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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT
OF 1934
for the Fiscal Year Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to __________
Commission file number 0-19604
AAMES FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4340340
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
350 S. GRAND AVENUE, LOS ANGELES, CALIFORNIA 90071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 640-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
- ------------------- -----------------------------------------
COMMON STOCK, PAR VALUE $0.001 NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
10.50% SENIOR NOTES DUE 2002 NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
9.125% Senior Notes Due 2003
----------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
At September 2, 1997, there were outstanding 27,771,035 shares of the
Common Stock of Registrant, and the aggregate market value of the shares held on
that date by non-affiliates of the Registrant, based on the closing price
($19.625 per share) of the Registrant's Common Stock on the New York Stock
Exchange was $477,826,340. For purposes of this computation, it has been assumed
that the shares beneficially held by directors and executive officers of
Registrant were "held by affiliates"; this assumption is not to be deemed to be
an admission by such persons that they are affiliates of Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement relating to its 1997 Annual
Meeting of Stockholders are incorporated by reference in Items 10, 11, 12 and 13
of Part III of this Annual Report.
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PART I
ITEM 1. BUSINESS
GENERAL
Aames Financial Corporation (the "Company") is a consumer finance
company primarily engaged, through its subsidiaries, in the business of
originating, purchasing, selling and servicing home equity mortgage loans
secured by single family residences. In late fiscal 1997, the Company began
offering small commercial loans on a limited basis which it plans to sell on a
whole loan basis servicing released. The Company, upon its formation in 1991,
acquired Aames Home Loan, a home equity lender founded in 1954.
The Company's principal market is borrowers whose financing needs are
not being met by traditional mortgage lenders for a variety of reasons,
including the need for specialized loan products or credit histories that may
limit such borrowers' access to credit. The Company believes these borrowers
continue to represent an underserved niche of the home equity loan market and
present an opportunity to earn a superior return for the risk assumed. The
mortgage loans originated and purchased by the Company, which include fixed and
adjustable rate loans, are generally used by borrowers to consolidate
indebtedness or to finance other consumer needs rather than to purchase homes.
The Company originates and purchases loans on a nationwide basis through
three production channels--retail, broker and correspondent. For the year ended
June 30, 1997, the Company originated and purchased $2.35 billion of mortgage
loans. The Company underwrites and appraises every loan it originates and
generally re-underwrites and reviews appraisals on all loans it purchases. See
"-- Mortgage Loan Production." The Company retains the servicing rights
(collecting loan payments and managing borrower defaults) to substantially all
of the loans it originates or purchases. At June 30, 1997, the Company had a
servicing portfolio of $3.17 billion, of which 53% was subserviced by third
parties. In fiscal 1997, the Company's servicing division implemented systems
and personnel that will allow it to service directly substantially all of its
servicing portfolio by the end of fiscal 1998. See "-- Loan Servicing."
During fiscal 1997, the Company experienced a dramatic shift up the
credit grade spectrum reflecting its previously announced strategic decision to
diversify the loans it originates and purchases to include more of the higher
credit grade loans. In fiscal 1997, of the total loans originated and purchased
by the Company, 82% were A, A-, B and C credit grade loans and 18% were C- and D
credit grade loans, compared to 66% and 34%, respectively, in fiscal 1996. This
diversification was accomplished primarily through the acquisition of One Stop
Mortgage, Inc. ("One Stop") in August 1996, which focuses on the higher credit
grade spectrum, the decrease in C- and D originations in certain non-judicial
foreclosure states and the adoption of pricing structures by credit grade in the
correspondent and retail divisions. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Revenues."
As a fundamental part of its business and financing strategy, the
Company sells substantially all of its loans to third party investors in
securitization transactions. These transactions enhance
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profitability, maximize liquidity and reduce the Company's exposure to
fluctuations in interests rates. The Company securitized and sold in the
secondary market $317 million, $791 million and $2.26 billion of loans in the
fiscal years ended June 30, 1995, 1996 and 1997, respectively. See
"--Securitization of Loans."
RECENT EVENTS
During the fourth quarter of fiscal 1997, two factors caused the Company
to re-evaluate its correspondent bulk purchase program--uncertainties in the
capital markets and the increase in the pricing for bulk loan product. These
uncertainties were evidenced by the sudden decline in common stock prices of
companies in the subprime home equity sector, including the Company, and pricing
sensitivity encountered by companies in the sector in accessing the public
equity and debt markets. Given that the Company funded the significant negative
cash flow associated with the bulk correspondent business in the public equity
and debt markets, the uncertainties in those markets increased the risk to the
Company that its cost of capital would be excessively high. Additionally, the
premiums paid by the Company for bulk product during the 1997 fiscal year
reached a peak of 8.25% in March 1997. These high premiums, together with the
apparent increase in the cost of capital, adversely impacted the projected
profitability of the bulk product. As a result of these developments, the
Company changed the approach used in the pricing of its bulk loan product.
Specifically, the Company established lower prices to be paid for this product
based primarily on its historical performance. This change is expected to
decrease the amount of bulk loans purchased in fiscal 1998 compared to fiscal
1997.
The Company also incorporated the results of the fourth quarter pricing
review into the regular quarterly fair market valuation of the interest-only
strips. The Company determines the fair market value of the interest-only
strips, in part, by applying management's expectations as to future prepayment
rates to the present value of the future cash flows from prior securitizations.
The use of revised prepayment rates resulted in a fourth quarter unrealized loss
of $28.0 million on the valuation of that asset. These same prepayment
assumptions materially lowered the Company's gain on sale expressed as a
percentage of total loans securitized. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Revenue."
In June 1997, the Company retained Donaldson, Lufkin & Jenrette
Securities Corporation to develop a means to maximize opportunities for the
Company and its stockholders. These opportunities include remaining independent
and continuing to grow internally and through acquisition, or selling the
Company or entering into a business combination transaction. While the Company
is in discussions concerning a possible business combination, it also believes
the profit-enhancing steps taken in the fourth quarter create a strong
foundation upon which to remain independent and continue to grow its production
channels and servicing platform.
BUSINESS STRATEGY
The Company continues to build on its position as a leading lender in
its niche market. The expansion of the Company's business over the last three
years has been driven by the growth in the volume of loans originated and
purchased by the Company and by the Company's ability to continue to access the
capital markets to facilitate the sale of these loans through securitizations.
As an
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independent entity, the Company intends to pursue its growth strategy by (i)
continuing to expand its retail loan office network, independent mortgage broker
network and flow and mini-bulk correspondent program; (ii) diversifying the
products offered; (iii) increasing its servicing portfolio and servicing
capabilities; (iv) continuing to enhance its corporate and operating
infrastructure; and (v) diversifying its funding sources. An important long-term
goal of the Company's business strategy is to continue to build its investment
in interest-only strips and mortgage servicing rights. The Company believes that
its investments in these assets yield attractive rates of returns. In addition,
the Company believes its cash flow profile will change over time as the rate of
loan production growth moderates and as the size of its servicing portfolio and
its interest-only strips increase. In particular, the Company intends to employ
the following strategies:
Geographic Diversification. The Company plans to continue the geographic
expansion of its loan production. During fiscal 1997, the Company expanded its
retail loan office network into the Midwest and East. The Company intends to
continue focusing on its nationwide retail expansion and to expand its loan
purchasing capabilities by opening new broker offices and building new
relationships with independent mortgage brokers and flow and mini-bulk loan
correspondents nationwide, with the goal of increasing market share in these
areas. The Company also is considering expanding operations on an international
basis.
Diversification of Loan Products. The Company regularly reviews its loan
offerings and introduces new loan products to attempt to meet the needs of its
customers. In furtherance of this strategy, during the fourth quarter of fiscal
1997, the Company began offering higher credit grade loans with higher
loan-to-value ratios which it intends to include in its securitizations. In
addition, the Company recently began offering 125% loan-to-value home
improvement loans to qualified borrowers which the Company intends initially to
sell on a whole loan basis servicing released. The Company believes these home
improvement loans will enhance cash flow as a result of the origination fees
charged and the cash gain on sale received. It may also slow down prepayment
rates, in cases in which the Company holds both the junior home improvement loan
and the senior loan on the property, by employing more of the borrower's
available equity. The Company also offers commercial loans to qualified
borrowers ranging from $250,000 to $2.0 million. At June 30, 1997, the Company
had $6.85 million in commercial loans, all of which it intends to sell on a
whole loan basis servicing released. The Company is considering establishing a
real estate investment trust to provide another distribution channel for its
commercial loans and certain of its residential loans.
Increase Servicing Portfolio; Increase Margins and Develop Subservicing
Capabilities. The Company plans to continue to build the size of its servicing
portfolio to provide a stable, and ultimately more significant, source of
recurring revenue. At June 30, 1997, the Company's servicing portfolio was $3.17
billion, up 131% from $1.37 billion at the end of the 1996 fiscal year, 53% of
which was subserviced by third parties. The Company expects to increase the size
of its loan servicing portfolio by continuing to increase loan originations and
purchases, completing new securitizations and subservicing on behalf of third
parties. Through December 1996, the Company was capable of servicing loans only
in a limited number of Western states. A new servicing system deployed in
November 1996 allows the Company to service loans in all 50 states. The Company
now services directly substantially all loans originated through its retail
network. In fiscal 1998, the Company intends to service directly substantially
all of its servicing portfolio.
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Continue to Enhance Corporate and Operational Management and
Infrastructure. From June 30, 1995 to June 30, 1997, the Company's loan
origination volume grew 561% and its employee base grew from 370 employees at
June 30, 1995 to 1,385 employees at June 30, 1997. To support this significantly
larger operation, the Company has invested in additional corporate and operating
management. Additionally, to enhance its infrastructure, the Company has
expanded its telemarketing operations, including a predictive dialer system
which became operational in fiscal 1997 and a data warehouse which significantly
enhanced the Company's ability to analyze its loans in fiscal 1997. In fiscal
1998, the Company intends to purchase a new loan origination system which will
further enhance efficiency and loan production capabilities.
Continue to Diversify Funding Sources and Become Self-Financing. The
Company intends to continue to expand and diversify its funding sources by
adding additional warehouse facilities, seeking to increase the advance rates on
existing and new facilities and establishing credit facilities to finance the
interest-only strips and the residual assets. In addition, the Company intends
to seek to obtain higher credit ratings by improving its financial condition and
operating results. The Company believes that achieving higher credit ratings,
obtaining higher advance rates on warehouse facilities and establishing residual
financing facilities will help it attain its goal of becoming self-financing
and, thereby, reduce its dependence on the capital markets. Principally as a
result of the developments described under "-- Recent Events," several rating
agencies have placed certain debt of the Company on credit watch. The Company
continues to improve its cash flows through such mechanisms as whole loan sales
and new securitization structures. The Company also believes it will improve its
cash flow by improving the efficiency of its servicing operations.
The strategies discussed above contain forward-looking statements. Such
statements are based on current expectations and are subject to risks,
uncertainties and assumptions, including those discussed under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors." Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated or projected. Thus, no
assurance can be given that the Company will be able to accomplish the above
strategies.
ONE STOP ACQUISITION
On August 28, 1996, the Company acquired One Stop, a residential
mortgage lender specializing in originating and purchasing home equity mortgage
loans made to credit-impaired borrowers from a network of independent mortgage
brokers. The acquisition is part of the Company's strategy to diversify its
mortgage loan production sources and to expand the geographic scope of its
operations. The acquisition was accomplished through the merger of a
wholly-owned subsidiary of the Company into One Stop, in a tax-free exchange
accounted for as a pooling-of-interests. See "-- Mortgage Loan Production --
Independent Mortgage Broker Network."
MORTGAGE LOAN PRODUCTION
The Company's principal loan product is a non-conforming home equity
loan with a fixed principal amount and term to maturity which is typically
secured by a first mortgage on the borrower's
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residence with either a fixed or adjustable rate. Non-conforming home equity
loans are loans made to homeowners whose borrowing needs may not be met by
traditional financial institutions due to credit exceptions or other factors and
that cannot be marketed to agencies such as the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
In addition, the Company offers junior mortgages and other products in order to
meet a wide variety of borrower needs. In fiscal 1997, the Company obtained its
loans through three primary channels: its retail loan office network,
independent mortgage broker network and correspondent program. In fiscal 1997,
the Company also expanded its retail production to include an outbound
telemarketing loan production capability.
The following table illustrates the sources of the Company's loan
production during the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
---------------------------
1995 1996 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Retail loans:
Total dollar amount .................. $148,200 $ 220,900 $ 436,900
Number of loans ...................... 3,734 4,792 8,565
Average loan amount .................. 40 46 51
Average initial combined loan to value 55% 60% 67%
Weighted average interest rate ....... 11.8% 11.0% 10.5%
Broker loans:
Total dollar amount .................. $ -- $ 319,800 $ 741,000
Number of loans ...................... -- 4,182 8,985
Average loan amount .................. -- 77 83
Average initial combined loan to value -- 68% 71%
Weighted average interest rate ........ -- 10.6% 10.0%
Correspondent program:
Total dollar amount .................. $206,800 $ 628,200 $1,170,000
Number of loans ...................... 2,314 7,166 12,500
Average loan amount .................. 89 88 94
Average initial combined loan to value 65% 66% 71%
Weighted average interest rate ....... 11.4% 11.7% 11.0%
Total loans:
Total dollar amount .................. $355,000 $1,168,900 $2,347,900
Number of loans ...................... 6,048 16,140 30,050
Average loan amount .................. 59 72 78
Average initial combined loan to value 61% 65% 70%
Weighted average interest rate ....... 11.6% 11.3% 10.6%
</TABLE>
Retail Loan Office Network. The Company originates home equity mortgage
loans through its network of retail loan offices which, at September 25, 1997,
consisted of 59 retail loan offices located in 23 states. Prior to fiscal year
1994, the retail offices were located only in California. Then, in fiscal year
1994, the Company expanded into two Western states. The Company has been
aggressively pursuing a strategy of expanding its retail loan office network
beyond the offices located in California and the other Western states. Of the
Company's 59 retail loan offices, 16 are located in the Midwest,
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9 in the Central U.S. and 16 in the East. The Company believes that it has
significant additional expansion opportunities in these areas.
The Company selects areas in which to introduce or expand its retail
presence on the basis of selected demographic statistics, marketing analyses and
other criteria developed by the Company. Typically, new office locations have
become profitable within 90 days of opening.
The Company's expansion of its retail loan office network has resulted
in significant increases in retail loan production over the last three fiscal
years. The Company originated $148 million, $221 million and $437 million of
mortgage loans through this network in fiscal 1995, 1996 and 1997, respectively.
The Company generates applications for loans through its retail loan
office network principally through a multimedia advertising program, which
relies primarily on the use of direct mailings to homeowners, television
advertising, yellow-page listings and telemarketing. The Company believes that
its advertising campaigns establish name recognition and serve to distinguish
the Company from its competitors. The Company continually monitors the sources
of its applications to determine the most effective methods and manner of
advertising.
The Company's advertising invites prospective borrowers to call its
headquarters office through the Company's toll-free telephone numbers. On the
basis of an initial screening conducted at the time of the call, the Company's
customer service representative makes a preliminary determination of whether the
customer and the property meet the Company's lending criteria, and schedules an
appointment with a loan officer in the retail loan office most conveniently
located to the customer or in the customer's home. If the customer cannot
schedule an appointment or is located in an area without a retail office, the
representative refers the customer to a loan officer in the "loan-by-phone"
department who takes the loan application by telephone.
The Company's loan officer at the local retail loan office assists the
applicant in completing the loan application, arranges for an appraisal, orders
a credit report from an independent, nationally recognized credit reporting
agency and performs various other tasks in connection with the completion of the
loan package. The loan package is then forwarded to the Company's headquarters
office for review by underwriters and for loan approval. If the loan package is
approved, the loan is funded by the Company. The Company's loan officers are
trained to structure loans that meet the applicant's needs, while satisfying the
Company's lending guidelines.
Through its retail loan office network, the Company also takes
applications from prospective borrowers who respond to the Company's advertising
but fall outside the Company's target market. These loans may be sold to other
institutional lenders or, until August 1997, to private investors. In these
cases, the Company receives commissions on loans sold.
Independent Mortgage Broker Network. Through its independent mortgage
broker network, One Stop funded $320 million and $741 million in loans during
the fiscal years ended June 30, 1996 and 1997, respectively. At August 31, 1997,
One Stop operated 41 offices in 35 states and had 3,700 approved mortgage
brokers. During fiscal 1997, One Stop originated loans through approximately
1,800 brokers, no one of which accounted for
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more than 10% of One Stop's total originations. All loans originated by One Stop
are underwritten in accordance with the Company's underwriting guidelines. Once
approved, the loan is funded or purchased by One Stop directly.
The broker's role is to identify the applicant, assist in completing the
loan application form, gather necessary information and documents and serve as
One Stop's liaison with the borrower through the lending process. One Stop
reviews and underwrites the applications submitted by the broker, approves or
denies the application, sets the interest rate and other terms of the loan and,
upon acceptance by the borrower and satisfaction of all conditions imposed by
One Stop, funds the loan. Because brokers conduct their own marketing and employ
their own personnel to complete loan applications and maintain contact with
borrowers, originating loans through its broker network allows One Stop to
increase its loan volume without incurring the higher marketing, personnel and
other overhead costs associated with increased retail originations.
Because mortgage brokers generally submit loan files to several
prospective lenders simultaneously, consistent underwriting, quick response
times and personal service are critical to successfully producing loans through
independent mortgage brokers. To meet these requirements, One Stop strives to
provide quick response time to the loan application (generally within 24 hours).
In addition, loan consultants and loan processors, including underwriters, are
available in One Stop's branch offices to answer questions, assist in the loan
application process and facilitate ultimate funding of the loan.
Correspondent Program. The Company purchases closed loans from mortgage
bankers and other financial institutions on a continuous or "flow" basis, and
through bulk and mini-bulk purchases. In fiscal 1997, 50% of the Company's loan
production came from these sources. The Company believes that its flow and
mini-bulk correspondent program represents a cost effective means of increasing
loan production.
During the fourth quarter of fiscal 1997, two factors caused the Company
to re-evaluate its correspondent bulk purchase program--uncertainties in the
capital markets and the increase in the pricing for bulk loan product. These
uncertainties were evidenced by the sudden decline in common stock prices of
companies in the subprime home equity sector, including the Company, and pricing
sensitivity encountered by companies in the sector in accessing the public
equity and debt markets. Given that the Company funded the significant negative
cash flow associated with the bulk correspondent business in the public equity
and debt markets, the uncertainties in those markets increased the risk to the
Company that its cost of capital would be excessively high. Additionally, the
premiums paid by the Company for bulk product during the 1997 fiscal year
reached a peak of 8.25% in March 1997. These high premiums, together with the
apparent increase in the cost of capital, adversely impacted the projected
profitability of the bulk product. As a result of these developments, the
Company changed the approach used in the pricing of its bulk loan product.
Specifically, the Company established lower prices to be paid for this product
based primarily on its historical performance. This change is expected to
decrease the amount of bulk loans purchased in fiscal 1998 compared to fiscal
1997.
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Underwriting. The Company underwrites every loan it originates and
generally re-underwrites each loan it purchases. The Company's underwriting
guidelines are designed to assess the adequacy of the real property as
collateral for the loan and the borrower's creditworthiness. An assessment of
the adequacy of the real property as collateral for the loan is primarily based
upon an appraisal of the property and a calculation of the ratio (the "combined
loan-to-value ratio") of all mortgages existing on the property (including the
loan applied for) to the appraised value of the property at the time of
origination. As a lender that specializes in loans made to credit-impaired
borrowers, the Company ordinarily makes home equity mortgage loans to borrowers
with credit histories or other factors that would typically disqualify them from
consideration for a loan from traditional financial institutions. Consequently,
the Company's underwriting guidelines generally require substantially lower
combined loan-to-value ratios than would typically be the case if the borrower
could qualify for a loan from a traditional financial institution.
Creditworthiness is assessed by examination of a number of factors, including
calculation of debt-to-income ratios, which is the sum of the borrower's monthly
debt payments divided by the borrowers's monthly income before taxes and other
payroll deductions, an examination of the borrower's credit history through
standard credit reporting bureaus, and by evaluating the borrower's payment
history with respect to existing mortgages, if any, on the property.
The underwriting of a mortgage loan to be originated or purchased by the
Company includes a review of the completed loan package, which includes the loan
application, a current appraisal, a preliminary title report and a credit
report. All loan applications and all closed loans offered to the Company for
purchase must be approved by the Company in accordance with its underwriting
criteria. On an exception basis, and approval of the Company's underwriters,
home equity mortgage loans may be made that do not conform to the Company's
guidelines but only with the approval of a senior underwriter or by certain
executive officers of the Company. The Company regularly reviews its
underwriting guidelines and makes changes when appropriate to respond to market
conditions, the poor performance of loans representing a particular loan product
or changes in laws or regulations.
Until June 1997, all appraisals in connection with loans originated by
the Company through its retail loan office network were performed by Company
appraisers. Beginning in June 1997, the Company streamlined its retail loan
appraisal department and currently uses Company-qualified contract appraisers
for most of its originations. Appraisers determine a property's value by
reference to the sales prices of comparable properties recently sold, adjusted
to reflect the condition of the property as determined through inspection.
Appraisals on loans purchased as part of the Company's correspondent program are
reviewed by Company appraisers or Company-qualified contract appraisers to
assure that they meet the Company's standards.
The Company requires title insurance coverage issued on an American Land
Title Association form of title insurance on all properties securing mortgage
loans it originates or purchases. The loan originator and its assignees are
generally named as the insured. Title insurance policies indicate the lien
position of the mortgage loan and protect the Company against loss if the title
or lien position is not as indicated. The applicant is also required to maintain
hazard and, in certain instances, flood insurance, in an amount sufficient to
cover the new loan and any senior mortgage, subject to the maximum amount
available under the National Flood Insurance Program.
Quality Control. The Company's quality control program is intended to
(i) monitor and improve the overall quality of loan production generated by the
Company's retail loan office network,
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independent mortgage broker network and correspondent program and (ii) identify
and communicate to management existing or potential underwriting and loan
packaging problems or areas of concern. The quality control file review examines
compliance with the Company's underwriting guidelines and federal and state
regulations. This is accomplished by focusing on: (i) the accuracy of all credit
and legal information; (ii) a collateral analysis which may include a desk or
field re-appraisal of the property and review of the original appraisal; (iii)
employment and/or income verification; and (iv) legal document review to ensure
that the necessary documents are in place.
Credit Grades. The Company believes that it originates a greater
proportion of lower credit quality loans ("C-" and "D" loans) than other lenders
who lend to credit-impaired borrowers and as a result has historically
experienced delinquency rates that are higher than those generally prevailing in
its industry. Although the Company has not historically experienced significant
loan losses because its loan portfolio has been characterized by relatively low
combined loan-to-value ratios, the Company's loan losses may increase in future
periods as a result of its migration to higher credit grade loans and
correspondingly higher permitted combined loan-to-value ratios. During fiscal
1997, the Company increased its provision for loan losses as higher credit grade
loans with higher loan-to-value ratios increased as a percentage of total loans
securitized. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources -- Securitization
Program." The weighted average initial combined loan-to-value ratio of loans in
its servicing portfolio at June 30, 1995, 1996 and 1997 was 59%, 64% and 68%,
respectively. The increase in weighted average combined loan-to-value ratios at
June 30, 1997 reflected a changing mix in the mortgage loans in the servicing
portfolio to include a greater proportion of first mortgages and higher credit
grade loans and from 1995 to 1996 a change in underwriting guidelines to remain
competitive.
