name of the undersigned or, subject to compliance with the restrictions on
transfer set forth in the Warrant, in such other name or names as are specified
below:
-----------------------------------------------------
-----------------------------------------------------
Print Name(s), if joint
-----------------------------------------------------
Address
-----------------------------------------------------
City, State, Zip Code
-----------------------------------------------------
-----------------------------------------------------
Taxpayer ID Number(s), if joint
-----------------------------------------------------
-----------------------------------------------------
Social Security Number(s), if joint
The undersigned represents that the shares resulting from the exercise
of the Warrant are acquired for the account of the undersigned for investment
and not with a view to, or for resale in connection with, the distribution
thereof and that the undersigned has no present intention of distributing or
reselling the shares.
Date:
---------------------------- --------------------------------------
--------------------------------------
Signature(s), if joint
<PAGE> 7
EXHIBIT A
1. Registration Rights.
(a) Certain Definitions. As used in this Section 1, the
following terms have the following definitions:
"Common Stock" means the Company's Common Stock, par value
$0.001 per share.
"Commission" means the Securities and Exchange Commission.
"Company" means The Credit Store, Inc., a Delaware
corporation.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Indemnified Party" and "Indemnifying Party" have the
meanings set forth in Section 1(f)(iii).
"JLB" means J.L.B. of Nevada, Inc.
"Registrable Stock" means: (i) all Warrant Shares which are
issuable to the Warrantholders pursuant to the Warrant, whether or not the
Warrant has in fact been exercised and whether or not such Warrant Shares have
in fact been issued, (ii) all Warrant Shares acquired by the Warrantholders
pursuant to the Warrant, (iii) any shares of Common Stock, whether or not such
shares of Common Stock have in fact been issued, and stock or other securities
of the Company issued upon conversion of, in a stock split or reclassification
of, or a stock dividend or other distribution on, or in substitution or exchange
for, or otherwise in connection with, such Warrant Shares.
"Securities Act" means the Securities Act of 1933, as amended.
"Warrant(s)" means this Warrant and any warrants issued in
exchange or replacement of this Warrant or upon transfer hereof.
"Warrantholder(s)" means JLB and its successors and assigns.
"Warrant Shares" means shares of Common Stock issuable to
Warrantholders pursuant to the Warrant.
(b) Required Registration.
(i) One Time Right. After six (6) months
following the date of consummation of the Company's first public offering of its
securities to the public pursuant to a general form of registration statement
under the Securities Act, whenever the Company shall receive a written request
therefor from any holder or holders of at least 10% of the Registrable Stock,
the Company shall promptly prepare and file a registration statement under the
Securities Act covering the Registrable Stock which is the subject of such
request and shall use its best efforts to cause such registration statement to
become effective as expeditiously as possible, provided that the Company shall
not be obligated to effect a registration pursuant to this subsection 1(b)(i) if
it shall provide a certificate signed by the President or other officer of the
Company stating that in the good faith judgment of the Board of
<PAGE> 8
Directors of the Company, it would be severely detrimental to the Company and
its stockholders for such registration to be effected at such time, in which
event the Company shall have the right to defer the filing of a registration
statement for a period of not more than 180 days after receipt of the request of
the holder or holders under this Section 1(b)(i). Upon the receipt of such
request, the Company shall promptly give written notice to all holders of
Registrable Stock that such registration is to be effected. The Company shall
include in such registration statement such Registrable Stock for which it has
received written requests to register such shares by the holders thereof within
thirty (30) days after the effectiveness of the Company's written notice to such
other holders. Notwithstanding the above, the Company is obligated to effect
only one (1) registration pursuant to this Section 1(b)(i) and any other
agreement providing similar "demand registration rights" to holders of other
options, warrants or other rights to purchase or acquire the Company's Common
Stock.
(ii) Form S-3 Registration. Subject to the
conditions herein, in case the Company shall receive from the holders of
Registrable Stock, a written request or requests that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Stock owned by such holders, the
Company will:
(A) promptly give written notice of
the proposed registration, and any related qualification or compliance, to all
other holders; and
(B) as soon as practicable, effect
such registration and all such qualifications and compliances as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such holder's Registrable Stock as are specified in such
request, together with all or such portion of the Registrable Stock of any other
holder or holders joining in such request as are specified in a written request
given within 20 days after receipt of such written notice from the Company;
provided that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 1(b)(ii):
(1) if Form S-3 is not available for such offering by the holders; (2) if the
holders, together with the holders of any other securities of the Company
entitled to inclusion in such registration, propose to sell Registrable Stock
and such other securities (if any) at an aggregate price to the public (net of
any underwriters discounts or commissions) of less than $1,000,000; (3) if the
Company shall furnish to the holders a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
stockholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than 180 days after receipt of
the request of the holder or holders under this Section 1(b)(ii); (4) if the
Company has, within the six month period preceding the date of such request,
already effected one registration on Form S-3 for the holders pursuant to this
Section 1(b)(ii); (5) if the Company has, within the six month period preceding
the date of such request, already effected one "demand registration" pursuant to
Section 1(b)(i) or any other agreement; or(6) in any particular jurisdiction in
which the Company would be required to qualify to do business or to execute a
general consent to service of process in effecting such registration,
qualification or compliance.
(C) Subject to the foregoing, the
Company shall file a registration statement covering the Registrable Stock and
other securities so requested to be registered as soon as practicable after
receipt of the request or requests of the holders. Registrations effected
pursuant to this Section 1(b)(ii) shall not be counted as demands for
registration effected pursuant to Section 1(b)(i).
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<PAGE> 9
(D) In the event that the underwriters
of the requested Form S-3 Registration advise the holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Company shall include in such registration only the
number of shares of Registrable Stock that the underwriters determine in their
sole discretion will not jeopardize the success of the offering. If the number
of shares of Registrable Stock requested to be sold in a Form S-3 Registration
exceeds the number of shares of Registrable Stock that can be sold, the Company
shall include in such Form S-3 Registration (i) first, the Registrable Stock
requested to be included in such registration by the holders of Registrable
Stock, and if two or more holders of Registrable Stock are included in the Form
S-3 Registration, pro rata among the holders on the basis of the number of
Registrable Stock owned by each such holder, and (ii) second, the Registrable
Stock requested to be included in such registration by any holders other than
the holders who made the request for the Form S-3 Registration, pro rata among
such holders on the basis of the number of Registrable Stock owned by each such
holder.
(c) Incidental Registration. Each time the Company shall
determine to file a registration statement under the Securities Act (other than
on Form S-8 or Form S-4) in connection with the proposed offer and sale for
money of any of its securities by it or by any of its security holders, the
Company will give written notice of its determination to all holders of
Registrable Stock. Upon the written request of a holder of any Registrable
Stock, the Company will cause all such Registrable Stock, the holders of which
have so requested registration thereof, to be included in such registration
statement, all to the extent requisite to permit the sale or other disposition
by the prospective seller or sellers of the Registrable Stock to be so
registered in accordance with the terms of the proposed offering. If the
registration statement is to cover an underwritten distribution, the Company
shall use its best efforts to cause the Registrable Stock requested for
inclusion pursuant to this Section 1(c) to be included in the underwriting on
the same terms and conditions as the securities otherwise being sold through the
underwriters. If, in the good faith judgment of the managing underwriter of such
public offering, the inclusion of all of the Registrable Stock requested to be
registered would materially and adversely affect the successful marketing of the
other shares proposed to be offered, then the amount of the Registrable Stock to
be included in the offering shall be reduced and the Registrable Stock and the
other shares to be offered shall participate in such offering as follows: first,
the shares to be sold by the Company, second the Registrable Stock and the other
shares of Common Stock to be included in such offering shall each be reduced pro
rata by each holder of such shares to equal in the aggregate the remaining
number of shares of Common Stock proposed to be included in such offering.
(d) Registration Procedures. If and whenever the Company
is required by the provisions of Section 1(b) or 1(c) to effect the registration
of Registrable Stock under the Securities Act, the Company will at its expense,
as expeditiously as possible:
(i) In accordance with the Securities Act and
the rules and regulations of the Commission, prepare and file with the
Commission a registration statement on the form of registration statement
appropriate with respect to such securities and use its best efforts to cause
such registration statement to become and remain effective until the earlier of
(x) the date on which the securities covered by such registration statement have
been sold, or (y) one hundred eighty (180) days after the effective date
thereof, and prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained therein as
may be necessary to keep such registration statement effective and such
registration statement and prospectus accurate and complete until the earlier of
(x) or (y) above;
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<PAGE> 10
(ii) If the offering is to be underwritten,
in whole or in part, enter into a written underwriting agreement with the
holders of the Registrable Stock participating in such offering and the
underwriter in form and substance reasonably satisfactory to the managing
underwriter of the public offering and the holders of the Registrable Stock
participating in such offering;
(iii) Furnish to the holders of securities
participating in such registration and to the underwriters of the securities
being registered such reasonable number of copies of the registration statement,
preliminary prospectus, final prospectus and such other documents as such
underwriters and holders may reasonably request in order to facilitate the
public offering of such securities;
(iv) Use its best efforts to register or qualify
the securities covered by such registration statement under such state
securities or blue sky laws of such jurisdictions as such participating holders
and underwriters may reasonably request provided that the Company shall not be
required to qualify in a particular jurisdiction in which the Company would be
required to qualify to do business or to execute a general consent to service of
process in effecting such registration or qualification if the Company was not
otherwise required to do so;
(v) Notify the holders participating in such
registration, promptly after it shall receive notice thereof, of the date and
time when such registration statement and each post-effective amendment thereto
has become effective or a supplement to any prospectus forming a part of such
registration statement has been filed;
(vi) Notify such holders promptly of any request
by the Commission for the amending or supplementing of such registration
statement or prospectus or for additional information;
(vii) Prepare and file with the Commission, promptly
upon the request of any such holders, any amendments or supplements to such
registration statement or prospectus relating to the Registrable Stock or the
holders thereof which, in the reasonable opinion of counsel for such holders, is
required under the Securities Act or the rules and regulations thereunder in
connection with the distribution of the Registrable Stock by such holders;
(viii) Prepare and promptly file with the Commission,
and promptly notify such holders of the filing of, such amendments or
supplements to such registration statement or prospectus as may reasonably be
necessary to correct any statements or omissions if, at the time when a
prospectus relating to such securities is required to be delivered under the
Securities Act, any event has occurred as the result of which any such
prospectus or any other prospectus as then in effect may include an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading;
(ix) In case any of such holders or any
underwriter for any such holders is required to deliver a prospectus at a time
when the prospectus then in circulation is not in compliance with the Securities
Act or the rules and regulations of the Commission, prepare promptly such
amendments or supplements to such registration statement and such prospectus as
may reasonably be necessary in order for such prospectus to comply with the
requirements of the Securities Act and such rules and regulations;
(x) Advise such holders, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance of any stop order by
the Commission suspending the effectiveness
4
<PAGE> 11
of such registration statement or the initiation or threatening of any
proceeding for that purpose and promptly use its best efforts to prevent the
issuance of any stop order or to obtain its withdrawal if such stop order should
be issued;
(xi) If requested by the managing underwriter or
underwriters or a holder of Registrable Stock being sold in connection with an
underwritten offering, immediately incorporate in a prospectus supplement or
post-effective amendment such information as the managing underwriters and the
holders of a majority of the Registrable Stock being sold agree should be
included therein relating to the plan of distribution with respect to such
Registrable Stock, including information with respect to the Registrable Stock
being sold to such underwriters, the purchase price being paid therefor by such
underwriters and with respect to any other terms of the underwritten (or best
efforts underwritten) offering of the Registrable Stock to be sold in such
offering; and make all required filings of such prospectus supplement or
post-effective amendment as soon as notified of the matters to be incorporated
in such prospectus supplement or post-effective amendment;
(xii) Cooperate with the selling holders of
Registrable Stock and the managing underwriters, if any, to facilitate the
timely preparation and delivery of certificates representing Registrable Stock
to be sold and not bearing any restrictive legends; and enable such Registrable
Stock to be in such denominations and registered in such names as the managing
underwriters may request at least two business days prior to any sale of
Registrable Stock to the underwriters;
(xiii) Prepare a prospectus supplement or
post-effective amendment to the registration statement or the related prospectus
or any document incorporated therein by reference or file any other required
documents so that, as thereafter delivered to the purchasers of the Registrable
Stock, the prospectus will not contain an untrue statement of material fact or
omit to state any material fact necessary to make the statements therein not
misleading;
(xiv) Enter into such agreements (including an
underwriting agreement) and take all such other actions in connection therewith
in order to expedite or facilitate the disposition of such Registrable Stock and
in such connection, whether or not an underwriting agreement is entered into and
whether or not the registration is an underwritten registration:
(A) make such representations and
warranties to the holders of such Registrable Stock and the underwriters, if
any, in form, substance and scope as are customarily made by issuers to
underwriters in primary underwritten offerings;
(B) If an underwriting agreement is entered
into, the same shall set forth in full the indemnification provisions and
procedures of Section 1(f) hereof with respect to all parties to be indemnified
pursuant to said Section; and
(C) The Company shall deliver such documents
and certificates as may be requested by the holders of the majority of the
Registrable Stock being sold and the managing underwriters, if any, to evidence
compliance with the terms of this Section 1(d) and with any customary conditions
contained in the underwriting agreement or other agreement entered into by the
Company.
The above shall be done at each closing under such
underwriting or similar agreement or as and to the extent required thereunder;
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<PAGE> 12
(xv) Make available for inspection by a
representative of the holders of a majority of the Registrable Stock, any
underwriter participating in any disposition pursuant to a registration
statement, and any attorney or accountant retained by the sellers or
underwriter, all pertinent financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors and employees to supply all pertinent information reasonably requested
by any such representative, underwriter, attorney or accountant in connection
with the preparation of the registration statement; provided, that any records,
information or documents that are designated by the Company in writing as
confidential shall be kept confidential by such persons unless disclosure of
such records, information or documents is required by court or administrative
order;
(xvi) Otherwise use its best efforts to comply
with all applicable rules and regulations of the Commission, including, without
being limited thereby, making generally available to the Company's security
holders in a timely manner, earning statements satisfying the applicable
provisions of the Securities Act; and
(xvii) At the request of any such holder furnish to
such holder promptly following the request (i) any opinion rendered by counsel
representing the Company for the purposes of such registration, addressed to the
underwriters, and (ii) any letter from the independent certified public
accountants of the Company addressed to the underwriters, in connection with
such registration.
(e) Expenses of Registration. All expenses incident to
the Company's performance of or compliance with this Warrant, including, without
limitation, the following shall be borne by the Company, regardless of whether
the registration statement becomes effective:
(i) All registration and filing fees
(including those with respect to filings required to be made with the National
Association of Securities Dealers, Inc.);
(ii) Fees and expenses of compliance with all
securities or blue sky laws (including fees and disbursements of counsel for the
underwriters or selling holders in connection with blue sky qualifications of
the Registrable Stock and in determination of their eligibility for investment
under the laws of such jurisdictions as the managing underwriters or holders of
a majority of the Registrable Stock being sold may designate);
(iii) Printing, messenger, telephone and delivery
expenses;
(iv) Fees and disbursements of counsel for
the Company and, for a registration under Section 1(c), the underwriters;
(v) Fees and disbursements of counsel for the
holders of Registrable Stock of up to $5,000 (provided such expenses are
related to the registration of Registrable Stock pursuant to Section 1(c));
(vi) Fees and disbursements of all
independent certified public accountants of the Company (including the
expenses of any special audit and "comfort" letters provided such expenses are
related to the registration of Registrable Stock pursuant to Section 1(c));
(vii) Fees and disbursements of underwriters
(excluding, discounts, commissions or fees of underwriters, selling brokers,
dealer managers or similar securities industry
6
<PAGE> 13
professionals relating to the distribution of the Registrable Stock or legal
expenses of any person other than the Company and the selling holders);
(viii) Fees and expenses of other persons retained by
the Company.
The Company will, in any event, pay its internal
expenses (including without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit, the fees and expenses incurred in connection with the listing
of the securities to be registered on each securities exchange on which similar
securities issued by the Company are then listed, rating agency fees and the
fees and expenses of any person, including special experts, retained by the
Company.
(f) Indemnification.
(i) The Company hereby agrees to indemnify
each of the holders of Registrable Stock against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any registration statement, preliminary or final prospectus, or other document
incident to any such registration, qualification or compliance (or in any
related registration statement, notification or the like) or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any violation by
the Company of any rule or regulation promulgated under the Securities Act
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration, qualification or compliance,
and to reimburse the holders of Registrable Stock (including officers and
directors of the same and controlling persons) for any legal and any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, provided, however, that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage or liability arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by
Warrantholders.
(ii) The Warrantholders severally and not
jointly agree to indemnify the Company and its officers and directors and each
person, if any, who controls any thereof within the meaning of Section 15 of the
Securities Act and their respective successors against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or based
on any untrue statement of a material fact contained in any prospectus, offering
circular or other document incident to any registration, qualification or
compliance relating to securities purchased pursuant to the Warrants (or in any
related registration statement, notification or the like) or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading and will reimburse
the Company and each other person indemnified pursuant to this subsection (ii)
for any legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action;
provided, however, that this subsection (ii) shall apply only if (and only to
the extent that) such statement or omission was made in reliance upon
information (including, without limitation, written negative responses to
inquiries) furnished in writing to the Company for use in such prospectus, or
other document (or related registration statement, notification or the like) or
any amendment or supplement thereto.
(iii) Each party entitled to indemnification
hereunder (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
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<PAGE> 14
sought, and shall permit the Indemnifying Party (at such Indemnifying Party's
expense) to assume the defense of any claim or any litigation resulting
therefrom, provided that counsel for the Indemnifying Party, who shall conduct
the defense of such claim or litigation, shall be satisfactory to the
Indemnified Party, and the Indemnified Party may participate in such defense at
such party's expense, and provided, further, that the omission by any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 1(f) except to the
extent that the omission results in a failure of actual notice to the
Indemnifying Party and such Indemnifying Party is materially damaged solely as a
result of the failure to give notice. No Indemnifying Party, in the defense of
any such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation.
(iv) If the indemnification provided for
in this Section 1(f) is unavailable or insufficient to hold harmless an
Indemnified Party in respect of any losses, claims, damages, liabilities,
expenses or actions in respect thereof referred to herein, then the Indemnifying
Party shall contribute to the amount paid or payable by such Indemnified Party
as a result of such losses, claims, damages, liabilities, expenses or actions in
such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand, and the Indemnified Party on the other, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities, expenses or actions as well as any other relevant
equitable considerations, including the failure to give the notice required
hereunder. The relative fault of the Indemnifying Party and the Indemnified
Party shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact relates to information
supplied by the Indemnifying Party or the Indemnified Party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Warrantholders agree
that it would not be just and equitable if contributions pursuant to this
Section 1(f) were determined by pro rata allocation or by any other method of
allocation which did not take account of the equitable considerations referred
to above. The amount paid or payable to an Indemnified Party as a result of the
losses, claims, damages, liabilities or actions in respect thereof, referred to
above, shall be deemed to include any legal or other expenses reasonably
incurred by such Indemnified Party in connection with investigating or defending
any such action or claim. Notwithstanding the contribution provisions of this
Section 1(f), in no event shall the amount contributed by any seller of
Registrable Stock exceed the aggregate net offering proceeds received by such
seller from the sale of Registrable Stock to which such contribution or
indemnification claim relates. No person guilty of fraudulent misrepresentations
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation.
(v) The indemnification required by this
Section 1(f) shall be made by periodic payments during the course of the
investigation or defense, as and when bills are received or expenses incurred.
Anything contained herein to the contrary notwithstanding, the maximum aggregate
liability of any holder of Registrable Stock under this Section 1(f) shall not
exceed the amount of the net proceeds actually received by such holder from the
sale of its Registrable Stock pursuant to the registration, qualification,
notification or compliance in respect of which such liability arose.
(g) Reporting Requirements Under Exchange Act. From and
after the effective date of the first registration statement filed by the
Company under the Securities Act, the Company shall (whether or not it shall
then be required to do so) timely file such information, documents and reports
as the Commission may require or prescribe under Section 13 or 15(d)(whichever
is
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<PAGE> 15
applicable) of the Exchange Act. Immediately upon becoming subject to the
reporting requirements of either Section 13 or 15(d) of the Exchange Act,the
Company shall forthwith upon request furnish any holder of Registrable Stock
(i) a written statement by the Company that it has complied with such reporting
requirements, (ii) a copy of the most recent annual or quarterly report of the
Company, and (iii) such other reports and documents filed by the Company with
the Commission as such holder may reasonably request in availing itself of an
exemption for the sale of Registrable Stock without registration under the
Securities Act. The Company acknowledges and agrees that the purpose of the
requirements contained in this Section 1(g) is to enable any such holder to
comply with the current public information requirement contained in Rule 144
under the Securities Act should such holder ever wish to dispose of any of the
securities of the Company acquired by it without registration under the
Securities Act in reliance upon Rule 144 (or any other similar exemptive
provision). In addition, the Company shall take such other measures and file
such other information, documents and reports as shall hereafter be required by
the Commission as a condition to the availability of Rule 144 and Rule 144A
under the Securities Act (or any similar exemptive provision hereafter in
effect).
(h) Stockholder Information. The Company may
require each holder of Registrable Stock as to which any registration is to be
effected pursuant to this Section 1 to furnish the Company such information with
respect to such holder and the distribution of such Registrable Stock as shall
be required by law or by the Commission in connection therewith.
(i) Termination of Requirements to Register.
The obligations of the Company under Sections 1(b) and 1(c) hereof shall
terminate when all of the Registrable Stock may be sold by all holders without
restriction under the Securities Act.
9
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COAST
LOAN AND SECURITY AGREEMENT
BORROWER: THE CREDIT STORE, INC.,
A DELAWARE CORPORATION
ADDRESS: 3401 NORTH LOUISE AVENUE
SIOUX FALLS, SOUTH DAKOTA 57107
DATE: APRIL 30, 1998
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS CREDIT, a division of Southern Pacific Bank ("Coast"), a California
corporation, with offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles,
California 90025, and the borrower named above (the "Borrower"), whose chief
executive office is located at the above address ("Borrower's Address"). The
Schedule to this Agreement (the "Schedule") shall for all purposes be deemed to
be a part of this Agreement, and the same is an integral part of this Agreement.
(Definitions of certain terms used in this Agreement are set forth in Section 1
below.)
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means in connection with reaffirmed personal credit card
debt, the obligor on a Receivable or General Intangible.
"Affiliate" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Audit" means to inspect, audit and copy Borrower's books and records and
the Collateral.
"Borrower" has the meaning set forth in the introduction to this
Agreement.
"Borrower's Address" has the meaning set forth in the introduction to this
Agreement.
"Business Day" means a day on which Coast is open for business.
"Change of Control" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) (other than the current holders of the
ownership interests in any Borrower) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, as a result of any single transaction, of more than twenty percent
(20%) of the total voting power of all classes of stock or other ownership
interests then outstanding of any Borrower normally entitled to vote in the
election of directors or analogous governing body.
"Closing Date" date of the initial funding under this Agreement.
"Coast" has the meaning set forth in the introduction to this Agreement.
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
"Code" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"Collateral" has the meaning set forth in Section 4 hereof.
"Credit Limit" means the maximum amount of Loans that Coast may make to
Borrower pursuant to the amounts and percentages shown on the Schedule.
"Default" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
"Dollars or $" means United States dollars.
"Early Termination Fee" means the amount set forth on the Schedule that
Borrower must pay Coast if this Agreement is terminated by Borrower or Coast
pursuant to Section 9.2 hereof.
"Eligible Receivables" means Receivables arising in the ordinary course of
Borrower's business and consisting of consumer credit card receivables
established through the balance transfer of charged-off consumer debt owned by
Borrower to newly established credit cards that Coast, in its sole judgment,
shall deem eligible for borrowing, based upon such considerations as Coast may
from time to time deem appropriate, including, without limitation, the payment
by each Account Debtor of at least three (3), and thereafter of the last three
(3), consecutive minimum monthly payments, each made on a timely basis. For
purposes of this Agreement, "minimum monthly payment" shall mean a payment by an
Account Debtor equal to at least three percent (3%) of the outstanding balance
due and owing by an Account Debtor minus Five Dollars ($5.00). A payment by an
Account Debtor shall be deemed to have been made on a timely basis if received
by Borrower within twenty-nine (29) days following the payment due date
specified on an Account Debtor's monthly periodic statement. Eligible
Receivables shall not include the following:
(a) Receivables with respect to which the Account Debtor has failed
to pay within 29 days of the due date; provided, however, Account Debtor's who
after failing to make a payment within twenty nine days of the due date, make 3
consecutive timely payments shall not be included in this subsection (a);
(b) Receivables owed by an Account Debtor or its Affiliates where
twenty-five percent (25%) or more of all Receivables owed by that Account Debtor
(or its Affiliates) are deemed ineligible under clause (a) above;
(c) Receivables with respect to which the Account Debtor is an
employee, Affiliate, or agent of Borrower;
(d) Receivables with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the Account Debtor may be
conditional;
(e) Receivables, that are not payable in Dollars or with respect to
which the Account Debtor: (i) does not maintain its chief executive office in
the United States, or (ii) is not organized under the laws of the United States
or any State thereof, or (iii) is the government of any foreign country or
sovereign state, or of any state, province, municipality, or other political
subdivision thereof, or of any department, agency, public corporation, or other
instrumentality thereof.
(f) Receivables with respect to which the Account Debtor is either
(i) the United States or any department, agency, or instrumentality of the
United States (exclusive, however, of Accounts with respect to which Borrower
has complied, to the satisfaction of Coast, with the Assignment of Claims Act,
31 U.S.C. ss. 3727), or (ii) any State of the United States (exclusive, however,
of Receivables owed by any State that does not have a statutory counterpart to
the Assignment of Claims Act);
(g) Receivables with respect to which the Account Debtor is a
creditor of Borrower, has or has asserted a right of setoff, has disputed its
liability, or has made any claim with respect to the Receivables;
(h) Receivables with respect to which the Account Debtor is subject
to any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt
(other than the initial establishment of the balance of the Receivable),
dissolution or liquidation proceeding, or becomes insolvent, or goes out of
business;
(i) Receivables the collection of which Coast, in its reasonable
credit judgment, believes to be doubtful by reason of the Account Debtor's
financial condition;
(j) Receivables with respect to which the goods
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<PAGE> 3
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
giving rise to such Receivable have not been shipped and billed to the Account
Debtor, the services giving rise to such Receivable have not been performed and
accepted by the Account Debtor, or the Receivable otherwise does not represent a
final sale;
(k) Receivables that represent progress payments or other advance
billings that are due prior to the completion of performance by Borrower of the
subject contract for goods or services.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and
other goods (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Event of Default" means any of the events set forth in Section 10.1 of
this Agreement.
"FDR" means First Data Resources, the provider of services relating to
data processing, monthly customer statements and card activation to Borrower.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States, consistently applied.
"General Intangibles" means all general intangibles of Borrower, whether
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, investment property, inventions, designs, drawings,
blueprints, patents, patent applications, trademarks and the goodwill of the
business symbolized thereby, names, trade names, trade secrets, goodwill,
copyrights, registrations, licenses, franchises, customer lists, security and
other deposits, rights in all litigation presently or hereafter pending for any
cause or claim (whether in contract, tort or otherwise), and all judgments now
or hereafter arising therefrom, all claims of Borrower against Coast, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation life
insurance, key man insurance, credit insurance, liability insurance, property
insurance and other insurance), tax refunds and claims, computer programs,
discs, tapes and tape files, claims under guaranties, security interests or
other security held by or granted to Borrower, all rights to indemnification and
all other intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired
goods, merchandise or other personal property, wherever located, to be furnished
under any contract of service or held for sale or lease (including without
limitation all raw materials, work in process, finished goods and goods in
transit, and including without limitation all farm products), and all materials
and supplies of every kind, nature and description which are or might be used or
consumed in Borrower's business or used in connection with the manufacture,
packing, shipping, advertising, selling or finishing of such goods, merchandise
or other personal property, and all warehouse receipts, documents of title and
other documents representing any of the foregoing.
"Investment Property" has the meaning set forth in Section 9115 of
the Code as in effect as of the date hereof.
"Issuing Bank" means a bank which issues credit cards.
"Loan Documents" means this Agreement, the agreements and documents listed
on Section 5 of the Schedule, and any other agreement, instrument or document
executed in connection herewith or therewith.
"Loans" has the meaning set forth in Section 2.1 hereof.
"Material Adverse Effect" means a material adverse effect on (i) the
business, assets, condition (financial or otherwise) or results of operations of
Borrower or any subsidiary of Borrower or any guarantor of any of the
Obligations, (ii) the ability of Borrower or any guarantor of any of the
Obligations to perform its obligations under this Agreement (including, without
limitation, repayment of the Obligations as they come due) or (iii) the validity
or enforceability of this Agreement or any other agreement or document entered
into by any party in connection herewith, or the rights or remedies of Coast
hereunder or thereunder.
"Maturity Date" means the date that this Agreement shall cease to be
effective, as set forth on the Schedule, subject to the provisions of Section
9.1 and 9.2 hereof.
"Maximum Dollar Amount" has the meaning set forth in Section 2 of the
Schedule.
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<PAGE> 4
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
"Minimum Monthly Interest" has the meaning set forth in Section 3 of the
Schedule.
"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Coast, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Coast in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorneys'
fees (including attorneys' fees and expenses incurred in bankruptcy), expert
witness fees, audit fees, letter of credit fees, collateral monitoring fees,
closing fees, facility fees, termination fees, minimum interest charges and any
other sums chargeable to Borrower under this Agreement or under any other
present or future instrument or agreement between Borrower and Coast.
"Permitted Liens" means the following:
(a) purchase money security interests in specific items of
Equipment;
(b) leases of specific items of Equipment;
(c) debt of J.L.B. of Nevada, Inc., a Nevada corporation, in the
approximate amount of $40 million dollars, which is subject to subordination.
(d) liens for taxes not yet payable;
(e) additional security interests and liens consented to in writing
by Coast, which consent shall not be unreasonably withheld;
(f) security interests being terminated substantially concurrently
with this Agreement;
(g) liens of materialmen, mechanics, warehousemen, carriers, or
other similar liens arising in the ordinary course of business and securing
obligations which are not delinquent;
(h) liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by liens of the type described above in
clauses (a), (b) or (c) above, provided that any extension, renewal or
replacement lien is limited to the property encumbered by the existing lien and
the principal amount of the indebtedness being extended, renewed or refinanced
does not increase;
(i) liens in favor of customs and revenue authorities which secure
payment of customs duties in connection with the importation of goods; or
(j) rights of Issuing Banks with respect to the proceeds of the
Receivables, in an amount equal to the amounts necessary to reimburse the
Issuing Banks for purchases made by and cash advances to Account Debtors on
their charge cards.
(k) rights of Issuing Banks in deposit accounts and repurchase
agreements held by Issuing Banks as reserve accounts pursuant to agreements with
Borrower relating to the issuance of credit cards to Account Debtors.
Coast will have the right to require, as a condition to its consent under
subparagraph (e) above, that the holder of the additional security interest or
lien sign an intercreditor agreement on Coast's then standard form, acknowledge
that the security interest is subordinate to the security interest in favor of
Coast, and agree not to take any action to enforce its subordinate security
interest so long as any Obligations remain outstanding, and that Borrower agree
that any uncured default in any obligation secured by the subordinate security
interest shall also constitute an Event of Default under this Agreement. Coast
shall execute documentation reasonably requested by Issuing Banks to confirm the
Permitted Liens described in subparagraphs (j) and (k) above.
"Person" means any individual, sole proprietorship, general partnership,
limited partnership, limited liability partnership, limited liability company,
joint venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Prime Rate" means the actual "Reference Rate" or the substitute therefor
of the Bank of America NT & SA whether or not that rate is the lowest interest
rate charged by said bank. If the Prime Rate, as defined, is unavailable, "Prime
Rate" shall mean the highest of the prime rates published in the Wall Street
Journal on the first business day of the applicable month, as the base rate on
corporate loans at large U.S. money center commercial banks.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by
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<PAGE> 5
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
performance), letters of credit, contract rights, chattel paper, instruments,
securities, documents, securities accounts, security entitlements, commodity
contracts, commodity accounts, investment property and all other forms of
obligations at any time owing to Borrower, all guaranties and other security
therefor, all merchandise returned to or repossessed by Borrower, and all rights
of stoppage in transit and all other rights or remedies of an unpaid vendor,
lienor or secured party.
"Renewal Date" shall mean the Maturity Date if this Agreement is renewed
pursuant to Section 9.1 hereof, and each anniversary thereafter that this
Agreement is renewed pursuant to Section 9.1 hereof.
"Renewal Fee" means the fee that Borrower must pay Coast upon renewal of
this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the
Schedule.
"SEC" means the Securities and Exchange Commission.
"Solvent" means, with respect to any Person on a particular date, that on
such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature, and (e) such Person is not engaged
in business or a transaction, and is not about to engage in business or a
transaction, for which such Person's properties and assets would constitute
unreasonably small capital after giving due consideration to the prevailing
practices in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that reasonably can
be expected to become an actual or matured liability.
"Tangible Net Worth" means consolidated owner's equity, plus debt
subordinated to the Obligations on terms and conditions acceptable to Coast in
its sole discretion, minus, goodwill, patents, trademarks, copyrights,
franchises, formulas, leasehold interests, leasehold improvements, non-compete
agreements, engineering plans, deferred tax benefits, organization costs,
prepaid items, and any other assets of Borrower that would be treated as
intangible assets on Borrower's balance sheet prepared in accordance with GAAP.
"Other Terms" All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
"Year 2000 Problem" means the risk that computer systems, software and
applications used by a Person may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any dates after
December 31, 1999.
2. CREDIT FACILITIES.
2.1 LOANS. Coast will make loans to Borrower (the "Loans"), in amounts and
in percentages to be determined by Coast, to be funded per instructions and
procedures as may be established by Coast from time to time, in its good faith
discretion, up to the Credit Limit, provided no Default or Event of Default has
occurred and is continuing. In addition, Coast may create reserves against or
reduce its advance rates based upon Eligible Receivables without declaring a
Default or an Event of Default if it determines that there has occurred a
Material Adverse Effect.
3. INTEREST AND FEES.
3.1 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Coast's discretion, be charged to Borrower's
loan account, and the same shall thereafter bear interest at the same rate as
the other Loans. Regardless of the amount of Obligations that may be outstanding
from time to time, Borrower shall pay Coast Minimum Monthly Interest during the
term of this Agreement with respect to the Loans in the amount set forth on the
Schedule.
3.2 FEES. Borrower shall pay Coast the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Coast and are deemed
fully earned and are nonrefundable.
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<PAGE> 6
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
4. SECURITY INTEREST.
To secure the payment and performance of all of the Obligations when due,
Borrower hereby grants to Coast a security interest in all of Borrower's
interest in the following, whether now owned or hereafter acquired, and wherever
located: All Receivables, Inventory, Equipment, Investment Property, and General
Intangibles, including, without limitation, all of Borrower's Deposit Accounts,
and all money, and all property now or at any time in the future in Coast's
possession (including claims and credit balances), and all proceeds of any of
the foregoing (including proceeds of any insurance policies, proceeds of
proceeds, and claims against third parties), all products of any of the
foregoing, and all books and records related to any of the foregoing (all of the
foregoing, together with all other property in which Coast may now or in the
future be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral")
5. CONDITIONS PRECEDENT.
The obligation of Coast to make the Loans is subject to the satisfaction,
in the sole discretion of Coast, at or prior to the first advance of funds
hereunder, of each, every and all of the following conditions:
5.1 STATUS OF ACCOUNTS AT CLOSING. No accounts payable shall be due and
unpaid one hundred twenty (120) days past its invoice date except for such
accounts payable being contested in good faith in appropriate proceedings and
for which adequate reserves have been provided.
5.2 MINIMUM AVAILABILITY. Borrower shall have minimum availability
immediately following the initial funding in the amount set forth on the
Schedule.
5.3 LANDLORD WAIVER. Coast shall have received duly executed landlord
waivers and access agreements in form and substance satisfactory to Coast, in
Coast's sole and absolute discretion, and, when deemed appropriate by Coast, in
form for recording in the appropriate recording office, with respect to all
leased locations where Borrower maintains any inventory or equipment.
5.4 EXECUTED AGREEMENT. Coast shall have received this Agreement duly
executed and in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.5 OPINION OF BORROWER'S COUNSEL. Coast shall have received an opinion of
Borrower's counsel, in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.6 PRIORITY OF COAST'S LIENS. Coast shall have received the results of
"of record" searches satisfactory to Coast in its sole and absolute discretion,
reflecting its Uniform Commercial Code filings against Borrower indicating that
Coast has a perfected, first priority lien in and upon all of the Collateral,
subject only to Permitted Liens.
5.7 INSURANCE. Coast shall have received copies of the insurance binders
or certificates evidencing Borrower's compliance with Section 8.2 hereof,
including lender's loss payee endorsements.
5.8 BORROWER'S EXISTENCE. Coast shall have received copies of Borrower's
articles or certificate of incorporation and all amendments thereto, and a
Certificate of Good Standing, each certified by the Secretary of State of the
state of Borrower's organization, and dated a recent date prior to the Closing
Date, and Coast shall have received Certificates of Foreign Qualification for
Borrower from the Secretary of State of each state wherein the failure to be so
qualified could have a Material Adverse Effect.
5.9 ORGANIZATIONAL DOCUMENTS. Coast shall have received copies of
Borrower's By-laws and all amendments thereto, and Coast shall have received
copies of the resolutions of the board of directors of Borrower, authorizing the
execution and delivery of this Agreement and the other documents contemplated
hereby, and authorizing the transactions contemplated hereunder and thereunder,
and authorizing specific officers of Borrower to execute the same on behalf of
Borrower, in each case certified by the Secretary or other acceptable officer of
Borrower as of the Closing Date.
5.10 TAXES. Coast shall have received evidence from Borrower that Borrower
has complied with all tax withholding and Internal Revenue Service regulations,
in form and substance satisfactory to Coast in its sole and absolute discretion.
5.11 DUE DILIGENCE. Coast shall have completed its due diligence with
respect to Borrower.
5.12 OTHER DOCUMENTS AND AGREEMENTS. Coast shall have received such other
agreements, instruments and documents as Coast may require in connection with
the transactions contemplated hereby, all in form and substance satisfactory to
Coast in Coast's sole and absolute discretion,
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
and in form for filing in the appropriate filing office, including, but not
limited to, those documents listed in Section 5 of the Schedule.
5.13 YEAR 2000 PROBLEM ASSESSMENT CERTIFICATE. Coast shall have received a
certificate from the relevant officer of Borrower to the effect that, as the
result of a comprehensive assessment undertaken by Borrower of Borrower's
computer systems, software and applications and after due inquiry made to
Borrower's material suppliers, vendors and customers, Borrower knows of no facts
that would cause Borrower to reasonably believe that the Year 2000 Problem will
cause a Material Adverse Effect.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to make Loans,
Borrower represents and warrants to Coast as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
6.1 EXISTENCE AND AUTHORITY. Borrower is and will continue to be, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Borrower is and will continue to be qualified
and licensed to do business in all jurisdictions in which any failure to do so
would have a Material Adverse Effect. The execution, delivery and performance by
Borrower of this Agreement, and all other documents contemplated hereby (a) have
been duly and validly authorized, (b) are enforceable against Borrower in
accordance with their terms (except as enforcement may be limited by equitable
principles and by bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to creditors' rights generally), and (c) do not violate Borrower's
articles or certificate of incorporation, or Borrower's by-laws, or any law or
any material agreement or instrument which is binding upon Borrower or its
property, and (d) do not constitute grounds for acceleration of any material
indebtedness or obligation under any material agreement or instrument which is
binding upon Borrower or its property.
6.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Coast thirty (30) days' prior written notice before changing
its name or doing business under any other name. Borrower has complied, and will
in the future comply, with all laws relating to the conduct of business under a
fictitious business name.
6.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Coast at least thirty (30) days'
prior written notice before opening any additional place of business, changing
its chief executive office, or moving any of the Collateral to a location other
than Borrower's Address or one of the locations set forth on the Schedule.
6.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will remain
free and clear of any and all liens, charges, security interests, encumbrances
and adverse claims, except for Permitted Liens. Coast now has, and will continue
to have, a first-priority perfected and enforceable security interest in all of
the Collateral, subject only to the Permitted Liens, and Borrower will at all
times defend Coast and the Collateral against all claims of others. None of the
Collateral now is or will be affixed to any real property in such a manner, or
with such intent, as to become a fixture. Borrower is not and will not become a
lessee under any real property lease pursuant to which the lessor may obtain any
rights in any of the Collateral and no such lease now prohibits, restrains,
impairs or will prohibit, restrain or impair Borrower's right to remove any
Collateral from the leased premises. Whenever any Collateral is located upon
premises in which any third party has an interest (whether as owner, mortgagee,
beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever
requested by Coast, use its best efforts to cause such third party to execute
and deliver to Coast, in form acceptable to Coast, such waivers and
subordinations as Coast shall specify, so as to ensure that Coast's rights in
the Collateral are, and will continue to be, superior to the rights of any such
third party. Borrower will keep in full force and effect, and will comply with
all the terms of, any lease of real property where any of the Collateral now or
in the future may be located.
6.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. Borrower will immediately advise Coast in writing of any
material loss or damage to the Collateral.
6.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
accurate books and records, comprising an accounting system in accordance with
GAAP.
6.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
now or in the future delivered to Coast have been, and will be, prepared in
conformity with GAAP (except, in the case of unaudited financial statements, for
the absence of footnotes and subject to normal year-end adjustments) and now and
in the future will fairly reflect the financial condition of Borrower, at the
times and for the periods therein stated. Between the last date covered by any
such statement provided to Coast and the date hereof, there has been no Material
Adverse Effect. Borrower is now and will continue to be Solvent.
6.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Coast in writing
of the commencement of, and any material development in, the proceedings, and
(iii) posts bonds or takes any other steps required to keep the contested taxes
from becoming a lien upon any of the Collateral. As of the date hereof, Borrower
is unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
6.9 COMPLIANCE WITH LAW. Borrower is in compliance, and will comply, in
all material respects, with all provisions of all material foreign, federal,
state and local laws and regulations relating to Borrower, with respect to which
failure to comply would have a Material Adverse Effect, including, but not
limited to, the Fair Labor Standards Act, and those relating to Borrower's
ownership of real or personal property, the conduct and licensing of Borrower's
business, and environmental matters.
6.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in a Material Adverse Effect.
Borrower will promptly inform Coast in writing of any claim, proceeding,
litigation or investigation in the future threatened or instituted by or against
Borrower involving an amount set forth on the Schedule.
6.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation G of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
6.12 YEAR 2000 COMPLIANCE. As the result of a comprehensive review and
assessment undertaken by Borrower of Borrower's computer systems, software and
applications and after due inquiry made of Borrower's material suppliers,
vendors and customers Borrower represents and warrants that the Year 2000
problem will not result in a Material Adverse Effect.
7. RECEIVABLES.
7.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Coast as follows: Each Eligible Receivable with respect to which
Loans are requested by Borrower shall, on the date each Loan is requested and
made, represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the balance transfer of charged-off consumer debt
owing by Borrower to a newly established credit card in the ordinary course of
Borrower's business.
7.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Coast as follows: All statements made and all unpaid
balances appearing in all invoices, instruments and other documents evidencing
the Eligible Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be.
All sales and other transactions underlying or
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
giving rise to each Eligible Receivable shall fully comply with all applicable
laws and governmental rules and regulations. All signatures and indorsements on
all documents, instruments, and agreements relating to all Eligible Receivables
are and shall be genuine, and all such documents, instruments and agreements are
and shall be legally enforceable in accordance with their terms.
7.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall
deliver to Coast via facsimile, unless otherwise directed by Coast, at such
locations and at such intervals as Coast may request, transaction reports and
loan requests, schedules of Receivables, and schedules of collections, all on
Coast's standard forms and such other forms as Coast may create to track payment
history on Receivables; provided, however, that Borrower's failure to execute
and deliver the same shall not affect or limit Coast's security interest and
other rights in all of Borrower's Receivables, nor shall Coast's failure to
advance or lend against a specific Receivable affect or limit Coast's security
interest and other rights therein. Loan requests received after 10:30 A.M. Los
Angeles, California time, will not be considered by Coast until the next
Business Day. Together with each such schedule, or later if requested by Coast,
Borrower shall furnish Coast with copies (or, at Coast's request, originals) of
all contracts, orders, invoices, and other similar documents. Borrower shall
also furnish to Coast an aged accounts receivable trial balance in such form and
at such intervals as Coast shall request. In addition, Borrower shall deliver to
Coast the originals of all instruments, chattel paper, security agreements,
guarantees and other documents and property evidencing or securing any
Receivables, upon receipt thereof and in the same form as received, with all
necessary indorsements, all of which shall be with recourse. Borrower shall also
provide Coast with copies of all credit memos as and when requested by Coast.
7.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect
all Receivables, unless and until an Event of Default has occurred. Borrower
shall hold all payments on, and proceeds of, Receivables in trust for Coast, and
Borrower shall deliver all such payments and proceeds to Coast within one (1)
Business Day after receipt by Borrower, in their original form, duly endorsed to
Coast, to be applied to the Obligations in such order as Coast shall determine.
Coast may, in its discretion, require that all proceeds of Collateral be
deposited by Borrower into a lockbox account, or such other "blocked account" as
Coast may specify, pursuant to a blocked account agreement in such form as Coast
may specify. Coast or its designee may, at any time, notify Account Debtors that
Coast has been granted a security interest in the Receivables.
7.5 REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of
any Collateral shall be delivered to Coast within one (1) Business Day after
receipt by Borrower, in their original form, duly endorsed to Coast, to be
applied to the Obligations in such order as Coast shall determine. Borrower
agrees that it will not commingle proceeds of Collateral with any of Borrower's
other funds or property, but will hold such proceeds separate and apart from
such other funds and property and in an express trust for Coast. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.
7.6 DISPUTES. Upon the reasonable request of Coast, Borrower shall provide
to Coast promptly information regarding disputes or claims relating to
Receivables to the extent reasonably available to the Borrower and not already
delivered to Coast. Borrower shall not forgive (completely or partially),
compromise or settle any Receivable for less than payment in full, or agree to
do any of the foregoing, except that Borrower may do so, provided that: (a)
Borrower does so in good faith, in a commercially reasonable manner, in the
ordinary course of business, and in arm's length transactions, which are
reported to Coast on the regular reports provided to Coast; (b) no notice of a
Default or Event of Default has been given by Coast to Borrower and is
continuing; and (c) taking into account all such discounts settlements and
forgiveness, the total outstanding Loans will not exceed the Credit Limit. Coast
may, at any time after the occurrence of an Event of Default, settle or adjust
disputes or claims directly with Account Debtors for amounts and upon terms
which Coast considers advisable in its reasonable credit judgment and, in all
cases, Coast shall credit Borrower's Loan account with only the net amounts
received by Coast in payment of any Receivables.
7.7 VERIFICATION. Coast may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Coast or such other name as Coast may choose; provided, however,
such contacts must be made in a commercially reasonable manner and in compliance
with applicable Federal and State consumer laws and regulations. Borrower agrees
that Coast may employ third parties to verify and monitor the Receivables the
cost of which shall be borne by Borrower.
7.8 NO LIABILITY. Coast shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
goods, the sale or other disposition of which gives rise to a Receivable, or for
any error, act, omission or delay of any kind occurring in the settlement,
failure to settle, collection or failure to collect any Receivable, or for
settling any Receivable in good faith for less than the full amount thereof, nor
shall Coast be deemed to be responsible for any of Borrower's obligations under
any contract or agreement giving rise to a Receivable. Nothing herein shall,
however, relieve Coast from liability for its own gross negligence or willful
misconduct.
8. ADDITIONAL DUTIES OF THE BORROWER.
8.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.
8.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Coast, in such form and amounts as Coast may
reasonably require, and Borrower shall provide evidence of such insurance to
Coast, so that Coast is satisfied that such insurance is, at all times, in full
force and effect. All liability insurance policies of Borrower shall name Coast
as an additional insured, and all property casualty and related insurance
policies of Borrower shall name Coast as a loss payee thereon and Borrower shall
cause a lender's loss payee endorsement in form reasonably acceptable to Coast.
Upon receipt of the proceeds of any such insurance, Coast shall apply such
proceeds in reduction of the Obligations as Coast shall determine in its sole
discretion, except that, provided no Default or Event of Default has occurred
and is continuing, Coast shall release to Borrower insurance proceeds with
respect to Equipment totaling less than the amount set forth in Section 8 of the
Schedule, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Coast may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Coast may, but is
not obligated to, obtain the same at Borrower's expense. Borrower shall promptly
deliver to Coast copies of all reports made to insurance companies.
8.3 REPORTS. Borrower, at its expense, shall provide Coast with the
written reports set forth in Section 8 of the Schedule, and such other written
reports with respect to Borrower (including budgets, sales projections,
operating plans and other financial documentation), as Coast shall from time to
time reasonably specify.
8.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times but not
less frequently than quarterly and on one (1) Business Day's notice, Coast, or
its agents, shall have the right to perform Audits; provided, however, Audits,
as used herein, shall not relate to Coast's access to FDR, via Borrower, which
may be on a daily basis and which shall be unlimited. Coast shall take
reasonable steps to keep confidential all confidential information obtained in
any Audit, but Coast shall have the right to disclose any such information to
its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena
or other legal process. The Audits shall be at Borrower's expense and the charge
for the Audits shall be Seven Hundred Fifty Dollars ($750) per person per day
(or such higher amount as shall represent Coast's then current standard charge
for the same), plus reasonable out-of-pocket expenses. Borrower will not enter
into any agreement with any accounting firm, service bureau or third party to
store Borrower's books or records at any location other than Borrower's Address,
without first notifying Coast of the same and obtaining the written agreement
from such accounting firm, service bureau or other third party to give Coast the
same rights with respect to access to books and records and related rights as
Coast has under this Loan Agreement. Borrower shall also take all necessary
steps to assure that this material accounting and software, systems and
applications, and those of its accounting firm, service bureau or any other
third party vendor or supplier, will, on a timely basis, adequately and
completely address the Year 2000 Problem in all material respects.
8.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's prior written
consent, do any of the following:
(a) merge or consolidate with another entity, except in a
transaction in which (i) the owners of the Borrower hold at least fifty percent
(50%) of the ownership interest in the surviving entity immediately after such
merger or consolidation, and (ii) the Borrower is the surviving entity;
(b) acquire any assets, except (i) in the ordinary course of
business, or (ii) in a transaction not involving the payment of an amount in
excess of the amount set forth in Section 8 of the Schedule or, in the aggregate
of all such transactions during any 12 month period of April 1-March 31, not in
excess of the amount set forth in Section 8 of the Schedule;
(c) make any investment, equity contribution, loan or other transfer
to any subsidiary or any other affiliate except for dividends or distributions
permitted under
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
Section 8.5(k) hereof and except for loans or capital contributions of up to
$25,000 per month by Borrower to Borrower's subsidiary Sleepy Hollow Associates,
Inc.; provided, however, Borrower may enter into joint ventures, reasonably
acceptable to Coast, and may contribute services to joint ventures (or enter
into service agreements with joint ventures), so long as Borrower does not make
an investment equity contribution or commingle the collections of Receivables;
(d) enter into any other transaction outside the ordinary course of
business;
(e) sell or transfer any Collateral, except for the sale of obsolete
or unneeded Equipment in the ordinary course of business; provided, however,
Borrower shall be permitted to sell Receivables, if Borrower pays to Coast an
amount equal to the borrowing availability equal to the Receivables sold, and
Borrower shall be permitted to transfer or replace accounts in its ordinary
course of business (including transfers and replacements as payment in kind for
the satisfaction of obligations of Borrower) so long as such transfer or
replacement does not result in a Default or an Event of Default. Upon any such
transfer Coast will provide reasonable evidence of the release of its lien
therein.
(f) store any Collateral with any warehouseman or other third party;
(g) sell any Inventory on a sale-or-return, guaranteed sale,
consignment, or other contingent basis;
(h) make any loans of any money or other assets, except (i) advances
to customers or suppliers in the ordinary course of business, (ii) travel
advances, employee relocation loans and other employee loans and advances in the
ordinary course of business, and (iii) loans to employees, officers and
directors for the purpose of purchasing equity securities of the Borrower;
(i) incur any debts, outside the ordinary course of business, which
would have a Material Adverse Effect;
(j) guarantee or otherwise become liable with respect to the
obligations of another party or entity;
(k) pay or declare any dividends or distributions on the ownership
interests in Borrower (except for dividends or distributions payable solely in
stock form of ownership interests in Borrower and except after achievement by
Borrower of two consecutive fiscal quarters of net, after-tax profitability,
Borrower may make such distributions, if Borrower meets a quarterly debt service
calculation of no less than 1.3. (for purposes of this calculation quarterly
debt service means, consistent with GAAP, the following; (EBITDA minus cash
capital expenditures minus cash payment of federal and state taxes), divided by
(all payments of principal plus interest, plus capital lease payments));
provided, however, no such payments may be made if a Default or Event of Default
exists or would occur due to such a distribution (including Borrower's failure
to have a Minimum Availability under the Loan Agreement of Five Hundred Thousand
Dollars ($500,000) and maintaining its Tangible Net Worth as required under the
Loan Agreement);
(l) make any change in Borrower's capital structure which would have
a Material Adverse Effect; or
(m) dissolve or elect to dissolve.
(n) fail to remit to Coast any cash received from an Issuing Banks,
as a result of any Issuing Bank reducing its cash reserve requirements.
Transactions permitted by the foregoing provisions of this Section are
only permitted if no Default or Event of Default is continuing or would occur as
a result of such transaction.
8.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Coast with respect to any Collateral or relating to
Borrower, Borrower shall, without expense to Coast, make available Borrower and
its officers, employees and agents and Borrower's books and records, to the
extent that Coast may deem them reasonably necessary in order to prosecute or
defend any such suit or proceeding.
8.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Coast, to execute all documents and take all actions, as Coast, may deem
reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
9. TERM.
9.1 MATURITY DATE. This Agreement shall continue in effect until the
Maturity Date; provided that the Maturity Date shall automatically be extended,
and this Agreement shall automatically and continuously renew, for successive
additional terms of one year each, unless one party gives
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
written notice to the other, not less than 120 days prior to the Maturity Date
or the next Renewal Date, that such party elects to terminate this Agreement
effective on the Maturity Date or such next Renewal Date. If this Agreement is
renewed under this Section 9.1, Borrower shall pay to Coast a Renewal Fee in the
amount shown in Section 3 of the Schedule. The Renewal Fee shall be due and
payable on the Renewal Date and thereafter shall bear interest at a rate equal
to the rate applicable to the Loans.
9.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (a) by Borrower, effective three (3) Business Days
after written notice of termination is given to Coast; or (b) by Coast at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Coast under this
Section 9.2, Borrower shall pay to Coast an Early Termination Fee in the amount
shown in Section 3 of the Schedule. The Early Termination Fee shall be due and
payable on the effective date of termination and thereafter shall bear interest
at a rate equal to the rate applicable to the Loans.
9.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Notwithstanding any termination of this Agreement, all of Coast's security
interests in all of the Collateral and all of the terms and provisions of this
Agreement shall continue in full force and effect until all Obligations have
been paid and performed in full; provided that, without limiting the fact that
Loans are subject to the discretion of Coast, Coast may, in its sole discretion,
refuse to make any further Loans after termination. No termination shall in any
way affect or impair any right or remedy of Coast, nor shall any such
termination relieve Borrower of any Obligation to Coast, until all of the
Obligations have been paid and performed in full. Upon payment and performance
in full of all the Obligations and termination of this Agreement, Coast shall
promptly deliver to Borrower termination statements, requests for reconveyances
and such other documents as may be required to fully terminate Coast's security
interests.
10. EVENTS OF DEFAULT AND REMEDIES.
10.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and Borrower shall
give Coast immediate written notice thereof:
(a) Any warranty, representation, statement, report or certificate
made or delivered to Coast by Borrower or any of Borrower's officers, employees
or agents, now or in the future, shall be untrue or misleading and results in a
Material Adverse Effect; or
(b) Borrower shall fail to pay when due any Loan or any interest
thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time
shall exceed the Credit Limit; or
(d) Borrower shall fail to deliver the proceeds of Collateral to
Coast as provided in Section 7.5 above, or shall fail to give Coast access to
its books and records or Collateral as provided in Section 8.4 above, or shall
breach any negative covenant set forth in Section 8.5 above; or
(e) Borrower shall fail to comply with the financial covenants (if
any) set forth in the Schedule or shall fail to perform any other non-monetary
Obligation which by its nature cannot be cured; or
(f) Borrower shall fail to perform any other non-monetary
Obligation, which failure is not cured within ten (10) Business Days after the
date due; or
(g) Any levy, assessment, attachment, seizure, lien or encumbrance
(other than a Permitted Lien) is made on all or any part of the Collateral which
is not cured within ten (10) days after the occurrence of the same; or
(h) any default or event of default occurs under any obligation
secured by a Permitted Lien, which is not cured within any applicable cure
period or waived in writing by the holder of the Permitted Lien; or
(i) Borrower breaches any material contract or obligation, which has
or may reasonably be expected to have a Material Adverse Effect; or
(j) Dissolution, termination of existence, insolvency or business
failure of Borrower or any guarantor of any of the Obligations; or appointment
of a receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by Borrower or any guarantor of any of the Obligations under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
(k) the commencement of any proceeding against Borrower or any
guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, which is (i) not
timely controverted, or (ii) not cured by the dismissal thereof within thirty
(30) days after the date commenced; or
(l) if Coast is denied access to FDR; or
(m) revocation or termination of, or limitation or denial of
liability upon, any guaranty of the Obligations or any attempt to do any of the
foregoing, or commencement of proceedings by any guarantor of any of the
Obligations under any bankruptcy or insolvency law; or
(n) revocation or termination of, or limitation or denial of
liability upon, any pledge of any certificate of deposit, securities or other
property or asset of any kind pledged by any third party to secure any or all of
the Obligations, or any attempt to do any of the foregoing, or commencement of
proceedings by or against any such third party under any bankruptcy or
insolvency law; or
(o) Borrower or any guarantor of any of the Obligations makes any
payment on account of any indebtedness or obligation which has been subordinated
to the Obligations, other than as permitted in the applicable subordination
agreement, or if any Person who has subordinated such indebtedness or
obligations terminates or in any way limits his subordination agreement; or
(p) Except as permitted under Section 8.5(a), Borrower shall suffer
or experience any Change of Control without Coast's prior written consent, which
consent shall be in the discretion of Coast in the exercise of its reasonable
business judgment; or
(q) Borrower shall generally not pay its debts as they become due,
or Borrower shall conceal, remove or transfer any part of its property, with
intent to hinder, delay or defraud its creditors, or make or suffer any transfer
of any of its property which may be fraudulent under any bankruptcy, fraudulent
conveyance or similar law; or
(r) there shall be any Material Adverse Effect.
Coast may cease making any Loans or extending any credit hereunder during any of
the above cure periods.
10.2 REMEDIES. Upon the occurrence, and during the continuance, of any
Event of Default, Coast, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following:
(a) Cease making Loans or otherwise extending credit to Borrower
under this Agreement or any other document or agreement;
(b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to any
Obligation;
(c) Take possession of any or all of the Collateral wherever it may
be found, and for that purpose Borrower hereby authorizes Coast without judicial
process to enter onto any of Borrower's premises without interference to search
for, take possession of, keep, store or remove any of the Collateral, and remain
on the premises or cause a custodian to remain on the premises in exclusive
control thereof, without charge for so long as Coast deems it reasonably
necessary in order to complete the enforcement of its rights under this
Agreement or any other agreement; provided, however, that should Coast seek to
take possession of any of the Collateral by Court process, Borrower hereby
irrevocably waives:
(i) any bond and any surety or security relating thereto
required by any statute, court rule or otherwise as an incident to such
possession;
(ii) any demand for possession prior to the commencement of
any suit or action to recover possession thereof; and
(iii) any requirement that Coast retain possession of, and not
dispose of, any such Collateral until after trial or final judgment;
(d) Require Borrower to assemble any or all of the Collateral and
make it available to Coast at places designated by Coast which are reasonably
convenient to Coast and Borrower, and to remove the Collateral to such locations
as Coast may deem advisable;
(e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Coast shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
without charge. Coast is hereby granted a license or other right to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to Coast's
benefit;
(f) Sell, lease or otherwise dispose of any of the Collateral, in
its condition at the time Coast obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Coast shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Coast deems reasonable, or on Coast's premises, or elsewhere and the
Collateral need not be located at the place of disposition. Coast may directly
or through any affiliated company purchase or lease any Collateral at any such
public disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General
Intangibles comprising Collateral and, in connection therewith, Borrower
irrevocably authorizes Coast to endorse or sign Borrower's name on all
collections, receipts, instruments and other documents, to take possession of
and open mail addressed to Borrower and remove therefrom payments made with
respect to any item of the Collateral or proceeds thereof, and, in Coast's sole
discretion, to grant extensions of time to pay, compromise claims and settle
Receivables and the like for less than face value; and
(h) Demand and receive possession of any of Borrower's federal and
state income tax returns and the books and records utilized in the preparation
thereof or referring thereto.
All attorneys' fees, expenses, costs, liabilities and obligations incurred
by Coast (including attorneys' fees and expenses incurred in connection with
bankruptcy) with respect to the foregoing shall be due from the Borrower to
Coast on demand. Coast may charge the same to Borrower's loan account, and the
same shall thereafter bear interest at the same rate as is applicable to the
Loans. Without limiting any of Coast's rights and remedies, from and after the
occurrence of any Event of Default, the interest rate applicable to the
Obligations shall be increased by an additional three percent per annum.
10.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Coast agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable:
(a) Notice of the sale is given to Borrower at least seven (7) days
prior to the sale, and, in the case of a public sale, notice of the sale is
published at least seven (7) days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted;
(b) Notice of the sale describes the collateral in general,
non-specific terms;
(c) The sale is conducted at a place designated by Coast, with or
without the Collateral being present;
(d) The sale commences at any time between 8:00 a.m. and 6:00 p.m.
Los Angeles, California time;
(e) Payment of the purchase price in cash or by cashier's check or
wire transfer is required; and
(f) With respect to any sale of any of the Collateral, Coast may
(but is not obligated to) direct any prospective purchaser to ascertain directly
from Borrower any and all information concerning the same.
Coast shall be free to employ other methods of noticing and selling the
Collateral, in its discretion, if they are commercially reasonable.
10.4 POWER OF ATTORNEY. Borrower grants to Coast an irrevocable power of
attorney coupled with an interest, authorizing and permitting Coast (acting
through any of its employees, attorneys or agents) at any time, at its option,
but without obligation, with or without notice to Borrower, and at Borrower's
expense, to do any or all of the following, in Borrower's name or otherwise, but
Coast agrees to exercise the following powers in a commercially reasonable
manner:
(a) Execute on behalf of Borrower any documents that Coast may, in
its sole discretion, deem advisable in order to perfect and maintain Coast's
security
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
interest in the Collateral, or in order to exercise a right of Borrower or
Coast, or in order to fully consummate all the transactions contemplated under
this Agreement, and all other present and future agreements;
(b) Execute on behalf of Borrower any document exercising,
transferring or assigning any option to purchase, sell or otherwise dispose of
or to lease (as lessor or lessee) any real or personal property which is part of
Coast's Collateral or in which Coast has an interest;
(c) Execute on behalf of Borrower, any invoices relating to any
Receivable, any draft against any Account Debtor and any notice to any Account
Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of
mechanic's, materialman's or other lien, or assignment or satisfaction of
mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items of
payment or proceeds of Collateral; endorse the name of Borrower upon any
instruments, or documents, evidence of payment or Collateral that may come into
Coast's possession;
(e) Endorse all checks and other forms of remittances received by
Coast;
(f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same;
(g) Grant extensions of time to pay, compromise claims and settle
Receivables and General Intangibles for less than face value and execute all
releases and other documents in connection therewith;
(h) Pay any sums required on account of Borrower's taxes or to
secure the release of any liens therefor, or both;
(i) Settle and adjust, and give releases of, any insurance claim
that relates to any of the Collateral and obtain payment therefor;
(j) Instruct any third party having custody or control of any books
or records belonging to, or relating to, Borrower to give Coast the same rights
of access and other rights with respect thereto as Coast has under this
Agreement; and
(k) Take any action or pay any sum required of Borrower pursuant to
this Agreement and any other present or future agreements.
Any and all sums paid and any and all costs, expenses, liabilities,
obligations and attorneys' fees incurred by Coast (including attorneys' fees and
expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be
added to and become part of the Obligations, and shall be payable on demand.
Coast may charge the foregoing to Borrower's loan account and the foregoing
shall thereafter bear interest at the same rate applicable to the Loans. In no
event shall Coast's rights under the foregoing power of attorney or any of
Coast's other rights under this Agreement be deemed to indicate that Coast is in
control of the business, management or properties of Borrower. Borrower shall
pay, indemnify, defend, and hold Coast and each of its officers, directors,
employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified
Person") harmless (to the fullest extent permitted by law) from and against any
and all claims, demands, suits, actions, investigations, proceedings, and
damages, and all attorneys fees and disbursements and other costs and expenses
actually incurred in connection therewith (as and when they are incurred and
irrespective of whether suit is brought), at any time asserted against, imposed
upon, or incurred by any of them in connection with or as a result of or related
to the execution, delivery, enforcement, performance, and administration of this
Agreement and any other Loan Documents or the transactions contemplated herein,
and with respect to any investigation, litigation, or proceeding related to this
Agreement, any other Loan Document, or the use of the proceeds of the credit
provided hereunder (irrespective of whether any Indemnified Person is a party
thereto), or any act, omission, event or circumstance in any manner related
thereto (all the foregoing, collectively, the "Indemnified Liabilities").
Borrower shall have no obligation to any Indemnified Person hereunder with
respect to any Indemnified Liability that a court of competent jurisdiction
finally determines to have resulted from the gross negligence or willful
misconduct of such Indemnified Person. This provision shall survive the
termination of this Agreement and the repayment of the Obligations.
10.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any
sale of the Collateral shall be applied by Coast first to the costs, expenses,
liabilities, obligations and attorneys' fees incurred by Coast in the exercise
of its rights under this Agreement, second to the interest due upon any of the
Obligations, and third to the principal of the Obligations, in such order as
Coast shall determine in its sole discretion. Any surplus shall be paid to
Borrower or other persons legally entitled thereto; Borrower shall remain liable
to Coast for any deficiency. If, Coast, in its sole
15
<PAGE> 16
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, Coast shall
have the option, exercisable at any time, in its sole discretion, of either
reducing the Obligations by the principal amount of purchase price or deferring
the reduction of the Obligations until the actual receipt by Coast of the cash
therefor.
10.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth
in this Agreement, Coast shall have all the other rights and remedies accorded a
secured party in equity, under the Code, and under all other applicable laws,
and under any other instrument or agreement now or in the future entered into
between Coast and Borrower, and all of such rights and remedies are cumulative
and none is exclusive. Exercise or partial exercise by Coast of one or more of
its rights or remedies shall not be deemed an election, nor bar Coast from
subsequent exercise or partial exercise of any other rights or remedies. The
failure or delay of Coast to exercise any rights or remedies shall not operate
as a waiver thereof, but all rights and remedies shall continue in full force
and effect until all of the Obligations have been indefeasibly paid and
performed.
11. GENERAL PROVISIONS.
11.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Coast (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Coast on account of the Obligations three (3) Business Days after
receipt by Coast of immediately available funds, and, for purposes of the
foregoing, any such funds received after 10:30 AM Los Angeles, California time,
on any day shall be deemed received on the next Business Day. Coast shall be
entitled to charge Borrower's account for such three (3) Business Days of
"clearance" or "float" at the rate(s) set forth in Section 3 of the Schedule on
all checks, wire transfers and other items received by Coast, regardless of
whether such three (3) Business Days of "clearance" or "float" actually occur,
and shall be deemed to be the equivalent of charging three (3) Business Days of
interest on such collections. This across-the-board three (3) Business Day
clearance or float charge on all collections is acknowledged by the parties to
constitute an integral aspect of the pricing of Coast's financing of Borrower.
Coast shall not, however, be required to credit Borrower's account for the
amount of any item of payment which is unsatisfactory to Coast in its sole
discretion, and Coast may charge Borrower's loan account for the amount of any
item of payment which is returned to Coast unpaid.
11.2 APPLICATION OF PAYMENTS. Subject to Section 7.5 hereof, all payments
with respect to the Obligations may be applied, and in Coast's sole discretion
reversed and re-applied, to the Obligations, in such order and manner as Coast
shall determine in its sole discretion.
11.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that
Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower's
Loan account, in which event they will bear interest from the date due to the
date paid at the same rate applicable to the Loans.
11.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Coast), unless Borrower
notifies Coast in writing to the contrary within forty-five (45) days after each
account is rendered, describing the nature of any alleged errors or omissions.
11.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, facsimile or certified mail return
receipt requested, addressed to Coast or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Coast shall be directed to the Commercial
Finance Division, to the attention of the Division Manager or the Division
Credit Manager. All notices shall be deemed to have been given upon delivery in
the case of notices personally delivered, faxed (at time of confirmation of
transmission), or at the expiration of one (1) Business Day following delivery
to the private delivery service, or two (2) Business Days following the deposit
thereof in the United States mail, with postage prepaid.
11.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
11.7 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Coast and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. There are
no oral
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
understandings, representations or agreements between the parties which are not
set forth in this Agreement or in other written agreements signed by the parties
in connection herewith.
11.8 WAIVERS. The failure of Coast at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between Borrower and Coast shall not waive or
diminish any right of Coast later to demand and receive strict compliance
therewith. Any waiver of any Default shall not waive or affect any other
Default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Coast shall be deemed to have been waived
by any act or knowledge of Coast or its agents or employees, but only by a
specific written waiver signed by an authorized officer of Coast and delivered
to Borrower. Borrower waives demand, protest, notice of protest and notice of
default or dishonor, notice of payment and nonpayment, release, compromise,
settlement, extension or renewal of any commercial paper, instrument, account,
General Intangible, document or guaranty at any time held by Coast on which
Borrower is or may in any way be liable, and notice of any action taken by
Coast, unless expressly required by this Agreement.
11.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Coast, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast, but nothing herein shall relieve Coast from
liability for its own gross negligence or willful misconduct.
11.10 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Coast.
11.11 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower and Coast of each and every obligation under this Agreement.
11.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall reimburse Coast
for all attorneys' fees (including attorneys' fees and expenses incurred
pursuant to bankruptcy) and all filing, recording, search, title insurance,
appraisal, audit, and other costs incurred by Coast, pursuant to, or in
connection with, or relating to this Agreement (whether or not a lawsuit is
filed), including, but not limited to, any attorneys' fees and costs (including
attorneys' fees and expenses incurred pursuant to bankruptcy) Coast incurs in
order to do the following: prepare and negotiate this Agreement and the
documents relating to this Agreement; obtain legal advice in connection with
this Agreement or Borrower; enforce, or seek to enforce, any of its rights;
prosecute actions against, or defend actions by, Account Debtors; commence,
intervene in, or defend any action or proceeding; initiate any complaint to be
relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; examine, audit,
copy, and inspect any of the Collateral or any of Borrower's books and records;
protect, obtain possession of, lease, dispose of, or otherwise enforce Coast's
security interest in, the Collateral; and otherwise represent Coast in any
litigation relating to Borrower. If either Coast or Borrower files any lawsuit
against the other predicated on a breach of this Agreement, the prevailing party
in such action shall be entitled to recover its costs and attorneys' fees
(including attorneys' fees and expenses incurred pursuant to bankruptcy),
including (but not limited to) attorneys' fees and costs incurred in the
enforcement of, execution upon or defense of any order, decree, award or
judgment. Borrower shall also pay Coast's standard charges for returned checks
and for wire transfers, in effect from time to time. All attorneys' fees, costs
and charges (including attorneys' fees and expenses incurred pursuant to
bankruptcy) and other fees, costs and charges to which Coast may be entitled
pursuant to this Agreement may be charged by Coast to Borrower's loan account
and shall thereafter bear interest at the same rate as the Loans.
11.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Coast; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Coast, and any prohibited
assignment shall be void. No consent by Coast to any assignment shall release
Borrower from its liability for the Obligations. Coast may assign its rights and
delegate its duties hereunder without the consent of Borrower. Coast reserves
the right to syndicate all or a portion of the transaction created herein or
sell, assign, transfer, negotiate, or grant participations in all or any part
of, or any interest in Coast's rights and benefits hereunder. In connection with
any such syndication, assignment or participation, which shall be subject to
Borrower's consent not to be unreasonably withheld in light of the confidential
nature of Borrower's business, Coast, subject to the
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
provisions of Section 11.18, may disclose all documents and information which
Coast now or hereafter may have relating to Borrower or Borrower's business. To
the extent that Coast assigns its rights and obligations hereunder to a third
Person, Coast thereafter shall be released from such assigned obligations to
Borrower.
11.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue
appropriate press releases and to cause a tombstone to be published announcing
the consummation of this transaction and the aggregate amount thereof.
11.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used
in this Agreement for convenience. Borrower and Coast acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Coast or Borrower under any rule
of construction or otherwise.
11.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Coast and Borrower
shall be governed by the internal laws of the State of California, without
regard to its conflicts of law principles. As a material part of the
consideration to Coast to enter into this Agreement, Borrower (a) agrees that
all actions and proceedings relating directly or indirectly to this Agreement
shall, at Coast's option, be litigated in courts located within California, and
that the exclusive venue therefor shall be Los Angeles County; (b) consents to
the jurisdiction and venue of any such court and consents to service of process
in any such action or proceeding by personal delivery or any other method
permitted by law; and (c) waives any and all rights Borrower may have to object
to the jurisdiction of any such court, or to transfer or change the venue of any
such action or proceeding.
11.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
11.18 CONFIDENTIALITY. Coast will maintain the confidentiality of any non
public information relating to the business operations and methodology of
Borrower and financial performance of Borrower provided to Coast solely by the
Borrower as required under the terms of this Agreement, including pursuant to
Sections 7.6, 8.3 and 8.4 ("Borrower Information"), and will not disclose
Borrower Information to any person, other than employees, agents, attorneys or
accountants of Coast. Coast will not disclose Borrower information to any other
party unless, prior to such disclosure, Coast obtains an executed acknowledgment
binding such party to maintain the confidentiality of the information,
prohibiting its disclosure except for the purposes permitted under this
Agreement, and agreeing that the information may not be used to compete with the
Borrower in any way. In the event Coast receives a subpoena or other process for
any Borrower Information, it will immediately give notice in writing of the
subpoena or other process, including a copy thereof, to Borrower.
BORROWER:
THE CREDIT STORE, INC.,
a Delaware corporation
By /s/ Martin Burke
-------------------------------------------------------
Chairman or President
By
-------------------------------------------------------
Vice President
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By /s/ [Illegible]
-------------------------------------------------------
Title: Vice President
----------------------------------------------------
18
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
19
<PAGE> 1
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
This FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Agreement") dated as of September 30, 1998 is by and between THE CREDIT STORE,
INC., a Delaware corporation (the "Borrower") and COAST BUSINESS CREDIT, a
division of Southern Pacific Bank, a California corporation ("Coast").
BACKGROUND INFORMATION
The Borrower and Coast are parties to a Loan and Security
Agreement (the "Loan Agreement") dated as of April 30, 1998. To secure the
payment of the Borrower's obligations under such agreement, the Borrower has
granted Coast a security interest in and lien upon substantially all of its
assets, including, without limitation, the Borrower's right, title, and interest
in Receivables (including the Funding I Receivables, as defined below) and
collections related thereto.
The Borrower and TCS Funding I, Inc., a Delaware corporation
(the "Buyer"), have entered into a Receivables Purchase Agreement (the
"Receivables Purchase Agreement") of even date herewith pursuant to which, from
time to time, the Borrower agrees to, sell, assign, transfer, set-over, and
otherwise convey to the Buyer, and the Buyer agrees to purchase from the
Borrower, all of the Borrower's right, title, and interest in, to, and under the
Conveyed Property, as defined in the Receivables Purchase Agreement (such
Conveyed Property referred to herein as the "Funding I Receivables").
To finance the purchase of the Funding I Receivables, the
Buyer, the Borrower, and Miller & Schroeder Investments Corporation, a Minnesota
corporation (the "Lender"), have entered into a Credit and Security Agreement
(the "Credit Agreement") of even date herewith pursuant to which the Lender
agrees to extend a term loan to the Buyer, which loan is to be secured by, among
other things, a first priority security interest in and lien upon the Funding I
Receivables.
As a condition precedent to disbursing the term loan under the
Credit Agreement, the Lender requires the due execution and delivery of this
Agreement by the parties hereto. Therefore, the parties hereto wish to amend the
Loan Agreement to release Coast's right, title, and/or interest in, to, or under
the Funding I Receivables and to provide for certain other changes in
circumstances and new arrangements among themselves.
ACCORDINGLY, in consideration of the premises and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
1.1 Loan Agreement Definitions. Terms defined in the Loan Agreement
shall have the same meaning when used herein unless otherwise indicated.
ARTICLE II
AMENDMENTS
2.1 Amendment to Section 1 of the Loan Agreement.
(a) Section 1 of the Loan Agreement is hereby amended by adding the
following definitions to such section:
"Funding I Receivables" means the "Conveyed Property" as
defined in the Receivables Purchase Agreement.
"Future Funding I Receivables" means all of the Funding I
Receivables to be transferred by the Borrower to TCS Funding I after
October 1, 1998 and arising from time to time in connection with the
credit card accounts listed on one or more schedules delivered to Coast
pursuant to Section 4.3 below.
"Initial Funding I Receivables" means any of the Funding I
Receivables, whether now existing or hereafter arising, to be
transferred by the Borrower to TCS Funding I and associated with the
credit card accounts listed on Annex F hereto.
"Lender" means Miller & Schroeder Investments Corporation, a
Minnesota corporation.
"TCS Funding I" means TCS Funding I, Inc., a Delaware
corporation.
"Receivables Purchase Agreement" means the Receivables
Purchase Agreement dated as of September 30, 1998 by and between the
Borrower, as seller, and TCS Funding I, as purchaser.
(b) The definitions of "General Intangibles" and "Receivables" stated
in Section 1 of the Loan Agreement are hereby amended by adding the phrase ";
excluding, however, the Initial Funding I Receivables and (subject to the terms
of Section 4.3 below) any Future Funding I Receivables" at the end of such
definitions.
2
<PAGE> 3
2.2 Amendment to Section 4 of the Loan Agreement.
(a) Section 4 of the Loan Agreement is hereby amended by adding the
phrase "4.1 SECURITY INTEREST." before the words "To secure the payment and
performance" in the first sentence of such section.
(b) Section 4 of the Loan Agreement is hereby further amended by adding
the phrase "; excluding, however, the Initial Funding I Receivables and (subject
to the terms of Section 4.3 below) any Future Funding I Receivables," after the
word "interest" in the final parenthetical clause of such section.
(c) Section 4 of the Loan Agreement is hereby further amended by adding
the following new sections to the end of such section:
4.2 RELEASE OF INITIAL FUNDING I RECEIVABLES. Coast
hereby (i) releases any and all right, title, and interest
Coast may have or hereafter acquire in the Initial Funding I
Receivables and (ii) consents to any sale, assignment,
transfer, or conveyance of, or granting of a security interest
in, the Initial Funding I Receivables by the Borrower to TCS
Funding I pursuant to the terms of the Receivables Purchase
Agreement. On or before the date of transfer of the Initial
Funding I Receivables, Coast agrees to promptly take all
further action, and to promptly execute and deliver any UCC
releases, confirmatory letters, and/or any other document,
reasonably required by the Borrower (at the Borrower's
expense) to effect, evidence, complete, and/or confirm Coast's
release of the Initial Funding I Receivables.