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The following chart generally outlines certain parameters of the credit
grades of the Company's underwriting guidelines at August 31, 1997:
<TABLE>
<CAPTION>
"A" CREDIT "A-" CREDIT "B" CREDIT "C" CREDIT "C-" CREDIT "D" CREDIT
GRADE GRADE GRADE GRADE GRADE GRADE
---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
GENERAL Has good Has good Pays the Marginal credit Marginal credit Designed to
REPAYMENT credit. credit but majority of history which history not provide a
might have accounts on is offset by offset by other borrower with
some minor time but has other positive positive poor credit
delinquency. some 30- attributes. attributes. history an
and/or 60-day opportunity to
delinquency. correct past
credit
problems
through lower
monthly
payments.
EXISTING No delinquen- Current at Current at Can have Must be paid Must be paid
MORTGAGE cies in past application application multiple 30-day in full from from loan
LOANS 12 months. time and a time and a delinquencies loan proceeds proceeds.
maximum of maximum of and one 60-day and no more Rating not a
two 30-day four 30-day delinquency than 120 days factor.
delinquencies delinquencies and one 90-day delinquent.
in the past 12 in the past 12 delinquency
months. months. in the past 12
months; currently
not more than
90 days delinquent
NON-MORTGAGE Major credit Major credit Major credit Major credit Major and Major credit
CREDIT and installment and installment and installment and installment minor credit delinquency is
debt should be debt should be debt can debt can delinquency is acceptable.
current. No current but exhibit some exhibit some acceptable, but
60-day delin- may exhibit minor 30- minor 60- must
quencies in some minor and/or 60-day and/or 90-day demonstrate
past 24 30-day delinquency. delinquency. some payment
months. delinquency. regularity.
Minor credit Minor credit Minor credit
may exhibit may exhibit up may exhibit
some minor to 90-day more serious
delinquency. delinquency. delinquency.
BANKRUPTCY Charge-offs, Charge-offs, Discharged Discharged Discharged Current
FILINGS judgments, judgments, more than two more than two prior to bankruptcy
liens, and liens, and years with years with closing. must be paid
former former reestablished reestablished through loan.
bankruptcies bankruptcies credit. credit.
are are
unacceptable. unacceptable.
</TABLE>
11
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<TABLE>
<CAPTION>
"A" CREDIT "A-" CREDIT "B" CREDIT "C" CREDIT "C-" CREDIT "D" CREDIT
GRADE GRADE GRADE GRADE GRADE GRADE
---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
DEBT SERVICE- Generally not Generally not Generally not Generally not Generally not Generally not
TO-INCOME to exceed to exceed to exceed to exceed to exceed to exceed
RATIO 42%. 45%. 50%. 50%. 55%. 60%.
MAXIMUM
COMBINED
LOAN-TO -
VALUE RATIO:
OWNER Generally 90% Generally 90% Generally 80% Generally 75% Generally 70% Generally 65%
OCCUPIED for a 1 to 4 for a 1 to 4 for a 1 to 4 for a 1 to 4 for a 1 to 4 for a 1 to 4
family family family family family family
dwelling. dwelling; dwelling; dwelling; dwelling. dwelling.
70% for a 65% for a 65% for a
condominium. condominium. condominium.
NON- Generally 80% Generally 75% Generally 70% Generally 65% Generally 65% Generally 60%
OWNER for a 1 to 4 for a 1 to 2 for a 1 to 2 for a 1 to 4 for a 1 to 4 for a 1 to 2
OCCUPIED family family family family family family
dwelling. dwelling; 65% dwelling; 60% dwelling; 60% dwelling. dwelling.
for a 3 to 4 for a 3 to 4 for a 3 to 4
family. family. family.
</TABLE>
The following tables present certain information about the Company's
loan production through its retail loan office network, independent mortgage
broker network and correspondent program during fiscal 1995, 1996 and 1997:
LOAN ORIGINATIONS AND PURCHASES IN FISCAL 1995
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE AVERAGE
DOLLAR AMOUNT % OF COMBINED INTEREST
CREDIT GRADE OF LOAN TOTAL LOAN-TO-VALUE RATE(1)
------------ ------- ----- ------------- -------
<S> <C> <C> <C> <C>
A- $111,808,000 31% 63% 10.6%
B 55,338,000 16 65 11.1
C 70,515,000 20 59 11.7
C- 53,635,000 15 62 12.2
D 63,629,000 18 58 13.3
------------ ---
Total $354,925,000 100%
============ ===
</TABLE>
12
<PAGE> 13
LOAN ORIGINATIONS AND PURCHASES IN FISCAL 1996
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE AVERAGE
DOLLAR AMOUNT % OF COMBINED INTEREST
CREDIT GRADE OF LOAN TOTAL LOAN-TO-VALUE RATE(1)
------------ ------- ----- ------------- -------
<S> <C> <C> <C> <C>
A $ 126,790,000 11% 70% 9.4%
A- 224,943,000 19 68 10.2
B 227,117,000 19 69 10.5
C 197,389,000 17 65 11.6
C- 107,039,000 9 63 12.1
D 285,668,000 25 61 13.0
-------------- ---
Total $1,168,946,000 100%
============== ===
</TABLE>
LOAN ORIGINATIONS AND PURCHASES IN FISCAL 1997
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE AVERAGE
DOLLAR AMOUNT % OF COMBINED INTEREST
CREDIT GRADE OF LOAN TOTAL LOAN-TO-VALUE RATE(1)
------------ ------- ----- ------------- -------
<S> <C> <C> <C> <C>
A $ 327,574,000 14% 72% 9.2%
A- 758,842,000 32 73 9.8
B 573,125,000 24 72 10.3
C 277,002,000 12 67 11.2
C- 112,209,000 5 65 12.0
D 299,186,000 13 62 13.4
-------------- ---
Total $2,347,938,000 100%
============== ===
</TABLE>
(1) Calculated with respect to the interest rate at the time the loan is
originated or purchased by the Company, as applicable.
SECURITIZATION OF LOANS
The primary funding strategy of the Company is to securitize and sell
mortgage loans originated or purchased by the Company. Securitization is a cost
competitive source of capital compared to other debt financing sources available
to the Company. Through June 30, 1997, the Company had completed 22
securitizations totaling $3.54 billion. The Company's operations have been
restructured in recent years specifically for the purpose of efficiently
originating, purchasing, underwriting and servicing loans for securitization in
order to meet the requirements of rating agencies, credit enhancers and
investors. The Company generally seeks to complete a securitization once each
quarter. The Company applies the net proceeds of the securitization to pay down
its warehouse facilities in order to make these facilities available for future
funding of mortgage loans. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Accounting
Considerations."
The Company securitized and sold in the secondary market $317 million,
$791 million and $2.26 billion of loans in the fiscal years ended June 30, 1995,
1996 and 1997, respectively. Of the 22 securitization transactions completed
through June 30, 1997, 21 have been credit-enhanced by monoline
13
<PAGE> 14
insurance to receive ratings of "Aaa" by Moody's Investors Service, Inc.
("Moody's") and "AAA" by Standard & Poor's Ratings Group, a Division of The
McGraw-Hill Companies ("S&P") and, in the case of 1997-A, "AAA" by Fitch
Investors Service, Inc. ("Fitch"). For the 1997-B transaction completed in June
1997, the Company utilized a senior/ subordinated structure in which the senior
tranches received ratings of "Aaa" by Moody's, "AAA" by S&P and "AAA" by Fitch.
In a senior/subordinated structure, the senior certificate holders are protected
from losses by outstanding subordinated certificates, rather than a monoline
insurance company.
Each agreement that the Company has entered into in connection with its
securitizations requires either the overcollateralization of the trust or the
establishment of a reserve account that may initially be funded by cash
deposited by the Company. The Company's interest in each overcollateralization
amount and reserve account is reflected on the Company's Consolidated Financial
Statements as "residual assets." If losses exceed the amount of the
over-collateralization or the reserve account, as applicable, the
credit-enhancement aspects of the trust are triggered. In a securitization
credit-enhanced by a monoline insurance policy, any further losses experienced
by holders of the senior interests in the related trust will be paid under such
policy. To date, there have been no claims on any monoline insurance policy
obtained in any of the Company's securitizations. Further, in the event
delinquencies exceed certain specified percentages, the monoline insurer may
terminate the Company as servicer. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Capital Resources
- -- Securitization Program" and " -- Risk Factors -- Delinquencies; Negative
Impact on Cash Flows; Right to Terminate Mortgage Servicing." In a
senior/subordinated structure, losses in excess of the overcollateralization
amount generally are allocated first to the holders of the subordinated
interests and then to the holders of the senior interests of the trust.
LOAN SERVICING
Servicing includes collecting and remitting loan payments, accounting
for principal and interest, contacting delinquent borrowers, managing borrower
defaults and liquidating foreclosed properties. The Company retains the
servicing rights to substantially all of the residential loans it originates or
purchases. The following table sets forth certain information regarding the
Company's servicing portfolio for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
---------------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Loans added to the servicing portfolio......... $355,000 $1,168,900 $2,347,900
Servicing portfolio (period end)............... 608,700 1,370,000 3,174,000
Loan service revenue (1)....................... 8,246 18,186 25,804
</TABLE>
(1) For a description of loan service revenue, see Note 1 of Notes to
Consolidated Financial Statements.
The Company directly services substantially all newly originated or
purchased loans which are secured by mortgaged properties located in 44 states.
Loans secured by properties located in other states are serviced through one or
more subservicers which are paid a fee per loan and a participation in certain
other fees paid by the borrowers. Through December 1996, the Company was capable
of servicing loans in a limited number of Western states. A new servicing system
deployed in November 1996
14
<PAGE> 15
allows the Company to service loans in all 50 states. During fiscal 1998, the
Company intends to service directly substantially all of its servicing
portfolio. The Company believes that the successful implementation of its new
servicing system will provide it with improved margins on its servicing and
potentially a new source of servicing revenue through subservicing for third
parties.
The agreements between the Company and the real estate mortgage
investment conduit ("REMIC") or owner trusts established in connection with
securitizations typically require the Company to advance interest (but not
principal) on delinquent loans to the holders of the senior interests in the
related trust. The agreements also require the Company to make certain servicing
advances (e.g., for property taxes or hazard insurance) unless the Company
determines that such advances would not be recoverable. Realized losses on the
loans are paid out of the related loss reserve account or paid out of principal
and interest payments on overcollateralized amounts as applicable, and if
necessary, from the related monoline insurance policy or the subordinated
interests.
In the case of securitizations credit-enhanced by monoline insurance,
the agreements also typically provide that the Company may be terminated as
servicer by the monoline insurance company (or by the trustee with the consent
of the monoline insurance company) upon certain events of default, including the
Company's failure to perform its obligations under the servicing agreement, the
rate of over 90-day delinquency (including properties acquired by foreclosure
and not sold) exceeding specified limits, losses on liquidation of collateral
exceeding certain limits, any payment being made by the monoline insurance
company under its policy, and certain events of bankruptcy or insolvency. At
June 30, 1997, seven trusts representing approximately 21% (by dollar volume)
of the Company's servicing portfolio exceeded the specified delinquency rate,
although the servicing rights of the Company have not been terminated. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources -- Securitization Program." In the case of the
Company's recent senior/subordinated securitization transactions, holders of 51%
of the certificates may terminate the servicer upon certain events of default.
The senior/subordinated securitization completed in June 1997 provides for
servicer termination upon the occurrence of certain levels of loss experience,
but not in the event of delinquency rates exceeding target percentages. No such
events of default have occurred to date in the Company's senior/subordinated
securitizations. The senior/subordinated securitization completed in September
1997 contains no loss or delinquencies triggers for servicer termination.
The Company receives a servicing fee based on a percentage of the
declining principal balance of each loan serviced. Servicing fees are collected
by the Company out of the borrower's monthly payments. In addition, the Company,
as servicer, generally receives all late and assumption charges paid by the
borrower on loans serviced directly by the Company, as well as other
miscellaneous fees for performing various loan servicing functions. The Company
also generally receives any prepayment fees paid by borrowers.
The Company's servicing portfolio is subject to reduction by normal
monthly principal amortization, by prepayment and by foreclosure. It is the
Company's strategy to build and retain its servicing portfolio. In general,
revenue from the Company's loan servicing portfolio may be adversely affected as
interest rates decline and loan prepayments increase. This effect has
historically been partially offset by
15
<PAGE> 16
increases in prepayment fee income received from borrowers. In some states in
which the Company currently operates, prepayment fees may be limited or
prohibited by applicable law. The Company is considering alternative licensing
structures that would eliminate or reduce the effects of such limitations and
prohibitions.
The following table illustrates the mix of credit grades in the
Company's servicing portfolio as of June 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
COMBINED ORIGINAL
DOLLAR AMOUNT INITIAL INTEREST
CREDIT GRADE OF LOAN % OF TOTAL LOAN-TO-VALUE RATE
------------ ------- ---------- ------------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
A $ 97,900 3% 71% 9.6%
A- 1,205,100 38 71 9.9
B 707,200 22 71 10.6
C 402,000 13 66 11.6
C- 194,700 6 64 12.3
D 474,700 15 61 13.4
Other 92,400 3 54 12.1
---------- ---
Total $3,174,000 100%
========== ===
</TABLE>
COLLECTIONS, DELINQUENCIES AND FORECLOSURES
The Company sends borrowers a monthly billing statement approximately
ten days prior to the monthly payment due date. Although borrowers generally
make loan payments within ten to fifteen days after the due date (the "grace
period"), if a borrower fails to pay the monthly payment within the grace
period, the Company commences collection efforts by notifying the borrower of
the delinquency. In the case of borrowers in the "C-" and "D" credit grades,
collection efforts begin immediately after the due date. The Company continues
contact with the borrower to determine the cause of the delinquency and to
obtain a commitment to cure the delinquency at the earliest possible time.
As a general matter, if efforts to obtain payment have not been
successful, a pre-foreclosure notice will be sent to the borrower immediately
after the due date of the next subsequently scheduled installment (five days
after the initial due date for C- and D credit grades), providing 30 days'
notice of impending foreclosure action. During the 30-day notice period,
collection efforts continue and the Company evaluates various legal options and
remedies to protect the value of the loan, including accepting a deed-in-lieu of
foreclosure, entering into a short sale or commencing foreclosure proceedings.
If no substantial progress has been made in collecting delinquent payments from
the borrower, foreclosure proceedings will begin. Generally, the Company will
have commenced foreclosure proceedings when a loan is 45 to 100 days delinquent,
depending upon credit grade.
Servicing and collection practices change over time in accordance with,
among other things, the Company's business judgment, changes in portfolio
performance and applicable laws and regulations.
16
<PAGE> 17
Loans originated or purchased by the Company are secured by mortgages,
deeds of trust, security deeds or deeds to secure debt, depending upon the
prevailing practice in the state in which the property securing the loan is
located. Depending on local law, foreclosure is effected by judicial action or
nonjudicial sale, and is subject to various notice and filing requirements. In
general, the borrower, or any person having a junior encumbrance on the real
estate, may cure a monetary default by paying the entire amount in arrears plus
other designated costs and expenses incurred in enforcing the obligation during
a statutorily prescribed reinstatement period. Generally, state law controls the
amount of foreclosure expenses and costs, including attorneys' fees, which may
be recovered by a lender, the minimum time required to foreclose and the
reinstatement or redemption rights of the borrower.
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the Company often purchases the property from the trustee or
referee through a credit bid in an amount up to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure.
Depending upon market conditions, the ultimate proceeds of the sale may not
equal the Company's investment in the property.
17
<PAGE> 18
The following table sets forth delinquency, foreclosure, loss and
reserve information relating to the Company's servicing portfolio for the
periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
---------------------------
1995 1996 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Percentage of dollar amount of delinquent
loans to loans serviced (period end)(1)(2)(3)
One Month.............................................. 3.9% 4.9% 4.3%
Two Months............................................. 1.6 1.8 1.9
Three or More Months
Not foreclosed (4)................................... 5.0 8.0 8.1
Foreclosed (5)....................................... 1.5 1.0 1.0
---- ---- ----
Total............................................ 12.0% 15.7% 15.3%
==== ==== ====
Percentage of dollar amount of loans
foreclosed to loans serviced (period end)(2)........... 1.2% 1.1% 1.5%
Number of loans foreclosed............................... 159 221(6) 560(6)
Principal amount of foreclosed loans..................... $6,675 $14,349 $48,029
Net losses on foreclosed loans included
in pools (7)........................................... $ 127 $ 931 $ 5,470
Percentage of losses to average servicing
portfolio.............................................. .03% .09% .24%
Liquidation loss reserve (8)............................. $3,371 $10,300 $43,586
</TABLE>
(1) Delinquent loans are loans for which more than one payment is past due.
(2) The delinquency and foreclosure percentages are calculated on the basis of
the total dollar amount of mortgage loans originated or purchased by the
Company and, in each case, serviced by the Company and any subservicers as
of the end of the periods indicated. Percentages for fiscal year 1996 have
not been restated to include delinquencies of loans originated by One Stop.
The Company believes any such adjustment would not be material.
(3) At June 30, 1997, the dollar volume of loans delinquent more than 90 days in
the Company's seven REMIC trusts formed during the period from December 1994
to June 1996 exceeded the permitted limit in the related pooling and
servicing agreements. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources;" and
"--Risk Factors -- Delinquencies; Negative Impact on Cash Flow; Right to
Terminate Mortgage Servicing".
(4) Represents loans which are in foreclosure but as to which foreclosure
proceedings have not concluded.
(5) Represents properties acquired following a foreclosure sale and still
serviced by the Company.
(6) The increase in the number of loans foreclosed and principal amount of loans
foreclosed in 1997 relative to 1996 is due to the larger and more seasoned
servicing portfolio.
(7) Represents losses net of gains on foreclosed properties in pools sold during
the periods indicated.
(8) Represents period end reserves for future liquidation losses.
18
<PAGE> 19
The Company's servicing portfolio has grown over the periods presented.
However, because foreclosures and losses typically occur months or years after a
loan is originated, data relating to delinquencies, foreclosures and losses as a
percentage of the current portfolio can understate the risk of future
delinquencies, losses or foreclosures.
COMPETITION
The Company faces intense competition in the business of originating,
purchasing and selling mortgage loans. The Company's competitors in the industry
include other consumer finance companies, mortgage banking companies, commercial
banks, credit unions, thrift institutions, credit card issuers and insurance
companies. Many of these competitors are substantially larger and have
considerably greater financial, technical and marketing resources than the
Company. In addition, many financial services organizations that are much larger
than the Company have formed national loan origination networks offering loan
products that are substantially similar to the Company's loan programs.
Competition among industry participants can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of the loan, loan origination fees and interest rates.
In addition, the current level of gains realized by the Company and its
competitors on the sale of subprime loans could attract additional competitors
into this market. Additional competition may lower the rates the Company can
charge borrowers and increase the price paid for purchased loans, thereby
potentially lowering gain on future loan sales and securitizations. To the
extent any of these competitors significantly expand their activities in the
Company's market, the Company could be materially adversely affected.
Fluctuations in interest rates and general economic conditions may also affect
the Company's competition. During periods of rising rates, competitors that have
locked in low borrowing costs may have a competitive advantage. During periods
of declining rates, competitors may solicit the Company's customers to refinance
their loans.
The Company believes its competitive strengths include: (i) its emphasis
on customer service to attract borrowers; (ii) providing a high level of service
to brokers and their customers; (iii) offering competitive loan programs for
borrowers whose needs are not met by conventional mortgage lenders; and (iv) the
convenience of its retail and broker offices.
REGULATION
The Company's operations are subject to extensive regulation,
supervision and licensing by federal, state and local governmental authorities
and are subject to various laws and judicial and administrative decisions
imposing requirements and restrictions on part or all of its operations. The
Company's consumer lending activities are subject to the Federal
Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), the Federal Equal Credit Opportunity Act, as amended,
and Regulation B, the Fair Credit Reporting Act of 1970, as amended, the Federal
Real Estate Settlement Procedures Act and Regulation X, the Home Mortgage
Disclosure Act, the Federal Debt Collection Practices Act and the National
Housing Act of 1934, as well as other federal and state statutes and regulations
affecting the Company's activities. The Company is also subject to the rules and
regulations of, and examinations by, state regulatory authorities with respect
to originating, processing, underwriting, selling, securitizing and servicing
loans. These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility
19
<PAGE> 20
criteria for mortgage loans, prohibit discrimination, govern inspections and
appraisals of properties and credit reports on loan applicants, regulate
assessment, collection, foreclosure and claims handling, investment and interest
payments on escrow balances and payment features, mandate certain disclosures
and notices to borrowers and, in some cases, fix maximum interest rates, fees
and mortgage loan amounts. Failure to comply with these requirements can lead to
loss of approved status, certain rights of rescission for mortgage loans, class
action lawsuits and administrative enforcement action. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Government Regulation."
In the course of its business, the Company may acquire properties as a
result of foreclosure. There is a risk that hazardous or toxic waste could be
found on such properties. In such event, the Company could be held responsible
for the cost of cleaning up or removing such waste, and such cost could exceed
the value of the underlying properties.
The Company is also subject to various other federal and state laws
regulating the issuance and sale of securities, relationships with entities
regulated by the Employee Retirement Income Security Act of 1974, as amended,
and other aspects of its business.
EMPLOYEES
At June 30, 1997, the Company employed 1,385 persons. The Company has
satisfactory relations with its employees.
ITEM 2. PROPERTIES
The executive and administrative offices of the Company are located at
350 S. Grand Avenue, Los Angeles, California, and consist of approximately
178,000 square feet. The lease on these premises extends through February 2012.
The Company also continues to lease space at its former headquarters location at
3731 Wilshire Boulevard, Los Angeles, California, which it uses for its
telemarketing operations. This lease expires in July 2000. The executive and
administrative offices of One Stop are located at 200 Baker Street, Costa Mesa,
California, and consist of approximately 19,544 square feet.
The lease on these premises extends through November 8, 1998.
The Company and One Stop also lease space for their branch offices.
These facilities aggregate approximately 178,000 square feet and are leased
under terms which vary as to duration. In general, the leases expire between
1997 and 2002, and provide for rent escalations tied to either increases in the
lessor's operating expenses or fluctuations in the consumer price index in the
relevant geographical area.
ITEM 3. LEGAL PROCEEDINGS
In September 1997, three purported class actions were filed against the
Company and certain of its directors and officers. One case, filed in the Los
Angeles Superior Court of the State of California (Polin, et al. v. Aames
Financial Corporation, et al., Case No. BC177236), alleges violations of the
California securities laws and the two other cases, filed in the United States
District Court for the
20
<PAGE> 21
Central District of California (Dauber, et al. v. Aames Financial Corporation,
et al., Case No. 97-6714 and Plaut, et al. v. Aames Financial Corporation, et
al., Case No. 97-6814), allege violations of the federal securities laws. In
these cases, plaintiffs allege that the Company and certain of its directors and
officers issued false and misleading statements regarding the Company's
correspondent bulk purchase program. Plaintiffs further allege that such
directors and officers sold shares of the Company's stock with knowledge of
material non-public information concerning such program. In the California
action, plaintiffs purport to represent a class of persons who purchased the
Company's stock between January 29, 1997 and April 30, 1997. In the federal
actions, plaintiffs purport to represent a class of persons who purchased the
Company's stock between January 23, 1996 and April 30, 1997. In all three cases,
plaintiffs seek unspecified compensatory damages, attorneys' fees and costs. The
Company believes that it has meritorious defenses to these actions and intends
to defend them vigorously.
The Company is involved in litigation arising in the normal course of
business. The Company believes that any liability with respect to such legal
actions, individually or in the aggregate, is not likely to be material to the
Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 1997 to a
vote of the security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
In November 1995, the Company's common stock began trading under the
symbol AAM on the New York Stock Exchange (NYSE). Prior to that time, the
Company's common stock traded on the NASDAQ National Market under the symbol
AAMS. The following table sets forth the range of high and low sale prices and
per share cash dividends declared for the periods indicated. All share prices
and cash dividends through February 21, 1997 have been adjusted to reflect the
three-for-two stock split in the form of stock dividend effected on that date
and the three-for-two stock split in the form of a stock dividend effected on
May 17, 1996.
<TABLE>
<CAPTION>
CASH
HIGH LOW DIVIDEND
<S> <C> <C> <C>
FISCAL 1996*
First Quarter................... $13.000 $ 7.667 $.033
Second Quarter.................. 16.333 10.750 .033
Third Quarter................... 16.750 10.833 .033
Fourth Quarter.................. 24.667 16.083 .033
FISCAL 1997*
First Quarter................... $37.922 $20.750 $.033
Second Quarter.................. 39.328 22.500 .033
Third Quarter................... 32.375 20.250 .033
Fourth Quarter.................. 20.500 10.750 .033
</TABLE>
------------------------
* As reported by Bloomberg
21
<PAGE> 22
As of September 23, 1997, the Company had 190 stockholders of record.
Since its initial public offering on December 3, 1991, the Company has
consistently paid quarterly cash dividends on its common stock. The Company
declared and subsequently paid an aggregate of $0.13 per share in dividends for
the year ended June 30, 1997, representing approximately 21.4% of its net income
for the period. The Board of Directors of the Company reviews the Company's
dividend policy at least annually in light of the earnings, cash position and
capital needs of the Company, general business conditions and other relevant
factors. Bank agreements generally limit the Company's ability to pay dividends
if such payment would result in an event of default under the agreements. The
Company's Indenture relating to its 9.125% Senior Notes due 2003 (the
"Indenture") prohibits the payment of dividends if the aggregate amount of such
dividends since October 26, 1996 exceeds the sum of (a) 25% of the Company's net
income during that period; (b) net cash proceeds from any securities issuances;
and (c) proceeds from the sale of certain investments. The Company's Indenture
of Trust relating to its 10.50% Senior Notes due 2002 restricts the payment of
dividends to an amount which does not exceed (i) $2.0 million, plus (ii) 50% of
the Company's aggregate net income for each fiscal year after the year ended
June 30, 1994, plus (iii) 100% of the net proceeds received by the Company on
offerings of its equity securities after December 31, 1994.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data for the Company for the five
year period ended June 30, 1997 have been derived from the audited Consolidated
Financial Statements. The selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
other financial information included herein. Results of operations of the
Company for the year ended June 30, 1997, reflect the Company's adoption of SFAS
No. 125. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected consolidated financial data
gives pro forma effect to the acquisition of One Stop. See "Item 1.
Business--One Stop Acquisition."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Gain on sale of loans............. $ 3,791 $ 8,705 $25,438 $ 95,299 $198,736
Net unrealized loss on valuation
of interest-only strips......... (18,950)
Commissions....................... 18,686 16,432 15,799 21,564 29,250
Loan service...................... 4,377 6,099 8,246 18,186 25,804
Fees and other.................... 4,762 5,595 7,940 15,215 37,679
------- ------- ------- -------- --------
Total revenue................. 31,616 36,831 57,423 150,264 272,519
Total expenses.................... 23,260 27,848 40,272 97,965 239,012
------- ------- ------- -------- --------
Income before income taxes........ 8,356 8,983 17,151 52,299 33,507
Provision for income taxes........ 3,353 3,684 7,117 22,508 16,398
------- ------- ------- -------- --------
Net income........................ $ 5,003 $ 5,299 $10,034 $ 29,791 $ 17,109
======= ======= ======= ======== ========
Net income per share (fully diluted) $ 0.50 $ 0.41 $ 0.74 $ 1.14 $ 0.60
======= ======== ======= ======== ========
Weighted average number of shares
outstanding (in thousands)
(fully diluted)................. 9,935 13,127 13,532 27,248 34,516
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
CASH FLOW DATA:
(Used in) operating activities $ (1,490) $(13,857) $(43,375) $ (241,073) $ (280,073)
(Used in) investing activities (489) (870) (988) (5,885) (8,865)
Provided by (used in) financing activities (1,522) 22,855 48,209 250,540 291,899
Net increase (decrease) in cash and
cash equivalents (3,501) 8,128 3,846 3,582 2,961
RATIOS AND OTHER DATA:
Return on average common equity 36% 18% 27% 28% 23%(5)
Return on average managed receivables(1) 2.1% 1.6% 2.0% 3.0% .8%
Loans originated or purchased:
Retail loans $122,200 $130,200 $148,200 $ 220,900 $ 436,900
Broker network -- -- -- 319,800 741,000
Correspondent loans -- 19,700 206,800 628,200 1,170,000
-------- -------- -------- ---------- ----------
Total $122,200 $149,900 $355,000 $1,168,900 $2,347,900
======== ======== ======== ========== ==========
Whole loans sold......................... -- -- -- $ 202,200 $ 7,500
Loans pooled and sold in the secondary
market................................. $ 52,500 $106,800 $316,600 $ 791,300 $2,262,700
Loans serviced (period end).............. $262,100 $381,800 $608,700 $1,370,000 $3,174,000
Weighted average commission rate on
retail loan originations (2) 14.0% 12.0% 9.4% 7.7% 4.9%
Weighted average interest rate (2) 11.2% 10.3% 11.6% 11.3% 10.6%
Weighted average initial combined
loan-to-value ratio (2)(3):
Retail loans........................... 51% 52% 55% 60% 67%
Broker network......................... -- -- 68% 71%
Correspondent loan..................... NM NM 65% 66% 71%
Number of retail loan offices
(period end)........................... 24 27 32 48 56
Number of One Stop branch offices
(period end)........................... -- -- -- 25 37
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
-----------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 8,385 $ 16,513 $ 20,359 $ 23,941 $ 26,902
Servicing assets (4)................ 7,555 18,780 56,960 184,691 404,890
Total assets........................ 21,307 53,344 114,623 421,475 761,593
------- -------- -------- -------- --------
10.5% Senior Notes due 2002......... -- -- 23,000 23,000 23,000
9.125% Senior Notes due 2003 -- -- -- -- 150,000
5.5% Convertible Subordinated Debentures
due 2006.......................... -- -- -- 115,000 113,990
Other long-term debt................ 944 1,104 144 45 --
------- -------- -------- -------- --------
Total long-term debt.......... 944 1,104 23,144 138,045 286,990
Stockholders' equity................ 15,850 31,669 80,047 133,429 268,354
</TABLE>
- ------------
(1) Represents net income divided by the average servicing portfolio for the
fiscal year.
(2) Computed on loans originated or purchased, as the case may be, during the
period.
(3) The weighted average initial combined loan-to-value ratio is determined by
dividing the sum of all loans secured by the junior or senior mortgages on
the property by the appraised value at origination.
(4) Represents the sum of interest-only strips, residual assets and mortgage
servicing rights. See Note 1 of Notes to Consolidated Financial Statements.
(5) Excludes nonrecurring charges of $32 million (pre-tax).
23
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Item 6.
Selected Financial Data and Item 8. Financial Statements and Supplementary Data.
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements are indicated by words or
phrases such as "anticipate," "estimate," "project," "management believes," "the
Company believes" and similar words or phrases. Such statements are based on
current expectations and are subject to risks, uncertainties and assumptions,
including those discussed under "--Risk Factors." Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected.
OVERVIEW
The Company is a consumer finance company primarily engaged, through its
subsidiaries, in the business of originating, purchasing, selling and servicing
home equity mortgage loans secured by single family residences. In late fiscal
1997, the Company began offering commercial loans on a limited basis which it
plans to sell on a whole loan basis servicing released. The Company, upon its
formation in 1991, acquired Aames Home Loan, a home equity lender founded in
1954.
The Company's principal market is borrowers whose financing needs are
not being met by traditional mortgage lenders for a variety of reasons,
including the need for specialized loan products or credit histories that may
limit such borrowers' access to credit. The Company believes these borrowers
continue to represent an underserved niche of the home equity loan market and
present an opportunity to earn a superior return for the risk assumed. The
mortgage loans originated and purchased by the Company, which include fixed and
adjustable rate loans, are generally used by borrowers to consolidate
indebtedness or to finance other consumer needs rather than to purchase homes.
The Company originates and purchases loans on a nationwide basis through
three production channels--retail, broker and correspondent. For the year ended
June 30, 1997, the Company originated and purchased $2.35 billion of mortgage
loans. The Company underwrites and appraises every loan it originates and
generally re-underwrites and reviews appraisals on all loans it purchases. See
"Item 1. Business--Mortgage Loan Production." The Company retains the servicing
rights (collecting loan payments and managing borrower defaults) to
substantially all of the loans it originates or purchases. At June 30, 1997, the
Company had a servicing portfolio of $3.17 billion, of which 53% was subserviced
by third parties. In fiscal 1997, the Company's servicing division implemented
systems and personnel that will allow it to service directly substantially all
of its servicing portfolio by the end of fiscal 1998. See "Item 1.
Business--Loan Servicing."
During fiscal 1997, the Company experienced a dramatic shift up the
credit grade spectrum reflecting its previously announced strategic decision to
diversify the loans it originates and purchases to include more of the higher
credit grade loans. In fiscal 1997, of the total loans originated and purchased
by the Company, 82% were A, A-, B and C credit grade loans and 18% were C- and D
credit grade loans, compared to 66% and 34%, respectively, in fiscal 1996. This
diversification was
24
<PAGE> 25
accomplished primarily through the acquisition of One Stop in August 1996, which
focuses on the higher credit grade spectrum, the decreasing of C- and D
originations in certain non-judicial foreclosure states and the adoption of
pricing structures by credit grade in the correspondent and retail divisions.
As a fundamental part of its business and financing strategy, the
Company sells substantially all of its loans to third party investors in
securitization transactions. These transactions enhance profitability, maximize
liquidity and reduce the Company's exposure to fluctuations in interests rates.
The Company securitized and sold in the secondary market $317 million, $791
million and $2.26 billion of loan in the fiscal years ended June 30, 1995, 1996
and 1997, respectively. See "Item 1. Business-- Securitization of Loans."
The Company has experienced significant growth in the last three years.
Management believes that this growth is primarily attributable to (i) the
Company's geographic expansion of its retail loan office network from 21 offices
in California at July 1, 1993 to 58 offices located in 25 states at August 31,
1997, (ii) the Company's acquisition of One Stop, (iii) the commencement of the
Company's correspondent program in fiscal 1994, (iv) the Company's ability to
complete mortgage loan securitizations on a quarterly basis, (v) the Company's
increased access to warehouse and other credit facilities over this period, and
(vi) the Company's ability to effect additional debt and equity financings over
this period, which in the aggregate raised net proceeds of approximately $279
million and $179 million, respectively. The Company has managed its growth by
employing experienced senior management, regularly monitoring its underwriting
guidelines, strengthening quality control procedures and enhancing technology.
In June 1997, the Company retained Donaldson, Lufkin & Jenrette
Securities Corporation to develop a means to maximize opportunities for the
Company and its stockholders. These opportunities include remaining independent
and continuing to grow internally and through acquisition, or selling the
Company or entering into a business combination transaction. While the Company
is in discussions concerning a possible business combination, it also believes
the profit-enhancing steps taken in the fourth quarter create a strong
foundation upon which to remain independent and continue to grow its production
channels and servicing platform. See "-- Revenue."
CERTAIN ACCOUNTING CONSIDERATIONS
As a fundamental part of its business and financing strategy, the
Company sells substantially all of its loans in securitization transactions. In
a securitization, the Company conveys loans that it has originated or purchased
to a separate entity (such as a trust or trust estate) in exchange for cash
proceeds and an interest in the loans securitized represented by the gain on
sale of loans. The cash proceeds are raised through an offering of the
pass-through certificates or bonds evidencing the right to receive principal
payments on the securitized loans and the interest rate on the certificate
balance or on the bonds. The gain on sale of loans (net of the unrealized gain
or loss on valuation of interest-only strips) represents, over the estimated
life of the loans, the present value of the excess of the weighted average
coupon on each pool of loans sold over the sum of the interest rate paid to
investors, the contractual servicing fee (currently 0.50%) and a monoline
insurance fee, if any. The gain on sale of loans provides the basis for the
calculation of the interest-only strips, which are recorded as an asset on the
Company's consolidated balance sheet. The interest-only strips represent the
present value of
25
<PAGE> 26
the future cash flows, adjusted for the provision for loan losses. The Company
determines the present value of the cash flows at the time each securitization
transaction closes using certain estimates made by management at the time the
loans are sold. These estimates include the following: (i) rate of prepayment;
(ii) discount rate used to calculate present value; and (iii) the provision for
credit losses on loans sold. There can be no assurance of the accuracy of
management's estimates.
Rate of Prepayment. The estimated life of the securitized loans depends
on the assumed annual prepayment rate which is a function of estimated voluntary
(full and partial) and involuntary (liquidations) prepayments. The prepayment
rate represents management's expectations of future prepayment rates based on
prior and expected loan performance, the type of loans in the relevant pool
(fixed or adjustable rate) and industry data. The rate of prepayment may be
affected by a variety of economic and other factors, including the production
channel which produced the loan, prevailing interest rates, the presence of
prepayment penalties, the loan-to-value ratios and the credit grades of the
loans included in the securitization. Generally, a declining interest rate
environment will encourage prepayments. Lower credit grade loans tend to be more
payment and less interest rate sensitive than higher credit grade loans. The
valuation adjustment recorded in the fourth quarter of fiscal 1997 was due to
the continued acceleration of prepayment rates of adjustable rate loans included
in the Company's earlier pools. For fiscal 1996 and 1997, prepayment rates used
in the valuation of the interest-only strips ranged from 22.0% to 25.5% and
23.5% to 38.3%, respectively. These rates represent a weighted average loan life
of approximately 2.8 to 4.3 years and 2.6 to 3.9 years for fiscal 1996 and 1997,
respectively. See "-- Revenue" and "-- Risk Factors -- Prepayment and Credit
Risk."
Discount Rate. In order to determine the present value of the cash flow
from the interest-only strips, the Company discounts the cash flows based upon
rates prevalent in the market. See Note 3 to Notes to Consolidated Financial
Statements.
Provision for credit losses on loans sold. In determining the provision
for credit losses on loans sold, the Company uses assumptions that it believes
are reasonable based on information from its prior securitizations and the
loan-to-value ratios of the loans included in the current securitizations. At
June 30, 1997, the Company had reserves of $43.6 million related to these credit
risks, or 1.6% of the outstanding balance of loans securitized as of that date.
Cumulative net losses to date from the Company's securitization transactions
since June 1992 have totaled $6.49 million. Losses ranged from .03% to .24% of
the average servicing portfolio for the fiscal years ended June 1995, 1996 and
1997. The weighted average loan-to-value ratio of the loans serviced by the
Company was 68% as of June 30, 1997.
The interest-only strips are amortized over the expected lives of the
related loans and a corresponding reduction in servicing fee income is recorded.
On a quarterly basis, the Company reviews the fair value of the interest-only
strips by analyzing its prepayment and other assumptions in relation to its
actual experience and current rates of prepayment prevalent in the industry. See
"-- Risk Factors -- Prepayment and Credit Risk." The interest-only strips are
marked to market through a charge to earnings. See "-- Revenue."
Additionally, upon sale or securitization of servicing retained
mortgages, the Company capitalizes the fair value of mortgage servicing rights
assets separate from the loan. The Company
26
<PAGE> 27
determines fair value based on the present value of estimated net future cash
flows related to servicing income. The cost allocated to the servicing rights is
amortized over the period of estimated net future servicing fee income. The
Company periodically reviews the valuation of capitalized servicing fees
receivable. This review is performed on a disaggregated basis for the
predominant risk characteristics of the underlying loans which are loan type and
origination date. The Company generally makes loans to credit-impaired borrowers
whose borrowing needs may not be met by traditional financial institutions due
to credit exceptions. The Company has found that credit impaired borrowers are
payment sensitive rather than interest rate sensitive. As such, the Company does
not consider interest rate a predominant risk characteristic for purposes of
valuation. As the Company increases the amount of higher credit grade loans it
originates and purchases, it may find that interest rate sensitivity among its
borrower base also increases.
The Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS 125") effective January 1, 1997. The adoption of SFAS 125
did not have a material effect on the Company's results of operations for the
year ended June 30, 1997. As a result of the adoption of FAS 125, the Company
records amounts previously categorized as "Excess servicing gains" in the
Consolidated Statements of Income as "Gain on sale of loans." Additionally, the
Company now records the right to future interest income that exceeds
contractually specified servicing fees and previously recorded as "Excess
servicing receivable" as an investment security called "Interest-only strips."
The Company has classified this asset as a trading security and, through June
30, 1997, recorded a mark-to-market loss of $19.0 million on this security
consisting of a $9.05 million gain on securitizations completed since March 1997
and a $28 million loss on securitizations recorded prior to March 1997. SFAS 125
requires that this mark-to-market adjustment be reported separately from "Gain
on sale of loans" and the adjustment has been labeled "Net unrealized loss on
valuation of interest-only strips" in the Consolidated Statements of Income.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 establishes standards for computing and presenting earnings per
share ("EPS") by replacing the presentation of primary EPS with a presentation
of basic EPS. Primary EPS included common stock equivalents while basic EPS
excludes them. This change simplifies the computation of EPS, while making the
United States computation more compatible to the standards of other countries.
It also requires dual presentation of basic and fully diluted EPS on the face of
the income statement for all entities with complex capital structures. The
Company will adopt SFAS 128 effective December 31, 1997 and does not expect the
adoption of SFAS 128 to have a material impact on its financial statements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS 129"). SFAS 129 establishes disclosure
requirements regarding pertinent rights and privileges of outstanding
securities. Examples of disclosure items regarding securities include, though
are not limited to, items such as dividend and liquidation preferences,
participation rights, call prices and dates, conversion or exercise prices or
rates. The number of shares issued upon conversion, exercise or satisfaction of
required conditions during at least the most recent annual fiscal period and any
subsequent interim period must also be disclosed. Disclosure of liquidation
preferences of preferred stock in the equity
27
<PAGE> 28
section of the statement of financial condition is also required. SFAS 129 is
effective for financial periods beginning after December 15, 1997.
In October 1995, the FASB released SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). This statement establishes methods of
accounting for stock-based compensation plans. SFAS 123 is effective for fiscal
years beginning after December 15, 1995. The Company adopted SFAS 123 in fiscal
year 1997. The adoption of SFAS 123 did not have a material effect on the
financial position of the Company.
28
<PAGE> 29
RESULTS OF OPERATIONS -- FISCAL YEARS 1995, 1996 AND 1997
The following table sets forth information regarding the components of
the Company's revenue and expenses in fiscal 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ---------------------- --------------------
(Dollars in thousands)
Dollars Percentage Dollars Percentage Dollars Percentage
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Gain on sale of loans........ $ 25,438 44.3% $ 95,299 63.4% $198,736 72.9%
Net unrealized loss on valuation
of interest-only strips -- -- -- -- (18,950) (6.9)
Commissions................... 15,799 27.5 21,564 14.4 29,250 10.7
Loan Service:
Servicing spread............ 4,399 7.7 12,667 8.4 16,265 6.0
Prepayment fees............. 1,974 3.4 3,229 2.1 5,815 2.1
Late charges and
other servicing fees 1,873 3.3 2,290 1.5 3,724 1.4
Fees and other:
Closing..................... 2,077 3.6 2,512 1.7 2,723 1.0
Appraisal................... 988 1.7 1,167 0.8 1,854 0.7
Underwriting................ 1,091 1.9 1,600 1.1 1,382 0.5
Interest income............. 2,339 4.1 9,127 6.1 31,160 11.4
Other....................... 1,445 2.5 809 0.5 560 0.2
-------- ----- -------- ----- -------- -----
Total revenue........... $ 57,423 100.0% $150,264 100.0% $272,519 100.0%
======== ===== ======== ===== ======== =====
Expenses:
Compensation and
related expenses.......... $ 17,610 30.7% $ 40,758 27.1% $ 81,021 29.7%
Sales and
advertising costs......... 9,906 17.2 19,036 12.7 27,229 10.0
General and administrative
expenses.................. 7,067 12.3 17,377 11.6 31,716 11.6
Interest expense............ 3,205 5.6 12,370 8.2 33,105 12.2
Provision for loan losses 2,484 4.3 8,424 5.6 33,941 12.5
Nonrecurring charges -- -- -- -- 32,000 11.7
-------- ----- -------- ----- -------- -----
Total expenses......... $40,272 70.1% $ 97,965 65.2% $239,012 87.7%
======== ===== ======== ===== ======== =====
Income before income taxes 17,151 29.9 52,299 34.8 33,507 12.3
Income taxes.................... 7,117 12.4 22,508 15.0 16,398 6.0
-------- ----- -------- ----- -------- -----
Net income.............. $ 10,034 17.5% $ 29,791 19.8% $ 17,109 6.3%
======== ===== ======== ===== ======== =====
</TABLE>
29
<PAGE> 30
REVENUE
Total revenue for fiscal 1997 increased $122 million, or 81%, from total
revenue for fiscal 1996 which, in turn, increased $92.8 million, or 162%, over
total revenue in fiscal 1995. The 1997 revenue includes a net unrealized loss on
the valuation of the Company's interest-only strips (see below). Increases in
total revenue for these periods were primarily the result of higher gain on sale
and loan service revenue resulting from increased volumes of mortgage loans
originated and purchased by the Company and securitized and sold. The Company
originated and purchased $355 million, $1.17 billion and $2.35 billion of
mortgage loans during fiscal 1995, 1996 and 1997, respectively. The substantial
increase from 1995 to 1996 was primarily the result of the increase in loans
purchased through the Company's correspondent loan division and, to a lesser
extent, the national expansion of the Company's retail division. The substantial
increase in 1997 over 1996 was due primarily to the increase in loans purchased
through the Company's correspondent loan division, loans originated through the
independent mortgage broker network and, to a lesser extent, the further
expansion of the retail network.
Gain on sale increased by $84.5 million, or 89%, in fiscal 1997 compared
to fiscal 1996 and $69.9 million, or 275%, in fiscal 1996 compared to fiscal
1995. These increases resulted primarily from the greater size of the mortgage
loan pools securitized and sold by the Company and, in fiscal 1996, increased
servicing spreads and the recognition of mortgage servicing rights pursuant to
SFAS 122 (see "--Certain Accounting Considerations"). The Company securitized
and sold $317 million, $791 million and $2.26 billion of loans during fiscal
1995, 1996 and 1997, respectively. The weighted average servicing spread (the
weighted average interest rate on the pool of loans sold over the sum of the
investor pass-through or bond rate and the monoline insurance fee, if any) on
loans securitized and sold during these periods was 3.91%, 4.93% and 4.16% for
fiscal 1995, 1996 and 1997, respectively. The lower weighted average servicing
spread in 1997 reflected a decrease in weighted average interest rates on pooled
loans due primarily to the higher percentage of higher credit grade loans
included in the loans securitized during the year and, to a lesser degree,
increased pass-through or bond rates due to the current interest rate
environment. The larger percentage of higher credit grade loans included in the
loans securitized during fiscal 1997 reflects the Company's previously announced
diversification of its loan originations and purchases to include more A, A-, B
and C credit grade loans. In addition, in the fourth quarter, the Company
increased the prepayment rate assumption used to record the gain on sale,
thereby reducing the total amount of gain recorded in the fourth quarter
securitization.