4.3 RELEASE OF FUTURE FUNDING I RECEIVABLES. Coast
hereby further (i) agrees to release from time to time, any
and all right, title, and interest Coast may have or hereafter
acquire in the Future Funding I Receivables and (ii) consents
to any sale, assignment, transfer, or conveyance of, or
granting of a security interest in, the Future Funding I
Receivables, from time to time, by the Borrower to TCS Funding
I pursuant to the terms of the Receivables Purchase Agreement,
subject to each of the following conditions: (a) no Default or
Event of Default shall have occurred and be continuing at the
time of, and after giving effect to, such release and (b) the
Borrower shall have delivered to Coast a schedule identifying
the credit card accounts with which such Future Funding I
Receivables are associated and a certificate to the effect
that after giving effect to the release of such Future Funding
I Receivables, the outstanding Loans will not exceed the
Credit Limit. On or before the date of transfer of any Future
Funding I Receivables, Coast agrees to promptly take all
further action, and to promptly execute any UCC releases
(including, without limitation, UCC releases in the form of
Annex A hereto), confirmatory letters, and/or any other
document, reasonably required by the Borrower (at the
Borrower's expense) to effect, evidence, complete, and/or
confirm Coast's release of such Future Funding I Receivables.
3
<PAGE> 4
2.3 Amendment to Section 8.5(c) of the Loan Agreement. Section 8.5(c)
of the Loan Agreement is hereby amended by adding the phrase "and loans or
capital contributions to TCS Funding I in connection with the Receivables
Purchase Agreement" after the phrase "Borrower's subsidiary Sleepy Hollow
Associates, Inc." in such section.
2.4 Addition of Annex A to the Loan Agreement. The Loan Agreement is
hereby Amended by adding Annex A hereto as Annex A to the Loan Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties. Each of the parties hereto
represents and warrants to the other party that (a) it is duly organized and
existing in good standing under the laws of its jurisdiction of organization and
has full power and authority to make and deliver this Agreement, (b) the
execution, delivery, and performance of this Agreement have been duly authorized
by all necessary action and do not and will not violate the provisions of, or
constitute a default under, any presently applicable law or its organizational
documents or any agreement presently binding on it, (c) this Agreement has been
duly executed and delivered by its duly authorized attorney-in-fact, officer, or
member, as the case may be, and constitutes the lawful, binding, and legally
enforceable agreement and obligation of such party, and (d) the authorization,
execution, delivery, and performance of this Agreement do not require
notification to, registration with, or consent or approval by, any federal,
state, province, or local regulatory body or administrative agency.
ARTICLE IV
MISCELLANEOUS
4.1 Ratification. As amended hereby, the Loan Agreement is hereby
ratified, approved, and confirmed in every respect, and shall remain in full
force and effect.
4.2 Further Assurances. The parties hereto agree to do and perform,
from time to time, any and all acts and to execute any and all further
instruments required or reasonably requested by the other party to this
Agreement to more fully effect the purposes of this Agreement and the amendments
and modifications contained herein, including, without limitation, the execution
of any financing statements or continuation statements or releases or amendments
to financing statements or equivalent documents relating to the Funding I
Receivables for filing under the provisions of the Uniform Commercial Code as
enacted in any applicable jurisdiction or other laws of any applicable
jurisdiction.
4.3 Execution in Counterparts and by Facsimile. This Agreement may be
executed in any number of counterparts (including facsimile counterparts) and by
the different parties on separate counterparts, each of which when so executed
and delivered shall be deemed to be
4
<PAGE> 5
an original and all of which counterparts, taken together, shall constitute but
one and the same instrument.
4.4 Costs and Expenses. The Borrower agrees to pay all costs and
expenses in connection with the negotiation, preparation, execution, delivery,
and administration of this Agreement and any and all other documents furnished
in connection with the execution and delivery of this Agreement, including
reasonable attorneys' fees and expenses.
4.5 Governing Law. This Agreement shall be governed by, and construed
in accordance with, the internal laws (without regard to the conflict of laws
provisions) of the State of California.
(Signature Page Follows)
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
THE CREDIT STORE, INC.
By
------------------------------
Its
-------------------------
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By /s/ Illegible
------------------------------
Its Vice President
-------------------------
(Signature Page 1 of 1 to the First Amendment to Loan Agreement)
<PAGE> 1
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
This SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Agreement") dated as of December 1, 1998 is by and between THE CREDIT STORE,
INC., a Delaware corporation (the "Borrower") and COAST BUSINESS CREDIT, a
division of Southern Pacific Bank, a California corporation ("Coast").
BACKGROUND INFORMATION
The Borrower and Coast are parties to a Loan and Security
Agreement dated as of April 30, 1998, as amended by the First Amendment to Loan
and Security Agreement dated as of September 30, 1998 (as so amended, the "Loan
Agreement"). To secure the payment of the Borrower's obligations under such
agreement, the Borrower has granted Coast a security interest in and lien upon
substantially all of its assets, including, without limitation, the Borrower's
right, title, and interest in Receivables (including the Funding II Receivables,
as defined below) and collections related thereto.
The Borrower and TCS Funding II, Inc., a Delaware corporation
(the "Buyer"), have entered into a Receivables Purchase Agreement (the
"Receivables Purchase Agreement") of even date herewith pursuant to which, from
time to time, the Borrower agrees to, sell, assign, transfer, set-over, and
otherwise convey to the Buyer, and the Buyer agrees to purchase from the
Borrower, all of the Borrower's right, title, and interest in, to, and under the
Conveyed Property, as defined in the Receivables Purchase Agreement (such
Conveyed Property referred to herein as the "Funding II Receivables").
To finance the purchase of the Funding II Receivables, the
Buyer, the Borrower, and Miller & Schroeder Investments Corporation, a Minnesota
corporation (the "Lender"), have entered into a Credit and Security Agreement
(the "Credit Agreement") of even date herewith pursuant to which the Lender
agrees to extend a term loan to the Buyer, which loan is to be secured by, among
other things, a first priority security interest in and lien upon the Funding II
Receivables.
As a condition precedent to disbursing the term loan under the
Credit Agreement, the Lender requires the due execution and delivery of this
Agreement by the parties hereto. Therefore, the parties hereto wish to amend the
Loan Agreement to release Coast's right, title, and/or interest in, to, or under
the Funding II Receivables and to provide for certain other changes in
circumstances and new arrangements among themselves.
ACCORDINGLY, in consideration of the premises and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
1.1 Loan Agreement Definitions. Terms defined in the Loan Agreement
shall have the same meaning when used herein unless otherwise indicated.
ARTICLE II
AMENDMENTS
2.1 Amendment to Section 1 of the Loan Agreement.
(a) Section 1 of the Loan Agreement is hereby amended by adding the
following definitions to such section:
"Funding II Receivables" means the "Conveyed Property" as
defined in the Receivables Purchase Agreement.
"Future Funding II Receivables" means all of the Funding II
Receivables to be transferred by the Borrower to TCS Funding II after
November 1, 1998 and arising from time to time in connection with the
credit card accounts listed on one or more schedules delivered to Coast
pursuant to Section 4.3 below.
"Initial Funding II Receivables" means any of the Funding II
Receivables, whether now existing or hereafter arising, to be
transferred by the Borrower to TCS Funding II and associated with the
credit card accounts listed on Annex F hereto.
"TCS Funding II" means TCS Funding II, Inc., a Delaware
corporation.
"Funding II Receivables Purchase Agreement" means the
Receivables Purchase Agreement dated as of December 1, 1998 by and
between the Borrower, as seller, and TCS Funding II, as purchaser.
(b) The definitions of "General Intangibles" and "Receivables" stated
in Section 1 of the Loan Agreement are hereby amended by amending and restating
such definitions in their entirety to read as follows:
"General Intangibles" means all general intangibles of
Borrower, whether now owned or hereafter created or acquired by
Borrower, including, without limitation, all choses in action, causes
of action, corporate or other business records, Deposit Accounts,
investment property, inventions, designs, drawings, blueprints,
patents, patent applications, trademarks and the goodwill of the
business symbolized thereby, names, trade names, trade secrets,
goodwill, copyrights, registrations, licenses, franchises, customer
lists, security and other deposits, rights in all litigation presently
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<PAGE> 3
or hereafter pending for any cause or claim (whether in contract, tort,
or otherwise), and all judgments now or hereafter arising therefrom,
all claims of Borrower against Coast, rights to purchase or sell real
or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders,
and all insurance policies and claims (including without limitation
life insurance, key man insurance, credit insurance, liability
insurance, property insurance and other insurance), tax refunds and
claims, computer programs, discs, tapes and tape files, claims under
guaranties, security interests or other security held by or granted to
Borrower, all rights to indemnification and all other intangible
property or every kind and nature (other than Receivables) excluding,
however, the Initial Funding I Receivables and (subject to the terms of
Section 4.3 below) any Future Funding I Receivables, the Initial
Funding II Receivables and (subject to the terms of Section 4.5 below)
any Future Funding II Receivables."
"Receivables" means all of Borrower's now owned and hereafter
acquired accounts (whether or not earned by performance), letters or
credit, contract rights, chattel paper, instruments, securities,
documents, securities accounts, security entitlements, commodity
contracts, commodity accounts, investment property and all other forms
of obligations at any time owing to Borrower, all guaranties and other
security therefor, all merchandise returned to or repossessed by
Borrower, and all rights of stoppage in transit and all other rights or
remedies of an unpaid vendor, lienor or secured party; excluding,
however, the Initial Funding I Receivables and (subject to the terms of
Section 4.3 below) any Future Funding I Receivables, the Initial
Funding II Receivables and (subject to the terms of Section 4.5 below)
any Future Funding II Receivables."
2.2 Amendment to Section 4 of the Loan Agreement.
(a) Section 4.1 of the Loan Agreement is hereby amended by amending the
final parenthetical clause of such section to read as follows: "(all of the
foregoing, together with all other property in which Coast may now or in the
future be granted a lien or security interest, excluding, however, the Initial
Funding I Receivables, the Initial Funding II Receivables and (subject to the
terms of Sections 4.3 and 4.5, respectively, below) any Future Funding I
Receivables and any Future Funding II Receivables, is referred to herein,
collectively, as the `Collateral')."
(b) The Loan Agreement is hereby further amended by adding the
following new sections after Section 4.3 thereof:
4.4 RELEASE OF INITIAL FUNDING II RECEIVABLES. Coast
hereby (i) releases any and all right, title, and interest
Coast may have or hereafter acquire in the Initial Funding II
Receivables and (ii) consents to any sale, assignment,
transfer, or conveyance of, or granting of a security interest
in, the Initial Funding II Receivables by the Borrower to TCS
Funding II pursuant to the terms of the Receivables Purchase
Agreement. On or before the date of
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<PAGE> 4
transfer of the Initial Funding II Receivables, Coast agrees
to promptly take all further action, and to promptly execute
and deliver any UCC releases, confirmatory letters, and/or any
other document, reasonably required by the Borrower (at the
Borrower's expense) to effect, evidence, complete, and/or
confirm Coast's release of the Initial Funding II Receivables.
4.5 RELEASE OF FUTURE FUNDING II RECEIVABLES. Coast
hereby further (i) agrees to release from time to time, any
and all right, title, and interest Coast may have or hereafter
acquire in the Future Funding II Receivables and (ii) consents
to any sale, assignment, transfer, or conveyance of, or
granting of a security interest in, the Future Funding II
Receivables, from time to time, by the Borrower to TCS Funding
II pursuant to the terms of the Receivables Purchase
Agreement, subject to each of the following conditions: (a) no
Default or Event of Default shall have occurred and be
continuing at the time of, and after giving effect to, such
release and (b) the Borrower shall have delivered to Coast a
schedule identifying the credit card accounts with which such
Future Funding II Receivables are associated and a certificate
to the effect that after giving effect to the release of such
Future Funding II Receivables, the outstanding Loans will not
exceed the Credit Limit. On or before the date of transfer of
any Future Funding II Receivables, Coast agrees to promptly
take all further action, and to promptly execute any UCC
releases (including, without limitation, UCC releases in the
form of Annex A hereto), confirmatory letters, and/or any
other document, reasonably required by the Borrower (at the
Borrower's expense) to effect, evidence, complete, and/or
confirm Coast's release of such Future Funding II Receivables.
2.3 Amendment to Section 8.5(c) of the Loan Agreement. Section 8.5(c)
of the Loan Agreement is hereby amended by restating such subsection in its
entirety to read as follows:
"(c) make any investment, equity contribution, loan or other
transfer to any subsidiary or any other affiliate except for dividends
or distributions permitted under Section 8.5(k) hereof and except for
(i) loans or capital contributions of up to $25,000 per month by
Borrower to Borrower's subsidiary Sleepy Hollow Associates, Inc., (ii)
loans or capital contributions to TCS Funding I in connection with the
Funding I Receivables Purchase Agreement, and (iii) loans or capital
contributions to TCS Funding II in connection with the Funding II
Receivables Purchase Agreement; provided, however, Borrower may enter
into joint ventures, reasonably acceptable to Coast, and may contribute
services to joint ventures (or enter into service agreements with joint
ventures), so long as Borrower does not make an investment equity
contribution or commingle the collections of Receivables;"
2.4 Addition of Annex A to the Loan Agreement. The Loan Agreement is
hereby Amended by adding Annex A hereto as Annex B to the Loan Agreement.
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<PAGE> 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties. Each of the parties hereto
represents and warrants to the other party that (a) it is duly organized and
existing in good standing under the laws of its jurisdiction of organization and
has full power and authority to make and deliver this Agreement, (b) the
execution, delivery, and performance of this Agreement have been duly authorized
by all necessary action and do not and will not violate the provisions of, or
constitute a default under, any presently applicable law or its organizational
documents or any agreement presently binding on it, (c) this Agreement has been
duly executed and delivered by its duly authorized attorney-in-fact, officer, or
member, as the case may be, and constitutes the lawful, binding, and legally
enforceable agreement and obligation of such party, and (d) the authorization,
execution, delivery, and performance of this Agreement do not require
notification to, registration with, or consent or approval by, any federal,
state, province, or local regulatory body or administrative agency.
ARTICLE IV
MISCELLANEOUS
4.1 Ratification. As amended hereby, the Loan Agreement is hereby
ratified, approved, and confirmed in every respect, and shall remain in full
force and effect.
4.2 Further Assurances. The parties hereto agree to do and perform,
from time to time, any and all acts and to execute any and all further
instruments required or reasonably requested by the other party to this
Agreement to more fully effect the purposes of this Agreement and the amendments
and modifications contained herein, including, without limitation, the execution
of any financing statements or continuation statements or releases or amendments
to financing statements or equivalent documents relating to the Funding II
Receivables for filing under the provisions of the Uniform Commercial Code as
enacted in any applicable jurisdiction or other laws of any applicable
jurisdiction.
4.3 Execution in Counterparts and by Facsimile. This Agreement may be
executed in any number of counterparts (including facsimile counterparts) and by
the different parties on separate counterparts, each of which when so executed
and delivered shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same instrument.
4.4 Costs and Expenses. The Borrower agrees to pay all costs and
expenses in connection with the negotiation, preparation, execution, delivery,
and administration of this Agreement and any and all other documents furnished
in connection with the execution and delivery of this Agreement, including
reasonable attorneys' fees and expenses.
5
<PAGE> 6
4.5 Governing Law. This Agreement shall be governed by, and construed
in accordance with, the internal laws (without regard to the conflict of laws
provisions) of the State of California.
(Signature Page Follows)
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
THE CREDIT STORE, INC.
By /s/ Michael J. Philippe
--------------------------------
Its CFO
---------------------------
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By [Illegible]
--------------------------------
Its VP
---------------------------
(Signature Page 1 of 1 to the Second Amendment to Loan Agreement)
<PAGE> 1
AMENDMENT NUMBER TWO TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT, dated as of
April 27, 1999 (this "Amendment"), amends that certain Loan and Security
Agreement, dated as of April 30, 1998, as amended by that certain First
Amendment to Loan and Security Agreement, dated as of September 30, 1998 (as
amended from time to time, the "Loan Agreement"), by and between THE CREDIT
STORE, INC., a Delaware corporation ("Borrower"), on the one hand, and COAST
BUSINESS CREDIT, a division of Southern Pacific Bank, a California corporation
("Coast"), on the other hand. All initially capitalized terms used in this
Agreement shall have the meanings ascribed thereto in the Loan Agreement unless
specifically defined herein.
R E C I T A L S
WHEREAS, Borrower and Coast wish to amend the Loan Agreement pursuant
to the terms and provisions set forth in this Amendment.
NOW, THEREFORE, the parties hereto agree as follows:
A M E N D M E N T
Section 1. AMENDMENT TO SECTION 9.1 OF THE SCHEDULE TO LOAN AND
SECURITY AGREEMENT. Section 9.1 of the Schedule to the Loan Agreement is hereby
amended by deleting such Section in its entirety and replacing it with the
following:
"Section 9.1 - Maturity Date:
July 29, 1999. Notwithstanding the provisions
in Section 9.1 of the Agreement,
the Agreement shall terminate on
the Maturity Date, unless
Borrower gives notice of its
desire to renew no less than
thirty (30) days prior to the
Maturity Date, provided,
however, that notwithstanding
anything to the contrary in the
Agreement, if and only if the
Agreement is terminated before
the Maturity Date, Borrower will
not have to pay the Early
Termination Fee (as defined in
Section 3 of this Schedule)."
Section 2. CONDITION PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon the following:
(a) Payment by Borrower to Coast of an amendment fee in the amount
of $6,250, which fee is fully-earned and non-refundable; and
(b) Receipt by Coast of a copy of this Amendment executed by
Borrower.
<PAGE> 2
Section 3. ENTIRE AGREEMENT. The Loan Agreement, as amended hereby,
embodies the entire agreement and understanding between the parties hereto and
supersedes all prior agreements and understandings relating to the subject
matter hereof. Borrower represents, warrants and agrees that in entering into
the Loan Agreement and consenting to this Amendment, it has not relied on any
representations, promise, understanding or agreement, oral or written, of, by or
with, Coast or any of its agents, employees, or counsel, except the
representations, promises, understandings and agreements specifically contained
in or referred to in the Loan Agreement, as amended hereby.
Section 4. CONFLICTING TERMS. In the event of a conflict between the
terms and provisions of this Amendment and the terms and provisions of the Loan
Agreement, the terms of this Amendment shall govern. In all other aspects, the
Loan Agreement, as amended and supplemented hereby, shall remain in full force
and effect.
Section 5. MISCELLANEOUS. This Amendment shall be governed by and
construed in accordance with the laws of the State of California. This Amendment
may be executed in any number of counterparts, all of which taken together shall
constitute one agreement, and any party hereto may execute this Amendment by
signing such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective officers thereunto duly authorized as of the
date first above written.
BORROWER:
THE CREDIT STORE, INC.,
a California corporation
By___________________________________________
President orVice President
Chief Financial Officer
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By: /s/ Michael Philippe
-------------------------------
Title: Chief Financial Officer
-------------------------------
<PAGE> 1
FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
This FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Fourth
Amendment") dated as of May 27, 1999 is by and between THE CREDIT STORE, INC. a
Delaware corporation (the "Borrower") and COAST BUSINESS CREDIT, a division of
Southern Pacific Bank, a California corporation ("Coast").
BACKGROUND INFORMATION
The Borrower and Coast are parties to a Loan and Security Agreement dated
as of April 30, 1998, as amended by the First Amendment to Loan and Security
Agreement dated as of September 30, 1998, the Second Amendment to Loan and
Security Agreement dated as of December 1, 1998 and the Third Amendment to Loan
and Security Agreement dated as of April 27, 1999 (as heretofore amended, the
"Loan Agreement") and as amended by this Fourth Amendment, the "Amended Loan
Agreement"). To secure the payment of the Borrower's obligations under such
agreement, the Borrower has granted Coast a security interest in and lien upon
substantially all its assets, including, without limitation, the Borrower's
right, title, and interest in Receivables (including the Funding III
Receivables, as defined below) and collections related thereto.
The Borrower and TCS Funding III, Inc., a Delaware corporation (the
"Buyer"), have entered into a Receivables Purchase Agreement (the "Receivables
Purchase Agreement") of even date herewith pursuant to which, from time to time,
the Borrower agrees to, sell, assign, transfer, set-over, and otherwise convey
to the Buyer, and the Buyer agrees to purchase from the Borrower, all of the
Borrower's right, title, and interest in, to, and under the Conveyed Property,
as defined in the Receivables Purchase Agreement (such Conveyed Property
referred to herein as the "Funding III Receivables").
To finance the purchase of the Funding III Receivables, the Buyer, the
Borrower, and Miller & Schroeder Investments Corporation, a Minnesota
corporation (the "Lender"), have entered into a Credit and Security Agreement
(the "Credit Agreement") of even date herewith pursuant to which the Lender
agrees to extend a term loan to the Buyer, which loan is to be secured by, among
other things, a first priority security interest in and lien upon the Funding
III Receivables.
As a condition precedent to disbursing the term loan under the Credit
Agreement, the Lender requires the due execution and delivery of this Fourth
Amendment by the parties hereto. Therefore, the parties hereto wish to amend the
Loan Agreement to release Coast's right, title, and/or interest in, to, or under
the Funding III Receivables and to provide for certain other changes in
circumstances and new arrangements among themselves.
ACCORDINGLY, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
1.1 Loan Agreement Definitions. Terms defined in the Loan Agreement shall
have the same meaning when used herein unless otherwise indicated.
ARTICLE II
AMENDMENTS
2.1 Amendment to Section 1 of the Loan Agreement.
(a) Section 1 of the Loan Agreement is hereby amended by adding the
following definitions to such section:
"Funding III Receivables" means any of the "Conveyed Property" (as
defined in the Receivables Purchase Agreement), whether now existing or
hereafter arising, to be transferred by the Borrower to TCS Funding III and
associated with the credit card accounts listed on Annex G hereto.
"TCS Funding III" means TCS Funding III, Inc., a Delaware corporation.
"Funding III Receivables Purchase Agreement'' means the Receivables
Purchase Agreement dated as of May 27, 1999 by and between the Borrower, as
seller, and TCS Funding III, as purchaser.
(b) The definitions of "General Intangibles" and "Receivables" stated in
Section 1 of the Loan Agreement are hereby amended by amending and restating
such definitions in their entirety to read as follows:
"General Intangibles" means all general intangibles of Borrower, whether now
owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, investment property, inventions, designs, drawings,
blueprints, patents, patent applications, trademarks and the goodwill of the
business symbolized thereby, names, trade names, trade secrets, goodwill,
copyrights, registrations, licenses, franchises, customer lists, security and
other deposits, rights in all ligation presently or hereafter pending for any
cause or claim (whether in contract, tort, or otherwise), and all judgments now
or hereafter arising therefrom, all claims of Borrower against Coast, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation
life insurance, key man insurance, credit insurance, liability insurance,
property insurance and other insurance), tax refunds and claims, computer
programs, discs, tapes and
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<PAGE> 3
tape files, claims under guaranties, security interests or other security
held by or granted to Borrower, all rights to indemnification and all other
intangible property or every kind and nature (other than Receivables)
excluding, however, the Initial Funding I Receivables and (subject to the
terms of Section 4.3 below) any Future Funding I Receivables, the Initial
Funding II Receivables, (subject to the terms of Section 4.5 below) and
Future Funding II Receivables and the Funding III Receivables."
"Receivables" means all of the Borrower's now owned and hereafter
acquired accounts (whether or not earned by performance), letters or
credit, contract rights, chattel paper, instruments, securities, documents,
securities accounts, security entitlements, commodity contracts, commodity
accounts, investment property and all other forms of obligations at any
time owing to Borrower, all guaranties and other security therefor, all
merchandise returned to or repossessed by Borrower, and all rights of
stoppage in transit and all other rights or remedies of an unpaid vendor,
lienor or secured party; excluding, however, the Initial Funding I
Receivables and (subject to the terms of Section 4.3 below) any Future
Funding I Receivables, the Initial Funding II Receivables, (subject to the
terms of Section 4.5 below) any Future Funding II Receivables and the
Funding III Receivables."
2.2 Amendment to Section 4 of the Loan Agreement.
(a) Section 4.1 of the Loan Agreement is hereby amended by amending the
final parenthetical clause of such section to read as follows: "(all of the
foregoing, together with all other property in which Coast may now or in the
future be granted a lien or security interest, excluding, however, the Initial
Funding I Receivables, the Initial Funding II Receivables, the Funding III
Receivables and (subject to the terms of Sections 4.3 and 4.5, respectively,
below), any Future Funding I Receivables and any Future Funding II Receivables,
is referred to herein, collectively, as the 'Collateral')."
(b) The Loan Agreement is hereby further amended by adding the following
new sections after Section 4.5 thereof:
4.6 Release of Funding III Receivables. Coast hereby (i)
releases any and all right, title, and interest Coast may have or
hereafter acquire in the Funding III Receivables and (ii) consents to
any sale, assignment, transfer, or conveyance of, or granting of a
security interest in, the Funding III Receivables by the Borrower to
TCS Funding III pursuant to the terms of the Receivable Purchase
Agreement. On or before the date of transfer of the Funding III
Receivables, Coast agrees to promptly take all further action, and to
promptly execute and deliver any UCC releases, confirmatory letters,
and/or any other documents, reasonably required by the Borrower (at
the Borrower's expense) to effect, evidence, complete, and/or confirm
Coast's release of the Funding III Receivables.
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<PAGE> 4
2.3 Amendment to Section 8.5(c) of the Loan Agreement. Section 8.5(c) of
the Loan Agreement is hereby amended by restating such subsection in its
entirety to read as follows:
"(c) make any investment, equity contribution, loan or other transfer
to any subsidiary or any other affiliate except for dividends or
distributions permitted under Section 8.5(k) hereof and except for (i)
loans or capital contributions of up to $25,000 per month by Borrower to
Borrower's subsidiary Sleepy Hollow Associates, Inc., (ii) loans or capital
contributions to TCS Funding I in connection with the Funding I Receivables
Purchase Agreement, (iii) loans or capital contributions to TCS Funding II
in connection with the Funding II Receivables Purchase Agreement, and (iv)
loans or capital contributions to TCS Funding III in connection with the
Funding III Receivables Purchase Agreement; provided, however, Borrower may
enter into joint ventures, reasonably acceptable to Coast, and may
contribute services to joint ventures (or enter into service agreements
with joint ventures), so long as Borrower does not make an investment
equity contribution or commingle the collections of Receivables;"
2.4 Addition of Annex C to the Loan Agreement. The Loan Agreement is
hereby Amended by adding Annex A hereto as Annex C to the Loan Agreement.
ARTICLE III
PRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties. Each of the parties hereto represents
and warrants to the other party that (a) it is duly organized and existing in
good standing under the laws of its jurisdiction of organization and has full
power and authority to make and deliver this Fourth Amendment, (b) the
execution, delivery, and performance of this Fourth Amendment have been duly
authorized by all necessary action and do not and will not violate the
provisions of, or constitute a default under, any presently applicable law or
its organizational documents or any agreement presently binding on it, (c) this
Fourth Amendment has been duly executed and delivered by its duly authorized
attorney-in-fact, officer, or member, as the case may be, and constitutes the
lawful, binding, and legally enforceable agreement and obligation of such party,
and (d) the authorization, execution, delivery, and performance of this Fourth
Amendment do not require notification to, registration with, or consent or
approval by, any federal, state, province, or local regulatory body or
administrative agency.
ARTICLE IV
MISCELLANEOUS
4.1 Ratification. The Amended Loan Agreement is hereby ratified, approved,
and confirmed in every respect, and shall remain in full force and effect.
<PAGE> 5
4.2 Further Assurances. The parties hereto agree to do and perform, from
time to time, any and all acts and to execute any and all further instruments
required or reasonably requested by the other party to this Fourth Amendment to
more fully effect the purposes of this Fourth Amendment and the amendments and
modifications contained herein, including, without limitation, the execution of
any financing statements or continuation statements or releases or amendments to
financing statements or equivalent documents relating to the Funding III
Receivables for filing under the provisions of the Uniform Commercial Code as
enacted in any applicable jurisdiction or other laws of any applicable
jurisdiction.
4.3 Execution in Counterparts and by Facsimile. This Fourth Amendment may
be executed in any number of counterparts (including facsimile counterparts) and
by the different parties on separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.
4.4 Costs and Expenses. The Borrower agrees to pay all costs and expenses
in connection with the negotiation, preparation, execution, delivery, and
administration of this Fourth Amendment and any and all other documents
furnished in connection with the execution and delivery of this Fourth
Amendment, including reasonable attorneys' fees and expenses.
4.5 Governing Law. This Fourth Amendment shall be governed by, and
construed in accordance with, the internal laws (without regard to the conflict
of laws provisions) of the State of California.
(Signature Page Follows)
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
THE CREDIT STORE, INC.
By /s/ [Illegible]
------------------------------------
Its CFO
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By /s/ [Illegible]
------------------------------------
Its VP
(Signature Page 1 of 1 to the Fourth Amendment to Loan Agreement)
<PAGE> 1
AMENDMENT NUMBER FIVE TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER FIVE TO LOAN AND SECURITY AGREEMENT, dated as of
June 25, 1999 (this "Amendment"), amends that certain Loan and Security
Agreement, dated as of April 30, 1998 (as amended from time to time, the "Loan
Agreement"), by and between THE CREDIT STORE, INC., a Delaware corporation
("Borrower"), and COAST BUSINESS CREDIT, a division of Southern Pacific Bank, a
California corporation ("Coast"). All initially capitalized terms used in this
Amendment shall have the meanings ascribed thereto in the Loan Agreement unless
specifically defined herein.
R E C I T A L S
WHEREAS, Borrower and Coast wish to amend the Loan Agreement pursuant to
the terms and provisions set forth in this Amendment; and
WHEREAS, in connection with the Loan Agreement, Borrower issued to Coast
that certain Warrant, dated as of April 30, 1998 (the "Warrant") whereby Coast
received the right to purchase 650,247 shares of Borrower's common stock. Coast
was granted immediate exercise rights in 278,677 of the 650,247 shares and
rights in the remaining 371,570 shares only after the Maximum Dollar Amount was
increased to Ten Million Dollars; and
WHEREAS, J.L.B. of Nevada, Inc., a Nevada corporation ("JLB") and Coast
have entered into that certain Subordination Agreement, dated as of May 1, 1998
(the "Subordination Agreement"), whereby JLB subordinated those certain notes
defined in the Subordination Agreement as Note A, Note B, Note C and Note D. JLB
has converted Note A in the amount of $10,000,000 to Series D Preferred Stock
effective May 31, 1998. JLB has converted $10,000,000 of the $20,000,000 Note B
into Series E Preferred Stock effective August 31, 1998. JLB has forgiven Five
Million Dollars ($5,000,000) of accrued and unpaid interest on Notes A & B
effective May 29, 1999. In response to such forgiveness, Coast has agreed to the
Permitted Payments (as defined in Section 9 hereof); and
NOW, THEREFORE, the parties hereto agree as follows:
A M E N D M E N T
SECTION 1. AMENDMENT TO SECTION 1 OF THE LOAN AGREEMENT. Section 1 of the
Loan Agreement is hereby amended by adding the following definitions:
"Existing Unconverted Accounts" means charged-off consumer debt
accounts owned by Borrower as of the date of this Amendment which
have not yet been converted to credit card receivables by the
Account Debtors.
Purchased Unconverted Accounts" means charged-off consumer debt
2
<PAGE> 2
accounts acquired by Borrower after the date of this Amendment which
have not been converted to credit card receivables by the Account
Debtors."
SECTION 2. AMENDMENT TO SECTION 2.1 OF THE SCHEDULE. Section 2.1 of the
Schedule to the Loan Agreement is hereby amended by deleting such Section in its
entirety and replacing it with the following:
"SECTION 2.1 - CREDIT LIMIT:
Loans in a total amount at any time outstanding not to exceed
the lesser of: (i) a total of Ten Million Dollars ($10,000,000) at
any one time outstanding (the "Maximum Dollar Amount"), or (ii) the
sum of (a), (b) and (c) below:
(a) Loans in an amount not to exceed the lesser of:
(1) The sum of:
(i) ten percent (10%) of the amount of Borrower's
Eligible Receivables with respect to which the Account Debtors
have made three (3) consecutive payments, plus, without
duplication;
(ii) twenty percent (20%) of the amount of Borrower's
Eligible Receivables with respect to which the Account Debtors
have made four (4) consecutive payments, plus, without
duplication;
(iii) thirty percent (30%) of the amount of
Borrower's Eligible Receivables with respect to which the
Account Debtors have made five (5) consecutive payments, plus,
without duplication;
(iv) forty percent (40%) of the amount of Borrower's
Eligible Receivables with respect to which the Account Debtors
have made six (6) consecutive payments, plus, without
duplication;
(v) fifty percent (50%) of the amount of Borrower's
Eligible Receivables with respect to which the Account Debtors
have made seven (7) or more consecutive payments; and
(2) Thirty-five percent (35%) of Eligible Receivables.
(b) Loans in an amount not to exceed the lesser of:
(1) Fifty percent (50%) of the sum of:
2
<PAGE> 3
(i) 1.50% of the balance of Existing Unconverted
Accounts which have received payments within the past
twenty-four (24) months prior to the date hereof;
(ii) 1.00% of the balance of Existing Unconverted
Accounts which have received payments between twenty-four (24)
and sixty (60) months prior to the date hereof;
(iii) 0.50% of the balance of Existing Unconverted
Accounts which have received payments between sixty-one (61)
and eighty-four (84) months prior to the date hereof; and
(iv) 0.25% of the balance of Existing Unconverted
Accounts which have received payments over eighty-four (84)
months prior to the date hereof, provided, however, the amount
of Existing Unconverted Accounts under this subsection
2.1(b)(iv) shall be limited to sixty percent (60%) of the
total of all Existing Unconverted Accounts; and
(2) Thirty-five percent (35%) of the Maximum Dollar
Amount.
(c) Loans in an amount equal to Fifty percent (50%) of the sum
of:
(i) 1.50% of the balance of Purchased Unconverted
Accounts which have received payments within the past
twenty-four (24) months prior to the date hereof;
(ii) 1.00% of the balance of Purchased Unconverted
Accounts which have received payments between twenty-four (24)
and sixty (60) months prior to the date hereof;
(iii) 0.50% of the balance of Purchased Unconverted
Accounts which have received payments between sixty-one (61)
and eighty-four (84) months prior to the date hereof; and
(iv) 0.25% of the balance of Purchased Unconverted
Accounts which have received payments over eighty-four (84)
months prior to the date hereof, provided, however, the amount
of Purchased Unconverted Accounts under this subsection
2.1(b)(iv) shall be limited to sixty percent (60%) of the
total of all Purchased Unconverted Accounts;
SECTION 3. AMENDMENT TO SECTION 3.1 OF THE SCHEDULE. Section 3.1 of the
Schedule to the Loan Agreement is hereby amended by deleting such Section in its
entirety and replacing it with the following:
3
<PAGE> 4
"SECTION 3.1 - INTEREST RATE:
A rate equal to the Prime Rate plus 2.5% per annum, calculated on
the basis of a 360-day year or the actual number of days elapsed.
The interest rate applicable to all Loans shall be adjusted monthly
as of the first day of each month, and the interest to be charged
for each month shall be based on the highest Prime Rate in effect
during the prior month, but in no event shall the rate of interest
charged on any Loans in any month be less than 9% per annum.
SECTION 3.1 - MINIMUM MONTHLY INTEREST:
Based on a daily outstanding borrowings of Fifty percent (50%)
of the Maximum Dollar Amount."
SECTION 4. AMENDMENT TO SECTION 3.2 OF THE SCHEDULE RELATING TO THE
FACILITY FEE. Section 3.2 of the Schedule to the Loan Agreement relating to the
Loan Fee and Facility Fee is hereby amended by deleting such Section in its
entirety and replacing it with the following:
"SECTION 3.2 - COLLATERAL MONITORING FEE:
Fifty Thousand Dollars ($50,000) per quarter, fully earned and
payable on the date hereof and every ninety (90) days thereafter
during the first year of the term hereof. Thereafter, Two Hundred
Thousand Dollars ($200,000) per year, fully earned and payable when
it is charged to the Loan on each and every anniversary of the date
hereof."
SECTION 5. FACILITY EXTENSION FEE. Borrower shall pay to Coast a facility
extension fee (the "Facility Extension Fee") in the amount of One Hundred
Thousand Dollars ($100,000) which shall be fully earned and payable on the date
hereof.
SECTION 6. AMENDMENT TO SECTION 9.1 OF THE SCHEDULE. Section 9.1 of the
Schedule to the Loan Agreement is hereby amended by deleting such Section in its
entirety and replacing it with the following:
"SECTION 9.1 - MATURITY DATE:
July 29, 2001. Notwithstanding the provisions in Section 9.1 of the
Agreement, the Agreement shall terminate on the Maturity Date,
unless Borrower gives notice of its desire to renew no less than
thirty (30) days prior to the Maturity Date, provided, however, that
notwithstanding anything to the contrary in the Agreement, if and
only if the Agreement is terminated before the Maturity Date,
Borrower will not have to pay the Early Termination Fee (as defined
in Section 3 of this Schedule)."
4
<PAGE> 5
SECTION 7. AMENDMENT TO SECTION 9.1 OF THE SCHEDULE. Section 9.1 of the
Schedule to the Loan Agreement is hereby amended by deleting such Section in its
entirety and replacing it with the following:
"SECTION 9.1 - RENEWAL FEE:
1/2% of the Maximum Dollar Amount per year starting July 29,
2001."
SECTION 8. AMENDMENT TO SECTION 9.2 OF THE SCHEDULE. Section 9.2 of the
Schedule to the Loan Agreement is hereby amended by deleting such Section in its
entirety and replacing it with the following:
"SECTION 9.2 - EARLY TERMINATION FEE:
An amount equal to the greater of (i) an amount equal to all
interest due and payable during the six (6) months immediately
preceding the effective date of termination, or (ii) an amount equal
to the Minimum Monthly Interest multiplied by the number of full or
partial months from the effective date of termination to the
Maturity Date, or (iii) an amount equal to the average monthly
interest accrued during the six (6) months immediately preceding the
effective date of termination, multiplied by the number of full or
partial months from the effective date of termination to the
Maturity Date; provided, however, if the Maximum Dollar Amount is
not increased to at least Twenty Million Dollars ($20,000,000)
within one hundred twenty (120) days of the effective date of this
Amendment, then this Early Termination Fee is waived; provided,
further however, if at anytime before or after such one hundred
twenty (120) day period the Maximum Dollar Amount is increased to at
least Twenty Million Dollars ($20,000,000) then the Early
Termination Fee provided for herein shall be in effect."
SECTION 9 . PERMITTED PAYMENT ON SUBORDINATED DEBT. Notwithstanding
Section 10.1(o) of the Agreement and the terms of the Subordination Agreement,
to the contrary, Coast shall permit Borrower to make one or more payments in the
aggregate not to exceed Three Million Dollars ($3,000,000) (the "Permitted
Payments") of accrued interest or principal to JLB, provided, however, the
Permitted Payments shall only be made once the Maximum Dollar Amount has been
increased to more than Ten Million Dollars ($10,000,000). Nothing herein
obligates Coast to permit future payments on any subordinated debt on terms
inconsistent with the Loan Documents.
SECTION 10. AMENDMENT TO SECTION 8.1 OF THE SCHEDULE TO THE LOAN
AGREEMENT. A new subparagraph (f) is hereby added to Section 8.1 of the Schedule
to the Loan Agreement to read as follows:
"(f) Coast agrees to use its best efforts to syndicate, find
additional lenders or sell participations to other lenders
acceptable to Coast so as to be in a position to increase the
Maximum Dollar
5
<PAGE> 6
Amount to more than Ten Million Dollars ($10,000,000) but not more
than Thirty Million Dollars ($30,000,000). In connection with any
such syndication or participation Coast shall receive the Early
Termination Fee referenced in Section 9.2(i) or (iii) of this
Agreement equal to the product of such fees set forth in section
9.2(i) and/or (iii) and a fraction equal to Coast's prorata share of
the then applicable Maximum Dollar Amount or in respect to the
formula in Section 9.2(ii) of this Agreement an Early Termination
Fee based upon the Ten Million Dollar ($10,000,000) commitment of
Coast and all other syndicate lenders or participants shall receive
an early termination fee, with respect to their pro-rata share,
based on the following formula:
An amount equal to two percent (2%) of the commitment of each
lender or participant, other than Coast, in the Maximum Dollar
Amount (as defined in this Schedule), if termination occurs before
July 29, 2000; and one percent (1%) of the commitment of each lender
or participant, other than Coast, in the Maximum Dollar Amount, if
termination occurs on or after July 29, 2000 and before the Maturity
Date."
SECTION 11. AMENDMENT TO SECTION 8.5 (C) OF THE LOAN AGREEMENT. Section
8.5(c) of the Loan Agreement is hereby amended by adding the following at the
end thereof:
"Notwithstanding the foregoing, in conjunction with the sale
in the ordinary course of Borrower's business of Receivables to a
wholly-owned subsidiary entity that satisfies the requirements of
Section 8.5 (e), so long as no Event of Default has occurred and is
continuing or will occur as a result of the following below
described non-cash equity contribution and so long as no over
advance based on the loan formulas set forth in the Schedule to the
Loan Agreement would result, Borrower may make a non-cash equity
contribution to such subsidiary entity and such subsidiary entity
may grant a senior and exclusive lien on the Receivables purchased."
SECTION 12. AMENDMENT TO SECTION 8.5 OF THE SCHEDULE. Section 8.5 of the
Schedule to the Loan Agreement is hereby amended by deleting such Section in its
entirety and replacing it with the following:
"SECTION 8.5 - NEGATIVE COVENANTS (ACQUIRED ASSETS):
One Hundred Thousand Dollars ($100,000) per transaction and
Seven Hundred Fifty Thousand Dollars ($750,000) per 12 month period
consisting of May 1 - April 30."
6
<PAGE> 7
SECTION 13 . COAST'S VESTED RIGHTS IN THE WARRANT. Borrower acknowledges
that in connection with the increase of the Maximum Dollar Amount to Ten Million
Dollars ($10,000,000) Coasts rights in the Warrant and the additional 371,570
shares have vested and the Warrant is fully exercisable.
SECTION 14. CONDITION PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon: (i) receipt by Coast of an executed copy of this
Amendment executed by Borrower, (ii) receipt by Coast of an executed copy of the
reaffirmation of the Continuing Guaranty executed by American Credit Alliance,
Inc., and}(iii) receipt by Coast of the Facility Extension Fee, (iv) receipt by
Coast of evidence, in form and substance satisfactory to Coast, that Sleepy
Hollow Associates, Inc., has been merged into Borrower, and (v) receipt by Coast
of evidence, in form and substance satisfactory to Coast, that JLB has forgiven
Five Million Dollars ($5,000,000) of accrued and unpaid interest owing on Notes
A and B.
SECTION 15. ENTIRE AGREEMENT. The Loan Agreement, as amended hereby,
embodies the entire agreement and understanding between the parties hereto and
supersedes all prior agreements and understandings relating to the subject
matter hereof. Borrower represents, warrants and agrees that in entering into
the Loan Agreement and consenting to this Amendment, it has not relied on any
representation, promise, understanding or agreement, oral or written, of, by or
with, Coast or any of its agents, employees, or counsel, except the
representations, promises, understandings and agreements specifically contained
in or referred to in the Loan Agreement, as amended hereby.
SECTION 16. CONFLICTING TERMS. In the event of a conflict between the
terms and provisions of this Amendment and the terms and provisions of the Loan
Agreement, the terms of this Amendment shall govern. In all other respects, the
Loan Agreement, as amended and supplemented hereby, shall remain in full force
and effect.
7
<PAGE> 8
SECTION 17. MISCELLANEOUS. This Amendment shall be governed by and
construed in accordance with the laws of the State of California. This Amendment
may be executed in any number of counterparts, all of which taken together shall
constitute one agreement, and any party hereto may execute this Amendment by
signing such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective officers thereunto duly authorized as of the
date first above written.
THE CREDIT STORE, INC.,
a Delaware corporation
By: /s/ Michael J. Philippe
--------------------------------
President or Vice President
By: /s/ Wayne Fanebust
--------------------------------
Secretary or Ass't Secretary
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By: /s/ Illegible
--------------------------------
Title: Vice President
8
<PAGE> 9
REAFFIRMATION OF GUARANTY
The undersigned has executed a Continuing Guaranty in favor of Coast
Business Credit, a division of Southern Pacific Bank, a California corporation
("Coast") respecting the obligations of The Credit Store, Inc., a Delaware
corporation ("Borrower") owing to Coast. The undersigned acknowledges the terms
of the above Amendment and reaffirms and agrees that (a) its Continuing Guaranty
remains in full force and effect, (b) nothing in such Continuing Guaranty
obligates Coast to notify the undersigned of any changes in the financial
accommodations made available to Borrower or to seek reaffirmations of the
Continuing Guaranty, and (c) no requirement to so notify the undersigned or to
seek reaffirmations in the future shall be implied by the execution of the
reaffirmation.
AMERICAN CREDIT ALLIANCE, INC.,
a Nevada corporation
By: /s/ Michael J. Philippe
--------------------------------
Name: Michael J. Philippe
Title: Chief Financial Officer
9
<PAGE> 1
AMENDMENT NUMBER SIX TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER SIX TO LOAN AND SECURITY AGREEMENT, dated as of
December 6, 1999 (this "Amendment"), amends that certain Loan and Security
Agreement, dated as of April 30, 1998 (as amended from time to time, the "Loan
Agreement"), by and between THE CREDIT STORE, INC., a Delaware corporation
("Borrower"), and COAST BUSINESS CREDIT, a division of Southern Pacific Bank, a
California corporation ("Coast"). All initially capitalized terms used in this
Amendment shall have the meanings ascribed thereto in the Loan Agreement unless
specifically defined herein.
R E C I T A L S
WHEREAS, Borrower and Coast wish to amend the Loan Agreement pursuant
to the terms and provisions set forth in this Amendment; and
NOW, THEREFORE, the parties hereto agree as follows:
A M E N D M E N T
SECTION 1 AMENDMENT TO SECTION 2.1 OF THE SCHEDULE. The lead in
language to Section 2.1 of the Schedule and Section 2.1(a) of the Schedule to
the Loan Agreement is hereby amended by deleting such sections in their entirety
and replacing them to read as follows:
SECTION 2.1 - Credit Limit:
Loans in a total amount at any time outstanding not
to exceed the lesser of: (i) a total of Fifteen Million
Dollars ($15,000,000) at any one time outstanding (the
"Maximum Dollar Amount"), or (ii) the sum of (a), (b) and (c)
below:
(a) Loans in an amount not to exceed the lesser of:
(1) The sum of:
(i) ten percent (10%) of the amount of
Borrower's Eligible Receivables with respect to which the
Account Debtors have made three (3) consecutive payments,
plus, without duplication;
(ii) twenty percent (20%) of the amount of
Borrower's Eligible Receivables with respect to which the
Account Debtors have made four (4) consecutive payments, plus,
without duplication;
1
<PAGE> 2
(iii) thirty percent (30%) of the amount of
Borrower's Eligible Receivables with respect to which the
Account Debtors have made five (5) consecutive payments, plus,
without duplication;
(iv) forty percent (40%) of the amount of
Borrower's Eligible Receivables with respect to which the
Account Debtors have made six (6) consecutive payments, plus,
without duplication;
(v) fifty percent (50%) of the amount of
Borrower's Eligible Receivables with respect to which the
Account Debtors have made seven (7) or more consecutive
payments; and
(2) Fifty percent (50%) of Eligible
Receivables.
The provisions of Sections 2.1(b) and 2.1(c) are unchanged by the terms
of this Amendment
SECTION 2 NO PAYMENT ON SUBORDINATED DEBT. Notwithstanding the
provisions in Amendment Number Five to Loan and Security Agreement ("Amendment
Number Five") to the contrary, Borrower shall not be permitted to make a payment
on the J.L.B. debt irrespective of the fact that Coast has increased the Maximum
Dollar Amount from $10,000,000 to $15,000,000. Borrower may make payments to JLB
to the extent such payments are otherwise permitted under the Loan Documents.
SECTION 3 FACILITY INCREASE FEE. Borrower shall pay to Coast a $50,000
fee for the $5,000,000 increase in the Maximum Dollar Amount ("Facility Increase
Fee"). Borrower shall pay the Facility Increase Fee in four installments, with
$12,500 being due and payable on the date hereof and $12,500 becoming due and
payable every 90 days thereafter until paid in full. Notwithstanding the
foregoing, if at any time prior to the date on which an installment of the
Facility Increase Fee is due and payable, (i) the Loans are paid in full and the
Loan Documents are terminated, or (ii) Lender syndicates, finds additional
lender(s) for or sells participations in the Loans, then the Facility Increase
Fee shall be deemed paid in full and no future payments shall become due and
payable.
SECTION 4 CONDITION PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon: (i) receipt by Coast of a duly executed copy of this
Amendment executed by Borrower, (ii) receipt by Coast of a duly executed copy of
the reaffirmation of the Continuing Guaranty executed by American Credit
Alliance, Inc., and (iii) receipt by Coast of the first $12,500 installment of
the Facility Increase Fee.
SECTION 5 ENTIRE AGREEMENT. The Loan Agreement, as amended hereby,
embodies the entire agreement and understanding between the parties hereto and
supersedes all prior agreements and understandings relating to the subject
matter hereof. Borrower represents, warrants and agrees that in entering into
the Loan Agreement and consenting to this Amendment, it has not relied on any
representation, promise, understanding or agreement, oral or written, of, by or
with, Coast or any of its agents, employees, or counsel, except the
representations, promises, understandings and agreements specifically contained
in or referred to in the Loan Agreement, as amended hereby.
2
<PAGE> 3
SECTION 6 CONFLICTING TERMS. In the event of a conflict between the
terms and provisions of this Amendment and the terms and provisions of the Loan
Agreement, the terms of this Amendment shall govern. In all other respects, the
Loan Agreement, as amended and supplemented hereby, shall remain in full force
and effect.
SECTION 7 MISCELLANEOUS. This Amendment shall be governed by and
construed in accordance with the laws of the State of California. This Amendment
may be executed in any number of counterparts, all of which taken together shall
constitute one agreement, and any party hereto may execute this Amendment by
signing such counterpart.
SECTION 8 IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their respective officers thereunto duly
authorized as of the date first above written.
THE CREDIT STORE, INC.,
a Delaware corporation
By: /s/ Michael Philippe
-------------------------------------
President or Vice President
By: /s/ Cynthia Hassoun
-------------------------------------
Secretary or Ass't Secretary
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By: /s/ John Nocita
-------------------------------------
Title: Vice President
3
<PAGE> 4
REAFFIRMATION OF GUARANTY
The undersigned has executed a Continuing Guaranty in favor of Coast
Business Credit, a division of Southern Pacific Bank, a California corporation
("Coast") respecting the obligations of The Credit Store, Inc., a Delaware
corporation ("Borrower") owing to Coast. The undersigned acknowledges the terms
of the above Amendment and reaffirms and agrees that (a) its Continuing Guaranty
remains in full force and effect, (b) nothing in such Continuing Guaranty
obligates Coast to notify the undersigned of any changes in the financial
accommodations made available to Borrower or to seek reaffirmations of the
Continuing Guaranty, and (c) no requirement to so notify the undersigned or to
seek reaffirmations in the future shall be implied by the execution of the
reaffirmation.
AMERICAN CREDIT ALLIANCE, INC.,
a Nevada corporation
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
<PAGE> 1
SECURITY AGREEMENT
This Security Agreement is made as of August 1, 1997 by and among J.L.B. of
Nevada, Inc., a Nevada corporation ("JLB"), Credit Store, Inc., a Delaware
corporation ("CSI") and Credit Store Mortgage, Inc., a Delaware corporation, New
Beginnings Corp., a South Dakota corporation, Consumer Debt Acquisitions, Inc.,
a South Dakota corporation, Sleepy Hollow Associates, Inc., a Delaware
corporation, Service One Holdings Inc., a Delaware corporation, Service One
International Corporation, a South Dakota corporation, American Credit Alliance,
Inc., a Nevada corporation, Service One Receivables Acquisition Corporation, a
Nevada corporation, The Credit Store, Inc., a South Dakota corporation, Service
One Commercial Corporation, a Delaware corporation, and Soiland Company, a South
Dakota corporation (collectively referred to herein as the "CSI Subsidiaries").
WHEREAS, CSI has requested that JLB loan CSI up to Thirty Million Dollars
($30,000,000.00) pursuant to the terms of the two Promissory Notes attached
hereto as Exhibit A and Exhibit B (the "Promissory Notes"); and
WHEREAS, to provide security to JLB for CSI's obligations under the terms
of the Promissory Notes and as consideration for JLB's agreement to make future
loans to CSI under the terms of the Promissory Notes, JLB has requested that CSI
and the CSI Subsidiaries grant JLB a security interest in all of their assets;
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and promises herein contained, the parties hereto HEREBY AGREE as follows:
1. GRANT OF SECURITY INTEREST. In order to secure the payment by CSI of
all amounts due to JLB with respect to the Promissory Notes, each of CSI and the
CSI Subsidiaries hereby grants to JLB a security interest in all of its assets,
including the stock of its subsidiaries and all of its goods, equipment,
inventory, accounts, deposit accounts, general intangibles, contract rights,
chattel paper, documents, instruments, investment property, investments in other
entities and money (the "Assets"), and all proceeds (including insurance
proceeds) and products of the Assets. Each of CSI and the CSI Subsidiaries
hereby represents and covenants that (a) all of the Assets are located at 3401
North Louise Avenue, Sioux Falls, South Dakota 57107 except for the Assets set
forth on Exhibit C, which are located in Elmsford, New York, (b) neither CSI nor
any of the CSI Subsidiaries will relocate, sell or pledge any of the Assets
without the consent of JLB, (c) the Assets are owned by CSI and the CSI
Subsidiaries free and clear of all liens and encumbrances except as set forth on
Exhibit D hereto, (d) set forth on Exhibit E hereto is a complete list
reflecting the number of shares of stock of each CSI Subsidiary issued and
outstanding as of the date hereof and the owner of such shares, and (e) no
additional shares of capital stock of the CSI Subsidiaries shall be issued until
the repayment of the Promissory Notes in full.
- 2 -
<PAGE> 3
2. REMEDIES, TERMINATION. The failure by CSI to pay, when due, the
principal, any interest, or any other sum payable under either of the Promissory
Notes, and continuance of such failure for five (5) business days after the date
on which such principal, installment of interest, or other sum is due (whether
upon maturity of a Promissory Note, upon any installment payment date, upon
acceleration, or otherwise) shall constitute an event of default (an "Event of
Default"). Upon such an Event of Default, JLB may exercise any and all of the
remedies available to a secured creditor under the Uniform Commercial Code of
the State of South Dakota. CSI agrees to pay JLB's costs of collection arising
out of an Event of Default, including reasonable attorneys' fees. This Security
Agreement shall terminate when all amounts due to JLB with respect to the
Promissory Notes have been received by JLB.
3. FINANCING STATEMENTS AND OTHER INSTRUMENTS. Each of CSI and the CSI
Subsidiaries agrees to cooperate fully in the preparation and execution of any
and all financing statements that JLB deems necessary or helpful to the
perfection, maintenance or continuation of the security interest in the Assets
granted by this Security Agreement, and to that effect each of CSI and the CSI
Subsidiaries expressly agrees to execute one or more financing statements in a
form satisfactory to JLB, who is authorized to file a financing statement in any
location deemed necessary or advisable to perfect JLB's security interest in the
Assets or proceeds.
- 3 -
<PAGE> 4
Each of CSI and the CSI Subsidiaries also agrees to cooperate fully with
JLB in executing additional financing statements, amendments to financing
statements and the like as may be deemed necessary or advisable by JLB in order
to maintain and continue the security interest in the Assets created by this
Security Agreement.
Each of CSI and the CSI Subsidiaries shall deliver to JLB, within ten (10)
days of the date of this Security Agreement, any and all stock certificates
representing issued and outstanding shares of stock of any of the CSI
Subsidiaries held by such entity, together with stock powers executed in blank.
4. GOVERNING LAW. This Security Agreement and its interpretation shall
be governed by the internal laws of the State of South Dakota, without reference
to its conflict-of-laws rules.
5. ENTIRE AGREEMENT. This Security Agreement, together with the
Promissory Notes, constitutes the entire agreement of the parties concerning the
subject matter hereof and may not be modified except by a writing signed by the
parties hereto. This Security Agreement supersedes any and all prior security
agreements between or among any of the parties hereto.
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused their authorized
officers to execute this Security Agreement as of the day and year first above
written.
J.L.B. OF NEVADA, INC.
By: /s/ Jay L. Botchman
-------------------------------------
Name: Jay L. Botchman
Title: President
CREDIT STORE, INC.
By: /s/ Kevin T. Riordan
-------------------------------------
Name: Kevin T. Riordan
Title: President
CREDIT STORE MORTGAGE, INC.
By: /s/ Robert M. Stata
-------------------------------------
Name: Robert M. Stata
Title: President
NEW BEGINNINGS CORP.
By: /s/ Kevin T. Riordan
-------------------------------------
Name: Kevin T. Riordan
Title: President
CONSUMER DEBT ACQUISITIONS, INC.
By: /s/ Kevin T. Riordan
-------------------------------------
Name: Kevin T. Riordan
Title: President
- 5 -
<PAGE> 6
SLEEPY HOLLOW ASSOCIATES, INC.
By: /s/ Robert D. Maum
-------------------------------------
Name: Robert D. Maum
Title: President
SERVICE ONE HOLDINGS INC.
By: /s/ Kevin T. Riordan
-------------------------------------
Name: Kevin T. Riordan
Title: President
SERVICE ONE INTERNATIONAL
CORPORATION
By: /s/ Kevin T. Riordan
-------------------------------------
Name: Kevin T. Riordan
Title: President
AMERICAN CREDIT ALLIANCE, INC.
By: /s/ Kevin T. Riordan
-------------------------------------
Name: Kevin T. Riordan
Title: President
SERVICE ONE RECEIVABLES
ACQUISITION CORPORATION
By: /s/ Kevin T. Riordan
-------------------------------------
Name: Kevin T. Riordan
Title: President
- 6 -
<PAGE> 7
THE CREDIT STORE, INC.
By: /s/ Kevin T. Riordan
-------------------------------------
Name: Kevin T. Riordan
Title: President
SERVICE ONE COMMERCIAL
CORPORATION
By: /s/ Kevin T. Riordan
-------------------------------------
Name: Kevin T. Riordan
Title: President
SOILAND COMPANY
By: /s/ Kevin T. Riordan
-------------------------------------
Name: Kevin T. Riordan
Title: President
- 7 -
<PAGE> 1
FIRST AMENDMENT TO
SECURITY AGREEMENT
This First Amendment to Security Agreement is made as of October 23, 1997
by and among J.L.B. of Nevada, Inc., a Nevada corporation ("JLB"), Credit Store,
Inc., a Delaware corporation ("CSI") and Credit Store Mortgage, Inc., a Delaware
corporation, New Beginnings Corp., a South Dakota corporation, Consumer Debt
Acquisitions, Inc., a South Dakota corporation, Sleepy Hollow Associates, Inc.,
a Delaware corporation, Service One Holdings Inc., a Delaware corporation,
Service One International Corporation, a South Dakota corporation, American
Credit Alliance, Inc., a Nevada corporation, Service One Receivables Acquisition
Corporation, a Nevada corporation, The Credit Store, Inc., a South Dakota
corporation, Service One Commercial Corporation, a Delaware corporation, and
Soiland Company, a South Dakota corporation (collectively referred to herein as
the "CSI Subsidiaries").
WHEREAS, the parties hereto entered into a Security Agreement dated as of
August 1, 1997 (the "Security Agreement") pursuant to which CSI and the CSI
Subsidiaries granted JLB a security interest in all of their assets to secure
certain indebtedness of CSI to JLB;
WHEREAS, CSI has requested that JLB loan CSI up to Five Million Dollars
($5,000,000.00) pursuant to the terms of the Promissory Note attached hereto as
Exhibit A (the "Promissory Note"); and
WHEREAS, to provide security to JLB for CSI's obligations under the terms
of the Promissory Note and as consideration for JLB's agreement to make future
loans to CSI under
<PAGE> 2
the terms of the Promissory Note, JLB has requested that CSI and the CSI
Subsidiaries agree that JLB's current security interest in all of their assets
shall secure all debt evidenced by the Promissory Note;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and promises herein contained, the parties hereto HEREBY AGREE as follows:
1. GRANT OF SECURITY INTEREST. In order to secure the payment by CSI of
all amounts due to JLB with respect to the Promissory Note, each of CSI and the
CSI Subsidiaries hereby agrees that the debt evidenced by the Promissory Note
shall be secured by the security interest currently held by JLB in all of its
assets pursuant to the terms of the Security Agreement, including the stock of
its subsidiaries and all of its goods, equipment, inventory, accounts, deposit
accounts, general intangibles, contract rights, chattel paper, documents,
instruments, investment property, investments in other entities and money (the
"Assets"), and all proceeds (including insurance proceeds) and products of the
Assets.
2. REMEDIES, TERMINATION. The failure by CSI to pay, when due, the
principal, any interest, or any other sum payable under the Promissory Note, and
continuance of such failure for five (5) business days after the date on which
such principal, installment of interest, or other sum is due (whether upon
maturity of a Promissory Note, upon any installment payment date, upon
acceleration, or otherwise) shall constitute an event of default (an "Event of
Default"). Upon such an Event of Default, JLB may exercise any and all of the
remedies available to a secured creditor under the Uniform Commercial Code of
the State of South Dakota. CSI agrees to pay JLB's costs of collection arising
out of an Event of Default, including reasonable attorneys' fees.
- 2 -
<PAGE> 3
3. FINANCING STATEMENTS AND OTHER INSTRUMENTS. Each of CSI and the
CSI Subsidiaries agrees to cooperate fully in the preparation and execution of
any and all financing statements that JLB deems necessary or helpful to the
perfection, maintenance or continuation of the security interest in the Assets
granted by this Amendment, and to that effect each of CSI and the CSI
Subsidiaries expressly agrees to execute one or more financing statements in a
form satisfactory to JLB, who is authorized to file a financing statement in any
location deemed necessary or advisable to perfect JLB's security interest in the
Assets or proceeds.
Each of CSI and the CSI Subsidiaries also agrees to cooperate fully with
JLB in executing additional financing statements, amendments to financing
statements and the like as may be deemed necessary or advisable by JLB in order
to maintain and continue the security interest in the Assets created by this
Amendment.
4. GOVERNING LAW. This Amendment and its interpretation shall be
governed by the internal laws of the State of South Dakota, without reference to
its conflict-of-laws rules.
5. ENTIRE AGREEMENT. This Amendment, together with the Security
Agreement and the Promissory Note, constitutes the entire agreement of the
parties concerning the subject matter hereof and may not be modified except by a
writing signed by the parties hereto.
- 3 -
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused their authorized
officers to execute this Amendment as of the day and year first above written.
J.L.B. OF NEVADA, INC.
By: /s/ Jay L. Botchman
------------------------------------
Name: Jay L. Botchman
Title: President
CREDIT STORE, INC.
By: /s/ Kevin T. Riordan
------------------------------------
Name: Kevin T. Riordan
Title: President
CREDIT STORE MORTGAGE, INC.
By: /s/ Robert M. Stata
------------------------------------
Name: Robert M. Stata
Title: President
NEW BEGINNINGS CORP.
By: /s/ Kevin T. Riordan
------------------------------------
Name: Kevin T. Riordan
Title: President
- 4 -
<PAGE> 5
CONSUMER DEBT ACQUISITIONS, INC.
By: /s/ Kevin T. Riordan
------------------------------------
Name: Kevin R. Riordan
Title: President
SLEEPY HOLLOW ASSOCIATES, INC.
By: /s/ Robert D. Maum
------------------------------------
Name: Robert D. Maum
Title: President
SERVICE ONE HOLDINGS INC.
By: /s/ Kevin T. Riordan
------------------------------------
Name: Kevin T. Riordan
Title: President
SERVICE ONE INTERNATIONAL
CORPORATION
By: /s/ Kevin T. Riordan
------------------------------------
Name: Kevin T. Riordan
Title: President
- 5 -
<PAGE> 6
AMERICAN CREDIT ALLIANCE, INC.
By: /s/ Kevin T. Riordan
------------------------------------
Name: Kevin T. Riordan
Title: President
SERVICE ONE RECEIVABLES
ACQUISITION CORPORATION
By: /s/ Kevin T. Riordan
------------------------------------
Name: Kevin T. Riordan
Title: President
THE CREDIT STORE, INC.
By: /s/ Kevin T. Riordan
------------------------------------
Name: Kevin T. Riordan
Title: President
SERVICE ONE COMMERCIAL
CORPORATION
By: /s/ Kevin T. Riordan
------------------------------------
Name: Kevin T. Riordan
Title: President
- 6 -
<PAGE> 7
SOILAND COMPANY
By: /s/ Kevin T. Riordan
------------------------------------
Name: Kevin T. Riordan
Title: President
- 7 -
<PAGE> 1
SECOND AMENDMENT TO
SECURITY AGREEMENT
This Second Amendment to Security Agreement is made as of November 21, 1997
by and among J.L.B. of Nevada, Inc., a Nevada corporation ("JLB"), Credit Store,
Inc., a Delaware corporation ("CSI") and Sleepy Hollow Associates, Inc., a
Delaware corporation, Service One International Corporation, a South Dakota
corporation, American Credit Alliance, Inc., a Nevada corporation, and Service
One Receivables Acquisition Corporation, a Nevada corporation, (collectively
referred to herein as the "CSI Subsidiaries").
WHEREAS, the parties hereto entered into a Security Agreement dated as of
August 1, 1997, as amended (the "Security Agreement"), pursuant to which CSI,
the CSI Subsidiaries and other CSI subsidiaries which have since been merged
into CSI and the CSI Subsidiaries granted JLB a security interest in all of
their assets to secure certain indebtedness of CSI to JLB;
WHEREAS, CSI has requested that JLB loan CSI up to Five Million Dollars
($5,000,000.00) pursuant to the terms of the Promissory Note attached hereto as
Exhibit A (the Promissory Note"); and
WHEREAS, to provide security to JLB for CSI's obligations under the terms
of the Promissory Note arid as consideration for JLB's agreement to make future
loans to CSI under the terms of the Promissory Note, JLB has requested that CSI
and the CSI Subsidiaries agree that JLB's current security interest in all of
their assets shall secure all debt evidenced by the Promissory Note;
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and promises herein contained, the parties hereto HEREBY AGREE as follows:
1. GRANT OF SECURITY INTEREST. In order to secure the payment by CSI of
all amounts due to JLB with respect to the Promissory Note, each of CSI and the
CSI Subsidiaries hereby agrees that the debt evidenced by the Promissory Note
shall be secured by the security interest currently held by JLB in all of its
assets pursuant to the terms of the Security Agreement, including the stock of
its subsidiaries and all of its goods, equipment, inventory, accounts, deposit
accounts, general intangibles, contract rights, chattel paper, documents,
instruments, investment property, investments in other entities and money (the
"Assets"), and all proceeds (including insurance proceeds) and products of the
Assets.
2. REMEDIES, TERMINATION. The failure by CSI to pay, when due, the
principal, any interest, or any other sum payable under the Promissory Note, and
continuance of such failure for five (5) business days after the date on which
such principal, installment of interest, or other sum is due (whether upon
maturity of a Promissory Note, upon any installment payment date, upon
acceleration, or otherwise) shall constitute an event of default (an "Event of
Default"). Upon such an Event of Default, JLB may exercise any and all of the
remedies available to a secured creditor under the Uniform Commercial Code of
the State of South Dakota. CSI agrees to pay JLB's costs of collection arising
out of an Event of Default, including reasonable attorneys' fees.
3. FINANCING STATEMENTS AND OTHER INSTRUMENTS. Each of CSI and the
CSI Subsidiaries agrees to cooperate fully in the preparation and execution of
any and all financing statements that JLB deems necessary or helpful to the
perfection, maintenance or
- 2 -
<PAGE> 3
continuation of the security interest in the Assets granted by this Amendment,
and to that effect each of CSI and the CSI Subsidiaries expressly agrees to
execute one or more financing statements in a form satisfactory to JLB, who is
authorized to file a financing statement in any location deemed necessary or
advisable to perfect JLB's security interest in the Assets or proceeds.
Each of CSI and the CSI Subsidiaries also agrees to cooperate fully with
JLB in executing additional financing statements, amendments to financing
statements and the like as may be deemed necessary or advisable by JLB in order
to maintain and continue the security interest in the Assets created by this
Amendment.
4. GOVERNING LAW. This Amendment and its interpretation shall be
governed by the internal laws of the State of South Dakota, without reference to
its conflict-of-laws rules.
5. ENTIRE AGREEMENT. This Amendment, together with the Security
Agreement and the Promissory Note, constitutes the entire agreement of the
parties concerning the subject matter hereof and may not be modified except by a
writing signed by the parties hereto.
- 3 -
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused their authorized
officers to execute this Amendment as of the day and year first above written.
J.L.B. OF NEVADA, INC.
By: /s/ Jay L. Botchman
----------------------------------
Name: Jay L. Botchman
Title: President
CREDIT STORE, INC.
By: /s/ Kevin T. Riordan
----------------------------------
Name: Kevin T. Riordan
Title: President
SLEEPY HOLLOW ASSOCIATES, INC.
By: /s/ Kevin T. Riordan
----------------------------------
Name: Kevin T. Riordan
Title: President
SERVICE ONE INTERNATIONAL
CORPORATION
By: /s/ Kevin T. Riordan
----------------------------------
Name: Kevin T. Riordan
Title: President
- 4 -
<PAGE> 5
AMERICAN CREDIT ALLIANCE, INC.
By: /s/ Kevin T. Riordan
----------------------------------
Name: Kevin T. Riordan
Title: President
SERVICE ONE RECEIVABLES
ACQUISITION CORPORATION
By: /s/ Kevin T. Riordan
----------------------------------
Name: Kevin T. Riordan
Title: President
- 5 -
<PAGE> 1
- - - --------------------------------------------------------------------------------
CREDIT AGREEMENT
Dated as of October 15, 1999
among
CREDIT STORE CAPITAL CORP.,
as Borrower,
THE CREDIT STORE, INC.,
as Servicer,
THE LENDERS SIGNATORY HERETO
FROM TIME TO TIME,
as Lenders,
and
GENERAL ELECTRIC CAPITAL CORPORATION,
as Agent and Lender
- - - --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. AMOUNT AND TERMS OF CREDIT........................................................................... 1
1.1. Revolving Credit Facility................................................................. 1
1.2. Revolving Notes........................................................................... 2
1.3. Prepayments............................................................................... 2
1.4. Use of Proceeds........................................................................... 3
1.5. Interest and Applicable Margins........................................................... 3
1.6. Eligible Accounts......................................................................... 4
1.7. Cash Management Systems................................................................... 5
1.8. Fees...................................................................................... 5
1.9. Receipt of Payments....................................................................... 6
1.10. Application and Allocation of Payments................................................... 7
1.11. Loan Account and Accounting.............................................................. 7
1.12. Indemnity................................................................................ 8
1.13. Access................................................................................... 8
1.14. Taxes.................................................................................... 9
1.15. Single Loan.............................................................................. 10
1.16. Servicer not an Obligor.................................................................. 10
2. CONDITIONS PRECEDENT................................................................................. 10
2.1. Conditions to the Initial Loans........................................................... 10
2.2. Further Conditions to Each Revolving Loan................................................. 12
3. REPRESENTATIONS AND WARRANTIES....................................................................... 13
3.1. Corporate Existence; Compliance with Law.................................................. 13
3.2. Executive Offices, Collateral Locations, FEIN............................................. 14
3.3. Corporate Power, Authorization, Enforceable Obligations................................... 14
3.4. Financial Statements and Projections...................................................... 14
3.5. Material Adverse Effect................................................................... 15
3.6. Ownership of Property; Liens.............................................................. 16
3.7. Labor Matters............................................................................. 16
3.8. Ventures, Subsidiaries and Affiliates; Outstanding Stock and Indebtedness................. 16
3.9. Government Regulation..................................................................... 16
3.10. Margin Regulations....................................................................... 17
3.11. Taxes.................................................................................... 17
3.12. ERISA.................................................................................... 17
3.13. No Litigation............................................................................ 18
3.14. Brokers.................................................................................. 18
3.15. Intellectual Property.................................................................... 18
3.16. Full Disclosure.......................................................................... 18
3.17. Environmental Matters.................................................................... 19
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
3.18. Insurance................................................................................ 19
3.19. Deposit and Disbursement Accounts........................................................ 19
3.20. Agreements and Other Documents........................................................... 19
3.21. Solvency................................................................................. 19
3.22. Year 2000 Representations................................................................ 19
4. FINANCIAL STATEMENTS AND INFORMATION..................................................................20
4.1. Reports and Notices....................................................................... 20
4.2. Communication with Accountants............................................................ 20
5. AFFIRMATIVE COVENANTS................................................................................ 20
5.1. Maintenance of Existence and Conduct of Business.......................................... 20
5.2. Payment of Obligations.................................................................... 20
5.3. Books and Records......................................................................... 21
5.4. Insurance; Damage to or Destruction of Collateral......................................... 21
5.5. Compliance with Laws...................................................................... 22
5.6. Supplemental Disclosure................................................................... 22
5.7. Intentionally Omitted..................................................................... 22
5.8. Composition of the Borrower's Board....................................................... 22
5.9. Compensation of Employees, Agents, and Consultants; Limitation on Agency.................. 22
5.10. Servicing; Fees.......................................................................... 23
5.11. Expenses................................................................................. 23
5.12. Mailing Address.......................................................................... 23
5.13. Books and Records........................................................................ 23
5.14. Financial Statements..................................................................... 23
5.15. Holding of Funds and Assets.............................................................. 23
5.16. Insurance................................................................................ 24
5.17. Separate Legal Entities.................................................................. 24
5.18. Arm's Length Relationships............................................................... 24
5.19. Servicing Arrangement.................................................................... 24
5.20. Further Assurances....................................................................... 24
6. NEGATIVE COVENANTS................................................................................... 24
6.1. Mergers, Subsidiaries, Etc................................................................ 24
6.2. Investments; Loans and Revolving Credit Advances.......................................... 25
6.3. Indebtedness.............................................................................. 25
6.4. Affiliate Transactions.................................................................... 25
6.5. Capital Structure and Business............................................................ 25
6.6. Guaranteed Indebtedness and Contractual Liabilities....................................... 26
6.7. Liens..................................................................................... 26
6.8. Sale of Assets............................................................................ 26
6.9. Purchases of Assets....................................................................... 26
6.10. ERISA.................................................................................... 26
6.11. Financial Covenants...................................................................... 27
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
6.12. Restricted Payments...................................................................... 27
6.13. Change of Corporate Name or Location; Change of Fiscal Year.............................. 27
6.14. No Speculative Transactions.............................................................. 27
6.15. Leases................................................................................... 27
6.16. Changes Relating to Other Key Agreements................................................. 28
6.17. Sale Characterization.................................................................... 28
6.18. Commingling.............................................................................. 28
6.19. Prohibited Transactions.................................................................. 28
6.20. Purchase of Accounts..................................................................... 28
7. TERM ................................................................................................ 28
7.1. Termination............................................................................... 28
7.2. Survival of Obligations Upon Termination of Financing Arrangements........................ 29
8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES............................................................... 29
8.1. Events of Default......................................................................... 29
8.2. Remedies.................................................................................. 32
8.3. Waivers and Agreements by Borrower and Servicer........................................... 32
9. ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF AGENT.................................................. 33
9.1. Assignment and Participations............................................................. 33
9.2. Appointment of Agent...................................................................... 34
9.3. Agent's Reliance, Etc..................................................................... 35
9.4. GE Capital and Affiliates................................................................. 36
9.5. Lender Credit Decision.................................................................... 36
9.6. Indemnification........................................................................... 36
9.7. Successor Agent........................................................................... 37
9.8. Setoff and Sharing of Payments............................................................ 37
9.9. Revolving Credit Advances; Payments; Non-Funding Lenders;
Information; Actions in Concert.......................................................... 38
10. SUCCESSORS AND ASSIGNS.............................................................................. 40
10.1. Successors and Assigns................................................................... 40
11. MISCELLANEOUS....................................................................................... 41
11.1. Complete Agreement; Modification of Agreement............................................ 41
11.2. Amendments and Waivers................................................................... 41
11.3. Fees and Expenses........................................................................ 43
11.4. No Waiver................................................................................ 44
11.5. Remedies................................................................................. 44
11.6. Severability............................................................................. 44
11.7. Conflict of Terms........................................................................ 44
11.8. Confidentiality.......................................................................... 45
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C>
11.9. GOVERNING LAW............................................................................ 45
11.10. Notices................................................................................. 46
11.11. Section Titles.......................................................................... 46
11.12. Counterparts............................................................................ 46
11.13. WAIVER OF JURY TRIAL.................................................................... 47
11.14. Press Releases; Etc..................................................................... 47
11.15. Reinstatement........................................................................... 47
11.16. Advice of Counsel....................................................................... 48
11.17. No Strict Construction.................................................................. 48
</TABLE>
iv
<PAGE> 6
INDEX OF APPENDICES
Annex A (Recitals) - Definitions
Annex B (Section 5.19) - Servicing Arrangement
Annex C (Section 1.8) - Cash Management System
Annex D (Section 2.1(a)) - Closing Checklist
Annex E (Section 4.1(a)) - Financial Statements and Projections - Reporting
Annex F (Section 4.1(b)) - Collateral Reports
Annex G (Section 6.10) - Financial Covenants
Annex H (Section 9.9(a)) - Lenders' Wire Transfer Information
Annex I (Section 11.10) - Notice AddressesAnnex J (from Annex A-
Commitments definition) - Commitments as of Closing Date
Exhibit 1.1(a)(i) - Form of Notice of Revolving Credit Advance
Exhibit 1.1(a)(ii) - Form of Revolving Note
Exhibit 4.1(b) - Form of Borrowing Base Certificate
Exhibit 9.1(a) - Form of Assignment Agreement
Exhibit A-1 - Form of Forward Purchase Agreement
Exhibit A-2 - Form of Collateral Assignment of Forward Purchase
Agreement
Exhibit B - Form of Control Letter
Disclosure Schedule 1.1 - Agent's Representatives
Disclosure Schedule 1.4 - Sources and Uses; Funds Flow Memorandum
Disclosure Schedule 3.7 - Labor Matters
Disclosure Schedule 3.11 - Tax Matters
Disclosure Schedule 3.13 - Litigation
Disclosure Schedule 3.18 - Insurance
Disclosure Schedule 5.4 - Required Insurance
v
<PAGE> 7
This CREDIT AGREEMENT (this "Agreement"), dated as of October
15, 1999 among CREDIT STORE CAPITAL CORP., a Delaware corporation ("Borrower");
THE CREDIT STORE, INC., a Delaware corporation, in its capacity as Servicer;
GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation (in its individual
capacity, "GE Capital"), for itself, as Lender, and as Agent for Lenders, and
the other Lenders signatory hereto from time to time.
RECITALS
WHEREAS, Borrower has requested that Lenders extend a
revolving credit facility to Borrower of up to SEVENTEEN MILLION FIVE HUNDRED
THOUSAND DOLLARS ($17,500,000) in the aggregate for the purpose of (a) financing
Borrower's purchases of Eligible Accounts and (b) providing funds for certain
fees and expenses in connection with the transactions contemplated hereby; and
for these purposes, Lenders are willing to make certain loans and other
extensions of credit to Borrower of up to such amount upon the terms and
conditions set forth herein; and
WHEREAS, Borrower has agreed to secure all of its obligations
under the Loan Documents by granting to Agent, for the benefit of Agent and
Lenders, a security interest in and lien upon all of its existing and
after-acquired personal property.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants hereinafter contained, and for other good and valuable
consideration, the parties hereto agree as follows:
1. AMOUNT AND TERMS OF CREDIT
1.1. Revolving Credit Facility. Subject to the terms and
conditions hereof, each Lender agrees to make available to Borrower from time to
time until the Commitment Termination Date its Pro Rata Share of advances (each,
a "Revolving Credit Advance"). The Pro Rata Share of the Revolving Loan of any
Lender shall not at any time exceed its separate Commitment. The obligations of
each Lender hereunder shall be several and not joint. The aggregate amount of
Revolving Credit Advances outstanding shall not exceed at any time the lesser of
(A) the Maximum Amount and (B) the Borrowing Base ("Borrowing Availability").
Borrowing Availability may be further reduced by Reserves imposed by Agent in
its reasonable credit judgment upon notice to Borrower. Until the Commitment
Termination Date, Borrower may from time to time borrow, repay and reborrow
under this Section 1.1(a). Each Revolving Credit Advance shall be made on notice
by Borrower to one of the representatives of Agent identified in Schedule 1.1 at
the address specified therein. Those notices must be given no later than 11:00
a.m. (Chicago time) five (5) Business Days prior to the Business Day of the
proposed Revolving Credit Advance if such Revolving Credit Advance is being used
to purchase Accounts, and no later than 11:00 a.m. (Chicago time) one (1)
Business Day of the proposed Revolving Credit Advance if such Revolving Credit
Advance is not being used to purchase Accounts. Each such notice (a "Notice of
Revolving Credit Advance") must be given in writing (by telecopy or overnight
courier) substantially in the form of Exhibit 1.1(a)(i),
<PAGE> 8
and shall include the information required in such Exhibit and such other
information as may be required by Agent.
Capitalized terms used in this Agreement shall have the
meanings ascribed to them in Annex A and, for purposes of this Agreement, the
rules of construction set forth in Annex A shall govern. All Annexes, Disclosure
Schedules, Exhibits and other attachments (collectively, "Appendices") hereto,
or expressly identified to this Agreement, are incorporated herein by reference,
and taken together with this Agreement, shall constitute but a single agreement.
1.2. Revolving Notes. Borrower shall execute and deliver to
each Lender a note to evidence the Commitment of that Lender. Each note shall be
in the principal amount of the Commitment of the applicable Lender, dated the
Closing Date and substantially in the form of Exhibit 1.1(a)(ii) (each a
"Revolving Note" and, collectively, the "Revolving Notes"). Each Revolving Note
shall represent the obligation of Borrower to pay the amount of Lender's
Commitment or, if less, such Lender's Pro Rata Share of the aggregate unpaid
principal amount of all Revolving Credit Advances to Borrower together with
interest thereon as prescribed in Section 1.5. The entire unpaid balance of the
Revolving Loan and all other non-contingent Obligations shall be immediately due
and payable in full in immediately available funds on the Commitment Termination
Date.
1.3. Prepayments.
(a) Prepayments Upon Voluntary Termination of Commitment.
Borrower may at any time on at least ten (10) days' prior written notice to
Agent terminate the Commitment; provided that upon such termination, the
Revolving Loan and other Obligations shall be immediately due and payable in
full. Any such voluntary prepayment and any such termination of the Commitment
must be accompanied by the payment of the Fee required by Section 1.8(c), if
any. Upon any such prepayment and termination of the Commitment, Borrower's
right to request Revolving Credit Advances shall simultaneously be terminated.
(b) Mandatory Prepayments.
(i) If at any time the outstanding balance of the
Revolving Loan exceeds the lesser of (A) the Maximum Amount and (B) the
Borrowing Base, Borrower shall immediately repay the aggregate
outstanding Revolving Credit Advances to the extent required to
eliminate such excess.
(ii) Immediately upon receipt by Borrower of proceeds
of any sale or other disposition of assets, Borrower shall deposit an
amount equal to all such proceeds, net of commissions and other
reasonable and customary transaction costs, fees and expenses properly
attributable to such transaction and payable by Borrower in connection
therewith (in each case, paid to non-Affiliates) into the Blocked
Account to be applied in accordance with Section 1.10.
2
<PAGE> 9
(c) The Commitment shall not be permanently reduced by any
prepayments under Section 1.3(b).
(d) Nothing in this Section 1.3 shall be construed to
constitute Agent's or any Lender's consent to any transaction that is not
permitted by other provisions of this Agreement or the other Loan Documents.
1.4. Use of Proceeds. Borrower shall utilize the proceeds of
the Revolving Loan solely to fund purchases of Unconverted Accounts and to pay
related fees and expenses, to pay the Servicing Fee, accountants' fees and the
expenses related to sales of Accounts to parties other than Servicer and to make
payments to Servicer as permitted by Section 6.12; provided, however, that
Borrower may use the proceeds of the initial Revolving Credit Advance to repay
in part the principal balance of the promissory note in the amount of
$3,534,419.02 dated as of October 1, 1999 owing by Borrower to Servicer (the
"Seller Note") and may use the proceeds of subsequent Revolving Credit Advances
to pay the remaining principal balance of, and interest on, such note.
Disclosure Schedule (1.4) contains a description of Borrower's sources and uses
of funds as of the Closing Date, including the Revolving Credit Advances to be
made or incurred on that date.
1.5. Interest and Applicable Margins.
(a) Borrower shall pay interest to Agent, for the ratable
benefit of Lenders in arrears on each applicable Interest Payment Date at the
Index Rate plus 2.50% per annum.
(b) If any payment on the Revolving Loan becomes due and
payable on a day other than a Business Day, the maturity thereof will be
extended to the next succeeding Business Day and, with respect to payments of
principal, interest thereon shall be payable at the then applicable rate during
such extension.
(c) All computations of Fees calculated on a per annum basis
and interest shall be made by Agent on the basis of a 360-day year, in each case
for the actual number of days occurring in the period for which such interest
and Fees are payable. The Index Rate shall be determined each day based upon the
Index Rate as in effect each day. Each determination by Agent of an interest
rate and Fees hereunder shall be presumed conclusive, absent demonstrable error.
(d) So long as an Event of Default has occurred and is
continuing under Section 8.1(a), (h) or (i), or so long as any other Event of
Default has occurred and is continuing and at the election of Agent (or upon the
written request of Requisite Lenders) confirmed by written notice from Agent to
Borrower, the interest rates applicable to the Revolving Loan shall be increased
by two percentage points (2%) per annum above the rates of interest otherwise
applicable hereunder ("Default Rate"), and all outstanding Obligations shall
bear interest at the Default Rate applicable to such Obligations. Interest at
the Default Rate shall accrue from the initial date of such Event of Default
until that Event of Default is cured or waived and shall be payable upon demand.
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(e) Notwithstanding anything to the contrary set forth in this
Section 1.5, if a court of competent jurisdiction determines in a final order
that the rate of interest payable hereunder exceeds the highest rate of interest
permissible under law (the "Maximum Lawful Rate"), then so long as the Maximum
Lawful Rate would be so exceeded, the rate of interest payable hereunder shall
be equal to the Maximum Lawful Rate; provided, however, that if at any time
thereafter the rate of interest payable hereunder is less than the Maximum
Lawful Rate, Borrower shall continue to pay interest hereunder at the Maximum
Lawful Rate until such time as the total interest received by Agent, on behalf
of Lenders, is equal to the total interest that would have been received had the
interest rate payable hereunder been (but for the operation of this paragraph)
the interest rate payable since the Closing Date as otherwise provided in this
Agreement. Thereafter, interest hereunder shall be paid at the rate(s) of
interest and in the manner provided in Sections 1.5(a) through (d), unless and
until the rate of interest again exceeds the Maximum Lawful Rate, and at that
time this paragraph shall again apply. In no event shall the total interest
received by any Lender pursuant to the terms hereof exceed the amount that such
Lender could lawfully have received had the interest due hereunder been
calculated for the full term hereof at the Maximum Lawful Rate. If the Maximum
Lawful Rate is calculated pursuant to this paragraph, such interest shall be
calculated at a daily rate equal to the Maximum Lawful Rate divided by the
number of days in the year in which such calculation is made. If,
notwithstanding the provisions of this Section 1.5(e), a court of competent
jurisdiction shall finally determine that a Lender has received interest
hereunder in excess of the Maximum Lawful Rate, Agent shall, to the extent
permitted by applicable law, promptly apply such excess in the order specified
in Section 1.10 and thereafter shall refund any excess to Borrower or as a court
of competent jurisdiction may otherwise order.
1.6. Eligible Accounts. All of the Accounts owned by Borrower
and reflected in the most recent Borrowing Base Certificate delivered by
Borrower to Agent shall be "Eligible Accounts" for purposes of this Agreement,
except any Account to which any of the exclusionary criteria set forth below
applies. Agent shall have the right to establish, modify or eliminate Reserves
against Eligible Accounts from time to time in its reasonable credit judgment.
In addition, Agent reserves the right, at any time and from time to time after
the Closing Date, to adjust any of the criteria set forth below, to establish
new criteria and to adjust advance rates with respect to Eligible Accounts, in
its reasonable credit judgment. Eligible Accounts shall not include any Account:
(a) if the Account Debtor is the subject of a petition
under the Bankruptcy Code or has made an assignment for the benefit of
creditors;
(b) if the Account has been previously discharged under
the Bankruptcy Code;
(c) if the Account Debtor is deceased;
(d) if the Account has been satisfied;
(e) if the Account Debtor has been released from
liability with respect to the Account;
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(f) if the Account is evidenced by a judgment;
(g) if any suit or claim by or on behalf of the Account
Debtor is pending or threatened regarding such Account;
(h) if the Face Amount of such Account is less than $300
or more than $8,000;
(i) that is not a legal, valid and binding obligation of
the Account Debtor, subject only to statute of limitations' defenses;
(j) if any defense, counterclaim, setoff or dispute has
been asserted in writing as to such Account;
(k) that is not a true and correct statement of bona fide
indebtedness incurred in the amount of the Account for merchandise sold or
services rendered to or money borrowed by, the applicable Account Debtor;
(l) (i) good and marketable title to which is not owned
by Borrower or (ii) that is subject to any right, claim, security interest or
other interest of any other Person (including obligations to collection agencies
or attorneys), other than Liens in favor of Agent, on behalf of itself and
Lenders;
(m) that is a Converted Account; or
(n) except for the initial portfolio purchased by
Borrower on the Closing Date, that was owned by Servicer for 120 days or more
prior to being purchased by Borrower, unless Agent shall otherwise agree.
Not more than 50% of all Eligible Accounts shall consist of
Chattel Paper or Instruments not in the possession of Borrower.
Eligible Accounts shall be included in the Borrowing Base only
up to their respective Face Amounts.
1.7. Cash Management Systems. On or prior to the Closing Date,
Borrower will establish and will maintain until the Termination Date, the cash
management systems described in Annex C (the "Cash Management Systems").
1.8. Fees.
(a) Borrower shall pay to Agent a closing fee in the
amount of $137,250 on the date hereof.
(b) As additional compensation for the Lenders, Borrower
shall pay to Agent, for the ratable benefit of such Lenders, in arrears, on the
first Business Day of each month, a fee
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for Borrower's non-use of available funds in an amount equal to one half of one
percent (0.5%) per annum (calculated on the basis of a 360 day year for actual
days elapsed) multiplied by the difference between (x) the Maximum Amount and
(y) the greater of (i) the Minimum Amount and (ii) the average for the period of
the daily closing balance of the Revolving Loan outstanding during the preceding
calendar month, commencing December 1, 1999 and continuing until the Commitment
Termination Date; provided, that the December 1, 1999 payment shall include all
such fees accrued from October 15, 1999 through November 30, 1999 and thereafter
each monthly payment shall be for such monthly fees accrued during the preceding
calendar month.
(c) If Borrower terminates the Commitment pursuant to Section
1.3(a), whether before or after acceleration of the Obligations, Borrower shall
pay to Agent, for the benefit of Lenders as liquidated damages and compensation
for the costs of being prepared to make funds available hereunder an amount
equal to the Applicable Percentage (as defined below) multiplied by the
Commitment; provided, however, that Borrower shall have the right to terminate
the Commitment without premium or penalty from April 30, 2000 to May 15, 2000,
provided that (i) Agent has not approved an aggregate $10,000,000 face amount of
Forward Purchase Agreements on or before April 15, 2000; and (ii) Borrower
provides written notice of intent to terminate the Commitment no earlier than
April 15, 2000 and no later than April 30, 2000. As used herein, the term
"Applicable Percentage" shall mean (x) three percent (3.0%), in the case of a
termination of the Commitment pursuant to Section 1.3(a) on or prior to the
first anniversary of the Closing Date, (y) two percent (2.0%), in the case of a
termination of the Commitment pursuant to Section 1.3(a) after the first
anniversary of the Closing Date but on or prior to the second anniversary
thereof, and (z) one percent (1.0%), in the case of a termination of the
Commitment pursuant to Section 1.3(a) after the second anniversary of the
Closing Date but on or prior to the date that is 60 days before the third
anniversary of the Closing Date.
(d) Borrower shall pay to Agent for the ratable benefit of
Lenders a monthly fee (the "Monthly Fee") on the first Business Day of each
month, in arrears, commencing December 1, 1999 and continuing until the
Commitment Termination Date; provided, that the December 1, 1999 payment shall
include all Monthly Fees accrued from October 15, 1999 through November 30, 1999
and thereafter each monthly payment shall be for the monthly Fees accrued during
the preceding calendar month. The Monthly Fee will equal (x) the difference
(expressed as a percentage) each day during the preceding calendar month between
the Index Rate plus 2.5% per annum and the Commercial Paper Rate per annum,
multiplied by (y) the applicable Minimum Amount less the average of the actual
outstanding principal balance of the Revolving Loan as of the close of business
on each day during the three preceding calendar months (but not less than zero).
(e) Borrower shall pay to Agent a collateral monitoring fee of
$100,000, annually in advance, on the Closing Date and on each anniversary of
the Closing Date until the Commitment Termination Date.
1.9. Receipt of Payments. Borrower shall make each payment
under this Agreement not later than 1:00 p.m. (Chicago time) on the day when due
in immediately available funds in Dollars to the Collection Account. Solely for
purposes of computing interest
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on the Revolving Loan as of any date, all payments shall be deemed received on
the second day after Agent's receipt of immediately available funds therefor in
the Collection Account prior to 1:00 p.m. Chicago time. Payments received after
1:00 p.m. Chicago time on any Business Day shall be deemed to have been received
on the following Business Day.
1.10. Application and Allocation of Payments.
(a) The Agent shall apply or disburse funds received in the
Collection Account with respect to the Borrower pursuant to the Loan Documents
in the following priority: (i) to the accrued and unpaid Servicing Fee, (ii) to
interest and any unpaid principal on the Seller Note (iii) to Fees and Agent's
expenses due under this Agreement or the Collateral Documents, (iv) to interest
then due and payable on the Revolving Credit Advances, (v) to the outstanding
principal balance of the Revolving Credit Advances until the same has been paid
in full, (vi) to all other Obligations, and (vii) to the Disbursement Account;
provided that all payments under any Forward Purchase Agreement shall be applied
or disbursed in the following priority: (i) to the accrued and unpaid Servicing
Fee, (ii) to Fees and Agent's expenses due under this Agreement or the
Collateral Documents, (iii) to interest then due and payable on the Revolving
Credit Advances, (iv) to the outstanding principal balance of the Revolving
Credit Advances until the same has been paid in full, (v) to all other
Obligations, (vi) to interest and any unpaid principal on the Seller Note and
(vii) to the Disbursement Account. All payments and prepayments applied to the
Revolving Loan shall be applied ratably to the portion thereof held by each
Lender as determined by its Pro Rata Share.
(b) Agent is authorized to, and at its sole election may,
charge to the Revolving Loan balance on behalf of Borrower and cause to be paid
all Fees, expenses, Charges, costs (including insurance premiums in accordance
with Section 5.4(a)) and interest owing by Borrower under this Agreement or any
of the other Loan Documents if and to the extent Borrower fails to pay promptly
any such amounts as and when due, even if such charges would cause the aggregate
balance of the Revolving Loan to exceed Borrowing Availability. At Agent's
option and to the extent permitted by law, any charges so made shall constitute
part of the Revolving Loan hereunder.
1.11. Loan Account and Accounting. Agent shall maintain a loan
account (the "Loan Account") on its books to record: Revolving Credit Advances,
all payments made by Borrower, and all other debits and credits as provided in
this Agreement with respect to the Revolving Loan or any other Obligations. All
entries in the Loan Account shall be made in accordance with Agent's customary
accounting practices as in effect from time to time. The balance in the Loan
Account, as recorded on Agent's most recent printout or other written statement,
shall be presumptive evidence, subject to rebuttal, of the amounts due and owing
to Agent and Lenders by Borrower; provided that any failure to so record or any
error in so recording shall not limit or otherwise affect Borrower's duty to pay
the Obligations. Agent shall render to Borrower a monthly accounting of
transactions with respect to the Revolving Loan setting forth the balance of the
Loan Account. Unless Borrower notifies Agent in writing of any objection to any
such accounting (specifically describing the basis for such objection), within
sixty (60) days after the date thereof, each and every such accounting shall,
absent manifest error, be deemed final,
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binding and conclusive on Borrower in all respects as to all matters reflected
therein. Only those items expressly objected to in such notice shall be deemed
to be disputed by Borrower. Notwithstanding any provision herein contained to
the contrary, any Lender may elect (which election may be revoked) to dispense
with the issuance of Notes to that Lender and may rely on the Loan Account as
evidence of the amount of Obligations from time to time owing to it.
1.12. Indemnity. The Borrower shall indemnify and hold
harmless each of Agent, Lenders and their respective Affiliates, and each such
Person's respective officers, directors, employees, attorneys, agents and
representatives (each, an "Indemnified Person"), from and against any and all
suits, actions, proceedings, claims, damages, losses, liabilities and expenses
(including reasonable attorneys' fees and disbursements and other costs of
investigation or defense, including those incurred upon any appeal) that may be
instituted or asserted against or incurred by any such Indemnified Person as the
result of credit having been extended, suspended or terminated under this
Agreement and the other Loan Documents and the administration of such credit,
and in connection with or arising out of the transactions contemplated hereunder
and thereunder and any actions or failures to act in connection therewith,
including legal costs and expenses arising out of or incurred in connection with
disputes between or among any parties to any of the Loan Documents
(collectively, "Indemnified Liabilities"); provided, that the Borrower shall not
be liable for any indemnification to an Indemnified Person to the extent that
any such suit, action, proceeding, claim, damage, loss, liability or expense
results from that Indemnified Person's gross negligence or willful misconduct.
NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO ANY
LOAN DOCUMENT, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF SUCH PERSON
OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR
INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A
RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER ANY LOAN
DOCUMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR
THEREUNDER.
1.13. Access. Each of Borrower and Servicer shall, during
normal business hours, from time to time upon one (1) Business Day's prior
notice as frequently as Agent determines to be appropriate: (a) provide Agent
and any of its officers, employees and agents access to its respective
properties, facilities, advisors and employees (including officers) and to the
Collateral, (b) permit Agent, and any of its officers, employees and agents, to
inspect, audit and make extracts from its respective books and records relating
to the Borrower or to the Collateral or the servicing thereof, and (c) permit
Agent, and its officers, employees and agents, to inspect, review, evaluate and
make test verifications of the Accounts. If a Default or Event of Default has
occurred and is continuing or if access is necessary to preserve or protect the
Collateral as determined by the Agent, each of Borrower and Servicer shall
provide such access to Agent and to each Lender at all times and without advance
notice. Each of Borrower and Servicer shall make available to Agent and its
counsel, as quickly as is possible under the circumstances, originals or copies
of all books and records that Agent may reasonably request regarding the
Collateral. Each of Borrower and Servicer shall deliver any document or
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instrument necessary for Agent, as it may from time to time reasonably request,
to obtain relevant records from any service bureau or other Person that
maintains records for Borrower or Servicer, and shall maintain normal and
customary backup records on media, including computer tapes and discs owned by
Borrower or Servicer. Agent will give Lenders at least ten (10) days' prior
written notice of regularly scheduled audits. Representatives of other Lenders
may accompany Agent's representatives on regularly scheduled audits at no charge
to Borrower. Borrower agrees to promptly reimburse Agent for all reasonable
out-of-pocket expenses incurred in connection with up to four audits per fiscal
year and the allocated internal costs of its auditors at a cost of $600 per
auditor per day; provided, that such limitations shall not apply if an Event of
Default has occurred and is continuing.
1.14. Taxes.
(a) Any and all payments by Borrower hereunder or under the
Notes shall be made, in accordance with this Section 1.14, free and clear of and
without deduction for any and all present or future Taxes. If Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder or under the Notes, (i) the sum payable shall be increased as much as
shall be necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this Section 1.14) Agent
or Lenders, as applicable, receive an amount equal to the sum they would have
received had no such deductions been made, (ii) Borrower shall make such
deductions, and (iii) Borrower shall pay the full amount deducted to the
relevant taxing or other authority in accordance with applicable law. Within
thirty (30) days after the date of any payment of Taxes, Borrower shall furnish
to Agent the original or a certified copy of a receipt evidencing payment
thereof.
(b) Borrower shall indemnify and, within ten (10) days of
demand therefor, pay Agent and each Lender for the full amount of Taxes
(including any Taxes imposed by any jurisdiction on amounts payable under this
Section 1.14) paid by Agent or such Lender, as appropriate, and any liability
(including penalties, interest and expenses) arising therefrom or with respect
thereto, whether or not such Taxes were correctly or legally asserted.
If any Lender receives a refund in respect of Taxes as to
which it has been indemnified by Borrower pursuant to this Section 1.14, it
shall promptly pay such refund to Borrower.
(c) Each Lender organized under the laws of a jurisdiction
outside the United States (a "Foreign Lender") as to which payments to be made
under this Agreement or under the Notes are exempt from United States
withholding tax under an applicable statute or tax treaty shall provide to
Borrower and Agent a properly completed and executed IRS Form 4224 or Form 1001
or other applicable form, certificate or document prescribed by the IRS or the
United States certifying as to such Foreign Lender's entitlement to such
exemption (a "Certificate of Exemption"). Any foreign Person that seeks to
become a Lender under this Agreement shall provide a Certificate of Exemption to
Borrower and Agent prior to becoming a Lender hereunder. No foreign Person may
become a Lender hereunder if such Person fails to deliver a
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Certificate of Exemption. Borrower shall not be liable for any taxes owing by a
foreign Lender because such Lender failed to file the appropriate form with the
IRS.
1.15. Single Loan. All of the Obligations of Borrower arising
under this Agreement and the other Loan Documents shall constitute one general
obligation of Borrower secured, until the Termination Date, by all of the
Collateral.
1.16. Servicer not an Obligor. Servicer shall have no duty to
pay any of the Obligations, except that it shall have a duty to turn over to
Borrower proceeds of all Collateral received by it. Each Lender acknowledges
that it is relying solely on the Borrower and the Collateral for repayment of
the Revolving Credit Advances and not on the creditworthiness of The Credit
Store, Inc., except for its obligations as Servicer hereunder and its
obligations under the Account Purchase Agreement to repurchase certain Accounts
in the event of certain breaches of representations and warranties therein.
2. CONDITIONS PRECEDENT
2.1. Conditions to the Initial Loans. No Lender shall be
obligated to make any Revolving Credit Advance on the Closing Date, or to take,
fulfill, or perform any other action hereunder, until the following conditions
have been satisfied or provided for in a manner satisfactory to Agent, or waived
in writing by Agent and Lenders:
(a) Credit Agreement; Loan Documents. This Agreement or
counterparts hereof shall have been duly executed by, and delivered to,
Borrower, Servicer, Agent and Lenders; and Agent shall have received such
documents, instruments, agreements and legal opinions as Agent shall reasonably
request in connection with the transactions contemplated by this Agreement and
the other Loan Documents, including all those listed in the Closing Checklist
attached hereto as Annex D, each in form and substance satisfactory to Agent.
(b) Bankruptcy Remote. Borrower shall have been incorporated
as a bankruptcy remote Subsidiary of Servicer with such board composition,
charter provisions, and other safeguards as Agent may reasonably request.
(c) Capital Contribution to Borrower. After giving effect to
the initial Revolving Credit Advance, Borrower shall have stockholder's equity
equal to at least 43% of the initial Revolving Credit Advance.
(d) Forward Purchase Agreement. Borrower shall have delivered
to Agent one or more Forward Purchase Agreements in form and substance and with
purchasers reasonably satisfactory to Agent, covering Eligible Accounts with a
value equal to or greater than the Borrowing Base on the Closing Date.
(e) Approvals. Agent shall have received (i) satisfactory
evidence that each of Borrower and Servicer have obtained all required consents
and approvals of all Persons including all requisite Governmental Authorities,
to the execution, delivery and performance of this Agreement and the other Loan
Documents and the Related Transaction Documents to which each
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is a party and the consummation of the Related Transactions or (ii) an officer's
certificate in form and substance satisfactory to Agent affirming that no such
consents or approvals are required.
(f) Opening Availability. The Eligible Accounts supporting the
initial Revolving Credit Advance shall be sufficient in value, as determined by
Agent, to provide Borrower with Net Borrowing Availability, after giving effect
to the initial Revolving Credit Advance, and the consummation of the Related
Transactions (on a pro forma basis, with expenses and liabilities being paid in
the ordinary course of business) of at least $1.00.
(g) Payment of Fees. Borrower shall have paid the Fees
required to be paid on the Closing Date in the respective amounts specified in
Section 1.8 and shall have reimbursed Agent for all fees, costs and expenses of
closing presented as of the Closing Date.
(h) Capital Structure. The capital structure of Borrower shall
be acceptable to Agent in its sole discretion.
(i) Consummation of Related Transactions. Agent shall have
received fully executed copies of the other Related Transactions Documents, each
of which shall be in form and substance satisfactory to Agent and its counsel.
The Related Transactions shall have been consummated in accordance with the
terms of the Related Transactions Documents.
2.2. Further Conditions to Each Revolving Loan. Except as
otherwise expressly provided herein, no Lender shall be obligated to fund any
Revolving Credit Advance:
(a) if, as of the date thereof:
(i) any representation or warranty by Borrower or
Servicer contained herein or in any of the other Loan Documents is
untrue or incorrect as of such date, except to the extent that such
representation or warranty expressly relates to an earlier date and
except for changes therein expressly permitted or expressly
contemplated by this Agreement and Agent or Requisite Lenders have
determined not to make such Revolving Credit Advance as a result of the
fact that such warranty or representation is untrue or incorrect;
(ii) any event or circumstance having a Material
Adverse Effect has occurred since the date hereof as determined by the
Requisite Lenders and Agent or Requisite Lenders have determined not to
make any Revolving Credit Advance as a result of the fact that such
event or circumstance has occurred;
(iii) any Default or Event of Default has occurred
and is continuing or would result after giving effect to any Revolving
Credit Advance, and Agent or Requisite Lenders shall have determined
not to make any Revolving Credit Advance as a result of that Default or
Event of Default; or
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(iv) after giving effect to any Revolving Credit
Advance the outstanding principal amount of the Revolving Loan would
exceed the lesser of the Borrowing Base and the Maximum Amount; and
(b) if such Revolving Purchase Advance is to be used to
purchase Accounts, unless Agent shall have received and approved at least five
(5) Business Days prior to the date thereof:
(i) the applicable Account Purchase Agreement(s);
(ii) a collateral assignment of Borrower's rights
under the applicable Account Purchase Agreements;
(iii) if necessary, one or more Forward Purchase
Agreements which, together with the outstanding Forward Purchase
Agreements previously delivered to Agent, cover aggregate Eligible
Accounts in an amount equal to the Borrowing Base on such date (taking
into account the Liquidation Values of the Eligible Accounts in the
Borrowing Base after giving pro forma effect to such purchase) or, if
Borrower's Forward Purchase Agreements relate to specific batches of
Accounts, Borrower shall deliver to Agent a Forward Purchase Agreement
that covers the Liquidation Values of the Accounts being added to the
Borrowing Base as a result of that purchase, multiplied by .70 (or, at
Agent's option, the purchase prices in the subject Forward Purchase
Agreement);
(iv) a collateral assignment of Borrower's rights
under each Forward Purchase Agreement referred to in clause (iii)
substantially in the form of Exhibit A-2 hereto;
(v) Lien searches with respect to the Accounts to
be purchased, if reasonably requested by Agent;
(vi) UCC-1's evidencing the sale of the "accounts",
as such term is defined in the Code, to be purchased; and
(vii) such other documents as Agent may reasonably
request regarding the Accounts to be purchased.
The request and acceptance by Borrower of the proceeds of any Revolving Credit
Advance, as the case may be, shall be deemed to constitute, as of the date of
such request, acceptance or incurrence, (i) a representation and warranty by
Borrower that the conditions in this Section 2.2 have been satisfied and (ii) a
reaffirmation by Borrower of the granting and continuance of Agent's Liens, on
behalf of itself and Lenders, pursuant to the Collateral Documents.
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3. REPRESENTATIONS AND WARRANTIES
To induce Lenders to make Revolving Credit Advances, Borrower
and Servicer (each as to itself only) make the following respective
representations and warranties to Agent and each Lender, each and all of which
shall survive the execution and delivery of this Agreement.
3.1. Corporate Existence; Compliance with Law. Each of
Borrower and Servicer (a) is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation; (b) is
duly qualified to conduct business and is in good standing in each other
jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification, except where the failure to be so
qualified would not result in exposure to losses, damages or liabilities in
excess of $50,000 with respect to Borrower or would not result in a Material
Adverse Effect with respect to Servicer; (c) has the requisite corporate power
and authority and the legal right to own, pledge, mortgage or otherwise encumber
and operate its properties, to lease the property it operates under lease and to
conduct its business as now, heretofore and proposed to be conducted; (d) has
all licenses, permits, consents or approvals from or by, and has made all
filings with, and has given all notices to, all Governmental Authorities having
jurisdiction, to the extent required for such ownership, operation and conduct,
except where the failure to do so would not result in exposure to losses,
damages or liabilities in excess of $50,000 with respect to Borrower or would
not result in a Material Adverse Effect with respect to Servicer; (e) is in
compliance with its charter and bylaws; and (f) subject to specific
representations set forth herein regarding Credit Collection Laws, tax and other
laws, is in compliance with all applicable provisions of law, except where the
failure to comply, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect.
3.2. Executive Offices, Collateral Locations, FEIN. As of the
Closing Date, the current location of Borrower's chief executive office and the
place where records with respect to the Collateral is located at 3401 North
Louise Avenue, Suite 104, Sioux Falls, South Dakota 57107, and such location has
not changed within the twelve (12) months preceding the Closing Date. The
federal employer identification number of Borrower is 52-2183551.
3.3. Corporate Power, Authorization, Enforceable Obligations.
The execution, delivery and performance by each of Borrower and Servicer of the
Loan Documents to which it is a party and the creation of all Liens provided for
therein: (a) are within such Person's corporate power; (b) have been duly
authorized by all necessary or proper corporate and shareholder action; (c) do
not contravene any provision of such Person's charter or bylaws; (d) do not
violate any law or regulation, or any order or decree of any court or
Governmental Authority; (e) do not result in the breach or termination of,
constitute a default under or accelerate or permit the acceleration of any
performance required by, any indenture, mortgage, deed of trust, lease,
agreement or other instrument to which such Person is a party or by which such
Person or any of its property is bound; (f) do not result in the creation or
imposition of any Lien upon any of the property of such Person other than those
in favor of Agent, on behalf of itself and Lenders, pursuant to the Loan
Documents; and (g) do not require the consent or approval of any Governmental
Authority or any other Person, except those referred to in
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Section 2.1(e), all of which will have been duly obtained, made or complied with
prior to the Closing Date. On or prior to the Closing Date, each of the Loan
Documents shall have been duly executed and delivered by Borrower and Servicer
to the extent that each is a party thereto and each such Loan Document shall
then constitute a legal, valid and binding obligation of Borrower and/or
Servicer, as the case may be, enforceable against it in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other similar laws now or hereafter
in effect affecting the enforcement of creditors' rights in general and by
general principles of equity.
3.4. Financial Statements and Projections. Except for the
Projections, all Financial Statements concerning Servicer and Borrower that are
referred to below have been prepared in accordance with GAAP consistently
applied throughout the periods covered (except as disclosed therein and except,
with respect to unaudited Financial Statements, for the absence of footnotes and
normal year-end audit adjustments) and present fairly in all material respects
the financial position of the Persons covered thereby as at the dates thereof
and the results of their operations and cash flows for the periods then ended.
(a) The following Financial Statements have been delivered on
or before the date hereof:
(i) The audited consolidated balance sheets at May
31, 1997 and 1998 and the related statements of income and cash flows
of Servicer and its Subsidiaries for the Fiscal Years then ended,
certified by Grant Thornton, LLP.
(ii) The unaudited balance sheet(s) at May 31, 1999
and the related statement(s) of income and cash flows of Servicer and
its Subsidiaries for the twelve months then ended.
(b) Pro Formas. The Pro Formas delivered on or before the date
hereof were prepared by Servicer giving pro forma effect to the Related
Transactions, and were prepared in accordance with GAAP, with only such
adjustments thereto as would be required in accordance with GAAP.
(c) Projections. The Projections delivered on or before the
date hereof have been prepared by Servicer with respect to Borrower and reflect
projections for the three-year period beginning on July 1, 1999 on a
month-by-month basis for the first year and on a year-by-year basis thereafter.
The Projections are based upon estimates and assumptions stated therein, all of
which Servicer believes to be reasonable and fair in light of current conditions
and current facts known to Servicer and, as of the Closing Date, reflect
Servicer's good faith and reasonable estimates of the future financial
performance of Borrower.
3.5. Material Adverse Effect.
(a) Between May 31, 1998 and the Closing Date, (i) neither
Borrower nor Servicer has incurred any obligations, contingent or noncontingent
liabilities, liabilities for
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Charges, long-term leases or unusual forward or long-term commitments that are
not reflected in the Pro Forma and that , alone or in the aggregate, could
reasonably be expected to have a Material Adverse Effect, (ii) no contract,
lease or other agreement or instrument has been entered into by Borrower or
Servicer or has become binding upon the assets of Borrower or Servicer and no
law or regulation applicable to Borrower or Servicer has been adopted, in each
case, that has had or could reasonably be expected to have a Material Adverse
Effect, and (iii) neither Borrower nor Servicer is in default and to the best
knowledge of each of Borrower and Servicer, no third party is in default under
any material contract, lease or other agreement or instrument, that alone or in
the aggregate could reasonably be expected to have a Material Adverse Effect.
Between January 1, 1999 and the Closing Date no event has occurred, that alone
or together with other events, could reasonably be expected to have a Material
Adverse Effect.
(b) As of the Closing and after giving effect to the Related
Transactions, Borrower is a newly-formed corporation that has no Guaranteed
Indebtedness, no Indebtedness except for the Obligations, no contractual
liabilities except for liabilities under this Agreement, the Account Purchase
Agreement and the Converted Accounts Sale Agreement, and liabilities as a seller
under Forward Purchase Agreements, no employees, and no assets except for
Accounts.
3.6. Ownership of Property; Liens. Borrower owns no real
estate. None of the assets of Borrower are subject to any Liens other than
pursuant to the Security Agreement. Borrower has received all assignments,
waivers, consents, nondisturbance and attornment or similar agreements, bills of
sale and other documents, and has duly effected all recordings, filings and
other actions necessary to establish, protect and perfect its right, title and
interest in and to its assets.
3.7. Labor Matters. As of the Closing Date (a) no strikes or
other material labor disputes against Servicer are pending or, to Servicer's
knowledge, threatened; (b) except as described on Disclosure Schedule (3.7),
Servicer is not a party to or bound by any collective bargaining agreement,
management agreement, material consulting agreement or material employment
agreement; (c) there is no organizing activity involving Servicer pending or, to
Servicer's knowledge, threatened by any labor union or group of employees; (d)
there are no representation proceedings pending or, to Servicer's knowledge,
threatened with the National Labor Relations Board, and no labor organization or
group of employees of any Servicer has made a pending demand for recognition;
and (e) there are no complaints or charges against Servicer pending or, to the
knowledge of Servicer, threatened to be filed with any Governmental Authority or
arbitrator based on, arising out of, in connection with, or otherwise relating
to the employment or termination of employment by Servicer of any individual
that are reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect.
3.8. Ventures, Subsidiaries and Affiliates; Outstanding Stock
and Indebtedness. Borrower has no Subsidiaries. All of the issued and
outstanding Stock of Borrower is owned by Servicer.
3.9. Government Regulation. Neither Company is an "investment
company" or an "affiliated person" of, or "promoter" or "principal underwriter"
for, an
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"investment company," as such terms are defined in the Investment Company Act of
1940. Neither Borrower nor Servicer is subject to regulation under the Public
Utility Holding Company Act of 1935, the Federal Power Act, or any other federal
or state statute that restricts or limits its ability to incur Indebtedness or
to perform its obligations hereunder. The making of the Revolving Loan by
Lenders to Borrower, the application of the proceeds thereof and repayment
thereof and the consummation of the Related Transactions will not violate any
provision of any such statute or any rule, regulation or order issued by the
Securities and Exchange Commission.
3.10. Margin Regulations. Borrower is not engaged, nor will it
engage, principally or as one of its important activities, in the business of
extending credit for the purpose of "purchasing" or "carrying" any "margin
stock" as such terms are defined in Regulation U of the Federal Reserve Board as
now and from time to time hereafter in effect (such securities being referred to
herein as "Margin Stock"). Borrower does not own any Margin Stock, and none of
the proceeds of the Revolving Loan or other extensions of credit under this
Agreement will be used, directly or indirectly, for the purpose of purchasing or
carrying any Margin Stock, for the purpose of reducing or retiring any
Indebtedness that was originally incurred to purchase or carry any Margin Stock
or for any other purpose that might cause the Revolving Loan or other extensions
of credit under this Agreement to be considered a "purpose credit" within the
meaning of Regulations T, U or X of the Federal Reserve Board. Borrower will not
take or permit to be taken any action that might cause any Loan Document to
violate any regulation of the Federal Reserve Board.
3.11. Taxes. All tax returns, reports and statements,
including information returns, required by any Governmental Authority to be
filed by Borrower or Servicer after any permitted extensions have been filed
with the appropriate Governmental Authority and all Charges have been paid prior
to the date on which any fine, penalty, interest or late charge may be added
thereto for nonpayment thereof (or any such fine, penalty, interest, late charge
or loss has been paid). Disclosure Schedule (3.11) sets forth as of the Closing
Date those taxable years for which the tax returns of Borrower or Servicer are
currently being audited by the IRS or any other applicable Governmental
Authority and any assessments or threatened assessments in connection with such
audit, or otherwise currently outstanding. Except as described in Disclosure
Schedule (3.11), as of the Closing Date neither Borrower nor Servicer has
executed or filed with the IRS or any other Governmental Authority any agreement
or other document extending, or having the effect of extending, the period for
assessment or collection of any Charges. As of the Closing Date, neither
Borrower nor Servicer has agreed or been requested to make any adjustment under
IRC Section 481(a), by reason of a change in accounting method or otherwise,
which would have a Material Adverse Effect. As of the Closing Date, Servicer
owes no federal income taxes or employee withholding payments other than accrued
taxes or payments not yet due and payable.
3.12. ERISA.
(a) Borrower has no Plans. Each Plan maintained by Servicer or
any ERISA Affiliate is in compliance with the applicable provisions of ERISA and
the IRC. Neither Servicer nor any ERISA Affiliate has engaged in a "prohibited
transaction," as defined in Section
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4975 of the IRC or Section 406 of ERISA, in connection with any Plan, that would
subject Borrower or Servicer to a material tax on prohibited transactions
imposed by Section 4975 of the IRC.
(b) (i) Neither Servicer nor any ERISA Affiliate sponsors,
maintains or has any Obligation to contribute to a Title IV Plan, an ESOP or a
Retiree Welfare Plan; (ii) there are no pending, or to the knowledge of
Servicer, threatened claims (other than claims for benefits in the normal
course), sanctions, actions or lawsuits, asserted or instituted against any Plan
or any Person as fiduciary or sponsor of any Plan; (iii) neither Servicer nor
any ERISA Affiliate has incurred or reasonably expects to incur any liability as
a result of a complete or partial withdrawal from a Multiemployer Plan; (iv)
within the last five years no Title IV Plan of Borrower, Servicer or any ERISA
Affiliate has been terminated nor has any such Plan with Unfunded Pension
Liabilities been transferred outside of the "controlled group" (within the
meaning of Section 4001(a)(14) of ERISA) of Servicer or any ERISA Affiliate and
(v) Stock of Servicer and its ERISA Affiliates makes up, in the aggregate, no
more than 10% of fair market value of the assets of any Plan.
3.13. No Litigation. No action, claim, lawsuit, demand,
investigation or proceeding is now pending or, to the knowledge of either
Borrower or Servicer, threatened against either Borrower or Servicer, before any
Governmental Authority or before any arbitrator or panel of arbitrators
(collectively, "Litigation"), that challenges either Borrower's or Servicer's
right or power to enter into or perform any of its obligations under the Loan
Documents to which it is a party, or the validity or enforceability of any Loan
Document or any action taken thereunder. As of the Closing Date, there is no
Litigation pending or threatened that asserts that Servicer has violated or is
violating any Credit Collection Law, except as set forth on Schedule 3.13.
Except as set forth on Schedule 3.13, as of the Closing Date there is no
Litigation pending or threatened that seeks damages in excess of $100,000 or
injunctive relief against, or alleges criminal misconduct of Servicer. As of the
Closing Date there is no Litigation pending or threatened with respect to
Borrower.
3.14. Brokers. No broker or finder acting on behalf of
Borrower or Servicer or any Affiliate thereof brought about the obtaining,
making or closing of the Revolving Loan or the Related Transactions, and none of
Borrower, Servicer or any Affiliate thereof has any obligation to any Person in
respect of any finder's or brokerage fees in connection therewith.
3.15. Intellectual Property. As of the Closing Date, Servicer
owns or has rights to use all Intellectual Property necessary to continue to
conduct its business as now or heretofore conducted by it or proposed to be
conducted by it.
3.16. Full Disclosure. No information contained in this
Agreement, any of the other Loan Documents, any Projections, Financial
Statements or Collateral Reports or other reports from time to time delivered
hereunder or any written statement furnished by or on behalf of Borrower or
Servicer to Agent or any Lender pursuant to the terms of this Agreement contains
or will contain any untrue statement of a material fact or omits or will omit to
state a material fact necessary to make the statements contained herein or
therein not misleading in light
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of the circumstances under which they were made. The Liens granted to Agent, on
behalf of itself and Lenders, pursuant to the Collateral Documents will at all
times be fully perfected first priority Liens in and to the Collateral described
therein (except for Instruments not in the possession of Borrower and, hence,
not in the possession of Agent and except for failure to have a first priority
Lien with respect to Chattel Paper as a result of (i) inadvertent error by the
seller of such Chattel Paper or (ii) fraud by such seller).
3.17. Environmental Matters. Neither Borrower nor Servicer has
any Environmental Liabilities and both Borrower and Servicer are in compliance
with all Environmental Laws.
3.18. Insurance. Disclosure Schedule (3.18) lists all
insurance policies of any nature maintained, as of the Closing Date, for current
occurrences by each of Borrower and Servicer.
3.19. Deposit and Disbursement AccountsBorrower maintains no
deposit or disbursement accounts as of the Closing Date, including any
Disbursement Accounts, other than those described in Annex C.
3.20. Agreements and Other Documents. As of the Closing Date,
Borrower has provided to Agent or its counsel, on behalf of Lenders, accurate
and complete copies of all of the following agreements or documents to which it
is subject: Account Purchase Agreements, Converted Accounts Sale Agreements and
Forward Purchase Agreements.
3.21. Solvency. Both before and after giving effect to (a) the
Revolving Credit Advances to be made or incurred on the Closing Date, (b) the
disbursement of the proceeds of such Revolving Credit Advances pursuant to the
instructions of Borrower, (c) the consummation of the other Related Transactions
and (d) the payment and accrual of all transaction costs in connection with the
foregoing, each of Borrower and Servicer is and will be Solvent.
3.22. Year 2000 Representations. Servicer has eliminated all
Year 2000 Problems, except where the failure to correct the same could not
reasonably be expected to have a Material Adverse Effect, individually or in the
aggregate.
4. FINANCIAL STATEMENTS AND INFORMATION
4.1. Reports and Notices.
(a) Each of Borrower and Servicer hereby agrees that from and
after the Closing Date and until the Termination Date, it shall deliver to Agent
or to Agent and Lenders, as required, the Financial Statements, notices,
Projections and other information at the times, to the Persons and in the manner
set forth in Annex E.
(b) Each of Borrower and Servicer hereby agrees that from and
after the Closing Date and until the Termination Date, it shall deliver to Agent
or to Agent and Lenders,
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as required, the various Collateral Reports (including
Borrowing Base Certificates in the form of Exhibit 4.1(b)) at the times, to the
Persons and in the manner set forth in Annex F.
4.2. Communication with Accountants. Each of Borrower and
Servicer authorizes Agent and, so long as a Default or Event of Default has
occurred and is continuing, each Lender, upon one (1) Business Day's notice to
Servicer, to communicate directly with its independent certified public
accountants, including Grant Thornton, LLP, and authorizes and at Agent's
request shall instruct those accountants and advisors to disclose and make
available to Agent and each Lender any and all Financial Statements and other
supporting financial documents, schedules and information relating to Borrower
or Servicer (including copies of any issued management letters) with respect to
the business, financial condition and other affairs thereof.
5. AFFIRMATIVE COVENANTS
Each of Borrower and Servicer agrees as to itself that from
and after the date hereof and until the Termination Date:
5.1. Maintenance of Existence and Conduct of Business. Each of
Borrower and Servicer shall do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence and its
rights and franchises; continue to conduct its business substantially as now
conducted or as otherwise permitted hereunder; at all times maintain, preserve
and protect all of its assets and properties used or useful in the conduct of
its business. Borrower shall and transact business only in its corporate name.
5.2. Payment of Obligations.
(a) Each of Borrower and Servicer shall pay and discharge or
cause to be paid and discharged promptly all Charges payable by it, including
Charges imposed upon it, its income and profits, or any of its property (real,
personal or mixed) and all Charges with respect to tax, social security and
unemployment withholding with respect to its employees.
(b) Borrower and Servicer may in good faith contest, by
appropriate proceedings, the validity or amount of any Charges or claims
described in Section 5.2(a); provided, that (i) adequate reserves with respect
to such contest are maintained on the books of Borrower or Servicer, as the case
may be, in accordance with GAAP; (ii) no Lien shall be imposed to secure payment
of such Charges and such contest is maintained and prosecuted continuously and
with diligence and operates to suspend collection or enforcement of such
Charges, (iii) none of the Collateral becomes subject to forfeiture or loss as a
result of such contest, (iv) if such contest is terminated or discontinued
adversely to Borrower or Servicer, as the case may be, or the conditions set
forth in this Section 5.2(b) are no longer met, Borrower or Servicer, as the
case may be, shall promptly pay or discharge such contested Charges or claims
and all additional charges, interest, penalties and expenses, if any, and shall
deliver to Agent evidence acceptable to Agent of such compliance, payment or
discharge, and (v) Agent has not
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advised Borrower in writing that Agent reasonably believes that nonpayment or
nondischarge thereof could have or result in a Material Adverse Effect.
5.3. Books and Records. Each of Borrower and Servicer shall
keep adequate books and records with respect to its business activities in which
proper entries, reflecting all financial transactions, are made in accordance
with GAAP and on a basis consistent with the Financial Statements attached as
delivered pursuant to Section 3.4(a).
5.4. Insurance; Damage to or Destruction of Collateral.
(a) Servicer shall, at its sole cost and expense, maintain the
policies of insurance described on Disclosure Schedule (5.4(a)) as in effect on
the date hereof or otherwise in form and amounts and with insurers acceptable to
Agent, unless Agent shall otherwise consent, which consent shall not be
unreasonably withheld. If Servicer at any time or times hereafter shall fail to
obtain or maintain any of the policies of insurance required above or to pay all
premiums relating thereto, Agent may at any time or times thereafter obtain and
maintain such policies of insurance and pay such premiums and take any other
action with respect thereto that Agent deems advisable. Agent shall have no
obligation to obtain insurance for Servicer or pay any premiums therefor. By
doing so, Agent shall not be deemed to have waived any Default or Event of
Default arising from Servicer's failure to maintain such insurance or pay any
premiums therefor. All sums so disbursed, including attorneys' fees, court costs
and other charges related thereto, shall be deducted from Servicing Fees owing
to Servicer.
(b) Servicer shall deliver to Agent, in form and substance
satisfactory to Agent, endorsements to Servicer's general liability and
automobile insurance policies naming Borrower and Agent, on behalf of itself and
Lenders, as additional insureds. In addition, Borrower shall be named as an
additional insured on all of Servicer's other liability policies.
5.5. Compliance with Laws. Each of Borrower and Servicer shall
comply in all material respects with all federal, state and local laws and
regulations applicable to it, including Credit Collections Laws.
5.6. Supplemental Disclosure. From time to time as may be
requested by Agent (which request will not be made more frequently than once
each year absent the occurrence and continuance of a Default or an Event of
Default), Borrower and Servicer shall supplement each Disclosure Schedule
hereto, or any representation herein or in any other Loan Document, with respect
to any matter hereafter arising that, if existing or occurring at the date of
this Agreement, would have been required to be set forth or described in such
Disclosure Schedule or as an exception to such representation or that is
necessary to correct any information in such Disclosure Schedule or
representation which has been rendered inaccurate thereby (and, in the case of
any supplements to any Disclosure Schedule, such Disclosure Schedule shall be
appropriately marked to show the changes made therein); provided that (a) no
such supplement to any such Disclosure Schedule or representation shall be or be
deemed a waiver of any Default or Event of Default resulting from the matters
disclosed therein, except as consented to by Agent
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and Requisite Lenders in writing; and (b) no supplement shall be required or
permitted as to representations and warranties that relate solely to the Closing
Date.
5.7. Intentionally Omitted.
5.8. Composition of the Borrower's Board. At least one member
of the Borrower's board of directors will be an individual who satisfies the
independent director eligibility requirements set forth in the Borrower's
certificate of incorporation; provided that, if such Person dies or resigns,
such position may remain vacant for up to thirty (30) days after the date of
such resignation or death. No such individual will be a direct, indirect or
beneficial stockholder, officer, director, employee, Affiliate, associate,
customer, or supplier of Servicer. No such director shall at any time serve as a
trustee in bankruptcy for Servicer.
5.9. Compensation of Employees, Agents, and Consultants;
Limitation on Agency. Any employee, consultant, director, or agent of Borrower
will be compensated from the Borrower's own bank accounts for services provided
to Borrower. Unless and until Servicer is terminated in accordance with Annex B
hereto, Borrower will engage no agents other than Servicer to service the
Accounts and to provide employees and organizational services. Servicer will be
fully compensated for its services to the Borrower by payment of fees set forth
in Annex B hereto.
5.10. Servicing; Fees. Subject to the terms of Annex B hereto,
Borrower is contracting with Servicer in this Agreement to perform all
operations required on a daily basis to service the Accounts. Borrower will pay
Servicer a monthly Servicing Fee as specified in Annex B to this Agreement.
Borrower will not incur any material indirect or overhead expenses for items
shared between Borrower and Servicer which are not reflected in documented
service or administration fees reasonably acceptable to Agent. To the extent, if
any, Borrower and Servicer share items of expenses not reflected in its
respective servicing or management fees (including, without limiting, legal,
auditing, and other professional services), such expenses will be allocated to
the extent practical on the basis of actual use of the services rendered, and
otherwise on a basis reasonably related to actual use or value of services
rendered.
5.11. Expenses. With the exception of start-up expenses,
Borrower's operating expenses will not be paid by Servicer.
5.12. Mailing Address. Borrower will have its own separate
mailing address, as provided in Annex I, and its own stationery.
5.13. Books and Records. Borrower's books and records and bank
accounts will be maintained separately from those of Servicer.
5.14. Financial Statements. Any financial statements of
Servicer which are consolidated to include Borrower shall contain detailed notes
clearly stating that Borrower is a separate legal entity with its own separate
creditors which will be entitled to be satisfied out of Borrower's assets prior
to any value in Borrower becoming available to Borrower's stockholders.
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5.15. Holding of Funds and Assets. The assets of Borrower will
be maintained in a manner that ensures their identification and segregation from
those of Servicer. Funds or other assets of Borrower will not be commingled with
those of Servicer. Borrower shall not maintain joint bank accounts or other
depository accounts to which Servicer (other than in its capacity as Servicer in
the exercise of its servicing responsibilities) has independent access. No funds
of Borrower will at any time be pooled with any funds of Servicer.
5.16. Insurance. Borrower shall not, directly or indirectly,
be named, or shall enter into any agreement to be named, as a direct or
contingent beneficiary or loss payee on any insurance policy covering the
property of Servicer, except as an additional insured on liability policies of
the Servicer.
5.17. Separate Legal Entities. Borrower acknowledges that all
the parties entering into this Agreement and any related documents do so in
reliance on the Borrower's identity as a legal entity separate from Servicer.
5.18. Arm's Length Relationships. Borrower will maintain arm's
length relationships with Servicer and its Affiliates. Neither Borrower nor the
Servicer or its Affiliates will be or will hold itself out to be responsible for
the debts of the other or the decisions or actions relating to the daily
business and affairs of the other.
5.19. Servicing Arrangement. So long as any Obligations are
outstanding and the Servicing Arrangement has not been terminated, Borrower and
Servicer shall comply with the terms of the Servicing Arrangement as set forth
on Annex B hereto. Agent is entitled to terminate the Servicing Arrangement in
accordance with Annex B.
5.20. Further Assurances. Each of Borrower and Servicer agrees
that it shall, at its own expense and upon request of Agent, duly execute and
deliver, or cause to be duly executed and delivered, to Agent such further
instruments and do and cause to be done such further acts as may be necessary or
proper in the reasonable opinion of Agent to carry out more effectively the
provisions and purposes of this Agreement or any other Loan Document.
6. NEGATIVE COVENANTS
Each of Borrower and Servicer agrees as to itself that,
without the prior written consent of Agent and the Requisite Lenders, from and
after the date hereof until the Termination Date:
6.1. Mergers, Subsidiaries, Etc. Borrower shall not, directly
or indirectly, by operation of law or otherwise, form or acquire any Subsidiary.
Neither Borrower nor Servicer shall, directly or indirectly, by operation of law
or otherwise, merge with, consolidate with, acquire all or substantially all of
the assets or Stock of, or otherwise combine with or acquire, any Person.
6.2. Investments; Loans and Revolving Credit Advances. Except
as otherwise expressly permitted by this Section 6, Borrower shall not make or
permit to exist any investment in, or make, accrue or permit to exist loans or
advances of money to, any
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Person, through the direct or indirect lending of money, holding of securities
or otherwise, except that Borrower may hold investments consisting of Accounts.
Notwithstanding the foregoing, so long as no Default or Event of Default has
occurred and is continuing, Borrower may make investments, subject to Control
Letters in favor of Agent for the benefit of Lenders or otherwise subject to a
perfected security interest in favor of Agent for the benefit of Lenders, in (i)
marketable direct obligations issued or unconditionally guaranteed by the United
States of America or any agency thereof maturing within one year from the date
of acquisition thereof, (ii) commercial paper maturing no more than one year
from the date of creation thereof and currently having the highest rating
obtainable from either Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., (iii) certificates of deposit maturing no more than one year from
the date of creation thereof issued by commercial banks incorporated under the
laws of the United States of America, each having combined capital, surplus and
undivided profits of not less than $300,000,000 and having a senior unsecured
rating of "A" or better by a nationally recognized rating agency (an "A Rated
Bank"), (iv) time deposits maturing no more than 30 days from the date of
creation thereof with A Rated Banks and (v) mutual funds that invest solely in
one or more of the investments described in clauses (i) through (iv) above.
6.3. Indebtedness. Borrower shall not create, incur, assume or
permit to exist any Indebtedness, except the Obligations and the Seller Note.
6.4. Affiliate Transactions.
(a) Borrower shall not enter into or be a party to any
transaction with Servicer or any Affiliate thereof except for the Related
Transactions and the Seller Note or in the ordinary course of and pursuant to
the reasonable requirements of Borrower's business and upon fair and reasonable
terms that are no less favorable to Borrower than would be obtained in a
comparable arm's length transaction with a Person not an Affiliate of Borrower.
(b) Borrower shall purchase Accounts from Servicer at a price
not in excess of the lesser of (i) the fair market value thereof or (ii) the
price paid by Servicer for such Accounts.
6.5. Capital Structure and Business. Borrower shall not (a)
make any changes in any of its business objectives, purposes or operations that
could in any way adversely affect the repayment of the Revolving Loan or any of
the other Obligations or could reasonably be expected to have or result in a
Material Adverse Effect, (b) make any change in its capital structure as
described in Section 3.8, including the issuance of any shares of Stock,
warrants or other securities convertible into Stock or any revision of the terms
of its outstanding Stock; (c) amend its charter or bylaws in a manner that would
adversely affect Agent or Lenders; or (d) engage in any business other than the
business of purchasing, holding and selling Accounts.
6.6. Guaranteed Indebtedness and Contractual Liabilities.
Borrower shall not create, incur, assume or permit to exist any Guaranteed
Indebtedness except by endorsement of instruments or items of payment for
deposit to the general account of Borrower. Borrower shall not incur any
contractual liabilities except liabilities under this Agreement, the
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Account Purchase Agreements, the Converted Accounts Sale Agreements and the
Forward Purchase Agreements.
6.7. Liens. Borrower shall not create, incur, assume or permit
to exist any Lien on or with respect to its Accounts or any of its other
properties or assets (whether now owned or hereafter acquired) other than the
Lien in favor of the Agents pursuant to the Collateral Documents.
6.8. Sale of Assets. Borrower shall not sell, transfer,
convey, assign or otherwise dispose of any of its assets, other than:
(a) the sale of Converted Accounts for cash pursuant to the
Converted Accounts Sale Agreement when and as Eligible Accounts become Converted
Accounts; provided that (i) the sale price shall equal or exceed 1.5% of the
Face Amount of the Converted Accounts sold to Servicer and (ii) Servicer shall
pay for those Converted Accounts not less frequently than once each month or
when the aggregate unpaid purchase price for Converted Accounts equals $250,000
(or greater) or more frequently when requested by Agent; and
(b) the sale of Accounts that are not Converted Accounts to
Servicer with the prior written consent of Agent or to a Person other than
Servicer, in each case for cash at a price equal to the applicable Liquidation
Value thereof.
6.9. Purchases of Assets. Borrower shall not purchase any
assets, except for purchases of Unconverted Accounts.
6.10. ERISA. Borrower shall not incur any liabilities under
ERISA or the IRC with respect to any Plan. Servicer shall indemnify and hold
Borrower harmless from any liabilities under ERISA or the IRC with respect to
any Plan of Servicer (or its Subsidiaries other than Borrower).
6.11. Financial Covenants. Borrower shall not breach or fail
to comply with any of the Financial Covenants set forth in Annex G.
6.12. Restricted Payments. Borrower shall not make any
Restricted Payments, except payments permitted by the Administration Agreement
and dividends to Servicer in its capacity as the sole stockholder of Borrower,
so long as (i) no Event of Default has occurred and is continuing or would
result after giving effect thereto, and (ii) Borrower has Borrowing Availability
of at least $1,000,000 after giving effect thereto.
6.13. Change of Corporate Name or Location; Change of Fiscal
Year. Neither Borrower nor Servicer shall (a) change its corporate name, or (b)
change its chief executive office, principal place of business, corporate
offices or locations at which Collateral is held or stored, or the location of
its records concerning the Collateral, in each case without at least thirty (30)
days prior written notice to Agent and after Agent's written acknowledgment that
any reasonable action requested by Agent in connection therewith, including to
continue the perfection of any Liens in favor of Agent, on behalf of Lenders, in
any Collateral, has been
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completed or taken, and provided that any such new location shall be in the
continental United States of America. Without limiting the generality of the
foregoing, neither Borrower nor Servicer shall change its name, identity or
corporate structure in any manner that might make any financing or continuation
statement filed in connection herewith seriously misleading within the meaning
of Section 9-402(7) of the Code or any other then applicable provision of the
Code except upon prior written notice to Agent and Lenders and after Agent's
written acknowledgment that any reasonable action requested by Agent in
connection therewith, including to continue the perfection of any Liens in favor
of Agent, on behalf of Lenders, in any Collateral, has been completed or taken.
Neither Borrower nor Servicer shall change its Fiscal Year.
6.14. No Speculative Transactions. Borrower shall not engage
in any transaction involving commodity options, futures contracts or similar
transactions, except interest swaps, caps or collars.
6.15. Leases. Borrower shall not enter into any lease of real
estate or equipment other than a sublease from Servicer for office space.
6.16. Changes Relating to Other Key Agreements. Following the
approval thereof by Agent, Borrower shall not change or amend the terms of any
Account Purchase Agreement, the Converted Accounts Sale Agreement or any Forward
Purchase Agreement without the prior written consent of Agent; provided that
with respect to such agreements with parties other than Servicer, such consent
shall not be unreasonably withheld.
6.17. Sale Characterization. Neither Servicer nor Borrower
shall make statements or disclosures, prepare any financial statements or in any
respect account for or treat (i) sales of Accounts to Borrower as anything other
than a true sale and absolute assignment of the title to such Accounts to
Borrower or (ii) any contribution of Accounts to the capital of Borrower as
anything other than an increase in the stated capital of Borrower.
6.18. Commingling. Borrower will not deposit or permit the
deposit of any funds into the Blocked Account that do not constitute Proceeds of
Accounts owned by Borrower.
6.19. Prohibited Transactions. Borrower will not enter into,
or be a party to, any transaction with any Person except as expressly permitted
hereunder.
6.20. Purchase of Accounts. Unless Borrower first obtains
Agent's consent, Borrower shall not purchase Accounts (a) if an Event of Default
shall have occurred and be continuing and Revolving Credit Advances have been
terminated or suspended or (b) if Borrowing Availability shall be zero or less
than zero.
6.21. True Sale Opinion. Borrower shall not take any action or
enter into any agreement which would conflict with any assumption made by Faegre
& Benson in connection with its true sale opinion delivered to Agent on the
Closing Date.
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7. TERM
7.1. Termination. The financing arrangements contemplated
hereby shall be in effect until the Commitment Termination Date, and the
Revolving Loan and all other Obligations shall be automatically due and payable
in full on such date.
7.2. Survival of Obligations Upon Termination of Financing
Arrangements. Except as otherwise expressly provided for in the Loan Documents,
no termination or cancellation (regardless of cause or procedure) of any
financing arrangement under this Agreement shall in any way affect or impair the
obligations, duties and liabilities of Borrower and Servicer or the rights of
Agent and Lenders relating to any unpaid portion of the Loans or any other
Obligations, due or not due, liquidated, contingent or unliquidated or any
transaction or event occurring prior to such termination, or any transaction or
event, the performance of which is required after the Commitment Termination
Date. Except as otherwise expressly provided herein or in any other Loan
Document, all undertakings, covenants, warranties and representations of
Borrower and Servicer, and all rights of Agent and each Lender, all as contained
in the Loan Documents, shall not terminate or expire, but rather shall survive
any such termination or cancellation and shall continue in full force and effect
until the Termination Date; provided, that the provisions of Section 11, and the
indemnities contained in the Loan Documents shall survive the Termination Date.
8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES
8.1. Events of Default. The occurrence of any one or more of
the following events (regardless of the reason therefor) shall constitute an
"Event of Default" hereunder:
(a) Borrower (i) fails to make any payment of principal of, or
interest on, or Fees owing in respect of, the Revolving Loan or any of the other
Obligations when due and payable, or (ii) fails to pay or reimburse Agent or
Lenders for any expense reimbursable hereunder or under any other Loan Document
within ten (10) days following Agent's demand for such reimbursement or payment
of expenses.
(b) Either Borrower or Servicer fails or neglects to perform,
keep or observe any of the provisions of Sections 1.4, 1.7, 5.4, 5.8, 5.13 or 6
(other than Section 6.19), Annex B clause (b)(iii) or any of the provisions set
forth in Annexes C or G, respectively, or Servicer fails or neglects to perform
its duties under Annex B clause (b)(vi) and such Default continues for one (1)
Business Day or more.
(c) Either Borrower or Servicer fails or neglects to perform,
keep or observe any of the provisions of Section 4, Section 6.19 or any
provisions set forth in Annexes E or F, respectively, and the same shall remain
unremedied for three (3) Business Days or more or Servicer fails or neglects to
perform its duties under Annex B (excluding clauses (b)(iii), (b)(iv) and
(b)(vi)) and such Default continues for ten (10) Business Days or more.
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(d) Either Borrower or Servicer fails or neglects to perform,
keep or observe any other provision of this Agreement or of any of the other
Loan Documents (other than any provision embodied in or covered by any other
clause of this Section 8.1) and the same shall remain unremedied for thirty (30)
days or more.
(e) A default or breach occurs under any other agreement,
document or instrument to which Borrower or Servicer is a party that is not
cured within any applicable grace period therefor, and such default or breach
(i) involves the failure to make any payment when due in respect of any
Indebtedness (other than the Obligations) of (A) the Borrower in excess of
$250,000 in the aggregate or (B) the Servicer in excess of $5,000,000 in the
aggregate, or (ii) causes, or permits any holder of such Indebtedness or a
trustee to cause, Indebtedness or a portion thereof in excess of (A) $250,000 in
the aggregate with respect to the Borrower or (B) $5,000,000 in the aggregate
with respect to the Servicer to become due prior to its stated maturity or prior
to its regularly scheduled dates of payment, regardless of whether such default
is waived, or such right is exercised, by such holder or trustee.
(f) Any information contained in any Borrowing Base
Certificate is untrue or incorrect in any respect or Servicer fails to perform
its duties under Annex B clause (b)(iv) (in each case, other than as a result of
inadvertent errors not exceeding $100,000 in the aggregate in any Borrowing Base
Certificate with respect to Borrowing Availability), or any representation or
warranty herein or in any Loan Document or in any written statement, report,
financial statement or certificate (other than a Borrowing Base Certificate)
made or delivered to Agent or any Lender by any Company is untrue or incorrect
in any material respect adverse to the interests of the Lenders as of the date
when made or deemed made.
(g) Assets of Borrower with a fair market value of $100,000 or
more, or of Servicer with a fair market value of $250,000 or more, are attached,
seized, levied upon or subjected to a writ or distress warrant, or come within
the possession of any receiver, trustee, custodian or assignee for the benefit
of creditors of Borrower or Servicer, as the case may be, and such condition
continues for thirty (30) days or more.
(h) A case or proceeding is commenced against Borrower or
Servicer seeking a decree or order in respect of Borrower or Servicer (i) under
the Bankruptcy Code, as now constituted or hereafter amended or any other
applicable federal, state or foreign bankruptcy or other similar law, (ii)
appointing a custodian, receiver, liquidator, assignee, trustee or sequestrator
(or similar official) for Borrower or Servicer or for any substantial part of
Borrower's or Servicer's assets, or (iii) ordering the winding-up or liquidation
of the affairs of Borrower or Servicer, and such case or proceeding shall remain
undismissed or unstayed for sixty (60) days or more or a decree or order
granting the relief sought in such case or proceeding by a court of competent
jurisdiction.
(i) Either of Borrower or Servicer (i) files a petition
seeking relief under the Bankruptcy Code, as now constituted or hereafter
amended, or any other applicable federal, state or foreign bankruptcy or other
similar law, (ii) consents or fails to contest in a timely and appropriate
manner to the institution of proceedings thereunder or to the filing of any such
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petition or to the appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or similar official) for Borrower
or Servicer or for any substantial part of Borrower's or Servicer's assets,
(iii) makes an assignment for the benefit of creditors, or (iv) takes any
corporate action in furtherance of any of the foregoing, or (v) admits in
writing its inability to, or is generally unable to, pay its debts as such debts
become due.
(j) A final judgment or judgments for the payment of money in
excess of (i) $100,000 in the aggregate at any time are outstanding against the
Borrower or (ii) $1,000,000 in the aggregate at any time are outstanding against
the Servicer, and the same are not, within thirty (30) days after the entry
thereof, discharged or execution thereof stayed or bonded pending appeal, or
such judgments are not discharged prior to the expiration of any such stay.
(k) Any material provision of any Loan Document for any reason
ceases to be valid, binding and enforceable in accordance with its terms (or
Borrower or Servicer shall challenge the enforceability of any Loan Document or
shall assert in writing, or engage in any action or inaction based on any such
assertion, that any provision of any of the Loan Documents has ceased to be or
otherwise is not valid, binding and enforceable in accordance with its terms),
or any Lien created under any Loan Document shall cease to be a valid and
perfected first priority Lien (except (i) for Instruments not in the possession
of Borrower and, hence, not in the possession of Agent, (ii) for failure to have
a first priority Lien with respect to Chattel Paper as a result of (A)
inadvertent error by the seller of such Chattel Paper or (B) fraud by such
seller, and (iii) as otherwise permitted herein or therein) in any of the
Collateral purported to be covered thereby.
(l) Any Change of Control occurs.
(m) (i) Martin Burke shall cease to be the Chief Executive
Officer of Servicer, Michael Philippe shall cease to be the Chief Financial
Officer of Servicer, Kevin Riordan shall ease to be the President of Servicer,
or the positions of Vice President of Finance of Servicer or Controller of
Servicer (or similar positions with different titles) shall be vacant, and in
each case a successor acceptable to Agent shall not have been hired within six
(6) months after such Person's cessation of employment or such vacancy or (ii)
any two of the foregoing five positions (or similar positions with different
titles) are vacant at any one time; provided, that an Event of Default shall not
occur if any of the above-named persons is promoted or if their titles change
without impacting their duties; and provided, further, as to clause (ii) that an
Event of Default shall not occur if the positions of Vice President of Finance
and Controller are vacant until those two positions have been vacant thirty (30)
days.
(n) The Converted Accounts Sale Agreement is terminated for
any reason.
(o) The Credit Store, Inc. breaches its payment obligations
under the Converted Accounts Sale Agreement and such breach is not remedied
within two (2) Business Days or The Credit Store, Inc. ceases making purchases
under the Converted Accounts Sale Agreement for any reason for thirty (30) days
or more while Revolving Credit Advances are outstanding or the Converted
Accounts Sale Agreement is terminated.
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(p) Borrower shall not have paid the Obligations in full on or
prior to August 31, 2002.
(q) Less than ten (10) Business Days shall remain before Agent
is precluded from effectively exercising the put option under any Forward
Purchase Agreement, if, as a consequence thereof, any portion of the Revolving
Loan (including accrued interest and Fees with respect thereto) would not be
covered by an enforceable Forward Purchase Agreement.
8.2. Remedies.
(a) If any Default or Event of Default has occurred and is
continuing, Agent may (and at the written request of the Requisite Lenders
shall), without notice, suspend the Revolving Loan facility with respect to
additional Revolving Credit Advances, whereupon any additional Revolving Credit
Advances shall be made or extended in Agent's sole discretion (or in the sole
discretion of the Requisite Lenders, if such suspension occurred at their
direction) so long as such Default or Event of Default is continuing. If any
Event of Default has occurred and is continuing, Agent may (and at the written
request of Requisite Lenders shall), without notice except as otherwise
expressly provided herein, increase the rate of interest applicable to the
Revolving Loan to the Default Rate.
(b) If any Event of Default has occurred and is continuing,
Agent may (and at the written request of the Requisite Lenders shall), without
notice, (i) terminate the Revolving Loan facility with respect to further
Revolving Credit Advances; (ii) declare all or any portion of the Obligations,
including all or any portion of any Revolving Loan to be forthwith due and
payable, all without presentment, demand, protest or further notice of any kind,
all of which are expressly waived by Borrower; or (iii) exercise any rights and
remedies provided to Agent under the Loan Documents and any Control Letter or at
law or equity, including all remedies provided under the Code; provided, that
upon the occurrence of an Event of Default specified in Sections 8.1(h) or (i),
the Revolving Loan facility shall be immediately terminated and all of the
Obligations, including the Revolving Loan, shall become immediately due and
payable without declaration, notice or demand by any Person.
8.3. Waivers and Agreements by Borrower and Servicer. Except
as otherwise provided for in this Agreement or by applicable law, Borrower
waives: (a) presentment, demand and protest and notice of presentment, dishonor,
notice of intent to accelerate, notice of acceleration, protest, default,
nonpayment, maturity, release, compromise, settlement, extension or renewal of
any or all commercial paper, accounts, contract rights, documents, instruments,
chattel paper and guaranties at any time held by Agent on which Borrower may in
any way be liable, and hereby ratifies and confirms whatever Agent may do in
this regard, (b) all rights to notice and a hearing prior to Agent's taking
possession or control of, or to Agent's replevy, attachment or levy upon, the
Collateral or any bond or security that might be required by any court prior to
allowing Agent to exercise any of its remedies, and (c) the benefit of all
valuation, appraisal, marshaling and exemption laws. Servicer agrees that
following acceleration and the Obligations, Agent shall have the right to use
Servicer's Intellectual Property, equipment, facilities and personnel to the
extent necessary to collect, sell,
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Convert or otherwise dispose of the Collateral and shall pay
fair market value to Servicer for such right.
9. ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF AGENT
9.1. Assignment and Participations.
(a) Borrower and Servicer consent to any Lender's sale of
participations in, at any time or times, the Loan Documents, Revolving Loan and
any Commitment or of any portion thereof or interest therein, including any
Lender's rights, title, interests, remedies, powers or duties thereunder. Any
assignment by a Lender of its interests in the Revolving Loan and the
Commitments shall: (i) require the consent of Agent and Borrower (which consent
shall not be unreasonably withheld or delayed with respect to a Qualified
Assignee) and the execution of an assignment agreement (an "Assignment
Agreement" substantially in the form attached hereto as Exhibit 9.1(a) and
otherwise in form and substance satisfactory to, and acknowledged by, Agent;
(ii) be conditioned on such assignee Lender representing to the assigning Lender
and Agent that it is purchasing the applicable Revolving Loan to be assigned to
it for its own account, for investment purposes and not with a view to the
distribution thereof; (iii) if a partial assignment, be in an amount at least
equal to $5,000,000 and, after giving effect to any such partial assignment, the
assigning Lender shall have retained Commitments in an amount at least equal to
$5,000,000; and (iv) include a payment by the assigning Lender to Agent of an
assignment fee of $3,500. In the case of an assignment by a Lender under this
Section 9.1, the assignee shall have, to the extent of such assignment, the same
rights, benefits and obligations as all other Lenders hereunder. The assigning
Lender shall be relieved of its obligations hereunder with respect to its
Commitments or assigned portion thereof from and after the date of such
assignment. Borrower hereby acknowledges and agrees that any assignment shall
give rise to a direct obligation of Borrower to the assignee and that the
assignee shall be considered to be a "Lender". In all instances, each Lender's
liability to make a Revolving Credit Advance hereunder shall be several and not
joint and shall be limited to such Lender's Pro Rata Share of the applicable
Commitment. In the event Agent or any Lender assigns or otherwise transfers all
or any part of the Obligations, Agent or any such Lender shall so notify
Borrower and Borrower shall, upon the request of Agent or such Lender, execute
new Notes in exchange for the Notes, if any, being assigned. Notwithstanding the
foregoing provisions of this Section 9.1(a), any Lender may at any time pledge
the Obligations held by it and such Lender's rights under this Agreement and the
other Loan Documents to a Federal Reserve Bank, and any lender that is an
investment fund may assign the Obligations held by it and such Lender's rights
under this Agreement and the other Loan Documents to another investment fund
managed by the same investment advisor; provided, that no such pledge to a
Federal Reserve Bank shall release such Lender from such Lender's obligations
hereunder or under any other Loan Document.
(b) Any participation by a Lender of all or any part of its
Commitments shall be made with the understanding that all amounts payable by
Borrower hereunder shall be determined as if that Lender had not sold such
participation, and that the holder of any such participation shall not be
entitled to require such Lender to take or omit to take any action hereunder
except actions directly affecting (i) any reduction in the principal amount of,
or
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interest rate or Fees payable with respect to, any Revolving Loan in which such
holder participates, (ii) any extension of the scheduled amortization of the
principal amount of any Revolving Loan in which such holder participates or the
final maturity date thereof, and (iii) any release of all or substantially all
of the Collateral (other than in accordance with the terms of this Agreement,
the Collateral Documents or the other Loan Documents). Solely for purposes of
Section 9.8, Borrower acknowledges and agrees that a participation shall give
rise to a direct obligation of Borrower to the participant and the participant
shall be considered to be a "Lender." Except as set forth in the preceding
sentence neither Borrower nor Servicer shall have any obligation or duty to any
participant. Neither Agent nor any Lender (other than the Lender selling a
participation) shall have any duty to any participant and may continue to deal
solely with the Lender selling a participation as if no such sale had occurred.
(c) Except as expressly provided in this Section 9.1, no
Lender shall, as between Borrower and that Lender, or Agent and that Lender, be
relieved of any of its obligations hereunder as a result of any sale,
assignment, transfer or negotiation of, or granting of participation in, all or
any part of the Revolving Loan, the Notes or other Obligations owed to such
Lender.
(d) Each of Borrower and Servicer shall assist any Lender
permitted to sell assignments or participations under this Section 9.1 as
reasonably required to enable the assigning or selling Lender to effect any such
assignment or participation, including the execution and delivery of any and all
agreements, notes and other documents and instruments as shall be requested and
the preparation of informational materials for, and the participation of
management in meetings with, potential assignees or participants. Each of
Borrower and Servicer shall certify the correctness, completeness and accuracy
of all descriptions of itself and its respective affairs contained in any
selling materials provided by it and all other information provided by it and
included in such materials, except that any Projections delivered by Borrower
shall only be certified by Borrower as having been prepared by Borrower in
compliance with the representations contained in Section 3.4(c).
(e) A Lender may furnish any information concerning Borrower
or Servicer in the possession of such Lender from time to time to assignees and
participants (including prospective assignees and participants). Each Lender
shall, prior to furnishing such information, obtain from assignees or
participants (including prospective assignees and participants) confidentiality
covenants substantially equivalent to those contained in Section 11.8.
9.2. Appointment of Agent. GE Capital is hereby appointed to
act on behalf of all Lenders as Agent under this Agreement and the other Loan
Documents. The provisions of this Section 9.2 are solely for the benefit of
Agent and Lenders and neither Borrower nor Servicer nor any other Person shall
have any rights as a third party beneficiary of any of the provisions hereof. In
performing its functions and duties under this Agreement and the other Loan
Documents, Agent shall act solely as an agent of Lenders and does not assume and
shall not be deemed to have assumed any obligation toward or relationship of
agency or trust with or for either of Borrower or Servicer or any other Person.
Agent shall have no duties or responsibilities except for those expressly set
forth in this Agreement and the other Loan
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Documents. The duties of Agent shall be mechanical and administrative in nature
and Agent shall not have, or be deemed to have, by reason of this Agreement, any
other Loan Document or otherwise a fiduciary relationship in respect of any
Lender. Neither Agent nor any of its Affiliates nor any of their respective
officers, directors, employees, agents or representatives shall be liable to any
Lender for any action taken or omitted to be taken by it hereunder or under any
other Loan Document, or in connection herewith or therewith, except for damages
caused by its or their own gross negligence or willful misconduct.
If Agent shall request instructions from Requisite Lenders or
all affected Lenders with respect to any act or action (including failure to
act) in connection with this Agreement or any other Loan Document, then Agent
shall be entitled to refrain from such act or taking such action unless and
until Agent shall have received instructions from Requisite Lenders or all
affected Lenders, as the case may be, and Agent shall not incur liability to any
Person by reason of so refraining. Agent shall be fully justified in failing or
refusing to take any action hereunder or under any other Loan Document (a) if
such action would, in the opinion of Agent, be contrary to law or the terms of
this Agreement or any other Loan Document, (b) if such action would, in the
opinion of Agent, expose Agent to Environmental Liabilities or (c) if Agent
shall not first be indemnified to its satisfaction against any and all liability
and expense which may be incurred by it by reason of taking or continuing to
take any such action. Without limiting the foregoing, no Lender shall have any
right of action whatsoever against Agent as a result of Agent acting or
refraining from acting hereunder or under any other Loan Document in accordance
with the instructions of Requisite Lenders or all affected Lenders, as
applicable.
9.3. Agent's Reliance, Etc. Neither Agent nor any of its
Affiliates nor any of their respective directors, officers, agents or employees
shall be liable for any action taken or omitted to be taken by it or them under
or in connection with this Agreement or the other Loan Documents, except for
damages caused by its or their own gross negligence or willful misconduct.
Without limiting the generality of the foregoing, Agent: (a) may treat the payee
of any Note as the holder thereof until Agent receives written notice of the
assignment or transfer thereof signed by such payee and in form satisfactory to
Agent; (b) may consult with legal counsel, independent public accountants and
other experts selected by it and shall not be liable for any action taken or
omitted to be taken by it in good faith in accordance with the advice of such
counsel, accountants or experts; (c) makes no warranty or representation to any
Lender and shall not be responsible to any Lender for any statements, warranties
or representations made in or in connection with this Agreement or the other
Loan Documents; (d) shall not have any duty to ascertain or to inquire as to the
performance or observance of any of the terms, covenants or conditions of this
Agreement or the other Loan Documents on the part of either of Borrower or
Servicer or to inspect the Collateral (including the books and records) of
either of Borrower or Servicer; (e) shall not be responsible to any Lender for
the due execution, legality, validity, enforceability, genuineness, sufficiency
or value of this Agreement or the other Loan Documents or any other instrument
or document furnished pursuant hereto or thereto; and (f) shall incur no
liability under or in respect of this Agreement or the other Loan Documents by
acting upon any notice, consent, certificate or other instrument or writing
(which may be by telecopy, telegram, cable or telex) believed by it to be
genuine and signed or sent by the proper party or parties.