The $19.0 million net unrealized loss on the valuation of the Company's
interest-only strips in fiscal 1997 resulted from the Company's quarterly review
of that asset to determine its current fair market value. The Company determines
the fair market value of the interest-only strips, in part, by applying
management's expectations as to future prepayment rates to the present value of
the future cash flows from prior securitizations. In conjunction with its bulk
pricing strategy change in the fourth quarter of fiscal 1997, management revised
its expectations as to future prepayment rates based primarily on the continued
acceleration of prepayment rates in adjustable rate loans included in some of
the Company's earlier pools. As a result, the Company recorded a $28 million
loss adjustment which is included in the $19 million unrealized loss on the
Company's interest-only strips. See "--Certain Accounting Considerations" and
"Item 1. Business -- Recent Events."
30
<PAGE> 31
Commissions earned on loan originations continue to be an important
component of total revenue, although to a lesser degree than in prior years,
comprising 28%, 14% and 11% of total revenue in fiscal 1995, 1996 and 1997,
respectively. Commissions increased $7.69 million, or 36%, in fiscal 1997
compared to fiscal 1996, and increased $5.77 million, or 36%, in fiscal year
1996 compared to fiscal 1995. Commission revenue is primarily a function of the
volume of mortgage loans originated by the Company through its retail loan
office network and the weighted average commission rate charged on such loans.
The increase in commissions in fiscal year 1997 was a result of increased
origination volume, offsetting a decline in weighted average commission rate.
The weighted average commission rate was 9.4%, 7.7% and 4.9% during fiscal 1995,
1996 and 1997, respectively. The lower weighted average commission rate in 1997
reflected the increase of higher credit grade loans originated through the
Company's retail loan office network, which generally carry lower commission
rates, and competitive factors. Commissions do not include $1.0 million and
$1.18 million of commissions on loans which were held for sale as of June 30,
1996 and 1997, respectively.
Loan service revenue increased $7.62 million, or 42%, in fiscal 1997
compared to fiscal 1996 and $9.94 million, or 121%, in fiscal 1996 compared to
fiscal 1995. Loan service revenue consists of net servicing spread earned on the
principal balances of the loans in the Company's loan servicing portfolio,
prepayment fees, late charges and other fees retained by the Company in
connection with the servicing of loans reduced by the amortization of the
interest-only strips. The increases in fiscal 1997 and 1996 were due primarily
to the greater size of the portfolio of loans serviced in each of these periods
offset by increased amortization of the interest-only strips. The Company's loan
servicing portfolio increased to $3.17 billion at June 30, 1997, up 131% from
the June 30, 1996 balance of $1.37 billion which, in turn, increased 125% over
the June 30, 1995 balance. At June 30, 1997, 53% of the Company's servicing
portfolio was subserviced by third parties. In fiscal 1998, the Company intends
to service directly substantially all the loans in its servicing portfolio.
Management believes that the business of loan servicing provides a more
consistent revenue stream and is less cyclical than the business of loan
origination and purchasing.
Fees and other revenue increased by $22.5 million, or 148%, in fiscal
1997 compared to fiscal 1996 and increased $7.28 million, or 92%, in fiscal 1996
compared to fiscal 1995. Fees and other revenue consist of fees received by the
Company through its retail loan office network in the form of closing,
appraisal, underwriting and other fees, plus interest income. The dollar amount
of these fees increased in each of the years presented due to the larger number
of mortgage loans originated through the Company's retail loan office network
during the respective periods. Interest income increased in fiscal 1997 and 1996
due to interest earned on larger amounts of loans held by the Company during the
period from origination or purchase of the loans until the date sold by the
Company.
EXPENSES
Compensation and related expenses increased $40.3 million, or 99%, in
fiscal 1997 compared to fiscal 1996. This increase was primarily due to the
continued effort to accommodate increased origination volumes and origination
channel expansion. Compensation and related expenses as a percentage of total
loan originations and purchases were 5.0%, 3.5% and 3.5% for fiscal 1995, 1996
and 1997, respectively.
31
<PAGE> 32
Sales and advertising costs increased $8.19 million, or 43%, in fiscal
1997 compared to fiscal 1996 and $9.13 million, or 92%, in fiscal 1996 compared
to fiscal 1995. This increase was primarily due to increased origination volume
and continued expansion into new geographical areas requiring concentrated
marketing efforts. Sales and advertising costs as a percentage of origination
volume were 2.8%, 1.6% and 1.2% for fiscal 1995, 1996 and 1997, respectively.
General and administrative expenses increased $14.3 million, or 83%, in
fiscal 1997 compared to fiscal 1996 and $10.3 million, or 146%, in fiscal 1996
compared to fiscal 1995. These increases were primarily the result of increased
occupancy and communication costs related to the Company's expansion and
increased origination volumes.
Interest expense increased to $33.1 million in fiscal 1997 compared to
$12.4 million in fiscal 1996 and $3.2 million in fiscal 1995. The increase was
primarily the result of increased borrowings under various financing
arrangements used to fund the origination and purchase of mortgage loans prior
to their securitization and sale in the secondary market and as a result of the
Company's sale of $115 million of its 5.5% Convertible Subordinated Debentures
due 2006 in the third quarter of fiscal 1996 and $150 million of its 9.125%
Senior Notes due 2003 in the second quarter of fiscal 1997. Interest expense is
expected to increase in future periods due to the Company's continued reliance
on warehousing arrangements to fund increased originations and purchases of
loans pending their securitization.
The provision for loan losses for fiscal 1997 increased to $33.9
million, up 303% when compared to fiscal 1996. The provision for loan losses
represents 1.50% of the loans securitized during fiscal 1997 compared to 1.06%
of the loans securitized during fiscal 1996. This increase reflects the greater
amount of higher credit grade loans with generally higher loan-to-value ratios
originated during fiscal 1997.
In fiscal 1997, the Company incurred $32.0 million of nonrecurring
charges. Approximately $25 million of these charges were recognized in August
1996 directly related to the acquisition of One Stop. The remaining amount
relates to a reserve for vacating corporate headquarters recorded in the first
quarter and to severance and other strategic decisions made in the fourth
quarter.
INCOME TAXES
The Company's provision for income taxes decreased to $16.4 million in
fiscal 1997 from $22.5 million in fiscal 1996 and increased from $7.1 million in
fiscal 1995, primarily as a result of the fluctuation in pre-tax income after
consideration of the tax impact of nonrecurring charges.
FINANCIAL CONDITION
Loans held for sale. The Company's portfolio of loans held for sale
increased to $243 million at June 30, 1997 from $186 million at June 30, 1996.
This increase is directly related to production volume and the size of the
Company's securitizations. In the quarter ended June 30, 1997, the Company
securitized only $500 million of its $644 million of loan production, increasing
the amount
32
<PAGE> 33
of loans carried over to the first quarter of fiscal 1998 to $243 million. This
represents an increase in loan carryover of approximately $136 million, or 127%,
over the third fiscal quarter's carryover amount. Management believes the
increase in the carryover amount will provide the Company with additional cash
flows, efficiencies and flexibility in the future.
Accounts receivable. Accounts receivable representing servicing fees and
advances and other receivables, increased from $9.7 million at June 30, 1996 to
$59.2 million at June 30, 1997. This increase was primarily the result of larger
pools serviced and increases in related advances and receivables.
Interest-only strips. Interest-only strips increased from $129 million
at June 30, 1996 to $270 million at June 30, 1997 reflecting the increased size
of the Company's securitizations during 1997.
See "-- Certain Accounting Considerations."
Mortgage servicing rights. Mortgage servicing rights increased from
$10.9 million at June 30, 1996 to $21.6 million at June 30, 1997 reflecting the
increased size of the Company's securitizations during 1997. See "-- Certain
Accounting Considerations."
Residual assets. Residual assets represent the reserve accounts and
overcollateralization amounts required to be maintained in connection with the
securitization of loans. Residual assets include cash and mortgage loans in
excess of the principal amounts of the senior and subordinated certificates or
bonds of the securitization trusts. Residual assets increased from $44.7 million
at June 30, 1996 to $113 million at June 30, 1997 due to the size of the
Company's recent securitizations.
Equipment and improvements, net. Primarily as a result of the Company's
expansion and the associated investment in technology, equipment and
improvements, net, increased from $6.7 million at June 30, 1996 to $12.7 million
at June 30, 1997.
Prepaid and other assets. Prepaid and other assets increased from $10.3
million at June 30, 1996 to $14.9 million at June 30, 1997 primarily as a result
of the capitalization, net of amortization, of debt issuance costs related to
the issuance of the Company's 9.125% Senior Notes due 2003.
Borrowings. Borrowings increased from $138 million at June 30, 1996 to
$287 million at June 30, 1997. This increase was the result of the sale in
October 1996 of $150 million of the Company's 9.125% Senior Notes due 2003.
Revolving warehouse facilities. Amounts outstanding under warehouse
facilities increased from $112 million at June 30, 1996 to $138 million at June
30, 1997 primarily as a result of the larger amount of loans held for sale at
such dates. Proceeds from the Company's securitizations are used to pay down the
Company's warehouse facilities.
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LIQUIDITY
The Company's operations require continued access to short-term and
long-term sources of cash. The Company's operating cash requirements include the
funding of: (i) mortgage loan originations and purchases prior to their
securitization and sale, (ii) fees and expenses incurred in connection with the
securitization and sale of loans, (iii) cash reserve accounts or
overcollateralization requirements in connection with the securitization and
sale of mortgage loans, (iv) tax payments due on recognition of gain on sale
other than in a debt-for-tax securitization structure (see below), (v) ongoing
administrative and other operating expenses, and (vi) interest and principal
payments under the Company's warehouse credit facilities and other existing
indebtedness.
The Company has operated on a negative operating cash flow basis and
expects to continue to do so for as long as the Company's cash requirements
necessitated by the growth in volume of its securitization program continue to
grow at rates in excess of the cash generated by the Company from its
operations, including its servicing activities. To increase the cash generated
from operations, the Company may increase the volume of whole loans sold in bulk
to other mortgage lenders. Unlike a securitization, a whole loan sale generates
cash at the closing of the sale; however, such sales may generate less profit
than a securitization.
The Company is continuing efforts to enhance cash flow with the ultimate
goal of reducing dependence on external sources. Historically, the Company
funded its negative operating cash flow principally through borrowings from
financial institutions, sales of equity securities and sales of senior and
subordinated notes, among other sources. The Company expects to continue to fund
its negative operating cash flows, subject to limitations under the Company's
existing credit facilities, principally from borrowings from financial
institutions and, to a lesser extent, sales of equity securities and public
debt. There can be no assurance that the Company will have access to the capital
markets in the future or that financing will be available to satisfy the
Company's operating and debt service requirements or to fund its future growth.
The Company anticipates that its sources of liquidity, assuming access to
residual financing, will be sufficient to fund the Company's liquidity
requirements for the next 12 months, if the Company's future operations are
consistent with management's current growth expectations. There can be no
assurance that the Company will be successful in consummating any such financing
transaction in the future on terms the Company would consider to be favorable.
Further, primarily as a result of the events described under "Item 1. Business
- -- Recent Events," certain rating agencies have placed certain issues of the
Company's debt under credit watch. This may affect the ability of the Company to
secure credit facilities on favorable terms. See "--Capital Resources" and "Item
1. Business "--Recent Events" and "--Business Strategy."
Under the terms of the Indenture, the Company's ability to incur certain
additional indebtedness, including residual financing, is limited to two times
stockholders' equity. Further, until the Company receives investment grade
ratings for the notes issued under the Indenture, the amount of residual
financing the Company may incur on its residuals (interest-only strips)
allocable to post-September 1996 securitizations is limited to 75% of the
difference between such post-September 1996 residuals and $225 million.
Warehouse indebtedness is not included in the indebtedness limitations.
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New loan originations and purchases represent the Company's most
significant cash flow requirement. The Company pays a premium on loans purchased
through its correspondent program and on loans purchased from independent
mortgage brokers. The amount of cash used to pay premiums approximated $76.9
million in 1997 and $33.7 million in 1996. This increase is primarily related to
the increase in the amount of loans purchased in bulk through the correspondent
program and, to a lesser extent, the higher premiums paid per loan. See "Item 1.
Business -- Recent Events."
The Company securitized and sold in the secondary market $317 million,
$791 million and $2.26 billion of loans in fiscal 1995, 1996 and 1997,
respectively. In connection with securitization transactions completed during
these periods, the Company was required to provide credit enhancements in the
form of overcollateralization amounts or reserve accounts. In addition, during
the life of the related securitization trusts, the Company subordinates a
portion of the excess cash flow otherwise due it to the rights of holders of
senior interests as a credit enhancement to support the sale of the senior
interests. The terms of the securitization trusts generally require that all
excess cash flow otherwise payable to the Company during the early months of the
trusts be used to increase the cash reserve accounts, or to repay the senior
interests in order to increase overcollateralization to specified maximums. The
accumulated amounts of such overcollateralization amounts and cash reserve
accounts are reflected on the Company's balance sheet as "residual assets." At
June 30, 1997, the residual assets balance was $113 million.
In addition, the increasing use of securitization transactions as a
funding source by the Company has resulted in a significant increase in the
amount of gain on sale of loans recognized by the Company. During fiscal 1995,
1996 and 1997, the Company recognized gain on sale of loans in the amounts of
$25.4 million, $95.3 million and $199 million, respectively. In addition, the
Company recognized $19.0 million in net unrealized loss on valuation of
interest-only strips in accordance with SFAS 125 implemented in the quarter
ended March 31, 1997. In the Company's securitizations structured as a REMIC,
the recognition of gain on sale had a negative impact on the cash flow of the
Company since the Company is required to pay federal and state taxes on a
portion of these amounts in the period recognized although it does not receive
the cash representing the gain until later periods as the related service fees
are collected and applicable reserve or overcollateralization requirements are
met. In its operations, the Company employs various tax planning strategies,
including the debt-for-tax structure, which allows the Company to defer the
payment of taxes until income is distributed or received by the trust. In March
1997, the Company completed its first securitization using the debt-for-tax
structure. This had a positive effect on the Company's cash flows without
materially changing the reported earnings.
The Company also incurs certain expenses in connection with
securitizations, including underwriting fees, credit enhancement fees, trustee
fees, hedging and other costs, which in fiscal 1997 approximated .62% of the
principal amount of the securitized mortgage loans.
CAPITAL RESOURCES
The Company finances its operating cash requirements primarily through
(i) warehouse facilities, (ii) the securitization and sale of mortgage loans,
and (iii) the issuance of debt and equity securities.
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Warehouse Facilities. At June 30, 1997, the Company had two warehouse
facilities in place. On January 15, 1997, the Company amended and restated its
warehouse and working capital line of credit with a syndicate of eight
commercial banks. The facility provides for a maximum borrowing amount of $350
million, is secured by loans originated and purchased by the Company as well as
certain servicing receivables, and bears an interest rate of either 1.05% over
the federal funds rate or .80% over one-month LIBOR. This line is currently
scheduled to expire on January 13, 1998 and is subject to renewal. There is an
additional warehouse line of credit from an investment bank that is secured by
loans originated and purchased by the Company. This line of $250 million bears
interest at a rate of 0.70% over one-month LIBOR and expires on December 30,
1997. The Company has a commitment from an investment bank for a warehouse
facility with a maximum borrowing amount of $400 million. Management expects,
although there can be no assurance, that the Company will be able to maintain
these or similar facilities in the future. See "-- Risk Factors -- Dependence on
Funding Sources."
Securitization Program. The Company's most important capital resource
has been its ability to sell loans originated and purchased by it in the
secondary market in order to generate cash proceeds to pay down its warehouse
facilities and fund new originations and purchases. The value of and market for
the Company's loans are dependent upon a number of factors, including general
economic conditions, interest rates and governmental regulations. Adverse
changes in such factors may affect the Company's ability to securitize and sell
loans for acceptable prices within a reasonable period of time. The ability of
the Company to sell loans in the secondary market on acceptable terms is
essential for the continuation of the Company's loan origination and purchase
operations. A reduction in the size of the secondary market for loans of the
types originated or purchased by the Company may adversely affect the Company's
ability to sell loans in the secondary market with a consequent adverse impact
on the Company's profitability and ability to fund future originations and
purchases. See "-- Risk Factors--Dependence on Funding Sources."
In addition, in order to gain access to the secondary market, the
Company has principally utilized monoline insurance companies to provide
financial guarantee insurance on senior interests in the securitization trusts
established by the Company. Although the Company completed its first
securitization utilizing a senior/subordinated structure in June 1997, which
relied on the internal credit enhancements of the pool rather than monoline
insurance, the Company expects to utilize monoline insurance companies for at
least a portion of its future securitizations. Any substantial reduction in the
size or availability of the secondary market for the Company's loans or the
unwillingness of monoline insurance companies to provide financial guarantee
insurance for the senior interests in the securitization trusts could have a
material adverse effect on the Company's financial position and results of
operations. At June 30, 1997, the dollar volume of loans delinquent more than 90
days on the Company's seven securitization trusts formed during the period from
December 1994 to June 1996 exceeded the permitted limit in the related pooling
and servicing agreements. The higher delinquency rates could negatively affect
the Company's cash flows and adversely influence the Company's assumptions
underlying the gain on sale. Additionally, the higher delinquency rates permit
the monoline insurance company to terminate the Company's servicing rights with
respect to the affected trust. To date, no servicing rights have been
terminated, and the Company believes that the likelihood of such an event is
remote. The Company has implemented various plans to lower the delinquency rates
in its future trusts, including diversifying the loans it originates and
purchases to include higher credit
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grade loans. However, the Company has not yet experienced the benefit of the
migration of credit grades to levels with lower expected delinquency. Further,
the monoline insurance companies agreed to higher permitted delinquency limits
in the five securitizations completed in fiscal year 1997. See "-- Risk Factors
- - Delinquencies; Negative Impact on Cash Flow; Right to Terminate Mortgage
Servicing."
Other Capital Resources. The Company has funded negative cash flow
primarily from the sale of its equity and debt securities. In December 1991,
July 1993, June 1995 and October 1996, the Company effected offerings of its
Common Stock with net proceeds to the Company aggregating $179 million. In
March 1995, the Company completed an offering of its 10.5% Senior Notes due 2002
with net proceeds to the Company of $22.2 million. In February 1996, the Company
completed an offering of its 5.5% Convertible Subordinated Debentures due 2006
with net proceeds to the Company of $112 million. In October 1996, the Company
completed an offering of its 9.125% Senior Notes due 2003 with net proceeds to
the Company of $145 million. Under the agreements relating to these debt
issuances, the Company is required to comply with various operating and
financial covenants including covenants which may restrict the Company's ability
to pay certain distributions, including dividends. See "Item 5. Market for
Registrant's Common Equity and Related Stockholder Matters." At June 30, 1997,
the Company had available $5.1 million for the payment of such distributions
under the most restrictive of such covenants.
The Company had cash and cash equivalents of approximately $26.9 million
(of which $12.9 million was restricted) at June 30, 1997. See "-- Risk Factors -
Negative Cash Flow and Capital Needs."
RISK MANAGEMENT
The Company's earnings may be directly affected by the level of and
fluctuation in interest rates and the level of prepayment in the Company
securitizations. The Company currently hedges its fixed rate pipeline and
continues to explore other avenues of risk mitigation, although none have been
employed to date. The current fixed rate hedge products utilized are swap
agreements with third parties that sell United States Treasury securities not
yet purchased and the purchase of Treasury put options. The amount and timing of
hedging transactions are determined by members of the Company's senior
management. While the Company monitors the interest rate environment and employs
fixed rate hedging strategies, there can be no assurance that the earnings of
the Company would not be adversely affected during any period of unexpected
changes in interest rates or prepayment rates.
The Company may also mitigate its exposure to interest rate risk through
a pre-funding strategy in which it agrees to sell loans to the securitization
trust in the future at an agreed-upon price. The pre-funding locks in the price
agreed upon with investors on the pricing date (typically five business days
prior to the closing date of the securitization) for a period of generally 30
days. In a pre-funding arrangement, the Company typically delivers approximately
75% of the loans sold at the closing and the remainder generally within 30 days
after the closing.
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RISK FACTORS
Forward Looking Statements. This Report contains forward looking
statements relating to such matters as anticipated financial performance,
business prospects and similar matters. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company notes that a variety of
factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectation expressed in the
Company's forward-looking statements. The risks and uncertainties that may
affect the operations, performance and results of the Company's business include
the following: negative cash flows and capital needs, delinquencies, prepayment
and credit risk, risks of contracted servicing, dependence on funding sources,
capitalized interest-only strips, recent acquisition of One Stop, dependence on
broker network, impact of increases in correspondent pricing, risks associated
with high loan-to-value loan products, competition, concentration of operations,
timing of loan sales, economic conditions, contingent risks and government
regulation. These risk factors are set forth below.
Negative Cash Flow and Capital Needs. In a securitization, the Company
recognizes a gain on sale of the loans securitized upon the closing of the
securitization, but does not receive the cash representing such gain until it
receives the excess cash flow, which in general is payable over the actual life
of the loans securitized. The Company incurs significant expense in connection
with a securitization and generally incurs both current and deferred tax
liabilities as a result of the gain on sale. Net cash used in operating
activities for fiscal 1995, 1996 and 1997 was $43.4 million, $241 million and
$280 million, respectively. Therefore, the Company requires continued access to
short- and long-term external sources of cash to fund its operations. The
Company expects to continue to operate on a negative cash flow basis as the
volume of the Company's loan purchases and originations increases and its
securitization program grows. However, the Company is continuing efforts to
enhance cash flow with the ultimate goal of reducing dependence on external
sources. The Company's primary cash requirements include the funding of: (i)
mortgage loan originations and purchases pending their securitization and sale;
(ii) fees and expenses incurred in connection with the securitization of loans;
(iii) reserve account or overcollateralization requirements in connection with
the securitization and sale of the loans; (iv) tax payments due on recognition
of gain on sale, other than in a debt-for-tax securitization structure; (v)
ongoing administrative and other operating expenses; and (vi) interest and
principal payments under the Company's warehouse credit facilities and other
existing indebtedness.
The Company's primary sources of liquidity in the future are expected to
be existing cash, fundings under warehouse facilities, access to residual
financing, sales of mortgage loans through securitizations, whole loan sales and
further issuances of debt or equity. See "--Liquidity" and "--Capital
Resources."
The Company's primary sources of liquidity as described in the paragraph
above are expected to be sufficient to fund the Company's liquidity requirements
through at least the next 12 months if the Company's future operations are
consistent with management's current growth expectations. However, because the
Company expects to continue to operate on a negative cash flow basis for the
foreseeable future, it may need to effect additional debt or equity financings.
The type, timing and terms of
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financing selected by the Company will be dependent upon the Company's cash
needs, the availability of other financing sources, limitations under debt
covenants and the prevailing conditions in the financial markets. There can be
no assurance that any such sources will be available to the Company at any given
time or as to the favorableness of the terms on which such sources may be
available. As a result of the limitations described above, the Company may be
restricted in the amount and type of future debt it may issue.
Delinquencies; Negative Impact on Cash Flow; Right to Terminate Mortgage
Servicing. A substantial majority of the Company's servicing portfolio consists
of loans securitized by the Company and sold to REMIC or owner trusts.
Generally, the form of agreement entered into in connection with these
securitizations contains specified limits on the 90-day (or 60-day, in the case
of the senior/ subordinated securitization structure) delinquency rate
(including properties acquired upon foreclosure and not sold) prevailing on the
loans included in each trust. If, at any measuring date, the 90-day delinquency
rate with respect to any trust credit-enhanced by monoline insurance were to
exceed the limit applicable to such trust, provisions of the agreements permit
the monoline insurance company to terminate the Company's servicing rights to
the pool as more fully described below. In addition, high delinquency rates have
a negative impact on cash flow.
At June 30, 1997, seven of the Company's trusts credit-enhanced by
monoline insurance (representing 20.5% of the dollar volume of the Company's
servicing portfolio) exceeded the applicable 90-day delinquency standard. These
seven trusts were formed during the period from December 1994 to June 1996. At
June 30, 1997, the 90-day delinquency rate on these seven trusts ranged from
15.2% to 36.2% of the remaining pool balance. The Company believes that the high
delinquency rates it has experienced are primarily due to the higher proportion
of lower credit grade loans ("C-" and "D" loans) included in these pools and the
seasoning of the portfolio. However, the Company believes its historical loan
losses have been below those experienced by most other lenders to
credit-impaired borrowers as a result of the lower initial combined
loan-to-value ratios which it requires on its lower credit grade loans. At June
30, 1997, the weighted average of the initial combined loan-to-value ratio on
loans in the seven trusts was 65.0%.
Although the monoline insurance company has the right to terminate
servicing with respect to the seven trusts referred to above, no servicing
rights have been terminated. There can be no assurance that the Company's
servicing rights with respect to the mortgage loans in such trusts, or any other
trust which exceeds the specified limits in future periods, will not be
terminated. The monoline insurance company has other rights to terminate
servicing if the Company were to breach its obligations under the agreement,
losses on foreclosure were to exceed specified limits, the insurance company
were required to make payments under its policy or certain bankruptcy or
insolvency events were to occur. None of these events has occurred with respect
to any of the trusts formed by the Company.
The Company implemented a variety of measures designed to reduce
delinquency rates on loans included in securitizations in future periods,
including the implementation of new procedures designed to shorten the time
required to transfer servicing on loans purchased through the Company's
correspondent program and the elimination of its loan program which has
experienced the highest delinquency rates. In addition, as a result of the
expansion of the Company's loan production capacity,
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including the acquisition of One Stop, the proportion of higher credit grade
loans originated or purchased by the Company is increasing. The Company expects
that the combined effect of these developments will have a positive impact on
delinquency rates experienced in trusts formed by the Company in future periods,
although average combined loan-to-value ratios are likely to increase. Despite
the Company's migration to higher credit grades loans, it has not yet
experienced the benefit of lower expected delinquencies. Further, delinquency
rates and losses on the Company's existing trusts and future trusts could
increase. Although the trust formed by the Company in September 1996 had
delinquency rates at June 30, 1997 within expectations and below the applicable
90-day delinquency standard (which were raised to 13.5% with respect to the June
1996 trust and 17% with respect to the trusts formed since that date), the loans
included in this trust were originated or purchased prior to these developments
and have been outstanding for a relatively short period of time and there can be
no assurance that delinquency rates on this trust will not increase in future
periods.
The Company's cash flow is also adversely impacted by high delinquency
rates in its trusts. Generally, provisions in the agreement have the effect of
requiring the overcollateralization account, which is funded primarily by the
excess spread on the loans held in the trust, to be increased when the
delinquency rates exceed the specified limit. As of June 30, 1997, the Company
was required to maintain an additional $19.5 million in overcollateralization
amounts as a result of the level of its delinquency rates above that which would
have been required to be maintained if the applicable delinquency rates had been
below the specified limit. Of this amount, at June 30, 1997, $7.96 million
remains to be added to the overcollateralization amounts from future spread
income on the loans held by these trusts. If delinquencies continue at this
level, the overcollateralization requirement will increase in the future. Loss
rates also could affect the Company's ability to effect securitizations in the
capital markets.
Prepayment and Credit Risk. Gain on sale is the most significant
component of the Company's reported revenues. Gain on sale represents the
recognition of the present value of the excess cash flow, which is based on
certain estimates made by management at the time loans are sold, including
estimates regarding prepayment rates. The rate of prepayment of loans may be
affected by a variety of economic and other factors, as discussed above. The
effects of these factors may vary depending on the particular type of loan.
Estimates of prepayment rates are made based on management's expectations of
future prepayment rates, which are based, in part, on the historic performance
of the Company's loans and other considerations. There can be no assurance of
the accuracy of management's estimates. If actual prepayments occur more quickly
than was projected at the time loans were sold, the carrying value of the
interest-only strips may have to be adjusted through a charge to earnings in the
period of adjustment. See "-- Revenue."
Loans made to borrowers who are unable or unwilling to obtain mortgage
financing from conventional mortgage sources may entail a higher risk of
delinquency and higher losses than loans made to borrowers who utilize
conventional mortgage sources. While the Company believes that the underwriting
criteria and collection methods it employs enable it to mitigate the higher
risks inherent in loans made to these borrowers, no assurance can be given that
such criteria or methods will afford adequate protection against such risks. In
the event that loans originated and purchased by the
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Company experience higher delinquencies, foreclosures or losses than
anticipated, the Company's results of operations or financial condition could be
adversely affected.
Generally, the Company's higher credit grade loans have higher
loan-to-value ratios than its lower credit grade loans. In such cases, the
collateral of such loans may not be sufficient to cover the principal amount of
the loans in the event of default. Losses not covered by the underlying
properties, if in excess of the Company's provision for such losses, could have
a material adverse effect on the Company's results of operations and financial
condition. In addition, historical loss rates affect the assumptions used by the
Company in computing its gain on sale. See " -- Revenue."
Risks of Contracted Servicing. At June 30, 1997, the Company's
subservicing arrangements accounted for approximately 53% of the Company's $3.17
billion servicing portfolio at June 30, 1997. The Company is subject to risks
associated with inadequate or untimely service rendered by subservicers. Many of
the Company's borrowers require notices and reminders to keep their loans
current and to prevent delinquencies and foreclosures. Any failure by a
subservicer to provide adequate or timely service could result in higher
delinquency rates and foreclosure losses on the portfolio of loans. The Company
intends to service directly substantially all loans in its servicing portfolio
commencing in fiscal 1998 (regardless of the location of the mortgaged
property). The transfer of servicing files could lead to temporary disruptions
in servicing. To the extent the Company terminates its subservicing
arrangements, the Company would be required to pay a termination fee.
Dependence on Funding Sources. The Company is dependent upon its access
to warehouse and other credit facilities in order to fund new originations and
purchases of mortgage loans pending securitization. At June 30, 1997, the
Company had warehouse facilities with certain financial institutions and
investment banks with aggregate borrowing capacity of $600 million and a
commitment from an investment bank for a $400 million facility. The Company's
warehouse facilities expire between December 1997 and January 1998. In
addition, the Company's growth strategies will require significant increases in
the amount of the Company's warehouse and other credit facilities. The Company
is currently negotiating with various investment banks to obtain additional
warehouse facilities. There can be no assurance that the Company will be able to
secure such financing on affordable terms, or at all. The Company expects to be
able to maintain existing warehouse and other credit facilities (or to obtain
replacement or additional financing) as current arrangements expire or become
fully utilized; however, there can be no assurance that such financing will be
obtainable on favorable terms. To the extent that the Company is unable to
extend or replace existing facilities, and arrange new warehouse or other credit
facilities, the Company may have to curtail loan origination and purchasing
activities, which would have a material adverse effect on the Company's
financial position and results of operations. Further, principally as a result
of the events described under "Item 1. Business -- Recent Events," certain
rating agencies have placed certain issues of the Company's debt under credit
watch. This may affect the ability of the Company to secure credit facilities on
favorable terms.
The Company relies on its ability to securitize and sell its mortgage
loans in the secondary market in order to generate cash proceeds for repayment
of its warehouse facilities. Accordingly, adverse changes in the Company's
securitization program or in the secondary mortgage market could
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impair the Company's ability to originate, purchase and sell mortgage loans on a
favorable or timely basis. Any such impairment could have a material adverse
effect upon the Company's financial position and results of operations. In
addition, in order to gain access to the secondary market, the Company has
utilized monoline insurance companies to provide financial guarantee insurance
on the senior interests in loans sold in the secondary market in order to obtain
ratings for such interests. Although the Company completed its first
securitization utilizing a senior/ subordinated structure in June 1997, which
relied on the internal credit enhancements of the pool rather than monoline
insurance, the Company expects to utilize monoline insurance companies for at
least a portion of its future securitizations. Any substantial reduction in the
size or availability of the secondary market of the Company's loans, or the
unwillingness of the monoline insurance companies to provide financial guarantee
insurance for the senior interests in loans sold in the secondary market, or
other accounting, tax or regulatory changes adversely affecting the Company's
securitization program, could have a material adverse effect on the Company's
financial position and results of operations.
Capitalized Interest-only strips; Mortgage Servicing Rights. The
majority of the Company's revenue is recognized as gain on sale (net of
unrealized gain or loss on valuation of interest-only strips), which represents,
over the estimated life of the loans, the present value of the weighted average
coupon on each pool of loans sold over the sum of the interest rate paid to
investors, the contractual servicing fee (currently 0.50%) and a monoline
insurance fee, if any. The gain on sale of loans provides the basis for the
calculation of the interest-only strips, which is recorded as an asset on the
Company's consolidated balance sheet. The interest-only strips represents the
present value of the future cash flows, adjusted for the provision for loan
losses. The Company determines the present value of the cash flows at the time
each securitization transaction closes using certain estimates made by
management at the time the loans are sold.
The estimated life of the securitized loans depends on the assumed
annual prepayment rate which is a function of estimated voluntary (full and
partial) and involuntary (liquidations). The prepayment rate represents
management's expectations of future prepayment rates based on prior and expected
loan performance, the type of loans in the relevant pool (fixed or adjustable
rate) and industry data. The rate of prepayment may be affected by a variety of
economic and other factors, including the production channel which produced the
loan, prevailing interest rates, the presence of prepayment penalties, the
loan-to-value ratios and the credit grades of the loans included in the
securitization. Generally, a declining interest rate environment will encourage
prepayments. Lower credit grade loans tend to be more payment sensitive and less
interest rate sensitive than higher credit grade loans.
In determining the adjustment for credit risk for a particular
securitization, the Company utilizes assumptions that it believes are reasonable
based on the information on its prior securitizations and the loan-to-value
ratios of the loans included in the current securitizations. At June 30, 1997,
the Company had reserves of $43.6 million related to these credit risks, or 1.6%
of the outstanding balance of loans securitized as of that date. Cumulative
losses to date from the Company's securitization transactions dating back to
June 1992 have totaled $6.49 million. Losses ranged from .03% to .24% of the
average servicing portfolio for the fiscal years ended June 30, 1995, 1996 and
1997. The weighted average initial combined loan-to-value ratio of the loans
serviced by the Company was 68% as of June 30, 1997. Accordingly, the Company
believes its allowance for credit losses is adequate to cover anticipated losses
on
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<PAGE> 43
previously securitized pools determined on a pool-by-pool basis. However, with
the Company's recent migration to higher credit grade loans, the average
loan-to-value ratio of its servicing portfolio has increased. At June 30, 1995,
1996 and 1997, the average initial combined loan-to-value ratio of the Company's
servicing portfolio was 59%, 64% and 68%, respectively. Therefore, the Company's
low historical loan loss rates may not be an accurate indication of anticipated
future losses.
The interest-only strips are amortized over the expected lives of the
related loans and a corresponding reduction in servicing fee income is recorded.
On a quarterly basis, the Company reviews the fair value of the interest-only
strips by analyzing its prepayment and other assumptions in relation to its
actual experience and current rates of prepayment prevalent in the industry. See
"-- Prepayment and Credit Risk." The interest-only strips are marked to market
through a charge to earnings. See "-- Revenue."
Recent Acquisition of One Stop. On August 28, 1996, the Company acquired
One Stop in a merger transaction. One Stop is operated as a wholly-owned
subsidiary of the Company. The Company acquired One Stop with the expectation
that the acquisition will result in beneficial synergies for the combined
business. Since commencement of operations in October 1995, One Stop's rate of
growth in originating and purchasing loans has been significant. The loans
originated and purchased by One Stop and included in the Company's
securitization have been outstanding for a relatively short period of time.
Consequently, the delinquency and loss experience of One Stop's loans to date
may not be indicative of that to be achieved in future periods, and One Stop may
not be able to maintain delinquency and loan loss ratios at their present levels
as One Stop's loan portfolio becomes more seasoned.
Dependence on Broker Network. The Company depends on independent
mortgage brokers for the origination and purchase of its broker loans, which
constitute a significant portion of the Company's loan production. These
independent mortgage brokers negotiate with multiple lenders for each
prospective borrower. The Company competes with these lenders for the
independent brokers' business on pricing, service, loan fees, costs and other
factors. The Company's competitors also seek to establish relationships with
such brokers, who are not obligated by contract or otherwise to do business with
the Company. The Company's future results of operations and financial condition
may be vulnerable to changes in the volume and cost of its broker loans
resulting from, among other things, competition from other lenders and
purchasers of such loans.
Impact of Increases in Correspondent Pricing. The Company has
implemented a program for purchasing mortgage loans in bulk as well as on an
ongoing or "flow" basis from mortgage bankers and financial institutions. This
program accounted for 50% of all mortgage loans originated or purchased by the
Company in fiscal 1997. During the fourth quarter of fiscal 1997, two factors
caused the Company to re-evaluate its correspondent bulk purchase
program--uncertainties in the capital markets and the increase in the pricing
for bulk loan product. These uncertainties were evidenced by the sudden decline
in common stock prices of companies in the subprime home equity sector,
including the Company, and pricing sensitivity encountered by companies in the
sector in accessing the public equity and debt markets. Given that the Company
funded the
43
<PAGE> 44
significant negative cash flow associated with the bulk correspondent business
in the public equity and debt markets, the uncertainties in those markets
increased the risk to the Company that its cost of capital would be excessively
high. Additionally, the premiums paid by the Company for bulk product during the
1997 fiscal year reached a peak of 8.25% in March 1997. These high premiums,
together with the apparent increase in the cost of capital, adversely impacted
the projected profitability of the bulk product. As a result of these
developments, the Company changed the approach used in the pricing of its bulk
loan product. Specifically, the Company established lower prices to be paid for
this product based primarily on its historical performance. This change is
expected to decrease the amount of bulk loans purchased in fiscal 1998 compared
to fiscal 1997.
Risks Associated with High Loan-To-Value Loan Products. The Company
recently commenced offering loans with loan-to-value ratios of up to 125%.
Although the Company intends to sell these loans on a whole loan basis, the
Company is subject to the risk of borrower default and foreclosure on these
loans during the period of time that the loans are held for sale or if the
Company is required to repurchase any such loans. To the extent that borrowers
with high loan-to-value ratios default on their loan obligations while the loans
are held by the Company, the Company would be unable to rely on equity in the
collateral property to reduce the Company's loss exposure. Under these
circumstances, the Company might be required to absorb any losses and such
absorption, if the losses exceed the Company reserves for such losses, could
have a material adverse effect on the Company's financial condition and results
of operations.
Competition. The Company faces intense competition in the business of
originating, purchasing and selling mortgage loans. Competition among industry
participants can take many forms, including convenience in obtaining a loan,
customer service, marketing and distribution channels, amount and term of the
loan, loan origination fees and interest rates. Many of the Company's
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. The Company's competitors in
the industry include other consumer finance companies, mortgage banking
companies, commercial banks, credit unions, thrift institutions, credit card
issuers and insurance companies. In the future, the Company may also face
competition from government- sponsored entities, such as FNMA and FHLMC. These
government-sponsored entities may enter the subprime mortgage market and target
potential customers in the Company's highest credit grades, who constitute a
significant portion of the Company's customer base.
The current level of gains realized by the Company and its competitors
on the sale of subprime mortgage loans could attract additional competitors into
this market. Certain large finance companies and conforming mortgage originators
have announced their intention to originate non-conforming mortgage loans, and
some of these large mortgage companies, thrifts and commercial banks have begun
offering non-conforming loan products to customers similar to the borrowers
targeted by the Company. In addition, establishing a broker-sourced loan
business requires a substantially smaller commitment of capital and human
resources than a direct-sourced loan business. This relatively low barrier to
entry permits new competitors to enter this market quickly and compete with the
Company's wholesale lending business.
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<PAGE> 45
Additional competition may lower the rates the Company can charge
borrowers and increase the cost to purchase loans, thereby potentially lowering
the gain on future loan sales or securitizations. Increased competition may also
reduce the volume of the Company's loan origination and loan sales and increase
the demand for the Company's experienced personnel and the potential that such
personnel will leave the Company for the Company's competitors.
Fluctuations in interest rates and general and localized economic
conditions may also affect the competition the Company faces. Competitors with
lower costs of capital have a competitive advantage over the Company. During
periods of declining rates, competitors may solicit the Company's customers to
refinance their loans. In addition, during periods of economic slowdown or
recession, the Company's borrowers may face financial difficulties and be more
receptive to the offers of the Company's competitors to refinance their loans.
The Company plans to expand into new geographic markets, where it will
face additional competition from lenders already established in these markets.
There can be no assurance that the Company will be able to successfully compete
with these lenders.
The Company's correspondent program depends largely on independent
mortgage bankers and other financial institutions for the purchases of new
loans. The Company's competitors also seek to establish relationships with the
same mortgage bankers and other financial institutions. The Company's future
results may become more exposed to fluctuations in the volume and cost of the
Company's correspondent program resulting from competition from other purchasers
of such loans, market conditions and other factors.
Concentration of Operations in California. At June 30, 1997, a
significant portion of the loans serviced by the Company were secured by
properties located in California. Because the Company's servicing portfolio is
currently concentrated in California, the Company's financial position and
results of operations have been and are expected to continue to be influenced by
general trends in the California economy and its residential real estate market.
Residential real estate market declines may adversely affect the values of the
properties securing loans such that the principal balances of such loans,
together with any primary financing on the mortgaged properties, will equal or
exceed the value of the mortgaged properties. In addition, California
historically has been vulnerable to certain natural disaster risks, such as
earthquakes and erosion-caused mudslides, which are not typically covered by the
standard hazard insurance policies maintained by borrowers. Uninsured disasters
may adversely impact the Company's ability to recover losses on properties
affected by such disasters and adversely impact the Company's results of
operations.
Timing of Loan Sales. The Company endeavors to effect the securitization
and sale of a loan pool each quarter. However, market and other considerations,
including the conformity of loan pools to monoline insurance company and rating
agency requirements, could affect the timing of such transactions. Any delay in
the sale of a loan pool beyond a quarter-end would postpone the recognition of
gain on sale related to such loans until their sale and would likely result in
losses for such quarter being reported by the Company.
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<PAGE> 46
Economic Conditions. The risks associated with the Company's business
become more acute in any economic slowdown or recession. Periods of economic
slowdown or recession may be accompanied by decreased demand for consumer credit
and declining real estate values. Any material decline in real estate values
reduces the ability of borrowers to use home equity to support borrowings and
increases the current combined loan-to-value ratios of loans previously made by
the Company, thereby weakening collateral coverage and increasing the
possibility of a loss in the event of liquidation. Further, delinquencies,
foreclosures and losses generally increase during economic slowdowns or
recessions. Because of the Company's focus on credit-impaired borrowers, the
actual rates of delinquencies, foreclosures and losses on such loans could be
higher than those generally experienced in the mortgage lending industry. In
addition, in an economic slowdown or recession, the Company's servicing costs
may increase. Any sustained period of increased delinquencies, foreclosure,
losses or increased costs could adversely affect the Company's ability to
securitize or sell loans in the secondary market and could increase the cost of
securitizing and selling loans in the secondary market. See "-- Prepayment and
Credit Risk."
The Company's earnings may be directly affected by the level of and
fluctuation in interest rates and the level of prepayment in the Company
securitizations. The Company currently hedges its fixed rate pipeline and
continues to explore other avenues of risk mitigation, although none have been
employed to date. The current fixed rate hedge products utilized are swap
agreements with third parties that sell United States Treasury securities not
yet purchased and the purchase of Treasury put options. The amount and timing of
hedging transactions are determined by members of the Company's senior
management. While the Company monitors the interest rate environment and employs
fixed rate hedging strategies, there can be no assurance that the earnings of
the Company would not be adversely affected during any period of unexpected
changes in interest rates or prepayment rates.
The Company introduced adjustable rate mortgages as a new product in
January 1994. Adjustable rate loans account for a substantial portion of the
mortgage loans originated or purchased by the Company. Substantially all such
adjustable rate mortgages include a "teaser" rate, i.e., an initial interest
rate significantly below the fully indexed interest rate at origination.
Although these loans are underwritten at the indexed rate as of the first
adjustment date, credit-impaired borrowers may encounter financial difficulties
as a result of increases in the interest rate over the life of the loan.
Contingent Risks. Although the Company sells substantially all the
mortgage loans which it originates or purchases, the Company retains some degree
of credit risk on substantially all loans sold. During the period of time that
loans are held pending sale, the Company is subject to the various business
risks associated with the lending business including the risk of borrower
default, the risk of foreclosure and the risk that a rapid increase in interest
rates would result in a decline in the value of loans to potential purchasers.
See "-- Risk Management." The documents governing the Company's securitization
program require the Company to establish deposit accounts or build
overcollateralization levels through retention of excess cash flow distributions
in such accounts or application of excess cash flow distributions to reduce the
principal balances of the senior interests issued by the related trust,
respectively. Such amounts serve as credit enhancement for the related trust and
are therefore available to fund losses realized on loans held by such trust. The
Company continues to be subject to the risks of default and foreclosure
following securitization and the sale of loans to the extent of excess cash flow
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<PAGE> 47
distributions required to be retained or applied to reduce principal from time
to time. Such amounts are a condition to obtaining the requisite rating on the
related interests in each trust. In addition, documents governing the Company's
securitization program require the Company to commit to repurchase or replace
loans which do not conform to the representations and warranties made by the
Company at the time of sale.
When borrowers are delinquent in making monthly payments on loans
included in a securitization trust, the Company is required to advance interest
payments with respect to such delinquent loans. These advances require funding
from the Company's capital resources but have priority of repayment from
collections or recoveries on the loans in the related pool in the succeeding
month.
In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees and officers of the Company, incomplete documentation and failures by
the Company to comply with various laws and regulations applicable to its
business. The Company believes that liability with respect to any currently
asserted claims or legal actions is not likely to be material to the Company's
financial position or results of operations; however, any claims asserted in the
future may result in legal expenses or liabilities which could have a material
adverse effect on the Company's financial position and results of operations.
See "Item 3. Legal Proceedings."