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9.4. GE Capital and Affiliates. With respect to its
Commitments hereunder, GE Capital shall have the same rights and powers under
this Agreement and the other Loan Documents as any other Lender and may exercise
the same as though it were not Agent; and the term "Lender" or "Lenders" shall,
unless otherwise expressly indicated, include GE Capital in its individual
capacity. GE Capital and its Affiliates may lend money to, invest in, and
generally engage in any kind of business with, either of Borrower or Servicer,
any of their Affiliates and any Person who may do business with or own
securities of either of Borrower or Servicer or any such Affiliate, all as if GE
Capital were not Agent and without any duty to account therefor to Lenders. GE
Capital and its Affiliates may accept fees and other consideration from Borrower
for services in connection with this Agreement or otherwise without having to
account for the same to Lenders.
9.5. Lender Credit Decision. Each Lender acknowledges that it
has, independently and without reliance upon Agent or any other Lender and based
on the Financial Statements referred to in Section 3.4(a) and such other
documents and information as it has deemed appropriate, made its own credit and
financial analysis of Borrower and Servicer and its own decision to enter into
this Agreement. Each Lender also acknowledges that it will, independently and
without reliance upon Agent or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement. Each
Lender acknowledges the potential conflict of interest of each other Lender as a
result of Lenders holding disproportionate interests in the Revolving Loan, and
expressly consents to, and waives any claim based upon, such conflict of
interest.
9.6. Indemnification. Lenders agree to indemnify Agent (to the
extent not reimbursed by Borrower and without limiting the obligations of
Borrower hereunder), ratably according to their respective Pro Rata Shares, from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever that may be imposed on, incurred by, or asserted against Agent
in any way relating to or arising out of this Agreement or any other Loan
Document or any action taken or omitted to be taken by Agent in connection
therewith; provided, that no Lender shall be liable for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from Agent's gross negligence or
willful misconduct. Without limiting the foregoing, each Lender agrees to
reimburse Agent promptly upon demand for its ratable share of any out-of-pocket
expenses (including counsel fees) incurred by Agent in connection with the
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement
and each other Loan Document, to the extent that Agent is not reimbursed for
such expenses by Borrower.
9.7. Successor Agent. Agent may resign at any time by giving
not less than thirty (30) days' prior written notice thereof to Lenders and
Borrower. Upon any such resignation, the Requisite Lenders shall have the right
to appoint a successor Agent. If no successor Agent shall have been so appointed
by the Requisite Lenders and shall have accepted
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such appointment within 30 days after the resigning Agent's giving notice of
resignation, then the resigning Agent may, on behalf of Lenders, appoint a
successor Agent, which shall be a Lender, if a Lender is willing to accept such
appointment, or otherwise shall be a commercial bank or financial institution or
a subsidiary of a commercial bank or financial institution if such commercial
bank or financial institution is organized under the laws of the United States
of America or of any State thereof and has a combined capital and surplus of at
least $300,000,000. If no successor Agent has been appointed pursuant to the
foregoing, within 30 days after the date such notice of resignation was given by
the resigning Agent, such resignation shall become effective and the Requisite
Lenders shall thereafter perform all the duties of Agent hereunder until such
time, if any, as the Requisite Lenders appoint a successor Agent as provided
above. Any successor Agent appointed by Requisite Lenders hereunder shall be
subject to the approval of Borrower, such approval not to be unreasonably
withheld or delayed; provided that such approval shall not be required if a
Default or an Event of Default has occurred and is continuing. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall succeed to and become vested with all the rights, powers,
privileges and duties of the resigning Agent. Upon the earlier of the acceptance
of any appointment as Agent hereunder by a successor Agent or the effective date
of the resigning Agent's resignation, the resigning Agent shall be discharged
from its duties and obligations under this Agreement and the other Loan
Documents, except that any indemnity rights or other rights in favor of such
resigning Agent shall continue. After any resigning Agent's resignation
hereunder, the provisions of this Section 9 shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was acting as Agent under
this Agreement and the other Loan Documents.
9.8. Setoff and Sharing of Payments. In addition to any rights
now or hereafter granted under applicable law and not by way of limitation of
any such rights, upon the occurrence and during the continuance of any Event of
Default and subject to Section 9.9(f), each Lender is hereby authorized at any
time or from time to time, without notice to Borrower or to any other Person,
any such notice being hereby expressly waived, to offset and to appropriate and
to apply any and all balances held by it at any of its offices for the account
of Borrower (regardless of whether such balances are then due to Borrower) and
any other properties or assets at any time held or owing by that Lender or that
holder to or for the credit or for the account of Borrower against and on
account of any of the Obligations that are not paid when due. Any Lender
exercising a right of setoff or otherwise receiving any payment on account of
the Obligations in excess of its Pro Rata Share thereof shall purchase for cash
(and the other Lenders or holders shall sell) such participations in each such
other Lender's or holder's Pro Rata Share of the Obligations as would be
necessary to cause such Lender to share the amount so offset or otherwise
received with each other Lender or holder in accordance with their respective
Pro Rata Shares. Borrower agrees, to the fullest extent permitted by law, that
(a) any Lender may exercise its right to offset with respect to amounts in
excess of its Pro Rata Share of the Obligations and may sell participations in
such amounts so offset to other Lenders and holders and (b) any Lender so
purchasing a participation in the Revolving Loan made or other Obligations held
by other Lenders or holders may exercise all rights of offset, bankers' lien,
counterclaim or similar rights with respect to such participation as fully as if
such Lender or holder were a direct holder of the Revolving Loan and the other
Obligations in the amount of such participation. Notwithstanding
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the foregoing, if all or any portion of the offset amount or payment otherwise
received is thereafter recovered from the Lender that has exercised the right of
offset, the purchase of participations by that Lender shall be rescinded and the
purchase price restored without interest.
9.9. Revolving Credit Advances; Payments; Non-Funding Lenders;
Information; Actions in Concert.
(a) Revolving Credit Advances; Payments.
(i) Agent shall notify Lenders, promptly after
receipt of a Notice of Revolving Credit Advance and in any event prior
to 1:00 p.m. (Chicago time) on the date such Notice of Revolving
Advance is received, by telecopy, telephone or other similar form of
transmission. Each Lender shall make the amount of such Lender's Pro
Rata Share of such Revolving Credit Advance available to Agent in same
day funds by wire transfer to Agent's account as set forth in Annex H
not later than 1:00 p.m. (Chicago time) on the requested funding date.
After receipt of such wire transfers (or, in the Agent's sole
discretion, before receipt of such wire transfers), subject to the
terms hereof, Agent shall make the requested Revolving Credit Advance
to Borrower. All payments by each Lender shall be made without setoff,
counterclaim or deduction of any kind.
(ii) On the second (2nd) Business Day of each
calendar week or more frequently as aggregate cumulative payments in
excess of $1,000,000 are received with respect to the Revolving Loan
(each, a "Settlement Date"), Agent shall advise each Lender by
telephone, or telecopy of the amount of such Lender's Pro Rata Share of
principal, interest and Fees paid for the benefit of Lenders with
respect to each applicable Revolving Loan. Provided that each Lender
has funded all payments and Revolving Credit Advances required to be
made by it and purchased all participations required to be purchased by
it under this Agreement and the other Loan Documents as of such
Settlement Date, Agent shall pay to each Lender such Lender's Pro Rata
Share of principal, interest and Fees paid by Borrower since the
previous Settlement Date for the benefit of such Lender on the
Revolving Loan held by it. To the extent that any Lender (a
"Non-Funding Lender") has failed to fund all such payments and
Revolving Credit Advances or failed to fund the purchase of all such
participations, Agent shall be entitled to set off the funding
short-fall against that Non-Funding Lender's Pro Rata Share of all
payments received from Borrower. Such payments shall be made by wire
transfer to such Lender's account (as specified by such Lender in Annex
H or the applicable Assignment Agreement) not later than 1:00 p.m.
(Chicago time) on the next Business Day following each Settlement Date.
(b) Availability of Lender's Pro Rata Share. Agent may assume
that each Lender will make its Pro Rata Share of each Revolving Credit Advance
available to Agent on each funding date. If such Pro Rata Share is not, in fact,
paid to Agent by such Lender when due, Agent will be entitled to recover such
amount on demand from such Lender without setoff, counterclaim or deduction of
any kind. If any Lender fails to pay the amount of its Pro Rata Share forthwith
upon Agent's demand, Agent shall promptly notify Borrower and Borrower shall
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immediately repay such amount to Agent. Nothing in this Section 9.9(b) or
elsewhere in this Agreement or the other Loan Documents shall be deemed to
require Agent to advance funds on behalf of any Lender or to relieve any Lender
from its obligation to fulfill its Commitments hereunder or to prejudice any
rights that Borrower may have against any Lender as a result of any default by
such Lender hereunder. To the extent that Agent advances funds to Borrower on
behalf of any Lender and is not reimbursed therefor on the same Business Day as
such Revolving Credit Advance is made, Agent shall be entitled to retain for its
account all interest accrued on such Revolving Credit Advance until reimbursed
by the applicable Lender.
(c) Return of Payments.
(i) If Agent pays an amount to a Lender under this
Agreement in the belief or expectation that a related payment has been
or will be received by Agent from Borrower and such related payment is
not received by Agent, then Agent will be entitled to recover such
amount from such Lender on demand without setoff, counterclaim or
deduction of any kind.
(ii) If Agent determines at any time that any amount
received by Agent under this Agreement must be returned to Borrower or
paid to any other Person pursuant to any insolvency law or otherwise,
then, notwithstanding any other term or condition of this Agreement or
any other Loan Document, Agent will not be required to distribute any
portion thereof to any Lender. In addition, each Lender will repay to
Agent on demand any portion of such amount that Agent has distributed
to such Lender, together with interest at such rate, if any, as Agent
is required to pay to Borrower or such other Person, without setoff,
counterclaim or deduction of any kind.
(d) Non-Funding Lenders. The failure of any Non-Funding Lender
to make any Revolving Credit Advance or any payment required by it hereunder on
the date specified therefor shall not relieve any other Lender (each such other
Lender, an "Other Lender") of its obligations to make such Revolving Credit
Advance or purchase such participation on such date, but neither any Other
Lender nor Agent shall be responsible for the failure of any Non-Funding Lender
to make a Revolving Credit Advance, purchase a participation or make any other
payment required hereunder. Notwithstanding anything set forth herein to the
contrary, a Non-Funding Lender shall not have any voting or consent rights under
or with respect to any Loan Document or constitute a "Lender" (or be included in
the calculation of "Requisite Lenders" hereunder) for any voting or consent
rights under or with respect to any Loan Document. At Borrower's request, Agent
or a Person acceptable to Agent shall have the right with Agent's consent and in
Agent's sole discretion (but shall have no obligation) to purchase from any
Non-Funding Lender, and each Non-Funding Lender agrees that it shall, at Agent's
request, sell and assign to Agent or such Person, all of the Commitments of that
Non-Funding Lender for an amount equal to the principal balance of the Revolving
Loan held by such Non-Funding Lender and all accrued interest and fees with
respect thereto through the date of sale, such purchase and sale to be
consummated pursuant to an executed Assignment Agreement.
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(e) Dissemination of Information. Agent shall use reasonable
efforts to provide Lenders with any notice of Default or Event of Default
received by Agent from, or delivered by Agent to, either of Borrower or
Servicer, with notice of any Event of Default of which Agent has actually become
aware and with notice of any action taken by Agent following any Event of
Default; provided, that Agent shall not be liable to any Lender for any failure
to do so, except to the extent that such failure is attributable to Agent's
gross negligence or willful misconduct. Lenders acknowledge that Borrower is
required to provide Financial Statements and Collateral Reports to Lenders in
accordance with Annexes E and F hereto and agree that Agent shall have no duty
to provide the same to Lenders.
(f) Actions in Concert. Anything in this Agreement to the
contrary notwithstanding, each Lender hereby agrees with each other Lender that
no Lender shall take any action to protect or enforce its rights arising out of
this Agreement or the Notes (including exercising any rights of setoff) without
first obtaining the prior written consent of Agent and Requisite Lenders, it
being the intent of Lenders that any such action to protect or enforce rights
under this Agreement and the Notes shall be taken in concert and at the
direction or with the consent of Agent.
10. SUCCESSORS AND ASSIGNS
10.1. Successors and Assigns. This Agreement and the other
Loan Documents shall be binding on and shall inure to the benefit of each of
Borrower, Servicer, Agent, Lenders and their respective successors and assigns
(including, in the case of Borrower or Servicer, a debtor-in-possession on
behalf of Borrower or Servicer), except as otherwise provided herein or therein.
Neither Borrower or Servicer may assign, transfer, hypothecate or otherwise
convey its rights, benefits, obligations or duties hereunder or under any of the
other Loan Documents without the prior express written consent of Agent and
Lenders. Any such purported assignment, transfer, hypothecation or other
conveyance by Borrower or Servicer without the prior express written consent of
Agent and Lenders shall be void. The terms and provisions of this Agreement are
for the purpose of defining the relative rights and obligations of Borrower,
Servicer, Agent and Lenders with respect to the transactions contemplated hereby
and no Person shall be a third party beneficiary of any of the terms and
provisions of this Agreement or any of the other Loan Documents.
11. MISCELLANEOUS
11.1. Complete Agreement; Modification of Agreement. The Loan
Documents constitute the complete agreement between the parties with respect to
the subject matter thereof and may not be modified, altered or amended except as
set forth in Section 11.2. Each letter of interest and each commitment letter
between Borrower or Servicer and Agent or any Lender or any of their respective
Affiliates, predating this Agreement and relating to a financing of
substantially similar form, purpose or effect shall be superseded by this
Agreement.
11.2. Amendments and Waivers.
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(a) Except for actions expressly permitted to be taken by
Agent, no amendment, modification, termination or waiver of any provision of
this Agreement or any other Loan Document, or any consent to any departure by
Borrower or Servicer therefrom, shall in any event be effective unless the same
shall be in writing and signed by Agent and Borrower, and by Requisite Lenders,
or all affected Lenders, as applicable. Except as set forth in clauses (b) and
(c) below, all such amendments, modifications, terminations or waivers requiring
the consent of any Lenders shall require the written consent of Requisite
Lenders.
(b) No amendment, modification, termination or waiver of or
consent with respect to any provision of this Agreement that waives compliance
with the conditions precedent set forth in Section 2.2 to the making of any
Revolving Loan shall be effective unless the same shall be in writing and signed
by Agent, Requisite Lenders and Borrower.
(c) No amendment, modification, termination or waiver shall,
unless in writing and signed by Agent and each Lender directly affected thereby:
(i) increase the principal amount of any Lender's Commitment (which action shall
be deemed to directly affect all Lenders; (ii) reduce the principal of, rate of
interest on or Fees payable with respect to any Revolving Loan of any affected
Lender; (iii) extend any scheduled payment date or final maturity date of the
principal amount of any Revolving Loan of any affected Lender; (iv) waive,
forgive, defer, extend or postpone any payment of interest or Fees as to any
affected Lender; (v) except as otherwise permitted herein or in the other Loan
Documents, release, or permit Borrower to sell or otherwise dispose of, any
Collateral other than as permitted by this Agreement (which action shall be
deemed to directly affect all Lenders); (vi) change the percentage of the
Commitments or of the aggregate unpaid principal amount of the Revolving Loan
that shall be required for Lenders or any of them to take any action hereunder;
and (vii) amend or waive this Section 11.2 or the definition of the term
"Requisite Lenders" insofar as such definition affects the substance of this
Section 11.2. Furthermore, no amendment, modification, termination or waiver
affecting the rights or duties of Agent under this Agreement or any other Loan
Document shall be effective unless in writing and signed by Agent, in addition
to Lenders required hereinabove to take such action. Each amendment,
modification, termination or waiver shall be effective only in the specific
instance and for the specific purpose for which it was given. No amendment,
modification, termination or waiver shall be required for Agent to take
additional Collateral pursuant to any Loan Document. No amendment, modification,
termination or waiver of any provision of any Note shall be effective without
the written concurrence of the holder of that Note. No notice to or demand on
either of Borrower or Servicer in any case shall entitle Borrower or Servicer to
any other or further notice or demand in similar or other circumstances. Any
amendment, modification, termination, waiver or consent effected in accordance
with this Section 11.2 shall be binding upon each holder of the Notes at the
time outstanding and each future holder of the Notes.
(d) If, in connection with any proposed amendment,
modification, waiver or termination (a "Proposed Change"):
(i) requiring the consent of all affected Lenders,
the consent of Requisite Lenders is obtained, but the consent of other
Lenders whose consent is required
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is not obtained (any such Lender whose consent is not obtained as
described in this clause (i) and in clause (ii), below being referred
to as a "Non-Consenting Lender"),
(ii) requiring the consent of Requisite Lenders, the
consent of Lenders holding 51% or more of the aggregate Commitments is
obtained, but the consent of Requisite Lenders is not obtained,
then, so long as Agent is not a Non-Consenting Lender, at Borrower's request
Agent, or a Person acceptable to Agent, shall have the right with Agent's
consent and in Agent's sole discretion (but shall have no obligation) to
purchase from such Non-Consenting Lenders, and such Non-Consenting Lenders agree
that they shall, upon Agent's request, sell and assign to Agent or such Person,
all of the Commitments of such Non-Consenting Lenders for an amount equal to the
principal balance of the Revolving Loan held by the Non-Consenting Lenders and
all accrued interest and Fees with respect thereto through the date of sale,
such purchase and sale to be consummated pursuant to an executed Assignment
Agreement.
(e) Upon payment in full in cash and performance of all of the
Obligations (other than indemnification Obligations), termination of the
Commitments and a release of all claims against Agent and Lenders, and so long
as no suits, actions proceedings, or claims are pending or threatened against
any Indemnified Person asserting any damages, losses or liabilities that are
Indemnified Liabilities, Agent shall deliver to Borrower termination statements,
mortgage releases and other documents necessary or appropriate to evidence the
termination of the Liens securing payment of the Obligations and termination of
the Blocked Account.
11.3. Fees and Expenses. Borrower shall reimburse Agent for
all fees, costs and expenses (including the reasonable fees and expenses of all
of its special counsel, advisors, consultants and auditors) for all fees, costs
and expenses, including the reasonable fees, costs and expenses of outside
counsel or other advisors (including appraisers) incurred in connection with the
negotiation and preparation of the Loan Documents and for advice, assistance, or
other representation in connection with:
(a) the forwarding to Borrower or any other Person on behalf
of Borrower by Agent of the proceeds of the Revolving Loan;
(b) any amendment, modification or waiver of, or consent with
respect to, or termination of, any of the Loan Documents or Related Transactions
Documents or advice in connection with the administration of the Revolving Loan
made pursuant hereto or its rights hereunder or thereunder;
(c) any litigation, contest, dispute, suit, proceeding or
action (whether instituted by Agent, any Lender, Borrower or any other Person
and whether as a party, witness or otherwise) in any way relating to the
Collateral, any of the Loan Documents or any other agreement to be executed or
delivered in connection herewith or therewith, including any litigation,
contest, dispute, suit, case, proceeding or action, and any appeal or review
thereof, in connection with a case commenced by or against Borrower or any other
Person that may be
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obligated to Agent by virtue of the Loan Documents, including any such
litigation, contest, dispute, suit, proceeding or action arising in connection
with any work-out or restructuring of the Revolving Loan during the pendency of
one or more Events of Default;
(d) any attempt to enforce any remedies of Agent or any Lender
against either of Borrower or Servicer or any other Person that may be obligated
to Agent or any Lender by virtue of any of the Loan Documents, including any
such attempt to enforce any such remedies in the course of any work-out or
restructuring of the Revolving Loan during the pendency of one or more Events of
Default;
(e) any workout or restructuring of the Revolving Loan during
the pendency of one or more Events of Default; and
(f) efforts to (i) monitor the Revolving Loan or any of the
other Obligations, (ii) evaluate, observe or assess either of Borrower or
Servicer or their respective affairs, and (iii) verify, protect, evaluate,
assess, appraise, collect, sell, liquidate or otherwise dispose of any of the
Collateral;
including, as to each of clauses (a) through (f) above, all reasonable
attorneys' and other professional and service providers' fees arising from such
services, including those in connection with any appellate proceedings, and all
expenses, costs, charges and other fees incurred by such counsel and others in
connection with or relating to any of the events or actions described in this
Section 11.3, all of which shall be payable, on demand, by Borrower to Agent.
Without limiting the generality of the foregoing, such expenses, costs, charges
and fees may include: reasonable fees, costs and expenses of accountants,
appraisers, investment bankers; court costs and expenses; photocopying and
duplication expenses; court reporter fees, costs and expenses; long distance
telephone charges; air express charges; telegram or telecopy charges;
secretarial overtime charges; and expenses for travel, lodging and food paid or
incurred in connection with the performance of such legal or other advisory
services.
11.4. No Waiver. Agent's or any Lender's failure, at any time
or times, to require strict performance by Borrower or Servicer of any provision
of this Agreement or any other Loan Document shall not waive, affect or diminish
any right of Agent or such Lender thereafter to demand strict compliance and
performance herewith or therewith. Any suspension or waiver of an Event of
Default shall not suspend, waive or affect any other Event of Default whether
the same is prior or subsequent thereto and whether the same or of a different
type. Subject to the provisions of Section 11.2, none of the undertakings,
agreements, warranties, covenants and representations of Borrower or Servicer
contained in this Agreement or any of the other Loan Documents and no Default or
Event of Default by either of Borrower or Servicer shall be deemed to have been
suspended or waived by Agent or any Lender, unless such waiver or suspension is
by an instrument in writing signed by an officer of or other authorized employee
of Agent and the applicable required Lenders and directed to Borrower specifying
such suspension or waiver.
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11.5. Remedies. Agent's and Lenders' rights and remedies under
this Agreement shall be cumulative and nonexclusive of any other rights and
remedies that Agent or any Lender may have under any other agreement, including
the other Loan Documents, by operation of law or otherwise. Recourse to the
Collateral shall not be required.
11.6. Severability. Wherever possible, each provision of this
Agreement and the other Loan Documents shall be interpreted in such a manner as
to be effective and valid under applicable law, but if any provision of this
Agreement or any other Loan Document shall be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
11.7. Conflict of Terms. Except as otherwise provided in this
Agreement or any of the other Loan Documents by specific reference to the
applicable provisions of this Agreement, if any provision contained in this
Agreement conflicts with any provision in any of the other Loan Documents, the
provision contained in this Agreement shall govern and control.
11.8. Confidentiality. Agent and each Lender agree to use
commercially reasonable efforts (equivalent to the efforts Agent or such Lender
applies to maintain the confidentiality of its own confidential information) to
maintain as confidential all confidential information provided to them by
Borrower or Servicer and designated as confidential for a period of two (2)
years following receipt thereof, except that Agent and each Lender may disclose
such information (a) to Persons employed or engaged by Agent or such Lender in
evaluating, approving, structuring or administering the Revolving Loan and the
Commitments; (b) to any bona fide assignee or participant or potential assignee
or participant that has agreed to comply with the covenant contained in this
Section 11.8 (and any such bona fide assignee or participant or potential
assignee or participant may disclose such information to Persons employed or
engaged by them as described in clause (a) above); (c) as required or requested
by any Governmental Authority or reasonably believed by Agent or such Lender to
be compelled by any court decree, subpoena or legal or administrative order or
process; (d) as, on the advice of Agent's or such Lender's counsel, is required
by law; (e) in connection with the exercise of any right or remedy under the
Loan Documents or in connection with any Litigation to which Agent or such
Lender is a party; or (f) that ceases to be confidential through no fault of
Agent or any Lender.
11.9. GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN
ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, THE LOAN DOCUMENTS AND THE OBLIGATIONS
SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND
PERFORMED IN THAT STATE AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
EACH CREDIT PARTY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS
LOCATED IN
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COOK COUNTY, CITY OF CHICAGO, ILLINOIS SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR
AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE CREDIT PARTIES, AGENT AND
LENDERS PERTAINING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO
ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN
DOCUMENTS; PROVIDED, THAT AGENT, LENDERS AND THE CREDIT PARTIES ACKNOWLEDGE THAT
ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF
COOK COUNTY, CITY OF CHICAGO, ILLINOIS AND; PROVIDED, FURTHER THAT NOTHING IN
THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE AGENT FROM BRINGING SUIT
OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE
COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT
OR OTHER COURT ORDER IN FAVOR OF AGENT. EACH CREDIT PARTY EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY
SUCH COURT, AND EACH CREDIT PARTY HEREBY WAIVES ANY OBJECTION THAT SUCH CREDIT
PARTY MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM
NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE
RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT.
11.10. Notices. Except as otherwise provided herein, whenever
it is provided herein that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties by any other parties, or whenever any of the parties desires to
give or serve upon any other parties any communication with respect to this
Agreement, each such notice, demand, request, consent, approval, declaration or
other communication shall be in writing and shall be deemed to have been validly
served, given or delivered (a) upon the earlier of actual receipt and three (3)
Business Days after deposit in the United States Mail, registered or certified
mail, return receipt requested, with proper postage prepaid, (b) upon
transmission, when sent by telecopy or other similar facsimile transmission
(with such telecopy or facsimile promptly confirmed by delivery of a copy by
personal delivery or United States Mail as otherwise provided in this Section
11.10); (c) one (1) Business Day after deposit with a reputable overnight
courier with all charges prepaid or (d) when delivered, if hand-delivered by
messenger, all of which shall be addressed to the party to be notified and sent
to the address or facsimile number indicated in Annex I or to such other address
(or facsimile number) as may be substituted by notice given as herein provided.
The giving of any notice required hereunder may be waived in writing by the
party entitled to receive such notice. Failure or delay in delivering copies of
any notice, demand, request, consent, approval, declaration or other
communication to any Person (other than Borrower or Agent) designated in Annex I
to receive copies shall in no way adversely affect the effectiveness of such
notice, demand, request, consent, approval, declaration or other communication.
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11.11. Section Titles. The Section titles and Table of
Contents contained in this Agreement are and shall be without substantive
meaning or content of any kind whatsoever and are not a part of the agreement
between the parties hereto.
11.12. Counterparts. This Agreement may be executed in any
number of separate counterparts, each of which shall collectively and separately
constitute one agreement.
11.13. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN
CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY
RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE
STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES
DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS.
THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL
SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY
IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER
SOUNDING IN CONTRACT, TORT OR OTHERWISE, AMONG AGENT, LENDERS AND BORROWER OR
SERVICER ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF
THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO.
11.14. Press Releases; Etc. Each of Borrower and Servicer
executing this Agreement agrees that neither it nor its Affiliates will in the
future issue any press releases or other public disclosure using the name of GE
Capital or its affiliates or referring to this Agreement, the other Loan
Documents or the Related Transactions Documents without at least two (2)
Business Days' prior notice to GE Capital and without the prior written consent
of GE Capital unless (and only to the extent that) Borrower or Servicer or its
Affiliate is required to do so under law and then, in any event, Borrower or
Servicer or its Affiliate will consult with GE Capital before issuing such press
release or other public disclosure. Each of Borrower and Servicer consents to
the publication by Agent or any Lender of a tombstone or similar advertising
material relating to the financing transactions contemplated by this Agreement.
Agent or such Lender shall provide a draft of any such tombstone or similar
advertising material to each of Borrower and Servicer for review and comment
prior to the publication thereof. Agent reserves the right to provide to
industry trade organizations information necessary and customary for inclusion
in league table measurements with Borrower's consent which shall not be
unreasonably withheld or delayed.
11.15. Reinstatement. This Agreement shall remain in full
force and effect and continue to be effective should any petition be filed by or
against Borrower for liquidation or reorganization, should Borrower become
insolvent or make an assignment for the benefit of any creditor or creditors or
should a receiver or trustee be appointed for all or any significant part of
Borrower's assets, and shall continue to be effective or to be reinstated, as
the case may be, if at any time payment and performance of the Obligations, or
any part thereof, is,
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pursuant to applicable law, rescinded or reduced in amount, or must otherwise be
restored or returned by any obligee of the Obligations, whether as a "voidable
preference," "fraudulent conveyance," or otherwise, all as though such payment
or performance had not been made. In the event that any payment, or any part
thereof, is rescinded, reduced, restored or returned, the Obligations shall be
reinstated and deemed reduced only by such amount paid and not so rescinded,
reduced, restored or returned.
11.16. Advice of Counsel. Each of the parties represents to
each other party hereto that it has discussed this Agreement and, specifically,
the provisions of Sections 11.9 and 11.13, with its counsel.
11.17. No Strict Construction. The parties hereto have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly executed as
of the date first written above.
BORROWER:
CREDIT STORE CAPITAL CORP.
By: /s/ Michael J. Philippe
---------------------------------------
Name: Michael J. Philippe
-------------------------------------
Title: CFO
------------------------------------
AGENT:
GENERAL ELECTRIC CAPITAL
CORPORATION, as Agent and Lender
By: /s/ Michael McKay
---------------------------------------
Duly Authorized Signatory
SERVICER:
THE CREDIT STORE, INC.
By: /s/ Michael J. Philippe
---------------------------------------
Name: Michael J. Philippe
-------------------------------------
Title: CFO
------------------------------------
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ANNEX A (RECITALS)
TO
CREDIT AGREEMENT
DEFINITIONS
Capitalized terms used in the Loan Documents shall have
(unless otherwise provided elsewhere in the Loan Documents) the following
respective meanings and all references to Sections, Exhibits, Schedules or
Annexes in the following definitions shall refer to Sections, Exhibits,
Schedules or Annexes of or to the Agreement:
"Account Debtor" means any Person who may become obligated to
Borrower with respect to an Account.
"Accounting Changes" has the meaning ascribed thereto in
Annex G.
"Accounts" means all charged-off consumer credit and accounts
receivable, other receivables, book debts and other forms of obligations now
owned or hereafter acquired by Borrower, including (a) "accounts," as such term
is defined in the Code, (b) all Chattel Paper and Instruments, (c) all General
Intangibles consisting of a right to receive a payment of money, and (d) all
collateral security and guaranties of any kind, now or hereafter in existence,
given by any Person with respect to any of the foregoing.
"Account Purchase Agreement" means (a) the Amended and
Restated Account Purchase Agreement of even date herewith between The Credit
Store, Inc., as seller, and Borrower, as buyer, as such agreement may be
amended, modified or supplemented from time to time with the consent of Agent or
(b) an agreement between a third party, as seller, and Borrower, as buyer, for
the purchase of Accounts, in form and substance reasonably satisfactory to
Agent.
"Administration Agreement" means the Administration Agreement
of even date herewith between Borrower and The Credit Store, Inc.
"Affiliate" means, with respect to any Person, (a) each Person
that, directly or indirectly, owns or controls, whether beneficially, or as a
trustee, guardian or other fiduciary, twenty percent (20%) or more of the Stock
having ordinary voting power in the election of directors of such Person, (b)
each Person that controls, is controlled by or is under common control with such
Person, (c) each of such Person's officers, directors, joint venturers and
partners and (d) in the case of Borrower, the immediate family members, spouses
and lineal descendants of individuals who are Affiliates of Borrower. For the
purposes of this definition, "control" of a Person shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of its
management or policies, whether through the ownership of voting securities, by
contract or otherwise; provided, however, that the term "Affiliate" shall
specifically exclude Agent and each Lender.
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"Agent" means GE Capital in its capacity as Agent for Lenders
or its successor appointed pursuant to Section 9.7.
"Agreement" means the Credit Agreement by and among Borrower,
Servicer, GE Capital, as Agent and Lender and the other Lenders from time to
time party thereto, as the same may be amended, supplemented, restated or
otherwise modified from time to time.
"Appendices" has the meaning ascribed to it in the recitals to
the Agreement.
"Assignment Agreement" has the meaning ascribed to it in
Section 9.1(a).
"Bankruptcy Code" means the provisions of Title 11 of the
United States Code, 11 U.S.C.ss.ss. 101 et seq.
"Blocked Account" has the meaning ascribed to it in Annex C.
"Borrower" has the meaning ascribed thereto in the recitals to
the Agreement.
"Borrower Accounts" has the meaning ascribed to it in Annex C.
"Borrowing Availability" has the meaning ascribed to it in
Section 1.1(a)(i).
"Borrowing Base" means, as of any date of determination by
Agent, from time to time, an amount equal to (i) the sum at such time of up to
70% of the Face Amount of Eligible Accounts:
(a) multiplied by the lesser of the purchase paid by Borrower
therefor or a Liquidation Value of one and one-half percent (1.5%) if
the Date of Last Payment is less than or equal to two years prior to
the date of determination;
(b) multiplied by the lesser of the purchase paid by Borrower
therefor or a Liquidation Value of one percent (1.00%) if the Date of
Last Payment is more than two years but less than or equal to five
years prior to the date of determination;
(c) multiplied by the lesser of the purchase paid by Borrower
therefor or a Liquidation of Value of one half of one percent (0.50%)
if the Date of Last Payment is more than five years and less than or
equal to seven years prior to the date of determination; and
(d) multiplied by the lesser of the purchase paid by Borrower
therefor or a Liquidation Value of one quarter of one percent (0.25%)
if the Date of Last Payment is more than seven years prior to the date
of termination;
or (ii), at Agent's option, the purchase prices set forth in the applicable
Forward Purchase Agreements (which may be higher or lower than 70% of the
Liquidation Values set forth above).
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Notwithstanding the foregoing: (i) if Borrower's Forward Purchase Agreements are
not related to specific batches of Accounts that are part of the Borrowing Base,
the amount of the Borrowing Base shall at no time exceed 70% of the aggregate
Face Amounts of Eligible Accounts that are then subject to valid and enforceable
Forward Purchase Agreements with creditworthy purchasers as reasonably
determined by Agent (taking into account the Liquidation Values of the Accounts
in the Borrowing Base) or, at Agent's option, the purchase prices in the Forward
Purchase Agreements, and (ii) if Borrower's Forward Purchase Agreements relate
to specific batches of Accounts that are part of the Borrowing Base, any
Account, the sale of which is not covered by a valid and enforceable Forward
Purchase Agreement with a creditworthy purchaser (as reasonably determined by
Agent), shall be excluded from the Borrowing Base.
"Borrowing Base Certificate" means a certificate to be
executed and delivered from time to time by Borrower in the form attached to the
Agreement as Exhibit 4.1(b).
"Business Day" means any day that is not a Saturday, a Sunday
or a day on which banks are required or permitted to be closed in the States of
Illinois, New York or South Dakota.
"Capital Expenditures" means, with respect to any Person, all
expenditures (by the expenditure of cash or the incurrence of Indebtedness) by
such Person during any measuring period for any fixed assets or improvements or
for replacements, substitutions or additions thereto, that have a useful life of
more than one year and that are required to be capitalized under GAAP.
"Cash Receipts" means for any fiscal period of Borrower, the
aggregate of all cash receipts received by Borrower other than Revolving Credit
Advances hereunder.
"Cash Disbursements" means for any fiscal period of Borrower,
the aggregate of all cash disbursements by Borrower (including, without
duplication, Restricted Payments), excluding payments of principal on the
Revolving Loan and cash paid for purchases of Accounts.
"Cash Management Systems" has the meaning ascribed to it in
Section 1.7.
"Change of Control" means any event, transaction or occurrence
as a result of which (a) Servicer ceases to own and control all of the economic
and voting rights associated with all of the outstanding capital Stock of
Borrower or (b) any Person or group of Persons (within the meaning of the
Securities Exchange Act of 1934) other than Martin J. Burke, III, Kevin Riordan,
Michael Philippe, Jay L. Botchman, Taxter One, LLC, JLB of Nevada, Inc., Lancer
Partners, L.P., Lancer Offshore Inc., Lancer Voyager Fund, Michael Lauer,
Renaissance Trust 1 and Blum Family Trust shall have acquired beneficial
ownership (within the meaning of Rule 13d-3 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934) of 35% or more of
the issued and outstanding shares of capital Stock of Servicer having the right
to vote for the election of directors of Servicer under ordinary circumstances;
(c) during any period of twelve consecutive calendar months, individuals who at
the beginning of such period constituted the board of directors of Servicer
(together with any
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new directors whose election by the board of directors of Servicer or whose
nomination for election by the Stockholders of Servicer was approved by a vote
of at least two-thirds of the directors then still in office who either were
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason other than death or
disability to constitute a majority of the directors then in office.
"Charge Off Date" means the date on which the originator of an
Account wrote off or charged off the Account as uncollectable, other than by
reason of the death of, or the filing of a petition under the Bankruptcy Code
with respect to, the Account Debtor.
"Charges" means all federal, state, county, city, municipal,
local, foreign or other governmental taxes (including taxes owed to the Pension
Benefit Guaranty Corporation at the time due and payable), levies, assessments,
charges, liens, claims or encumbrances upon or relating to (a) the Collateral,
(b) the Obligations, (c) the employees, payroll, income or gross receipts of
either of Borrower or Servicer, (d) Borrower's or Servicer's ownership or use of
any properties or other assets, or (e) any other aspect of Borrower's or
Servicer's business.
"Chattel Paper" means any "chattel paper," as such term is
defined in the Code, now owned or hereafter acquired by Borrower.
"Closing Date" means October 15, 1999.
"Closing Checklist" means the schedule, including all
appendices, exhibits or schedules thereto, listing certain documents and
information to be delivered in connection with the Agreement, the other Loan
Documents and the transactions contemplated thereunder, substantially in the
form attached hereto as Annex D.
"Code" means the Uniform Commercial Code as the same may, from
time to time, be enacted and in effect in the State of Illinois; provided, that
in the event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection or priority of, or remedies with respect to, Agent's or
any Lender's Lien on any Collateral is governed by the Uniform Commercial Code
as enacted and in effect in a jurisdiction other than the State of Illinois, the
term "Code" shall mean the Uniform Commercial Code as enacted and in effect in
such other jurisdiction solely for purposes of the provisions thereof relating
to such attachment, perfection, priority or remedies and for purposes of
definitions related to such provisions.
"Collateral" means the property covered by the Security
Agreement, and the other Collateral Documents and any other property, real or
personal, tangible or intangible, now existing or hereafter acquired, that may
at any time be or become subject to a security interest or Lien in favor of
Agent, on behalf of itself and Lenders, to secure the Obligations.
"Collateral Documents" means the Security Agreement and all
similar agreements entered into or granting a Lien upon property as security for
payment of, the Obligations.
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"Collateral Reports" means the reports with respect to the
Collateral referred to in Annex F.
"Collection Account" means that certain account of Agent,
account number 502-328-54 in the name of Agent at Bankers Trust Company in New
York, New York ABA No. 021 001 033, or such other account as may be specified in
writing by Agent as the "Collection Account."
"Commercial Paper Rate" means for each calendar month the per
annum rate of interest applicable to 30-day dealer commercial paper (high grade
unsecured notes sold through dealers by major corporations in multiples of
$1,000) as published in the "Money Rates" section of The Wall Street Journal as
of the last Business Day of the preceding month.
"Commitments" means (a) as to any Lender, the aggregate of
such Lender's commitments to make Revolving Credit Advances as set forth on
Annex J to the Agreement or in the most recent Assignment Agreement executed by
such Lender and (b) as to all Lenders, the aggregate of all Lenders'
Commitments, which aggregate commitment shall be Seventeen Million Five Hundred
Thousand ($17,500,000) on the Closing Date, as to each of clauses (a) and (b),
as such Commitments may be reduced, or adjusted from time to time in accordance
with the Agreement.
"Commitment Termination Date" means the earliest of (a) August
31, 2002, (b) the date of termination of Lenders' obligations to make Revolving
Credit Advances and acceleration of the outstanding Revolving Loan pursuant to
Section 8.2(b), and (c) the date of indefeasible prepayment in full by Borrower
of the Revolving Loan and the permanent reduction of the Commitment to zero
dollars ($0) pursuant to Section 1.3(a).
"Compliance Certificate" has the meaning ascribed to it in
Annex E.
"Concentration Account" has the meaning ascribed to it in
Annex C.
"Contracts" means all "contracts," as such term is defined in
the Code, now owned or hereafter acquired by Borrower, in any event, including
all contracts, undertakings, or agreements (other than rights evidenced by
Chattel Paper, Documents or Instruments) in or under which Borrower may now or
hereafter have any right, title or interest, including any agreement relating to
the terms of payment or the terms of performance of any Account, the Converted
Accounts Sale Agreements, the Account Purchase Agreements and the Forward
Purchase Agreements.
"Control Letter" means a letter agreement between Agent and
(i) the issuer of uncertificated securities with respect to uncertificated
securities in the name of any Company, (ii) a securities intermediary with
respect to securities, whether certificated or uncertificated, securities
entitlements and other financial assets held in a securities account in the name
of Borrower, (iii) a futures commission merchant, as applicable, or clearing
house with respect to
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commodity accounts and commodity contracts held by Borrower, in the form of
Exhibit B hereto.
"Convert" means the act of causing an Account Debtor to agree
to convert part or all of the outstanding balance of an Account to a current
outstanding balance on a newly issued credit card.
"Converted Accounts" means Accounts as to which the Account
Debtor has agreed to transfer part or all of the outstanding balance of an
Account to a current outstanding balance on a newly issued credit card and has
satisfied the underwriting criteria for issuance of the credit card.
"Converted Accounts Sale Agreement" means the Amended and
Restated Converted Accounts Sale Agreement of even date herewith between The
Credit Store, Inc., as buyer, and Borrower, as seller, for the sale of Converted
Accounts, as such agreement may be amended, modified or supplemented from time
to time, with the consent of Agent.
"Credit Collection Laws" means state and federal laws
governing the business of collecting consumer debt.
"Date of Last Payment" means the date on which the last
payment of principal or interest was received with respect to a particular
Account or, if such date is not known with respect to an Account, 180 days prior
to the Charge Off Date or, if the Charge Off Date is not known for such Account,
the Date of Last Payment shall be deemed to be more than seven years before such
Account was acquired by Borrower.
"Default" means any event that, with the passage of time or
notice or both, would, unless cured or waived, become an Event of Default.
"Default Rate" has the meaning ascribed to it in Section
1.5(d).
"Disbursement Accounts" has the meaning ascribed to it in
Annex C.
"Disclosure Schedules" means the Schedules prepared by
Borrower and denominated as Disclosure Schedules (1.1) through (5.4(a)) in the
Index of Appendices to the Agreement.
"Documents" means any "documents," as such term is defined in
the Code, now owned or hereafter acquired by Borrower, wherever located.
"Dollars" or "$" means lawful currency of the United States of
America.
"Eligible Accounts" has the meaning ascribed to it in Section
1.6 of the Agreement.
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"Environmental Laws" means all applicable federal, state and
local laws, statutes, ordinances, codes, rules, standards and regulations, now
or hereafter in effect, and any applicable judicial or administrative
interpretation thereof, including any applicable judicial or administrative
order, consent decree, order or judgment, imposing liability or standards of
conduct for or relating to the regulation and protection of human health,
safety, the environment and natural resources (including ambient air, surface
water, groundwater, wetlands, land surface or subsurface strata, wildlife,
aquatic species and vegetation). Environmental Laws include the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C.
ss.ss. 9601 et seq.) ("CERCLA"); the Hazardous Materials Transportation
Authorization Act of 1994 (49 U.S.C. ss.ss. 5101 et seq.); the Federal
Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. ss.ss. 136 et seq.); the
Solid Waste Disposal Act (42 U.S.C. ss.ss. 6901 et seq.); the Toxic Substance
Control Act (15 U.S.C. ss.ss. 2601 et seq.); the Clean Air Act (42 U.S.C. ss.ss.
7401 et seq.); the Federal Water Pollution Control Act (33 U.S.C. ss.ss. 1251 et
seq.); the Occupational Safety and Health Act (29 U.S.C. ss.ss. 651 et seq.);
and the Safe Drinking Water Act (42 U.S.C. ss.ss. 300(f) et seq.), and any and
all regulations promulgated thereunder, and all analogous state and local
counterparts or equivalents and any transfer of ownership notification or
approval statutes.
"Environmental Liabilities" means, with respect to any Person,
all liabilities, obligations, responsibilities, response, remedial and removal
costs, investigation and feasibility study costs, capital costs, operation and
maintenance costs, losses, damages, punitive damages, property damages, natural
resource damages, consequential damages, treble damages, costs and expenses
(including all fees, disbursements and expenses of counsel, experts and
consultants), fines, penalties, sanctions and interest incurred as a result of
or related to any claim, suit, action, investigation, proceeding or demand by
any Person, whether based in contract, tort, implied or express warranty, strict
liability, criminal or civil statute or common law, including any arising under
or related to any Environmental Laws, Environmental Permits, or in connection
with any Release or threatened Release or presence of a Hazardous Material
whether on, at, in, under, from or about or in the vicinity of any real or
personal property.
"Environmental Permits" means all permits, licenses,
authorizations, certificates, approvals or registrations required by any
Governmental Authority under any Environmental Laws.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and any regulations promulgated thereunder.
"ERISA Affiliate" means, with respect to Servicer, any trade
or business (whether or not incorporated) that, together with Servicer are
treated as a single employer within the meaning of Sections 414(b), (c), (m) or
(o) of the IRC.
"ERISA Event" means, with respect to Servicer or any ERISA
Affiliate, (a) any event described in Section 4043(c) of ERISA with respect to a
Title IV Plan; (b) the withdrawal of Servicer or ERISA Affiliate from a Title IV
Plan subject to Section 4063 of ERISA during a
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plan year in which it was a substantial employer, as defined in Section
4001(a)(2) of ERISA; (c) the complete or partial withdrawal of Servicer or any
ERISA Affiliate from any Multiemployer Plan; (d) the filing of a notice of
intent to terminate a Title IV Plan or the treatment of a plan amendment as a
termination under Section 4041 of ERISA; (e) the institution of proceedings to
terminate a Title IV Plan or Multiemployer Plan by the Pension Benefit Guaranty
Corporation; (f) the failure by Servicer or ERISA Affiliate to make when due
required contributions to a Multiemployer Plan or Title IV Plan unless such
failure is cured within 30 days; (g) any other event or condition that might
reasonably be expected to constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Title IV Plan
or Multiemployer Plan or for the imposition of liability under Section 4069 or
4212(c) of ERISA; (h) the termination of a Multiemployer Plan under Section
4041A of ERISA or the reorganization or insolvency of a Multiemployer Plan under
Section 4241 of ERISA; (i) the loss of a Qualified Plan's qualification or tax
exempt status; or (j) the termination of a Plan described in Section 4064 of
ERISA.
"ESOP" means a Plan that is intended to satisfy the
requirements of Section 4975(e)(7) of the IRC.
"Event of Default" has the meaning ascribed to it in
Section 8.1.
"Face Amount" means, as to any Account, the principal amount
thereof and all interest accrued with respect thereto as of the Charge Off Date,
and expressly excluding all interest, fees and expenses accruing with respect
thereto after the Charge Off Date, less payments made by the Account Debtor
subsequent to the Charge Off Date; provided, however, if Borrower and Servicer
do not know the Charge Off Date with respect to an account, the Face Amount of
such Account shall be determined as if the Charge-Off Date were the date such
Account was first acquired by Servicer or Borrower.
"Federal Funds Rate" means, for any day, a floating rate equal
to the weighted average of the rates on overnight federal funds transactions
among members of the Federal Reserve System, as determined by Agent.
"Federal Reserve Board" means the Board of Governors of the
Federal Reserve System.
"Fees" means any and all fees payable to Agent or any Lender
pursuant to Section 1.8.
"Financial Covenants" means the financial covenants set forth
in Annex G.
"Financial Statements" means the income statements, statements
of cash flows and balance sheets of Borrower delivered in accordance with
Section 3.4 and Annex E.
"Fiscal Month" means any of the monthly accounting periods of
Borrower.
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"Fiscal Quarter" means any of the quarterly accounting periods
of Borrower, ending on August 31, November 30, February 28/29 and May 31 of each
year.
"Fiscal Year" means any of the annual accounting periods of
Borrower ending on May 31 of each year.
"Forward Purchase Agreement" means a stand-by purchase
agreement with respect to the sale of Accounts (other than Converted Accounts)
(i) as to Accounts that were not originally purchased from Servicer, to Servicer
or an Affiliate or Servicer with Agent's prior written consent or (ii) to third
party purchasers acceptable to Agent, for cash, at prices equal to or in excess
of the outstanding Revolving Loan at such time applicable to various categories
of Accounts. Unless Agent agrees otherwise in writing, each Forward Purchase
Agreement shall be exercisable on an "all or none" basis. Such agreements with
Servicer or an Affiliate of Servicer shall be substantially in the form of
Exhibit A-1 hereto and such agreements with other parties shall be satisfactory
in form and substance to Agent.
"GAAP" means generally accepted accounting principles in the
United States of America, consistently applied, as such term is further defined
in Annex G to the Agreement.
"GE Capital" means General Electric Capital Corporation, a New
York corporation.
"General Intangibles" means "general intangibles," as such
term is defined in the Code, now owned or hereafter acquired by Borrower, and,
in any event, including all right, title and interest that Borrower may now or
hereafter have in or under any Contract, all customer lists, rights in
Intellectual Property, interests in partnerships, joint ventures and other
business associations, licenses, permits, copyrights, trade secrets, proprietary
or confidential information, inventions (whether or not patented or patentable),
technical information, procedures, designs, knowledge, know-how, software, data
bases, data, skill, expertise, experience, processes, models, drawings,
materials and records, goodwill (including the goodwill associated with any
trademark or trademark license), all rights and claims in or under insurance
policies (including insurance for fire, damage, loss and casualty, whether
covering personal property, real property, tangible rights or intangible rights,
all liability, life, key man and business interruption insurance, and all
unearned premiums), uncertificated securities, choses in action, deposit,
checking and other bank accounts, rights to receive tax refunds and other
payments, rights of indemnification, all books and records, correspondence,
credit files, invoices and other papers, including without limitation all tapes,
cards, computer runs and other papers and documents Borrower, or any computer
bureau or service company from time to time acting for such Borrower.
"Governmental Authority" means any nation or government, any
state or other political subdivision thereof, and any agency, department or
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
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"Guaranteed Indebtedness" shall mean, as to any Person, any
obligation of such Person guaranteeing any indebtedness, lease, dividend, or
other obligation ("primary obligation") of any other Person (the "primary
obligor") in any manner, including any obligation or arrangement of such Person
to (a) purchase or repurchase any such primary obligation, (b) advance or supply
funds (i) for the purchase or payment of any such primary obligation or (ii) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency or any balance sheet condition of the
primary obligor, (c) purchase property, securities or services primarily for the
purpose of assuring the owner of any such primary obligation of the ability of
the primary obligor to make payment of such primary obligation, or (d) indemnify
the owner of such primary obligation against loss in respect thereof. The amount
of any Guaranteed Indebtedness at any time shall be deemed to be an amount equal
to the lesser at such time of (x) the stated or determinable amount of the
primary obligation in respect of which such Guaranteed Indebtedness is incurred
and (y) the maximum amount for which such Person may be liable pursuant to the
terms of the instrument embodying such Guaranteed Indebtedness, or, if not
stated or determinable, the maximum reasonably anticipated liability (assuming
full performance) in respect thereof.
"Indebtedness" means , with respect to any Person, without
duplication (a) all indebtedness of such Person for borrowed money or for the
deferred purchase price of property payment for which is deferred six (6) months
or more, but excluding obligations to trade creditors incurred in the ordinary
course of business that are not overdue by more than six (6) months unless being
contested in good faith, (b) all reimbursement and other obligations with
respect to letters of credit, bankers' acceptances and surety bonds, whether or
not matured, (c) all obligations evidenced by notes, bonds, debentures or
similar instruments, (d) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to repossession
or sale of such property), (e) all capital lease obligations and the present
value (discounted at the Index Rate as in effect on the Closing Date) of future
rental payments under all synthetic leases, (f) all obligations of such Person
under commodity purchase or option agreements or other commodity price hedging
arrangements, in each case whether contingent or matured, (g) all obligations of
such Person under any foreign exchange contract, currency swap agreement,
interest rate swap, cap or collar agreement or other similar agreement or
arrangement designed to alter the risks of that Person arising from fluctuations
in currency values or interest rates, in each case whether contingent or
matured, (h) all Indebtedness referred to above secured by (or for which the
holder of such Indebtedness has an existing right, contingent or otherwise, to
be secured by) any Lien upon or in property or other assets (including accounts
and contract rights) owned by such Person, even though such Person has not
assumed or become liable for the payment of such Indebtedness, and (i) the
Obligations.
"Indemnified Liabilities" has the meaning ascribed to it in
Section 1.12.
"Indemnified Person" has the meaning ascribed to it in Section
1.12.
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"Index Rate" means, for any day, a floating rate equal to the
higher of (i) the rate publicly quoted from time to time by The Wall Street
Journal as the "base rate on corporate loans at large U.S. money center
commercial banks" (or, if The Wall Street Journal ceases quoting a base rate of
the type described, the highest per annum rate of interest published by the
Federal Reserve Board in Federal Reserve statistical release H.15 (519) entitled
"Selected Interest Rates" as the bank prime loan rate or its equivalent), and
(ii) the Federal Funds Rate plus fifty (50) basis points per annum. Each change
in any interest rate provided for in the Agreement based upon the Index Rate
shall take effect at the time of such change in the Index Rate.
"Instruments" means any "instrument," as such term is defined
in the Code, now owned or hereafter acquired by Borrower, wherever located, and,
in any event, including all certificated securities, all certificates of
deposit, and all notes and other, without limitation, evidences of indebtedness,
other than instruments that constitute, or are a part of a group of writings
that constitute, Chattel Paper.
"Intellectual Property" means any and all patents, copyrights,
trademarks, the goodwill associated with such trademarks, and licenses or rights
to use patents, trademarks or copyrights.
"Interest Payment Date" means the first Business Day of each
month, the date on which the Revolving Loan is paid in full and the Commitment
Termination Date.
"Investment Property" means all "investment property" as such
term is defined in Section 9-115 of the Code in those jurisdictions in which
such definition has been adopted now owned or hereafter acquired by Borrower,
wherever located, including (i) all securities, whether certificated or
uncertificated, including stocks, bonds, interests in limited liability
companies, partnership interests, treasuries, certificates of deposit, and
mutual fund shares; (ii) all securities entitlements of Borrower, including the
rights of Borrower to any securities account and the financial assets held by a
securities intermediary in such securities account and any free credit balance
or other money owing by any securities intermediary with respect to that
account; (iii) all securities accounts of Borrower; (iv) all commodity contracts
of Borrower; and (v) all commodity accounts held by Borrower.
"IRC" means the Internal Revenue Code of 1986, as amended, and
all regulations promulgated thereunder.
"IRS" means the Internal Revenue Service.
"Lenders" means GE Capital, the other Lenders named on the
signature pages of the Agreement, and, if any such Lender shall decide to assign
all or any portion of the Obligations, such term shall include any assignee of
such Lender.
"Liabilities" means, with respect to any Person, any and all
liabilities reflected on the balance sheet of such Person, prepared in
accordance with GAAP.
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"Lien" means any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including any lease or title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement perfecting a security interest
under the Code or comparable law of any jurisdiction).
"Liquidation Value" means as to each Eligible Account, the
estimated liquidation value thereof, expressed as a percentage of the Face
Amount of such Account based on the time elapsed since the Date of Last Payment,
in each case as set forth in the definition of Borrowing Base, as from time to
time amended.
"Litigation" has the meaning ascribed to it in Section 3.13.
"Loan Account" has the meaning ascribed to it in Section 1.12.
"Loan Documents" means the Agreement, the Revolving Notes, the
Collateral Documents, the Forward Purchase Agreements in effect as of the
Closing Date, the Converted Accounts Sale Agreements in effect as of the Closing
Date and the Account Purchase Agreements in effect as of the Closing Date. Any
reference in the Agreement or any other Loan Document to a Loan Document shall
include all appendices, exhibits or schedules thereto, and all amendments,
restatements, supplements or other modifications thereto, and shall refer to the
Agreement or such Loan Document as the same may be in effect at any and all
times such reference becomes operative.
"Margin Stock" has the meaning ascribed to it in Section 3.10.
"Material Adverse Effect" means a material adverse effect on
(a) the business, assets, operations, prospects or financial or other condition
of Borrower or Servicer, (b) Borrower's ability to pay any of the Loans or any
of the other Obligations in accordance with the terms of the Agreement, (c) the
Collateral or Agent's Liens, on behalf of itself and Lenders, on the Collateral
or the priority of such Liens, or (d) Agent's or any Lender's rights and
remedies under the Agreement and the other Loan Documents.
"Maximum Amount" means, as of any date of determination, an
amount equal to the Commitment of all Lenders as of that date.
"Minimum Amount" means $10,000,000 for each month during the
first year after the Closing Date and $12,500,000 for each month thereafter.
"Multiemployer Plan" means a "multiemployer plan" as defined
in Section 3(37) or 4001(a)(3) of ERISA, and to which Servicer or any ERISA
Affiliate is making, is obligated to make or has made or been obligated to make,
contributions on behalf of participants who are or were employed by any of them.
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"Net Borrowing Availability" means as of any date of
determination, the lesser of (i) the Maximum Amount and (ii) the Borrowing Base,
in each case less the Revolving Loan then outstanding.
"Net Worth" means, with respect to Borrower as of any date of
determination, the applicable Liquidation Values of its Accounts, minus the sum
of (a) reserves applicable thereto, and (b) all of Borrower's liabilities
(including accrued and deferred income taxes, but excluding that portion of the
Revolving Loan in the amount of $320,000 used to pay closing fees and expenses),
all as determined in accordance with GAAP.
"Non-Funding Lender" has the meaning ascribed to it in Section
9.9(a)(ii).
"Notice of Revolving Credit Advance" has the meaning ascribed
to it in Section 1.1(a).
"Obligations" means all loans, advances, debts, liabilities
and obligations, for the performance of covenants, tasks or duties or for
payment of monetary amounts (whether or not such performance is then required or
contingent, or such amounts are liquidated or determinable) owing by Borrower to
Agent or any Lender, and all covenants and duties regarding such amounts, of any
kind or nature, present or future, whether or not evidenced by any note,
agreement or other instrument, arising under the Agreement or any of the other
Loan Documents. This term includes all principal, interest (including all
interest that accrues after the commencement of any case or proceeding by or
against Borrower in bankruptcy, whether or not allowed in such case of
proceeding), Fees, Charges, expenses, attorneys' fees and any other sum
chargeable to Borrower under the Agreement or any of the other Loan Documents.
"Overadvance" has the meaning ascribed to it in Section
1.1(a)(iii).
"Pension Plan" means a Plan described in Section 3(2) of
ERISA.
"Person" means any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, limited liability company, institution, public benefit corporation,
other entity or government (whether federal, state, county, city, municipal,
local, foreign, or otherwise, including any instrumentality, division, agency,
body or department thereof).
"Plan" means, at any time, an "employee benefit plan," as
defined in Section 3(3) of ERISA, that Borrower or Servicer or an ERISA
Affiliate maintains, contributes to or has an obligation to contribute to on
behalf of participants who are or were employed by Borrower or Servicer.
"Pro Formas" means (i) the unaudited consolidated balance
sheet of Servicer and (ii) the unaudited balance sheet of Borrower, in each
case, as of July 31, 1999 after giving pro forma effect to the Related
Transactions.
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"Pro Rata Share" means with respect to all matters relating to
any Lender the percentage obtained by dividing (i) (a) the Commitment of that
Lender by (ii) the aggregate Commitments of all Lenders and (b) on and after the
Commitment Termination Date, the percentage obtained by dividing (i) the
aggregate outstanding principal balance of the Revolving Loan held by that
Lender, by (ii) the outstanding principal balance of the Revolving Loan held by
all Lenders.
"Proceeds" means "proceeds," as such term is defined in the
Code and, in any event, shall include (a) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to Borrower from time to time with
respect to any of the Collateral, (b) any recoveries by Borrower against third
parties with respect to any litigation or dispute concerning any of the
Collateral, (c) dividends, interest and distributions with respect to Investment
Property, (d) all collections on the Accounts from Account Debtors and all
payments made to Borrower under the Converted Account Sales Agreement and
Forward Purchase Agreements and (e) any and all other amounts from time to time
paid or payable under or in connection with any of the Collateral, upon
disposition or otherwise.
"Projections" means Borrower's and Servicer's forecasted
consolidated: (a) balance sheets; (b) profit and loss statements; (c) cash flow
statements; and (d) capitalization statements, all consistent with the
historical Financial Statements of Borrower, together with appropriate
supporting details and a statement of underlying assumptions.
"Qualified Assignee" means (a) any Lender, any Affiliate of
any Lender and, with respect to any Lender that is an investment fund that
invests in commercial loans, any other investment fund that invests in
commercial loans and that is managed or advised by the same investment advisor
as such Lender or by an Affiliate of such investment advisor, and (b) any
commercial bank, savings and loan association or savings bank or any other
entity which is an "accredited investor" (as defined in Regulation D under the
Securities Act) which extends credit or buys loans as one of its businesses,
including insurance companies, mutual funds, lease financing companies and
commercial finance companies; and (ii) in addition to the criteria set forth in
the foregoing clause (i), any such Assignee shall be a Person which has and
maintains a rating of BBB or higher from S&P and a rating of Baa2 or higher from
Moody's and which, through its applicable lending office, is capable of lending
to Borrowers without the imposition of any withholding or similar taxes;
provided that (A) no creditor of Servicer or its Affiliates, (B) no Person
determined by Agent to be acting in the capacity of a vulture fund or distressed
debt purchaser and (C) no competitor of Servicer shall be a Qualified Assignee.
"Qualified Plan" means a Pension Plan that is intended to be
tax-qualified under Section 401(a) of the IRC.
"Related Transactions" means the initial borrowing under the
Revolving Loan on the Closing Date, the contribution of Eligible Accounts to the
capital of Borrower on the Closing Date, the sale of Eligible Accounts to
Borrower on the Closing Date, entering into the initial
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Forward Purchase Agreement, the payment of all fees, costs and
expenses associated with all of the foregoing and the execution and delivery of
all of the Related Transactions Documents.
"Related Transactions Documents" means the Loan Documents, the
Account Purchase Agreement between Borrower and Servicer, the initial Forward
Purchase Agreement and the Converted Accounts Sale Agreement.
"Requisite Lenders" means Lenders having (a) more than
sixty-six and two-thirds percent (66 2/3%) of the Commitments of all Lenders, or
(b) if the Commitments have been terminated, more than sixty-six and two-thirds
percent (66 2/3%) of the aggregate outstanding amount of the Revolving Loan.
"Reserves" means, with respect to the Borrowing Base of
Borrower such reserves against Eligible Accounts or Borrowing Availability of
Borrower that Agent may, in its reasonable credit judgment, establish from time
to time.
"Restricted Payment" means, with respect to Borrower (a) the
declaration or payment of any dividend or the incurrence of any liability to
make any other payment or distribution of cash or other property or assets in
respect of Stock; provided that dividends in an aggregate amount not to exceed
the aggregate unpaid purchase price of Accounts previously purchased by Borrower
from The Credit Store, Inc. shall not constitute Restricted Payments so long as
no Event of Default has occurred or will result after giving effect to the
payment of any such dividend; (b) any payment on account of the purchase,
redemption, defeasance, sinking fund or other retirement of Borrower's Stock or
any other payment or distribution made in respect thereof, either directly or
indirectly; (c) any payment made to redeem, purchase, repurchase or retire, or
to obtain the surrender of, any outstanding warrants, options or other rights to
acquire Stock of Borrower now or hereafter outstanding; (d) any payment of a
claim for the rescission of the purchase or sale of, or for material damages
arising from the purchase or sale of, any shares of Borrower's Stock or of a
claim for reimbursement, indemnification or contribution arising out of or
related to any such claim for damages or rescission; (e) any payment, loan,
contribution, or other transfer of funds or other property to any Stockholder of
Borrower other than payment of compensation in the ordinary course to
stockholders who are employees of Borrower; and (f) any payment of management
fees (or other fees of a similar nature) by Borrower to any Stockholder of
Borrower or its Affiliates.
"Retiree Welfare Plan" means, at any time, a Welfare Plan that
provides for continuing coverage or benefits for any participant or any
beneficiary of a participant after such participant's termination of employment,
other than continuation coverage provided pursuant to Section 4980B of the IRC
and at the sole expense of the participant or the beneficiary of the
participant.
"Revolving Credit Advance" has the meaning ascribed to it in
Section 1.1(a)(i).
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"Revolving Loan" means, at any time, the sum of the aggregate
amount of Revolving Credit Advances outstanding to Borrower.
"Revolving Note" has the meaning ascribed to it in Section
1.1(a)(ii).
"Security Agreement" means the Security Agreement of even date
herewith entered into by and among Agent, on behalf of itself and Lenders, and
Borrower, as such agreement may be amended, modified or supplemented from time
to time in accordance with its terms.
"Seller Note" shall have the meaning ascribed to it in Section
1.4.
"Servicer" means The Credit Store, Inc., a Delaware
corporation, or any replacement servicer appointed by Agent pursuant to Annex B.
"Servicing Fee" means 25% of collections on Unconverted
Accounts from Account Debtors.
"Solvent" means, with respect to any Person on a particular
date, that on such date (a) the fair value of the property of such Person is
greater than the total amount of liabilities, including contingent liabilities,
of such Person; (b) the present fair salable value of the assets of such Person
is not less than the amount that will be required to pay the probable liability
of such Person on its debts as they become absolute and matured; (c) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature; and (d) such Person is not engaged in a business or transaction, and is
not about to engage in a business or transaction, for which such Person's
property would constitute an unreasonably small capital. The amount of
contingent liabilities (such as litigation, guaranties and pension plan
liabilities) at any time shall be computed as the amount that, in light of all
the facts and circumstances existing at the time, represents the amount that can
be reasonably be expected to become an actual or matured liability.
"Stock" means all shares, options, warrants, general or
limited partnership interests, membership interests or other equivalents
(regardless of how designated) of or in a corporation, partnership, limited
liability company or equivalent entity whether voting or nonvoting, including
common stock, preferred stock or any other "equity security" (as such term is
defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934).
"Stockholder" means, with respect to any Person, each holder
of Stock of such Person.
"Subsidiary" means, with respect to any Person, (a) any
corporation of which an aggregate of more than fifty percent (50%) of the
outstanding Stock having ordinary voting power to elect a majority of the board
of directors of such corporation (irrespective of whether, at the time, Stock of
any other class or classes of such corporation shall have or might have voting
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power by reason of the happening of any contingency) is at the time, directly or
indirectly, owned legally or beneficially by such Person or one or more
Subsidiaries of such Person, or with respect to which any such Person has the
right to vote or designate the vote of fifty percent (50%) or more of such Stock
whether by proxy, agreement, operation of law or otherwise, and (b) any
partnership or limited liability company in which such Person and/or one or more
Subsidiaries of such Person shall have an interest (whether in the form of
voting or participation in profits or capital contribution) of more than fifty
percent (50%) or of which any such Person is a general partner or may exercise
the powers of a general partner.
"Taxes" means taxes, levies, imposts, deductions, Charges or
withholdings, and all liabilities with respect thereto, excluding taxes imposed
on or measured by the net income of Agent or a Lender.
"Termination Date" means the date on which (a) the Loans have
been indefeasibly repaid in full, (b) all other Obligations under the Agreement
and the other Loan Documents have been completely discharged, and (c) Borrower
shall not have any further right to borrow any monies under the Agreement.
"Third Party Interactives" means all Persons with whom
Servicer exchanges data electronically in the ordinary course of business,
including, without limitation, customers, suppliers, third-party vendors,
subcontractors, processors-converters, shippers and warehousemen.
"Title IV Plan" means a Pension Plan which is subject to Title
IV of ERISA.
"Unfunded Pension Liability" means, at any time, the aggregate
amount, if any, of the sum of (a) the amount by which the present value of all
accrued benefits under each Title IV Plan exceeds the fair market value of all
assets of such Title IV Plan allocable to such benefits in accordance with Title
IV of ERISA, all determined as of the most recent valuation date for each such
Title IV Plan using the actuarial assumptions for funding purposes in effect
under such Title IV Plan, and (b) for a period of five (5) years following a
transaction which might reasonably be expected to be covered by Section 4069 of
ERISA, the liabilities (whether or not accrued) that could be avoided by
Servicer or any ERISA Affiliate as a result of such transaction.
"Unconverted Accounts" means all Accounts other than Converted
Accounts.
"Welfare Plan" means a Plan described in Section 3(1) of
ERISA.
"Year 2000 Date-Sensitive System/Component" means, as to any
Person, any system software, network software, applications software, data base,
computer file, embedded microchip, firmware or hardware that accepts, creates,
manipulates, sorts, sequences, calculates, compares or outputs calendar-related
data accurately; such systems and components shall include, without limitation,
mainframe computers, file server/client systems, computer workstations, routers,
hubs, other network-related hardware, and other computer-related
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software, firmware or hardware and information processing and delivery systems
of any kind and telecommunications systems and other communications processors,
security systems, alarms, elevators and HVAC systems.
"Year 2000 Problems" means, with respect to Servicer,
limitations on the capacity or readiness of Servicer's Year 2000 Date-Sensitive
Systems/Components to accurately accept, create, manipulate, sort, sequence,
calculate, compare or output calendar date information with respect to calendar
year 1999 or any subsequent calendar year beginning on or after January 1, 2000
(including leap year computations), including, without limitation, exchanges of
information among Year 2000 Date-Sensitive Systems/Components of Servicer and
exchanges of information among Borrower or Servicer and Year 2000 Date-Sensitive
Systems/Components of Third Party Interactives and functionality of peripheral
interfaces, firmware and embedded microchips.
Rules of construction with respect to accounting terms used in
the Agreement or the other Loan Documents shall be as set forth in Annex G. All
other undefined terms contained in any of the Loan Documents shall, unless the
context indicates otherwise, have the meanings provided for by the Code as in
effect in the State of Illinois to the extent the same are used or defined
therein. Unless otherwise specified, references in the Agreement or any of the
Appendices to a Section, subsection or clause refer to such Section, subsection
or clause as contained in the Agreement. The words "herein," "hereof" and
"hereunder" and other words of similar import refer to the Agreement as a whole,
including all Annexes, Exhibits and Schedules, as the same may from time to time
be amended, restated, modified or supplemented, and not to any particular
section, subsection or clause contained in the Agreement or any such Annex,
Exhibit or Schedule.
Wherever from the context it appears appropriate, each term
stated in either the singular or plural shall include the singular and the
plural, and pronouns stated in the masculine, feminine or neuter gender shall
include the masculine, feminine and neuter genders. The words "including",
"includes" and "include" shall be deemed to be followed by the words "without
limitation"; the word "or" is not exclusive; references to Persons include their
respective successors and assigns (to the extent and only to the extent
permitted by the Loan Documents) or, in the case of governmental Persons,
Persons succeeding to the relevant functions of such Persons; and all references
to statutes and related regulations shall include any amendments of the same and
any successor statutes and regulations. Whenever any provision in any Loan
Document refers to the knowledge (or an analogous phrase) of Borrower or
Servicer, such words are intended to signify that Borrower or Servicer has
actual knowledge or awareness of a particular fact or circumstance or that
Borrower or Servicer, if it had exercised reasonable diligence, would have known
or been aware of such fact or circumstance.
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AMENDED 1997 STOCK OPTION PLAN
OF
CREDIT STORE, INC.
(AS AMENDED ON DECEMBER 15, 1997)
1. PURPOSES OF THE PLAN. This stock incentive plan (the
"Plan") is designed to provide an incentive to key employees, consultants and
directors of CREDIT STORE, INC., a Delaware corporation (the "Company"), or any
of its Subsidiaries (as defined in Paragraph 19), and to offer an additional
inducement in obtaining the services of such persons. The Plan provides for the
grant of "incentive stock options" ("ISOs") within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code") and nonqualified
stock options which do not qualify as ISOs ("NQSOs"). The Company makes no
representation or warranty, express or implied, as to the qualification of any
option as an "incentive stock option" under the Code.
2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Paragraph 12, the aggregate number of shares of Common Stock, $.001 par value
per share, of the Company ("Common Stock") for which options may be granted
under the Plan shall not exceed 4,000,000. Such shares of Common Stock may, in
the discretion of the Board of Directors of the Company (the "Board of
Directors"), consist either in whole or in part of authorized but unissued
shares of Common Stock or shares of Common Stock held in the treasury of the
Company. Subject to the provisions of Paragraph 13, any shares of Common Stock
subject to an option which for any reason expires, is canceled or is terminated
unexercised or which ceases for any reason to be exercisable, shall again become
available for the granting of options under the Plan. The Company shall at all
times during the term of the Plan reserve and keep available such number of
shares of Common Stock as will be sufficient to satisfy the requirements of the
Plan.
3. ADMINISTRATION OF THE PLAN. The Plan shall be
administered by the Board of Directors or a committee (the "Committee") of the
Board of Directors consisting of not less than two directors (those
administering the Plan are the "Administrators"). During such time as the
Company has a class of equity securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended, each Administrator shall meet the
requirements of Rule 16b-3 promulgated under such act (as the same may be in
effect and interpreted from time to time, "Rule 16b-3"). Unless otherwise
provided in the By-laws of the Company or resolution of the Board of Directors,
a majority of the members of the Committee shall constitute a quorum, and the
acts of a majority of the members present at any meeting at which a quorum is
present, and any acts approved in writing by all of the members of the Committee
without a meeting, shall be the acts of the Committee.
Subject to the express provisions of the Plan, the
Administrators shall have the authority, in their sole discretion, to determine:
the key employees, consultants and directors who shall be granted options; the
type of option to be granted to a key employee; the times when an option
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<PAGE> 2
shall be granted; the number of shares of Common Stock to be subject to each
option; the term of each option; the date each option shall become exercisable;
whether an option shall be exercisable in whole, in part or in installments and,
if in installments, the number of shares of Common Stock to be subject to each
installment, whether the installments shall be cumulative, the date each
installment shall become exercisable and the term of each installment; whether
to accelerate the date of exercise of any option or installment; whether shares
of Common Stock may be issued upon the exercise of an option as partly paid and,
if so, the dates when future installments of the exercise price shall become due
and the amounts of such installments; the exercise price of each option; the
form of payment of the exercise price; whether to restrict the sale or other
disposition of the shares of Common Stock acquired upon the exercise of an
option and, if so, whether and under what conditions to waive any such
restriction; whether and under what conditions to subject all or a portion of
the grant or exercise of an option or the shares acquired pursuant to the
exercise of an option to the fulfillment of certain restrictions or
contingencies as specified in the contract referred to in Paragraph 11 hereof
(the "Contract"), including without limitation, restrictions or contingencies
relating to entering into a covenant not to compete with the Company, any of its
Subsidiaries or a Parent (as defined in Paragraph 19), to financial objectives
for the Company, any of its Subsidiaries or a Parent, a division of any of the
foregoing, a product line or other category, and/or to the period of continued
employment of the optionee with the Company, any of its Subsidiaries or a
Parent, and to determine whether such restrictions or contingencies have been
met; whether an optionee is Disabled (as defined in Paragraph 19); the amount,
if any, necessary to satisfy the obligation of the Company, a Subsidiary or
Parent to withhold taxes or other amounts; the fair market value of a share of
Common Stock; to construe the respective Contracts and the Plan; with the
consent of the optionee, to cancel or modify an option, provided, that the
modified provision is permitted to be included in an option granted under the
Plan on the date of the modification, and further, provided, that in the case of
a modification (within the meaning of Section 424(h) of the Code) of an ISO,
such option as modified would be permitted to be granted on the date of such
modification under the terms of the Plan; to prescribe, amend and rescind rules
and regulations relating to the Plan; to approve any provision of the Plan or
any option granted under the Plan, or any amendment to either, which under Rule
16b-3 requires the approval of the Board of Directors, a committee of
non-employee directors or the stockholders to be exempt (unless otherwise
specifically provided herein); and to make all other determinations necessary or
advisable for administering the Plan. Any controversy or claim arising out of or
relating to the Plan, any option granted under the Plan or any Contract shall be
determined unilaterally by the Administrators in their sole discretion. The
determinations of the Administrators on the matters referred to in this
Paragraph 3 shall be conclusive and binding on the parties.
No Administrator or former Administrator shall be liable
for any action, failure to act or determination made in good faith with respect
to the Plan or any option hereunder. In addition to any other rights of
indemnification they may have as directors or as an Administrator or former
Administrator, each such member and former member shall be indemnified and held
harmless by the Company from and against any reasonable expenses (including
reasonable attorneys' fees) actually and necessarily incurred in connection with
the defense of any claim, action, suit, proceeding or appeal (collectively,
"Case") to which he is a party by reason of an action or failure to act under or
in
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<PAGE> 3
connection with the Plan or any option granted hereunder, and against all
amounts paid by him in settlement of such Case (provided such settlement is
approved by the Company) or paid in satisfaction of a judgment in such Case;
provided, however, that such Administrator or former Administrator shall not be
entitled to indemnification (a) if he did not within 60 days after the
institution of such Case offer to the Company in writing the opportunity to
handle and defend the Case at its own expense, or (b) to the extend the Case
resulted from his gross negligence or willful misconduct.
4. ELIGIBILITY. The Administrators may from time to time,
in their sole discretion, consistent with the purposes of the Plan, grant
options to (a) key employees (including officers and directors who are key
employees) of the Company or any of its Subsidiaries, (b) consultants to the
Company or any of its Subsidiaries and (c) Non-Employee Directors (as defined in
Paragraph 19). Such options granted shall cover such number of shares of Common
Stock as the Administrators may determine, in their sole discretion, as set
forth in the applicable Contract; provided, however, that the maximum number of
shares subject to options that may be granted to any employee during any
calendar year under the Plan (the "162(m) Maximum") shall be 1,000,000 shares;
and further, provided, that the aggregate market value (determined at the time
the option is granted in accordance with Paragraph 5) of the shares of Common
Stock for which any eligible employee may be granted ISOs under the Plan or any
other plan of the Company, or of a Parent or a Subsidiary of the Company, which
are exercisable for the first time by such optionee during any calendar year
shall not exceed $100,000. Such ISO limitation shall be applied by taking ISOs
into account in the order in which they were granted. Any option granted in
excess of such ISO limitation amount shall be treated as a NQSO to the extent of
such excess.
5. EXERCISE PRICE. The exercise price of the shares of
Common Stock under each option shall be determined by the Administrators, in
their sole discretion, as set forth in the applicable Contract; provided,
however, that the exercise price of an ISO shall not be less than the fair
market value of the Common Stock subject to such option on the date of grant;
and further, provided, that if, at the time an ISO is granted, the optionee owns
(or is deemed to own under Section 424(d) of the Code) stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company, of any of its Subsidiaries or of a Parent, the exercise price of such
ISO shall not be less than 110% of the fair market value of the Common Stock
subject to such ISO on the date of grant.
The fair market value of a share of Common Stock on any
day shall be (a) if the principal market for the Common Stock is a national
securities exchange, the average of the highest and lowest sales prices per
share of Common Stock on such day as reported by such exchange or on a composite
tape reflecting transactions on such exchange, (b) if the principal market for
the Common Stock is not a national securities exchange and the Common Stock is
quoted on The Nasdaq Stock Market ("Nasdaq"), and (i) if actual sales price
information is available with respect to the Common Stock, the average of the
highest and lowest sales prices per share of Common Stock on such day on Nasdaq,
or (ii) if such information is not available, the average of the highest bid and
lowest asked prices per share of Common Stock on such day on Nasdaq, or (c) if
the principal market for the
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Common Stock is not a national securities exchange and the Common Stock is not
quoted on Nasdaq, the average of the highest bid and lowest asked prices per
share of Common Stock on such day as reported on the OTC Bulletin Board Service
or by National Quotation Bureau, Incorporated or a comparable service; provided,
however, that if clauses (a), (b) and (c) of this Paragraph are all
inapplicable, or if no trades have been made or no quotes are available for such
day, the fair market value of the Common Stock shall be determined by the Board
of Directors by any method consistent with applicable regulations adopted by the
Treasury Department relating to stock options.