Government Regulation. The Company's operations are subject to extensive
regulation, supervision and licensing by federal, state and local governmental
authorities and are subject to various laws and judicial and administrative
decisions imposing requirements and restrictions on part or all of its
operations. The Company's consumer lending activities are subject to the Federal
Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), the Federal Equal Credit Opportunity Act, as amended,
and Regulation B, the Fair Credit Reporting Act of 1970, as amended, the Federal
Real Estate Settlement Procedures Act and Regulation X, the Home Mortgage
Disclosure Act, the Federal Debt Collection Practices Act and the National
Housing Act of 1934, as well as other federal and state statutes and regulations
affecting the Company's activities. The Company is also subject to the rules and
regulations of, and examinations by, state regulatory authorities with respect
to originating, processing, underwriting, selling, securitizing and servicing
loans. These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, govern inspections and appraisals of properties and
credit reports on loan applicants, regulate assessment, collection, foreclosure
and claims handling, investment and interest payments on escrow balances and
payment features, mandate certain disclosures and notices to borrowers and, in
some cases, fix maximum interest rates, fees and mortgage loan amounts. Failure
to comply with these requirements can lead to loss of approved status, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement action.
Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on
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<PAGE> 48
borrower income, type of loan or principal amount. Because many of the Company's
loans are made to borrowers for the purpose of consolidating consumer debt or
financing other consumer needs, the competitive advantages of tax deductible
interest, when compared with alternative sources of financing, could be
eliminated or seriously impaired by such government action. Accordingly, the
reduction or elimination of these tax benefits could have a material adverse
effect on the demand for loans of the kind offered by the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are attached to this report:
Reports of Independent Accountants
Consolidated Balance Sheets at June 30, 1996 and 1997
Consolidated Statements of Income for Fiscal Years Ended June 30, 1995,
1996 and 1997 Consolidated Statements of Stockholders' Equity for Fiscal
Years Ended June 30, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for Fiscal Years Ended June 30,
1995, 1996 and 1997 Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information regarding directors and executive officers of the Registrant
will appear in the proxy statement for the 1997 Annual Meeting of Stockholders,
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear in the proxy
statement for the 1997 Annual Meeting of Stockholders, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management will appear in the proxy statement for the 1997 Annual Meeting of
Stockholders, and is incorporated herein by reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
will appear in the proxy statement for the 1997 Annual Meeting of Stockholders,
and is incorporated by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) Financial Statements:
See Financial Statements listed as part of Item 8. Financial
Statements and Supplementary Data.
(b) Financial Statement Schedules:
Schedule 6 Property, Plant and Equipment.
Schedule 7 Accumulated Depreciation, Depletion and Amortization
of Property, Plant and Equipment.
See pages F-19 and F-20 attached to this report.
(c) Exhibits - Management Contracts and Compensatory Plans:
<TABLE>
<S> <C>
10.1 Form of Director and Officer Indemnification Agreement
10.2(a) Amended and Restated Employment Agreement between Registrant and
Gary K. Judis (10)
10.2(b) Severance Agreement between Registrant and Gary K. Judis
10.2(c) Consulting Agreement between Registrant and Gary K. Judis
10.3(a) Second Amended and Restated Employment between Registrant and
Cary H. Thompson
10.3(b) Stock Option Agreement between Registrant and Cary H. Thompson(10)
10.4(a) Employment Agreement between Registrant and Neil Kornswiet
10.4(b) Amendment No. 1 to Exhibit 10.4(a)
10.5 Executive Severance Agreement between Registrant and Gregory
Witherspoon
10.6 Second Amended and Restated Employment Agreement between Registrant
and Barbara Polsky
10.7 Employment Agreement between Registrant and Mark Costello
10.8 1991 Stock Incentive Plan, as amended (2)
10.9 1995 Stock Incentive Plan (10)
</TABLE>
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<TABLE>
<S> <C>
10.10(a) 1996 Stock Incentive Plan (12)
10.10(b) Amendment No. 1 to Exhibit 10.10(a)
10.11 1995 Employee Stock Purchase Plan (3)
10.20 Variable Deferred Compensation Plan
</TABLE>
(d) Other Exhibits:
<TABLE>
<S> <C>
2.1 Agreement and Plan of Reorganization, dated as of
August 12, 1996, as amended by Amendment No. 1, dated
August 28, 1996 by and among Registrant, Aames
Acquisition Corporation, One Stop Mortgage, Inc. and
Neil B. Kornswiet (14)
3.1 Certificate of Incorporation of Registrant, as amended
3.2 Bylaws of Registrant, as amended
4.1 Specimen certificate evidencing Common Stock of Registrant
4.2 Rights Agreement, dated as of June 21, 1996 between Registrant and
Wells Fargo Bank, as rights agent (4)
10.12(a) Office Lease, dated December 13, 1989, between State
Street Bank and Trust Company of California, N.A.
and Aames Home Loan, Registrant's wholly owned
subsidiary, for the premises located at 3731
Wilshire Boulevard, Los Angeles, California (1)
10.12(b) Amendments dated August 1, 1991, March 15, 1992,
June 30, 1993 and September 7, 1993 to Exhibit
10.12(b) (5)
10.13(a) Office Building Lease, dated as of August 7, 1996, between Registrant
and California Plaza IIA, LLC, for the premises located at
350 S. Grand Avenue, Los Angeles, California
10.13(b) First Amendment, dated as of August 15, 1997, to Exhibit 10.13(a)
10.14(a) Indenture of Trust, dated February 1, 1995, between Registrant and
Bankers Trust Company of California, N.A., relating to Registrant's
10.50% Senior Notes due 2002 (5)
10.14(b) Supplemental Indenture of Trust, dated as of April 25, 1995 to Exhibit
10.14(a) (6)
10.15 Indenture, dated as of February 26, 1996, between
Registrant and The Chase Manhattan Bank, N.A.,
relating to Registrant's 5.5% Convertible
Subordinated Debentures due 2006 (7)
10.16 First Supplemental Indenture, dated as of October
21, 1996, between Registrant, The Chase Manhattan
Bank and certain wholly owned subsidiaries of
Registrant, relating to Registrant's 9.125% Senior
Notes due 2003 (11)
10.17(a) Interim Loan and Security Agreement, dated as of
November 22, 1996, between Aames Capital
Corporation, Registrant's wholly owned subsidiary
("ACC") and Prudential Securities Credit Corporation
10.17(b) Notice of Extension of Agreement No. 1, dated as of May 15, 1997,
with effect as of March 31, 1997, to Exhibit 10.17(a)
10.17(c) Amendment, dated as of August 19, 1997, to Exhibit 10.17(a)
10.18 Amended and Restated Mortgage Loan Warehousing Agreement, dated
as of January 15, 1997, among Registrant; ACC; the
lenders from time
</TABLE>
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<TABLE>
<S> <C>
to time a party thereto; and NationsBank of Texas,
N.A., as administrative agent for the lenders (13)
10.19(a) Aircraft Lease Agreement, dated as of March 8, 1996,
between C.I.T. Leasing Corporation and Oxford
Aviation Corporation, Inc., Registrant's wholly
owned subsidiary (7)
10.19(b) Corporate Guaranty Agreement, dated as of March 8,
1996, between Registrant and C.I.T. Leasing
Corporation, with respect to Exhibit 10.19(a) (7)
11 Statement re computation of per share earnings
21 Subsidiaries of the Registrant
23.1 Consent of Price Waterhouse LLP
23.2 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
1 Incorporated by reference from Registrant's Registration Statement on Form
S-1, File No. 33-43237.
2 Incorporated by reference from Registrant's Registration Statement on Form
S-1, File No. 33-62400.
3 Incorporated by reference from Registrant's Registration Statement, File No.
333-01312.
4 Incorporated by reference from Registrant's Registration Statement on Form
8-A, File No. 33-13660.
5 Incorporated by reference from Registrant's Registration Statement on Form
S-2, File No. 33-88516.
6 Incorporated by reference from Registrant's Annual Report on Form 10-K for
the year ended June 30, 1995.
7 Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
8 Incorporated by reference from Registrant's Registration Statement on Form
S-2, File No. 33-91640.
9 Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1995.
10 Incorporated by reference from Registrant's Annual Report on Form 10-K for
the year ended June 30, 1996, filed with the Commission on September 16,
1996.
11 Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
12 Incorporated by reference from Registrant's Registration Statement on Form
S-8 dated January 6, 1997.
13 Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996.
14 Incorporated by reference from Registrant's Current Report on Form 8-K
dated September 11, 1996.
(e) Reports on Form 8-K:
During the last quarter of the fiscal year ended June 30, 1997,
the Company filed a Current Report on Form 8-K dated May 12, 1997
(earliest event reported April 30, 1997), reporting information
under Item 5 with respect to third quarter results, a cash
dividend and management succession.
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To the Board of Directors
and Stockholders of
Aames Financial Corporation
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Aames Financial Corporation and its
subsidiaries (the "Company") at June 30, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
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 did not audit the financial statements of One Stop Mortgage,
Inc., a wholly-owned subsidiary, which statements reflect total assets of $127
million at June 30, 1996 and total revenues of $7 million for the period from
August 24, 1995 (inception) through June 30, 1996. Those statements were audited
by other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for One Stop
Mortgage, Inc. is based solely on the report of the other auditors. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted accounting standards that changed its method of accounting for transfers
and servicing of financial assets during the year ended June 30, 1997 and its
method of accounting for mortgage servicing rights for the year ended June 30,
1996.
The audits referred to above also included an audit of the financial statement
schedules listed in Item 14. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
/s/Price Waterhouse LLP
Los Angeles, California
August 25, 1997
F-1
<PAGE> 53
INDEPENDENT AUDITORS' REPORT
The Board of Directors
One Stop Mortgage, Inc.:
We have audited the accompanying balance sheet of One Stop Mortgage, Inc. (the
Company) as of June 30, 1996 and the related statements of operations, changes
in stockholders' equity and cash flows for the period January 1, 1996 through
June 30, 1996 and the period August 24, 1995 (inception) through December 31,
1995. 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 also 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 presents fairly, in
all material respects, the financial position of One Stop Mortgage, Inc. as of
June 30, 1996 and the results of its operations and its cash flows for the
period January 1, 1996 through June 30, 1996 and the period August 24, 1995
(inception) through December 31, 1995 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Orange County, California
August 16, 1996
F-2
<PAGE> 54
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 23,941,000 $ 26,902,000
Loans held for sale, at lower of cost or market 186,189,000 242,987,000
Accounts receivable 9,685,000 59,180,000
Interest-only strips, at estimated fair market value (Note 3) 129,113,000 270,422,000
Mortgage servicing rights (Note 3) 10,902,000 21,641,000
Residual assets 44,676,000 112,827,000
Equipment and improvements, net (Note 4) 6,674,000 12,685,000
Prepaid and other 10,295,000 14,949,000
------------ ------------
Total assets $421,475,000 $761,593,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings (Note 5) $138,045,000 $286,990,000
Revolving warehouse facilities (Note 5) 112,363,000 137,500,000
Accounts payable and accrued expenses 11,380,000 23,219,000
Accrued compensation and related expenses 4,427,000 6,078,000
Income taxes payable (Note 6) 21,831,000 39,452,000
------------ ------------
Total liabilities 288,046,000 493,239,000
------------ ------------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, par value $.001 per
share, 1,000,000 shares authorized;
none outstanding -- --
Common stock, par value $.001 per share
50,000,000 shares authorized;
23,845,300 and 27,758,800 shares outstanding
(Note 10) 24,000 28,000
Additional paid-in capital 88,134,000 209,358,000
Retained earnings 45,271,000 58,968,000
------------ ------------
Total stockholders' equity 133,429,000 268,354,000
------------ ------------
Total liabilities and stockholders' equity $421,475,000 $761,593,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 55
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
JUNE 30,
---------------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Gain on sale of loans (Note 3) $ 25,438,000 $ 95,299,000 $ 198,736,000
Net unrealized loss on valuation
of interest-only strips (Note 3) -- -- (18,950,000)
Commissions 15,799,000 21,564,000 29,250,000
Loan service 8,246,000 18,186,000 25,804,000
Fees and other 7,940,000 15,215,000 37,679,000
------------- ------------- -------------
Total revenue 57,423,000 150,264,000 272,519,000
------------- ------------- -------------
Expenses:
Compensation and related expenses 17,610,000 40,758,000 81,021,000
Sales and advertising costs 9,906,000 19,036,000 27,229,000
General and administrative expenses 7,067,000 17,377,000 31,716,000
Interest expense (Note 5) 3,205,000 12,370,000 33,105,000
Provision for loan losses 2,484,000 8,424,000 33,941,000
Nonrecurring charges (Note 2) -- -- 32,000,000
------------- ------------- -------------
Total expenses 40,272,000 97,965,000 239,012,000
------------- ------------- -------------
Income before income taxes 17,151,000 52,299,000 33,507,000
Provision for income taxes 7,117,000 22,508,000 16,398,000
============= ============= =============
Net income $ 10,034,000 $ 29,791,000 $ 17,109,000
============= ============= =============
Net income per share
Primary $ 0.74 $ 1.18 $ 0.60
============= ============= =============
Fully diluted $ 0.74 $ 1.14 $ 0.60
============= ============= =============
Dividends per share $ 0.13 $ 0.13 $ 0.13
============= ============= =============
Weighted average number
of shares outstanding
Primary 13,532,000 25,194,000 28,371,000
============= ============= =============
Fully Diluted 13,532,000 27,248,000 34,516,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 56
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
JUNE 30,
-----------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net income $ 10,034,000 $ 29,791,000 $ 17,109,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 2,484,000 8,424,000 33,941,000
Depreciation and amortization 606,000 1,275,000 2,853,000
Deferred income taxes 3,972,000 15,369,000 17,915,000
Gain on sale of loans (36,375,000) (112,399,000) (262,811,000)
Net unrealized loss on valuation of interest-only strips -- -- 18,950,000
Amortization of interest-only strips 4,402,000 16,940,000 68,611,000
Mortgage servicing rights originated (11,759,000) (16,251,000)
Amortization of mortgage servicing rights 857,000 5,512,000
Changes in assets and liabilities:
Loans originated or purchased (387,600,000) (1,168,945,000) (2,347,938,000)
Proceeds from sale of loans 373,609,000 1,006,887,000 2,291,139,000
(Increase) in:
Accounts receivable (2,663,000) (3,595,000) (49,495,000)
Prepaid and other (2,217,000) (5,276,000) (4,654,000)
Residual assets (8,691,000) (29,794,000) (68,151,000)
Increase (decrease) in:
Accounts payable and accrued expenses 534,000 5,554,000 11,839,000
Accrued compensation and related expenses 581,000 2,724,000 1,651,000
Income taxes payable (2,051,000) 2,874,000 (293,000)
--------------- --------------- ---------------
Net cash used in operating activities (43,375,000) (241,073,000) (280,073,000)
--------------- --------------- ---------------
Investing activities:
Purchases of property and equipment (988,000) (5,885,000) (8,864,000)
--------------- --------------- ---------------
Net cash used in investing activities (988,000) (5,885,000) (8,864,000)
--------------- --------------- ---------------
Financing activities:
Proceeds from sale of stock or exercise of options 40,087,000 26,280,000 121,228,000
Proceeds from borrowings 19,540,000 114,901,000 148,945,000
Increase (decrease) in amounts outstanding under
warehouse facilities (9,675,000) 112,048,000 25,137,000
Dividends paid (1,743,000) (2,689,000) (3,412,000)
--------------- --------------- ---------------
Net cash provided by financing activities 48,209,000 250,540,000 291,898,000
--------------- --------------- ---------------
Net increase in cash and cash equivalents 3,846,000 3,582,000 2,961,000
Cash and cash equivalents at beginning of period 16,513,000 20,359,000 23,941,000
--------------- --------------- ---------------
Cash and cash equivalents at end of period $ 20,359,000 $ 23,941,000 $ 26,902,000
=============== =============== ===============
Supplemental disclosures
Interest paid $ 3,225,000 $ 6,633,000 $ 30,207,000
Taxes paid (refunded) 4,843,000 4,354,000 (1,197,000)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 57
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
----------------------------------------------------------
<S> <C> <C> <C> <C>
As of June 30, 1994 $ 13,500 $ 21,777,500 $ 9,878,000 $ 31,669,000
Issuance of common stock 7,500 40,079,500 40,087,000
Dividends (1,743,000) (1,743,000)
Net income 10,034,000 10,034,000
----------------------------------------------------------
As of June 30, 1995 $ 21,000 $ 61,857,000 $ 18,169,000 $ 80,047,000
Issuance of common stock 2,064,000 2,064,000
Shares issued in merger
transaction 3,000 (3,000) -
Dividends (2,689,000) (2,689,000)
Issuance of common stock
warrants 24,216,000 24,216,000
Net income 29,791,000 29,791,000
----------------------------------------------------------
As of June 30, 1996 $ 24,000 $ 88,134,000 $ 45,271,000 $ 133,429,000
Issuance of common stock 4,000 121,224,000 121,228,000
Dividends (3,412,000) (3,412,000)
Net income 17,109,000 17,109,000
----------------------------------------------------------
AS OF JUNE 30, 1997 $ 28,000 $209,358,000 $ 58,968,000 $ 268,354,000
----------------------------------------------------------
</TABLE>
F-6
<PAGE> 58
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
OPERATIONS
Aames Financial Corporation (the "Company" or "Aames") is a consumer finance
company primarily engaged, through its subsidiaries, in the business of
originating, purchasing, selling, and servicing home equity mortgages secured by
single family residences. At June 30, 1997, Aames operated 56 retail loan
offices located in 24 states. At June 30, 1997, 14 of the 56 branches were
located in California. Its wholly- owned subsidiary, One Stop Mortgage, Inc.
("One Stop") operated 37 offices located in 33 states. At June 30, 1997, 7 of
the 37 branches were located in California. The Company originates and purchases
loans on a nationwide basis through three production channels -- retail, broker
and correspondent. For the years ended June 30, 1996 and 1997, the Company
originated and purchased $1.17 billion and $2.35 billion of mortgage loans,
respectively. The Company's principal market is borrowers whose financing needs
are not being met by traditional mortgage lenders for a variety of reasons,
including the need for specialized loan products or credit histories that may
limit such borrowers' access to credit. Loans originated by the Company are
primarily extended on the basis of the equity in the borrower's property and, to
a lesser extent, the creditworthiness of the borrower. The aggregate outstanding
balance of loans serviced by the Company was $1.37 billion and $3.17 billion at
June 30, 1996 and June 30, 1997, respectively (which include $456 million and
$1.67 billion of loans at June 30, 1996 and June 30, 1997, respectively,
serviced for the Company by unaffiliated subservicers under subservicing
agreements).
The Company's most important capital resource has been its ability to sell loans
originated and purchased by it in the secondary market in order to generate cash
proceeds to pay down its warehouse facilities and fund new originations and
purchases. The value of and market for the Company's loans are dependent upon a
number of factors, including general economic conditions, competition, interest
rates and governmental regulations. Adverse changes in such factors may affect
the Company's ability to securitize or sell loans for acceptable prices within a
reasonable period of time.
ACQUISITION OF ONE STOP
On August 28, 1996, the Company acquired One Stop, through the merger of a
wholly-owned subsidiary of the Company into One Stop, in a tax-free exchange
accounted for as a pooling of interests, in which the Company issued
approximately 3.49 million shares (adjusted for the three-for-two stock split in
the form of a stock dividend in February 1997) of its common stock, par value
$.001 per share ("common stock"), and assumed options granted to key employees
to purchase approximately 563,000 shares (adjusted for the three-for-two stock
split in the form of a stock dividend in February 1997) of common stock. Under
the pooling rules, the costs incurred by the Company and One Stop in
consummating the merger were expensed in the first quarter of fiscal 1997. All
prior years financial statements have been restated to include One Stop.
The following table shows the pro-forma effect of the merger:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Fiscal Year Ended June 30, 1996
==============================================================
<S> <C>
Net income by entity
Aames as previously reported $ 31,048
One Stop (1,257)
--------------------------------------------------------------
Restated June 30, 1996 net income 29,791
--------------------------------------------------------------
Net income per fully diluted share
Previously reported (2/97 split adj.) $ 1.39
Restated $ 1.14
</TABLE>
One Stop's operations, from the period July 1, 1996 through August 28, 1996,
were immaterial to restate separately.
F-7
<PAGE> 59
PRINCIPLES OF ACCOUNTING AND CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
Aames and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and 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.
CASH IN TRUST
The Company services loans on behalf of customers. In such capacity, certain
monies are collected and placed in segregated trust accounts, which totaled
$26.8 million and $28.3 million at June 30, 1996 and June 30, 1997,
respectively. These accounts and corresponding liabilities are not included in
the accompanying balance sheet.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are being recorded utilizing
straight-line and accelerated methods over the following estimated useful lives:
Data processing equipment Five years
Furniture Five to seven years
Data processing software Three years
Leasehold improvements Lower of life of lease or asset
Equipment under capital leases Five years
Automobiles Five years
REVENUE RECOGNITION
The Company adopted Statement of Financial Accounting Standard ("SFAS") 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS 125") effective January 1, 1997. The adoption of SFAS 125
did not have a material effect on the Company's results of operations for the
year ended June 30, 1997. As a result of the adoption of SFAS 125, the Company
records amounts previously categorized as "Excess servicing gains" in the
Consolidated Statements of Income as "Gain on sale of loans." Additionally, the
Company now records the right to future interest income that exceeds
contractually specified servicing fees and previously recorded as "Excess
servicing receivable" as an investment security called "Interest-only strips."
The Company has classified this asset as a trading security and during the year
ended June 30, 1997, recorded a mark-to-market loss of $19.0 million on this
security. Of this amount, $9.05 million represents unrealized gains on the
interest-only strips created in March and June of 1997 offset by a $28.0 million
unrealized loss on the interest-only strips as of June 1997. SFAS 125 requires
that this mark-to-market adjustment be reported separately from "Gain on sale of
loans," and the adjustment has been labeled " Net unrealized loss on valuation
of interest-only strips" in the Consolidated Statements of Income. SFAS 125
supersedes SFAS 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122").
In fiscal year 1996, the Company adopted SFAS 122. Under SFAS 122, the Company
recognized mortgage servicing rights ("MSR's") as assets separate from the
mortgage loans to which the MSR's relate based on their respective fair values.
Prior to SFAS 122, the Company allocated the entire cost of originating or
purchasing mortgage loans to the carrying value of such mortgage loans. The
effect of adopting SFAS 122 was to increase the net income of the Company for
the fiscal year ended June 30, 1996, by $5.7 million, or $0.21 per fully diluted
weighted average share.
As a fundamental part of its business and financing strategy, the Company sells
substantially all of its loans in securitization transactions. In a
securitization, the Company conveys loans that it has originated or purchased to
a separate entity (such as a trust or trust estate) in exchange for cash
proceeds and an interest in the loans
F-8
<PAGE> 60
securitized represented by the gain on sale of loans. The cash proceeds are
raised through an offering of the pass-through certificates or bonds evidencing
the right to receive principal payments on the securitized loans and the
interest rate on the certificate balance or on the bonds. The gain on sale of
loans (net of the unrealized gain or loss on valuation of the interest-only
strips) represents, over the estimated life of the loans, the present value of
the excess of the weighted average coupon on each pool of loans sold over the
sum of the interest rate paid to investors, the contractual servicing fee
(currently 0.50%) and a monoline insurance fee, if any. The gain on sale of
loans provides the basis for the calculation of the interest-only strips, which
is recorded as an asset on the Company's consolidated balance sheet. The
interest-only strips represents the present value of the future cash flows,
adjusted for the provision for loan losses. The Company determines the present
value of the cash flows at the time each securitization transaction closes using
certain estimates made by management at the time the loans are sold. These
estimates include the following: (i) rate of prepayment; (ii) discount rate used
to calculate present value; and (iii) the provision for credit losses on loans
sold. There can be no assurance of the accuracy of management's estimates.
Additionally, upon sale or securitization of servicing retained mortgages, the
Company capitalizes mortgage servicing rights separate from the loan. The
Company determines fair value based on the present value of estimated net future
cash flows related to servicing income. The cost allocated to the servicing
rights is amortized in proportion to and over the period of estimated net future
servicing fee income. The Company periodically reviews capitalized servicing fee
receivable for valuation impairment. This review is performed on a disaggregated
basis for the predominant risk characteristics of the underlying loans which are
loan type and origination date. At June 30, 1996 and 1997, there were no
valuation allowances on mortgage servicing rights.
INCOME TAXES
Taxes are provided on substantially all income and expense items included in
earnings, regardless of the period in which such items are recognized for tax
purposes. The Company uses an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than the enactment of
changes in the tax law or rates.
RISK MANAGEMENT
The Company's earnings may be directly affected by the level of and fluctuation
in interest rates and the level of prepayment in the Company's securitizations.
The Company currently hedges its fixed rate pipeline and continues to explore
other avenues of risk mitigation, although none have been employed to date. The
current fixed rate hedge products utilized are swap agreements with third
parties that sell United States Treasury securities not yet purchased and the
purchases of United States Treasury put options. The amount and timing of
hedging transactions are determined by members of the Company's senior
management. While the Company monitors the interest rate environment and employs
fixed rate hedging strategies there can be no assurance that the earnings of the
Company would not be adversely affected during any period of unexpected changes
in interest rates or prepayment rates. At June 30, 1996 and 1997, the Company
had open hedging positions with notional balances of $40.0 million and $135
million, respectively.
The Company also mitigates its exposure to interest rate risk through a
pre-funding strategy in which it agrees to sell loans to the securitization
trust in the future at an agreed-upon price. The pre-funding locks in the price
agreed upon with investors on the pricing date (typically five business days
prior to the closing date of the securitization) for a period of generally 30
days. In a pre-funding arrangement, the Company typically delivers approximately
75% of the loans sold at the closing and the remainder generally within 30 days
after the closing.
CASH AND CASH EQUIVALENTS
At June 30, 1997, the Company had $26.9 million in cash, of which $12.9 million
was held in a restricted account in connection with the securitization closed in
June 1997. These funds were released to the Company in July 1997.
F-9
<PAGE> 61
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of aggregate cost or market value.
Market value is determined by current investor yield requirements.
ACCOUNTS RECEIVABLE
Accounts receivable primarily consisted of pool related advances, accrued
interest receivable and various servicing advances.
RESIDUAL ASSETS
In connection with its securitization transactions, the Company initially
deposits with a trustee cash or the required overcollateralization amount, and
subsequently deposits a portion of the servicing spread collected on the related
loans. The amounts set aside ($44.7 million at June 30, 1996 and $113 million at
June 30, 1997) are available for distribution to investors in the event of
certain shortfalls in amounts due to investors. These amounts are subject to
increase up to maximum subordination amounts as specified in the related
securitization documents. Cash amounts on deposit are invested in certain
instruments as permitted by the related securitization documents. To the extent
amounts on deposit exceed specified levels, distributions are made to the
Company and, at the termination of the related trust, any remaining amounts on
deposit are distributed to the Company.
DEBT ISSUANCE COSTS
At June 30, 1997, the Company had an unamortized balance of debt issuance costs
of $8.41 million related to the issuance of $23.0 million of 10.5% Senior Notes
due 2002, the issuance of $115 million of 5.5% Convertible Subordinated
Debentures due 2006 and the issuance of $150 million of 9.125% Senior Notes due
2003. This balance is included in "Prepaid and other" on the Consolidated
Balance Sheets and is amortized into expense over the life of the related debt.
EARNINGS PER SHARE
Earnings per share of common stock is computed using the weighted average number
of shares of common stock outstanding during each period, after giving effect to
the assumed exercise of certain stock options and warrants, and in addition, for
fully diluted earnings per share, the conversion of shares related to the
Company's 5.5% Convertible Subordinated Debentures due 2006.
All references in the accompanying Consolidated Balance Sheets, Consolidated
Statements of Earnings and Notes to Consolidated Financial Statements to the
number of common shares and share amounts have been restated to reflect the
three-for-two stock splits in the form of stock dividends effected on February
21, 1997 and May 17, 1996.
RECLASSIFICATIONS
Certain amounts related to 1995 and 1996 have been reclassified to conform to
the 1997 presentation.
ADOPTION OF RECENT ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board ("FASB") released SFAS
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This statement
establishes methods of accounting for stock-based compensation plans. SFAS 123
is effective for fiscal years beginning after December 15, 1995. The Company
adopted SFAS 123 in fiscal year 1997. The adoption of SFAS 123 did not have a
material effect on the financial position of the Company. See Note 9.
In February 1997, the FASB issued SFAS 128, "Earnings Per Share" ("SFAS 128")
which establishes standards for computing and presenting earnings per share
("EPS") by replacing the presentation of primary EPS with a presentation of
basic EPS. Primary EPS includes common stock equivalents while basic EPS
excludes them. This change simplifies the computation of EPS. It also requires
dual presentation of basic and fully diluted EPS on the face of the income
statement for all entities with complex capital structures. The Company will
adopt SFAS 128 effective December 31, 1997 and does not expect the adoption of
SFAS 128 to have a material impact on its financial statements.
F-10
<PAGE> 62
In February 1997, the FASB issued SFAS 129, "Disclosure of Information about
Capital Structure" ("SFAS 129"). SFAS 129 establishes disclosure requirements
regarding pertinent rights and privileges of outstanding securities. Examples of
disclosure items regarding securities include, though are not limited to, items
such as dividend and liquidation preferences, participation rights, call prices
and dates, conversion or exercise prices or rates. The number of shares issued
upon conversion, exercise or satisfaction of required conditions during at least
the most recent annual fiscal period and any subsequent interim period must also
be disclosed. Disclosure of liquidation preferences of preferred stock in the
equity section of the Balance Sheet is also required. SFAS 129 is effective for
financial periods beginning after December 15, 1997.
In June 1997, FASB issued SFAS 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes disclosure standards for reporting comprehensive
income in a full set of general purpose financial statements. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. The adoption of
this standard is not expected to have an impact on the Company's financial
position or results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") which is effective for periods
beginning after December 15, 1997. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The adoption of
this standard is not expected to have an impact on the Company's financial
position or results of operations.
Note 2 Nonrecurring Charges
In fiscal 1997, the Company incurred $32.0 million of nonrecurring charges.
Approximately $25.0 million of these charges were recognized in August 1996
directly related to the acquisition of One Stop. The remaining amount relates to
a reserve for vacating corporate headquarters recorded in the first quarter and
to severance and other strategic decisions made in the fourth quarter.
Note 3 Interest-only Strips and Mortgage Servicing Rights
The activity in the interest-only strips is summarized as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------
1996 1997
---------------------------------
<S> <C> <C>
Balance, beginning of year $ 42,078,000 $ 129,113,000
Gain on sale of loans 112,399,000 262,811,000
Provision for loan losses (8,424,000) (33,941,000)
Amortization of receivable (16,940,000) (68,611,000)
Net unrealized loss on valuation
of interest-only strips -- (18,950,000)
---------------------------------
Balance, end of year $ 129,113,000 $ 270,422,000
</TABLE>
F-11
<PAGE> 63
The activity in mortgage servicing rights is summarized as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------
1996 1997
-------------------------------
<S> <C> <C>
Balance, beginning of year $ -- $ 10,902,000
Gain on sale of loans 11,759,000 16,251,000
Amortization of receivable (857,000) (5,512,000)
-------------------------------
Balance, end of year $ 10,902,000 $ 21,641,000
</TABLE>
The Company determines fair value for both the interest-only strips and the
mortgage servicing rights based on rates used to discount the future cash flows,
which were 11.8% and 11.4% for the years ended June 30, 1996 and 1997,
respectively. The Company retains a certain amount of credit risk on loans
securitized. The Company had reserves of $10.3 million and $43.6 million at June
30, 1996 and 1997, respectively, related to these credit risk obligations, which
are netted against the interest-only strips. The weighted average loss reserves
were 1.06% and 1.50% of the amount securitized for the years ended June 30, 1996
and 1997, respectively.
The interest-only strips and the mortgage servicing rights are amortized over
the estimated lives of the loans to which they relate. At June 30, 1996 and
1997, the unamortized balance of the interest-only strips was $129 million and
$290 million, respectively.
The Company determines the fair market value of the interest-only strips, in
part, by applying management's expectations as to future prepayment rates to the
present value of the future cash flows from prior securitizations. The use of
revised prepayment rates, resulted in a fourth quarter unrealized loss of $28.0
million on the valuation of that asset.
Note 4 Equipment and Improvements
Equipment and improvements consisted of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------------
1996 1997
-------------------------------
<S> <C> <C>
Data processing equipment $ 4,937,000 $ 8,239,000
Furniture and fixtures 3,554,000 5,892,000
Data processing software 242,000 1,756,000
Leasehold improvements 242,000 1,666,000
Equipment under capital leases 806,000 806,000
Automobiles 256,000 497,000
-------------------------------
Total 10,037,000 18,856,000
Accumulated depreciation and amortization (3,363,000) (6,171,000)
-------------------------------
Net $ 6,674,000 $ 12,685,000
</TABLE>
F-12
<PAGE> 64
Note 5 Borrowings and Revolving Warehouse Facilities
Borrowings consist of the following:
<TABLE>
<CAPTION>
June 30,
------------------------------
1996 1997
------------------------------
<S> <C> <C>
9.125% Senior Notes due 2003, guaranteed by each of the Restricted Subsidiaries
of the Company. Principal payments of $37,500,000 in each of calendar years
2000 through 2003 -- $150,000,000
5.5% Subordinated Convertible Debentures due 2006 convertible to 6.2 million
shares of the common stock at $19 per share. The Subordinated Convertible
Debentures are subordinated to all existing and future senior debt of the
Company (as defined in the Indenture) $115,000,000 113,990,000
10.5% Senior Notes due 2002, collateralized by certain residual certificates
Principal payments of $5,750,000 in each of calendar years 1999 through 2002 23,000,000 23,000,000
Obligations under capital leases 45,000 --
------------------------------
Total borrowings $138,045,000 $286,990,000
</TABLE>
Maturities on borrowings are as follows:
<TABLE>
<CAPTION>
Total
Borrowings
------------
<S> <C>
Fiscal Years Ended June 30,
1998 -
1999 $5,750,000
2000 43,250,000
2001 43,250,000
2002 43,250,000
2003 37,500,000
Thereafter 113,990,000
------------
Total $286,990,000
</TABLE>
Amounts outstanding under revolving warehouse facilities:
<TABLE>
<CAPTION>
June 30,
-------------------------------
1996 1997
-------------------------------
<S> <C> <C>
Warehouse facility with investment bank collateralized by mortgages/deeds of
trust; expired March 31, 1997 with interest at 0.875% over applicable LIBOR
rate; total credit available $150 million. Applicable LIBOR
rate was 5.5% at June 30, 1996 $ 11,026,000
Warehouse facility with a syndicate of eight commercial banks collateralized by
loans originated and purchased by the Company as well as certain servicing
receivables; expires January 13, 1998 with interest at the option of the Company
of either 1.05% over Fed Funds rate, or .80% over one-month LIBOR rate. Total
credit available $350 million. Fed Funds rate was 5.4% and one-month LIBOR was
5.7% at June 30, 1997 $137,500,000
</TABLE>
F-13
<PAGE> 65
<TABLE>
<CAPTION>
June 30,
---------------------------------
1996 1997
---------------------------------
<S> <C> <C>
Warehouse facility from an investment bank collateralized by loans originated
and purchased by the Company. This line of $125 million (which increased to $250
million at August 19, 1997) bears interest at a rate of .70% over one-month
LIBOR and expires on December 31, 1997. One-month LIBOR rate was 5.7% at June
30, 1997
$250,000,000 revolving warehouse line of credit with an
investment bank secured by the loans held for sale. Interest
accrued based on LIBOR, which varied based on the outstanding
balance of the line of credit. Expired September 1996 122,765,000
$5,000,000 unsecured working capital note with an investment
bank which expired September 1996. Interest accrued at 12% and
was paid monthly 2,000,000
Prepaid commitment fee related to issuance of common stock
warrants to investment bank, net of amortization of $788,000 (23,428,000)
---------------------------------
Total amounts outstanding under
warehouse facilities $ 112,363,000 $ 137,500,000
</TABLE>
Note 6 Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------
1995 1996 1997
---------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 2,154,000 $ 6,344,000 $ 203,000
State 992,000 2,212,000 262,000
---------------------------------------------
3,146,000 8,556,000 465,000
Deferred:
Federal 2,891,000 10,212,000 13,081,000
State 1,080,000 3,740,000 2,852,000
---------------------------------------------
3,971,000 13,952,000 15,933,000
---------------------------------------------
Total $ 7,117,000 $22,508,000 $16,398,000
</TABLE>
The financial statement balances at June 30, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------
1996 1997
------------------------------
<S> <C> <C>
Current taxes payable (receivable):
Federal $ 2,668,000 $ 4,431,000
State 706,000 (1,350,000)
------------------------------
3,374,000 3,081,000
Deferred taxes payable:
Federal 13,451,000 26,930,000
State 5,006,000 9,441,000
------------------------------
18,457,000 36,371,000
------------------------------
Total $ 21,831,000 $ 39,452,000
</TABLE>
F-14
<PAGE> 66
Deferred tax liabilities (assets) consists of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------------
1996 1997
-------------------------------
<S> <C> <C>
Deferred tax liabilities
Interest-only strips $ 16,851,000 $ 35,505,000
Depreciation 412,000 440,000
Deferred loan fees -- 1,346,000
Mortgage servicing rights 5,015,000 9,116,000
-------------------------------
Total deferred tax liabilities 22,278,000 46,407,000
Deferred tax assets
Sec. 475 mark-to-market -- (2,870,000)
State taxes (2,471,000) (3,396,000)
Vacation accrual (298,000) (701,000)
Allowance for doubtful accounts (218,000) (435,000)
Lease cancellation accrual -- (920,000)
Other accruals (834,000) (1,714,000)
-------------------------------
Total deferred tax assets (3,821,000) (10,036,000)
Valuation allowance -- --
-------------------------------
Net deferred tax liabilities $ 18,457,000 $ 36,371,000
</TABLE>
Effective tax rate calculation for fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
Tax Affected Effective
Permanent Permanent Tax Rate
Differences Differences Calculation
---------------------------------------------
<S> <C> <C> <C>
Tax provision $16,398,000
Pretax income 33,507,000
Effective tax rate 48.939%
Federal statutory rate 35.000%
State pre-tax after permanent difference $36,558,000 $2,654,000 7.921%
Pooling of interests 5,156,000 1,805,000 5.385%
Stock options (2,227,000) (779,000) (2.326%)
Other (net) 2.959%
-----------
48.939%
</TABLE>
For 1995 and 1996 the Company's effective tax rate was computed using the
appropriate statutory rates with no significant differences.
Note 7 Commitments and Contingencies
The Company leases office space under operating leases expiring at various dates
through February 2012. In addition, in February 1996, the Company entered into
an operating lease for an airplane, which expires February 2006. Total rent
expense related to operating leases amounted to $1.5 million, $3.2 million and
$5.3 million, for the years ended June 30, 1995, 1996 and 1997, respectively.
Certain leases have provisions for renewal options and/or rental increases at
specified increments or in relation to increases in the Consumer Price Index (as
defined). As of June 30, 1997, listed below are future minimum rental payments
required under non-cancelable operating leases that have initial or remaining
terms in excess of one year:
F-15
<PAGE> 67
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
- ---------------------------
<S> <C>
1998 $ 4,886,000
1999 5,061,000
2000 5,851,000
2001 4,294,000
2002 3,577,000
Thereafter 35,342,000
-----------
$59,011,000
</TABLE>
LITIGATION
In the ordinary course of its business, the Company is subject to claims made
against it by borrowers and private investors arising from, among other things,
losses that are claimed to have been incurred as a result of alleged breaches of
fiduciary obligations, misrepresentations, errors and omissions of employees and
officers of the Company, incomplete documentation and failures by the Company to
comply with various laws and regulations applicable to its business. The Company
believes that liability with respect to any currently asserted claims or legal
action is not likely to be material to the Company's financial position or
results of operations; however, any claims asserted in the future may result in
legal expenses which could have a material adverse effect on the Company's
financial position and results of operations.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Certain members of management have employment or severance agreements which
provide for enhanced severance and other benefits upon a change in control,
as defined in the agreements.
Note 8 Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments as
of June 30, 1996 and 1997 are made by the Company using available market
information, historical data, and appropriate valuation methodologies. However,
considerable judgment is required to interpret market and historical data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1997
------------------------------ ------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance Sheet:
Cash and cash equivalents $ 23,941,000 $ 23,941,000 $ 26,902,000 $ 26,902,000
Loans held for sale 186,189,000 198,507,000 242,987,000 255,136,000
Interest-only strips at fair market value 129,113,000 129,113,000 270,422,000 270,422,000
Mortgage servicing rights 10,902,000 10,902,000 21,641,000 21,641,000
Amounts outstanding under revolving
warehouse facilities 135,791,000 135,791,000 137,500,000 137,500,000
Borrowings 138,045,000 139,035,000 286,990,000 284,735,000
Off Balance Sheet:
Hedge position notional amount outstanding 40,000,000 40,000,000 135,000,000 135,246,000
</TABLE>
The fair value estimates as of June 30, 1996 and 1997 are based on pertinent
information available to management as of the respective dates. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been revalued for purposes
of these financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
The following describes the methods and assumptions used by the Company in
estimating fair values:
Cash and cash equivalents are based on the carrying amount which is a reasonable
estimate of the fair value.
F-16
<PAGE> 68
Loans held for sale are based on current investor yield requirements.
Interest-only strips and mortgage servicing rights are based on the expected
future cash flows using industry assumptions as well as the Company's historical
experience.
Amounts outstanding under revolving warehouse facilities are short-term in
nature and generally bear market rates of interest.
Borrowings are based on the quoted market prices for the same or similar issues
or on the current rates offered to the Company for debt of the same remaining
maturities.
Hedge positions are based on quoted market prices.
Note 9 Employee Benefit Plans
401(K) RETIREMENT SAVINGS PLAN
The Company sponsors a 401(k) Retirement Savings Plan, a defined contribution
plan. Substantially all employees are eligible to participate in the plan after
reaching the age of 21 and completion of six months of service. Contributions
are made from employees' elected salary deferrals. Employer contributions are
determined at the beginning of the plan year at the option of the employer. For
fiscal years 1995, 1996 and 1997, the Company's contribution to the plan
aggregated $46,000, $252,000 and $432,000, respectively.
DEFERRED COMPENSATION PLAN
In April 1997, the Company implemented a Deferred Compensation Plan for highly
compensated employees and directors of the Company. The plan is unfunded and
non-qualified. Eligible participants may defer a portion of their compensation
and receive a Company matching amount up to 4% of their annual base salary. The
Company may also make discretionary contributions to the plan. For the 1997
fiscal year, the Company made no matching or discretionary contributions to the
plan.
STOCK BASED COMPENSATION
The Company has reserved 3,750,000 shares of the common stock for issuance under
its 1991 Stock Incentive Plan, 1995 Stock Incentive Plan and 1996 Stock
Incentive Plan. Under these plans, the Company may grant incentive and
non-qualified options to eligible participants that may vest immediately on the
date of grant or in accordance with a vesting schedule, as determined in the
sole discretion of the Compensation Committee of the Company's Board of
Directors. The exercise price for each option is based on the closing price of
the common stock on the day before the date of grant. Each option plan provides
for a term of 10 years. The Company has also granted options outside of these
plans, on terms established by the Compensation Committee.
A summary of the Company's stock option plans and arrangements as of June 30,
1995, 1996 and 1997 and changes during the years then ended are as follows:
<TABLE>
<CAPTION>
Option Option
Shares Price Range
------------------------------
<S> <C> <C>
1995
Outstanding at beginning of year 447,749 $3.33 - $5.11
Granted 286,875 3.89 - 3.89
Exercised (17,246) 3.33 - 3.89
Forfeited (4,382) 3.33 - 3.89
---------- -------------
Outstanding at end of year 712,996 3.33 - 5.11
---------- -------------
1996
Outstanding at beginning of year 712,996 3.33 - 5.11
Granted 2,464,049 0.19 - 18.61(1)
Exercised (223,148) 3.33 - 7.95
Forfeited (13,175) 3.33 - 7.95
---------- -------------
Outstanding at end of year 2,940,722 0.19 - 18.61
---------- -------------
1997
Outstanding at beginning of year 2,940,722 0.19 - 18.61
Granted 1,647,733 12.0 - 29.70
Exercised (325,049) 3.33 - 11.50
Forfeited (80,915) 3.89 - 28.92
---------- -------------
Outstanding at end of year 4,182,491 0.19 - 29.70
---------- -------------
</TABLE>
(1) Includes options assumed in One Stop acquisition.
The number of options exercisable at June 30, 1996 and 1997, was 670,988 and
1,563,722, respectively. The weighted-average fair value of options granted
during 1996 and 1997 was $5.62 and $13.83, respectively.
F-17
<PAGE> 69
The Company applies APB Opinion 25 and related interpretations in accounting for
its stock-based compensation plans. No compensation cost has been recognized for
its stock option plans and arrangements. If compensation cost for the stock
option plans and arrangements had been determined based on the fair value at the
grant dates for awards under this plan consistent with the method prescribed by
SFAS 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
June 30,
1996 1997
-------------- --------------
<S> <C> <C>
Net income
As reported $ 29,791,000 $ 17,109,000
Pro forma 29,295,000 13,194,000
Primary earnings per share
As reported 1.18 .60
Pro forma 1.16 .46
Fully diluted earnings per share
As reported 1.14 .60
Pro forma 1.12 .49
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
June 30,
1996 1997
------- -------
<S> <C> <C>
Dividend yield 1.22% .54%
Expected volatility 45.42 47.98
Risk-free interest rate 6.26 6.30
Expected life of option 6 years 6 years
</TABLE>
Note 10 Stockholders' Equity
The Company issued a three-for-two stock split in the form of a stock dividend
on February 21, 1997 to stockholders of record on February 10, 1997. The split
was effected as a dividend of one share of common stock for every two shares of
common stock outstanding. After giving effect to this stock split, the Company
had 27.8 million shares outstanding at June 30, 1997.
The Company issued a three-for-two stock split in the form of a stock dividend
on May 17, 1996 to stockholders of record on May 6, 1996. The split was effected
as a dividend of one share of common stock on every two shares of common stock
outstanding. After giving effect to this stock split, the Company had 23.8
million shares outstanding at June 30, 1996.
On October 10, 1996, the Company completed the sale of 3.62 million shares of
common stock in a public offering. The proceeds to the Company from the
offering, net of expenses, were $118 million.
The Company's bank agreements generally limit the Company's ability to pay
dividends to an amount equal to 85% of its net income. In addition, the
Company's indentures relating to its 10.5% Senior Notes due 2002 and 9.125%
Senior Notes due 2003 place certain restrictions on the payment of dividends and
the encumbrance of additional indebtedness based on the Company's net worth.