6. TERM. The term of each Administrator's Option granted
pursuant to the Plan shall be such term as is established by the Administrators,
in their sole discretion; provided, however, that the term of each ISO granted
pursuant to the Plan shall be for a period not exceeding 10 years from the date
of grant thereof; and further, provided, that if, at the time an ISO is granted,
the optionee owns (or is deemed to own under Section 424(d) of the Code) stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company, of any of its Subsidiaries or of a Parent, the term of the
ISO shall be for a period not exceeding five years from the date of grant.
Options shall be subject to earlier termination as hereinafter provided.
7. EXERCISE. An option (or any part or installment
thereof), to the extent then exercisable, shall be exercised by giving written
notice to the Company at its principal office stating which option is being
exercised, specifying the number of shares of Common Stock as to which such
option is being exercised and accompanied by payment in full of the aggregate
exercise price therefor (or the amount due on exercise if the applicable
Contract permits installment payments) (a) in cash or by certified check or (b)
if the applicable Contract permits, with previously acquired shares of Common
Stock having an aggregate fair market value on the date of exercise (determined
in accordance with Paragraph 5) equal to the aggregate exercise price of all
options being exercised, or with any combination of cash, certified check or
shares of Common Stock having such value. The Company shall not be required to
issue any shares of Common Stock pursuant to any such option until all required
payments, including any required withholding, have been made.
The Administrators may, in their sole discretion, permit
payment of the exercise price of an option by delivery by the optionee of a
properly executed notice, together with a copy of his irrevocable instructions
to a broker acceptable to the Administrators to deliver promptly to the Company
the amount of sale or loan proceeds sufficient to pay such exercise price. In
connection therewith, the Company may enter into agreements for coordinated
procedures with one or more brokerage firms.
A person entitled to receive Common Stock upon the
exercise of an option shall not have the rights of a stockholder with respect to
such shares of Common Stock until the date of issuance of a stock certificate
for such shares or in the case of uncertificated shares, an entry is made on the
books of the Company's transfer agent representing such shares; provided,
however, that until such stock certificate is issued or book entry is made, any
optionee using previously acquired shares
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<PAGE> 5
of Common Stock in payment of an option exercise price shall continue to have
the rights of a stockholder with respect to such previously acquired shares.
In no case may a fraction of a share of Common Stock be
purchased or issued under the Plan.
8. TERMINATION OF RELATIONSHIP. Except as may otherwise be
expressly provided in the applicable Contract, an optionee whose relationship
with the Company, its Parent and Subsidiaries as an employee or a consultant has
terminated for any reason (other than as a result of the death or Disability of
the optionee) may exercise the options granted to him as an employee or
consultant, to the extent exercisable on the date of such termination, at any
time within three months after the date of termination, but not thereafter and
in no event after the date the option would otherwise have expired; provided,
however, that if such relationship is terminated either (a) for Cause (as
defined in Paragraph 19), or (b) without the consent of the Company, such option
shall terminate immediately. Except as may otherwise be expressly provided in
the applicable Contract, options granted under the Plan to an employee or
consultant shall not be affected by any change in the status of the optionee so
long as the optionee continues to be an employee of, or a consultant to, the
Company, or any of the Subsidiaries or a Parent (regardless of having changed
from one to the other or having been transferred from one corporation to
another).
For the purposes of the Plan, an employment relationship
shall be deemed to exist between an individual and the Company, any of its
Subsidiaries or a Parent if, at the time of the determination, the individual
was an employee of such corporation for purposes of Section 422(a) of the Code.
As a result, an individual on military, sick leave or other bona fide leave of
absence shall continue to be considered an employee for purposes of the Plan
during such leave if the period of the leave does not exceed 90 days, or, if
longer, so long as the individual's right to reemployment with the Company, any
of its Subsidiaries or a Parent is guaranteed either by statute or by contract.
If the period of leave exceeds 90 days and the individual's right to
reemployment is not guaranteed by statute or by contract, the employment
relationship shall be deemed to have terminated on the 91st day of such leave.
Except as may otherwise be expressly provided in the
applicable Contract, an optionee whose relationship with the Company as a
Non-Employee Director ceases for any reason (other than as a result of his death
or Disability) may exercise the options granted to him as a Non-Employee
Director, to the extent exercisable on the date of such termination, at any time
within three months after the date of termination, but not thereafter and in no
event after the date the option would otherwise have expired; provided, however,
that if such relationship is terminated for Cause, such option shall terminate
immediately. Except as may otherwise be expressly provided in the applicable
Contract, options granted to a Non-Employee Director shall not be affected by
the optionee becoming an employee of the Company, any of its Subsidiaries or a
Parent.
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<PAGE> 6
Nothing in the Plan or in any option granted under the
Plan shall confer on any optionee any right to continue in the employ of, or as
a consultant to, the Company, any of its Subsidiaries or a Parent, or as a
director of the Company, or interfere in any way with any right of the Company,
any of its Subsidiaries or a Parent to terminate the optionee's relationship at
any time for any reason whatsoever without liability to the Company, any of its
Subsidiaries or a Parent.
9. DEATH OR DISABILITY OF AN OPTIONEE. Except as may
otherwise be expressly provided in the applicable Contract, if an optionee dies
(a) while he is an employee of, or consultant to, the Company, any of its
Subsidiaries or a Parent, (b) within three months after the termination of such
relationship (unless such termination was for Cause or without the consent of
the Company) or (c) within one year following the termination of such
relationship by reason of his Disability, the options that were granted to him
as an employee or consultant may be exercised, to the extent exercisable on the
date of his death, by his Legal Representative (as defined in Paragraph 19) at
any time within one year after death, but not thereafter and in no event after
the date the option would otherwise have expired.
Except as may otherwise be expressly provided in the
applicable Contract, any optionee whose relationship as an employee of, or
consultant to, the Company, its Parent and Subsidiaries has terminated by reason
of such optionee's Disability may exercise the options that were granted to him
as an employee or consultant, to the extent exercisable upon the effective date
of such termination, at any time within one year after such date, but not
thereafter and in no event after the date the option would otherwise have
expired.
Except as may otherwise be expressly provided in the
applicable Contract, any optionee whose relationship as a Non-Employee Director
ceases as a result of his death or Disability may exercise the options that were
granted to him as a Non-Employee Director, to the extent exercisable on the date
of such termination, at any time within one year after the date of termination,
but not thereafter and in no event after the date the option would otherwise
have expired. In the case of the death of the Non-Employee Director, the option
may be exercised by his Legal Representative.
10. COMPLIANCE WITH SECURITIES LAWS. It is a condition to
the exercise of any option that either (a) a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
shares of Common Stock to be issued upon such exercise shall be effective and
current at the time of exercise, or (b) there is an exemption from registration
under the Securities Act for the issuance of the shares of Common Stock upon
such exercise. Nothing herein shall be construed as requiring the Company to
register shares subject to any option under the Securities Act or to keep any
Registration Statement effective or current.
The Administrators may require, in their sole discretion,
as a condition to the receipt of an option or the exercise of any option that
the optionee execute and deliver to the Company his representations and
warranties, in form, substance and scope satisfactory to the Administrators,
which the Administrators determines are necessary or convenient to facilitate
the perfection of an
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<PAGE> 7
exemption from the registration requirements of the Securities Act, applicable
state securities laws or other legal requirement, including without limitation
that (a) the shares of Common Stock to be issued upon the exercise of the option
are being acquired by the optionee for his own account, for investment only and
not with a view to the resale or distribution thereof, and (b) any subsequent
resale or distribution of shares of Common Stock by such optionee will be made
only pursuant to (i) a Registration Statement under the Securities Act which is
effective and current with respect to the shares of Common Stock being sold, or
(ii) a specific exemption from the registration requirements of the Securities
Act, but in claiming such exemption, the optionee shall prior to any offer of
sale or sale of such shares of Common Stock provide the Company with a favorable
written opinion of counsel satisfactory to the Company, in form, substance and
scope satisfactory to the Company, as to the applicability of such exemption to
the proposed sale or distribution.
In addition, if at any time the Administrators shall
determine, in their sole discretion, that the listing or qualification of the
shares of Common Stock subject to any option on any securities exchange, Nasdaq
or under any applicable law, or the consent or approval of any governmental
agency or regulatory body, is necessary or desirable as a condition to, or in
connection with, the granting of an option or the issuing of shares of Common
Stock thereunder, such option may not be granted and such option may not be
exercised in whole or in part unless such listing, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Company.
11. CONTRACTS. Each option shall be evidenced by an
appropriate Contract which shall be duly executed by the Company and the
optionee, and shall contain such terms, provisions and conditions not
inconsistent herewith as may be determined by the Administrators. The terms of
each option and Contract need not be identical.
12. ADJUSTMENTS UPON CHANGES IN COMMON STOCK.
Notwithstanding any other provision of the Plan, in the event of a stock
dividend, recapitalization, merger in which the Company is the surviving
corporation, spin-off, split-up, combination or exchange of shares or the like
which results in a change in the number or kind of shares of Common Stock which
is outstanding immediately prior to such event, the aggregate number and kind of
shares subject to the Plan, the aggregate number and kind of shares subject to
each outstanding option and the exercise price thereof shall be appropriately
adjusted by the Board of Directors, whose determination shall be conclusive and
binding on all parties. Such adjustment may provide for the elimination of
fractional shares which might otherwise be subject to options without payment
therefor.
In the event of (a) the liquidation or dissolution of the
Company, (b) a merger or similar transaction in which the Company is not the
surviving corporation or a consolidation or (c) a merger (or similar
transaction) in which the Company is the surviving corporation but more than 50%
of the outstanding Common Stock is transferred or exchanged for other
consideration or in which shares of Common Stock are issued in an amount in
excess of the number of shares of Common Stock outstanding immediately preceding
the merger (or similar transaction), any outstanding options shall
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<PAGE> 8
terminate upon the earliest of any such event, unless other provision is made
therefor in the transaction or the applicable Contract.
13. AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was
adopted by the Board of Directors on March 5, 1997 and amended by the Board of
Directors on December 15, 1997. No ISO may be granted under the Plan after March
4, 2007. The Board of Directors, without further approval of the Company's
stockholders, may at any time suspend or terminate the Plan, in whole or in
part, or amend it from time to time in such respects as it may deem advisable,
including, without limitation, in order that ISOs granted hereunder meet the
requirements for "incentive stock options" under the Code, to comply with the
provisions of Rule 16b-3, Section 162(m) of the Code, or any change in
applicable law, regulations, rulings or interpretations of administrative
agencies; provided, however, that no amendment shall be effective without the
requisite prior or subsequent stockholder approval which would (a) except as
contemplated in Paragraph 12, increase the maximum number of shares of Common
Stock for which options may be granted under the Plan or the 162(m) Maximum, (b)
change the eligibility requirements to receive options hereunder or (c) make any
change for which applicable law requires stockholder approval. No termination,
suspension or amendment of the Plan shall, without the consent of the optionee,
adversely affect his rights under any option granted under the Plan. The power
of the Administrators to construe and administer any option granted under the
Plan prior to the termination or suspension of the Plan nevertheless shall
continue after such termination or during such suspension.
14. NON-TRANSFERABILITY. Unless otherwise provided in the
applicable Contract, no option granted under the Plan shall be transferable
otherwise than by will or the laws of descent and distribution, and options may
be exercised, during the lifetime of the optionee, only by the optionee or his
Legal Representatives. Except to the extent provided above, options may not be
assigned, transferred, pledged, hypothecated or disposed of in any way (whether
by operation of law or otherwise) and shall not be subject to execution,
attachment or similar process, and any such attempted assignment, transfer,
pledge, hypothecation or disposition shall be null and void ab initio and of no
force or effect.
15. WITHHOLDING TAXES. The Company, a Subsidiary or Parent
may withhold (a) cash or (b) with the consent of the Administrators (in the
Contract or otherwise), shares of Common Stock to be issued upon exercise of an
option having an aggregate fair market value on the relevant date (determined in
accordance with Paragraph 5) or a combination of cash and shares, in an amount
equal to the amount which the Company, a Subsidiary or Parent determines is
necessary to satisfy its obligation to withhold Federal, state and local income
taxes or other amounts incurred by reason of the grant, vesting, exercise or
disposition of an option, or the disposition of the underlying shares of Common
Stock. Alternatively, the Company, a Subsidiary or Parent may require the holder
to pay to it such amount, in cash, promptly upon demand.
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<PAGE> 9
16. LEGENDS; PAYMENT OF EXPENSES. The Company may endorse
such legend or legends upon the certificates for shares of Common Stock issued
upon exercise of an option under the Plan and may issue such "stop transfer"
instructions to its transfer agent in respect of such shares as it determines,
in its discretion, to be necessary or appropriate to (a) prevent a violation of,
or to perfect an exemption from, the registration requirements of the Securities
Act and any applicable state securities laws, (b) implement the provisions of
the Plan or any agreement between the Company and the optionee with respect to
such shares of Common Stock, or (c) permit the Company to determine the
occurrence of a "disqualifying disposition," as described in Section 421(b) of
the Code, of the shares of Common Stock issued or transferred upon the exercise
of an ISO granted under the Plan.
The Company shall pay all issuance taxes with respect to
the issuance of shares of Common Stock upon the exercise of an option granted
under the Plan, as well as all fees and expenses incurred by the Company in
connection with such issuance.
17. USE OF PROCEEDS. The cash proceeds received upon the
exercise of an option under the Plan shall be added to the general funds of the
Company and used for such corporate purposes as the Board of Directors may
determine.
18. SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CERTAIN
CONSTITUENT CORPORATIONS. Anything in this Plan to the contrary notwithstanding,
the Board of Directors may, without further approval by the stockholders,
substitute new options for prior options of a Constituent Corporation (as
defined in Paragraph 19) or assume the prior options of such Constituent
Corporation.
19. DEFINITIONS. For purposes of the Plan, the following
terms shall be defined as set forth below:
(a) "Cause" shall mean (i) in the case of an
employee or consultant, if there is a written employment or consulting agreement
between the optionee and the Company, any of its Subsidiaries or a Parent which
defines termination of such relationship for cause, cause as defined in such
agreement, and (ii) in all other cases, cause as defined by applicable state
law.
(b) "Constituent Corporation" shall mean any
corporation which engages with the Company, any of its Subsidiaries or a Parent
in a transaction to which Section 424(a) of the Code applies (or would apply if
the option assumed or substituted were an ISO), or any Parent or any Subsidiary
of such corporation.
(c) "Disability" shall mean a permanent and total
disability within the meaning of Section 22(e)(3) of the Code.
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(d) "Legal Representative" shall mean the
executor, administrator or other person who at the time is entitled by law to
exercise the rights of a deceased or incapacitated optionee with respect to an
option granted under the Plan.
(e) "Non-Employee Director" shall mean a person
who is a director of the Company, but is not an employee of the Company, any of
its Subsidiaries or a Parent.
(f) "Parent" shall have the same definition as
"parent corporation" in Section 424(e) of the Code.
(g) "Subsidiary" shall have the same definition as
"subsidiary corporation" in Section 424(f) of the Code.
20. GOVERNING LAW; CONSTRUCTION. The Plan, the options and
Contracts hereunder and all related matters shall be governed by, and construed
in accordance with, the laws of the State of Delaware, without regard to
conflict of law provisions which defer to the substantive laws of another
jurisdiction.
Neither the Plan nor any Contract shall be construed or
interpreted with any presumption against the Company by reason of the Company
causing the Plan or Contract to be drafted. Whenever from the context it appears
appropriate, any term stated in either the singular or plural shall include the
singular and plural, and any term stated in the masculine, feminine or neuter
gender shall include the masculine, feminine and neuter.
21. PARTIAL INVALIDITY. The invalidity, illegality or
unenforceability of any provision in the Plan, any option or Contract shall not
affect the validity, legality or enforceability of any other provision, all of
which shall be valid, legal and enforceable to the fullest extent permitted by
applicable law.
22. STOCKHOLDER APPROVAL. The Plan shall be subject to
approval by a majority of the votes of the stockholders at a meeting at which a
quorum is present or by written consent. No options granted hereunder may be
exercised prior to such approval; provided, however, that the date of grant of
any option shall be determined as if the Plan had not been subject to such
approval. Notwithstanding the foregoing, if the Plan is not approved by a vote
of the stockholders of the Company on or before March 4, 1998, the Plan and any
options granted hereunder shall terminate.
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EMPLOYMENT AGREEMENT
This Agreement is made and entered into effective as of March
27, 1997 by and between Credit Store, Inc., a Delaware corporation ("Employer"),
and Martin Burke ("Employee").
Employer hereby agrees to employ Employee, and Employee hereby
accepts such employment, on the terms and conditions hereinafter set forth.
1. Period of Employment. The period of Employee's employment
under this Agreement (the "Period of Employment") shall commence on the date
hereof (the "Effective Date") and shall expire on March 26, 2002 (the
"Expiration Date"), subject to any extension pursuant to section 1 or 9.14
hereof, or as may otherwise be agreed, or any earlier termination of Employer's
employment as provided in Section 6 hereof. Upon the expiration of the initial
term of this Agreement, and each subsequent term or extension thereof, this
Agreement shall automatically be extended for an additional term of one year,
unless the Employer or the Employee shall have notified the other party hereto
of its election to terminate this Agreement not later than 90 days prior to the
scheduled Expiration Date. If Employee's employment is terminated pursuant to
Section 6 hereof, the Period of Employment shall expire as of the Date of
Termination (as hereinafter defined).
2. Duties. During the Period of Employment, Employee will
faithfully perform those duties and responsibilities assigned by the Board of
Directors of Employer (the "Board") and Employee will devote his full working
time and use his best efforts to advance the business and welfare of Employer in
furtherance of the policies established by the Board. It is understood that the
office at which Employee will be primarily located will be in Sioux Falls, South
Dakota, but that the Employee's duties and responsibilities may require travel.
<PAGE> 2
During the Period of Employment, Employee shall not engage in any other
employment activities for any direct or indirect remuneration without the
concurrence of the Board, except that, so long as such activities do not
interfere with his duties under this Agreement, Employee may (i) continue to
devote reasonable time to the management of investments and to participation in
community and charitable affairs, and (ii) devote not more than 5% of his
working time on matters not related to the business of the Employer unless the
Board of Directors by resolution directs otherwise. Employee shall have the
title of Vice Chairman and Chief Executive Officer, or such other title as the
Board shall determine from time to time.
3. Compensation.
3.1 Base Salary. During the Period of Employment,
Employer shall pay Employee a Base Salary at the rate of $60,000 per annum
payable at least as frequently as bi-weekly and subject to payroll deductions as
may be necessary or customary in respect of Employer's salaried employees in
general. The amount of Employee's Base Salary shall be subject to annual review
by the Board, provided that the level of such Base Salary shall not be subject
to reduction.
3.2 Incentive Compensation. As additional, incentive
compensation, Employee shall be entitled to receive one and one-half percent
(1.5%) of the annual net earnings of Credit Store, Inc. before taxes as
reflected on the company's certified financial statements ("Incentive
Compensation"). Incentive Compensation shall be adjusted in any fiscal year in
which Employee is employed for less than the full year by multiplying the
Incentive Compensation otherwise due by a fraction equal to the number of months
Employee was employed during the fiscal year (not taking account of partial
months) by the total
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number of months in the fiscal year. Payment of Incentive Compensation due
hereunder shall be made not later than 30 days following the receipt of the
certified financial statements of Credit Store, Inc.
3.3 Options. In connection with Employee's
employment, Employer has granted Employee an option (the "Option") to purchase
1,000,000 shares of common stock of the Employer at $5.50 per share (the market
price of the shares on the date of the grant). The form of Option is attached as
Exhibit A hereto.
4. Benefits. During the Period of Employment, Employee shall
be entitled to participate in all fringe benefit programs (the "Fringe
Benefits") such as medical and dental coverage, life insurance, pension and
profit-sharing plans, etc., that may be maintained by Employer that are
available to its executive officers generally. Any payments or benefits payable
to Employee hereunder in respect of any calendar year during which Employee is
employed by Employer for less than the entire year shall, unless otherwise
provided in the applicable plan or arrangement, be prorated in accordance with
the number of days in such calendar year during which he is so employed.
Employee acknowledges that he shall have no vested rights under or to
participate in any such program except as expressly provided under the terms
hereof or thereof.
5. Expenses. Employer will pay or reimburse Employee for such
reasonable travel, entertainment, lodging or other expenses as he may incur on
behalf of Employer during the Period of Employment in connection with the
performance of his duties hereunder but only to the extent that such expenses
were either specifically authorized by Employer or incurred in accordance with
policies established by the Board and provided that
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<PAGE> 4
Employee shall furnish Employer with such evidence relating to such expenses as
Employer may reasonably require to substantiate such expenses for tax purposes.
6. Termination of Employment.
6.1 Circumstances of Termination. Notwithstanding the
terms set forth in Section 1 hereof, Employee's employment shall terminate under
any of the following circumstances:
(a) Death. In the event of Employee's death.
(b) Permanent Disability. If during the
Period of Employment Employee becomes physically or mentally incapacitated or
disabled so that (i) he is unable to perform for Employer substantially the same
services as he performed prior to incurring such incapacity or disability or to
devote his full working time or use his best efforts to advance the business and
welfare of Employer or otherwise to perform his duties under this Agreement and
(ii) such condition exists for an aggregate of six months in any 12 consecutive
calendar month period (Employer, at its option and expense, being entitled to
retain a physician reasonably acceptable to Employee to confirm the existence of
such incapacity or disability, and the determination of such physician being
binding upon Employer and Employee).
(c) Cause. At the option of Employer,
because Employee:
(i) has been convicted of, or has
pled guilty or nolo contendere to, a felony,
or
(ii) has embezzled or
misappropriated Employer funds or property,
or
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<PAGE> 5
(iii) has continued use of alcohol
or drugs to an extent that interferes with
the performance by Employee of his
employment responsibilities, or
(iv) has materially violated Section
8.1, Section 8.2, Section 8.3 or Section 8.4
hereof, or
(v) has willfully failed or refused
to perform those duties reasonably assigned
or delegated to him by the Board of
Directors, which failure or refusal
continues following (A) the Board of
Directors giving the Employee written notice
setting forth the facts or events
constituting such failure or refusal and (B)
a reasonable opportunity to correct the
deficiencies or other problems specified in
such notice to the reasonable satisfaction
of the Board of Directors.
(d) Not For Cause. At the option of
Employer at any time for any reason other than those referred to above or for no
reason at all, whereupon the Employer shall become obligated to make those
payments set forth in Section 7.l(d) hereof. If Employer shall be in material
breach of this Agreement and by reason thereof Employee terminates his
employment hereunder, such termination shall be deemed a termination by Employer
pursuant to this Section 6.1(d).
6.2 Notice of Termination. Any termination of
Employee's employment by Employer (other than termination pursuant to Section
6.1(a) hereof) or by Employee shall be communicated by written Notice of
Termination to the other party hereto in accordance with Section 9.2. For
purposes of this Agreement, a "Notice of Termination"
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<PAGE> 6
shall mean a notice terminating Employee's employment by Employer. If a Notice
of Termination is given by Employer, such notice shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances that provide a basis for
termination of Employee's employment under the provision so indicated. In the
event Employer sends a Notice of Termination under section 6.1(c), Employee
shall have a reasonable opportunity to provide documentation or other evidence
to the Board of Directors contesting the basis for the termination. For purposes
of this Agreement, the "Date of Termination" shall be the date on which the
Notice of Termination is delivered except that with respect to Section 6.1(a)
the "Date of Termination" shall be the date of Employee's death.
7. Payments Upon Termination of Employment.
7.1 Payments. In the event that Employee's employment
is terminated prior to the Expiration Date (including any extension thereof),
the Period of Employment shall expire as of the Date of Termination.
(a) If Employer terminates Employee's
employment for Cause or if Employee voluntarily terminates his employment other
than as a result of Employer's material breach of the terms of this Agreement,
Employer's obligation to compensate Employee shall in all respects cease as of
the Date of Termination, except that Employer shall (i) pay Employee the Base
Salary accrued under Section 3, any Fringe Benefits accrued under Section 4 and
the reimbursable expenses incurred under Section 5 of this Agreement up to such
Date of Termination (the "Accrued Obligations"); and (ii) solely in the event
Employee voluntarily terminates his employment without material breach, pay
Employee the
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<PAGE> 7
incentive compensation accrued as of the Date of Termination computed and paid
in accordance with section 3.2;
(b) If Employee's employment is terminated
upon the death of Employee, Employer's obligation to compensate Employee shall
in all respects cease as of the Date of Termination, except that Employer shall
(i) within thirty (30) days after the Date of Termination Employer shall pay
Employee's estate or legal representative the Accrued Obligations, (ii) pay
accrued incentive compensation in accordance with section 3.2, and (iii)
continue to maintain during the six month period following the Date of
Termination for the benefit of the Employee's dependents, basic health and
dental insurance and related medical expenses coverage on terms no less
favorable to the Employee than Employer provides to its executive officers
generally, as such benefits may be modified from time to time during such
period;
(c) If Employee's employment is terminated
upon the Permanent Disability of Employee, Employer's obligation to compensate
Employee shall in all respects cease as of the Date of Termination, except that
Employer shall (i) within thirty (30) days after the Date of Termination pay
Employee Accrued Obligations and a lump sum payment equal to 25% of the
Employee's annual Base Salary payable under Section 3 hereof at the rate in
effect immediately prior to such termination less the amount of any disability
payments payable to Employee during the six-month period following the Date of
Termination pursuant to any Employer-paid or state sponsored insurance policy or
employer self-insured program, (ii) pay accrued incentive compensation in
accordance with section 3.2, and (iii) continue to maintain during the six-month
period following the Date of Termination for the benefit of Employee and his
dependents, basic health, disability and dental insurance
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<PAGE> 8
and related medical expenses coverage on terms no less favorable to the Employee
than Employer provides to its executive officers generally, as such benefits may
be modified from time to time during such period provided that the Employee
shall continue to be obligated to make any contributions or payments in
connection with such benefits to the same extent as other executive officers
generally; and
(d) If Employee's employment is terminated
by Employer pursuant to Section 6.1(d), Employer's obligation to compensate
Employee shall in all respects cease, except as follows:
(i) within thirty (30) days after
the Date of Termination Employer shall pay
to Employee the Accrued Obligations and
during the period beginning with the Date of
Termination and ending on the later of March
26, 2002 or the end of any subsequent term
(the "Severance Period"), Employer shall (x)
pay to Employee on a monthly basis the sum
of one-twelfth (1/12th) of the annual Base
Salary of Employee in effect at the Date of
Termination (the "Continuation Payments")
and (y) continue to maintain, during the
Severance Period for the benefit of the
Employee and his dependents, basic health,
dental and life insurance and related
medical expenses coverage (including
disability and hospitalization coverage)
(the "Continuation Benefits") on terms no
less favorable to the Employee than the
Employer provides to its executive officers
generally, as such benefits may be modified
from time to time
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during the Severance Period. During the
Severance Period, Employee shall make any
contributions required to maintain such
Continuation Benefits, which may be withheld
from the Continuation Payments; provided
that such contributions are also required to
be made by the Employer's executive officers
generally. If at any time during the
Severance Period Employee shall obtain
employment with a third party (the
"Substitute Employer") in which Employee is
entitled to receive basic health benefits in
connection with such employment on terms
provided by the Substitute Employer to its
similarly situated employees generally, the
Employer shall no longer be required to
provide Continuation Benefits to the
Employee, regardless of whether such
benefits differ in any respect from the
Continuation Benefits.
(ii) In satisfaction of all
obligations to pay Incentive Compensation,
Employer shall pay Employee amounts due
under section 3.2 as if Employee had not
been terminated provided that, in the event
Employee is terminated and there has been no
change in control as defined by section
9.13, then Employer shall pay incentive
compensation due under section 3.2 with
respect only to the period extending from
the Date of Termination to the end of the
18th month thereafter. Employee shall be
entitled to no compensation pursuant to this
provision if
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he is terminated pursuant to Section 6.1(d)
during an extended or subsequent term of
this Agreement, except that Employee shall
be paid any Incentive Compensation accrued
as of the Date of Termination, in accordance
with section 3.2.
(iii) The Employer shall be excused
from its obligations to make payments under
this Section 7.1(d) if the Employee breaches
its obligations hereunder (including its
obligations under Article 8 hereof).
7.2 Release and Satisfaction. With respect to
Employee, his heirs, successors and assigns, payment by Employer of the amounts
provided under this Section 7 shall release, relinquish and forever discharge
Employer and any director, officer, employee, shareholder or agent of Employer
from any and all claims, damages, losses, costs, expenses, liabilities or
obligations, whether known or unknown (other than any such claims, damages,
losses, costs, expenses, liabilities or obligations arising under any written
employee benefit plan or arrangement (whether or not tax-qualified) covering
Employee), which Employee has incurred or suffered or may incur or suffer as a
result of the termination of such employment.
7.3 Effect on This Agreement. Any termination of
Employee's employment and any expiration of the Period of Employment under this
Agreement shall not affect the continuing operation and effect of Sections 7.2,
8.1, 8.2, 8.3, 8.4 and 8.5 hereof, which shall continue in full force and effect
with respect to Employer and Employee, and its and his heirs, successors and
assigns. Nothing in Section 7.1 hereof shall be deemed to operate or shall
operate as a release, settlement or discharge of any action or omission by
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Employee enumerated in Section 6.1(c) hereof as a possible basis for termination
of Employee's employment for Cause.
7.4 No Mitigation. Subject to the provisions of
Sections 8.1, 8.2, 8.3, 8.4 and 8.5 hereof, Employee shall be free to accept
such employment and engage in such business as Employee may desire following the
termination of his employment hereunder, and any compensation received by
Employee therefrom shall not reduce any payments required to be made by Employer
hereunder.
8. Non-disclosure of Proprietary Information, Surrender of
Records; Inventions and Patents; Non-Compete.
8.1 Proprietary Information. Employee shall not
during the Period of Employment or at any time thereafter (irrespective of the
circumstances under which Employee's employment by Employer terminates),
directly or indirectly use for his own purpose or for the benefit of any person
or entity other than Employer, nor otherwise disclose, any proprietary
information, as defined below, to any individual or entity, unless such
disclosure has been authorized in writing by the Board or is otherwise required
by law. For purposes of this Agreement, the term "proprietary information" shall
include, but is not limited to: (a) the name or address of any customer, vendor
or affiliate or Employer or any information concerning the transactions or
relations of any customer, vendor or affiliate or Employer with Employer; (b)
any information concerning any product, technology or procedure employed by
Employer but not generally known to its customers, vendors or competitors, or
under development by or being tested by Employer but not at the time offered
generally to customers or vendors; (c) any information relating to Employer's
computer software, computer systems, pricing or marketing methods, margins,
capital
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<PAGE> 12
structure, operating results, borrowing arrangements or business plans;
(d) any information which is generally regarded as confidential or proprietary
in any line of business engaged in by Employer; (e) any information contained in
any of Employer's written or oral policies and procedures or employee manuals;
(f) any information belonging to customers, vendors or affiliates of Employer
which Employer has agreed to hold in confidence; (g) any inventions, innovations
or improvements covered by Section 8.3 below; (h) any other information which
the Board has reasonably determined by resolution and communicated to Employee
to be confidential or proprietary; and (i) all written, graphic and other
material relating to any of the foregoing. Information that is not novel or
copyrighted or patented may nonetheless be proprietary information. Proprietary
information, however, shall not include (x) any information that is or becomes
generally known to the industries in which Employer competes through sources
independent of Employer or through authorized publication to persons other than
Employer's employees by Employer or (y) other non-sensitive information that may
be disclosed by Employee in the ordinary course of business, the disclosure of
which is not reasonably likely to adversely affect Employer's business
operations, their relationships with customers, vendors or employees or the
results of their operations.
8.2 Confidentiality and Surrender of Records.
Employee shall not during the Period of Employment or at an time thereafter
(irrespective of the circumstances under which Employee's employment by Employer
terminates), except as required by law, or in connection with the ongoing
business of Employer, directly or indirectly give any "confidential records" (as
hereinafter defined) to, or permit any inspection or copying of confidential
records by, any individual or entity other than in the course of such
individual's or entity's employment or retention by Employer, nor shall he
retain, and will deliver
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<PAGE> 13
promptly to Employer, any of the same following termination of his employment.
For purposes hereof, "confidential records" means all correspondence, memoranda,
files, manuals, books, lists, financial, operating or marketing records,
magnetic tape, or electronic or other media or equipment of any kind which may
be in Employee's possession or under his control or accessible to him which
contain any proprietary information as defined in Section 8.1. above. All
confidential records shall be and remain the sole property of Employer during
the Period of Employment and thereafter.
8.3 Inventions and Patents: All inventions,
innovations or improvements in Employer's method of conducting its business
(including policies, procedures, products, improvements, software, ideas and
discoveries, whether paten- table or copyrightable or not) conceived or made by
Employee, either alone or jointly with others, during the Period of Employment
belong to Employer. Employee will promptly disclose in writing such inventions,
innovations or improvements to the Board and perform all actions reasonably
requested by the Board to establish and confirm such ownership by Employer,
including, but not limited to, cooperating with and assisting Employer in
obtaining patents for Employer in the United States and in foreign countries.
Any patent application filed by Employee within a year after termination of his
employment hereunder shall be presumed to relate to an invention which was made
during the Period of Employment unless Employee can provide evidence to the
contrary.
8.4 Covenant Not to Compete; No Solicitation.
(a) Employee acknowledges and recognizes the
highly competitive nature of Employer's business and, in consideration of the
payment by Employer to Employee of amounts that may hereafter be paid to
Employee pursuant to Sections 7.1 and
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<PAGE> 14
8.4(d) hereof, Employee agrees that, provided he receives the applicable
payments provided for in Section 7.1 and 8.4(d) hereof, during the period (the
"Covered Time") beginning on the Date of Termination and ending (i) if
Employee's employment is terminated for any reason other than pursuant to
Section 6.1(d) hereof, on the second anniversary of the Date of Termination or
(ii) if Employee's employment is terminated pursuant to Section 6.1(d) hereof
and subject to Section 8.4(d) hereof, on the earlier of (A) the first
anniversary of the Date of Termination or (B) the Expiration Date, Employee will
not compete with the business of Employer, which means that Employee will not
engage, directly or indirectly, in the "Covered Business" (as hereinafter
defined) in any state of the United States of America in which the Employer is
conducting business or proposes to conduct business as of the Date of
Termination (these areas are hereinafter collectively referred to as the
"Covered Area"). For the purpose of this Agreement, (i) "Covered Business" shall
mean the businesses in which Employer or any "affiliate" of Employer was engaged
at any time during the one year period preceding the Date of Termination; and
(ii) the phrase "engage, directly or indirectly" shall mean engaging directly or
having an interest, directly or indirectly, as owner, partner, shareholder,
employee, independent contractor, capital investor, lender, renderer of
consultation services or advice or otherwise (other than as the holder of less
than 2% of the outstanding stock of a publicly-traded corporation), either alone
or in association with others, in the operation of any aspect of any type of
business or enterprise engaged in any aspect of the Covered Business. Employee
shall be deemed engaged in business in the Covered Area if his place of business
is located in the Covered Area or if he solicits customers located anywhere in,
or provides products anywhere in, the Covered Area. For all purposes of this
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<PAGE> 15
Agreement, the term "affiliate(s)" shall be defined as the term "affiliate" is
defined in Rule 12b-2 of the General Rules and Regulations under the Securities
Exchange Act of 1934.
(b) Employee agrees that during the term of
this Agreement (including any extension thereof) and during the Covered Time he
shall not (i) directly or indirectly solicit or attempt to solicit any of the
employees, agents or representatives of Employer or of affiliates of Employer to
leave any of such entities; (ii) directly or indirectly solicit or attempt to
solicit any of the employees, agents, consultants or representatives of Employer
or of affiliates of Employer to become employees, agents, representatives or
consultants or any other person or entity; or (iii) directly or indirectly
solicit or attempt to solicit any customer, vendor or lender of Employer or of
affiliates of Employer with respect to any product or service being furnished by
Employer.
(c) Employee understands that the provisions
of Section 8.4 (a) may limit his ability to earn a livelihood in a business
which is substantially similar to the business of Employer but nevertheless
agrees and hereby acknowledges that the consideration provided under this
Agreement, including any amounts or benefits provided under Section 7 hereof, is
sufficient to justify the restrictions contained in such provisions and in
consideration thereof and in light of Employee's education, skills and
abilities, Employee agrees that he will not assert that, and it should not be
considered that, such provisions prevent him from earning a living, or otherwise
are void or unenforceable or should be voided or held unenforceable. Employee
acknowledges and agrees that his duties with Employer are of an executive nature
and that he is a member of Employer's management group.
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<PAGE> 16
(d) If Employee's employment is terminated
pursuant to Section 6.1(d) hereof, Employer may extend the Covered Time to
extend up to and through the second anniversary of the Date of Termination, but
no later than the first anniversary of the Expiration Date by delivering written
notice to Employee (specifying the duration of the extended Covered Time),
within ten (10) days of such Date of Termination, that Employer has elected to
continue to pay to Employee the Continuation Payments (except that during any
period of Covered Time that extends beyond the Expiration Date, the Continuation
Payments shall be increased by an additional 50% thereof) and provide the
Continuation Benefits (on terms no less favorable to Employee than Employer
provides to its executive officers generally, as such benefits may be modified
from time to time) for each month of such extended Covered Time. During the
extended Covered Time, Employee shall be required to make any contributions
required to maintain such Continuation Benefits, which may be withheld from the
Continuation Payments; provided that such contributions are also required to be
made by the Employer's executive officers generally. If at any time during the
extended Covered Time Employee shall obtain employment with a Substitute
Employer in which Employee is entitled to receive basic health benefits in
connection with such employment on terms provided by the Substitute Employer to
its similarly situated employees generally, Employer shall no longer be required
to provide Continuation Benefits to the Employee, regardless of whether such
benefits differ in respect from the Continuation Benefits. Employer shall be
excused from its obligations to make payments under this Section 8.4(d) if
Employee breaches its obligations hereunder.
8.5 Litigation Assistance. Employee agrees that after
the Date of Termination he shall, at the request of Employer, and subject to
time limitations imposed by
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<PAGE> 17
business or employment obligations, render all reasonable assistance and perform
all lawful acts that Employer considers necessary or advisable in connection
with any litigation involving Employer or any director, officer, employee,
shareholder, agent, representative, consultant, customer or vendor of Employer.
In the event that Employer requests Employee's assistance under this Section
8.5, Employer shall pay to Employee for each day such assistance is rendered an
amount equal to the annual Base Salary of Employee in effect at the Date of
Termination divided by 250 and shall promptly pay or reimburse Employee for such
reasonable travel expenses as he may incur in connection with rendering
assistance hereunder.
8.6 Definition of Employer. For purposes of this
Section 8, the term Employer shall include Employer and any and all of its
subsidiaries, ventures or affiliates, whether currently existing or hereafter
formed, which are engaged in the Covered Business or a portion thereof, as well
as any person to whom this Agreement is assigned as permitted by Section 9.8
hereof, provided, however, that the business of any assignee not already engaged
in by Employer shall not be included as a Covered Business.
8.7 Enforcement.
(a) The parties hereto agree and acknowledge
that the covenants and agreements contained herein are reasonably necessary in
duration and to protect the reasonable competitive business interests of
Employer, including, without limitation, the value of the proprietary
information and goodwill of Employer.
(b) Employee agrees that the covenants and
undertakings contained in Article 8 of this Agreement relate to matters which
are of a special, unique and extraordinary character and that Employer cannot be
reasonably or adequately compensated
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<PAGE> 18
in damages in an action at law in the event Employee breaches any of these
covenants or undertakings. Therefore, Employee agrees that Employer shall be
entitled, as a matter of course, without the need to prove irreparable injury,
to an injunction, restraining order or other equitable relief from any court of
competent jurisdiction, restraining any violation or threatened violation of any
of such terms by Employee and such other persons as the court shall order. The
unsuccessful party will pay costs and legal fees incurred by the party that is
successful in any proceeding by Employer seeking to obtain such an injunction.
(c) Rights and remedies provided for in this
Section are cumulative and shall be in addition to rights and remedies otherwise
available to the parties under any other agreement or applicable law.
(d) In the event that any provision of this
Agreement shall to any extent be held invalid, unreasonable or unenforceable in
any circumstance, the parties hereto agree that the remainder of this Agreement
and the application of such provision of this Agreement to other circumstances
shall be valid and enforceable to the fullest extent permitted by law. If any
provision of this Agreement, or any part thereof, is held to be unenforceable
because of the scope or duration of or the area covered by such provision, the
parties hereto agree that the court or arbitrator making such determination
shall reduce the scope, duration and/or area of such provision (and shall
substitute appropriate provisions for any such unenforceable provisions) in
order to make such provision enforceable to the fullest extent permitted by law,
and/or shall delete specific words and phrases, and such modified provision
shall then be enforceable and shall be enforced. The parties hereto recognize
that if, in any judicial proceeding, a court shall refuse to enforce any of the
separate covenants contained in this Agreement, then that unenforceable covenant
contained in this Agreement
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<PAGE> 19
shall be deemed eliminated from these provisions to the extent necessary to
permit the remaining separate covenants to be enforced. In the event that any
court or arbitrator determines that the time period or the area, or both, are
unreasonable and that any of the covenants is to that extent unenforceable, the
parties hereto agree that such covenants will remain in full force and effect,
first, for the greatest time period, and second, in the greatest geographical
area that would not render them unenforceable.
9. Miscellaneous
9.1 Key Man Insurance. Employee recognizes and
acknowledges that Employer or its affiliates may seek and purchase one or more
policies providing key man life insurance with respect to Employee, the proceeds
of which would be payable to Employer or such affiliate. Employee hereby
consents to Employer or its affiliates seeking and purchasing such insurance and
will provide such information, undergo such medical examinations (at Employer's
expense), execute such documents, and otherwise take any and all actions
necessary or desirable in order for Employer or its affiliates to seek, purchase
and maintain in full force and effect such policy or policies.
9.2 Notice. Any notice required or permitted to be
given hereunder shall be deemed sufficiently given if sent by registered or
certified mail, postage prepaid, addressed to the addressee at his or its
address last provided the sender in writing by the addressee for purposes of
receiving notices hereunder or, unless or until such address shall be so
furnished, to the address indicated opposite his or its signature to this
Agreement. For purposes of this Agreement, notice sent in conformity with this
Section 9.2 shall be deemed to have been received on the third business day
following the date on which such notices are so sent.
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<PAGE> 20
9.3 Modification and No Waiver of Breach. No waiver
or modification of this Agreement shall be binding unless it is in writing
signed by the parties hereto. No waiver or modification of this Agreement shall
be binding unless it is in writing signed by the parties hereto. No waiver by a
party of a breach hereof by the other party shall be deemed to constitute a
waiver of a future breach, whether of a similar or dissimilar nature, except to
the extent specifically provided in any written waiver under this Section 9.3.
9.4 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK, AND ALL QUESTIONS RELATING TO THE VALIDITY AND PERFORMANCE HEREOF AND
REMEDIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAW.
9.5 Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same agreement.
9.6 Captions. The captions used herein are for ease
of reference only and shall not define or limit the provisions hereof.
9.7 Entire Agreement. This Agreement constitutes the
entire agreement between the parties hereto relating to the matters encompassed
hereby and supersedes any prior oral or written agreements.
9.8 Assignment. The rights of Employer under this
Agreement may, without the consent of Employee, be assigned by Employer to any
person, firm, corporation, or other business entity which at any time, whether
by purchase, merger, or
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<PAGE> 21
otherwise, directly or indirectly, acquires all or material portions of the
stock, assets or any line of business of Employer, provided such assignee
assumes all of the obligations of Employer under this Agreement.
9.9 Non-Transferability of Interest. None of the
rights of Employee to receive any form of compensation payable pursuant to this
Agreement shall be assignable or transferable except through a testamentary
disposition or by the laws of descent and distribution upon the death of
Employee. Any attempted assignment, transfer, conveyance, or other disposition
(other than as aforesaid) of any interest in the rights of Employee to receive
any form of compensation to be made by Employer pursuant to this Agreement shall
be void.
9.10 Arbitration. The parties shall endeavor to
settle all disputes by amicable negotiations. Except as otherwise provided
herein, any claim, dispute, disagreement or controversy that arises between the
parties relating to this Agreement that is not amicably settled shall be
resolved by arbitration, as follows:
(a) Any such arbitration shall be heard in
The City of New York, New York, before a panel consisting of one (1) to three
(3) arbitrators, each of whom shall be impartial. Upon the written Request of
Arbitration of either party hereto to commence arbitration hereunder, the
parties shall attempt to mutually agree as to the number and identity of the
arbitrator(s), within thirty (30) days of the date of such Request. Except as
the parties may otherwise agree, all arbitrators (if not selected by the parties
hereto within thirty (30) days of a written Request for Arbitration) shall be
appointed pursuant to the commercial arbitration rules of the American
Arbitration Association. In determining the number and appropriate background of
the arbitrators, the appointing authority shall give due
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<PAGE> 22
consideration to the issues to be resolved, but his or her decision as to the
number of arbitrators and their identity shall be final.
(b) An arbitration may be commenced by any
party to this Agreement by the service of a written Request for Arbitration upon
the other affected parties. Such Request for Arbitration shall summarize the
controversy or claim to be arbitrated.
(c) All attorneys' fees and costs of the
arbitration shall in the first instance be borne by the respective party
incurring such costs and fees, but the arbitrators shall have the discretion to
award costs and/or attorneys' fees as they deem appropriate under the
circumstances. The parties hereby expressly waive punitive damages, and under no
circumstances shall an award contain any amount that in any way reflects
punitive damages.
(d) Judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
(e) It is intended that controversies or
claims submitted to arbitration under this Section 9.10 shall remain
confidential, and to that end it is agreed by the parties that neither the facts
disclosed in the arbitration, the issues arbitrated, nor the views or opinions
of any persons concerning them, shall be disclosed to third persons at any time,
except to the extent necessary to enforce an award or judgment or as required by
law or in response to legal process or in connection with such arbitration.
(f) Any arbitration under this Section 9.10
shall be conducted pursuant to the commercial arbitration rules of the American
Arbitration Association.
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<PAGE> 23
9.11 Jurisdiction: Venue. Subject to Section 9.10
hereof, the parties hereto irrevocably and unconditionally submit to the
exclusive jurisdiction of any State or Federal court sitting in New York, New
York over any suit, action or proceeding arising out of or relating to this
Agreement. The parties hereto irrevocably and unconditionally waive any
objection to the laying of venue of any such suit, action or proceeding brought
in any such court and any claim that any such suit, action or proceeding brought
in any such court has been brought in an inconvenient forum. A final judgment in
any suit, action or proceeding brought in any such court shall be conclusive and
binding upon the parties and may be enforced in any other courts to whose
jurisdiction a party is or may be subject, by suit upon such judgment.
9.12 Indemnification. Employer will indemnify and
hold Employee harmless from and against any damage, loss, liability, claim,
costs, expenses, penalties or fines to the fullest extent permitted by
applicable law with respect to any actual or threatened claim, suit,
investigation, proceeding or action of any kind, civil or criminal, whether
seeking damages, equitable relief, or otherwise, by any governmental authority
or person not a party hereto or affiliated with a party hereto ("Proceeding").
Such indemnification shall include, without limitation, the obligation to
advance legal fees and costs necessarily and reasonably incurred by Employee in
connection with such a Proceeding.
9.13 Change in Control. In the event there is a
change in control of Employer during the initial term of this Agreement, then
Employee shall have the right, within 60 days of the date a change in control
occurs, to terminate his employment and to have such termination be treated as a
termination without cause under Section 6.1(d) for the sole purpose of
determining Employee's compensation in connection with the termination.
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<PAGE> 24
For purposes of this Agreement a change in control shall be deemed to have
occurred at such time as either (i) Taxter One, L.L.C. shall own directly or
indirectly less than 10% of the outstanding voting common stock of Employer and
shall own directly or indirectly less than 50% of each other outstanding class
of securities the majority vote of which is required for shareholder action; or
(ii) Jay Botchman shall own less than 50% of the membership interests in Taxter
One, L.L.C.
9.14 Death of Jay Botchman. In the event Jay Botchman
shall die during the term of this Agreement, the term of this Agreement shall be
automatically extended to September 30, 2006. IN WITNESS WHEREOF, the parties
have executed this Agreement as of the day and year first above written.
CREDIT STORE, INC. - Employer
-----------------------------
By: /s/ Jay Botchman
-----------------------------
/s/ Martin Burke
-----------------------------
Employee
Martin Burke
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<PAGE> 1
Martin J. Burke
4902 South Oxbow, Apartment 113
Sioux Falls, South Dakota 57106
March 27, 1997
Credit Store, Inc.
3401 North Louise Avenue
Sioux Falls, South Dakota 57107
Gentlemen:
Credit Store has provided me with a credit card, account number [number
omitted]. Any charges that I make on the card will be personal and will
constitute a loan from the corporation to me. I will be bound by the terms of
the Cardholder Agreement which provides for interest at the rate of 18.9% APR,
with a minimum monthly payment equal to 3.0% of the outstanding balance. The
credit limited on the card will be $450,000. In addition to the minimum monthly
payments and as a requirement for this corporate loan, the after-tax amount of
my Earnings Bonus (as defined in my employment agreement with the corporation of
even date herewith), if any, will be applied by the corporation to reduce the
outstanding balance of my credit card account. I understand that if am not
serving as either a director or an officer of the Corporation, my rights to make
additional charges or to obtain cash advances will be terminated and that I will
remain obligated to repay any outstanding balance pursuant to the terms of the
cardholder agreement.
Very truly yours,
/s/ Martin J. Burke, III
-----------------------------------
Martin J. Burke, III
<PAGE> 1
EMPLOYMENT AGREEMENT
This Agreement is made and entered into effective as of April
1, 1997 by and between Credit Store, Inc., a Delaware corporation ("Employer"),
and Kevin
Riordan ("Employee").
Employer hereby agrees to employ Employee, and Employee hereby
accepts such employment, on the terms and conditions hereinafter set forth.
1. Period of Employment. The period of Employee's employment
under this Agreement (the "Period of Employment") shall commence on the date
hereof (the "Effective Date") and shall expire on March 31, 2002 (the
"Expiration Date"), subject to any extension as may be agreed or any earlier
termination of Employee's employment as provided in Section 6 hereof. Upon the
expiration of the initial term of this Agreement, and each subsequent term or
extension thereof, this Agreement shall automatically be extended for an
additional term of one year, unless the Employer or the Employee shall have
notified the other party hereto of its election to terminate this Agreement not
later than 90 days prior to the scheduled Expiration Date. If Employee's
employment is terminated pursuant to Section 6 hereof, the Period of Employment
shall expire as of the Date of Termination (as hereinafter defined).
2. Duties. During the Period of Employment, Employee will
faithfully perform those duties and responsibilities assigned by the Board of
Directors of Employer (the "Board") and Employee will devote his full working
time and use his best efforts to advance the business and welfare of Employer in
furtherance of the policies
<PAGE> 2
established by the Board. It is understood that the office at which Employee
will be primarily located will be in Northern New Jersey or Rockland County or
Westchester County, New York, but that the Employee's duties and
responsibilities will require travel away from his office. During the Period of
Employment, Employee shall not engage in any other employment activities for any
direct or indirect remuneration without the concurrence of the Board, except
that Employee may continue to devote reasonable time to the management of
investments and to participation in community and charitable affairs, so long as
such activities do not interfere with his duties under this Agreement. Employee
shall have such title as the Board shall determine from time to time; Employee's
initial title is set forth on Exhibit A hereto.
3. Compensation.
3.1 Base Salary. During the Period of Employment, Employer shall
pay Employee a Base Salary at the rate of $300,000 per annum payable at least as
frequently as bi-weekly and subject to payroll deductions as may be necessary or
customary in respect of Employer's salaried employees in general. The amount of
Employee's Base Salary shall be subject to annual review by the Board, provided
that the level of such Base Salary shall not be subject to reduction.
3.2 Initial Payment. In addition to the foregoing Base Salary
and as an inducement to and in consideration for Employee entering into this
five year Employment Agreement, the Employer is paying to the Employee
simultaneously with the execution hereof the sum of $2,000,000.
3.3 Options. Simultaneously herewith Employer is granting the
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<PAGE> 3
Employee an option (the "Option") to purchase 300,0000 shares of common stock
of the Employer at $7-3/8 share (the market price of the shares as of the date
hereof). The Option may only be exercised after two years from the date hereof.
The Options shall expire on the earlier of (a) five years from the date hereof,
(b) termination of Employee's employment pursuant to Section 6.1(c)(ii) hereof,
and (c) Employee terminating his employment hereunder prior to any material
breach hereof by Employer.
The Option shall be in substantially the form of Exhibit B hereto.
4. Benefits. During the Period of Employment, Employee shall
be entitled to participate in all fringe benefit programs (the "Fringe
Benefits") such as medical and dental coverage, life insurance, pension and
profit-sharing plans, etc., that may be maintained by Employer that are
available to its executive officers generally. Any payments or benefits payable
to Employee hereunder in respect of any calendar year during which Employee is
employed by Employer for less than the entire year shall, unless otherwise
provided in the applicable plan or arrangement, be prorated in accordance with
the number of days in such calendar year during which he is so employed.
Employee acknowledges that he shall have no vested rights under or to
participate in any such program except as expressly provided under the terms
hereof or thereof.
5. Expenses. Employer will pay or reimburse Employee for such
reasonable travel, entertainment or other expenses as he may incur on behalf of
Employer during the Period of Employment in connection with the performance of
his duties hereunder but only to the extent that such expenses were either
specifically
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authorized by Employer or incurred in accordance with policies established by
the Board and provided that Employee shall furnish Employer with such evidence
relating to such expenses as Employer may reasonably require to substantiate
such expenses for tax purposes.
6. Termination of Employment.
6.1 Circumstances of Termination. Notwithstanding the
terms set forth in Section 1 hereof, Employee's employment shall terminate under
any of the following circumstances:
(a) Death. In the event of Employee's death.
(b) Permanent Disability. If during the Period of
Employment Employee becomes physically or mentally incapacitated or disabled so
that (i) he is unable to perform for Employer substantially the same services as
he performed prior to incurring such incapacity or disability or to devote his
full working time or use his best efforts to advance the business and welfare of
Employer or otherwise to perform his duties under this Agreement and (ii) such
condition exists for an aggregate of six months in any 12 consecutive calendar
month period (Employer, at its option and expense, being entitled to retain a
physician reasonably acceptable to Employee to confirm the existence of such
incapacity or disability, and the determination of such physician being birding
upon Employer and Employee).
(c) Cause. At the option of Employer, because
Employee:
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<PAGE> 5
(i) has been convicted of, or has pled guilty or
nolo contendere to, a felony, or
(ii) has embezzled or misappropriated Employer
funds or property, or
(iii) has continued use of alcohol or drugs to an
extent that interferes with the performance by Employee of
his employment responsibilities, or
(iv) has materially violated Section 8.1, Section
8.2, Section 8.3 or Section 8.4 hereof, or
(v) has willfully failed or refused to perform
those duties reasonably assigned or delegated to him by
the Board of Directors, which failure or refusal continues
following (A) the Board of Directors giving the Employee
written notice setting forth the facts or events
constituting such failure or refusal and (B) a reasonable
opportunity to correct the deficiencies or other problems
specified in such notice to the reasonable satisfaction of
the Board of Directors.
(d) Not For Cause. At the option of Employer at
any time for any reason other than those referred to above or for no reason at
all, whereupon the Employer shall become obligated to make those payments set
forth in Section 7.1(d) hereof. If Employer shall be in material breach of this
Agreement and by
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reason thereof Employee terminates his employment hereunder, such termination
shall be deemed a termination by Employer pursuant to this Section 6.1(d).
6.2 Notice of Termination. Any termination of Employee's
employment by Employer (other than termination pursuant to Section 6.1(a)
hereof) or by Employee shall be communicated by written Notice of Termination to
the other party hereto in accordance with Section 9.2. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice terminating Employee's
employment by Employer. If a Notice of Termination is given by Employer, such
notice shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
that provide a basis for termination of Employee's employment under the
provision so indicated. For purposes of this Agreement, the "Date of
Termination" shall be the date on which the Notice of Termination is delivered
except that with respect to Section 6.1(a) the "Date of Termination" shall be
the date of Employee's death.
7. Payments Upon Termination of Employment.
7.1 Payments. In the event that Employee's employment is
terminated prior to the Expiration Date (including any extension thereof), the
Period of Employment shall expire as of the Date of Termination.
(a) If Employer terminates Employee's employment for
Cause or if Employee voluntarily terminates his employment other than as a
result of Employer's material breach of the terms of this Agreement, Employer's
obligation to compensate Employee shall in all respects cease as of the Date of
Termination, except
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that Employer shall pay Employee the Base Salary accrued under Section 3, any
Fringe Benefits accrued under Section 4 and the reimbursable expenses incurred
under Section 5 of this Agreement up to such Date of Termination (the "Accrued
Obligations");
(b) If Employee's employment is terminated upon the
death of Employee, Employer's obligation to compensate Employee shall in all
respects cease as of the Date of Termination, except that within thirty (30)
days after the Date of Termination Employer shall (i) pay Employee's estate or
legal representative the Accrued Obligations and (ii) continue to maintain
during the six month period following the Date of Termination for the benefit of
the Employee's dependents, basic health and dental insurance and related medical
expenses coverage on terms no less favorable to the Employee than Employer
provides to its executive officers generally, as such benefits may be modified
from time to time during such period;
(c) If Employee's employment is terminated upon the
Permanent Disability of Employee, Employer's obligation to compensate Employee
shall in all respects cease as of the Date of Termination, except that within
thirty (30) days after the Date of Termination Employer shall (i) pay Employee
Accrued Obligations and a lump sum payment equal to 25% of the Employee's annual
Base Salary payable under Section 3 hereof at the rate in effect immediately
prior to such termination less the amount of any disability payments payable to
Employee during the six-month period following the Date of Termination pursuant
to any Employer-paid or
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state sponsored insurance policy or employer self-insured program and (ii)
continue to maintain during the six-month period following the Date of
Termination for the benefit of Employee and his dependents, basic health,
disability and dental insurance and related medical expenses coverage on terms
no less favorable to the Employee than Employer provides to its executive
officers generally, as such benefits may be modified from time to time during
such period provided that the Employee shall continue to be obligated to make
any contributions or payments in connection with such benefits to the same
extent as other executive officers generally; and
(d) If Employee's employment is terminated by
Employer pursuant to Section 6.1(d), Employer's obligation to compensate
Employee shall in all respects cease, except that within thirty (30) days after
the Date of Termination Employer shall pay to Employee the Accrued Obligations
and during the period ending on the Expiration Date (the "Severance Period"),
Employer shall (i) pay to Employee on a monthly basis the sum of one-twelfth
(1/12th) of the annual Base Salary of Employee in effect at the Date of
Termination (the "Continuation Payments") and (ii) continue to maintain, during
the Severance Period for the benefit of the Employee and his dependents, basic
health, dental and life insurance and related medical expenses coverage
(including disability and hospitalization coverage) (the "Continuation
Benefits") on terms no less favorable to the Employee than the Employer provides
to its executive officers generally, as such benefits may be modified from time
to time during the Severance Period. During the Severance Period, Employee shall
be required to make any contributions required to maintain such Continuation
Benefits, which may be
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<PAGE> 9
withheld from the Continuation Payments; provided that such contributions are
also required to be made by the Employer's executive officers generally. If at
any time during the Severance Period Employee shall obtain employment with a
third party (the "Substitute Employer") in which Employee is entitled to receive
basic health benefits in connection with such employment on terms provided by
the Substitute Employer to its similarly situated employees generally, the
Employer shall no longer be required to provide Continuation Benefits to the
Employee, regardless of whether such benefits differ in any respect from the
Continuation Benefits. The Employer shall be excused from its obligations to
make payments under this Section 7.1(d) if the Employee breaches its obligations
hereunder (including its obligations under Article 8 hereof).
7.2 Release and Satisfaction. With respect to
Employee, his heirs, successors and assigns, payment by Employer of the amounts
provided under this Section 7 shall release, relinquish and forever discharge
Employer and any director, officer, employee, shareholder or agent of Employer
from any and all claims, damages, losses, costs, expenses, liabilities or
obligations, whether known or unknown (other than any such claims, damages,
losses, costs, expenses, liabilities or obligations (a) covered by any
indemnification arrangement of Employer with respect to Employee or (b) arising
under any written employee benefit plan or arrangement (whether or not
tax-qualified) covering Employee, which Employee has incurred or suffered or may
incur or suffer as a result of the termination of such employment.
7.3 Effect on This Agreement. Any termination of
Employee's employment and any expiration of the Period of Employment under this
Agreement
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shall not affect the continuing operation and effect of Sections 7.2, 8.1, 8.2,
8.3, 8.4 and 8.5 hereof, which shall continue in full force and effect with
respect to Employer and Employee, and its and his heirs, successors and assigns.
Nothing in Section 7.1 hereof shall be deemed to operate or shall operate as a
release, settlement or discharge of any action or omission by Employee
enumerated in Section 6.1(c) hereof as a possible basis for termination of
Employee's employment for Cause.
7.4 No Mitigation. Subject to the provisions of
Sections 8.1, 8.2, 8.3, 8.4 and 8.5 hereof, Employee shall be free to accept
such employment and engage in such business as Employee may desire following the
termination of his employment hereunder, and any compensation received by
Employee therefrom shall not reduce any payments required to be made by Employer
hereunder.
8. Non-disclosure of Proprietary Information, Surrender of
Records, Inventions and Patents: Non-Compete.
8.1 Proprietary Information. Employee shall not
during the Period of Employment or at any time thereafter (irrespective of the
circumstances under which Employee's employment by Employer terminates),
directly or indirectly use for his own purpose or for the benefit of any person
or entity other than Employer, nor otherwise disclose, any proprietary
information, as defined below, to any individual or entity, unless such
disclosure has been authorized in writing by the Board or is otherwise required
by law. For purposes of this Agreement, the term "proprietary information" shall
include, but is not limited to: (a) the name or address of any customer, vendor
or affiliate or Employer or any information concerning the
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<PAGE> 11
transactions or relations of any customer, vendor or affiliate of Employer with
Employer or any of its shareholders; (b) any information concerning any product,
technology or procedure employed by Employer but not generally known to its
customers, vendors or competitors, or under development by or being tested by
Employer but not at the time offered generally to customers or vendors; (c) any
information relating to Employer's computer software, computer systems, pricing
or marketing methods, margins, capital structure, operating results, borrowing
arrangements or business plans; (d) any information which is generally regarded
as confidential or proprietary in any line of business engaged in by Employer;
(e) any information contained in any of Employer's written or oral policies and
procedures or employee manuals; (f) any information belonging to customers,
vendors or affiliates of Employer which Employer has agreed to hold in
confidence; (g) any inventions, innovations or improvements covered by Section
8.3 below, (h) any other information which the Board has reasonably determined
by resolution and communicated to Employee to be confidential or proprietary;
and (i) all written, graphic and other material relating to any of the
foregoing. Information that is not novel or copyrighted or patented may
nonetheless be proprietary information. Proprietary information, however, shall
not include (i) any information that is or becomes generally known to the
industries in which Employer competes through sources independent of Employer or
through authorized publication to persons other than Employer's employees by
Employer or (ii) other non-sensitive information that may be disclosed by
Employee in the ordinary course of business, the disclosure of which is not
reasonably likely to adversely affect Employer's business
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<PAGE> 12
operations, their relationships with customers, vendors or employees or the
results of their operations.
8.2 Confidentiality and Surrender of Records.
Employee shall not during the Period of Employment or at any time thereafter
(irrespective of the circumstances under which Employee's employment by Employer
terminates), except as required by law, directly or indirectly give any
"confidential records" (as hereinafter defined) to, or permit any inspection or
copying of confidential records by, any individual or entity other than in the
course of such individual's or entity's employment or retention by Employer, nor
shall he retain, and will deliver promptly to Employer, any of the same
following termination of his employment. For purposes hereof, "confidential
records" means all correspondence, memoranda, files, manuals, books, lists,
financial, operating or marketing records, magnetic tape, or electronic or other
media or equipment of any kind which may be in Employee's possession or under
his control or accessible to him which contain any proprietary information as
defined in Section 8.1. above. All confidential records shall be and remain the
sole property of Employer during the Period of Employment and thereafter.
8.3 Inventions and Patents: All inventions,
innovations or improvements in Employer's method of conducting its business
(including policies, procedures, products, improvements, software, ideas and
discoveries, whether paten-table or copyrightable or not) conceived or made by
Employee, either alone or jointly with others, during the Period of Employment
belong to Employer. Employee will promptly disclose in writing such inventions,
innovations or improvements to the Board
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and perform all actions reasonably requested by the Board to establish and
confirm such ownership by Employer, including, but not limited to, cooperating
with and assisting Employer in obtaining patents for Employer in the United
States and in foreign countries. Any patent application filed by Employee within
a year after termination of his employment hereunder shall be presumed to relate
to an invention which was made during the Period of Employment unless Employee
can provide evidence to the contrary.
8.4 Covenant Not to Compete: No Solicitation.
(a) Employee acknowledges and recognizes the
highly competitive nature of Employer's business and, in consideration of the
payment by Employer to Employee of amounts that may hereafter be paid to
Employee pursuant to Sections 7.1 and 8.4(d) hereof, Employee agrees that,
provided he receives the applicable payments provided for in Section 7.1 and
8.4(d) hereof, during the period (the "Covered Time") beginning on the Date of
Termination
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and ending (i) if Employee's employment is terminated for any reason
other than pursuant to Section 6.1(d) hereof, on the second anniversary of the
Date of Termination or (ii) if Employee's employment is terminated pursuant to
Section 6.1(d) hereof and subject to Section 8.4(d) hereof, on the earlier of
(A) the first anniversary of the Date of Termination or (B) the Expiration Date,
Employee will not compete with the business of Employer, which means that
Employee will not engage, directly or indirectly, in the "Covered Business" (as
hereinafter defined) in any state of the United States of America in which the
Employer is conducting business or proposes to conduct business as of the Date
of Termination and any states contiguous herewith (these areas are hereinafter
collectively referred to as the "Covered Area"). For the purpose of this
Agreement (i) "Covered Business" shall mean the businesses in which Employer or
any "affiliate" of Employer was engaged at any time during the one year period
preceding the Date of Termination; and (ii) the phrase "engage, directly or
indirectly" shall mean engaging directly or having an interest, directly or
indirectly, as owner, partner, shareholder, employee, independent contractor,
capital investor, lender, renderer of consultation services or advice or
otherwise (other than as the holder of less than 2% of the outstanding stock of
a publicly-traded corporation), either alone or in association with others, in
the operation of any aspect of any type of business or enterprise engaged in any
aspect of the Covered Business. Employee shall be deemed engaged in business in
the Covered Area if his place of business is located in the Covered Area or if
he solicits customers located anywhere in, or provides products anywhere in, the
Covered Area. For all purposes of this Agreement, the term "affiliate(s)" shall
be defined as the term "affiliate" is defined in Rule 12b-2 of the General Rules
and Regulations under the Securities Exchange Act of 1934.
(b) Employee agrees that during the term of
this Agreement (including any extension thereof) and during the Covered Time he
shall not (i) directly or indirectly solicit or attempt to solicit any of the
employees, agents or representatives of Employer or of affiliates of Employer to
leave any of such entities; (ii) directly or indirectly solicit or attempt to
solicit any of the employees, agents, consultants or representatives of Employer
or of affiliates of Employer to become
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employees, agents, representatives or consultants or any other person or entity;
or (iii) directly or indirectly solicit or attempt to solicit any customer,
vendor or lender of Employer or of affiliates of Employer with respect to any
product or service being furnished by Employer.
(c) Employee understands that the provisions
of Section 8.4(a) may limit his ability to earn a livelihood in a business which
is substantially similar to the business of Employer but nevertheless agrees and
hereby acknowledges that the consideration provided under this Agreement,
including any amounts or benefits provided under Section 7 hereof, is sufficient
to justify the restrictions contained in such provisions and in consideration
thereof and in light of Employee's education, skills and abilities, Employee
agrees that he will not assert that, and it should not be considered that, such
provisions prevent him from earning a living or otherwise are void or
unenforceable or should be voided or held unenforceable. Employee acknowledges
and agrees that his duties with Employer are of an executive nature and that he
is a member of Employer's management group.
(d) If Employee's employment is terminated
pursuant to Section 6.1(d) hereof, Employer may extend the Covered Time to
extend up to and through the second anniversary of the Date of Termination, but
no later than the first anniversary of the Expiration Date by delivering written
notice to Employee (specifying the duration of the extended Covered Time),
within ten (10) days of such Date of Termination, that Employer has elected to
continue to pay to Employee the Continuation Payments (except that during any
period of Covered Time that extends
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beyond the Expiration Date, the Continuation Payments shall be increased by an
additional 50% thereof) and provide the Continuation Benefits (on terms no less
favorable to Employee than Employer provides to its executive officers
generally, as such benefits may be modified from time to time) for each month of
such extended Covered Time. During the extended Covered Time, Employee shall be
required to make any contributions required to maintain such Continuation
Benefits, which may be withheld from the Continuation Payments; provided that
such contributions are also required to be made by the Employer's executive
officers generally. If at any time during the extended Covered Time Employee
shall obtain employment with a Substitute Employer in which Employee is entitled
to receive basic health benefits in connection with such employment on terms
provided by the Substitute Employer to its similarly situated employees
generally, Employer shall no longer be required to provide Continuation Benefits
to the Employee, regardless of whether such benefits differ in respect from the
Continuation Benefits. Employer shall be excused from its obligations to make
payments under this Section 8.4(d) if Employee breaches its obligations
hereunder.
8.5 Litigation Assistance. Employee agrees that after
the Date of Termination he shall, at the request of Employer, render all
reasonable assistance and perform all lawful acts that Employer considers
necessary or advisable in connection with any litigation involving Employer or
any director, officer, employee, shareholder, agent, representative, consultant,
customer or vendor of Employer. In the event that Employer requests Employee's
assistance under this Section 8.5, Employer
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shall pay to Employee for each day such assistance is rendered an amount equal
to the annual Base Salary of Employee in effect at the Date of Termination
divided by 250 and shall promptly pay or reimburse Employee for such reasonable
travel expenses as he may incur in connection with rendering assistance
hereunder.
8.6 Definition of Employer. For purposes of this
Section 8, the term Employer shall include Employer and any and all of its
subsidiaries, ventures or affiliates, whether currently existing or hereafter
formed, which are engaged in the Covered Business or a portion thereof, as well
as any person to whom this Agreement is assigned as permitted by Section 9.8
hereof.
8.7 Enforcement.
(a) The parties hereto agree and
acknowledge that the covenants and agreements contained herein are reasonably
necessary in duration and to protect the reasonable competitive business
interests of Employer, including, without limitation, the value of the
proprietary information and goodwill of Employer.
(b) Employee agrees that the covenants and
undertakings contained in Article 8 of this Agreement relate to matters which
are of a special, unique and extraordinary character and that Employer cannot be
reasonably or adequately compensated in damages in an action at law in the event
Employee breaches any of these covenants or undertakings. Therefore, Employee
agrees that Employer shall be entitled, as a matter of course, without the need
to prove irreparable injury, to an injunction, restraining order or other
equitable relief from any court of
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competent jurisdiction restraining any violation or threatened violation of any
of such terms by Employee and such other persons as the court shall order.
Employee agrees to pay costs and legal fees incurred by Employer provided
Employer is successful in obtaining such injunction.
(c) Rights and remedies provided for in
this Section are cumulative and shall be in addition to rights and remedies
otherwise available to the parties under any other agreement or applicable law.
(d) In the event that any provision of this
Agreement shall to any extent be held invalid, unreasonable or unenforceable in
any circumstance, the parties hereto agree that the remainder of this Agreement
and the application of such provision of this Agreement to other circumstances
shall be valid and enforceable to the fullest extent permitted by law. If any
provision of this Agreement, or any part thereof, is held to be unenforceable
because of the scope or duration of or the area covered by such provision, the
parties hereto agree that the court or arbitrator making such determination
shall reduce the scope, duration and/or area of such provision (and shall
substitute appropriate provisions for any such unenforceable provisions) in
order to make such provision enforceable to the fullest extent permitted by law,
and/or shall delete specific words and phrases, and such modified provision
shall then be enforceable and shall be enforced. The parties hereto recognize
that if, in any judicial proceeding, a court shall refuse to enforce any of the
separate covenants contained in this Agreement, then that unenforceable covenant
contained in this Agreement shall be deemed eliminated from these provisions to
the extent necessary to permit the
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remaining separate covenants to be enforced. In the event that any court or
arbitrator determines that the time period or the area, or both, are
unreasonable and that any of the covenants is to that extent unenforceable, the
parties hereto agree that such covenants will remain in full force and effect,
first, for the greatest time period, and second, in the greatest geographical
area that would not render them unenforceable.
9. Miscellaneous.
9.1 Key Man Insurance. Employee recognizes
and acknowledges that Employer or its affiliates may seek and purchase one or
more policies providing key man life insurance with respect to Employee, the
proceeds of which would be payable to Employer or such affiliate. Employee
hereby consents to Employer or its affiliates seeking and purchasing such
insurance and will provide such information, undergo such medical examinations
(at Employer's expense), execute such documents, and otherwise take any and all
actions necessary or desirable in order for Employer or its affiliates to seek,
purchase and maintain in full force and effect such policy or policies.
9.2 Notice. Any notice required or permitted
to be given hereunder shall be deemed sufficiently given if sent by registered
or certified mail, postage prepaid, addressed to the addressee at his or its
address last provided the sender in writing by the addressee for purposes of
receiving notices hereunder or, unless or until such address shall be so
furnished, to the address indicated opposite his or its signature to this
Agreement. For purposes of this Agreement, notice sent in conformity with this
Section 9.2 shall be deemed to have been received on the third
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business day following the date on which such notices are so sent.
9.3 Modification and No Waiver of Breach. No waiver
or modification of this Agreement shall be binding unless it is in writing
signed by the parties hereto. No waiver or modification of this Agreement shall
be binding unless it is in writing signed by the parties hereto. No waiver by a
party of a breach hereof by the other party shall be deemed to constitute a
waiver of a future breach, whether of a similar or dissimilar nature, except to
the extent specifically provided in any written waiver under this Section 9.3.
9.4 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK AND ALL QUESTIONS RELATING TO THE VALIDITY AND PERFORMANCE HEREOF AND
REMEDIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAW.
9.5 Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same agreement.
9.6 Captions. The captions used herein are for ease
of reference only and shall not define or limit the provisions hereof.
9.7 Entire Agreement. This Agreement constitutes the
entire agreement between the parties hereto relating to the matters encompassed
hereby and supersedes any prior oral or written agreements.
9.8 Assignment. The rights of Employer under this
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Agreement may, without the consent of Employee, be assigned by Employer to any
person, firm, corporation, or other business entity which at any time, whether
by purchase, merger, or otherwise, directly or indirectly, acquires all or
material portions of the stock, assets or any line of business of Employer,
provided such assignee assumes all of the obligations of Employer under this
Agreement.
9.9 Non-Transferability of Interest. None of the
rights of Employee to receive any form of compensation payable pursuant to this
Agreement shall be assignable or transferable except through a testamentary
disposition or by the laws of descent and distribution upon the death of
Employee. Any attempted assignment, transfer, conveyance, or other disposition
(other than as aforesaid) of any interest in the rights of Employee to receive
any form of compensation to be made by Employer pursuant to this Agreement shall
be void.
9.10 Arbitration. The parties shall endeavor to
settle all disputes by amicable negotiations. Except as otherwise provided
herein, any claim, dispute, disagreement or controversy that arises between the
parties relating to this Agreement that is not amicably settled shall be
resolved by arbitration, as follows:
(a) Any such arbitration shall be heard in
The City of New York, New York, before a panel consisting of one (1) to three
(3) arbitrators, each of whom shall be impartial. Upon the written Request of
Arbitration of either party hereto to commence arbitration hereunder, the
parties shall attempt to mutually agree as to the number and identity of the
arbitrator(s), within thirty (30) days of the date of such Request. Except as
the parties may otherwise agree, all arbitrators (if not
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selected by the parties hereto within thirty (30) days of a written Request for
Arbitration) shall be appointed pursuant to the commercial arbitration rules of
the American Arbitration Association. In determining the number and appropriate
background of the arbitrators, the appointing authority shall give due
consideration to the issues to be resolved, but his or her decision as to the
number of arbitrators and their identity shall be final.
(b) An arbitration may be commenced by any
party to this Agreement by the service of a written Request for Arbitration upon
the other affected parties. Such Request for Arbitration shall summarize the
controversy or claim to be arbitrated.
(c) All attorneys' fees and costs of the
arbitration shall in the first instance be borne by the respective party
incurring such costs and fees, but the arbitrators shall have the discretion to
award costs and/or attorneys' fees as they deem appropriate under the
circumstances. The parties hereby expressly waive punitive damages, and under no
circumstances shall an award contain any amount that in any way reflects
punitive damages.
(d) Judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
(e) It is intended that controversies or
claims submitted to arbitration under this Section 9.10 shall remain
confidential, and to that end it is agreed by the parties that neither the facts
disclosed in the arbitration, the issues arbitrated, nor the views or opinions
of any persons concerning them, shall be
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disclosed to third persons at any time, except to the extent not necessary to
enforce an award or judgment or as required by law or in response to legal
process or in connection with such arbitration.
(f) Any arbitration under this Section 9.10
shall be conducted pursuant to the commercial arbitration rules of the American
Arbitration Association.
9.11 Jurisdiction: Venue. Subject to Section 9.10
hereof, the parties hereto irrevocably and unconditionally submit to the
exclusive jurisdiction of any State or Federal court sitting in New York, New
York over any suit, action or proceeding arising out of or relating to this
Agreement. The parties hereto irrevocably and unconditionally waive any
objection to the laying of venue of any such suit, action or proceeding brought
in any such court and any claim that any such suit, action or proceeding brought
in any such court has been brought in an inconvenient forum. A final judgment in
any suit, action or proceeding brought in any such court shall be conclusive and
binding upon the parties and may be enforced in any other courts to whose
jurisdiction a party is or may be subject, by suit upon such judgment.
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IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
CREDIT STORE, INC. - Employer
By: /s/ Jay Botchman, Chairman
---------------------------------------
/s/ Kevin Riordan - Employee
-------------------------------------------
Kevin Riordan
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EXHIBIT A
TITLE
PRESIDENT
<PAGE> 1
EMPLOYMENT AGREEMENT
This Agreement is made and entered into effective as of June 17, 1997 by
and between Credit Store, Inc., a Delaware corporation ("Employer"), and Michael
J. Philippe ("Employee").
Employer hereby agrees to employ Employee, and Employee hereby accepts such
employment, on the terms and conditions hereinafter set forth.
1. Period of Employment. The period of Employee's employment under this
Agreement (the "Period of Employment") shall commence on the date hereof (the
"Effective Date") and shall expire on June 17, 2000 (the "Expiration Date"),
subject to any extension as may be agreed or any earlier termination of
Employee's employment as provided in Section 6 hereof. Upon the expiration of
the initial term of this Agreement, and each subsequent term or extension
thereof, this Agreement shall automatically be extended for an additional term
of one year, unless the Employer or the Employee shall have notified the other
party hereto of its election to terminate this Agreement not later than 90 days
prior to the scheduled Expiration Date. If Employee's employment is terminated
pursuant to Section 6 hereof, the Period of Employment shall expire as of the
Date of Termination (as hereinafter defined).
2. Duties. During the Period of Employment, Employee will faithfully
perform those duties and responsibilities assigned by the Board of Directors of
Employer (the "Board") and Employee will devote his full working time and use
his best efforts to advance the business and welfare of Employer in furtherance
of the policies established by the Board. It is understood that the Employee
will be based in Minneapolis (or another city of his choice) and that his
primary office will be located in Sioux Falls, South Dakota, but that the
Employee's duties and responsibilities may require travel away from his office.
During the Period of Employment, Employee shall not engage in any other
<PAGE> 2
employment activities for any direct or indirect remuneration without the
concurrence of the Board, except that, so long as such activities do not
interfere with his duties under this Agreement, Employee may (i) continue to
devote reasonable time to the management of investments and to participation in
community and charitable affairs, and (ii) devote not more than 5% of his
working time on matters not related to the business of the Employer unless the
Board of Directors by resolution directs otherwise. Employee shall have such
title as the Board shall determine from time to time.
3. Compensation.
3.1 Base Salary. During the Period of Employment, Employer shall pay
Employee a Base Salary at the rate of $180,000 per annum payable at least as
frequently as bi-weekly and subject to payroll deductions as may be necessary or
customary in respect of Employer's salaried employees in general. The amount of
Employee's Base Salary shall be subject to annual review by the Board, provided
that the level of such Base Salary shall not be subject to reduction.
3.2 This section, 3.2 is intentionally left blank.
3.3 Options. As an inducement to Employee to enter into this Agreement
and in consideration of the performance of the services by Employee hereunder,
the Employer is granting to Employee options (the "Options") to purchase up to
100,000 shares of common stock of CSI, par value $.001 per share, (the "Common
Stock") at an exercise price of $6.00 per share pursuant to the terms of the
Option Agreement which is attached hereto and incorporated herein by reference
as Exhibit A.
4. Benefits. During the Period of Employment, Employee shall be entitled to
participate in all fringe benefit programs (the "Fringe Benefits") such as
medical and dental coverage, life insurance, pension and profit-sharing plans,
etc., that may be
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<PAGE> 3
maintained by Employer that are available to its executive officers generally.
Any payments or benefits payable to Employee hereunder in respect of any
calendar year during which Employee is employed by Employer for less than the
entire year shall, unless otherwise provided in the applicable plan or
arrangement, be prorated in accordance with the number of days in such calendar
year during which he is so employed. Employee acknowledges that he shall have no
vested rights under or to participate in any such program except as expressly
provided under the terms hereof or thereof.
5. Expenses. Employer will pay or reimburse Employee for such reasonable
travel, entertainment or other expenses as he may incur on behalf of Employer
during the Period of Employment in connection with the performance of his duties
hereunder but only to the extent that such expenses were either specifically
authorized by Employer or incurred in accordance with policies established by
the Board and provided that Employee shall furnish Employer with such evidence
relating to such expenses as Employer may reasonably require to substantiate
such expenses for tax purposes. Employer will reimburse Employee for air travel
expenses to and from Sioux Falls and will provide lodging or pay reasonable
lodging expenses when Employee is in Sioux Falls.
6. Termination of Employment.
6.1 Circumstances of Termination. Notwithstanding the terms set forth in
Section 1 hereof, Employee's employment shall terminate under any of the
following circumstances:
(a) Death. In the event of Employee's death.
(b) Permanent Disability. If during the Period of Employment
Employee becomes physically or mentally incapacitated or disabled so that (i) he
is unable to perform for Employer substantially the same services as he
performed prior
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<PAGE> 4
to incurring such incapacity or disability or to devote his full working time or
use his best efforts to advance the business and welfare of Employer or
otherwise to perform his duties under this Agreement and (ii) such condition
exists for an aggregate of six months in any 12 consecutive calendar month
period (Employer, at its option and expense, being entitled to retain a
physician reasonably acceptable to Employee to confirm the existence of such
incapacity or disability, and the determination of such physician being binding
upon Employer and Employee).
(c) Cause. At the option of Employer, because Employee:
(i) has been convicted of, or has pled guilty or nolo contendere
to, a felony, or
(ii) has embezzled or misappropriated Employer funds or
property, or
(iii) has continued use of alcohol or drugs to an extent that
interferes with the performance by Employee of his employment responsibilities,
or
(iv) has materially violated Section 8. 1, Section 8.2, Section
8.3 or Section 8.4 hereof, or
(v) has willfully failed or refused to perform those duties
reasonably assigned or delegated to him by the Board of Directors, which failure
or refusal continues following (A) the Board of Directors giving the Employee
written notice setting forth the facts or events constituting such failure or
refusal and (B) a reasonable opportunity to correct the deficiencies or other
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<PAGE> 5
problems specified in such notice to the reasonable satisfaction of the Board of
Directors.
(d) Not For Cause. At the option of Employer at any time for any
reason other than those referred to above or for no reason at all, whereupon the
Employer shall become obligated to make those payments set forth in Section
7.1(d) hereof. If Employer shall be in material breach of this Agreement and by
reason thereof Employee terminates his employment hereunder, such termination
shall be deemed a termination by Employer pursuant to this Section 6.1(d).
6.2 Notice of Termination. Any termination of Employee's employment by
Employer (other than termination pursuant to Section 6.1(a) hereof) or by
Employee shall be communicated by written Notice of Termination to the other
party hereto in accordance with Section 9.2. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice terminating Employee's employment by
Employer. If a Notice of Termination is given by Employer, such notice shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances that provide a
basis for termination of Employee's employment under the provision so indicated.
In the event Employer sends a Notice of Termination under Section 6.1(c),
Employee shall have a reasonable opportunity to provide documentation or other
evidence to the Board of Directors contesting the basis for the termination. For
purposes of this Agreement, the "Date of Termination" shall be the date on which
the Notice of Termination is delivered except that with respect to Section 6.1
(a) the "Date of Termination" shall be the date of Employee's death.
7. Payments Upon Termination of Employment.
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<PAGE> 6
7.1 Payments. In the event that Employee's employment is terminated
prior to the Expiration Date (including any extension thereof), the Period of
Employment shall expire as of the Date of Termination.
(a) If Employer terminates Employee's employment for Cause or if
Employee voluntarily terminates his employment other than as a result of
Employer's material breach of the terms of this Agreement, Employer's obligation
to compensate Employee shall in all respects cease as of the Date of
Termination, except that Employer shall pay Employee the Base Salary accrued
under Section 3, any Fringe Benefits accrued under Section 4 and the
reimbursable expenses incurred under Section 5 of this Agreement up to such Date
of Termination (the "Accrued Obligations");
(b) If Employee's employment is terminated upon the death of
Employee, Employer's obligation to compensate Employee shall in all respects
cease as of the Date of Termination, except that within thirty (30) days after
the Date of Termination Employer shall (1) pay Employee's estate or legal
representative the Accrued Obligations and (11) continue to maintain during the
six month period following the Date of Termination for the benefit of the
Employee's dependents, basic health and dental insurance and related medical
expenses coverage on terms no less favorable to the Employee than Employer
provides to its executive officers generally, as such benefits may be modified
from time to time during such period;
(c) If Employee's employment is terminated upon the Permanent
Disability of Employee, Employer's obligation to compensate Employee shall in
all respects cease as of the Date of Termination, except that within thirty (30)
days after the Date of Termination Employer shall (i) pay Employee Accrued
Obligations and a lump sum payment equal to 25% of the Employee's annual Base
Salary payable under Section 3
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<PAGE> 7
hereof at the rate in effect immediately prior to such termination less the
amount of any disability payments payable to Employee during the six-month
period following the Date of Termination pursuant to any Employer-paid or state
sponsored insurance policy or employer self-insured program, (ii) continue to
maintain during the six-month period following the Date of Termination for the
benefit of Employee and his dependents, basic health, disability and dental
insurance and related medical expenses coverage on terms no less favorable to
the Employee than Employer provides to its executive officers generally, as such
benefits may be modified from time to time during such period provided that the
Employee shall continue to be obligated to make any contributions or payments in
connection with such benefits to the same extent as other executive officers
generally; and
(d) If Employee's employment is terminated by Employer pursuant to
Section 6.1(d), Employer's obligation to compensate Employee shall in all
respects continue from the Date of Termination until the later of June 17, 2000
or the end of the Extended Term of this Agreement (the "Severance Period"),
Employer shall (i) pay to Employee on a monthly basis the sum of one-twelfth
(1/12th) of the annual Base Salary of Employee in effect at the Date of
Termination (the "Continuation Payments") and (ii) continue to maintain, during
the Severance Period for the benefit of the Employee and his dependents, basic
health, dental and life insurance and related medical expenses coverage
(including disability and hospitalization coverage) (the "Continuation
Benefits") on terms no less favorable to the Employee than the Employer provides
to its executive officers generally, as such benefits may be modified from time
to time during the Severance Period. During the Severance Period, Employee shall
be required to make any contributions required to maintain such Continuation
Benefits, which may be withheld from the Continuation Payments; provided that
such contributions are also required to be made by
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<PAGE> 8
the Employer's executive officers generally. If at any time during the Severance
Period Employee shall obtain employment with a third party (the "Substitute
Employer") in which Employee is entitled to receive basic health benefits in
connection with such employment on terms provided by the Substitute Employer to
its similarly situated employees generally, the Employer shall no longer be
required to provide Continuation Benefits to the Employee, regardless of whether
such benefits differ in any respect from the Continuation Benefits. Continuation
Payments shall be made by Employer periodically in the same amounts and at the
same intervals as the Base Salary was paid immediately prior to termination of
the employment. The Employer shall be excused from its obligations to make
payments under this Section 7.1(d) if the Employee breaches its obligations
hereunder (including its obligations under Article 8 hereof).
7.2 Release and Satisfaction. With respect to Employee, his heirs,
successors and assigns, payment by Employer of the amounts provided under this
Section 7 shall release, relinquish and forever discharge Employer and any
director, officer, employee, shareholder or agent of Employer from any and all
claims, damages, losses, costs, expenses, liabilities or obligations, whether
known or unknown (other than any such claims, damages, losses, costs, expenses,
liabilities or obligations arising under any written employee benefit plan or
arrangement (whether or not tax-qualified) covering Employee, which Employee has
incurred or suffered or may incur or suffer as a result of the termination of
such employment.
7.3 Effect on This Agreement. Any termination of Employee's employment
and any expiration of the Period of Employment under this Agreement shall not
affect the continuing operation and effect of Sections 7.2, 8.1, 8.2, 8.3, 8.4
and 8.5 hereof, which shall continue in full force and effect with respect to
Employer and Employee, and its
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<PAGE> 9
and his heirs, successors and assigns. Nothing in Section 7.1 hereof shall be
deemed to operate or shall operate as a release, settlement or discharge of any
action or omission by Employee enumerated in Section 6.1 (c) hereof as a
possible basis for termination of Employee's employment for Cause.
7.4 No Mitigation. Subject to the provisions of Sections 8.1, 8.2, 8.3,
8.4 and 8.5 hereof, Employee shall be free to accept such employment and engage
in such business as Employee may desire following the termination of his
employment hereunder, and any compensation received by Employee therefrom shall
not reduce any payments required to be made by Employer hereunder.
8. Non-disclosure of Proprietary Information, Surrender of Records;
Inventions and Patents; Non-Compete.
8.1 Proprietary Information. Employee shall not during the Period of
Employment or at any time thereafter (irrespective of the circumstances under
which Employee's employment by Employer terminates), directly or indirectly use
for his own purpose or for the benefit of any person or entity other than
Employer, nor otherwise disclose, any proprietary information, as defined below,
to any individual or entity, unless such disclosure has been authorized in
writing by the Board or is otherwise required by law. For purposes of this
Agreement, the term "proprietary information" shall include, but is not limited
to: (a) the name or address of any customer, vendor or affiliate or Employer or
any information concerning the transactions or relations of any customer, vendor
or affiliate or Employer with Employer; (b) any information concerning any
product, technology or procedure employed by Employer but not generally known to
its customers, vendors or competitors, or under development by or being tested
by Employer but not at the time offered generally to customers or vendors; (c)
any information relating to Employer's
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<PAGE> 10
computer software, computer systems, pricing or marketing methods, margins,
capital structure, operating results, borrowing arrangements or business plans;
(d) any information which is generally regarded as confidential or proprietary
in any line of business engaged in by Employer; (e) any information contained in
any of Employer's written or oral policies and procedures or employee manuals;
(f) any information belonging to customers, vendors or affiliates of Employer
which Employer has agreed to hold in confidence; (g) any inventions, innovations
or improvements covered by Section 8.3 below; (h) any other information which
the Board has reasonably determined by resolution and communicated to Employee
to be confidential or proprietary; and (i) all written, graphic and other
material relating to any of the foregoing. Information that is not novel or
copyrighted or patented may nonetheless be proprietary information. Proprietary
information, however, shall not include (i) any information that is or becomes
generally known to the industries in which Employer competes through sources
independent of Employer or through authorized publication to persons other than
Employer's employees by Employer or (ii) other non-sensitive information that
may be disclosed by Employee in the ordinary course of business, the disclosure
of which is not reasonably likely to adversely affect Employer's business
operations, their relationships with customers, vendors or employees or the
results of their operations.
8.2 Confidentiality and Surrender of Records. Employee shall not during
the Period of Employment or at any time thereafter (irrespective of the
circumstances under which Employee's employment by Employer terminates), except
as required by law, or in connection with the ongoing business of Employer,
directly or indirectly give any "confidential records" (as hereinafter defined)
to, or permit any inspection or copying of confidential records by, any
individual or entity other than in the course of such individual's
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<PAGE> 11
or entity's employment or retention by Employer, nor shall he retain, and will
deliver promptly to Employer, any of the same following termination of his
employment. For purposes hereof, "confidential records" means all
correspondence, memoranda, files, manuals, books, lists, financial, operating or
marketing records, magnetic tape, or electronic or other media or equipment of
any kind which may be in Employee's possession or under his control or
accessible to him which contain any proprietary information as defined in
Section 8.1. above. All confidential records shall be and remain the sole
property of Employer during the Period of Employment and thereafter.
8.3 Inventions and Patents: All inventions, innovations or improvements
in Employer's method of conducting its business (including policies, procedures,
products, improvements, software, ideas and discoveries, whether paten- table or
copyrightable or not) conceived or made by Employee, either alone or jointly
with others, during the Period of Employment belong to Employer. Employee will
promptly disclose in writing such inventions, innovations or improvements to the
Board and perform all actions reasonably requested by the Board to establish and
confirm such ownership by Employer, including, but not limited to, cooperating
with and assisting Employer in obtaining patents for Employer in the United
States and in foreign countries. Any patent application filed by Employee within
a year after termination of his employment hereunder shall be presumed to relate
to an invention which was made during the Period of Employment unless Employee
can provide evidence to the contrary.
8.4 Covenant Not to Compete; No Solicitation.
(a) Employee acknowledges and recognizes the highly competitive
nature of Employer's business and, in consideration of the payment by Employer
to Employee of amounts that may hereafter be paid to Employee pursuant to
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<PAGE> 12
Sections 7.1 and 8.4(d) hereof, Employee agrees that, provided he receives the
applicable payments provided for in Section 7.1 and 8.4(d) hereof, during the
period (the "Covered Time") beginning on the Date of Termination and ending (i)
if Employee's employment is terminated for any reason other than pursuant to
Section 6.1(d) hereof, on the second anniversary of the Date of Termination or
(ii) if Employee's employment is terminated pursuant to Section 6.1(d) hereof
and subject to Section 8.4(d) hereof, on the earlier of (A) the first
anniversary of the Date of Termination or (B) the Expiration Date, Employee will
not compete with the business of Employer, which means that Employee will not
engage, directly or indirectly, in the "Covered Business" (as hereinafter
defined) in any state of the United States of America in which the Employer is
conducting business or proposes to conduct business as of the Date of
Termination (these areas are hereinafter collectively referred to as the
"Covered Area"). For the purpose of this Agreement, (i) "Covered Business" shall
mean the businesses in which Employer or any affiliate" of Employer was engaged
at any time during the one year period preceding the Date of Termination; and
(ii) the phrase "engage, directly or indirectly" shall mean engaging directly or
having an interest, directly or indirectly, as owner, partner, shareholder,
employee, independent contractor, capital investor, lender, renderer of
consultation services or advice or otherwise (other than as the holder of less
than 2% of the outstanding stock of a publicly-traded corporation), either alone
or in association with others, in the operation of any aspect of any type of
business or enterprise engaged in any aspect of the Covered Business. Employee
shall be deemed engaged in business in the Covered Area if his place of business
is located in the Covered Area or if he solicits customers located anywhere in,
or provides products anywhere in, the Covered Area. For all purposes of this
Agreement, the term "affiliate(s)"
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<PAGE> 13
shall be defined as the term "affiliate" is defined in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934.
(b) Employee agrees that during the term of this Agreement
(including any extension thereof) and during the Covered Time he shall not (i)
directly or indirectly solicit or attempt to solicit any of the employees,
agents or representatives of Employer or of affiliates of Employer to leave any
of such entities; (ii) directly or indirectly solicit or attempt to solicit any
of the employees, agents, consultants or representatives of Employer or of
affiliates of Employer to become employees, agents, representatives or
consultants or any other person or entity; or (iii) directly or indirectly
solicit or attempt to solicit any customer, vendor or lender of Employer or of
affiliates of Employer with respect to any product or service being furnished by
Employer.
(c) Employee understands that the provisions of Section 8.4 (a) may
limit his ability to earn a livelihood in a business which is substantially
similar to the business of Employer but nevertheless agrees and hereby
acknowledges that the consideration provided under this Agreement, including any
amounts or benefits provided under Section 7 hereof, is sufficient to justify
the restrictions contained in such provisions and in consideration thereof and
in light of Employee's education, skills and abilities, Employee agrees that he
will not assert that, and it should not be considered that, such provisions
prevent him from earning a living or otherwise are void or unenforceable or
should be voided or held unenforceable. Employee acknowledges and agrees that
his duties with Employer are of an executive nature and that he is a member of
Employer's management group.
(d) If Employee's employment is terminated pursuant to Section 6.1
(d) hereof, Employer may extend the Covered Time to extend up to and through
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the second anniversary of the Date of Termination, but no later than the first
anniversary of the Expiration Date by delivering written notice to Employee
(specifying the duration of the extended Covered Time), within ten (10) days of
such Date of Termination, that Employer has elected to continue to pay to
Employee the Continuation Payments (except that during any period of Covered
Time that extends beyond the Expiration Date, the Continuation Payments shall be
increased by an additional 50% thereof) and provide the Continuation Benefits
(on terms no less favorable to Employee than Employer provides to its executive
officers generally, as such benefits may be modified from time to time) for each
month of such extended Covered Time. During the extended Covered Time, Employee
shall be required to make any contributions required to maintain such
Continuation Benefits, which may be withheld from the Continuation Payments;
provided that such contributions are also required to be made by the Employer's
executive officers generally. If at any time during the extended Covered Time
Employee shall obtain employment with a Substitute Employer in which Employee is
entitled to receive basic health benefits in connection with such employment on
terms provided by the Substitute Employer to its similarly situated employees
generally, Employer shall no longer be required to provide Continuation Benefits
to the Employee, regardless of whether such benefits differ in respect from the
Continuation Benefits. Employer shall be excused from its obligations to make
payments under this Section 8.4(d) if Employee breaches its obligations
hereunder.
8.5 Litigation Assistance. Employee agrees that after the Date of
Termination he shall, at the request of Employer, and subject to time
limitations imposed by business or employment obligations, render all reasonable
assistance and perform all lawful acts that Employer considers necessary or
advisable in connection with any litigation involving Employer or any director,
officer, employee, shareholder, agent, representative,
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<PAGE> 15
consultant, customer or vendor of Employer. In the event that Employer requests
Employee's assistance under this Section 8.5, Employer shall pay to Employee for
each day such assistance is rendered an amount equal to the annual Base Salary
of Employee in effect at the Date of Termination divided by 250 and shall
promptly pay or reimburse Employee for such reasonable travel expenses as he may
incur in connection with rendering assistance hereunder.
8.6 Definition of Employer. For purposes of this Section 8, the term
Employer shall include Employer and any and all of its subsidiaries, ventures or
affiliates, whether currently existing or hereafter formed, which are engaged in
the Covered Business or a portion thereof, as well as any person to whom this
Agreement is assigned as permitted by Section 9.8 hereof, provided, however,
that the business of any assignee not already engaged in by Employer shall not
be included as a Covered Business.
8.7 Enforcement.
(a) The parties hereto agree and acknowledge that the covenants and
agreements contained herein are reasonably necessary in duration and to protect
the reasonable competitive business interests of Employer, including, without
limitation, the value of the proprietary information and goodwill of Employer.
(b) Employee agrees that the covenants and undertakings contained in
Article 8 of this Agreement relate to matters which are of a special, unique and
extraordinary character and that Employer cannot be reasonably or adequately
compensated in damages in an action at law in the event Employee breaches any of
these covenants or undertakings. Therefore, Employee agrees that Employer shall
be entitled, as a matter of course, without the need to prove irreparable
injury, to an injunction, restraining order or other equitable relief from any
court of competent jurisdiction,
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restraining any violation or threatened violation of any of such terms by
Employee and such other persons as the court shall order. The unsuccessful party
will pay costs and legal fees incurred by the party that is successful in any
proceeding by Employer seeking to obtain such an injunction.
(c) Rights and remedies provided for in this Section are cumulative
and shall be in addition to rights and remedies otherwise available to the
parties under any other agreement or applicable law.
(d) In the event that any provision of this Agreement shall to any
extent be held invalid, unreasonable or unenforceable in any circumstance, the
parties hereto agree that the remainder of this Agreement and the application of
such provision of this Agreement to other circumstances shall be valid and
enforceable to the fullest extent permitted by law. If any provision of this
Agreement, or any part thereof, is held to be unenforceable because of the scope
or duration of or the area covered by such provision, the parties hereto agree
that the court or arbitrator making such determination shall reduce the scope,
duration and/or area of such provision (and shall substitute appropriate
provisions for any such unenforceable provisions) in order to make such
provision enforceable to the fullest extent permitted by law, and/or shall
delete specific words and phrases, and such modified provision shall then be
enforceable and shall be enforced. The parties hereto recognize that if, in any
judicial proceeding, a court shall refuse to enforce any of the separate
covenants contained in this Agreement, then that unenforceable covenant
contained in this Agreement shall be deemed eliminated from these provisions to
the extent necessary to permit the remaining separate covenants to be enforced.
In the event that any court or arbitrator determines that the time period or the
area, or both, are unreasonable and that any of the covenants is to that extent
unenforceable, the parties
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hereto agree that such covenants will remain in full force and effect, first,
for the greatest time period, and second, in the greatest geographical area that
would not render them unenforceable.
9. Miscellaneous.
9.1 Key Man Insurance. Employee recognizes and acknowledges that
Employer or its affiliates may seek and purchase one or more policies providing
key man life insurance with respect to Employee, the proceeds of which would be
payable to Employer or such affiliate. Employee hereby consents to Employer or
its affiliates seeking and purchasing such insurance and will provide such
information, undergo such medical examinations (at Employers expense), execute
such documents, and otherwise take any and all actions necessary or desirable in
order for Employer or its affiliates to seek, purchase and maintain in full
force and effect such policy or policies.
9.2 Notice. Any notice required or permitted to be given hereunder shall
be deemed sufficiently given if sent by registered or certified mail, postage
prepaid, addressed to the addressee at his or its address last provided the
sender in writing by the addressee for purposes of receiving notices hereunder
or, unless or until such address shall be so furnished, to the address indicated
opposite his or its signature to this Agreement. For purposes of this Agreement,
notice sent in conformity with this Section 9.2 shall be deemed to have been
received on the third business day following the date on which such notices are
so sent.
9.3 Modification and No Waiver of Breach. No waiver or modification of
this Agreement shall be binding unless it is in writing signed by the parties
hereto. No waiver or modification of this Agreement shall be binding unless it
is in writing signed by the parties hereto. No waiver by a party of a breach
hereof by the other party
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<PAGE> 18
shall be deemed to constitute a waiver of a future breach, whether of a similar
or dissimilar nature, except to the extent specifically provided in any written
waiver under this Section 9.3.
9.4 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND ALL
QUESTIONS RELATING TO THE VALIDITY AND PERFORMANCE HEREOF AND REMEDIES HEREUNDER
SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAW.
9.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same agreement.
9.6 Captions. The captions used herein are for ease of reference only
and shall not define or limit the provisions hereof.
9.7 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto relating to the matters encompassed hereby and
supersedes any prior oral or written agreements.
9.8 Assignment. The rights of Employer under this Agreement may, without
the consent of Employee, be assigned by Employer to any person, firm,
corporation, or other business entity which at any time, whether by purchase,
merger or otherwise, directly or indirectly, acquires all or material portions
of the stock, assets or any line of business of Employer, provided such assignee
assumes all of the obligations of Employer under this Agreement.
9.9 Non-Transferability of Interest. None of the rights of Employee to
receive any form of compensation payable pursuant to this Agreement shall be
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<PAGE> 19
assignable or transferable except through a testamentary disposition or by the
laws of descent and distribution upon the death of Employee. Any attempted
assignment, transfer, conveyance, or other disposition (other than as aforesaid)
of any interest in the rights of Employee to receive any form of compensation to
be made by Employer pursuant to this Agreement shall be void.
9.10 Arbitration. The parties shall endeavor to settle all disputes by
amicable negotiations. Except as otherwise provided herein, any claim, dispute,
disagreement or controversy that arises between the parties relating to this
Agreement that is not amicably settled shall be resolved by arbitration, as
follows:
(a) Any such arbitration shall be heard in The City of New York, New
York, before a panel consisting of one (1) to three (3) arbitrators, each of
whom shall be impartial. Upon the written request of Arbitration of either party
hereto to commence arbitration hereunder, the parties shall attempt to mutually
agree as to the number and identity of the arbitrator(s), within thirty (30)
days of the date of such Request. Except as the parties may otherwise agree, all
arbitrators (if not selected by the parties hereto within thirty (30) days of a
written Request for Arbitration) shall be appointed pursuant to the commercial
arbitration rules of the American Arbitration Association. In determining the
number and appropriate background of the arbitrators, the appointing authority
shall give due consideration to the issues to be resolved, but his or her
decision as to the number of arbitrators and their identity shall be final.
(b) An arbitration may be commenced by any party to this Agreement
by the service of a written Request for Arbitration upon the other affected
parties. Such Request for Arbitration shall summarize the controversy or claim
to be arbitrated.
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<PAGE> 20
(c) All attorneys' fees and costs of the arbitration shall in the
first instance be borne by the respective party incurring such costs and fees,
but the arbitrators shall have the discretion to award costs and/or attorneys'
fees as they deem appropriate under the circumstances. The parties hereby
expressly waive punitive damages, and under no circumstances shall an award
contain any amount that in any way reflects punitive damages.
(d) Judgment on the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof.
(e) It is intended that controversies or claims submitted to
arbitration under this Section 9.10 shall remain confidential, and to that end
it is agreed by the parties that neither the facts disclosed in the arbitration,
the issues arbitrated, nor the views or opinions of any persons concerning them,
shall be disclosed to third persons at any time, except to the extent necessary
to enforce an award or judgment or as required by law or in response to legal
process or in connection with such arbitration.
(f) Any arbitration under this Section 9.10 shall be conducted
pursuant to the commercial arbitration rules of the American Arbitration
Association.
9.11 Jurisdiction: Venue. Subject to Section 9.10 hereof, the parties
hereto irrevocably and unconditionally submit to the exclusive jurisdiction of
any State or Federal court sifting in New York, New York over any suit, action
or proceeding arising out of or relating to this Agreement. The parties hereto
irrevocably and unconditionally waive any objection to the laying of venue of
any such suit, action or proceeding brought in any such court and any claim that
any such suit, action or proceeding brought in any such court has been brought
in an inconvenient forum. A final judgment in any suit, action or
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<PAGE> 21
proceeding brought in any such court shall be conclusive and binding upon the
parties and may be enforced in any other courts to whose jurisdiction a party is
or may be subject, by suit upon such judgment.
9.12 Indemnification. Employer will indemnify and hold Employee harmless
from and against any damage, loss, liability, claim, costs, expenses, penalties
or fines to the fullest extent permitted by applicable law with respect to any
actual or threatened claim, suit, investigation, proceeding or action of any
kind, civil or criminal, whether seeking damages, equitable relief, or
otherwise, by any governmental authority or person not a party hereto or
affiliated with a party hereto ("Proceeding"). Such indemnification shall
include, without limitation, the obligation to advance legal fees and costs
necessarily and reasonably incurred by Employee in connection with such a
Proceeding.
9.13 Change in Control. In the event there is a change in control of
Employer during the initial term of this Agreement, then Employee shall have the
right, within 60 days of the date a change in control occurs, to terminate his
employment and to have such termination be treated as a termination without
cause under Section 6.1(d) for the sole purpose of determining Employee's
compensation in connection with the termination. For purposes of this Agreement
a change in control shall be deemed to have occurred at such time as either (i)
Taxter One, L.L.C. shall own directly or indirectly less than 10% of the
outstanding voting common stock of Employer and shall own directly or indirectly
less than 50% of each other outstanding class of securities the majority vote of
which is required for shareholder action; or (ii) Jay Botchman shall own less
than 50% of the membership interests in Taxter One, L.L.C.
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<PAGE> 22
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
Credit Store, Inc. - Employer
3401 N. Louise Avenue, Sioux Falls, SD 57107
By: /s/ Jay Botchman
-------------------------------
/s/ Michael J. Philippe - Employee
------------------------------------
Michael J. Philippe
2712 W. 40th Street
Minneapolis, MN 55410
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<PAGE> 1
December 15, 1999
Michael J. Philippe
2712 West 40th Street
Minneapolis, MN 55410
RE: Amendment to Employment Agreement
Dear Mike:
This letter amends and modifies your Employment Agreement dated June 17, 1997.
The Board of Directors at its meeting on September 15, 1999, approved a
relocation package for you which provides:
(i) A $50,000 bonus payable upon moving to Sioux Falls,
(ii) Expenses of selling your current home (grossed up for taxes),
(iii) Expenses of moving to Sioux Falls,
(iv) Payment, if you are terminated, of the lesser of
(a) the sum expenses of selling your home in Sioux Falls, and the
loss of equity on his home in Sioux Falls, if any (grossed up
for income taxes), or
(b) $100,000 (grossed up for income taxes), and
(v) an extension of your term agreement through June 30, 2002.
Except as modified by this letter, your Employment Agreement continue to govern
all aspects of your employment.
Sincerely,
Kevin T. Riordan
President
AGREED AND ACCEPTED:
- - - ------------------------------
Michael J. Philippe
<PAGE> 1
EMPLOYMENT AGREEMENT
This Agreement is made and entered into effective as of August 1, 1997 by
and between Credit Store, Inc., a Delaware corporation ("Employer"), and Richard
S. Angel ("Employee").
Employer hereby agrees to employ Employee, and Employee hereby accepts such
employment, on the terms and conditions hereinafter set forth.
1. Period of Employment. The period of Employee's employment under this
Agreement (the "Period of Employment") shall commence on the date hereof (the
"Effective Date") and shall expire on July 31, 2000 (the "Expiration Date"),
subject to any extension as may be agreed or any earlier termination of
Employee's employment as provided in Section 6 hereof. Upon the expiration of
the initial term of this Agreement, and each subsequent term or extension
thereof, this Agreement shall automatically be extended for an additional term
of one year, unless the Employer or the Employee shall have notified the other
party hereto of its election to terminate this Agreement not later than 90 days
prior to the scheduled Expiration Date. If Employee's employment is terminated
pursuant to Section 6 hereof, the Period of Employment shall expire as of the
Date of Termination (as hereinafter defined).
2. Duties. During the Period of Employment, Employee will faithfully
perform those duties and responsibilities assigned by the Board of Directors of
Employer (the "Board") and Employee will devote his full working time and use
his best efforts to advance the business and welfare of Employer in furtherance
of the policies established by the Board. It is understood that the Employee
will be based in Los Angeles (or another city of his choice) and that his
primary office will be located in Sioux Falls, South Dakota, but that the
Employee's duties and responsibilities may
<PAGE> 2
require travel away from his office. During the Period of Employment, Employee
shall not engage in any other employment activities for any direct or indirect
remuneration without the concurrence of the Board, except that, so long as such
activities do not interfere with his duties under this Agreement, Employee may
(i) continue to devote reasonable time to the management of investments and to
participation in community and charitable affairs, and (ii) devote not more than
5% of his working time on matters not related to the business of the Employer
unless the Board of Directors by resolution directs otherwise. Employee shall
have such title as the Board shall determine from time to time.
3. Compensation.
3.1 Base Salary. During the Period of Employment, Employer shall pay
Employee a Base Salary at the rate of $216,000 per annum payable at least as
frequently as bi-weekly and subject to payroll deductions as may be necessary or
customary in respect of Employer's salaried employees in general. The amount of
Employee's Base Salary shall be subject to annual review by the Board, provided
that the level of such Base Salary shall not be subject to reduction.
3.2 This section, 3.2 is intentionally left blank.
3.3 Options. As an inducement to Employee to enter into this Agreement
and in consideration of the performance of the services by Employee hereunder,
the Employer is granting to Employee options (the "Options") to purchase up to
100,000 shares of common stock of CSI, par value $.001 per share, (the "Common
Stock") at an exercise price of $6.00 per share pursuant to the terms of the
Option Agreement which is attached hereto and incorporated herein by reference
as Exhibit A.
- 2 -
<PAGE> 3
4. Benefits. During the Period of Employment, Employee shall be entitled to
participate in all fringe benefit programs (the "Fringe Benefits") such as
medical and dental coverage, life insurance, pension and profit-sharing plans,
etc., that may be maintained by Employer that are available to its executive
officers generally. Any payments or benefits payable to Employee hereunder in
respect of any calendar year during which Employee is employed by Employer for
less than the entire year shall, unless otherwise provided in the applicable
plan or arrangement, be prorated in accordance with the number of days in such
calendar year during which he is so employed. Employee acknowledges that he
shall have no vested rights under or to participate in any such program except
as expressly provided under the terms hereof or thereof.
5. Expenses. Employer will pay or reimburse Employee for such reasonable
travel, entertainment or other expenses as he may incur on behalf of Employer
during the Period of Employment in connection with the performance of his duties
hereunder but only to the extent that such expenses were either specifically
authorized by Employer or incurred in accordance with policies established by
the Board and provided that Employee shall furnish Employer with such evidence
relating to such expenses as Employer may reasonably require to substantiate
such expenses for tax purposes. Employer will reimburse Employee for State Bar
dues and the cost of malpractice insurance with $1,000,000/$3,000,000 coverage
and a $5,000 deductible. Employer will reimburse Employee for air travel
expenses to and from Sioux Falls and will provide lodging or pay reasonable
lodging expenses when Employee is in Sioux Falls.
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<PAGE> 4
6. Termination of Employment.
6.1 Circumstances of Termination. Notwithstanding the terms set forth in
Section 1 hereof, Employee's employment shall terminate under any of the
following circumstances:
(a) Death. In the event of Employee's death.
(b) Permanent Disability. If during the Period of Employment
Employee becomes physically or mentally incapacitated or disabled so that (i) he
is unable to perform for Employer substantially the same services as he
performed prior to incurring such incapacity or disability or to devote his full
working time or use his best efforts to advance the business and welfare of
Employer or otherwise to perform his duties under this Agreement and (ii) such
condition exists for an aggregate of six months in any 12 consecutive calendar
month period (Employer, at its option and expense, being entitled to retain a
physician reasonably acceptable to Employee to confirm the existence of such
incapacity or disability, and the determination of such physician being binding
upon Employer and Employee).
(c) Cause. At the option of Employer, because Employee:
(i) has been convicted of, or has pled guilty or nolo contendere
to, a felony, or
(ii) has embezzled or misappropriated Employer funds or
property, or
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<PAGE> 5
(iii) has continued use of alcohol or drugs to an extent that
interferes with the performance by Employee of his employment responsibilities,
or
(iv) has materially violated Section 8. 1, Section 8.2, Section
8.3 or Section 8.4 hereof, or
(v) has willfully failed or refused to perform those duties
reasonably assigned or delegated to him by the Board of Directors, which failure
or refusal continues following (A) the Board of Directors giving the Employee
written notice setting forth the facts or events constituting such failure or
refusal and (B) a reasonable opportunity to correct the deficiencies or other
problems specified in such notice to the reasonable satisfaction of the Board of
Directors.
(d) Not For Cause. At the option of Employer at any time for any
reason other than those referred to above or for no reason at all, whereupon the
Employer shall become obligated to make those payments set forth in Section
7.1(d) hereof. If Employer shall be in material breach of this Agreement and by
reason thereof Employee terminates his employment hereunder, such termination
shall be deemed a termination by Employer pursuant to this Section 6.1(d).
6.2 Notice of Termination. Any termination of Employee's employment by
Employer (other than termination pursuant to Section 6.1(a) hereof) or by
Employee shall be communicated by written Notice of Termination to the other
party hereto in accordance with Section 9.2. For purposes of this Agreement, a
"Notice of
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<PAGE> 6
Termination" shall mean a notice terminating Employee's employment by Employer.
If a Notice of Termination is given by Employer, such notice shall indicate the
specific termination provision in this Agreement relied upon and shall set forth
in reasonable detail the facts and circumstances that provide a basis for
termination of Employee's employment under the provision so indicated. In the
event Employer sends a Notice of Termination under Section 6.1(c), Employee
shall have a reasonable opportunity to provide documentation or other evidence
to the Board of Directors contesting the basis for the termination. For purposes
of this Agreement, the "Date of Termination" shall be the date on which the
Notice of Termination is delivered except that with respect to Section 6.1 (a)
the "Date of Termination" shall be the date of Employee's death.
7. Payments Upon Termination of Employment.
7.1 Payments. In the event that Employee's employment is terminated
prior to the Expiration Date (including any extension thereof), the Period of
Employment shall expire as of the Date of Termination.
(a) If Employer terminates Employee's employment for Cause or if
Employee voluntarily terminates his employment other than as a result of
Employer's material breach of the terms of this Agreement, Employer's obligation
to compensate Employee shall in all respects cease as of the Date of
Termination, except that Employer shall pay Employee the Base Salary accrued
under Section 3, any Fringe Benefits accrued under Section 4 and the
reimbursable expenses incurred under Section 5 of this Agreement up to such Date
of Termination (the "Accrued Obligations");
(b) If Employee's employment is terminated upon the death of
Employee, Employer's obligation to compensate Employee shall in all respects
- 6 -
<PAGE> 7
cease as of the Date of Termination, except that within thirty (30) days after
the Date of Termination Employer shall (1) pay Employee's estate or legal
representative the Accrued Obligations and (11) continue to maintain during the
six month period following the Date of Termination for the benefit of the
Employee's dependents, basic health and dental insurance and related medical
expenses coverage on terms no less favorable to the Employee than Employer
provides to its executive officers generally, as such benefits may be modified
from time to time during such period;
(c) If Employee's employment is terminated upon the Permanent
Disability of Employee, Employer's obligation to compensate Employee shall in
all respects cease as of the Date of Termination, except that within thirty (30)
days after the Date of Termination Employer shall (i) pay Employee Accrued
Obligations and a lump sum payment equal to 25% of the Employee's annual Base
Salary payable under Section 3 hereof at the rate in effect immediately prior to
such termination less the amount of any disability payments payable to Employee
during the six-month period following the Date of Termination pursuant to any
Employer-paid or state sponsored insurance policy or employer self-insured
program, (ii) continue to maintain during the six-month period following the
Date of Termination for the benefit of Employee and his dependents, basic
health, disability and dental insurance and related medical expenses coverage on
terms no less favorable to the Employee than Employer provides to its executive
officers generally, as such benefits may be modified from time to time during
such period provided that the Employee shall continue to be obligated to make
any contributions or payments in connection with such benefits to the same
extent as other executive officers generally; and
- 7 -
<PAGE> 8
(d) If Employee's employment is terminated by Employer pursuant to
Section 6.1(d), Employer's obligation to compensate Employee shall in all
respects continue from the Date of Termination until the later of July 31, 2000
or the end of the Extended Term of this Agreement (the "Severance Period"),
Employer shall (i) pay to Employee on a monthly basis the sum of one-twelfth
(1/12th) of the annual Base Salary of Employee in effect at the Date of
Termination (the "Continuation Payments") and (ii) continue to maintain, during
the Severance Period for the benefit of the Employee and his dependents, basic
health, dental and life insurance and related medical expenses coverage
(including disability and hospitalization coverage) (the "Continuation
Benefits") on terms no less favorable to the Employee than the Employer provides
to its executive officers generally, as such benefits may be modified from time
to time during the Severance Period. During the Severance Period, Employee shall
be required to make any contributions required to maintain such Continuation
Benefits, which may be withheld from the Continuation Payments; provided that
such contributions are also required to be made by the Employer's executive
officers generally. If at any time during the Severance Period Employee shall
obtain employment with a third party (the "Substitute Employer") in which
Employee is entitled to receive basic health benefits in connection with such
employment on terms provided by the Substitute Employer to its similarly
situated employees generally, the Employer shall no longer be required to
provide Continuation Benefits to the Employee, regardless of whether such
benefits differ in any respect from the Continuation Benefits. Continuation
Payments shall be made by Employer periodically in the same amounts and at the
same intervals as the Base Salary was paid immediately prior to termination of
the employment. The Employer shall be excused from
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<PAGE> 9
its obligations to make payments under this Section 7.1(d) if the Employee
breaches its obligations hereunder (including its obligations under Article 8
hereof).
7.2 Release and Satisfaction. With respect to Employee, his heirs,
successors and assigns, payment by Employer of the amounts provided under this
Section 7 shall release, relinquish and forever discharge Employer and any
director, officer, employee, shareholder or agent of Employer from any and all
claims, damages, losses, costs, expenses, liabilities or obligations, whether
known or unknown (other than any such claims, damages, losses, costs, expenses,
liabilities or obligations arising under any written employee benefit plan or
arrangement (whether or not tax-qualified) covering Employee, which Employee has
incurred or suffered or may incur or suffer as a result of the termination of
such employment.
7.3 Effect on This Agreement. Any termination of Employee's employment
and any expiration of the Period of Employment under this Agreement shall not
affect the continuing operation and effect of Sections 7.2, 8.1, 8.2, 8.3, 8.4
and 8.5 hereof, which shall continue in full force and effect with respect to
Employer and Employee, and its and his heirs, successors and assigns. Nothing in
Section 7.1 hereof shall be deemed to operate or shall operate as a release,
settlement or discharge of any action or omission by Employee enumerated in
Section 6.1 (c) hereof as a possible basis for termination of Employee's
employment for Cause.
7.4 No Mitigation. Subject to the provisions of Sections 8.1, 8.2, 8.3,
8.4 and 8.5 hereof, Employee shall be free to accept such employment and engage
in such business as Employee may desire following the termination of his
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<PAGE> 10
employment hereunder, and any compensation received by Employee therefrom shall
not reduce any payments required to be made by Employer hereunder.
8. Non-disclosure of Proprietary Information, Surrender of Records;
Inventions and Patents; Non-Compete.
8.1 Proprietary Information. Employee shall not during the Period of
Employment or at any time thereafter (irrespective of the circumstances under
which Employee's employment by Employer terminates), directly or indirectly use
for his own purpose or for the benefit of any person or entity other than
Employer, nor otherwise disclose, any proprietary information, as defined below,
to any individual or entity, unless such disclosure has been authorized in
writing by the Board or is otherwise required by law. For purposes of this
Agreement, the term "proprietary information" shall include, but is not limited
to: (a) the name or address of any customer, vendor or affiliate or Employer or
any information concerning the transactions or relations of any customer, vendor
or affiliate or Employer with Employer; (b) any information concerning any
product, technology or procedure employed by Employer but not generally known to
its customers, vendors or competitors, or under development by or being tested
by Employer but not at the time offered generally to customers or vendors; (c)
any information relating to Employers computer software, computer systems,
pricing or marketing methods, margins, capital structure, operating results,
borrowing arrangements or business plans; (d) any information which is generally
regarded as confidential or proprietary in any line of business engaged in by
Employer; (e) any information contained in any of Employer's written or oral
policies and procedures or employee manuals; (f) any information belonging to
customers, vendors or affiliates of Employer which Employer has
- 10 -
<PAGE> 11
agreed to hold in confidence; (g) any inventions, innovations or improvements
covered by Section 8.3 below; (h) any other information which the Board has
reasonably determined by resolution and communicated to Employee to be
confidential or proprietary; and (i) all written, graphic and other material
relating to any of the foregoing. Information that is not novel or copyrighted
or patented may nonetheless be proprietary information. Proprietary information,
however, shall not include (i) any information that is or becomes generally
known to the industries in which Employer competes through sources independent
of Employer or through authorized publication to persons other than Employer's
employees by Employer or (ii) other non-sensitive information that may be
disclosed by Employee in the ordinary course of business, the disclosure of
which is not reasonably likely to adversely affect Employer's business
operations, their relationships with customers, vendors or employees or the
results of their operations.
8.2 Confidentiality and Surrender of Records. Employee shall not during
the Period of Employment or at any time thereafter (irrespective of the
circumstances under which Employee's employment by Employer terminates), except
as required by law, or in connection with the ongoing business of Employer,
directly or indirectly give any "confidential records" (as hereinafter defined)
to, or permit any inspection or copying of confidential records by, any
individual or entity other than in the course of such individual's or entity's
employment or retention by Employer, nor shall he retain, and will deliver
promptly to Employer, any of the same following termination of his employment.
For purposes hereof, "confidential records" means all correspondence, memoranda,
files, manuals, books, lists, financial, operating or marketing records,
magnetic tape, or electronic or other media or equipment of any kind which may
be in
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<PAGE> 12
Employee's possession or under his control or accessible to him which contain
any proprietary information as defined in Section 8.1. above. All confidential
records shall be and remain the sole property of Employer during the Period of
Employment and thereafter.
8.3 Inventions and Patents: All inventions, innovations or improvements
in Employer's method of conducting its business (including policies, procedures,
products, improvements, software, ideas and discoveries, whether patentable or
copyrightable or not) conceived or made by Employee, either alone or jointly
with others, during the Period of Employment belong to Employer. Employee will
promptly disclose in writing such inventions, innovations or improvements to the
Board and perform all actions reasonably requested by the Board to establish and
confirm such ownership by Employer, including, but not limited to, cooperating
with and assisting Employer in obtaining patents for Employer in the United
States and in foreign countries. Any patent application filed by Employee within
a year after termination of his employment hereunder shall be presumed to relate
to an invention which was made during the Period of Employment unless Employee
can provide evidence to the contrary.
8.4 Covenant Not to Compete; No Solicitation.
(a) Employee acknowledges and recognizes the highly competitive
nature of Employer's business and, in consideration of the payment by Employer
to Employee of amounts that may hereafter be paid to Employee pursuant to
Sections 7.1 and 8.4(d) hereof, Employee agrees that, provided he receives the
applicable payments provided for in Section 7.1 and 8.4(d) hereof, during the
period (the "Covered Time") beginning on the Date of Termination and ending
(i) if Employee's
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<PAGE> 13
employment is terminated for any reason other than pursuant to Section 6.1(d)
hereof, on the second anniversary of the Date of Termination or (ii) if
Employee's employment is terminated pursuant to Section 6.1(d) hereof and
subject to Section 8.4(d) hereof, on the earlier of (A) the first anniversary of
the Date of Termination or (B) the Expiration Date, Employee will not compete
with the business of Employer, which means that Employee will not engage,
directly or indirectly, in the "Covered Business" (as hereinafter defined) in
any state of the United States of America in which the Employer is conducting
business or proposes to conduct business as of the Date of Termination (these
areas are hereinafter collectively referred to as the "Covered Area"). For the
purpose of this Agreement, (i) "Covered Business" shall mean the businesses in
which Employer or any "affiliate" of Employer was engaged at any time during the
one year period preceding the Date of Termination; and (ii) the phrase "engage,
directly or indirectly" shall mean engaging directly or having an interest,
directly or indirectly, as owner, partner, shareholder, employee, independent
contractor, capital investor, lender, renderer of consultation services or
advice or otherwise (other than as the holder of less than 2% of the outstanding
stock of a publicly-traded corporation), either alone or in association with
others, in the operation of any aspect of any type of business or enterprise
engaged in any aspect of the Covered Business. Employee shall be deemed engaged
in business in the Covered Area if his place of business is located in the
Covered Area or if he solicits customers located anywhere in, or provides
products anywhere in, the Covered Area. For all purposes of this Agreement, the
term "affiliate(s)" shall be defined as the term "affiliate" is defined in
Rule 12b-2 of the General Rules and Regulations under the Securities Exchange
Act of 1934.
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<PAGE> 14
(b) Employee agrees that during the term of this Agreement
(including any extension thereof) and during the Covered Time he shall not
(i) directly or indirectly solicit or attempt to solicit any of the employees,
agents or representatives of Employer or of affiliates of Employer to leave any
of such entities; (ii) directly or indirectly solicit or attempt to solicit any
of the employees, agents, consultants or representatives of Employer or of
affiliates of Employer to become employees, agents, representatives or
consultants or any other person or entity; or (iii) directly or indirectly
solicit or attempt to solicit any customer, vendor or lender of Employer or of
affiliates of Employer with respect to any product or service being furnished by
Employer.
(c) Employee understands that the provisions of Section 8.4 (a) may
limit his ability to earn a livelihood in a business which is substantially
similar to the business of Employer but nevertheless agrees and hereby
acknowledges that the consideration provided under this Agreement, including any
amounts or benefits provided under Section 7 hereof, is sufficient to justify
the restrictions contained in such provisions and in consideration thereof and
in light of Employee's education, skills and abilities, Employee agrees that he
will not assert that, and it should not be considered that, such provisions
prevent him from earning a living or otherwise are void or unenforceable or
should be voided or held unenforceable. Employee acknowledges and agrees that
his duties with Employer are of an executive nature and that he is a member of
Employers management group.
(d) If Employee's employment is terminated pursuant to Section 6.1
(d) hereof, Employer may extend the Covered Time to extend up to and through the
second anniversary of the Date of Termination, but no later than the first
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<PAGE> 15
anniversary of the Expiration Date by delivering written notice to Employee
(specifying the duration of the extended Covered Time), within ten (10) days of
such Date of Termination, that Employer has elected to continue to pay to
Employee the Continuation Payments (except that during any period of Covered
Time that extends beyond the Expiration Date, the Continuation Payments shall be
increased by an additional 50% thereof) and provide the Continuation Benefits
(on terms no less favorable to Employee than Employer provides to its executive
officers generally, as such benefits may be modified from time to time) for each
month of such extended Covered Time. During the extended Covered Time, Employee
shall be required to make any contributions required to maintain such
Continuation Benefits, which may be withheld from the Continuation Payments;
provided that such contributions are also required to be made by the Employer's
executive officers generally. If at any time during the extended Covered Time
Employee shall obtain employment with a Substitute Employer in which Employee is
entitled to receive basic health benefits in connection with such employment on
terms provided by the Substitute Employer to its similarly situated employees
generally, Employer shall no longer be required to provide Continuation Benefits
to the Employee, regardless of whether such benefits differ in respect from the
Continuation Benefits. Employer shall be excused from its obligations to make
payments under this Section 8.4(d) if Employee breaches its obligations
hereunder.
8.5 Litigation Assistance. Employee agrees that after the Date of
Termination he shall, at the request of Employer, and subject to time
limitations imposed by business or employment obligations, render all reasonable
assistance and perform all lawful acts that Employer considers necessary or
advisable in connection with any
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<PAGE> 16
litigation involving Employer or any director, officer, employee, shareholder,
agent, representative, consultant, customer or vendor of Employer. In the event
that Employer requests Employee's assistance under this Section 8.5, Employer
shall pay to Employee for each day such assistance is rendered an amount equal
to the annual Base Salary of Employee in effect at the Date of Termination
divided by 250 and shall promptly pay or reimburse Employee for such reasonable
travel expenses as he may incur in connection with rendering assistance
hereunder.
8.6 Definition of Employer. For purposes of this Section 8, the term
Employer shall include Employer and any and all of its subsidiaries, ventures or
affiliates, whether currently existing or hereafter formed, which are engaged in
the Covered Business or a portion thereof, as well as any person to whom this
Agreement is assigned as permitted by Section 9.8 hereof, provided, however,
that the business of any assignee not already engaged in by Employer shall not
be included as a Covered Business.
8.7 Enforcement.
(a) The parties hereto agree and acknowledge that the covenants and
agreements contained herein are reasonably necessary in duration and to protect
the reasonable competitive business interests of Employer, including, without
limitation, the value of the proprietary information and goodwill of Employer.
(b) Employee agrees that the covenants and undertakings contained in
Article 8 of this Agreement relate to matters which are of a special, unique and
extraordinary character and that Employer cannot be reasonably or adequately
compensated in damages in an action at law in the event Employee breaches
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<PAGE> 17
any of these covenants or undertakings. Therefore, Employee agrees that Employer
shall be entitled, as a matter of course, without the need to prove irreparable
injury, to an injunction, restraining order or other equitable relief from any
court of competent jurisdiction, restraining any violation or threatened
violation of any of such terms by Employee and such other persons as the court
shall order. The unsuccessful party will pay costs and legal fees incurred by
the party that is successful in any proceeding by Employer seeking to obtain
such an injunction.
(c) Rights and remedies provided for in this Section are cumulative
and shall be in addition to rights and remedies otherwise available to the
parties under any other agreement or applicable law.
(d) In the event that any provision of this Agreement shall to any
extent be held invalid, unreasonable or unenforceable in any circumstance, the
parties hereto agree that the remainder of this Agreement and the application of
such provision of this Agreement to other circumstances shall be valid and
enforceable to the fullest extent permitted by law. If any provision of this
Agreement, or any part thereof, is held to be unenforceable because of the scope
or duration of or the area covered by such provision, the parties hereto agree
that the court or arbitrator making such determination shall reduce the scope,
duration and/or area of such provision (and shall substitute appropriate
provisions for any such unenforceable provisions) in order to make such
provision enforceable to the fullest extent permitted by law, and/or shall
delete specific words and phrases, and such modified provision shall then be
enforceable and shall be enforced. The parties hereto recognize that if, in any
judicial proceeding, a court shall refuse to enforce any of the separate
covenants contained in this Agreement, then
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<PAGE> 18
that unenforceable covenant contained in this Agreement shall be deemed
eliminated from these provisions to the extent necessary to permit the remaining
separate covenants to be enforced. In the event that any court or arbitrator
determines that the time period or the area, or both, are unreasonable and that
any of the covenants is to that extent unenforceable, the parties hereto agree
that such covenants will remain in full force and effect, first, for the
greatest time period, and second, in the greatest geographical area that would
not render them unenforceable.
9. Miscellaneous.
9.1 Key Man Insurance. Employee recognizes and acknowledges that
Employer or its affiliates may seek and purchase one or more policies providing
key man life insurance with respect to Employee, the proceeds of which would be
payable to Employer or such affiliate. Employee hereby consents to Employer or
its affiliates seeking and purchasing such insurance and will provide such
information, undergo such medical examinations (at Employers expense), execute
such documents, and otherwise take any and all actions necessary or desirable in
order for Employer or its affiliates to seek, purchase and maintain in full
force and effect such policy or policies.
9.2 Notice. Any notice required or permitted to be given hereunder shall
be deemed sufficiently given if sent by registered or certified mail, postage
prepaid, addressed to the addressee at his or its address last provided the
sender in writing by the addressee for purposes of receiving notices hereunder
or, unless or until such address shall be so furnished, to the address indicated
opposite his or its signature to this Agreement. For purposes of this Agreement,
notice sent in conformity
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<PAGE> 19
with this Section 9.2 shall be deemed to have been received on the third
business day following the date on which such notices are so sent.
9.3 Modification and No Waiver of Breach. No waiver or modification of
this Agreement shall be binding unless it is in writing signed by the parties
hereto. No waiver or modification of this Agreement shall be binding unless it
is in writing signed by the parties hereto. No waiver by a party of a breach
hereof by the other party shall be deemed to constitute a waiver of a future
breach, whether of a similar or dissimilar nature, except to the extent
specifically provided in any written waiver under this Section 9.3.
9.4 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND ALL
QUESTIONS RELATING TO THE VALIDITY AND PERFORMANCE HEREOF AND REMEDIES HEREUNDER
SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAW.
9.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same agreement.
9.6 Captions. The captions used herein are for ease of reference only
and shall not define or limit the provisions hereof.
9.7 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto relating to the matters encompassed here and
supersedes any prior oral or written agreements.
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<PAGE> 20
9.8 Assignment. The rights of Employer under this Agreement may, without
the consent of Employee, be assigned by Employer to any person, firm,
corporation, or other business entity which at any time, whether by purchase,
merger or otherwise, directly or indirectly, acquires all or material portions
of the stock, assets or any line of business of Employer, provided such assignee
assumes all of the obligations of Employer under this Agreement.
9.9 Non-Transferability of Interest. None of the rights of Employee to
receive any form of compensation payable pursuant to this Agreement shall be
assignable or transferable except through a testamentary disposition or by the
laws of descent and distribution upon the death of Employee. Any attempted
assignment, transfer, conveyance, or other disposition (other than as aforesaid)
of any interest in the rights of Employee to receive any form of compensation to
be made by Employer pursuant to this Agreement shall be void.
9.10 Arbitration. The parties shall endeavor to settle all disputes by
amicable negotiations. Except as otherwise provided herein, any claim, dispute,
disagreement or controversy that arises between the parties relating to this
Agreement that is not amicably settled shall be resolved by arbitration, as
follows:
(a) Any such arbitration shall be heard in The City of New York, New
York, before a panel consisting of one (1) to three (3) arbitrators, each of
whom shall be impartial. Upon the written request of Arbitration of either party
hereto to commence arbitration hereunder, the parties shall attempt to mutually
agree as to the number and identity of the arbitrator(s), within thirty (30)
days of the date of such Request. Except as the parties may otherwise agree, all
arbitrators (if not selected by
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<PAGE> 21
the parties hereto within thirty (30) days of a written Request for Arbitration)
shall be appointed pursuant to the commercial arbitration rules of the American
Arbitration Association. In determining the number and appropriate background of
the arbitrators, the appointing authority shall give due consideration to the
issues to be resolved, but his or her decision as to the number of arbitrators
and their identity shall be final.
(b) An arbitration may be commenced by any party to this Agreement
by the service of a written Request for Arbitration upon the other affected
parties. Such Request for Arbitration shall summarize the controversy or claim
to be arbitrated.
(c) All attorneys' fees and costs of the arbitration shall in the
first instance be borne by the respective party incurring such costs and fees,
but the arbitrators shall have the discretion to award costs and/or attorneys'
fees as they deem appropriate under the circumstances. The parties hereby
expressly waive punitive damages, and under no circumstances shall an award
contain any amount that in any way reflects punitive damages.
(d) Judgment on the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof.
(e) It is intended that controversies or claims submitted to
arbitration under this Section 9.10 shall remain confidential, and to that end
it is agreed by the parties that neither the facts disclosed in the arbitration,
the issues arbitrated, nor the views or opinions of any persons concerning them,
shall be disclosed to third persons at any time, except to the extent necessary
to enforce an award or judgment or as required by law or in response to legal
process or in connection with such arbitration.
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<PAGE> 22
(f) Any arbitration under this Section 9.10 shall be conducted
pursuant to the commercial arbitration rules of the American Arbitration
Association.
9.11 Jurisdiction: Venue. Subject to Section 9.10 hereof, the parties
hereto irrevocably and unconditionally submit to the exclusive jurisdiction of
any State or Federal court sifting in New York, New York over any suit, action
or proceeding arising out of or relating to this Agreement. The parties hereto
irrevocably and unconditionally waive any objection to the laying of venue of
any such suit, action or proceeding brought in any such court and any claim that
any such suit, action or proceeding brought in any such court has been brought
in an inconvenient forum. A final judgment in any suit, action or proceeding
brought in any such court shall be conclusive and binding upon the parties and
may be enforced in any other courts to whose jurisdiction a party is or may be
subject, by suit upon such judgment.
9.12 Indemnification. Employer will indemnify and hold Employee harmless
from and against any damage, loss, liability, claim, costs, expenses, penalties
or fines to the fullest extent permitted by applicable law with respect to any
actual or threatened claim, suit, investigation, proceeding or action of any
kind, civil or criminal, whether seeking damages, equitable relief, or
otherwise, by any governmental authority or person not a party hereto or
affiliated with a party hereto ("Proceeding"). Such indemnification shall
include, without limitation, the obligation to advance legal fees and costs
necessarily and reasonably incurred by Employee in connection with such a
Proceeding.
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<PAGE> 23
9.13 Change in Control. In the event there is a change in control of
Employer during the initial term of this Agreement, then Employee shall have the
right, within 60 days of the date a change in control occurs, to terminate his
employment and to have such termination be treated as a termination without
cause under Section 6.1(d) for the sole purpose of determining Employee's
compensation in connection with the termination. For purposes of this Agreement
a change in control shall be deemed to have occurred at such time as either (i)
Taxter One, L.L.C. shall own directly or indirectly less than 10% of the
outstanding voting common stock of Employer and shall own directly or indirectly
less than 50% of each other outstanding class of securities the majority vote of
which is required for shareholder action; or (ii) Jay Botchman shall own less
than 50% of the membership interests in Taxter One, L.L.C.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
Credit Store, Inc. - Employer
-------------------------
3401 N. Louise Avenue, Sioux Falls, SD 57107
By: /s/ Jay Botchman
-----------------------
/s/ Richard Angel - Employee
--------------------------
Richard S. Angel
21 Privateer
Marina Del Rey, CA 90291
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<PAGE> 1
December 15, 1999
Richard S. Angel
4509 Vista Lane
Sioux Falls, SD 57108
RE: Amendment to Employment Agreement
Dear Richard:
This letter amends and modifies your Employment Agreement dated August 1, 1997.
The Board of Directors at its meeting on September 15, 1999, approved a
relocation package for you which provides:
(i) A $50,000 bonus payable upon moving to Sioux Falls,
(ii) The lease of an executive home (including maintenance and utilities)
for 1 year (grossed up for income taxes)
(iii) Moving expenses to and from Sioux Falls
(iv) An extension of your term of employment through September 30, 2000.
Except as modified by this letter, your Employment Agreement will continue to
govern all aspects of your employment.
Sincerely,
Kevin T. Riordan
President
AGREED AND ACCEPTED:
- - - -------------------------------
Richard S. Angel
<PAGE> 1
EMPLOYMENT AGREEMENT
This Agreement is made and entered into effective as of October 15, 1997 by
and between Credit Store, Inc., ("Employer") and Cynthia Hassoun ("Employee").
Employer hereby agrees to employ Employee, and Employee hereby accepts such
employment, on the terms and conditions hereinafter set forth.
1. Period of Employment. The period of Employee's employment under this
Agreement (the "Period of Employment") shall commence on the date hereof (the
"Effective Date") and shall expire on October 15, 2000 (the "Expiration Date"),
subject to any extension as may be agreed or any earlier termination of
Employee's employment as provided in Section 6 hereof. Upon the expiration of
the initial term of this Agreement, and each subsequent term or extension
thereof, this Agreement shall automatically be extended for an additional term
of one year, unless the Employer or the Employee shall have notified the other
party hereto of its election to terminate this Agreement not later than 90 days
prior to the scheduled Expiration Date. If Employee's employment is terminated
pursuant to Section 6 hereof, the Period of Employment shall expire as of the
Date of Termination (as hereinafter defined).
2. Duties. During the Period of Employment, Employee will faithfully
perform those duties and responsibilities assigned by the Board of Directors of
Employer (the "Board") and Employee will devote his full working time and use
his best efforts to advance the business and welfare of Employer in furtherance
of the policies established by the Board. It is understood that the office at
which Employee will be primarily located will be in Sioux Falls, South Dakota,
but that the Employee's duties and responsibilities may require travel away from
his office. During the Period of Employment,
<PAGE> 2
Employee shall not engage in any other employment activities for any direct or
indirect remuneration without the concurrence of the Board, except that Employee
may continue to devote reasonable time to the management of investments and to
participation in community and charitable affairs, so long as such activities do
not interfere with his duties under this Agreement. Employee shall have such
title as the Board shall determine from time to time; Employee's initial title
is set forth on Exhibit A hereto..
3. Compensation.
3.1 Base Salary. During the Period of Employment, Employer shall pay
Employee a Base Salary at the rate of $150,000 per annum payable at least as
frequently as bi-weekly and subject to payroll deductions as may be necessary or
customary in respect of Employer's salaried employees in general.
3.2 In addition to the foregoing Base Salary and as inducement to and
in consideration for Employee entering into this Employment Agreement, the
Employer is paying to the Employee simultaneously with the execution hereof the
sum of $50,000.
3.3 Options. As an inducement to Employee to enter into this Agreement
and in consideration of the performance of the services by Employee hereunder,
the Employer is granting to Employee options (the "Options") to purchase up to
75,000 shares of common stock of CSI, par value $.001 per share, (the "Common
Stock") at an exercise price of $6.00 per share. (i) Options to purchase 25,000
of such shares of Common Stock shall not vest until first anniversary of the
Effective Date; (ii) Options to purchase 25,000 shares of such Common Stock
shall not vest until the second anniversary of the Effective Date and (iii)
Options to purchase 25,000 of such shares of Common Stock shall not vest until
the third anniversary of the Effective Date. The
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<PAGE> 3
Options shall expire on the earlier of (a) five years from the date hereof, (b)
termination of Employee's employment pursuant to Section 6.1( c)(ii) hereof, and
(c) Employee terminating his employment hereunder prior to any material breach
hereof by Employer. The Option shall be in substantially the form of Exhibit B
hereto.
4. Benefits. During the Period of Employment, Employee shall be entitled to
participate in all fringe benefit programs (the "Fringe Benefits") such as
medical and dental coverage, life insurance, pension and profit-sharing plans,
etc., that may be maintained by Employer that are available to its executive
officers generally. Any payments or benefits payable to Employee hereunder in
respect of any calendar year during which Employee is employed by Employer for
less than the entire year shall, unless otherwise provided in the applicable
plan or arrangement, be prorated in accordance with the number of days in such
calendar year during which he is so employed. Employee acknowledges that he
shall have no vested rights under or to participate in any such program except
as expressly provided under the terms hereof or thereof.
5. Expenses. Employer will pay or reimburse Employee for such reasonable
travel, entertainment or other expenses as he may incur on behalf of Employer
during the Period of Employment in connection with the performance of his duties
hereunder but only to the extent that such expenses were either specifically
authorized by Employer or incurred in accordance with policies established by
the Board and provided that Employee shall furnish Employer with such evidence
relating to such expenses as Employer may reasonably require to substantiate
such expenses for tax purposes.
6. Termination of Employment.
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<PAGE> 4
6.1 Circumstances of Termination. Notwithstanding the terms set forth in
Section 1 hereof, Employee's employment shall terminate under any of the
following circumstances:
(a) Death. In the event of Employee's death.
(b) Permanent Disability. If during the Period of Employment
Employee becomes physically or mentally incapacitated or disabled so that (i) he
is unable to perform for Employer substantially the same services as he
performed prior to incurring such incapacity or disability or to devote his full
working time or use his best efforts to advance the business and welfare of
Employer or otherwise to perform his duties under this Agreement and (ii) such
condition exists for an aggregate of six months in any 12 consecutive calendar
month period (Employer, at its option and expense, being entitled to retain a
physician reasonably acceptable to Employee to confirm the existence of such
incapacity or disability, and the determination of such physician being binding
upon Employer and Employee).
(c) Cause. At the option of Employer, because Employee:
(i) has been convicted of, or has pled guilty or nolo contendere
to, a felony, or
(ii) has embezzled or misappropriated Employer funds or
property, or
(iii) has continued use of alcohol or drugs to an extent that
interferes with the performance by Employee of his employment
responsibilities, or
(iv) has materially violated Section 8.1, Section 8.2,
Section 8.3 or Section 8.4 hereof, or
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<PAGE> 5
(v) has willfully failed or refused to perform those duties
reasonably assigned or delegated to him by the Board of Directors,
which failure or refusal continues following (A) the Board of
Directors giving the Employee written notice setting forth the facts
or events constituting such failure or refusal and (B) a reasonable
opportunity to correct the deficiencies or other problems specified
in such notice to the reasonable satisfaction of the Board of
Directors.
(d) Not For Cause. At the option of Employer at any time for any
reason other than those referred to above or for no reason at all, whereupon the
Employer shall become obligated to make those payments set forth in Section
7.1(d) hereof. If Employer shall be in material breach of this Agreement and by
reason thereof Employee terminates his employment hereunder, such termination
shall be deemed a termination by Employer pursuant to this Section 6.1(d).
6.2 Notice of Termination. Any termination of Employee's employment by
Employer (other than termination pursuant to Section 6.1(a) hereof) or by
Employee shall be communicated by written Notice of Termination to the other
party hereto in accordance with Section 9.2. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice terminating Employee's employment by
Employer. If a Notice of Termination is given by Employer, such notice shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances that provide a
basis for termination of Employee's employment under the provision so indicated.
For purposes of this Agreement, the "Date of Termination" shall be the date on
which the Notice of Termination is delivered except that with respect to Section
6.1(a) the "Date of Termination" shall be the date of Employee's death.
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<PAGE> 6
7. Payments Upon Termination of Employment.
7.1 Payments. In the event that Employee's employment is terminated
prior to the Expiration Date (including any extension thereof), the Period of
Employment shall expire as of the Date of Termination.
(a) If Employer terminates Employee's employment for Cause or if
Employee voluntarily terminates his employment other than as a result of
Employer's material breach of the terms of this Agreement, Employer's obligation
to compensate Employee shall in all respects cease as of the Date of
Termination, except that Employer shall pay Employee the Base Salary accrued
under Section 3, any Fringe Benefits accrued under Section 4 and the
reimbursable expenses incurred under Section 5 of this Agreement up to such Date
of Termination (the "Accrued Obligations");
(b) If Employee's employment is terminated upon the death of
Employee, Employer's obligation to compensate Employee shall in all respects
cease as of the Date of Termination, except that within thirty (30) days after
the Date of Termination Employer shall (i) pay Employee's estate or legal
representative the Accrued Obligations and (ii) continue to maintain during the
six month period following the Date of Termination for the benefit of the
Employee's dependents, basic health and dental insurance and related medical
expenses coverage on terms no less favorable to the Employee than Employer
provides to its executive officers generally, as such benefits may be modified
from time to time during such period;
(c) If Employee's employment is terminated upon the Permanent
Disability of Employee, Employer's obligation to compensate Employee shall in
all respects cease as of the Date of Termination, except that within thirty (30)
days after the Date of Termination Employer shall (i) pay Employee Accrued
Obligations and a lump sum payment equal to 25% of the Employee's annual Base
Salary payable under Section 3
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<PAGE> 7
hereof at the rate in effect immediately prior to such termination less the
amount of any disability payments payable to Employee during the six-month
period following the Date of Termination pursuant to any Employer-paid or state
sponsored insurance policy or employer self-insured program, (ii) continue to
maintain during the six-month period following the Date of Termination for the
benefit of Employee and his dependents, basic health, disability and dental
insurance and related medical expenses coverage on terms no less favorable to
the Employee than Employer provides to its executive officers generally, as such
benefits may be modified from time to time during such period provided that the
Employee shall continue to be obligated to make any contributions or payments in
connection with such benefits to the same extent as other executive officers
generally; and
(d) If Employee's employment is terminated by Employer pursuant to
Section 6.1(d), Employer's obligation to compensate Employee shall in all
respects cease, except that within thirty (30) days after the Date of
Termination Employer shall pay to Employee the Accrued Obligations and during
the period ending on the Expiration Date (the "Severance Period"), Employer
shall (i) pay to Employee on a monthly basis the sum of one-twelfth (1/12th) of
the annual Base Salary of Employee in effect at the Date of Termination and
shall pay to Employee if and when due the amount of any bonuses accruing under
Section 3.2 hereof (the "Continuation Payments") (ii) continue to maintain,
during the Severance Period for the benefit of the Employee and his dependents,
basic health, dental and life insurance and related medical expenses coverage
(including disability and hospitalization coverage) (the "Continuation
Benefits") on terms no less favorable to the Employee than the Employer provides
to its executive officers generally, as such benefits may be modified from time
to time during the Severance Period. During the Severance Period, Employee shall
be required to make any contributions required to maintain such Continuation
Benefits, which may be withheld from the Continuation
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<PAGE> 8
Payments; provided that such contributions are also required to be made by the
Employer's executive officers generally. If at any time during the Severance
Period Employee shall obtain employment with a third party (the "Substitute
Employer") in which Employee is entitled to receive basic health benefits in
connection with such employment on terms provided by the Substitute Employer to
its similarly situated employees generally, the Employer shall no longer be
required to provide Continuation Benefits to the Employee, regardless of whether
such benefits differ in any respect from the Continuation Benefits. The Employer
shall be excused from its obligations to make payments under this Section 7.1(d)
if the Employee breaches its obligations hereunder (including its obligations
under Article 8 hereof).
7.2 Release and Satisfaction. With respect to Employee, his heirs,
successors and assigns, payment by Employer of the amounts provided under this
Section 7 shall release, relinquish and forever discharge Employer and any
director, officer, employee, shareholder or agent of Employer from any and all
claims, damages, losses, costs, expenses, liabilities or obligations, whether
known or unknown (other than any such claims, damages, losses, costs, expenses,
liabilities or obligations (a) covered by any indemnification arrangement of
Employer with respect to Employee or (b) arising under any written employee
benefit plan or arrangement (whether or not tax-qualified) covering Employee,
which Employee has incurred or suffered or may incur or suffer as a result of
the termination of such employment.
7.3 Effect on This Agreement. Any termination of Employee's employment
and any expiration of the Period of Employment under this Agreement shall not
affect the continuing operation and effect of Sections 7.2, 8.1, 8.2, 8.3, 8.4
and 8.5 hereof, which shall continue in full force and effect with respect to
Employer and Employee, and its and his heirs, successors and assigns. Nothing in
Section 7.1 hereof shall be deemed to
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<PAGE> 9
operate or shall operate as a release, settlement or discharge of any action or
omission by Employee enumerated in Section 6.1(c) hereof as a possible basis for
termination of Employee's employment for Cause.
7.4 No Mitigation. Subject to the provisions of Sections 8.1, 8.2, 8.3,
8.4 and 8.5 hereof, Employee shall be free to accept such employment and engage
in such business as Employee may desire following the termination of his
employment hereunder, and any compensation received by Employee therefrom shall
not reduce any payments required to be made by Employer hereunder.
8. Non-disclosure of Proprietary Information, Surrender of Records;
Inventions and Patents; Non-Compete.
8.1 Proprietary Information. Employee shall not during the Period of
Employment or at any time thereafter (irrespective of the circumstances under
which Employee's employment by Employer terminates), directly or indirectly use
for his own purpose or for the benefit of any person or entity other than
Employer, nor otherwise disclose, any proprietary information, as defined below,
to any individual or entity, unless such disclosure has been authorized in
writing by the Board or is otherwise required by law. For purposes of this
Agreement, the term "proprietary information" shall include, but is not limited
to: (a) the name or address of any customer, vendor or affiliate or Employer or
any information concerning the transactions or relations of any customer, vendor
or affiliate or Employer with Employer or any of its shareholders; (b) any
information concerning any product, technology or procedure employed by Employer
but not generally known to its customers, vendors or competitors, or under
development by or being tested by Employer but not at the time offered generally
to customers or vendors; (c) any information relating to Employers computer
software, computer systems, pricing or marketing methods, margins,
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<PAGE> 10
capital structure, operating results, borrowing arrangements or business plans;
(d) any information which is generally regarded as confidential or proprietary
in any line of business engaged in by Employer; (e) any information contained in
any of Employer's written or oral policies and procedures or employee manuals;
(f) any information belonging to customers, vendors or affiliates of Employer
which Employer has agreed to hold in confidence; (g) any inventions, innovations
or improvements covered by Section 8.3 below; (h) any other information which
the Board has reasonably determined by resolution and communicated to Employee
to be confidential or proprietary; and (i) all written, graphic and other
material relating to any of the foregoing. Information that is not novel or
copyrighted or patented may nonetheless be proprietary information. Proprietary
information, however, shall not include (i) any information that is or becomes
generally known to the industries in which Employer competes through sources
independent of Employer or through authorized publication to persons other than
Employer's employees by Employer or (ii) other non-sensitive information that
may be disclosed by Employee in the ordinary course of business, the disclosure
of which is not reasonably likely to adversely affect Employer's business
operations, their relationships with customers, vendors or employees or the
results of their operations.
8.2 Confidentiality and Surrender of Records. Employee shall not during
the Period of Employment or at any time thereafter (irrespective of the
circumstances under which Employee's employment by Employer terminates), except
as required by law, directly or indirectly give any "confidential records" (as
hereinafter defined) to, or permit any inspection or copying of confidential
records by, any individual or entity other than in the course of such
individual's or entity's employment or retention by Employer, nor shall he
retain, and will deliver promptly to Employer, any of the same following
termination of his employment. For purposes hereof, "confidential records" means
all correspondence,
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<PAGE> 11
memoranda, files, manuals, books, lists, financial, operating or marketing
records, magnetic tape, or electronic or other media or equipment of any kind
which may be in Employee's possession or under his control or accessible to him
which contain any proprietary information as defined in Section 8.1. above. All
confidential records shall be and remain the sole property of Employer during
the Period of Employment and thereafter.
8.3 Inventions and Patents: All inventions, innovations or improvements
in Employer's method of conducting its business (including policies, procedures,
products, improvements, software, ideas and discoveries, whether paten- table or
copyrightable or not) conceived or made by Employee, either alone or jointly
with others, during the Period of Employment belong to Employer. Employee will
promptly disclose in writing such inventions, innovations or improvements to the
Board and perform all actions reasonably requested by the Board to establish and
confirm such ownership by Employer, including, but not limited to, cooperating
with and assisting Employer in obtaining patents for Employer in the United
States and in foreign countries. Any patent application filed by Employee within
a year after termination of his employment hereunder shall be presumed to relate
to an invention which was made during the Period of Employment unless Employee
can provide evidence to the contrary.
8.4 Covenant Not to Compete; No Solicitation.
(a) Employee acknowledges and recognizes the highly competitive
nature of Employer's business and, in consideration of the payment by Employer
to Employee of amounts that my hereafter be paid to Employee pursuant to
Sections 7.1 and 8.4(d) hereof, Employee agrees that, provided he receives the
applicable payments provided for in Section 7.1 and 8.4(d) hereof, during the
period (the "Covered Time") beginning on the Date of Termination and ending (i)
if Employee's employment is terminated for any reason other than pursuant to
Section 6.1(d) hereof, on the second
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<PAGE> 12
anniversary of the Date of Termination or (ii) if Employee's employment is
terminated pursuant to Section 6.1(d) hereof and subject to Section 8.4(d)
hereof, on the earlier of (A) the first anniversary of the Date of Termination
or (B) the Expiration Date, Employee will not compete with the business of
Employer, which means that Employee will not engage, directly or indirectly, in
the "Covered Business" (as hereinafter defined) in any state of the United
States of America in which the Employer is conducting business or proposes to
conduct business as of the Date of Termination and any states contiguous
therewith (these areas are hereinafter collectively referred to as the "Covered
Area"). For the purpose of this Agreement, (i) "Covered Business" shall mean the
businesses in which Employer or any "affiliate" of Employer was engaged at any
time during the one year period preceding the Date of Termination; and (ii) the
phrase "engage, directly or indirectly" shall mean engaging directly or having
an interest, directly or indirectly, as owner, partner, shareholder, employee,
independent contractor, capital investor, lender, renderer of consultation
services or advice or otherwise (other than as the holder of less than 2% of the
outstanding stock of a publicly-traded corporation), either alone or in
association with others, in the operation of any aspect of any type of business
or enterprise engaged in any aspect of the Covered Business. Employee shall be
deemed engaged in business in the Covered Area if his place of business is
located in the Covered Area or if he solicits customers located anywhere in, or
provides products anywhere in, the Covered Area. For all purposes of this
Agreement, the term "affiliate(s)" shall be defined as the term "affiliate" is
defined in Rule 12b-2 of the General Rules and Regulations under the Securities
Exchange Act of 1934.
(b) Employee agrees that during the term of this Agreement
(including any extension thereof) and during the Covered Time he shall not (i)
directly or indirectly solicit or attempt to solicit any of the employees,
agents or representatives of Employer or of affiliates of Employer to leave any
of such entities; (ii) directly or indirectly
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<PAGE> 13
solicit or attempt to solicit any of the employees, agents, consultants or
representatives of Employer or of affiliates of Employer to become employees,
agents, representatives or consultants or any other person or entity; or (iii)
directly or indirectly solicit or attempt to solicit any customer, vendor or
lender of Employer or of affiliates of Employer with respect to any product or
service being furnished by Employer.
(c) Employee understands that the provisions of Section 8.4 (a) may
limit his ability to earn a livelihood in a business which is substantially
similar to the business of Employer but nevertheless agrees and hereby
acknowledges that the consideration provided under this Agreement, including any
amounts or benefits provided under Section 7 hereof, is sufficient to justify
the restrictions contained in such provisions and in consideration thereof and
in light of Employee's education, skills and abilities, Employee agrees that he
will not assert that, and it should not be considered that, such provisions
prevent him from earning a living or otherwise are void or unenforceable or
should be voided or held unenforceable. Employee acknowledges and agrees that
his duties with Employer are of an executive nature and that he is a member of
Employer's management group.
(d) If Employee's employment is terminated pursuant to Section
6.1(d) hereof, Employer may extend the Covered Time to extend up to and through
the second anniversary of the Date of Termination, but no later than the first
anniversary of the Expiration Date by delivering written notice to Employee
(specifying the duration of the extended Covered Time), within ten (10) days of
such Date of Termination, that Employer has elected to continue to pay to
Employee the Continuation Payments (except that during any period of Covered
Time that extends beyond the Expiration Date, the Continuation Payments shall be
increased by an additional 50% thereof) and provide the Continuation Benefits
(on terms no less favorable to Employee than Employer provides to its executive
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<PAGE> 14
officers generally, as such benefits may be modified from time to time) for each
month of such extended Covered Time. During the extended Covered Time, Employee
shall be required to make any contributions required to maintain such
Continuation Benefits, which may be withheld from the Continuation Payments;
provided that such contributions are also required to be made by the Employer's
executive officers generally. If at any time during the extended Covered Time
Employee shall obtain employment with a Substitute Employer in which Employee is
entitled to receive basic health benefits in connection with such employment on
terms provided by the Substitute Employer to its similarly situated employees
generally, Employer shall no longer be required to provide Continuation Benefits
to the Employee, regardless of whether such benefits differ in respect from the
Continuation Benefits. Employer shall be excused from its obligations to make
payments under this Section 8.4(d) if Employee breaches its obligations
hereunder.
8.5 Litigation Assistance. Employee agrees that after the Date of
Termination he shall, at the request of Employer, render all reasonable
assistance and perform all lawful acts that Employer considers necessary or
advisable in connection with any litigation involving Employer or any director,
officer, employee, shareholder, agent, representative, consultant, customer or
vendor of Employer. In the event that Employer requests Employee's assistance
under this Section 8.5, Employer shall pay to Employee for each day such
assistance is rendered an amount equal to the annual Base Salary of Employee in
effect at the Date of Termination divided by 250 and shall promptly pay or
reimburse Employee for such reasonable travel expenses as he may incur in
connection with rendering assistance hereunder.
8.6 Definition of Employer. For purposes of this Section 8, the term
Employer shall include Employer and any and all of its subsidiaries, ventures or
affiliates, whether currently existing or hereafter formed, which are engaged in
the Covered
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<PAGE> 15
Business or a portion thereof, as well as any person to whom this Agreement is
assigned as permitted by Section 9.8 hereof
8.7 Enforcement.
(a) The parties hereto agree and acknowledge that the covenants and
agreements contained herein are reasonably necessary in duration and to protect
the reasonable competitive business interests of Employer, including, without
limitation, the value of the proprietary information and goodwill of Employer.
(b) Employee agrees that the covenants and undertakings contained in
Article 8 of this Agreement relate to matters which are of a special, unique and
extraordinary character and that Employer cannot be reasonably or adequately
compensated in damages in an action at law in the event Employee breaches any of
these covenants or undertakings. Therefore, Employee agrees that Employer shall
be entitled, as a matter of course, without the need to prove irreparable
injury, to an injunction, restraining order or other equitable relief from any
court of competent jurisdiction, restraining any violation or threatened
violation of any of such terms by Employee and such other persons as the court
shall order. Employee agrees to pay costs and legal fees incurred by Employer
provided Employer is successful in obtaining such an injunction.
(c) Rights and remedies provided for in this Section are cumulative
and shall be in addition to rights and remedies otherwise available to the
parties under any other agreement or applicable law.
(d) In the event that any provision of this Agreement shall to any
extent be held invalid, unreasonable or unenforceable in any circumstance, the
parties hereto agree that the remainder of this Agreement and the application of
such provision of this Agreement to other circumstances shall be valid and
enforceable to the fullest extent permitted by law. If any provision of this
Agreement, or any part thereof, is held to be
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<PAGE> 16
unenforceable because of the scope or duration of or the area covered by such
provision, the parties hereto agree that the court or arbitrator making such
determination shall reduce the scope, duration and/or area of such provision
(and shall substitute appropriate provisions for any such unenforceable
provisions) in order to make such provision enforceable to the fullest extent
permitted by law, and/or shall delete specific words and phrases, and such
modified provision shall then be enforceable and shall be enforced. The parties
hereto recognize that if, in any judicial proceeding, a court shall refuse to
enforce any of the separate covenants contained in this Agreement, then that
unenforceable covenant contained in this Agreement shall be deemed eliminated
from these provisions to the extent necessary to permit the remaining separate
covenants to be enforced. In the event that any court or arbitrator determines
that the time period or the area, or both, are unreasonable and that any of the
covenants is to that extent unenforceable, the parties hereto agree that such
covenants will remain in full force and effect, first, for the greatest time
period, and second, in the greatest geographical area that would not render them
unenforceable.
9. Miscellaneous.
9.1 Key Man Insurance. Employee recognizes and acknowledges that
Employer or its affiliates may seek and purchase one or more policies providing
key man life insurance with respect to Employee, the proceeds of which would be
payable to Employer or such affiliate. Employee hereby consents to Employer or
its affiliates seeking and purchasing such insurance and will provide such
information, undergo such medical examinations (at Employer's expense), execute
such documents, and otherwise take any and all actions necessary or desirable in
order for Employer or its affiliates to seek, purchase and maintain in full
force and effect such policy or policies.
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<PAGE> 17
9.2 Notice. Any notice required or permitted to be given hereunder shall
be deemed sufficiently given if sent by registered or certified mail, postage
prepaid, addressed to the addressee at his or its address last provided the
sender in writing by the addressee for purposes of receiving notices hereunder
or, unless or until such address shall be so furnished, to the address indicated
opposite his or its signature to this Agreement. For purposes of this Agreement,
notice sent in conformity with this Section 9.2 shall be deemed to have been
received on the third business day following the date on which such notices are
so sent.
9.3 Modification and No Waiver of Breach. No waiver or modification of
this Agreement shall be binding unless it is in writing signed by the parties
hereto. No waiver or modification of this Agreement shall be binding unless it
is in writing signed by the parties hereto. No waiver by a party of a breach
hereof by the other party shall be deemed to constitute a waiver of a future
breach, whether of a similar or dissimilar nature, except to the extent
specifically provided in any written waiver under this Section 9.3.
9.4 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND ALL
QUESTIONS RELATING TO THE VALIDITY AND PERFORMANCE HEREOF AND REMEDIES HEREUNDER
SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAW.
9.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same agreement.
9.6 Captions. The captions used herein are for ease of reference only
and shall not define or limit the provisions hereof.
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<PAGE> 18
9.7 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto relating to the matters encompassed hereby and
supersedes any oral or written agreements, including, without limitation. letter
of even date herewith between Employee and Employer.
9.8 Assignment. The rights of Employer under this Agreement may, without
the consent of Employee, be assigned by Employer to any person, firm,
corporation, or other business entity which at any time, whether by purchase,
merger or otherwise, directly or indirectly, acquires all or material portions
of the stock, assets or any line of business of Employer, provided such assignee
assumes all of the obligations of Employer under this Agreement.
9.9 Non-Transferability of Interest. None of the rights of Employee to
receive any form of compensation payable pursuant to this Agreement shall be
assignable or transferable except through a testamentary disposition or by the
laws of descent and distribution upon the death of Employee. Any attempted
assignment, transfer, conveyance, or other disposition (other than as aforesaid)
of any interest in the rights of Employee to receive any form of compensation to
be made by Employer pursuant to this Agreement shall be void.
9.10 Arbitration. The parties shall endeavor to settle all disputes by
amicable negotiations. Except as otherwise provided herein, any claim, dispute,
disagreement or controversy that arises between the parties relating to this
Agreement that is not amicably settled shall be resolved by arbitration, as
follows:
(a) Any such arbitration shall be heard in The City of New York, New
York, before a panel consisting of one (1) to three (3) arbitrators, each of
whom shall be impartial. Upon the written Request of Arbitration of either party
hereto to commence arbitration hereunder, the parties shall attempt to mutually
agree as to the
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<PAGE> 19
number and identity of the arbitrator(s), within thirty (30) days of the date of
such Request. Except as the parties may otherwise agree, all arbitrators (if not
selected by the parties hereto within thirty (30) days of a written Request for
Arbitration) shall be appointed pursuant to the commercial arbitration rules of
the American Arbitration Association. In determining the number and appropriate
background of the arbitrators, the appointing authority shall give due
consideration to the issues to be resolved, but his or her decision as to the
number of arbitrators and their identity shall be final.
(b) An arbitration may be commenced by any party to this Agreement
by the service of a written Request for Arbitration upon the other affected
parties. Such Request for Arbitration shall summarize the controversy or claim
to be arbitrated.
(c) All attorneys' fees and costs of the arbitration shall in the
first instance be borne by the respective party incurring such costs and fees,
but the arbitrators shall have the discretion to award costs and/or attorneys'
fees as they deem appropriate under the circumstances. The parties hereby
expressly waive punitive damages, and under no circumstances shall an award
contain any amount that in any way reflects punitive damages.
(d) Judgment on the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof.
(e) It is intended that controversies or claims submitted to
arbitration under this Section 9.10 shall remain confidential, and to that end
it is agreed by the parties that neither the facts disclosed in the arbitration,
the issues arbitrated, nor the views or opinions of any persons concerning them,
shall be disclosed to third persons at any time, except to the extent necessary
to enforce an award or judgment or as required by law or in response to legal
process or in connection with such arbitration.
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<PAGE> 20
(f) Any arbitration under this Section 9.10 shall be conducted
pursuant to the commercial arbitration rules of the American Arbitration
Association.
9.11 Jurisdiction: Venue. Subject to Section 9.10 hereof, the parties
hereto irrevocably and unconditionally submit to the exclusive jurisdiction of
any State or Federal court sifting in New York, New York over any suit, action
or proceeding arising out of or relating to this Agreement. The parties hereto
irrevocably and unconditionally waive any objection to the laying of venue of
any such suit, action or proceeding brought in any such court and any claim that
any such suit, action or proceeding brought in any such court has been brought
in an inconvenient forum. A final judgment in any suit, action or proceeding
brought in any such court shall be conclusive and binding upon the parties and
may be enforced in any other courts to whose jurisdiction a party is or may be
subject, by suit upon such judgment.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
[Illegible] - Employer
--------------------------------
By: /s/ Cynthia Hassoun
----------------------------
- Employee
--------------------------------
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<PAGE> 1
BANKCARD MARKETING AGREEMENT
This Bankcard Marketing Agreement (the "Agreement") is made and entered
into this 9th day of February, 1999, by and between THE CREDIT STORE, INC., a
Delaware corporation ("Marketer"), and Bank of Hoven, a commercial bank
chartered under the laws of the State of South Dakota ("Bank").
RECITALS:
WHEREAS, Bank is a duly registered principal member of VISA and
MasterCard and, as such, is authorized to establish VISA and MasterCard credit
card accounts; and
WHEREAS, Marketer is in the business of providing certain services
necessary for the marketing and application processing of MasterCard and VISA
credit card programs; and
WHEREAS, Bank desires to engage Marketer to provide the services set
forth herein,
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Marketer and Bank agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1 Definitions. The terms described below shall be defined as
set forth herein:
Account Agreement. Account Agreement means the agreement entered into
between the Bank and Cardholders governing the terms and use of the Card and the
Cardholder Account established pursuant to this Agreement.
Bankcard Program. Bankcard Program means the solicitation, marketing,
administration, supervision and processing of the Cards, Cardholder Accounts and
applications pursuant to this Agreement.
Card. Card means any VISA or MasterCard credit card issued by Bank in
connection with the Bankcard Program.
Cardholder. Cardholder means a person who has been issued a Card by
Bank and any person who is an authorized user of such Card.
<PAGE> 2
Cardholder Account. Cardholder Account means any credit line provided
by Bank which is accessed through a Card.
ISO. ISO means an independent sales organization selected by Bank and
licensed by VISA and/or MasterCard for the purpose of marketing Cardholder
Accounts.
IMO. IMO means an independent marketing, membership, or advertising
organization recommended by Marketer and approved by Bank to provide materials
or market credit card services for Bank.
MasterCard. MasterCard means MasterCard International, Inc., a Delaware
corporation.
Processor. Processor means any organization engaged in the business of
providing data processing services for bankcard systems.
Regulatory Authority. Regulatory Authority means any agency or entity
which shall have jurisdiction over the Bank's activities with respect to their
credit card program and shall include but not be limited to: the Office of the
Comptroller of the Currency, Office of Thrift Supervision, the Federal Reserve
Board, the Federal Deposit Insurance Corporation, VISA, MasterCard, or other
state or federal regulatory agencies.
Rules and Regulations. Rules and Regulations means all federal and
state statutes, regulations interpreting the same, orders or requirements of any
Regulatory Authority having jurisdiction over Bank or Marketer, and VISA and/or
MasterCard Bylaws and Operating Regulations, as any such statutes, regulations,
requirements, orders, or bylaws may be amended or in effect from time to time
during the term of this Agreement.
VISA. VISA means VISA USA, Inc., a Delaware corporation.
ARTICLE II.
MARKETING OF BANKCARD PROGRAM
Section 2.1 Duties of Marketer. Bank hereby appoints Marketer as its
marketing and sales representative to market VISA and MasterCard credit cards to
prospective Cardholders in accordance with this Agreement. Marketer shall locate
prospective Cardholders that Marketer believes to be likely candidates for the
Bankcard Program. Marketer shall obtain such information and documentation as
Bank may reasonably require on each prospective Cardholder, including an oral or
written application for a Cardholder Account (with written applications being
signed by the prospective Cardholder), such applications to be in a form
acceptable to Bank. Marketer agrees that it shall record each oral application
for a Cardholder Account. In addition, Marketer
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<PAGE> 3
shall perform all application processing services for the Bankcard Program,
including the management of the application process, the evaluation of the
creditworthiness of Card applicants, the collection of application fees (if
any), notifications of denial of applications, and other related services. All
application processing shall be performed by Marketer in accordance with
applicable Rules and Regulations. In evaluating Card applications on behalf of
Bank, Marketer shall apply the underwriting criteria approved by Bank, a copy of
which is attached hereto and incorporated herein by reference as Exhibit A (the
"Credit Criteria and Standards"). Marketer shall also provide to Bank all credit
information and documentation in its possession that Bank may reasonably request
with respect to any applicant.
Section 2.2 Underwriting Criteria. Marketer and Bank have developed the
Credit Criteria and Standards applicable to the issuance of Cards. Bank shall
have the right to approve, disapprove or modify the Credit Criteria and
Standards and the policies and procedures used in connection with the
solicitation and evaluation of potential cardholders to ensure the safety and
soundness of Bank and the Bankcard Program.
Section 2.3 Bank to Approve All Cardholder Accounts. Marketer
acknowledges that approval of an application for a Cardholder Account creates a
customer relationship between Bank and Cardholder which involves, among other
things, the extension of credit, the collection of payments and disbursements of
funds to process and settle credit card transactions. Bank shall, in its sole
discretion, make the final decision as to whether or not to approve or decline
any Card application submitted to Bank in accordance with this Agreement.
Section 2.4 Ownership of Cards and Cardholder Accounts; Separate
Portfolio of Cards. All Cards, Cardholders, Cardholder Accounts, Account
Agreements and all related records shall be and remain the sole and exclusive
property of Bank, except as otherwise agreed by the parties in that certain
Purchase Agreement of even date herewith. Cards issued in connection with
applications procured through the efforts of Marketer or an IMO shall be
segregated from other credit cards issued by Bank and held by Bank in a separate
credit card portfolio with a BIN and ICA established for the sole and exclusive
use of Marketer.
Section 2.5 Other Marketing Organizations. Marketer may establish
contractual relationships with IMOs to market Cards on behalf of Marketer and
Bank. Each IMO must enter into a separate written agreement with Marketer, in
form and substance reasonably satisfactory to Bank, which provides that such IMO
will comply with all Rules and Regulations and the terms of this Agreement in
providing such services. All costs and fees incurred by Marketer or any IMO in
connection with this Section 2.5 shall be the responsibility of Marketer and
such IMO.
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<PAGE> 4
Section 2.6 Compliance with Rules and Regulations. Bank and Marketer
each represents and warrants to the other that it is familiar with the
requirements of all applicable consumer protection laws and covenants, as well
as all Rules and Regulations, and agrees that it will comply with all such Rules
and Regulations, now and in the future. Marketer shall be responsible for
causing the Bankcard Program to be in compliance with all Rules and Regulations.
Section 2.7 Marketing Materials. Marketer shall use only such marketing
or advertising materials approved in writing by Bank that comply with this
Agreement and with all Rules and Regulations. Marketer shall keep such materials
updated as necessary to assure continued compliance with all such Rules and
Regulations. Marketer will cooperate and cause each IMO to cooperate with Bank
to the end that all required disclosures are made to prospective Cardholders and
that no statements inconsistent with law or the credit card criteria shall be
made to prospective Cardholders. No such material may identify Marketer unless
Marketer is prominently identified as an ISO of Bank and, if appropriate, as the
owner of previously charged-off debts. Marketer and all IMOs must identify Bank
as the issuing bank when marketing applications for Cards, whether by telephone
or in person.
Section 2.8 Card Pricing. Marketer shall consult with Bank as to the
terms and conditions of the Bankcard Program, including:
(a) the amount of any rebate to be paid to Cardholders, if any;
(b) the interest rate and balance computation method to be applied
to Cardholder Accounts;
(c) the annual account fee to be paid by Cardholders; and
(d) other fees to be imposed on Cardholders.
Section 2.9 System Changes and Operating Instructions. Bank and
Marketer shall jointly develop, subject to the Bank's final approval, operating
instructions governing the operation of the marketing and application processing
services provided by Marketer pursuant to this Agreement. Marketer shall not,
without giving prior notice to and obtaining approval of Bank, initiate
modifications of, additions to, or substitutions for practices and procedures
for delivering services to Bank where such change materially affects Bank's
procedures or reporting with respect to Bank's credit card program. Bank may
request, in writing, modifications to the operating instructions to meet its
requirements, and Marketer shall promptly make such modifications.
Section 2.10 Inspection. Information and records concerning Cardholders
or Card applications in the possession of Marketer shall be available for
inspection and audit by representatives of Bank and by applicable Regulatory
Authority upon
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<PAGE> 5
reasonable notice and during normal business hours. All out of
pocket and incidental expenses incurred by either party to accommodate
inspection activities shall be paid for by the party requesting the inspection
activities.
Section 2.11 Cardholders Product and Service Offerings. Marketer shall
have the right, at its expense, to solicit Cardholders with offerings of
products and services and to insert offerings in monthly Cardholder statements
subject to the prior approval of Bank. Bank shall not knowingly market to
Cardholders any product or service, or contact Cardholders for any purpose
unrelated to the oversight and administration of the Marketer Card Portfolio
without Marketer's prior written approval.
Section 2.12 Bankcard Program Expenses.
(a) As between Bank and Marketer, unless otherwise agreed by the
parties (whether pursuant to the Purchase Agreement of even
date herewith between the parties or otherwise), Bank shall at
all times be solely responsible for all costs associated with
the operation of its credit card program which shall include,
but not be limited to: costs of Card manufacturing; costs of
printing Account Agreements, billing statements, and other
Bank statement messages; amounts outstanding under Cardholder
Accounts charged off as credit losses, such as losses
sustained as a result of a Cardholder's bankruptcy or refusal
to pay, a lost or stolen Card, or fraud; other losses,
including losses resulting from violations of Rules and
Regulations, VISA or MasterCard fines, or violations of
Account Agreements; Processor fees and Processor pass through
expenses; MasterCard and/or VISA license fees, quarterly
assessments, warning bulletin expenses, and any other fees or
special assessments.
(b) Marketer shall at all times be solely responsible for all
costs associated with the marketing and solicitation of new
applicants and the processing of applications which shall
include, but not be limited to: direct mail marketing costs,
radio (if any), television (if any), print media costs, credit
bureau reports, and other such costs associated with normal
operation of its obligations hereunder. Marketer shall also be
solely responsible for all fees payable by Marketer (and its
IMO's and agents) to VISA and MasterCard in connection with
its registration (and the registration of its IMO's and
agents) as an ISO with such organizations.
ARTICLE III.
INDEMNIFICATION
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<PAGE> 6
Section 3.1 Bank Indemnification of Marketer. Bank agrees to indemnify
and save Marketer harmless from and against any and all claims, actions,
liability, judgments, damages, costs and expenses, including reasonable
attorneys fees, that may arise from the acts or omissions of Bank or Bank's
breach of the terms and conditions of this Agreement unless such claims,
actions, liability, judgments, damages, costs and expense, result from (i) the
negligence or willful misconduct of Marketer, (ii) the failure of Marketer to
apply the underwriting criteria approved by Bank, or (iii) the violation by
Marketer of any applicable law. Notwithstanding the foregoing, in no event shall
Bank be liable to Marketer for any losses suffered by Marketer as a result of
the uncollectibility of a Cardholder Account or fraud committed by persons other
than Bank.
Section 3.2 Marketer Indemnification of Bank. Marketer agrees to
indemnify and hold Bank harmless from any and all claims, actions, liability,
judgments, damages, costs and expenses, including reasonable attorneys' fees,
arising out of or in connection with the Bankcard Program including, without
limitation (i) Card marketing and advertising, (ii) credit risks, liability and
loss and regulatory compliance associated with Card issuance and Cardholders,
Card use and activity, (iii) any securitizing of the Bankcard Program, and (iv)
all third party expenses associated with the Bankcard Program, unless such
amounts indemnified hereunder result from the negligence or willful misconduct
of Bank.
Section 3.3 Notification. Each party shall promptly notify the other of
any suit or threat of suit of which that party becomes aware (except with
respect to a threat of suit one party might institute against the other) which
may give rise to a right of indemnification pursuant to this Agreement. The
indemnifying party will be entitled to participate in the settlement or defense
thereof. The indemnifying party and the indemnified party shall cooperate (at no
cost to the indemnified party) in the settlement or defense of any such claim,
demand, suit or proceeding.
Section 3.4 Survival. The terms of this Article III shall survive the
expiration or earlier termination of this Agreement.
ARTICLE IV.
TERMINATION
Section 4.1 Term. The initial term of this Agreement shall be for a
period of one (1) year commencing on the date of this Agreement, provided that
this Agreement shall automatically renew for successive one (1) year periods
unless one party provides to the other party a notice of non-renewal at least
sixty (60) days prior to the end of the initial term or any subsequent renewal
term.
Section 4.2 Termination. Notwithstanding the foregoing, either party
may terminate this Agreement as follows:
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<PAGE> 7
(a) Either party may terminate this Agreement upon thirty (30)
days' written notice if the other party has materially
breached this Agreement and does not cure the breach within
ten (10) days of receipt of said notice or, in the event of a
breach that cannot be cured within 10 days, has not in good
faith commenced to cure the breach within ten (10) days of
such notice.
(b) Either party may terminate this Agreement immediately upon
written notice to the other party if a Regulatory Authority
demands that this Agreement be modified or terminated.
This Agreement shall terminate immediately upon the termination of the
Purchase Agreement of even date herewith between Bank and Marketer.
ARTICLE V.
CONFIDENTIAL INFORMATION
Section 5.1 Confidential Information. In performing their obligations
pursuant to this Agreement, each party may have access to and receive disclosure
of certain confidential information about the other party or parties, including
without limitation, the terms and conditions of this Agreement, the names and
addresses of a party's customers or members, marketing plans and objectives,
research and test results, and other information which is confidential and the
property of the party disclosing the information ("Confidential Information").
Confidential Information shall not include information in the public domain.
Bank and Marketer agree that Confidential Information shall be used by each
party solely in the performance of its obligations under this Agreement. Each
party shall receive Confidential Information in confidence and not disclose
Confidential Information to any third party, except as may be necessary to
perform its obligations hereunder or as may be otherwise agreed in writing by
the party furnishing the information. Upon request or upon any expiration or
termination of this Agreement, each party shall return to the other party or
destroy (as the latter may instruct) all of the latter's Confidential
Information which is in written or other recorded form, including data stored in
any computer medium. Confidential Information shall include, without limitation,
any and all marketing materials, status and performance reports, customer
information, Card information, operating manuals and guides, internal memoranda,
and other information relating to the marketing and servicing of any Marketer
Card Portfolio established pursuant to this Agreement. Notwithstanding the
foregoing, the Confidential Information may be disclosed (i) to the parties'
respective agents, employees and representatives that agree to be bound by the
terms and conditions hereof, and (ii) as may be required by legal process,
applicable law or regulatory authorities with jurisdiction over the parties
hereto. The terms of this Subsection 5.1 shall survive the termination of this
Agreement.
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<PAGE> 8
Section 5.2 Protective Agreements. Each party shall require each
subcontractor having access to Confidential Information to agree in writing to
be bound by the provisions of this Article V prior to disclosure to such
subcontractor of any Confidential Information. Such party shall keep and
maintain such protective agreements and shall promptly provide the other parties
with copies thereof upon request.
Section 5.3 Survival. The terms of this Article shall survive the
expiration or earlier termination of this Agreement.
ARTICLE VI.
GENERAL PROVISIONS
Section 6.1 Due Incorporation and Legal Authority. Marketer warrants
and represents to Bank that it is duly organized and existing as of the date
this Agreement is executed, that all necessary consents and approvals have been
duly obtained, and that this Agreement does not conflict with any provision of
any applicable federal or state laws or regulations or any agreement binding
Marketer or its property or affairs.
Section 6.2 Licenses. Bank hereby agrees to maintain, at its sole
expense, a principal license with VISA and/or MasterCard and to pay any fees,
dues, or assessments associated therewith. Except as otherwise agreed by the
parties in that certain Purchase Agreement of even date herewith, Bank shall be
entitled to all income distributions from VISA and MasterCard to its members.
Section 6.3 Relationship of the Parties. Bank and Marketer agree that
in performing their responsibilities pursuant to this Agreement, they are in the
position of independent contractors. This Agreement is not intended to create,
nor does it create and shall not be construed to create, a relationship of
partner or joint venture or any association for profit between and among Bank
and Marketer.
Section 6.4 Governing Law. Except as preempted or controlled by federal
law, this Agreement shall be governed by and construed in accordance with the
laws of the State of South Dakota.
Section 6.5 Severability. In the event that any part of this Agreement
is ruled by any court or administrative or regulatory agency to be invalid or
unenforceable, then this Agreement shall be automatically modified to eliminate
that part which is affected thereby. The remainder of this Agreement shall
remain in full force and effect.
Section 6.6 Survival of Covenants, Warranties and Agreements. All
representations, warranties and agreements made by the parties hereto shall not
merge into any document associated herewith and shall survive and continue
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throughout the term of this Agreement and shall be enforceable at law or in
equity against such party, its successors and assigns.
Section 6.7 Assignment. This Agreement and the rights and obligations
created under it shall be binding upon and inure solely to the benefit of the
parties hereto and their respective successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. This
Agreement shall not be assigned or transferred by any party without the prior
written consent of the other party, which consent shall not be unreasonably
withheld or delayed; provided, however, that (a) Marketer may assign its rights
hereunder to its wholly-owned subsidiary without the written consent of Bank
provided that such assignment shall not extinguish or limit Marketer's
liabilities or obligations under this Agreement, including, without limitation,
the indemnification obligations under Article III hereof and (b) Bank may assign
its rights and obligations hereunder to its affiliate without the written
consent of Marketer.
Section 6.8 Notices. All notices, requests, and approvals required by
this Agreement (i) shall be in writing, (ii) shall be addressed to the parties
as indicated below unless notified in writing of a change in address, and (iii)
shall be deemed to have been given either when personally delivered or when sent
by regular United States mail, in which event it shall be sent postage prepaid
upon delivery thereof, as follows:
To Bank: Bank of Hoven
202 Main Street
Hoven, SD 57450
Attn: President
To Marketer: THE CREDIT STORE, INC.
3401 North Louise Avenue
Sioux Falls, SD 57107
Attn: President
Section 6.9 Waiver. None of the parties shall be deemed to have waived
any of its rights, powers, or remedies hereunder unless such waiver is approved
in writing by the waiving party.
Section 6.10 Amendments. This agreement may be amended or otherwise
changed only in writing, signed by both parties.
Section 6.11 Counterparts. This Agreement may be executed and delivered
by the parties hereto in any number of counterparts, and by different parties on
separate counterparts, each of which counterpart shall be deemed to be an
original and all of which counterparts, taken together, shall constitute but one
and the same instrument.
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Section 6.12 Headings. Captions and headings in this Agreement are for
convenience only, and are not to be deemed part of this Agreement.
Section 6.13 Non-Exclusivity. This Agreement is a non-exclusive
bankcard marketing agreement between the parties, and the parties hereto may
enter into similar agreements with other persons or entities at any time.
Section 6.14 Entire Agreement. This Agreement contains the entire
agreement between the parties relating to the subject matter hereof and
supersedes all prior or contemporaneous agreements, discussions, representations
or understandings relating to the subject matter hereof.
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IN WITNESS WHEREOF, the parties have entered into this Agreement on the
date set forth above.
MARKETER:
THE CREDIT STORE, INC.
By______________________________
Its____________________________
BANK:
BANK OF HOVEN
By______________________________
Its____________________________
<PAGE> 1
PURCHASE AGREEMENT
This Purchase Agreement (the "Agreement") is made and entered into this
9th day of February, 1999, by and between Bank of Hoven, a South Dakota State
Bank. (the "Bank") and THE CREDIT STORE, INC., a Delaware corporation (the
"Purchaser").
RECITALS:
WHEREAS, Bank will issue certain VISA and MasterCard credit cards (the
"Cards") which will be marketed on behalf of the Bank by the Purchaser pursuant
to the terms of a Bankcard Marketing Agreement (herein so called) of even date
herewith between the parties (all Cards issued by Bank as a result of
Purchaser's and its affiliate's marketing efforts are herein referred to as the
"Marketer Card Portfolio"); and
WHEREAS, Bank desires to sell, and Purchaser desires to buy, all of the
outstanding loans and other credit resulting from cash advances, purchases,
balance transfers or any other charges on the Cards in the Marketer Card
Portfolio, together with all interest income, finance charges, membership fees,
usage fees, transaction charges, late charges, over limit charges, return check
charges, and all other rights to payment or compensation related to the Cards in
the Marketer Card Portfolio (all of the foregoing herein collectively referred
to as the "Receivables"), all in accordance with the terms and conditions of
this Agreement; and
WHEREAS, the Purchaser and the Bank acknowledge that Purchaser may from
time to time securitize ("Securitization") or otherwise finance ("Financing
Transaction") such Receivables or sell such Receivables in whole or in part to
another purchaser ("Portfolio Sale") and in any such case Bank will use its best
efforts to provide information and otherwise assist Purchaser in completing such
transactions; and
WHEREAS, Purchaser and the Bank acknowledge that in connection with any
Securitization, Financing Transaction, or full or partial Portfolio Sale, Bank
may be asked to transfer, without recourse, all or a portion of the Marketer
Card Portfolio to another Person also a member of MasterCard or Visa and Bank
will use its best efforts to facilitate such transfer.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE 1.
Purchase and Sale
Section 1.1 Purchase of Balance Transfer Amounts by Bank. Purchaser is
the owner of defaulted consumer debt. Through Purchaser's marketing and
collection
<PAGE> 2
efforts in accordance with the terms of the Bankcard Marketing
Agreement, certain obligors of such defaulted consumer debt may elect to
transfer all or a portion of the balance ("balance transfer") of their consumer
debt to a Card established by such obligor with the Bank, which Card will become
a part of the Marketer Card Portfolio. Provided that Purchaser is not in default
of its monetary obligations under this Agreement, Bank shall purchase the
consumer debt of obligors that elect to balance transfer their debt to their
Card. The purchase price payable by Bank to Purchaser for each obligor's balance
transfer ("Bank Purchase Price") shall be the par value of the aggregate
principal amount of the consumer debt that is balance transferred to the Cards.
The Bank Purchase Price payable under this Section 1.1 will be payable on the
day of each balance transfer and may be offset by Bank against the Purchaser
Purchase Price payable under Section 1.4 below. Concurrent with the execution of
this Agreement, Purchaser will deliver to Bank an original executed Uniform
Commercial Code Form 1 Financing Statement in the form attached hereto as
Exhibit A.
Section 1.2 Sale of Receivables. Bank hereby agrees that, subject to
the terms and conditions of this Agreement, it will sell, convey, transfer and
deliver to Purchaser on a daily basis (other than weekends and Bank holidays),
one hundred percent (100%) of the Receivables outstanding in connection with the
Marketer Card Portfolio which have not previously been sold to Purchaser
hereunder. The Receivables sold to Purchaser shall be free and clear of all
liens, mortgages, obligations or encumbrances or other adverse claims incurred
as a result of Bank's ownership of the Receivables. Except for the
representation in the previous sentence, the Receivables are sold without
recourse against the Bank.
Section 1.3 Agreement to Purchase. Purchaser hereby agrees that,
subject to the terms and conditions of this Agreement, Purchaser will purchase
and accept delivery and conveyance from Bank of, on a daily basis (other than
weekends and Bank holidays), one hundred percent (100%) of the Receivables
outstanding in connection with the Marketer Card Portfolio which have not
previously been purchased by Purchaser hereunder. The Receivables shall be
conveyed to Purchaser free and clear of all liens, mortgages, obligations or
encumbrances and other adverse claims incurred as a result of Bank's ownership
of the Receivables. Purchaser acknowledges that only the Receivables generated
by the Marketer Card Portfolio are being acquired and that ownership of the
Cards is to be maintained by the Bank, subject to Section 4.1 hereof.
Section 1.4 Purchaser Purchase Price. The purchase price payable by
Purchaser to Bank ("Purchaser Purchase Price") for the Receivables to be
transferred on any day shall be the unpaid principal balance thereof, which
amount shall include the unpaid principal balance transferred to a Card, plus
all cash advances and
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<PAGE> 3
purchases on the Cards. The Purchaser Purchase Price for
purchases (to the extent not offset against any Bank Purchase Price due and
payable on such day pursuant to Section 1.1) of Receivables shall be paid in
cash or by wire transfer on the date of the purchase.
Section 1.5 Bank Fee. In consideration of Bank's agreement to sell the
Receivables to Purchaser, Purchaser shall pay Bank a fee of $0.50 per Card per
month for the Cards in the Marketer Card Portfolio until such time as Cards in
the Marketer Card Portfolio has been transferred to a financial institution
other than Bank (the "Bank Fee"). The Bank Fee shall be paid by Purchaser by
wire transfer on the 15th day of each month. The Bank Fee shall be based upon
the number of Cards issued and outstanding in the Marketer Card Portfolio as of
the last day of the prior month as reported on the First Data Resources, Inc.
("FDR") CMO51 Report (or comparable internal report generated by Purchaser) each
month.
Section 1.6 Management of Portfolio and Processing Costs; Servicing of
Accounts; Payment Processor.
(a) Bank shall utilize the services of First Data Resources, Inc.
("FDR") as its third-party Card processor. Bank agrees that the administration
of the Marketer Card Portfolio shall be segregated from other Bank credit card
programs and accounted for separately on FDR's system. Bank shall establish a
Bank Identification Number ("BIN") with VISA and an ICA Number ("ICA") with
MasterCard that are solely dedicated to the Marketer Card Portfolio. Purchaser
shall be responsible for the payment of all charges by the third-party processor
made relative to the Marketer Card Portfolio. In the event that the rates
charged by the third party processor increase by more than ten (10) percent in
any given year, Bank agrees to cooperate with Purchaser, at Purchaser's request,
in transferring the processing responsibilities for the Cards to a more cost
effective third-party processor to be mutually agreed upon by Bank and
Purchaser.
(b) Purchaser shall service the Cards and Card accounts in the Marketer
Card Portfolio. Such services shall be provided in the same manner and with the
same diligence as all other credit card accounts owned or held by Purchaser. In
servicing the Cards, Purchaser shall manage, perform and enforce the terms of
the cardholder agreements relating to the Cards and enforce any and all of the
obligations and liabilities of cardholders in the Marketer Card Portfolio
("Cardholders") under such cardholder agreements in accordance with Purchaser's
policies and procedures; provided that to the extent such enforcement requires
cooperation by the Bank, Bank agrees to use its best efforts to cooperate with
Purchaser in such enforcement. Without limiting the generality of the foregoing,
Purchaser's servicing responsibilities shall
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<PAGE> 4
include providing customer service, security and fraud monitoring and control,
collection efforts, and payment processing. Purchaser will be responsible for
all expenses and obligations incurred in connection with the servicing of the
Cards and the enforcement of the cardholder agreements. Purchaser shall provide
to Bank, in a timely manner, all information reasonably requested by Bank and
reasonably required to facilitate the preparation of such reports. Bank shall
provide Purchaser with access to information and reports regarding the Marketer
Card Portfolio in its possession or in the possession of FDR, and full access to
the FDR computer system. If the Southeast Bankcard Association ("SEBA")
establishes "associate member" status for non-bank institutions, then Bank will
take all reasonable actions necessary to appoint Purchaser as an associate
member of SEBA. Purchaser shall pay all membership fees for the Bank (if it is
not already a member) and/or Purchaser to become members of SEBA. Bank, at its
sole cost and expense, will prepare and submit required quarterly and annual
reports to VISA and MasterCard.
In performing its servicing duties hereunder, Purchaser shall, at a
minimum, meet the following standards:
(i) New applications shall be processed in twenty-five (25) days
or less;
(ii) Customer service correspondence shall be responded to in
twenty-five (25) days or less;
(iii) Customer calls shall be answered within sixty (60) seconds;
(iv) Customer service call abandon rate shall be five percent (5%)
or less;
(v) Payments received by 9:00 a.m. at the remittance address shall
be posted the same day;
(vi) Subject to limitations imposed by applicable laws, collection
effort must consist of a minimum of three (3) telephone
attempts and one collection letter per month for accounts one
or more billing cycles delinquent; and
(vii) Cards should be mailed within five (5) days of account
approval.
Purchaser shall use its best efforts to provide (and in any event
within six (6) months of the date of this Agreement Purchaser shall provide) to
Bank monthly reports summarizing Purchaser's monthly and year-to-date
performance of each of these
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customer service standards. Such monthly reports shall then be provided within
twenty (20) days of the end of each month.
Section 1.7 Allocation of Costs. Any and all third-party costs and
expenses related to the Marketer Card Portfolio shall be Purchaser's obligation,
including, without limitation, costs of Card manufacturing; costs of printing
account agreements, billing statements, and other Bank statement messages;
amounts outstanding under Cardholder accounts charged off as credit losses, such
as losses sustained as a result of a Cardholder's bankruptcy or refusal to pay,
a lost or stolen card, or fraud; other losses, including losses resulting from
Purchaser's violations of federal and state law, VISA or MasterCard rules and
regulations, or account agreements; processor fees and processor pass through
expenses; MasterCard and/or VISA license fees, quarterly assessments, warning
bulletin expenses, and any other fees or special assessments. Purchaser shall
promptly reimburse Bank or promptly pay the appropriate third party for such
costs and expenses as Purchaser receives invoices therefor. For purposes of
determining allocable expenses, no portion of Bank's general administrative
expense nor any direct marketing or other expenses incurred relative to the
Bank's other credit card programs shall be allocable to the Marketer Card
Portfolio.
Section 1.8 Purchaser Entitlement. The Receivables acquired by
Purchaser from Bank shall entitle Purchaser to 100% of all principal, interest,
overlimit fees, late payment fees, cash advance fees, returned check fees,
insurance commissions, annual fees, interchange fees and any and all other fees
or earnings related to the Marketer Card Portfolio. Purchaser shall also receive
all annual fees charged and paid for in cash or cash equivalents prior to or
contemporaneously with Card issuance. All payments made by Cardholders and all
interchange fees and refunds shall be remitted to Purchaser on a daily basis
unless otherwise agreed by the parties.
Section 1.9 Chargebacks and Refunds. All Cardholder claims for refunds
or reversals made with respect to charges incurred and paid for by Purchaser
shall be processed by Purchaser or Purchaser's processor in the ordinary course
and all cash received and/or the cash equivalent of merchant account debits made
with respect to said refund claims shall be promptly remitted to Purchaser.
Purchaser acknowledges, however, that ultimate liability for all refunds due to
such Cardholders shall be Purchaser's responsibility.
Section 1.10 Instruments of Conveyance. Bank agrees to deliver to
Purchaser such bills of sale, Uniform Commercial Code financing statements,
endorsements, assignments or other good and sufficient instruments of conveyance
and transfer, as shall be effective to vest in Purchaser and any assignee or
designee of Purchaser good
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<PAGE> 6
and perfected ownership interest, in and marketable title to, the Receivables
free and clear of all liens, encumbrances and other adverse claims arising from
or through Bank.
Section 1.11 Ownership of Marketer Card Portfolio. Except for the sale
of the Receivables hereunder and subject to the provisions of Section 4.1,
during the term of this Agreement Bank shall retain ownership of the Marketer
Card Portfolio and the related Cards, Cardholder accounts, Cardholder records
and other related assets.
Section 1.12 Further Assurances. The parties hereby agree from time to
time, at the other's request and without further consideration, to execute and
deliver such other instruments of conveyance and transfer and take such other
action as either party may reasonably require to convey, transfer and to vest in
Purchaser a perfected ownership interest in and good and marketable title to the
Receivables, and to put Purchaser or the applicable purchasing party in
possession of the Receivables to be sold, conveyed, transferred and delivered
hereunder. Additionally, Bank acknowledges that (i) Purchaser or a purchasing
arty may pledge as collateral for a loan, sell, or securitize all or a portion
of the credit card Receivables acquired under this Purchase Agreement and in any
such case Bank will use its best efforts to provide information and otherwise
assist in completing such transactions, and (ii) in connection with any pledge
as collateral for a loan, sale or securitization, Bank may be asked to transfer,
without recourse, all or a portion of the Marketer Card Portfolio to another
person also a member of MasterCard or Visa and Bank will use its best efforts to
facilitate such transfer. Subject to the requirements of applicable law,
regulatory authorities, and VISA and MasterCard rules and regulations, Bank
shall use its best efforts to make reasonable modifications to this Agreement
and to its procedures as necessary for Purchaser or a purchasing party to pledge
as collateral for a loan, sell, or securitize all or a portion of the
Receivables. Purchaser shall reimburse Bank for all costs and expenses incurred
by it in such cooperative effort including a reasonable per diem reimbursement
for Bank employee's time and reasonable attorney fees, which shall be payable at
the time of closing of the transfer or pledge of the Receivables. Transfers
under this Section shall not result in a termination of this Agreement pursuant
to the provisions of Article 4.
Section 1.13 Grant of Security Interest. Bank hereby unconditionally
grants to Purchaser a security interest in each Receivable transferred by Bank
to Purchaser, all collections and other payments in respect thereof, each
related Card, and all books and records pertaining thereto and all proceeds of
the foregoing. This Agreement shall constitute a security agreement under the
Uniform Commercial Code of each applicable jurisdiction. Concurrent with the
execution of this Agreement, Bank shall deliver to
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<PAGE> 7
Purchaser an original executed Uniform Commercial Code Form 1 Financing
Statement in the form attached hereto as Exhibit B.
ARTICLE 2.
Representations and Warranties of Bank
Section 2.1 Express Representations and Warranties. As of the date of
each Receivables purchase, Bank represents, warrants and covenants to Purchaser
as follows:
(a) Title to Receivables. Bank has good and marketable title to
the Receivables being sold and owns each Receivable free and
clear of any adverse claim, lien or encumbrance created by it.
(b) Corporate Authority. Bank is a state bank duly organized,
validly existing and in good standing under the laws of the
State of South Dakota. Bank has all requisite power and
authority to enter into this Agreement and perform its
obligations hereunder. The execution and delivery of this
Agreement by Bank, and the performance of its obligations
hereunder, have been duly authorized by all necessary
corporate action.
(c) Power to Sell. Bank has complete and unrestricted power to
sell, convey, assign, transfer and deliver to Purchaser the
Receivables to be purchased and sold hereunder.
(d) Valid Conveyance. All Receivables and rights to be conveyed
hereunder will be validly conveyed and assigned to Purchaser
and will transfer all rights of ownership to Purchaser.
(e) Independent Review. Bank has acted independently and without
reliance upon Purchaser in (i) approving the Credit Criteria
and Standards set forth in Exhibit C hereto, and (ii)
undertaking its obligations as set forth in this Agreement.
(f) Compliance. Bank is and will remain in material compliance
with applicable State and Federal laws, rules and regulations
and the rules and regulations of Visa and MasterCard. Bank is
and will remain a member in good standing of Visa and
MasterCard.
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(g) Corporate Offices. Bank's corporate offices and principal
place of business is 202 Main Street, Hoven, South Dakota
57450.
ARTICLE 3.
Representations and Warranties of Purchaser
Section 3.1 Express Representations and Warranties. As of the date of
each Receivables purchase, Purchaser represents and warrants to Bank as follows:
(a) Power to Purchase. Purchaser has complete and unrestricted
power to purchase the Receivables under the terms and in
accordance with this Agreement.
(b) Corporate Authority. Purchaser is a corporation duly
organized, validly existing and in good standing under the
laws of the State of Delaware. Purchaser has all requisite
power and authority to enter into this Agreement and perform
its obligations hereunder. The execution and delivery of this
Agreement by Purchaser, and the performance of its obligations
hereunder, have been duly authorized by all necessary
corporate action.
(c) Credit Criteria. Purchaser agrees to be bound by the terms of
the Marketer Card Portfolio as set forth in Exhibit C attached
hereto, as the same may be amended or modified from time to
time with the consent of Purchaser.
(d) Independent Review. Purchaser has acted independently and
without reliance upon Bank in (i) approving the Credit
Criteria and Standards set forth in Exhibit C hereto, and (ii)
undertaking its obligations as set forth in this Agreement.
(e) Title to Consumer Debt; No Bankruptcy. Purchaser has good and
marketable title to the consumer debt being sold to Bank
pursuant to Section 1.1 hereof and has complied with all
applicable laws with respect to such debt. Such consumer debt
is enforceable in accordance with its terms and such debt is
not currently and has not previously been the subject of a
bankruptcy or insolvency filing or proceeding.
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<PAGE> 9
(f) Compliance. Purchaser is and will remain in material
compliance with applicable Federal and State laws, rules and
regulations and the rules and regulations of Visa and
MasterCard. Purchaser is and will remain an ISO of Visa and
MasterCard.
(g) Corporate Offices. Purchaser's corporate offices and principal
place of business is 3401 North Louise Avenue, Sioux Falls,
South Dakota 57107.
ARTICLE 4.
Purchase of Marketer Card Portfolio
Section 4.1 Purchase. Upon (a) termination of this Agreement for any
reason, unless otherwise agreed in writing by the parties, or (b) ten (10) days'
notice by Purchaser to Bank, Purchaser or any designee or assignee of Purchaser
shall purchase, without recourse to the Bank, all right, title and interest of
Bank in and to all of (or in the case of termination under subsection 4.1(b),
all or a portion of) the Cards, Receivables, accounts, customers, customer
records and other assets of the Bank directly related to the Marketer Card
Portfolio (herein the "Portfolio Assets"). The purchase price for the Portfolio
Assets shall be an amount equal to the unpaid principal balance of all
Receivables owned by the Bank under Cards in the Marketer Card Portfolio that
have not previously been purchased by Purchaser hereunder. The purchase price
under this Section 4.1 shall be payable in immediately available funds upon the
closing of the sale of the Portfolio Assets hereunder. The parties hereby agree,
at the other party's request and without further consideration, to execute and
deliver such instruments of conveyance and transfer and to take such other
actions as a party may reasonably require to promptly convey, transfer and vest
in Purchaser or any designee or assignee of Purchaser a perfected ownership
interest in and good and marketable title to the Portfolio Assets. Any
third-party costs associated with the purchase under this Section 4.1 shall be
paid by the Purchaser at the time of the closing of the sale of the Portfolio
Assets. In connection with the termination of this Agreement and the sale of the
Portfolio Assets, Bank shall use all reasonable efforts to transfer the
Cardholder accounts and records, and, if requested, Purchaser's dedicated BIN
and ICA, to a successor financial institution that is licensed and authorized by
VISA and MasterCard to issue credit cards. Bank shall also use good faith
efforts to accommodate the administrative and processing needs of Purchaser with
regard to the Marketer Card Portfolio after the termination of this Agreement.
Bank shall continue to
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act as the issuing bank for the Cards until the successor bank has been
identified and its substitution for the Bank has been completed.
ARTICLE 5.
Contingent Liability Fund
Section 5.1 Contingent Liability Fund. Prior to the issuance of the
first Card by Bank, Purchaser shall establish and fund a reserve account (the
"Contingent Liability Fund") at Bank. The Contingent Liability Fund shall be in
the name of Purchaser, but Purchaser shall only be entitled to withdraw funds or
other assets therefrom with the written consent of Bank. Purchaser shall
maintain a balance in the Contingent Liability Fund in an amount equal to the
lesser of (i) $500,000.00 or (ii) twenty-five percent (25%) of the aggregate
amount of the contingent liability arising in connection with the Cards in the
Marketer Card Portfolio as such contingent liability amount is reported in FDR
report CD 121 ("Required Deposit Amount"). In the event the Contingent Liability
Fund exceeds the Required Deposit Amount, the Bank shall from time to time (but
no less often than monthly) permit the Purchaser to withdraw the amount of such
excess from the Contingent Liability Fund. The Contingent Liability Fund shall
be maintained after the termination of this Agreement and shall be disbursed to
Purchaser only after Bank has reasonably determined that Purchaser's obligations
to Bank hereunder have been completely satisfied, which determination shall be
made within ninety (90) days following termination. If a bank regulator finds
that the amount of the Contingent Liability Fund is not sufficient to cover the
risk associated with the Cards in the Marketer Card Portfolio, then the Bank
shall provide notice to Purchaser of such finding and the amount that such
regulator determines will be a sufficient reserve. Upon receipt of such notice,
Purchaser shall have thirty (30) days to increase the Contingent Liability Fund
to the amount determined to be sufficient by such bank regulator. If Purchaser
has not increased the amount of the Contingent Liability Fund within said thirty
(30) day period, then Bank shall have the option to terminate this Agreement.
As security for Purchaser's obligations to Bank hereunder, Purchaser
hereby grants to Bank a security interest in the Contingent Liability Fund. Bank
shall have the right to set off and apply against all obligations of Purchaser
owed to Bank, at any time (with concurrent notice to Purchaser), any and all
deposits or other sums at any time credited by or owing from Bank to Purchaser.
The Contingent Liability Fund established by Purchaser shall be in the
form of a repurchase agreement for mutually agreed upon and identified
obligations of the United States government. Each party shall take all
reasonable actions and execute such
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documents as necessary to perfect and protect the other party's interest in the
repurchase agreement and the government obligations subject thereto.
ARTICLE 6.
Indemnification
Section 6.1 Bank Indemnification of Purchaser. Bank agrees to indemnify
and save Purchaser harmless from and against any and all claims, actions,
liabilities, judgments, damages, costs and expenses, including reasonable
attorneys fees, that may arise from the acts or omissions of Bank or Bank's
breach of the terms and conditions of this Agreement unless such claims,
actions, liability, judgments, damages, costs and expense, result from the
negligence or willful misconduct of Purchaser. Notwithstanding the foregoing, in
no event shall Bank be liable to Purchaser as a result of Purchaser's inability
to collect any Receivable as a result of fraud committed by persons other than
Bank.
Section 6.2 Purchaser Indemnification of Bank. Purchaser agrees to
indemnify and save Bank harmless from and against any and all claims, actions,
liability, judgments, damages, costs and expenses, including reasonable
attorneys fees, that may arise from the acts or omissions of Purchaser or from
Purchaser's breach of the terms and conditions of this Agreement unless such
claim, action, liability, judgments, damages, costs and expenses result from the
negligence or willful misconduct of Bank.
Section 6.3 Notification. Each party shall promptly notify the other of
any suit or threat of suit of which that party becomes aware (except with
respect to a threat of suit one party might institute against the other) which
may give rise to a right of indemnification pursuant to this Agreement. The
indemnifying party will be entitled to participate in the settlement or defense
thereof. The indemnifying party and the indemnified party shall cooperate (at no
cost to the indemnified party) in the settlement or defense of any such claim,
demand, suit or proceeding.
Section 6.4 Survival. The terms of this Article VI shall survive the
expiration or earlier termination of this Agreement.
ARTICLE 7.
General Provisions
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Section 7.1 Survival of Covenants, Warranties, and Agreements. The
representations, warranties and agreements made by Purchaser and Bank herein
shall not merge into any document associated herewith and shall survive and
continue throughout the term of this Agreement and shall be enforceable at law
or in equity against such party, its successors and assigns.
Section 7.2 Notice. All notice, request, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given either when personally delivered or when sent by regular United
States mail, postage prepaid, addressed as indicated below unless notified in
writing of a change in address:
To Bank: Bank of Hoven
202 Main Street
Hoven, SD 57450
Attn: President
To Purchaser: The Credit Store, Inc.
P.O. Box 5217
Sioux Falls, SD 57117-5217
Attn: President
Section 7.3 Amendments. This Agreement may be amended, altered or
modified by, and only by a written instrument executed by all the parties
hereto.
Section 7.4 Term; Termination Fees. The initial term of this Agreement
shall be for a period of one (1) year commencing on the date of this Agreement,
provided that this Agreement shall automatically renew for successive one (1)
year periods unless one party provides to the other party a notice of
non-renewal at least sixty (60) days prior to the end of the initial term or any
subsequent renewal term. Notwithstanding the foregoing, either party may
terminate this Agreement as follows:
(i) If either party shall fail to pay any obligation hereunder on
the date due, the non-defaulting party may terminate this
Agreement on five (5) business days' written notice.
(ii) With respect to any breach hereunder other than a payment
default, either party may terminate this Agreement upon thirty
(30) days' written notice if the other party has materially
breached this Agreement and does not cure the breach within
ten (10) days of the notice by the other party or, in the
event of a breach that cannot
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be cured within 10 days, has not in good faith commenced to
cure the breach within ten (10) days of such notice.
(iii) Either party may terminate this Agreement immediately upon
written notice to the other party if a regulatory authority
demands that this Agreement be terminated or modified (such
regulatory authority to include the Office of the Comptroller
of the Currency, the Federal Reserve Board, the Federal
Deposit Insurance Corporation, VISA, MasterCard, or any other
state or federal regulatory agency).
This Agreement shall terminate immediately upon the
termination of the Bankcard Marketing Agreement.
Section 7.5 Expenses. The parties to this Agreement shall pay their own
expenses (including, without limitation, the fees and expenses of their agents,
representatives, counsel and accountants) incidental to the preparation of this
Agreement.
Section 7.6 Relationship of the Parties. Bank and Purchaser agree that
in performing their responsibilities pursuant to this Agreement, they are in the
position of independent contractors. This Agreement is not intended to create,
nor does it create and shall not be construed to create, a relationship of
partner or joint venture or any association for profit between and among Bank
and Purchaser.
Section 7.7 Section and Other Headings. The section and other headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
Section 7.8 Successors and Assigns. Except as otherwise provided
herein, upon execution hereof this Agreement shall inure to the benefit of and
become binding upon the parties, their heirs, personal representatives,
successors and assigns.
Section 7.9 Separate Counterparts. This Agreement may be executed in
separate counterparts which shall collectively and separately be considered one
and the same Agreement.
Section 7.10 Severability. Should any one or more of the provisions
hereof be determined to be illegal or unenforceable, all other provisions hereof
shall be given effect separately therefrom and shall not be affected thereby.
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Section 7.11 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of South Dakota.
Section 7.12 Assignment. This Agreement may not be assigned without the
prior written consent of the other party; provided, however, that (a) Purchaser
may assign its rights hereunder to its wholly-owned subsidiary without the
written consent of Bank provided that such assignment shall not extinguish or
limit Purchaser's liabilities or obligations under this Agreement, including,
without limitation, the indemnification obligations under Article VI hereto and
(b) Bank may assign its rights and obligations hereunder to its affiliate
without the written consent of Purchaser.
Section 7.13 Entire Agreement, Prior Agreements. This Agreement
contains the entire agreement between the parties relating to the subject matter
hereof and supersedes all prior or contemporaneous agreements, discussions,
representations or understandings relating to the subject matter hereof.
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<PAGE> 15
Section 7.14 Reporting and Financial Statements; Audits.
(a) Purchaser agrees to provide Bank annually within one hundred
twenty (120) days of the end of its fiscal year a copy of its
audited financial statements, including a balance sheet,
statement of income and expenses, statement of cash flows, and
related financial information, as prepared by an independent
certified public accountant reasonably acceptable to Bank.
Purchaser also agrees to provide Bank quarterly within thirty
(30) days of the end of each fiscal quarter a copy of its
internally prepared quarterly financial statements containing
such financial information as Bank may reasonably require.
(b) Purchaser agrees to provide Bank monthly within fifteen (15)
days of the end of each month a management report regarding
the Receivables, including, without limitation, information
regarding the amount of Receivables outstanding, an aging of
the Receivables, and other information as Bank may reasonably
require.
(c) Purchaser agrees to provide Bank, at Purchaser's expense, with
written results of annual compliance audits and annual
operational audits performed with respect to Purchaser's
business by an independent audit firm acceptable to Bank. Such
audits shall be conducted in accordance with audit standards
normally applied to federally insured financial institutions
and in a manner reasonably acceptable to Bank.
Section 7.15 Non-Exclusive Agreement. Bank acknowledges that (i) Buyer
has and may in the future enter into agreements similar in nature and purpose to
this Purchase Agreement and the Bankcard Marketing Agreement with other issuers
of credit cards, and (ii) Buyer may, in its discretion, sell debt and establish
credit cards through other issuing entities.
Section 7.16 Confidentiality. In performing their obligations pursuant
to this Agreement, each party may have access to and receive disclosure of
certain confidential information about the other party or parties, including
without limitation, the terms and conditions of this Agreement, the names and
addresses of a party's customers or members, marketing plan and objectives,
research and test results, and other information which is confidential and the
property of the party disclosing the information ("Confidential Information").
Under no circumstances shall Bank solicit Purchaser's customers for any product
or service. Confidential Information shall not include information in the public
domain. Bank and Purchaser agree that Confidential
15
<PAGE> 16
Information shall be used by each party solely in the performance of its
obligations under this Agreement. Each party shall receive Confidential
Information in confidence and shall not disclose Confidential Information to any
third party, except as may be necessary to perform its obligations hereunder or
as may be otherwise agreed in writing by party furnishing the information. Bank
shall not market to Cardholders any product or service, or contact Cardholders
for any purpose related to the oversight and administration of the Marketer Card
Portfolio. Bank shall not sell or transfer Cardholders' names, addresses or
telephone numbers. Upon request or upon any expiration or termination of this
Agreement, each party shall return to the other party or destroy (as the latter
may instruct) all of the latter's Confidential Information which is in any
written or other recorded form, including data stored in any computer medium.
Confidential Information shall include, without limitation, any and all
marketing materials, status and performance reports, customer information, Card
information, operating manuals and guides, internal memoranda, and other
information relating to the marketing and servicing of any Marketer Card
Portfolio established pursuant to this Agreement. Notwithstanding the foregoing,
the Confidential Information may be disclosed (i) to the parties' respective
agents, employees and representatives that agree to be bound by the terms and
conditions hereof, and (ii) as may be required by legal process, applicable law
or regulatory authorities with jurisdiction over the parties hereto. The terms
of this Subsection 7.16 shall survive the termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date set forth above.
BANK:
BANK OF HOVEN
By______________________________
Its_____________________________
PURCHASER:
THE CREDIT STORE, INC.
By_______________________________
Its______________________________
16
<PAGE> 1
BANKCARD MARKETING AGREEMENT
This Bankcard Marketing Agreement (the "Agreement") is made and entered
into this 2d day of October, 1997, by and between SERVICE ONE INTERNATIONAL
CORPORATION, a South Dakota corporation, doing business as TCS Services, Inc.
("Marketer"), and FIRST NATIONAL BANK IN BROOKINGS ("Bank").
RECITALS:
WHEREAS, Bank is a duly registered principal member of VISA and
MasterCard and, as such, is authorized to establish VISA and MasterCard credit
card accounts; and
WHEREAS, Marketer is in the business of providing certain services
necessary for the marketing and application processing of MasterCard and VISA
credit card programs; and
WHEREAS, Bank desires to engage Marketer to provide the services set
forth herein,
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Marketer and Bank agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1 Definitions. The terms described below shall be defined as
set forth herein:
Account Agreement. Account Agreement means the agreement entered into
between the Bank and Cardholders governing the terms and use of the Card and the
Cardholder Account.
Bankcard Program. Bankcard Program means the solicitation, marketing,
administration, supervision and processing of the Cards, Cardholder Accounts and
applications pursuant to this Agreement.
Card. Card means any VISA or MasterCard credit card issued by Bank.
Cardholder. Cardholder means a person who has been issued a Card by
Bank and any person who is an authorized user of such Card.
Cardholder Account. Cardholder Account means any credit line provided
by Bank which is accessed through a Card.
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ISO. An independent sales organization selected by Bank and licensed by
VISA and/or MasterCard for the purpose of marketing Cardholder Accounts.
IMO. An independent marketing, membership, or advertising organization
recommended by Marketer and approved by Bank to provide materials or market
credit card services for Bank.
MasterCard. MasterCard means MasterCard International, Inc., a Delaware
corporation.
Processor. Processor means any organization engaged in the business of
providing data processing services for bank card systems.
Regulatory Authority. Regulatory Authority means any agency
or entity which shall have jurisdiction over the Bank's activities with respect
to their credit card program and shall include but not be limited to: the Office
of the Comptroller of the Currency, Office of Thrift Supervision, the Federal
Reserve Board, the Federal Deposit Insurance Corporation, VISA, MasterCard, or
other state or federal regulatory agencies.
Rules and Regulations. Rules and Regulations means all federal and
state statutes, regulations interpreting the same, orders or requirements of any
Regulatory Authority having jurisdiction over Bank or Marketer, and VISA and/or
MasterCard Bylaws and Operating Regulations, as any such statutes, regulations,
requirements, orders, or bylaws may be amended or in effect from time to time
during the term of this Agreement.
VISA. VISA means VISA USA, Inc., a Delaware corporation.
ARTICLE II.
MARKETING OF BANKCARD PROGRAM
Section 2.1 Duties of Marketer. Bank hereby appoints Marketer as its
marketing and sales representative to market VISA and MasterCard credit cards to
prospective Cardholders in accordance with this Agreement. Marketer shall locate
prospective Cardholders that Marketer believes to be likely candidates for the
Bankcard Program. Marketer shall obtain such information and documentation as
Bank may reasonably require on each prospective Cardholder, including an oral or
written application for a Cardholder Account (with written applications being
signed by the prospective Cardholder), such applications to be in a form
acceptable to Bank. Marketer agrees that it shall record each oral application
for a Cardholder Account. In addition, Marketer shall perform all application
processing services for the Bankcard Program, including the management of the
application process, the evaluation of the creditworthiness
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<PAGE> 3
of Card applicants, the collection of application fees (if any), notifications
of denial of applications, and other related services. All application
processing shall be performed by Marketer in accordance with applicable Rules
and Regulations. In evaluating Card applications on behalf of Bank, Marketer
shall apply the underwriting criteria approved by Bank, a copy of which is
attached hereto and incorporated herein by reference as Exhibit A (the "Credit
Criteria and Standards"). Marketer shall also provide to Bank all credit
information and documentation in its possession that Bank may reasonably request
with respect to any applicant.
Section 2.2 Underwriting Criteria. Marketer and Bank have developed the
Credit Criteria and Standards applicable to the issuance of Cards. Bank shall
have the right to approve, disapprove or modify the Credit Criteria and
Standards and the policies and procedures used in connection with the
solicitation and evaluation of potential cardholders to ensure the safety and
soundness of Bank and the Bankcard Program.
Section 2.3 Bank to Approve All Cardholder Accounts. Marketer
acknowledges that approval of an application for a Cardholder Account creates a
customer relationship between Bank and Cardholder which involves, among other
things, the extension of credit, the collection of payments and disbursements of
funds to process and settle credit card transactions. Bank shall, in its sole
discretion, make the final decision as to whether or not to approve or decline
any Card application submitted to Bank in accordance with this Agreement.
Section 2.4 Ownership of Cards and Cardholder Accounts; Separate
Portfolio of Cards. All Cards, Cardholders, Cardholder Accounts, Account
Agreements and all related records shall be and remain the sole and exclusive
property of Bank, except as otherwise agreed by the parties in that certain
Purchase Agreement of even date herewith. Cards issued in connection with
applications procured through the efforts of Marketer or an IMO shall be
segregated from other credit cards issued by Bank and held by Bank in a separate
credit card portfolio with a BIN and ICA established for the sole and exclusive
use of Marketer.
Section 2.5 Other Marketing Organizations. Marketer may establish
contractual relationships with IMOs to market Cards on behalf of Marketer and
Bank. Each IMO must enter into a separate written agreement with Marketer, in
form and substance reasonably satisfactory to Bank, which provides that such IMO
will comply with all Rules and Regulations and the terms of this Agreement in
providing such services. All costs and fees incurred by Marketer or any IMO in
connection with this Section 2.5 shall be the responsibility of Marketer and
such IMO.
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<PAGE> 4
Section 2.6 Compliance with Rules and Regulations. Bank and Marketer
each represents and warrants to the other that it is familiar with the
requirements of all applicable consumer protection laws and covenants, as well
as all Rules and Regulations, and agrees that it will comply with all such Rules
and Regulations, now and in the future. Marketer shall be responsible for
causing the Bankcard Program to be in compliance with all Rules and Regulations.
Section 2.7 Marketing Materials. Marketer shall use only such marketing
or advertising materials approved in writing by Bank that comply with this
Agreement and with all Rules and Regulations. Marketer shall keep such materials
updated as necessary to assure continued compliance with all such Rules and
Regulations. Marketer will cooperate and cause each IMO to cooperate with Bank
to the end that all required disclosures are made to prospective Cardholders and
that no statements inconsistent with law or the credit card criteria shall be
made to prospective Cardholders. No such material may identify Marketer unless
Marketer is prominently identified as an ISO of Bank and, if appropriate, as the
owner of previously charged-off debts. Marketer and all IMOs must identify Bank
as the issuing bank when marketing applications for Cards, whether by telephone
or in person.
Section 2.8 Card Pricing. Marketer shall consult with Bank as to the
terms and conditions of the Bankcard Program, including:
(a) the amount of any rebate to be paid to Cardholders, if any;
(b) the interest rate and balance computation method to be applied
to Cardholder Accounts;
(c) the annual account fee to be paid by Cardholders; and
(d) other fees to be imposed on Cardholders.
Section 2.9 System Changes and Operating Instructions. Bank and
Marketer shall jointly develop, subject to the Bank's final approval, operating
instructions governing the operation of the marketing and application processing
services provided by Marketer pursuant to this Agreement. Marketer shall not,
without giving prior notice to and obtaining approval of Bank, initiate
modifications of, additions to, or substitutions for practices and procedures
for delivering services to Bank where such change materially affects Bank's
procedures or reporting with respect to Bank's credit card program. Bank may
request, in writing, modifications to the operating instructions to meet its
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<PAGE> 5
requirements, and Marketer shall promptly make such modifications.
Section 2.10 Inspection. Information and records concerning Cardholders
or Card applications in the possession of Marketer shall be available for
inspection and audit by representatives of Bank and by applicable Regulatory
Authority upon reasonable notice and during normal business hours. All out of
pocket and incidental expenses incurred by either party to accommodate
inspection activities shall be paid for by the party requesting the inspection
activities.
Section 2.11 Cardholders Product and Service Offerings. Marketer shall
have the right, at its expense, to solicit Cardholders with offerings of
products and services and to insert offerings in monthly Cardholder statements
subject to the prior approval of Bank. Bank shall not knowingly market to
Cardholders any product or service, or contact Cardholders for any purpose
unrelated to the oversight and administration of the Marketer Card Portfolio
without Marketer's prior written approval.
Section 2.12 Bankcard Program Expenses.
(a) As between Bank and Marketer, unless otherwise agreed by the
parties (whether pursuant to the Purchase Agreement of even
date herewith between the parties or otherwise), Bank shall at
all times be solely responsible for all costs associated with
the operation of its credit card program which shall include,
but not be limited to: costs of Card manufacturing; costs of
printing Account Agreements, billing statements, and other
Bank statement messages; amounts outstanding under Cardholder
Accounts charged off as credit losses, such as losses
sustained as a result of a Cardholder's bankruptcy or refusal
to pay, a lost or stolen Card, or fraud; other losses,
including losses resulting from violations of Rules and
Regulations, VISA or MasterCard fines, or violations of
Account Agreements; Processor fees and Processor pass through
expenses; MasterCard and/or VISA license fees, quarterly
assessments, warning bulletin expenses, and any other fees or
special assessments.
(b) Marketer shall at all times be solely responsible for all
costs associated with the marketing and solicitation of new
applicants and the processing of applications which shall
include, but not be limited to: direct mail marketing costs,
radio (if any), television (if any), print media costs, credit
bureau reports, and other such costs associated with normal
operation of its obligations hereunder. Marketer shall
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also be solely responsible for all fees payable by Marketer
(and its IMO's and agents) to VISA and MasterCard in
connection with its registration (and the registration of its
IMO's and agents) as an ISO with such organizations.
ARTICLE III.
INDEMNIFICATION
Section 3.1 Bank Indemnification of Marketer. Bank agrees to indemnify
and save Marketer harmless from and against any and all claims, actions,
liability, judgments, damages, costs and expenses, including reasonable
attorneys fees, that may arise from the acts or omissions of Bank or Bank's
breach of the terms and conditions of this Agreement unless such claims,
actions, liability, judgments, damages, costs and expense, result from (i) the
negligence or willful misconduct of Marketer, or (ii) the failure of Marketer to
apply the underwriting criteria approved by Bank. Notwithstanding the foregoing,
in no event shall Bank be liable to Marketer for any losses suffered by Marketer
as a result of the uncollectibility of a Cardholder Account or fraud committed
by persons other than Bank.
Section 3.2 Marketer Indemnification of Bank. Marketer agrees to
indemnify and save Bank harmless from and against any and all claims, actions,
liability, judgments, damages, costs and expenses, including reasonable
attorneys fees, that may arise from the acts or omissions of Marketer and/or any
IMO under contract with Marketer, or from Marketer's breach of the terms and
conditions of this Agreement unless such claim, action, liability, judgments,
damages, costs and expenses result from the negligence or willful misconduct of
Bank.
Section 3.3 Notification. Each party shall promptly notify the other of
any suit or threat of suit of which that party becomes aware (except with
respect to a threat of suit one party might institute against the other) which
may give rise to a right of indemnification pursuant to this Agreement. The
indemnifying party will be entitled to participate in the settlement or defense
thereof. The indemnifying party and the indemnified party shall cooperate (at no
cost to the indemnified party) in the settlement or defense of any such claim,
demand, suit or proceeding.
Section 3.4 Survival. The terms of this Article III shall survive the
expiration or earlier termination of this Agreement.
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ARTICLE IV.
TERMINATION
Section 4.1 Term. The initial term of this Agreement shall be for a
period of one (1) year, commencing on the date of this Agreement, provided that
this Agreement shall automatically renew for successive one (1) year periods
unless one party provides to the other party a notice of non-renewal at least
sixty (60) days prior to the end of the initial term or any subsequent renewal
term.
Section 4.2 Termination. Notwithstanding the foregoing, either party
may terminate this Agreement as follows:
(a) Either party may terminate this Agreement with or without
cause upon giving the other party sixty (60) days' written
notice.
(b) Either party may terminate this Agreement upon thirty (30)
days' written notice if the other party has materially
breached this Agreement and does not cure the breach within
ten (10) days of the notice or, in the event of a breach that
cannot be cured within ten (10) days, has not in good faith
commenced to cure the breach within ten (10) days of such
notice.
(c) Either party may terminate this Agreement immediately upon
written notice to the other party if a Regulatory Authority
demands that this Agreement be modified or terminated.
This Agreement shall terminate immediately upon the termination of the
Purchase Agreement of even date herewith between Bank and Marketer.
ARTICLE V.
CONFIDENTIAL INFORMATION
Section 5.1 Confidential Information. In performing their obligations
pursuant to this Agreement, each party may have access to and receive disclosure
of certain confidential information about the other party or parties, including
without limitation, the terms and conditions of this Agreement, the names and
addresses of a party's customers or members, marketing plans and objectives,
research and test results, and other information which is confidential and the
property of the party disclosing the information ( "Confidential Information").
Confidential Information shall not include information in the public domain.
Bank and Marketer agree that Confidential Information shall be used by each
party solely in the performance of its obligations
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<PAGE> 8
under this Agreement. Each party shall receive Confidential Information in
confidence and not disclose Confidential Information to any third party, except
as may be necessary to perform its obligations hereunder or as may be otherwise
agreed in writing by the party furnishing the information. Upon request or upon
any expiration or termination of this Agreement, each party shall return to the
other party or destroy (as the latter may instruct) all of the latter's
Confidential Information which is in written or other recorded form, including
data stored in any computer medium. Confidential Information shall include,
without limitation, any and all marketing materials, status and performance
reports, customer information, Card information, operating manuals and guides,
internal memoranda, and other information relating to the marketing and
servicing of any Marketer Card Portfolio established pursuant to this Agreement.
Notwithstanding the foregoing, the Confidential Information may be disclosed (i)
to the parties' respective agents, employees and representatives that agree to
be bound by the terms and conditions hereof, and (ii) as may be required by
legal process, applicable law or regulatory authorities with jurisdiction over
the parties hereto.
Section 5.2 Protective Agreements. Each party shall require each
subcontractor having access to Confidential Information to agree in writing to
be bound by the provisions of this Article V prior to disclosure to such
subcontractor of any Confidential Information. Such party shall keep and
maintain such protective agreements and shall promptly provide the other parties
with copies thereof upon request.
Section 5.3 Survival. The terms of this Article shall survive the
expiration or earlier termination of this Agreement.
ARTICLE VI.
GENERAL PROVISIONS
Section 6.1 Disclosure.
(a) Each party shall promptly notify the other of any action, suit
or proceeding, facts or circumstances, or the prospect or
threat of the same, which might materially adversely affect
either party's ability to perform this Agreement.
(b) Each party warrants and represents to the other that there are
no suits, actions, or legal, administrative, arbitration, or
other proceedings or government investigations pending against
either party or its parent or affiliates, or its officers,
directors, or employees or, to the knowledge of either party,
threatened against Marketer or Bank or its parent or
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<PAGE> 9
affiliates, or its officers, directors, or employees, that
have not been previously disclosed in writing, and which might
materially adversely affect the financial condition of
Marketer or Bank, or the ability of Marketer or Bank to
perform this Agreement.
Section 6.2 Due Incorporation and Legal Authority. Marketer warrants
and represents to Bank that it is duly organized and existing as of the date
this Agreement is executed, that all necessary consents and approvals have been
duly obtained, and that this Agreement does not conflict with any provision of
any applicable federal or state laws or regulations or any agreement binding
Marketer or its property or affairs.
Section 6.3 Licenses. Bank hereby agrees to maintain, at its sole
expense, a principal license with VISA and/or MasterCard and to pay any fees,
dues, or assessments associated therewith. Except as otherwise agreed by the
parties in that certain Purchase Agreement of even date herewith, Bank shall be
entitled to all income distributions from VISA and MasterCard to its members.
Section 6.4 Relationship of the Parties. Bank and Marketer agree that
in performing their responsibilities pursuant to this Agreement, they are in the
position of independent contractors. This Agreement is not intended to create,
nor does it create and shall not be construed to create, a relationship of
partner or joint venture or any association for profit between and among Bank
and Marketer.
Section 6.5 Governing Law. Except as preempted or controlled by federal
law, this Agreement shall be governed by and construed in accordance with the
laws of the State of South Dakota.
Section 6.6 Severability. In the event that any part of this Agreement
is ruled by any court or administrative or regulatory agency to be invalid or
unenforceable, then this Agreement shall be automatically modified to eliminate
that part which is affected thereby. The remainder of this Agreement shall
remain in full force and effect.
Section 6.7 Survival of Covenants, Warranties and Agreements. All
representations, warranties and agreements made by the parties hereto shall not
merge into any document associated herewith and shall survive and continue
throughout the term of this Agreement and shall be enforceable at law or in
equity against such party, its successors and assigns.
Section 6.8 Assignment. This Agreement and the rights and obligations
created under it shall be binding upon and inure solely to the benefit of the
parties hereto and their respective
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successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. This Agreement shall not be assigned or
transferred by any party without the prior written consent of the other party,
which consent shall not be unreasonably withheld or delayed; provided, however,
that (a) Marketer may assign its rights hereunder to its wholly-owned subsidiary
without the written consent of Bank provided that such assignment shall not
extinguish or limit Marketer's liabilities or obligations under this Agreement,
including, without limitation, the indemnification obligations under Article III
hereof and (b) Bank may assign its rights and obligations hereunder to its
affiliate without the written consent of Marketer.
Section 6.9 Notices. All notices, requests, and approvals required by
this Agreement (i) shall be in writing, (ii) shall be addressed to the parties
as indicated below unless notified in writing of a change in address, and (iii)
shall be deemed to have been given either when personally delivered or when sent
by regular United States mail, in which event it shall be sent postage prepaid
upon delivery thereof, as follows:
To Bank: First National Bank in Brookings
2220 Sixth Street
P.O. Box 6000
Brookings, SD 57006
Attn: Card Center Manager
To Marketer: TCS Services, Inc.
P.O. Box 5217
Sioux Falls, SD 57117-5217
Attn: President
Section 6.10 Waiver. None of the parties shall be deemed to have waived
any of its rights, powers, or remedies hereunder unless such waiver is approved
in writing by the waiving party.
Section 6.11 Amendments. This agreement may be amended or otherwise
changed only in writing, signed by both parties.
Section 6.12 Counterparts. This Agreement may be executed and delivered
by the parties hereto in any number of counterparts, and by different parties on
separate counterparts, each of which counterpart shall be deemed to be an
original and all of which counterparts, taken together, shall constitute but one
and the same instrument.
Section 6.13 Headings. Captions and headings in this Agreement are for
convenience only, and are not to be deemed part of this Agreement.
Section 6.14 Non-Exclusivity. This Agreement is a non-exclusive
bankcard marketing agreement between the parties, and
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the parties hereto may enter into similar agreements with other persons or
entities at any time.
Section 6.15 Binding Arbitration. Any disputes arising hereunder shall
be submitted by the parties to binding arbitration to be conducted in the State
of South Dakota by a qualified, mutually acceptable arbitrator in accordance
with the rules governing commercial disputes established by the American
Arbitration Association. Any decision by the arbitrator shall be binding and
final on all parties. Use of the arbitration procedure under this Section shall
be the exclusive method of resolving disputes under this Agreement, unless
otherwise agreed by the parties. The parties agree that a court located in the
State of South Dakota may enter judgment upon any award made pursuant to a
decision of the arbitrator.
Section 6.16 Entire Agreement. This Agreement contains the entire
agreement between the parties relating to the subject matter hereof and
supersedes all prior or contemporaneous agreements, discussions, representations
or understandings relating to the subject matter hereof.
IN WITNESS WHEREOF, the parties have entered into this Agreement on the
date set forth above.
MARKETER:
SERVICE ONE INTERNATIONAL CORPORATION
By /s/ Kevin T. Riordan
---------------------------------
Its President
------------------------
BANK:
FIRST NATIONAL BANK IN BROOKINGS
By /s/ [Illegible]
---------------------------------
Its Executive Vice President
------------------------
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GUARANTY OF CREDIT STORE, INC.
The undersigned hereby guarantees the prompt payment and performance of
each of Marketer's obligations to Bank under this Agreement. This shall be an
absolute, irrevocable and unconditional guaranty of payment and performance, and
not a guaranty of collection. No set-off, counterclaim, recoupment, reduction or
diminution of any obligation, or any defense of any kind or nature which the
undersigned may have against Marketer, Bank, or any other party, shall be
available to, or shall be asserted by, the undersigned against Bank or Bank's
successors or assigns.
Notice of the acceptance of this guaranty, of nonpayment of Marketer's
obligations, of protest, demand or other remedy availed of hereunder is
expressly waived.
The undersigned hereby expressly consents to any renewal or extension
of this Agreement and no notice of any renewal or extension of this Agreement
need be given to the undersigned.
This Guaranty shall be binding upon the undersigned and upon its
successors and assigns, and shall inure to the benefit of Bank and its
successors and assigns.
Dated as of the date first written above.
CREDIT STORE, INC.,
a Delaware corporation
By /s/ Kevin T. Riordan
---------------------------------
Its President
------------------------
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PURCHASE AGREEMENT
This Purchase Agreement (the "Agreement") is made and entered into this 2d
day of October, 1997, by and between FIRST NATIONAL BANK IN BROOKINGS (the
"Bank") and SERVICE ONE INTERNATIONAL CORPORATION, a South Dakota
corporation, doing business as TCS Services, Inc. (the "Purchaser").
RECITALS:
WHEREAS, Bank will be the owner of certain VISA and MasterCard credit cards
(the "Cards") which will be marketed on behalf of the Bank by the Purchaser or
Purchaser's affiliate pursuant to the Bankcard Marketing Agreement (herein so
called) of even date herewith between the parties (all Cards issued by Bank as a
result of Purchaser's and its affiliate's marketing efforts are herein referred
to as the "Marketer Card Portfolio"); and
WHEREAS, Bank desires to sell, and Purchaser or the Purchasing Party (as
hereinafter defined) desires to buy, all of the outstanding loans and other
credit resulting from cash advances, purchases, balance transfers or any other
charges on the Cards in the Marketer Card Portfolio, together with all interest
income, finance charges, membership fees, usage fees, transaction charges, late
charges, overlimit charges, return check charges, and all other rights to
payment or compensation related to the Cards in the Marketer Card Portfolio (all
of the foregoing herein collectively referred to as the "Receivables"), all in
accordance with the terms and conditions of this Agreement,
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I.
Purchase and Sale
Section 1.1 Purchase of Balance Transfer Amounts. Purchaser, or its
affiliate, or a third party reasonably acceptable to Bank for whom Purchaser is
acting as a marketer and servicer (each of the foregoing other than Purchaser
herein, a "Purchasing Party"), is the owner of defaulted consumer debt. Through
Purchaser's marketing efforts pursuant to the Bankcard Marketing Agreement,
certain obligors of such defaulted consumer debt may elect to balance transfer
all or a portion of their consumer debt to a Card in the Marketer Card
Portfolio. Provided that Purchaser has not defaulted in its obligations
hereunder or under the Bankcard Marketing Agreement, Bank shall purchase the
defaulted consumer debt of obligors that elect to balance transfer their debt to
their Card. The purchase price shall be
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the par value of the amount of the consumer debt that is balance transferred to
Cards. The purchase price payable by Bank under this Section 1.1 may be offset
by Bank against Purchaser's obligations under Section 1.4 below.
Section 1.2 Sale of Receivables. Bank hereby agrees that, subject to the
terms and conditions of this Agreement, it will sell, convey, transfer and
deliver to Purchaser or a Purchasing Party, on a daily basis (other than
weekends and Bank holidays), one hundred percent (100%) of the Receivables
outstanding in connection with the Marketer Card Portfolio which have not
previously been sold to Purchaser or a Purchasing Party hereunder. The
Receivables purchased and sold hereunder shall be sold free and clear of all
liens, mortgages, obligations or encumbrances incurred as a result of Bank's
ownership of the Receivables. The Receivables are sold without recourse against
the Bank, and Purchaser and Purchasing Party shall look solely to the Marketer
Card Portfolio for its return of and on investment.
Section 1.3 Agreement to Purchase. Purchaser hereby agrees that, subject to
the terms and conditions of this Agreement, Purchaser or a Purchasing Party will
purchase and accept delivery and conveyance from Bank of, on a daily basis
(other than weekends and Bank holidays), one hundred percent (100%) of the
Receivables outstanding in connection with the Marketer Card Portfolio which
have not previously been purchased by Purchaser or a Purchasing Party hereunder.
The Receivables shall be conveyed free and clear of all liens, mortgages,
obligations or encumbrances incurred as a result of Bank's ownership of the
Receivables. Purchaser, for itself and on behalf of each Purchasing Party,
acknowledges that only the Receivables generated by the Marketer Card Portfolio
are being acquired and that ownership of the Cards is to be maintained by the
Bank, subject to Section 4.1 hereof.
Section 1.4 Purchase Price. The purchase price for the Receivables shall be
the par value of the amounts balance transferred to Cards, plus all cash
advances and purchases on the Cards in the Marketer Card Portfolio. The purchase
price for these daily purchases of Receivables shall be paid in cash or by wire
transfer on the date of the purchase.
Section 1.5 Fixed Fee; Base Fee. In consideration of Bank's agreement to
sell the Receivables to Purchaser, Purchaser shall pay Bank a fee of $1.50 per
Card for the first 14,000 Cards, $1.00 per Card for 14,001 Cards to 35,000
Cards, and $0.50 per Card for the number of Cards in excess of 35,000 in the
Marketer Card Portfolio per month for so long as this Agreement remains in
effect (the "Fixed Fee"). Purchaser shall pay Bank a minimum Fixed Fee on
100,000 credit cards for the first twelve (12) months of this Agreement. The
minimum Fixed Fee shall be due and payable during each of the first twelve
months of the first
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year of this Agreement, provided that Purchaser shall be under no obligation to
continue to pay the minimum Fixed Fee if (1) Bank materially alters its Credit
Criteria and Standards, a copy of which is attached hereto as Exhibit A, for the
Marketer Card Portfolio without the prior written consent of Purchaser, (2) the
marketing program generating the Marketer Card Portfolio cannot be continued due
to VISA or MasterCard regulations or state or federal law, regulation, or
ruling, (3) the Bankcard Marketing Agreement between Bank and Purchaser is
terminated, or (4) the Marketer Card Portfolio is transferred to a financial
institution other than Bank. In addition to the above consideration, the
Purchaser shall pay to the Bank a fee of $10,000 per month (the "Base Fee")
until such time as the Marketer Card Portfolio has been transferred to a
financial institution other than Bank. This Base Fee shall compensate the Bank
for time and resources dedicated to the Cards being issued and serviced under
this Agreement, including Bank customer service representatives fielding calls
with regard to this program. The Fixed Fee and the Base Fee shall be paid by
Purchaser on the 15th day of each month. The Fixed Fee shall be based upon the
number of Cards issued and outstanding in the Marketer Card Portfolio as of the
last day of the prior month as shown on the reports of the third-party processor
described in Section 1.6 hereof. The Fixed Fee and the Base Fee shall be paid by
cash or wire transfer.
Section 1.6 Management of Portfolio and Processing Costs; Servicing of
Accounts.
(a) Bank shall utilize the services of First Data Resources, Inc. ("FDR")
as its third party processor. Bank agrees that the administration of the
Marketer Card Portfolio shall be segregated from other Bank credit card programs
and accounted for separately on the third party processor's system. Bank shall
establish Bank Identification Number ("BIN") with VISA and an ICA Number ("ICA")
with MasterCard that are solely dedicated to the Marketer Card Portfolio. With
Bank's prior written consent (which shall not be unreasonably withheld),
Purchaser shall have the right to issue and assign Principal and Agent numbers
within the dedicated BIN and ICA to Purchaser or a Purchasing Party. Purchaser
shall be responsible for the payment of all charges by the third-party processor
made relative to the Marketer Card Portfolio. The schedule of current rates
charged by FDR is attached hereto as Exhibit B. In the event that these Exhibit
B rates increase by more than ten (10) percent in any given year, Bank agrees to
cooperate with Purchaser, at Purchaser's request, in transferring the processing
responsibilities to a more cost effective third party processor to be mutually
agreed upon by Bank and Purchaser. Purchaser acknowledges that it and Bank
presume the accuracy of all reports generated by the third-party processor. Any
audit of said reports shall be paid for by the party requesting the audit.
(b) Purchaser shall service the Cards and Card accounts in the Marketer
Card Portfolio. Such services shall be provided in
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the same manner and with the same diligence as all other credit card accounts
owned or held by Purchaser. In servicing the Cards, Purchaser shall manage,
perform and enforce the terms of the cardholder agreements relating to the Cards
and enforce any and all of the obligations and liabilities of cardholders under
such cardholder agreements in accordance with the exercise of Purchaser's best
business judgment. Without limiting the generality of the foregoing, Purchaser's
servicing responsibilities shall include providing customer service, security
and fraud monitoring and control, collections, and payment processing. Purchaser
will be responsible for all expenses and obligations incurred in connection with
the servicing of the Cards and the enforcement of the cardholder agreements.
If the Southeast Bankcard Association ("SEBA") establishes "associate
member" status for non-bank institutions, then Bank will take all reasonable
actions necessary to appoint Purchaser as an associate member of SEBA. Bank, at
its sole cost and expense, will prepare and submit required quarterly and annual
reports to VISA and MasterCard. To the extent permitted by applicable law and
VISA and MasterCard rules and regulations, Bank shall provide Purchaser with
access to information and reports regarding the Marketer Card Portfolio in its
possession or in the possession of FDR.
In performing its servicing duties hereunder, Purchaser shall, at a
minimum, meet the following standards:
(i) New applications shall be processed in twenty-five (25) days or less;
(ii) Customer service correspondence shall be responded to in
twenty-five (25) days or less;
(iii) Customer calls shall be answered within sixty (60) seconds;
(iv) Customer service call abandon rate shall be five percent (5%) or
less;
(v) Payments received by 9:00 a.m. at the remittance address shall be
posted the same day;
(vi) Collection effort must consist of a minimum of three (3) telephone
attempts and one collection letter per month for accounts one or
more billing cycles delinquent; and
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(v) Cards should be mailed within five (5) days of account approval.
Purchaser shall use its best efforts to provide (and in any event within
six (6) months of the date of this Agreement Purchaser shall provide) to Bank
monthly reports summarizing Purchaser's monthly and year-to-date performance of
each of these customer service standards. Such monthly reports shall then be
provided within twenty (20) days of the end of each month.
Section 1.7 Allocation of Costs. Except for costs covered by the Base Fee,
which costs shall be paid for by Bank, any and all costs and expenses related to
the Marketer Card Portfolio shall be Purchaser's obligation, including, without
limitation, costs of Card manufacturing; costs of printing account agreements,
billing statements, and other Bank statement messages; amounts outstanding under
cardholder accounts charged off as credit losses, such as losses sustained as a
result of a cardholder's bankruptcy or refusal to pay, a lost or stolen card, or
fraud; other losses, including losses resulting from violations of federal and
state law, violations of VISA or MasterCard rules and regulations, VISA or
MasterCard fines, or violations of account agreements; processor fees and
processor pass through expenses; MasterCard and/or VISA license fees, quarterly
assessments, warning bulletin expenses, and any other fees or special
assessments. Purchaser shall promptly reimburse Bank or promptly pay the
appropriate third party for such costs and expenses as Purchaser receives
invoices therefor. For purposes of determining allocable expense, no portion of
Bank's general administrative expense nor any direct marketing or other expenses
incurred relative to the Bank's other credit card programs shall be allocable to
the Marketer Card Portfolio. To the extent that extraordinary direct expenses,
other than those contemplated herein, are incurred by Bank in overseeing the
Marketer Card Portfolio, the parties agree to negotiate in good faith the
necessity for the additional costs and the cost sharing between the parties.
Section 1.8 Purchaser Entitlement. The Receivables acquired shall entitle
Purchaser or the applicable Purchasing Party to 100% of all principal, interest,
overlimit fees, late payment fees, cash advance fees, returned check fees,
insurance commissions, annual fees, interchange fees and any and all other fees
or earnings related to the Marketer Card Portfolio. Purchaser or the applicable
Purchasing Party shall also receive all annual fees charged and paid for in cash
or cash equivalents prior to or contemporaneously with Card issuance. All
payments made by cardholders in the Marketer Card Portfolio and all interchange
fees and refunds shall be remitted to Purchaser on a daily basis.
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Section 1.9 Chargebacks and Refunds. All cardholder claims for refunds or
reversals made with respect to charges incurred and paid for by Purchaser or a
Purchasing Party shall be processed by Bank, Purchaser, or Bank's processor in
the ordinary course and all cash received and/or the cash equivalent of merchant
account debits made with respect to said refund claims shall be promptly
remitted to Purchaser. Purchaser acknowledges, however, that ultimate liability
for all refunds due to such cardholders shall be Purchaser's responsibility.
Section 1.10 Instruments of Conveyance. Bank agrees to deliver to Purchaser
such bills of sale, Uniform Commercial Code financing statements, endorsements,
assignments or other good and sufficient instruments of conveyance and transfer,
as shall be effective to vest in Purchaser or a Purchasing Party good and
marketable title to the Receivables.
Section 1.11 Ownership of Marketer Card Portfolio. Except for the sale of
the Receivables hereunder and subject to the provisions of Section 4.1, Bank
shall retain ownership of the Marketer Card Portfolio and the related Cards,
cardholder accounts, cardholder records and other related assets. Unless
otherwise agreed by Purchaser, Bank may dispose of such ownership rights only
after the termination of this Agreement and the parties' agreement not to
transfer the rights of the Bank in the Marketer Card Portfolio to Purchaser as
provided in Section 4.1 of this Agreement.
Section 1.12 Further Assurances. The parties hereby agree from time to
time, at the other's request and without further consideration, to execute and
deliver such other instruments of conveyance and transfer and take such other
action as either party may reasonably require to convey, transfer and to vest in
Purchaser the Receivables, and to put Purchaser or the applicable Purchasing
Party in possession of the Receivables to be sold, conveyed, transferred and
delivered hereunder. Additionally, Bank acknowledges that Purchaser or a
Purchasing Party may pledge as collateral for a loan, sell, or securitize all or
a portion of the credit card Receivables acquired under this Purchase Agreement.
Subject to the requirements of applicable law, regulatory authority, and VISA
and MasterCard rules and regulations, Bank shall use its best efforts to make
reasonable modifications to this Agreement and to its procedures as necessary
for Purchaser or a Purchasing Party to pledge as collateral for a loan, sell, or
securitize all or a portion of the Receivables. Purchaser shall reimburse Bank
for all costs and expenses incurred by it in such cooperative effort including a
reasonable per diem reimbursement for Bank employee's time and reasonable
attorney fees, which shall be payable at the time of closing of the transfer or
pledge of the Receivables.
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ARTICLE II.
Representations and Warranties of Bank
Section 2.1 Express Representations and Warranties. As of the date of each
Receivables purchase, Bank represents, warrants and covenants as follows:
(a) Title to Receivables. Bank has good and marketable title to the
Receivables being sold.
(b) Corporate Authority. Bank is a banking corporation duly organized,
validly existing and in good standing under the laws of the United
States of America. Bank has all requisite power and authority to
enter into this Agreement and perform its obligations hereunder.
The execution and delivery of this Agreement by Bank, and the
performance of its obligations hereunder, have been duly authorized
by all necessary corporate action.
(c) Power to Sell. Bank has complete and unrestricted power to sell,
convey, assign, transfer and deliver to Purchaser the Receivables
to be purchased and sold hereunder.
(d) Valid Conveyance. All Receivables and rights to be conveyed
hereunder will be validly conveyed and assigned to Purchaser.
ARTICLE III.
Representations and Warranties of Purchaser
Section 3.1 Express Representations and Warranties. As of the date of each
Receivables purchase, Purchaser represents and warrants as follows:
(a) Power to Purchase. Purchaser has complete and unrestricted power to
purchase the Receivables under the terms and in accordance with
this Agreement.
(b) Corporate Authority. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State
of South Dakota. Purchaser has all requisite power and authority to
enter into this Agreement and perform its obligations hereunder.
The execution and delivery of this Agreement by Purchaser, and the
performance of its obligations hereunder, have been duly authorized
by all necessary corporate action.
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(c) Credit Criteria. Purchaser agrees to be bound by the credit
criteria and standards agreed to by Purchaser and Bank with respect
to the Marketer Card Portfolio as set forth in Exhibit A attached
hereto, as the same may be amended or modified from time to time.
(d) Independent Review. Purchaser has acted independently and without
reliance upon Bank in (i) approving the Credit Criteria and
Standards set forth in Exhibit A hereto, and (ii) undertaking its
obligations as set forth in this Agreement.
(e) Title to Consumer Debt. Purchaser or a Purchasing Party has good
and marketable title to the consumer debt being sold to Bank
pursuant to Section 1.1 hereof.
ARTICLE IV.
Purchase of Marketer Card Portfolio
Section 4.1 Purchase. Upon termination of this Agreement for any reason,
unless otherwise agreed in writing by the parties, Purchaser or a Purchasing
Party shall purchase all right, title and interest of Bank in and to the
Marketer Card Portfolio and all Cards, Receivables, accounts, customers,
customer records and other assets of the Bank directly related to the Marketer
Card Portfolio (herein the "Portfolio Assets"). The purchase price for the
Portfolio Assets shall be an amount equal to the par value of the outstanding
credit generated by balance transfers, cash advances, and purchases on the Cards
in the Marketer Card Portfolio that have not previously been purchased by
Purchaser hereunder. The purchase price under this Section 4.1 shall be payable
in cash upon the closing of the sale of the Portfolio Assets hereunder. The
parties hereby agree, at the other party's request and without further
consideration, to execute and deliver such instruments of conveyance and
transfer and to take such other actions as a party may reasonably require to
promptly convey, transfer and vest in Purchaser or a Purchasing Party the
Portfolio Assets. Any third party costs associated with the purchase under this
Section 4.1 shall be paid by the Purchaser at the time of the closing of the
sale of the Portfolio Assets. In connection with the termination of this
Agreement and the sale of the Portfolio Assets to Purchaser or a Purchasing
Party, Bank shall use all reasonable efforts to transfer the Cardholder accounts
and records, and Purchaser's dedicated BIN and ICA, to a successor bank that is
licensed and authorized by VISA and MasterCard to issue credit cards. Bank shall
also use good faith efforts to accommodate the administrative and processing
needs of Purchaser with regard to the Marketer Card Portfolio after the
termination of this Agreement.
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ARTICLE V.
Contingent Liability Fund
Section 5.1 Contingent Liability Fund. Purchaser shall establish and fund a
reserve account (the "Contingent Liability Fund") at Bank. The Contingent
Liability Fund shall be in the name of Purchaser, but Purchaser shall only be
entitled to withdraw funds or other assets therefrom with the written consent of
Bank. Purchaser shall maintain a cash balance in the Contingent Liability Fund
in an amount not less than the aggregate amount of the unused credit lines
available in connection with the Cards in the Marketer Card Portfolio. In the
event the Contingent Liability Fund exceeds the aggregate amount of such unused
credit lines, the Bank shall from time to time (but no less often than
quarterly) permit the Purchaser to withdraw the amount of such excess from the
Contingent Liability Fund. The Contingent Liability Fund shall be maintained
after the termination of this Agreement and shall be disbursed to Purchaser only
after Bank has reasonably determined that Purchaser's obligations to Bank
hereunder have been completely satisfied.
As security for Purchaser's obligations to Bank hereunder, Purchaser hereby
grants to Bank a security interest in the Contingent Liability Fund and all
money, instruments, general intangibles and other property of Purchaser now or
hereafter held by Bank. Bank shall have the right to set off and apply against
all obligations of Purchaser owed to Bank, at any time and without notice to
Purchaser, any and all deposits or other sums at any time credited by or owing
from Bank to Purchaser.
The Contingent Liability Fund established by Purchaser shall be in the form
of a Repurchase Agreement for mutually agreed upon and identified obligations of
the United States government. Each party shall take all reasonable actions and
execute such documents as necessary to perfect and protect the other party's
interest in the Repurchase Agreement and the government obligations subject
thereto.
ARTICLE VI.
Indemnification
Section 6.1 Bank Indemnification of Purchaser. Bank agrees to indemnify and
save Purchaser harmless from and against any and all claims, actions, liability,
judgments, damages, costs and expenses, including reasonable attorneys fees,
that may arise from the acts or omissions of Bank or Bank's breach of the terms
and conditions of this Agreement unless such claims, actions, liability,
judgments, damages, costs and expense, result from the negligence or willful
misconduct of Purchaser. Notwithstanding
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the foregoing, in no event shall Bank be liable to Purchaser as a result of
Purchaser's inability to collect any Receivable sold hereunder or as a result of
fraud committed by persons other than Bank.
Section 6.2 Purchaser Indemnification of Bank. Purchaser agrees to
indemnify and save Bank harmless from and against any and all claims, actions,
liability, judgments, damages, costs and expenses, including reasonable
attorneys fees, that may arise from the acts or omissions of Purchaser or a
Purchasing Party or from Purchaser's or a Purchasing Party's breach of the terms
and conditions of this Agreement unless such claim, action, liability,
judgments, damages, costs and expenses result from the negligence or willful
misconduct of Bank.
Section 6.3 Notification. Each party shall promptly notify the other of any
suit or threat of suit of which that party becomes aware (except with respect to
a threat of suit one party might institute against the other) which may give
rise to a right of indemnification pursuant to this Agreement. The indemnifying
party will be entitled to participate in the settlement or defense thereof. The
indemnifying party and the indemnified party shall cooperate (at no cost to the
indemnified party) in the settlement or defense of any such claim, demand, suit
or proceeding.
Section 6.4 Survival. The terms of this Article VI shall survive the
expiration or earlier termination of this Agreement.
ARTICLE VII.
General Provisions
Section 7.1 Survival of Covenants, Warranties, and Agreements. The
representations, warranties and agreements made by Purchaser and Bank herein
shall not merge into any document associated herewith and shall survive and
continue throughout the term of this Agreement and shall be enforceable at law
or in equity against such party, its successors and assigns.
Section 7.2 Notice. All notice, request, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given either
when personally delivered or when sent by regular United States mail, postage
prepaid, addressed as indicated below unless notified in writing of a change in
address:
To Bank: First National Bank in Brookings
2220 Sixth Street
P.O. Box 6000
Brookings, SD 57006
Attn: Credit Card Manager
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To Purchaser: TCS Services, Inc.
P.O. Box 5217
Sioux Falls, SD 57117-5217
Attn: President
Section 7.3 Amendments. This Agreement may be amended, altered or modified
by, and only by a written instrument executed by all the parties hereto.
Section 7.4 Term; Termination Fees.
(a) The initial term of this Agreement shall be for a period of one (1)
year commencing on the date of this Agreement, provided that this
Agreement shall automatically renew for successive one (1) year
periods unless one party provides to the other party a notice of
non-renewal at least sixty (60) days prior to the end of the
initial term or any subsequent renewal term. Notwithstanding the
foregoing, either party may terminate this Agreement as follows:
(i) Either party may terminate this Agreement with or without
cause upon giving the other party sixty (60) days' written
notice.
(ii) Either party may terminate this Agreement upon thirty (30)
days' written notice if the other party has materially
breached this Agreement and does not cure the breach within
ten (10) days of the notice or, in the event of a breach that
cannot be cured within 10 days, has not in good faith
commenced to cure the breach within ten (10) days of such
notice.
(iii) Either party may terminate this Agreement immediately upon
written notice to the other party if a regulatory authority
demands that this Agreement be terminated or modified (such
regulatory authority to include the Office of the Comptroller
of the Currency, the Federal Reserve Board, the Federal
Deposit Insurance Corporation, VISA, MasterCard, or any other
state or federal regulatory agency).
This Agreement shall terminate immediately upon the termination of
the Bankcard Marketing Agreement.
(b) In the event Purchaser terminates this Agreement and Bank is not
then in material breach of its
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obligations hereunder, Purchaser shall immediately pay to Bank an
amount equal to six (6) multiplied by the largest amount of Fixed
Fees and Base Fees accrued in any month during the immediately
preceding six (6) month period ("Termination Fee"). Purchaser shall
not be obligated to pay the Termination Fee in the event that
Purchaser elects to terminate the Agreement as a result of and
within six (6) months after the occurrence of any of the following
events: (i) Bank materially alters its Credit Criteria and
Standards for the Marketer Card Portfolio without the prior written
consent of Purchaser, or (ii) the Bank unreasonably restricts or
unreasonably disapproves of Purchaser's operation and/or management
of the marketing, issuance or servicing of the Marketer Card
Portfolio, or proposed changes thereto, unless such restriction or
disapproval is based upon actions taken by Bank in response to VISA
or MasterCard rules, or applicable law or regulation.
Section 7.5 Expenses. The parties to this Agreement shall pay their own
expenses (including, without limitation, the fees and expenses of their agents,
representatives, counsel and accountants) incidental to the preparation of this
Agreement.
Section 7.6 Relationship of the Parties. Bank and Purchaser agree that in
performing their responsibilities pursuant to this Agreement, they are in the
position of independent contractors. This Agreement is not intended to create,
nor does it create and shall not be construed to create, a relationship of
partner or joint venture or any association for profit between and among Bank
and Purchaser.
Section 7.7 Section and Other Headings. The section and other headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
Section 7.8 Successors and Assigns. Except as otherwise provided herein,
upon execution hereof this Agreement shall inure to the benefit of and become
binding upon the parties, their heirs, personal representatives, successors and
assigns.
Section 7.9 Separate Counterparts. This Agreement may be executed in
separate counterparts which shall collectively and separately be considered one
and the same Agreement.
Section 7.10 Severability. Should any one or more of the provisions hereof
be determined to be illegal or unenforceable, all other provisions hereof shall
be given effect separately therefrom and shall not be affected thereby.
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Section 7.11 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of South Dakota.
Section 7.12 Assignment. This Agreement may not be assigned without the
prior written consent of the other party; provided, however, that (a) Purchaser
may assign its rights hereunder to its wholly-owned subsidiary without the
written consent of Bank provided that such assignment shall not extinguish or
limit Purchaser's liabilities or obligations under this Agreement, including,
without limitation, the indemnification obligations under Article VI hereto and
(b) Bank may assign its rights and obligations hereunder to its affiliate
without the written consent of Purchaser.
Section 7.13 Binding Arbitration. Any disputes arising hereunder shall be
submitted by the parties to binding arbitration to be conducted in the State of
South Dakota by a qualified, mutually acceptable arbitrator in accordance with
the rules governing commercial disputes established by the American Arbitration
Association. Any decision by the arbitrator shall be binding and final on all
parties. Use of the arbitration procedure under this Section shall be the
exclusive method of resolving disputes under this Agreement, unless otherwise
agreed by the parties. The parties agree that a court located in the State of
South Dakota may enter judgment upon any award made pursuant to a decision of
the arbitrator.
Section 7.14 Entire Agreement, Prior Agreements. This Agreement contains
the entire agreement between the parties relating to the subject matter hereof
and supersedes all prior or contemporaneous agreements, discussions,
representations or understandings relating to the subject matter hereof. All
Cards and Receivables issued or created pursuant to the prior purchase agreement
and bankcard marketing agreement by and between Bank and Purchaser, and all
other rights, obligations and duties previously governed by such prior
agreements, are hereby transferred to and shall be governed by the terms and
provisions of this Agreement and the Bankcard Marketing Agreement.
Section 7.15 Reporting and Financial Statements; Audits.
(a) Purchaser agrees to provide Bank annually within one hundred
twenty (120) days of the end of its fiscal year a copy of Credit
Store, Inc.'s audited financial statements, including a balance
sheet, statement of income and expenses, statement of cash flows,
and related financial information, as prepared by an independent
certified public accountant reasonably acceptable to Bank.
Purchaser also agrees to provide Bank quarterly within thirty (30)
days of the end of each of Credit Store, Inc.'s fiscal quarters a
copy
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of Credit Store, Inc.'s internally prepared quarterly financial
statements containing such financial information as Bank may
reasonably require.
(b) Purchaser agrees to provide Bank monthly within fifteen (15) days
of the end of each month a management report regarding the
Receivables, including, without limitation, information regarding
the amount of Receivables outstanding, an aging of the Receivables,
and other information as Bank may reasonably require.
(c) Purchaser agrees to provide Bank, at Purchaser's expense, with
written results of annual compliance audits and annual operational
audits performed with respect to Purchaser's business by an
independent audit firm acceptable to Bank. If Bank is requested to
purchase debt pursuant to Section 1.1 hereof from a Purchasing
Party, Purchaser shall provide to Bank written results of such
audits with respect to such Purchasing Party. Such audits shall be
conducted in accordance with audit standards normally applied to
federally insured financial institutions and in a manner reasonably
acceptable to Bank.
Section 7.16 Confidentiality. In performing their obligations pursuant to
this Agreement, each party may have access to and receive disclosure of certain
confidential information about the other party or parties, including without
limitation, the terms and conditions of this Agreement, the names and addresses
of a party's customers or members, marketing plan and objectives, research and
test results, and other information which is confidential and the property of
the party disclosing the information ("Confidential Information"). Confidential
Information shall not include information in the public domain. Bank and
Purchaser agree that Confidential Information shall be used by each party solely
in the performance of its obligations under this Agreement. Each party shall
receive Confidential Information in confidence and shall not disclose
Confidential Information to any third party, except as may be necessary to
perform its obligations hereunder or as may be otherwise agreed in writing by
party furnishing the information. Upon request or upon any expiration or
termination of this Agreement, each party shall return to the other party or
destroy (as the latter may instruct) all of the latter's Confidential
Information which is in any written or other recorded form, including data
stored in any computer medium. Confidential Information shall include, without
limitation, any and all marketing materials, status and performance reports,
customer information, Card information, operating manuals and guides, internal
memoranda, and other information relating to the marketing and servicing of any
Marketer Card Portfolio established pursuant to this Agreement.
- 14 -
<PAGE> 15
Notwithstanding the foregoing, the Confidential Information may be disclosed (i)
to the parties' respective agents, employees and representatives that agree to
be bound by the terms and conditions hereof, and (ii) as may be required by
legal process, applicable law or regulatory authorities with jurisdiction over
the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date set forth above.
BANK:
FIRST NATIONAL BANK IN BROOKINGS
By [Illegible]
-----------------------------------
Its Executive Vice President
-------------------------------
PURCHASER:
SERVICE ONE INTERNATIONAL CORPORATION
By /s/ Kevin T. Riordan
------------------------------------
Its President
--------------------------------
GUARANTY OF CREDIT STORE, INC.
The undersigned hereby guarantees the prompt payment and performance of
each of Purchaser's obligations to Bank under this Agreement. This shall be an
absolute, irrevocable and unconditional guaranty of payment and performance, and
not a guaranty of collection. No set-off, counterclaim, recoupment, reduction or
diminution of any obligation, or any defense of any kind or nature which the
undersigned may have against Purchaser, Bank, or any other party, shall be
available to, or shall be asserted by, the undersigned against Bank or Bank's
successors or assigns.
Notice of the acceptance of this guaranty, of nonpayment of Purchaser's
obligations, of protest, demand or other remedy availed of hereunder is
expressly waived.
The undersigned hereby expressly consents to any renewal or extension of
this Agreement and no notice of any renewal or extension of this Agreement need
be given to the undersigned.
- 15 -
<PAGE> 16
This Guaranty shall be binding upon the undersigned and upon its successors
and assigns, and shall inure to the benefit of Bank and its successors and
assigns.
Dated as of the date first written above.
CREDIT STORE, INC.,
a Delaware corporation
By /s/ Kevin T. Riordan
------------------------------------
Its President
--------------------------------
- 16 -
<PAGE> 1
AMENDMENT TO PURCHASE AGREEMENT
This Amendment to the Purchase Agreement is made and entered into this
31st day of August, 1998 by and between First National Bank in Brookings, (Bank)
and The Credit Store, Inc. (Purchaser) fka Service One International Corporation
dba TCS Services, Inc.
WITNESSETH
WHEREAS, Bank and Purchaser entered into a Purchase Agreement dated
October 2, 1997, and
WHEREAS, Bank and Purchaser now desire to amend the Purchase Agreement
as hereinafter more particularly set forth;
NOW, THEREFORE, Bank and Purchaser hereby agree as follows:
1. Effective August 1st , 1998 (hereinafter referred to as the
"Effective Date"), Article V. Section 5.1 of the Purchase
Agreement is hereby amended to read as follows:
Section 5.1 Contingent Liability Fund. Purchaser shall
establish and fund a reserve account (the "Contingent
Liability Fund") at Bank. The Contingent Liability Fund shall
be in the name of Purchaser, but Purchaser shall only be
entitled to withdraw funds or other assets therefrom with the
written consent of Bank. Purchaser shall maintain a cash
balance in the Contingent Liability Fund in an amount not less
than $750,000. The Contingent Liability Fund shall be
maintained after the termination of this Agreement and shall
be disbursed to Purchaser only after Bank has reasonably
determined that Purchaser's obligations to Bank hereunder have
been completely satisfied.
As security for Purchaser's obligations to Bank hereunder,
Purchaser hereby grants to Bank a security interest in the
Contingent Liability Fund and all money, instruments, general
intangibles and other property of Purchaser now or hereafter
held by Bank. Bank shall have the right to set off and apply
against all obligations of Purchaser owed to Bank, at any time
and without notice to Purchaser, any and all deposits or other
sums at any time credited by or owing from Bank to Purchaser.
The Contingent Liability Fund established by Purchaser shall
be in the form of a Repurchase Agreement for mutually agreed
upon and identified obligations
<PAGE> 2
of the United States government. Each party shall take all
reasonable actions and execute such documents as necessary to
perfect and protect the other party's interest in the
Repurchase Agreement and the government obligations subject
thereto.
2. Effective August 1st, 1998, Article I. Section 1.4 of the
Purchase Agreement is hereby amended to read as follows:
Section 1.4 Purchase Price. The purchase price for the
Receivables shall be the par value of the amounts balance
transferred to Cards, plus all cash advances and purchases on
the Cards in the Marketer Card Portfolio. The purchase price
for these daily purchases of receivables (net daily
settlement) shall be paid in cash or by wire transfer on the
date of the purchase. Priority of funds disbursement to Bank
is established by the Paying Agent Agreement and First
Amendment to Lockbox agreement dated April 30, 1998 between
The Credit Store, Inc. (Servicer), Norwest Bank South Dakota,
N.A., (the Lockbox Bank), Norwest Bank Minnesota, N.A. (the
"Paying Agent"), and Coast Business Credit ("Coast").
3. As hereby amended, the Purchase Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
the Purchase Agreement the day and year above written.
FIRST NATIONAL BANK IN BROOKINGS THE CREDIT STORE, INC.
By: /s/ [Illegible] By: /s/ Michael J. Philippe
------------------------- --------------------------
Title: Vice-President Title: CFO
----------------------- -----------------------
<PAGE> 1
August 17, 1999
First National Bank in Brookings
2220 Sixth Street
P.O. Box 6000
Brookings, SD 57006
Attn: Jay Weems
Re: Letter Agreement Regarding Bankcard Marketing Agreement
and Purchase Agreement
Dear Jay:
This letter agreement shall memorialize the terms of the agreements
reached between First National Bank in Brookings ("FNB") and The Credit Store,
Inc. ("TCS"). As you are aware, FNB and Service One International Corporation
("SOIC") are parties to a Bankcard Marketing Agreement dated October 2, 1997 and
a Purchase Agreement dated October 2, 1997, as amended on August 31, 1998. SOIC
was merged into TCS, which is the successor-in-interest to the Bankcard
Marketing Agreement and the Purchase Agreement.
Previously, TCS sent a notice of termination of the Bankcard Marketing
Agreement and Purchase Agreement. This notice has been rescinded by TCS and the
Bankcard Marketing Agreement and Purchase Agreement remain in full force and
effect, according to their terms, as modified by this letter.
Subject to the renewal and termination provisions of the Bankcard
Marketing Agreement and Purchase Agreement, the current term of these agreements
will expire on October 1, 2000. Furthermore, through October 1, 2000, the Fixed
Fee (as defined in Section 1.5 of the Purchase Agreement) shall be based upon
50,000 credit cards.
FNB and TCS agree to make mutually acceptable modifications and
amendments to the Bankcard Marketing Agreement and Purchase Agreement as
reasonably necessary to aid and facilitate the securitization of credit card
receivables.
<PAGE> 2
Within ten (10) days following the execution of this letter, (i) FNB
and TCS shall execute and file UCC-3 amendments to the existing UCC-1 Financing
Statements for the above-described agreements correcting the name, the employer
identification number and address of SOIC to reflect the correct information for
TCS, and (ii) FNB shall deliver to TCS a secretaries certificate evidencing
resolutions by the Board of Directors of FNB approving the Bankcard Marketing
Agreement, the Purchase Agreement, as amended, the Termination Agreement dated
October 2, 1997 and this letter agreement.
If this letter accurately sets forth the agreements reached between FNB
and TCS, please have this letter executed in the space provided below and
returned to me at your earliest convenience.
Sincerely,
The Credit Store, Inc.
By: /s/ Kevin T. Riordan
----------------------------------------
Kevin T. Riordan, President
ACKNOWLEDGED AND AGREED
First National Bank in Brookings
By: /s/ David Waligoske
-------------------------------
Name: David Waligoske
-------------------------
Title: Senior Vice President
------------------------
<PAGE> 1
AGREEMENT REGARDING TRANSFER OF ACCOUNTS
THIS AGREEMENT REGARDING TRANSFER OF ACCOUNTS is made and entered into this
14th day of December, 1998, by and between THE CREDIT STORE, INC. ("TCS") and
FIRST NATIONAL BANK IN BROOKINGS ("Bank").
RECITALS
A. TCS (through its former subsidiary, Service One International
Corporation, which has been merged into TCS) and Bank entered into a Bankcard
Marketing Agreement and Purchase Agreement, both dated as of October 2, 1997,
pursuant to which TCS markets credit cards, balance transfers debts to credit
cards issued by Bank, purchases credit card receivables and services credit
cards.
B. TCS owns credit card receivables that are associated with credit cards
issued by the Federal Deposit Insurance Corporation, in its capacity as receiver
for BestBank. The FDIC and TCS would like to transfer certain credit card
accounts in BIN No. 480975 which contains credit card accounts associated with
the receivables owned by TCS ("TCS Accounts").
C. Bank is willing to take an assignment of the TCS Accounts from the FDIC,
but as a condition precedent to taking such an assignment, will require TCS to
waive claims and indemnify Bank for any and all liabilities associated with the
TCS Accounts which may now exist or may arise in the future.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, TCS and Bank agree as follows:
1. TCS and Bank agree that the TCS Accounts (and new cards issued by Bank
for such Accounts) will be governed by the terms and conditions of the
Bankcard Marketing Agreement and the Purchase Agreement.
2. In addition to the indemnification contained in the Bankcard Marketing
Agreement and the Purchase Agreement, TCS hereby waives claims and
agrees to indemnify and save Bank harmless from and against any and all
claims, actions, liability, judgments, damages, costs and expenses,
including reasonable attorneys' fees, that may arise from or in any way
relate to any claim, action or lawsuit relating to the TCS Accounts,
whether arising before or after the date of this Agreement, except to
the extent covered by Bank's indemnification obligations under Section
3.1 of the Bankcard Marketing Agreement and Section 6.1 of the Purchase
Agreement as a result of Bank's wrongful acts or omissions.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
BANK:
FIRST NATIONAL BANK IN BROOKINGS
By [Illegible]
-----------------------------------------
Its Vice President
-------------------------------------
TCS:
THE CREDIT STORE, INC.
By /s/ Kevin T. Riordan
----------------------------------------
Its President
------------------------------------
-2-
<PAGE> 1
SUBORDINATED GRID PROMISSORY NOTE
Sioux Falls, South Dakota
$20,000,000.00 August 1, 1997
FOR VALUE RECEIVED, Credit Store, Inc., a Delaware corporation (the
"Maker"), promises to pay to the order of J.L.B. of Nevada, Inc., a Nevada
corporation, or assigns ("JLB" or the "Holder"), ON DEMAND, the principal amount
of Twenty Million Dollars ($20,000,000.00) or such lesser amount as shall equal
the aggregate unpaid principal amount of the loans made by the Holder to the
Maker, together with interest on the unpaid principal amount hereof from the
date hereof until paid in full at a rate per annum equal to 12%, said interest
to be due and payable in monthly installments, beginning on August 31, 1997 and
continuing on the last day of each month thereafter until the payment in full of
all amounts outstanding under this Note. All payments hereunder shall be made in
lawful money of the United States of America, without offset.
1. Definition of Senior Debt. The term "Senior Debt" shall mean and
consist of all present and future indebtedness for borrowed money of the Maker
(contingently or otherwise), to banks, insurance companies and similar
institutional lenders (all such lenders, the "Lenders") and any extension,
replacement, removal, restatement or refinancing thereof.
2. Subordination.
(a) The payments of any and all of the principal amount of and
interest on this Note (and all other obligations hereunder) is hereby expressly
subordinated and made junior to the payment of the principal amount, redemption
premium, if any, all interest and any other amounts due on the Senior Debt, to
the extent and in the manner set forth herein.
(b) Until the Senior Debt shall have been indefensibly paid in
full, the Maker shall not make, and the Holder shall not receive, accept or
retain, any direct or indirect payment or reduction (whether by way of loan,
set-off or otherwise) in respect of the principal and interest of this Note,
whether this Note shall have become payable at maturity or by acceleration or
otherwise; provided, however, that, subject to the provisions of subsection (c)
hereof, the Maker may make, and the Holder may receive, accept and retain,
payments of principal and interest under this Note, unless, if, on the date such
payment would (but for the terms hereof) be payable to and received by the
Holder pursuant to this Note, (i) a default under the documents evidencing the
Senior Debt shall have occurred, shall be continuing and shall not have been
specifically waived in writing by the Lenders, or the Lenders shall
<PAGE> 2
- 2 -
have declared the Senior Debt or any portion thereof due and payable in full on
the basis of the occurrence of such default, or (ii) such default shall not be
continuing on any such payment date, but the Lenders shall have declared all or
any portion of the Senior Debt due and payable in full on the basis of the
occurrence of such default and such acceleration shall not have been
specifically rescinded in writing by the Lenders.
(c) In the event of (i) any insolvency, bankruptcy,
receivership, custodianship, liquidation, reorganization, readjustment of debt,
arrangement, composition, assignment for the benefit of creditors, or other
similar proceeding relative to the Maker, or (ii) any proceeding for voluntary
liquidation, dissolution or other winding up or bankruptcy proceedings, then and
in any such event:
(A) All of the Senior Debt shall first be paid in
full before any payment or distribution of any character,
whether in cash, securities, obligations or other property,
shall be made in respect of this Note;
(B) Any payment or distribution of any character
which would otherwise (but for the terms hereof) be payable or
deliverable in respect of this Note (including any payment or
distribution of any other indebtedness of the Maker being
subordinated to this Note), shall be paid or delivered
directly to the Lenders or their representative, until all of
the Senior Debt shall have been paid in full, and the Holder
irrevocably authorizes, empowers and directs all receivers,
custodians, trustees, liquidators, conservators and others
having authority to effect all such payments and deliveries;
(C) The Holder shall execute and deliver to the
Lenders or their representative all such further instruments
confirming the authorization referred to in the foregoing
clause (B), and shall take all such other actions as may be
requested by the Lenders or their representative in order to
enable the Lenders or their representative to enforce any and
all claims upon or in respect of this Note and to collect and
give any and all payments or distributions which may be
payable or deliverable at any time upon or with respect to
this Note.
(d) If, notwithstanding the provisions of this Note, any
payment or distribution of any character (whether in cash, securities, or other
property) or any security shall be received by the Holder in contravention of
the terms of this Note, and before all Senior Debt shall have been paid in full,
such payment, distribution or security shall not be commingled with any asset of
<PAGE> 3
- 3 -
the Holder, shall be held in trust for the benefit of, and shall be paid over or
delivered and transferred to, the Lenders or their representative, for
application to the payment of all Senior Debt remaining unpaid, until all of the
Senior Debt shall have been paid in full.
(e) This Note, without further reference, shall pass to and
may be relied on and enforced by any transferee or subsequent holder of the
Senior Debt.
(f) Except to the extent provided in this Note that the debt
evidenced by this Note may not become due and payable or be paid and the Holder
may not exercise rights with respect thereto, nothing contained herein shall
impair, as between the Maker and the Holder, the obligation of the Maker, to pay
to the Holder the principal of this Note, and interest thereon, as and when the
same shall become due and payable in accordance with the terms hereof, or
prevent the Holder upon default with respect to this Note, from exercising all
rights, powers and remedies otherwise provided herein or by applicable law, all
subject to the rights of the holders of Senior Debt hereunder. Upon any
distribution of assets of the Maker referred to in the provisions hereof, the
Holder shall be entitled to rely upon any order or decree made by any court of
competent jurisdiction in which such dissolution, winding up, liquidation or
reorganization proceedings are pending or a certificate of the liquidating
trustee or agent or other person making any distribution to the Holder, for the
purpose of ascertaining the persons entitled to participate in such
distribution, the holders of the Senior Debt and other indebtedness of the
Maker, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to the provisions
hereof.
(g) Notwithstanding any statute, including, without
limitation, the Bankruptcy Code, any rule of law or bankruptcy procedures to the
contrary, the right of the Lenders hereunder to have all of the Senior Debt paid
and satisfied in full prior to the payment of any of the debt evidenced by this
Note shall include, without limitation, the right of the Lenders to be paid in
full all interest accruing on the Senior Debt due to it after the filing of any
petition by or against the Maker in connection with any bankruptcy or similar
proceeding or any other proceeding referred to in subsection 2(c) hereof, prior
to the payment of any amounts in respect of this Note, including, without
limitation, any interest due to the Holder accruing after such date.
(h) No right of any present or future holders of any Senior
Debt to enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Maker or
by any act or failure to act in good faith by any such holders, or by any
noncompliance by the
<PAGE> 4
- 4 -
Maker with the terms and provisions of this Note, regardless of any knowledge
thereof with which any such holders may have or be otherwise charged. The
holders of the Senior Debt may, without in any way affecting the obligations of
the Holder with respect thereto, at any time or from time to time in their
absolute discretion, change the manner, place or terms of payment of, change or
extend the time of payment of, or renew or alter, any Senior Debt, or amend,
modify or supplement any agreement or instrument governing or evidencing such
Senior Debt or any other document referred to therein, or exercise or refrain
from exercising any other of their rights under the Senior Debt including,
without limitation, the waiver of default thereunder and the release of any
collateral securing such Senior Debt, all without notice to or assent from the
Holder.
(i) Subject to the prior payment in full of all Senior Debt,
the Holder shall be subrogated to the rights of the holders of Senior Debt to
receive payments or distributions of assets of the Maker applicable to the
Senior Debt until all amounts owing on this Note shall be paid in full, and for
the purpose of such subrogation no payments or distributions to the holders of
the Senior Debt by or on behalf of the Maker or by or on behalf of the Holder by
virtue of the provisions hereof which otherwise would have been made to the
Holder shall, as between the Maker, its creditors, other than the holders of the
Senior Debt, and the Holder, be deemed to be payment by the Maker to or on
account of the Senior Debt, it being understood that the provisions hereof are
and are intended solely for the purpose of defining the relative rights of the
Holder, on the one hand, and the holders of the Senior Debt, on the other hand.
3. Use of Grid. The Holder is hereby authorized by the Maker to endorse
on the schedule attached to this Note (or any continuation thereof) the amount
of each loan made by the Holder to the Maker, the date such loan is made, and
the amount of any payment or prepayment of such loan received by the Holder,
provided that any failure by the Holder to make any such endorsement shall not
affect the obligations of the Maker hereunder in respect of such loans. The
aggregate unpaid amount of loan advances is reflected on the schedule attached
to this Note and shall be presumptive evidence of the entire outstanding loan
amount.
4. Prepayment. Subject to the subordination provisions of Section 2 of
this Note, the unpaid principal amount of this Note may be prepaid in whole or
in part at any time or times without premium or penalty. Each prepayment shall
be applied first to the payment of all interest and other amounts accrued
hereunder on the date of any such prepayment, and the balance of any such
prepayment shall be applied to reduce the amount of the principal outstanding.
<PAGE> 5
- 5 -
5. Security Agreement. This Note evidences a loan advanced by JLB to or
for the benefit of the Maker. JLB, the Maker and the Maker's subsidiaries are
parties to a Security Agreement dated of even date herewith (the "Security
Agreement") that contains additional terms and conditions regarding the making
of the loan evidenced by this Note and a description of the collateral securing
such loan. Reference is made to the Security Agreement for such additional terms
and conditions and for a description of the collateral and additional rights and
remedies of the Holder.
6. Events of Default.
(a) The failure to pay, when due, the principal, any interest,
or any other sum payable hereunder, and continuance of such failure for five (5)
business days after the date on which such principal, installment of interest,
or other sum is due (whether upon maturity hereof, upon any installment payment
date, upon acceleration, or otherwise) shall constitute an event of default
("Event of Default") hereunder. Subject to the subordination provisions of
Section 2 in this Note, upon the occurrence of an Event of Default hereunder,
the entire principal amount hereof, and all accrued and unpaid interest thereon,
shall be accelerated, and shall be immediately due and payable, at the option of
the Holder, without demand or notice, and in addition thereto, and not in
substitution therefor, the Holder shall be entitled to exercise any one or more
of the rights and remedies exercisable by the Holder upon an Event of Default
under the Security Agreement or provided by applicable law. Failure to exercise
said option or to pursue such other remedies shall not constitute a waiver of
such option or such other remedies or of the right to exercise any of the same
in the event of any subsequent Event of Default hereunder.
(b) The Holder may, upon the occurrence of any such Event of
Default hereunder and subject to the subordinated provisions in Section 2 of
this Note, have resort to the collateral given as security for this Note, and
may sell and dispose of such collateral in whole or in part, at any time or from
time to time.
7. Expenses. The Maker promises to pay all costs and expenses
(including without limitation attorneys' fees and disbursements) incurred in
connection with the collection hereof or in the protection or realization of any
collateral now or hereafter given as security for the repayment hereof, and to
perform each and every covenant or agreement to be performed by the Maker under
this Note, the Security Agreement and any other instrument evidencing or
securing the obligation evidenced by this Note.
8. Payment Dates. Any payment on this Note coming due on a Saturday, a
Sunday, or a day which is a legal holiday in the place
<PAGE> 6
- 6 -
at which a payment is to be made hereunder shall be made on the next succeeding
day which is a business day in such place.
9. Waivers.
(a) The Maker hereby waives presentment, protest, demand,
notice of dishonor, and all other notices, and all defenses and pleas on the
grounds of any extension or extensions of the time of payments or the due dates
of this Note, in whole or in part, before or after maturity, with or without
notice. No renewal or extension of this Note, no release or surrender of any
collateral given as security for this note, and no delay in enforcement of this
Note or in exercising any right or power hereunder, shall affect the liability
of the Maker. The pleading of any statute of limitations as a defense to any
demand against the Maker is expressly waived.
(b) No single or partial exercise by the Holder of any right
hereunder, under the Security Agreement, or under any other agreement given as
security for this Note or pertaining hereto, shall preclude any other or further
exercise thereof or the exercise of any other rights. No delay or omission on
the part of the Holder in exercising any right hereunder shall operate as a
waiver of such right or of any other right under this Note.
10. Successors and Assigns. Whenever used herein, the words "Maker" and
"Holder" shall be deemed to include their respective successors and assigns.
11. Governing Law. This Note shall be governed by and construed under
and in accordance with the laws of the State of South Dakota (but not including
the choice of law rules thereof).
IN WITNESS WHEREOF, the undersigned has caused this Note to be duly
executed as of the day and year first hereinabove set forth.
CREDIT STORE, INC.
By: /s/ Martin Burke
-----------------------------------
Title:
-----------------------------------
<PAGE> 7
SCHEDULE TO
GRID PROMISSORY NOTE
ADVANCES
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Amount of Unpaid
Date of Amount of Principal Principal Notations
Advance Advance Paid Balance Made by
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/1/97 6,102,940
---------------------------------------------------------------------
8/6/97 5,500,000
---------------------------------------------------------------------
8/7/97 600,000
---------------------------------------------------------------------
8/19/97 1,000,000
---------------------------------------------------------------------
8/29/97 2,250,000
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
<PAGE> 1
SUBORDINATED GRID PROMISSORY NOTE
Sioux Falls, South Dakota
$5,000,000.00 October 23, 1997
FOR VALUE RECEIVED, Credit Store, Inc., a Delaware corporation (the
"Maker"), promises to pay to the order of J.L.B. of Nevada, Inc., a Nevada
corporation, or assigns ("JLB" or the "Holder"), ON DEMAND, the principal amount
of Five Million Dollars ($5,000,000.00) or such lesser amount as shall equal the
aggregate unpaid principal amount of the loans made by the Holder to the Maker,
together with interest on the unpaid principal amount hereof from the date
hereof until paid in full at a rate per annum equal to twelve percent (12%).
Interest on the outstanding principal balance of this Note shall be computed on
the basis of the actual number of days elapsed and a year of 360 days, and said
interest shall be due and payable in monthly installments, beginning on
____________, 1997 and continuing on the last day of each month thereafter until
the payment in full of all amounts outstanding under this Note. All payments
hereunder shall be made in lawful money of the United States of America, without
offset.
1. Definition of Senior Debt. The term "Senior Debt" shall mean and
consist of all present and future indebtedness for borrowed money of the maker
(contingently or otherwise), to banks, insurance companies and similar
institutional lenders (all such lenders, the "Lenders") and any extension,
replacement, removal, restatement or refinancing thereof.
2. Subordination.
(a) The payments of any and all of the principal amount of and
interest on this Note (and all other obligations hereunder) is hereby expressly
subordinated and made junior to the payment of the principal amount, redemption
premium, if any, all interest and any other amounts due on the Senior Debt, to
the extent and in the manner set forth herein.
(b) Until the Senior Debt shall have been indefensibly paid in
full, the Maker shall not make, and the Holder shall not receive, accept or
retain, any direct or indirect payment or reduction (whether by way of loan,
set-off or otherwise) in respect of the principal and interest of this Note,
whether this Note shall have become payable at maturity or by acceleration or
otherwise; provided, however, that, subject to the provisions of subsection (c)
hereof, the Maker may make, and the Holder may receive, accept and retain,
payments of principal and interest under this Note, unless, if, on the date such
payment would (but for the terms hereof) be payable to and received by the
Holder pursuant to this Note, (i) a default under the documents evidencing the
Senior Debt
<PAGE> 2
- 2 -
shall have occurred, shall be continuing and shall not have been specifically
waived in writing by the Lenders, or the Lenders shall have declared the Senior
Debt or any portion thereof due and payable in full on the basis of the
occurrence of such default, or (ii) such default shall not be continuing on any
such payment date, but the Lenders shall have declared all or any portion of the
Senior Debt due and payable in full on the basis of the occurrence of such
default and such acceleration shall not have been specifically rescinded in
writing by the Lenders.
(c) in the event of (i) any insolvency, bankruptcy,
receivership, custodianship, liquidation, reorganization, readjustment of debt,
arrangement, composition, assignment for the benefit of creditors, or other
similar proceeding relative to the Maker, or (ii) any proceeding for voluntary
liquidation, dissolution or other winding up or bankruptcy proceedings, then and
in any such event:
(A) All of the Senior Debt shall first be paid in
full before any payment or distribution of any character,
whether in cash, securities, obligations or other property,
shall be made in respect of this Note;
(B) Any payment or distribution of any character
which would otherwise (but for the terms hereof) be payable or
deliverable in respect of this Note (including any payment or
distribution of any other indebtedness of the Maker being
subordinated to this Note), shall be paid or delivered
directly to the Lenders or their representative, until all of
the Senior Debt shall have been paid in full, and the Holder
irrevocably authorizes, empowers and directs all receivers,
custodians, trustees, liquidators, conservators and others
having authority to effect all such payments and deliveries;
(C) The Holder shall execute and deliver to the
Lenders or their representative all such further instruments
confirming the authorization referred to in the foregoing
clause (B), and shall take all such other actions as may be
requested by the Lenders or their representative in order to
enable the Lenders or their representative to enforce any and
all claims upon or in respect of this Note and to collect and
give any and all payments or distributions which may be
payable or deliverable at any time upon or with respect to
this Note.
(d) If, notwithstanding the provisions of this Note, any
payment or distribution of any character (whether in cash, securities, or other
property) or any security shall be received by the Holder in contravention of
the terms of this Note, and before
<PAGE> 3
- 3 -
all Senior Debt shall have been paid in full, such payment, distribution or
security shall not be commingled with any asset of the Holder, shall be held in
trust for the benefit of, and shall be paid over or delivered and transferred
to, the Lenders or their representative, for application to the payment of all
Senior Debt remaining unpaid, until all of the Senior Debt shall have been paid
in full.
(e) This Note, without further reference, shall pass to and
may be relied on and enforced by any transferee or subsequent holder of the
Senior Debt.
(f) Except to the extent provided in this Note that the debt
evidenced by this Note may not become due and payable or be paid and the Holder
may not exercise rights with respect thereto, nothing contained herein shall
impair, as between the Maker and the Holder, the obligation of the Maker, to pay
to the Holder the principal of this Note, and interest thereon, as and when the
same shall become due and payable in accordance with the terms hereof, or
prevent the Holder upon default with respect to this Note, from exercising all
rights, powers and remedies otherwise provided herein or by applicable law, all
subject to the rights of the holders of Senior Debt hereunder. Upon any
distribution of assets of the Maker referred to in the provisions hereof, the
Holder shall be entitled to rely upon any order or decree made by any court of
competent jurisdiction in which such dissolution, winding up, liquidation or
reorganization proceedings are pending or a certificate of the liquidating
trustee or agent or other person making any distribution to the Holder, for the
purpose of ascertaining the persons entitled to participate in such
distribution, the holders of the Senior Debt and other indebtedness of the
Maker, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to the provisions
hereof.
(g) Notwithstanding any statute, including, without
limitation, the Bankruptcy Code, any rule of law or bankruptcy procedures to the
contrary, the right of the Lenders hereunder to have all of the Senior Debt paid
and satisfied in full prior to the payment of any of the debt evidenced by this
Note shall include, without limitation, the right of the Lenders to be paid in
full all interest accruing on the Senior Debt due to it after the filing of any
petition by or against the Maker in connection with any bankruptcy or similar
proceeding or any other proceeding referred to in subsection 2(c) hereof, prior
to the payment of any amounts in respect of this Note, including, without
limitation, any interest due to the Holder accruing after such date.
(h) No right of any present or future holders of any Senior
Debt to enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure
<PAGE> 4
- 4 -
to act on the part of the Maker or by any act or failure to act in good faith by
any such holders, or by any noncompliance by the Maker with the terms and
provisions of this Note, regardless of any knowledge thereof with which any such
holders may have or be otherwise charged. The holders of the Senior Debt may,
without in any way affecting the obligations of the Holder with respect thereto,
at any time or from time to time in their absolute discretion, change the
manner, place or terms of payment of, change or extend the time of payment of,
or renew or alter, any Senior Debt, or amend, modify or supplement any agreement
or instrument governing or evidencing such Senior Debt or any other document
referred to therein, or exercise or refrain from exercising any other of their
rights under the Senior Debt including, without limitation, the waiver of
default thereunder and the release of any collateral securing such Senior Debt,
all without notice to or assent from the Holder.
(i) Subject to the prior payment in full of all Senior Debt,
the Holder shall be subrogated to the rights of the holders of Senior Debt to
receive payments or distributions of assets of the Maker applicable to the
Senior Debt until all amounts owing on this Note shall be paid in full, and for
the purpose of such subrogation no payments or distributions to the holders of
the Senior Debt by or on behalf of the Maker or by or on behalf of the Holder by
virtue of the provisions hereof which otherwise would have been made to the
Holder shall, as between the Maker, its creditors, other than the holders of the
Senior Debt, and the Holder, be deemed to be payment by the Maker to or on
account of the Senior Debt, it being understood that the provisions hereof are
and are intended solely for the purpose of defining the relative rights of the
Holder, on the one hand, and the holders of the Senior Debt, on the other hand.
3. Use of Grid. The Holder is hereby authorized by the Maker to endorse
on the schedule attached to this Note (or any continuation thereof) the amount
of each loan made by the Holder to the Maker, the date such loan is made, and
the amount of any payment or prepayment of such loan received by the Holder,
provided that any failure by the Holder to make any such endorsement shall not
affect the obligations of the Maker hereunder in respect of such loans. The
aggregate unpaid amount of loan advances is reflected on the schedule attached
to this Note and shall be presumptive evidence of the entire outstanding loan
amount.
4. Prepayment. Subject to the subordination provisions of Section 2 of
this Note, the unpaid principal amount of this Note may be prepaid in whole or
in part at any time or times without premium or penalty. Each prepayment shall
be applied first to the payment of all interest and other amounts accrued
hereunder on the date of any such prepayment, and the balance of any such
prepayment shall be applied to reduce the amount of the principal outstanding.
<PAGE> 5
- 5 -
5. Security Agreement. This Note evidences a loan advanced by JLB to or
for the benefit of the Maker. JLB, the Maker and the Maker's subsidiaries are
parties to a Security Agreement dated of August 1, 1997, as amended (the
"Security Agreement") that contains additional terms and conditions regarding
the making of the loan evidenced by this Note and a description of the
collateral securing such loan. Reference is made to the Security Agreement for
such additional terms and conditions and for a description of the collateral and
additional rights and remedies of the Holder.
6. Events of Default.
(a) The failure to pay, when due, the principal, any interest,
or any other sum payable hereunder, and continuance of such failure for five (5)
business days after the date on which such principal, installment of interest,
or other sum is due (whether upon maturity hereof, upon any installment payment
date, upon acceleration, or otherwise)shall constitute an event of default
("Event of Default") hereunder. Subject to the subordination provisions of
Section 2 in this Note, upon the occurrence of an Event of Default hereunder,
the entire principal amount hereof, and all accrued and unpaid interest thereon,
shall be accelerated, and shall be immediately due and payable, at the option of
the Holder, without demand or notice, and in addition thereto, and not in
substitution therefor, the Holder shall be entitled to exercise any one or more
of the rights and remedies exercisable by the Holder upon an Event of Default
under the Security Agreement or provided by applicable law. Failure to exercise
said option or to pursue such other remedies shall not constitute a waiver of
such option or such other remedies or of the right to exercise any of the same
in the event of any subsequent Event of Default hereunder.
(b) The Holder may, upon the occurrence of any such Event of
Default hereunder and subject to the subordinated provisions in Section 2 of
this Note, have resort to the collateral given as security for this Note, and
may sell and dispose of such collateral in whole or in part, at any time or from
time to time.
7. Expenses. The Maker promises to pay all costs and expenses
(including without limitation attorneys' fees and disbursements) incurred in
connection with the collection hereof or in the protection or realization of any
collateral now or hereafter given as security for the repayment hereof, and to
perform each and every covenant or agreement to be performed by the Maker under
this Note, the Security Agreement and any other instrument evidencing or
securing the obligation evidenced by this Note.
8. Payment Dates. Any payment on this Note coming due on a Saturday, a
Sunday, or a day which is a legal holiday in the place
<PAGE> 6
- 6 -
at which a payment is to be made hereunder shall be made on the next succeeding
day which is a business day in such place.
9. Waivers.
(a) The Maker hereby waives presentment, protest, demand,
notice of dishonor, and all other notices, and all defenses and pleas on the
grounds of any extension or extensions of the time of payments or the due dates
of this Note, in whole or in part, before or after maturity, with or without
notice. No renewal or extension of this Note, no release or surrender of any
collateral given as security for this note, and no delay in enforcement of this
Note or in exercising any right or power hereunder, shall affect the liability
of the Maker. The pleading of any statute of limitations as a defense to any
demand against the Maker is expressly waived.
(b) No single or partial exercise by the Holder of any right
hereunder, under the Security Agreement, or under any other agreement given as
security for this Note or pertaining hereto, shall preclude any other or further
exercise thereof or the exercise of any other rights. No delay or omission on
the part of the Holder in exercising any right hereunder shall operate as a
waiver of such right or of any other right under this Note.
10. Successors and Assigns. Whenever used herein, the words "Maker" and
"Holder" shall be deemed to include their respective successors and assigns.
11. Governing Law. This Note shall be governed by and construed under
and in accordance with the laws of the State of South Dakota (but not including
the choice of law rules thereof).
IN WITNESS WHEREOF, the undersigned has caused this Note to be duly
executed as of the day and year first hereinabove set forth.
CREDIT STORE, INC.
By: /s/ Kevin T. Riordan
----------------------------------------
Name: Kevin T. Riordan
Title: President
<PAGE> 7
$5,000,000.00 October 23, 1997
SCHEDULE TO GRID PROMISSORY NOTE
<TABLE>
<CAPTION>
DATE OF AMOUNT OF AMOUNT OF UNPAID PRINCIPAL NOTATIONS
ADVANCE ADVANCE PRINCIPAL PAID BALANCE MADE BY
<S> <C> <C> <C> <C>
10/23/97 607,940.00
10/28/97 580,000.00
10/30/97 400,000.00
11/3/97 888,000.00
11/7/97 680,000.00
11/13/97 1,149,000.00
11/21/97 70,000.00
11/25/97 350,000.00
</TABLE>
<PAGE> 8
SCHEDULE TO
GRID PROMISSORY NOTE
ADVANCES
- - - --------------------------------------------------------------------------------
Amount of Unpaid
Date of Amount of Principal Principal Notations
Advance Advance Paid Balance Made by
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
<PAGE> 1
SUBORDINATED GRID PROMISSORY NOTE
Sioux Falls, South Dakota
$5,000,000.00 November 21, 1997
FOR VALUE RECEIVED, Credit Store, Inc., a Delaware corporation (the
"Maker"), promises to pay to the order of J.L.B. of Nevada, Inc., a Nevada
corporation, or assigns ("JLB" or the "Holder"), ON DEMAND, the principal amount
of Five Million Dollars ($5,000,000.00) or such lesser amount as shall equal the
aggregate unpaid principal amount of the loans made by the Holder to the Maker,
together with interest on the unpaid principal amount hereof from the date
hereof until paid in full at a rate per annum equal to twelve percent (12%).
Interest on the outstanding principal balance of this Note shall be computed on
the basis of the actual number of days elapsed and a year of 360 days, and said
interest shall be due and payable in monthly installments, beginning on January
1, 1998 and continuing on the last day of each month thereafter until the
payment in full of all amounts outstanding under this Note. All payments
hereunder shall be made in lawful money of the United States of America, without
offset.
1. Definition of Senior Debt. The term "Senior Debt" shall mean and
consist of all present and future indebtedness for borrowed money of the Maker
(contingently or otherwise), to banks, insurance companies and similar
institutional lenders (all such lenders, the "Lenders") and any extension,
replacement, removal, restatement or refinancing thereof.
2. Subordination.
(a) The payments of any and all of the principal amount of and
interest on this Note (and all other obligations hereunder) is hereby expressly
subordinated and made junior to the payment of the principal amount, redemption
premium, if any, all interest and any other amounts due on the Senior Debt, to
the extent and in the manner set forth herein.
(b) Until the Senior Debt shall have been indefensibly paid in
full, the Maker shall not make, and the Holder shall not receive, accept or
retain, any direct or indirect payment or reduction (whether by way of loan,
set-off or otherwise) in respect of the principal and interest of this Note,
whether this Note shall have become payable at maturity or by acceleration or
otherwise; provided, however, that, subject to the provisions of subsection (c)
hereof, the Maker may make, and the Holder may receive, accept and retain,
payments of principal and interest under this Note, unless, if, on the date such
payment would (but for the terms hereof) be payable to and received by the
Holder pursuant to this Note, (i) a default under the documents evidencing the
Senior Debt shall have occurred, shall be continuing and shall not have been
specifically waived in writing by the Lenders, or the Lenders shall have
declared the Senior Debt or any portion thereof due and payable in full on the
basis of the occurrence of such default, or (ii) such
<PAGE> 2
-2-
default shall not be continuing on any such payment date, but the Lenders shall
have declared all or any portion of the Senior Debt due and payable in full on
the basis of the occurrence of such default and such acceleration shall not have
been specifically rescinded in writing by the Lenders.
(c) In the event of (i) any insolvency, bankruptcy, receivership,
custodianship, liquidation, reorganization, readjustment of debt, arrangement,
composition, assignment for the benefit of creditors, or other similar
proceeding relative to the Maker, or (ii) any proceeding for voluntary
liquidation, dissolution or other winding up or bankruptcy proceedings, then and
in any such event:
(A) All of the Senior Debt shall first be paid in
full before any payment or distribution of any character, whether
in cash, securities, obligations or other property, shall be made
in respect of this Note;
(B) Any payment or distribution" of any character
which would otherwise (but for the terms hereof) be payable or
deliverable in respect of this Note (including any payment or
distribution of any other indebtedness of the Maker being
subordinated to this Note), shall be paid or delivered directly to
the Lenders or their representative, until all of the Senior Debt
shall have been paid in full, and the Holder irrevocably
authorizes, empowers and directs all receivers, custodians,
trustees, liquidators, conservators and others having authority to
effect all such payments and deliveries;
(C) The Holder shall execute and deliver to the
Lenders or their representative all such further instruments
confirming the authorization referred to in the foregoing clause
A, and shall take all such other actions as may be requested by
the Lenders or their representative in order to enable the Lenders
or their representative to enforce any and all claims upon or in
respect of this Note and to collect and give any and all payments
or distributions which may be payable or deliverable at any time
upon or with respect to this Note.
(d) If, notwithstanding the provisions of this Note, any payment
or distribution of any character (whether in cash, securities, or other
property) or any security shall be received by the Holder in contravention of
the terms of this Note, and before all Senior Debt shall have been paid in full,
such payment, distribution or security shall not be commingled with any asset of
the Holder, shall be held in trust for the benefit of, and shall be paid over or
delivered and transferred to, the Lenders or their representative, for
application to the payment of all Senior Debt remaining unpaid, until all of the
Senior Debt shall have been paid in full.
(e) This Note, without further reference, shall pass to and may be
relied on and enforced by any transferee or subsequent holder of the Senior
Debt.
<PAGE> 3
-3-
(f) Except to the extent provided in this Note that the debt
evidenced by this Note may not become due and payable or be paid and the Holder
may not exercise rights with respect thereto, nothing contained herein shall
impair, as between the Maker and the Holder, the obligation of the Maker, to pay
to the Holder the principal of this Note, and interest thereon, as and when the
same shall become due and payable in accordance with the terms hereof, or
prevent the Holder upon default with respect to this Note, from exercising all
rights, powers and remedies otherwise provided herein or by applicable law, all
subject to the rights of the holders of Senior Debt hereunder. Upon any
distribution of assets of the Maker referred to in the provisions hereof, the
Holder shall be entitled to rely upon any order or decree made by any court of
competent jurisdiction in which such dissolution, winding up, liquidation or
reorganization proceedings are pending or a certificate of the liquidating
trustee or agent or other person making any distribution to the Holder, for the
purpose of ascertaining the persons entitled to participate in such
distribution, the holders of the Senior Debt and other indebtedness of the
Maker, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to the provisions
hereof.
(g) Notwithstanding any statute, including, without limitation,
the Bankruptcy Code, any rule of law or bankruptcy procedures to the contrary,
the right of the Lenders hereunder to have all of the Senior Debt paid and
satisfied in full prior to the payment of any of the debt evidenced by this Note
shall include, without limitation, the right of the Lenders to be paid in full
all interest accruing on the Senior Debt due to it after the filing of any
petition by or against the Maker in connection with any bankruptcy or similar
proceeding or any other proceeding referred to in subsection 2(c) hereof, prior
to the payment of any amounts in respect of this Note, including, without
limitation, any interest due to the Holder accruing after such date.
(h) No right of any present or future holders of any Senior Debt
to enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Maker or
by any act or failure to act in good faith by any such holders, or by any
noncompliance by the Maker with the terms and provisions of this Note,
regardless of any knowledge thereof with which any such holders may have or be
otherwise charged. The holders of the Senior Debt may, without in any way
affecting the obligations of the Holder with respect thereto, at any time or
from time to time in their absolute discretion, change the manner, place or
terms of payment of, change or extend the time of payment of, or renew or alter,
any Senior Debt, or amend, modify or supplement any agreement or instrument
governing or evidencing such Senior Debt or any other document referred to
therein, or exercise or refrain from exercising any other of their rights under
the Senior Debt including, without limitation, the waiver of default thereunder
and the release of any collateral securing such Senior Debt, all without notice
to or assent from the Holder.
<PAGE> 4
-4-
(i) Subject to the prior payment in full of all Senior Debt, the
Holder shall be subrogated to the rights of the holders of Senior Debt to
receive payments or distributions of assets of the Maker applicable to the
Senior Debt until all amounts owing on this Note shall be paid in full, and for
the purpose of such subrogation no payments or distributions to the holders of
the Senior Debt by or on behalf of the Maker or by or on behalf of the Holder by
virtue of the provisions hereof which otherwise would have been made to the
Holder shall, as between the Maker, its creditors, other than the holders of the
Senior Debt, and the Holder, be deemed to be payment by the Maker to or on
account of the Senior Debt, it being understood that the provisions hereof are
and are intended solely for the purpose of defining the relative rights of the
Holder, on the one hand, and the holders of the Senior Debt, on. the other hand.
3. Use of Grid. The Holder is hereby authorized by the Maker to endorse
on the schedule attached to this Note (or any continuation thereof) the amount
of each loan made by the Holder to the Maker, the date such loan is made, and
the amount of any payment or prepayment of such loan received by the Holder,
provided that any failure by the Holder to make any such endorsement shall not
affect the obligations of the Maker hereunder in respect of such loans. The
aggregate unpaid amount of loan advances is reflected on the schedule attached
to this Note and shall be presumptive evidence of the entire outstanding loan
amount.
4. Prepayment. Subject to the subordination provisions of Section 2 of
this Note, the unpaid principal amount of this Note may be prepaid in whole or
in part at any time or times without premium or penalty. Each prepayment shall
be applied first to the payment of all interest and other amounts accrued
hereunder on the date of any such prepayment, and the balance of any such
prepayment shall be applied to reduce the amount of the principal outstanding.
5. Security Agreement. This Note evidences a loan advanced by JLB to or
for the benefit of the Maker. JLB, the Maker and the Maker's subsidiaries are
parties to a Security Agreement dated of August 1, 1997, as amended (the
"Security Agreement"), that contains additional terms and conditions regarding
the making of the loan evidenced by this Note and a description of the
collateral securing such loan. Reference is made to the Security Agreement for
such additional terms and conditions and for a description of the collateral and
additional rights and remedies of the Holder.
6. Events of Default.
(a) The failure to pay, when due, the principal, any interest, or
any other sum payable hereunder, and continuance of such failure for five (5)
business days after the date on which such principal, installment of interest or
other sum is due (whether upon maturity hereof, upon any installment payment
date, upon acceleration, or otherwise) shall constitute an event of default
("Event of Default") hereunder. Subject to the subordination provisions of
Section 2 in this Note, upon the occurrence of any Event of Default hereunder,
the entire principal amount
<PAGE> 5
-5-
hereof, and all accrued and unpaid interest thereon, shall be accelerated, and
shall be immediately due and payable, at the option of the Holder, without
demand or notice, and in addition thereto, and not in substitution therefor, the
Holder shall be entitled to exercise any one or more of the rights and remedies
exercisable by the Holder upon an Event of Default under the Security Agreement
or provided by applicable law. Failure to exercise said option or to pursue such
other remedies shall not constitute a waiver of such option or such other
remedies or of the right to exercise any of the same in the event of any
subsequent Event of Default hereunder.
(b) The Holder may, upon the occurrence of any such Event of
Default hereunder and subject to the subordinated provisions in Section 2 of
this Note, have resort to the collateral given as security for this Note, and
may sell and dispose of such collateral in whole or in part, at any time or from
time to time.
7. Expenses. The Maker promises to pay all costs and expenses
(including without limitation attorneys' fees and disbursements) incurred in
connection with the collection hereof or in the protection or realization of any
collateral now or hereafter given as security for the repayment hereof, and to
perform each and every covenant or agreement to be performed by the Maker under
this Note, the Security Agreement and any other instrument evidencing or
securing the obligation evidenced by this Note.
8. Payment Dates. Any payment on this Note coming due on a Saturday, a
Sunday, or a day which is a legal holiday in the place at which a payment is to
be made hereunder shall be made on the next succeeding day which is a business
day in such place.
9. Waivers.
(a) The Maker hereby waives presentment, protest, demand, notice
of dishonor, and all other notices, and all defenses and pleas on the grounds of
any extension or extensions of the time of payments or the due dates of this
Note, in whole or in part, before or after maturity, with or without notice. No
renewal or extension of this Note, no release or surrender of any collateral
given as security for this note, and no delay in enforcement of this Note or in
exercising any right or power hereunder, shall affect the liability of the
Maker. The pleading of any statute of limitations as a defense to any demand
against the Maker is expressly waived.
(b) No single or partial exercise by the Holder of any right
hereunder, under the Security Agreement, or under any other agreement given as
security for this Note or pertaining hereto, shall, preclude any other or
further exercise thereof or the exercise of any other rights. No delay or
omission on the part of the Holder in exercising any right hereunder shall
operate as a waiver of such right or of any other right under this Note.
<PAGE> 6
-6-
10. Successors and Assigns. Whenever used herein, the words "Maker" and
"Holder" shall be deemed to include their respective successors and assigns.
11. Governing Law. This Note shall be governed by and construed under
and in accordance with the laws of the State of South Dakota (but not including
the choice of law rules thereof).
IN WITNESS WHEREOF, the undersigned has caused this Note to be duly
executed as of the day and year first hereinabove set forth.
CREDIT STORE, INC.
By: /s/ Kevin T. Riordan
---------------------
Kevin T. Riordan
President
<PAGE> 7
SCHEDULE TO
GRID PROMISSORY NOTE
ADVANCES
<TABLE>
<CAPTION>
- - - -----------------------------------------------------------------------------------------------------------
Amount of Unpaid
Date of Amount of Principal Principal Notations
Advance Advance Paid Balance Made by
- - - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nov 21 1997 63,940.12
- - - -----------------------------------------------------------------------------------------------------------
Nov 26 1997 350,000.00
- - - -----------------------------------------------------------------------------------------------------------
Dec 05 1997 306,000.00
- - - -----------------------------------------------------------------------------------------------------------
Dec 08 1997 363,000.00
- - - -----------------------------------------------------------------------------------------------------------
Dec 12 1997 375,000.00
- - - -----------------------------------------------------------------------------------------------------------
Dec 18 1997 567,000.00
- - - -----------------------------------------------------------------------------------------------------------
Dec 23 1997 300,000.00
- - - -----------------------------------------------------------------------------------------------------------
- - - -----------------------------------------------------------------------------------------------------------
- - - -----------------------------------------------------------------------------------------------------------
- - - -----------------------------------------------------------------------------------------------------------
- - - -----------------------------------------------------------------------------------------------------------
- - - -----------------------------------------------------------------------------------------------------------
- - - -----------------------------------------------------------------------------------------------------------
- - - -----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
February 23, 1999
Office of The Chief Accountant
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Re: The Credit Store, Inc.
Ladies and Gentlemen:
We were previously principal accountants for The Credit Store, Inc.
And, under the date of August 1, 1999, we reported on the consolidated financial
statements of The Credit Store, Inc. as of and for the year ended May 31, 1997.
On July 8, 1998, our services were terminated. We have read The Credit Store
Inc.'s statements included under Item 14 of its Form 10, and we agree with such
statements.
Very truly yours,
/s/ TANNER + CO.
<PAGE> 1
Exhibit 21.1
LIST OF SUBSIDIARIES
STATE OF INCORPORATION
SUBSIDIARY OR ORGANIZATION
- - - ---------- ---------------
Credit Store Capital Corp. Delaware
American Credit Alliance, Inc. Nevada
Dakota Card Fund II, LLC Nevada
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-1-1999
<PERIOD-END> NOV-30-1999
<CASH> 5,273,121
<SECURITIES> 0
<RECEIVABLES> 34,463,665
<ALLOWANCES> (5,276,148)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 11,410,849
<DEPRECIATION> (6,432,571)
<TOTAL-ASSETS> 50,787,483
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
27,000,000
<COMMON> 34,762
<OTHER-SE> (15,844,577)
<TOTAL-LIABILITY-AND-EQUITY> 50,787,483
<SALES> 0
<TOTAL-REVENUES> 22,549,303
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,737,867
<INTEREST-EXPENSE> 2,139,454
<INCOME-PRETAX> 1,780,034
<INCOME-TAX> 1,286,409
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (506,375)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 19,849,089
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,559,044
<INTEREST-EXPENSE> 2,219,073
<INCOME-PRETAX> 318,864
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (381,135)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 4,283,930
<SECURITIES> 0
<RECEIVABLES> 23,775,879
<ALLOWANCES> 3,994,269
<INVENTORY> 0
<CURRENT-ASSETS> 5,302,335
<PP&E> 11,334,878
<DEPRECIATION> 5,202,266
<TOTAL-ASSETS> 45,991,970
<CURRENT-LIABILITIES> 8,411,208
<BONDS> 0
0
27,000,000
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