In June 1996, the Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right ("Right") on each share of
the Company's common stock outstanding on July 12, 1996. Each
F-18
<PAGE> 70
Right, when exercisable, entitles the holder to purchase from the Company one
one-hundredth of a share of Preferred Stock, par value $0.001 per share, of the
Company at a price of $100.00, subject to adjustments in certain cases to
prevent dilution.
The Rights will become exercisable (with certain limited exceptions provided in
the Rights agreement) following the 10th day after (a) a person or group
announces acquisition of 15 percent or more of the common stock, (b) a person or
group announces commencement of a tender offer, the consummation of which would
result in ownership by the person or group of 15 percent or more of the common
stock, (c) the filing of a registration statement for an exchange offer of 15
percent or more of the common stock under the Securities Act of 1933, as
amended, or (d) the Company's board of continuing directors determines that a
person is an "adverse person," as defined in the Rights agreement.
Note 11 Subsidiary Guarantors
In October 1996, the Company completed an offering of its 9.125% Senior Notes
due 2003 which were guaranteed by all of the Company's subsidiaries, all of
which are wholly-owned. The guarantees are joint and several, full, complete and
unconditional. There are no restrictions on the ability of such subsidiaries to
transfer funds to the Company in the form of cash dividends, loans or advances.
The Company is a holding company with limited assets or operations other than
its investments in its subsidiaries. Separate financial statements of the
guarantors are not presented because the aggregate total assets, net earnings
and net equity of such subsidiaries are substantially equivalent to the total
assets, net earnings and net equity of the Company on a consolidated basis.
Note 12 Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------
Sept 30 Dec 31 Mar 31 Jun 30
-------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Fiscal 1996
Revenue $ 23,921 $ 34,079 $ 40,603 $ 51,661
Income before income taxes 9,758 12,190 14,823 15,528
Net income 5,659 7,289 8,564 8,279
Earnings per share - fully diluted 0.23 0.29 0.33 0.29
Fiscal 1997
Revenue $ 75,641 $ 80,028 $ 84,080 $ 32,772
Income before income taxes (4,053) 31,510 30,309 (24,258)
Net income (4,624) 18,274 17,575 (14,115)
Earnings per share - fully diluted (.11) 0.53 0.51 (.37)
</TABLE>
F-19
<PAGE> 71
AAMES FINANCIAL
CORPORATION
RULE 12-06 PROPERTY PLANT AND EQUIPMENT
FISCAL YEARS 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------- ----------- ---------- ----------- ---------- -----------
OTHER
CHANGES-
BALANCE AT ADD BALANCE
BEGINNING ADDITIONS (DEDUCT)- AT END OF
CLASSIFICATION OF PERIOD AT COST RETIREMENTS DESCRIBE PERIOD
- -------------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1995
Automobile $ 202,000 $ 69,000 $ 76,000 $ 195,000
Furniture & Fixtures 1,237,000 349,000 125,000 1,461,000
Leasehold Improvements 113,000 20,000 133,000
Data Processing Equipment 1,116,000 538,000 1,654,000
Capital Leases 797,000 797,000
----------- ---------- -------- --------- -----------
Total $ 3,465,000 $ 976,000 $201,000 $ 4,240,000
=========== ========== ======== ========= ===========
1996
Automobile $ 195,000 $ 154,000 $ 93,000 $ 256,000
Furniture & Fixtures 1,461,000 2,163,000 70,000 3,554,000
Leasehold Improvements 133,000 109,000 242,000
Data Processing Equipment 1,654,000 3,341,000 58,000 4,937,000
Data Processing Software 242,000 242,000
Capital Leases 797,000 9,000 806,000
----------- ---------- -------- --------- -----------
Total $ 4,240,000 $6,018,000 $221,000 $10,037,000
=========== ========== ======== ========= ===========
1997
Automobile $ 256,000 $ 241,000 $ 497,000
Furniture & Fixtures 3,554,000 2,366,000 $ 28,000 5,892,000
Leasehold Improvements 242,000 1,424,000 1,666,000
Data Processing Equipment 4,937,000 3,308,000 6,000 8,239,000
Data Processing Software 242,000 1,514,000 1,756,000
Capital Leases 806,000 806,000
----------- ---------- -------- --------- -----------
Total $10,037,000 $8,853,000 $ 34,000 $18,856,000
=========== ========== ======== ========= ===========
</TABLE>
F-20
<PAGE> 72
AAMES FINANCIAL
CORPORATION
RULE 12-07 ACCUMULATED DEPRECIATION
DEPLETION AND AMORTIZATION OF PROPERTY
PLANT AND EQUIPMENT
FISCAL YEARS 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------- ----------- ------------ ----------- --------- ------------
OTHER
ADDITIONS CHANGES-
BALANCE AT CHARGED TO ADD BALANCE
BEGINNING COSTS & (DEDUCT)- AT END OF
DESCRIPTION OF PERIOD EXPENSES RETIREMENTS DESCRIBE PERIOD
- ----------- ----------- ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
1995
Automobile $ 88,000 $ 9,000 $ 76,000 $ 21,000
Furniture & Fixtures 646,000 175,000 125,000 696,000
Leasehold Improvements 100,000 12,000 112,000
Data Processing Equipment 395,000 263,000 658,000
Capital Leases 555,000 130,000 685,000
---------- ---------- -------- -------- ----------
Total $1,784,000 $ 589,000 $201,000 - $2,172,000
========== ========== ======== ======== ==========
1996
Automobile $ 21,000 $ 102,000 $ 72,000 $ 51,000
Furniture & Fixtures 696,000 377,000 1,073,000
Leasehold Improvements 112,000 21,000 133,000
Data Processing Equipment 658,000 668,000 1,326,000
Data Processing Software - 22,000 22,000
Capital Leases 685,000 73,000 758,000
---------- ---------- -------- -------- ----------
Total $2,172,000 $1,263,000 $ 72,000 - $3,363,000
========== ========== ======== ======== ==========
1997
Automobile $ 51,000 $ 94,000 $ 145,000
Furniture & Fixtures 1,073,000 793,000 1,866,000
Leasehold Improvements 133,000 63,000 196,000
Data Processing Equipment 1,326,000 1,467,000 $ 10,000 2,783,000
Data Processing Software 22,000 353,000 375,000
Capital Leases 758,000 48,000 806,000
---------- ---------- -------- -------- ----------
Total $3,363,000 $2,818,000 $ 10,000 - $6,171,000
========== ========== ======== ======== ==========
</TABLE>
F-21
<PAGE> 73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AAMES FINANCIAL CORPORATION
(Registrant)
Dated: September 26, 1997 By: /s/ Cary H. Thompson
------------------------------------
Cary H. Thompson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gary K. Judis Chairman of the Board September 26, 1997
- ------------------------------
Gary K. Judis
/s/ Cary H. Thompson Chief Executive Officer, September 26, 1997
- ------------------------------ Director (Principal Executive Officer)
Cary H. Thompson
/s/ Neil B. Kornswiet President, Director September 26, 1997
- ------------------------------
Neil B. Kornswiet
/s/ Gregory J. Witherspoon Executive Vice President-- September 26, 1997
- ------------------------------ Finance, Chief Financial
Gregory J. Witherspoon Officer, Director
/s/ Mark E. Elbaum Senior Vice President-- September 26, 1997
- ------------------------------ Finance (Principal Accounting Officer)
Mark E. Elbaum
/s/ Joseph R. Cerrell Director September 26, 1997
- ------------------------------
Joseph R. Cerrell
/s/ John Getzelman Director September 26, 1997
- ------------------------------
John C. Getzelman
/s/ Dennis F. Holt Director September 26, 1997
- ------------------------------
Dennis F. Holt
/s/ Melvyn Kinder Director September 26, 1997
- ------------------------------
Melvyn Kinder
/s/ Lee Masters Director September 26, 1997
- ------------------------------
Lee Masters
</TABLE>
<PAGE> 74
EXHIBIT INDEX
Management Contracts and Compensatory Plans:
<TABLE>
<S> <C>
10.1 Form of Director and Officer Indemnification Agreement
10.2(a) Amended and Restated Employment Agreement between Registrant
and Gary K. Judis (10)
10.2(b) Severance Agreement between Registrant and Gary K. Judis
10.2(c) Consulting Agreement between Registrant and Gary K. Judis
10.3(a) Second Amended and Restated Employment between Registrant and
Cary H. Thompson
10.3(b) Stock Option Agreement between Registrant and Cary H.
Thompson(10)
10.4(a) Employment Agreement between Registrant and Neil Kornswiet
10.4(b) Amendment No. 1 to Exhibit 10.4(a)
10.5 Executive Severance Agreement between Registrant and Gregory
Witherspoon
10.6 Second Amended and Restated Employment Agreement between
Registrant and Barbara Polsky
10.7 Employment Agreement between Registrant and Mark Costello
10.8 1991 Stock Incentive Plan, as amended (2)
10.9 1995 Stock Incentive Plan (10)
10.10(a) 1996 Stock Incentive Plan (12)
10.10(b) Amendment No. 1 to Exhibit 10.10(a)
10.11 1995 Employee Stock Purchase Plan (3)
10.20 Variable Deferred Compensation Plan
Other Exhibits:
2.1 Agreement and Plan of Reorganization, dated as of
August 12, 1996, as amended by Amendment No. 1, dated
August 28, 1996 by and among Registrant, Aames
Acquisition Corporation, One Stop Mortgage, Inc. and
Neil B. Kornswiet (14)
3.1 Certificate of Incorporation of Registrant, as amended
3.2 Bylaws of Registrant, as amended
4.1 Specimen certificate evidencing Common Stock of Registrant
4.2 Rights Agreement, dated as of June 21, 1996 between Registrant and
Wells Fargo Bank, as rights agent (4)
10.12(a) Office Lease, dated December 13, 1989, between State
Street Bank and Trust Company of California, N.A. and
Aames Home Loan, Registrant's wholly owned subsidiary,
for the premises located at 3731 Wilshire Boulevard,
Los Angeles, California (1)
10.12(b) Amendments dated August 1, 1991, March 15, 1992, June 30, 1993
and September 7, 1993 to Exhibit 10.12(b) (5)
10.13(a) Office Building Lease, dated as of August 7, 1996, between Registrant
and California Plaza IIA, LLC, for the premises located at
350 S. Grand Avenue, Los Angeles, California
10.13(b) First Amendment, dated as of August 15, 1997, to Exhibit 10.13(a)
</TABLE>
<PAGE> 75
<TABLE>
<S> <C>
10.14(a) Indenture of Trust, dated February 1, 1995, between
Registrant and Bankers Trust Company of California,
N.A., relating to Registrant's 10.50% Senior Notes due
2002 (5)
10.14(b) Supplemental Indenture of Trust, dated as of April 25, 1995 to Exhibit
10.14(a) (6)
10.15 Indenture, dated as of February 26, 1996, between
Registrant and The Chase Manhattan Bank, N.A.,
relating to Registrant's 5.5% Convertible Subordinated
Debentures due 2006 (7)
10.16 First Supplemental Indenture, dated as of October 21,
1996, between Registrant, The Chase Manhattan Bank and
certain wholly owned subsidiaries of Registrant,
relating to Registrant's 9.125% Senior Notes due 2003 (11)
10.17(a) Interim Loan and Security Agreement, dated as of
November 22, 1996, between Aames Capital Corporation,
Registrant's wholly owned subsidiary ("ACC") and
Prudential Securities Credit Corporation
10.17(b) Notice of Extension of Agreement No. 1, dated as of May 15, 1997,
with effect as of March 31, 1997, to Exhibit 10.17(a)
10.17(c) Amendment, dated as of August 19, 1997, to Exhibit 10.17(a)
10.18 Amended and Restated Mortgage Loan Warehousing Agreement,
dated as of January 15, 1997, among Registrant; ACC;
the lenders from time to time a party thereto; and
NationsBank of Texas, N.A., as administrative agent
for the lenders (13)
10.19(a) Aircraft Lease Agreement, dated as of March 8, 1996,
between C.I.T. Leasing Corporation and Oxford
Aviation Corporation, Inc., Registrant's wholly owned
subsidiary (7)
10.19(b) Corporate Guaranty Agreement, dated as of March 8,
1996, between Registrant and C.I.T. Leasing
Corporation, with respect to Exhibit 10.19(a) (7)
11 Statement re computation of per share earnings
21 Subsidiaries of the Registrant
23.1 Consent of Price Waterhouse LLP
23.2 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
1 Incorporated by reference from Registrant's Registration Statement on Form
S-1, File No. 33-43237.
2 Incorporated by reference from Registrant's Registration Statement on Form
S-1, File No. 33-62400.
3 Incorporated by reference from Registrant's Registration Statement, File No.
333-01312.
4 Incorporated by reference from Registrant's Registration Statement on Form
8-A, File No. 33-13660.
5 Incorporated by reference from Registrant's Registration Statement on Form
S-2, File No. 33-88516.
6 Incorporated by reference from Registrant's Annual Report on Form 10-K for
the year ended June 30, 1995.
<PAGE> 76
7 Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
8 Incorporated by reference from Registrant's Registration Statement on Form
S-2, File No. 33-91640.
9 Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1995.
10 Incorporated by reference from Registrant's Annual Report on Form 10-K for
the year ended June 30, 1996, filed with the Commission on September 16,
1996.
11 Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
12 Incorporated by reference from Registrant's Registration Statement on Form
S-8 dated January 6, 1997.
13 Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996.
14 Incorporated by reference from Registrant's Current Report on Form 8-K
dated September 11, 1996.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
AAMES FINANCIAL CORPORATION
FIRST: The name of this corporation is Aames Financial
Corporation (the "Corporation").
SECOND: The address of the registered office of the
Corporation in the State of Delaware is 1209 Orange Street, City of Wilmington,
County of New Castle. The name of its registered agent at that address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which a corporation may now or hereafter be
organized under the General Corporation Law of the State of Delaware as set
forth in Title 8 to the Delaware Code (the "GCL").
FOURTH: The total number of shares which the Corporation
shall have authority to issue is 8,000,000 consisting of 7,000,000 shares of
common stock, par value $0.001 per share (the "Common Stock"), and 1,000,000
shares of preferred stock, par value $0.001 per share (the "Preferred Stock").
Shares of the Preferred Stock of the Corporation may be issued
from time to time in one or more classes or series, each of which class or
series shall have such distinctive designation or title as shall be fixed by
the Board of Directors of the Corporation (the "Board of Directors") prior to
the issuance of any shares thereof. Each such class or series of Preferred
Stock shall have such voting powers, full or limited, or no voting powers, and
such preferences and relative, participating, optional or other special rights
and such qualifications, limitations or restrictions thereof, as shall be
stated in such resolution or resolutions providing for the issue of such class
or series of Preferred Stock as may be adopted from time to time by the Board
of Directors prior to the issuance of any shares thereof pursuant to the
authority hereby expressly vested in it, all in accordance with the laws of the
State of Delaware.
FIFTH: All rights to vote and all voting power shall be
vested in the Common Stock and the holders thereof shall be entitled at all
elections of directors to one (1) vote per share. Special meetings of the
stockholders for any purpose or purposes may be called at any time only by the
Board of Directors, the Chairman of the Board or by the Chief Executive Officer
or President of the Corporation.
SIXTH: The directors of the Corporation shall be divided
into three classes, designated Class I, Class II and Class III. The term of
the initial Class I directors shall terminate on the date of the 1994 annual
meeting of stockholders; the term of the initial Class II directors shall
terminate on the date of the 1993 annual meeting of stockholders and the term
of the initial Class III directors shall terminate on the date of the 1992
annual meeting of stockholders. At each annual
<PAGE> 2
meeting of stockholders beginning in 1992, successors to the class of directors
whose term expires at that annual meeting shall be elected for a three-year
term. If the number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in each
class as nearly equal as reasonably possible, and any additional directors of
any class elected to fill a vacancy resulting from an increase in such class
shall hold office for a term that shall coincide with the remaining term of
that class, but in no case will a decrease in the number of directors shorten
the term of any incumbent directors. A director shall hold office until the
annual meeting for the year in which his term expires and until his successor
shall be elected and shall qualify, subject, however, to prior death,
resignation, retirement, disqualification or removal from office. Any vacancy
on the Board of Directors, howsoever resulting, shall be filled only by a
majority of the directors then in office, even if less than a quorum, or by a
sole remaining director and not by the stockholders. Any director elected to
fill a vacancy shall hold office for a term that shall coincide with the terms
of the class to which such director shall have been elected.
Subject to the rights, if any, of the holders of shares of
Preferred Stock then outstanding, any or all of the directors of the
Corporation may be removed from office at any time, for cause only, by the
affirmative vote of the holders of a majority of the outstanding shares of the
Corporation then entitled to vote generally in the election of directors,
considered for purposes of this Article SIXTH as one class.
Notwithstanding the foregoing, whenever the holders of any one
or more classes or series of Preferred Stock issued by the Corporation shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of stockholders, the election, term of office,
filling of vacancies and other features of such directorships shall be governed
by the terms of this Certificate of Incorporation or the resolution or
resolutions adopted by the Board of Directors pursuant to the second paragraph
of Article FOURTH applicable thereto, and such directors so elected shall not
be divided into classes pursuant to this Article SIXTH unless expressly
provided by such terms.
SEVENTH: Elections of directors at an annual or
special meeting of stockholders need not be by written ballot unless the Bylaws
of the Corporation shall otherwise provide.
Any action required or permitted to be taken at any annual or
special meeting of stockholders may be taken only upon the vote of the
stockholders at an annual or special meeting duly noticed and called, as
provided in the Bylaws of the Corporation, and may not be taken by written
consent of the stockholders pursuant to the GCL.
EIGHTH: The officers of the Corporation shall be chosen in
such a manner, shall hold their offices for such terms and shall carry out such
duties as are determined solely by the Board of Directors, subject to the right
of the Board of Directors to remove any officer or officers at any time with or
without cause.
2
<PAGE> 3
NINTH: (A) The Corporation shall indemnify to the full
extent authorized or permitted by law (as now or hereafter in effect) any
person made, or threatened to be made, a defendant or witness to any action,
suit or proceeding (whether civil or criminal or otherwise) by reason of the
fact that he, his testator or intestate, is or was a director or officer of the
Corporation or by reason of the fact that such director or officer, at the
request of the Corporation, is or was serving any other corporation,
partnership, joint venture, trust, employee benefit plan or enterprise, in any
capacity. Nothing contained herein shall affect any rights to indemnification
to which employees other than directors and officers may be entitled by law.
No amendment or repeal of this Section A of Article NINTH shall apply to or
have any effect on any right to indemnification provided hereunder with respect
to any acts or omissions occurring prior to such amendment or repeal.
(B) No director of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for any breach of fiduciary duty by such a director as a director.
Notwithstanding the foregoing sentence, a director shall be liable to the
extent provided by applicable law (i) for any 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 GCL, or (iv) for any transaction from
which such director derived an improper personal benefit. No amendment to or
repeal of this Section B of Article NINTH 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 or repeal.
(C) In furtherance and not in limitation
of the powers conferred by statute:
(i) 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 serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify against such liability under the provisions
of law; and
(ii) the Corporation may create a
trust fund, grant a security interest and/or use other means (including,
without limitation, letters of credit, surety bonds and/or other similar
arrangements), as well as enter into contracts providing indemnification to the
full extent authorized or permitted by law and including as part thereof
provisions with respect to any or all of the foregoing to ensure the payment of
such amounts as may become necessary to effect indemnification as provided
therein, or elsewhere.
3
<PAGE> 4
TENTH: In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to adopt,
repeal, alter, amend or rescind the Bylaws of the Corporation.
ELEVENTH: The Corporation reserves the right to repeal,
alter, amend or rescind any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred on stockholders herein are granted subject to this
reservation.
TWELFTH: The name and mailing address for the
Incorporator of the Corporation is as follows: Barbara J. Gillen, 10940
Wilshire Boulevard, Suite 600, Los Angeles, California 90024-3902.
IN WITNESS WHEREOF, the undersigned has executed the
Certificate of Incorporation this 2nd day of October, 1991.
/s/ Barbara J. Gillen
---------------------
Barbara J. Gillen
Incorporator
4
<PAGE> 5
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
AAMES FINANCIAL CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That a meeting of the Board of Directors of Aames Financial
Corporation (the "Corporation"), resolutions were duly adopted setting forth a
proposed amendment of the Certificate of Incorporation of the Corporation,
declaring the amendment to be advisable and calling a meeting of the
stockholders of the Corporation for consideration thereof. The resolution
setting forth the proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of the
Corporation be amended by changing Article FOURTH to provide
that the authorized number of shares shall be 11,000,000,
consisting of 10,000,000 shares of common stock, par value
$0.001 per shares, and 1,000,000 shares of preferred stock,
par value $0.001 per share.
SECOND: That thereafter, pursuant to resolution of its Board
of Directors, the annual meeting of the stockholders of the Corporation was
duly called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That the amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporate law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Gary K. Judis, its Chief Executive Officer, and Bobbie J. Burroughs,
its Secretary, this 25 day of April, 1994.
By:/s/ Gary K. Judis
------------------------------
Chief Executive Officer
ATTEST: /s/ Bobbie J. Burroughs
--------------------------
Secretary
<PAGE> 6
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
AAMES FINANCIAL CORPORATION
(A DELAWARE CORPORATION)
The undersigned GARY JUDIS and BOBBIE BURROUGHS, the President and
Secretary, respectively, of Aames Financial Corporation (the "Corporation"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "DGCL"), do hereby certify
pursuant to Section 103 of the DGCL:
The text of Article FOURTH of the Certificate of Incorporation of the
Corporation is hereby amended and restated to read in full as follows:
FOURTH: The total number of shares which the Corporation shall
have authority to issue is 51,000,000, consisting of
50,000,000 shares of common stock, par value $0.001 per share
(the "Common Stock") and 1,000,000 shares of preferred stock,
par value $0.001 per share (the "Preferred Stock").
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Amendment to the Certificate of Incorporation of the Corporation as of this
17th day of January, 1996.
By: /s/ Gary K. Judis
---------------------------------------
Gary K. Judis, President
Attest: /s/ Bobbie J. Burroughs, Secretary
-----------------------------------
Bobbie J. Burroughs, Secretary
<PAGE> 7
CERTIFICATE OF DESIGNATION OF
RIGHTS, PREFERENCES AND PRIVILEGES OF
SERIES A PREFERRED STOCK
OF
AAMES FINANCIAL CORPORATION
Pursuant to Section 151 of the Delaware General Corporation law:
The undersigned hereby certifies that the following resolution has
been adopted by the Board of Directors of Aames Financial Corporation, a
Delaware corporation (the "Corporation") as required by Section 151 of the
Delaware General Corporation Law by unanimous written consent on June 21, 1996;
RESOLVED, that pursuant to the authority granted to
and vested in the Board of Directors of this
Corporation (hereinafter called the "Board of
Directors") in accordance with the provisions of the
Certificate of Incorporation of the Corporation, the
Board of Directors hereby creates a new series of the
previously authorized Preferred Stock, par value
$0.001 per share (the "Preferred Stock") of the
Corporation, and hereby states the designation and
number of shares, and fixes the, relative rights,
preferences and limitations thereof (in addition to
any provision set forth in the Certificate of
Incorporation of the Corporation which are applicable
to the Preferred Stock of all classes and series) as
follows:
Series A Preferred Stock:
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Preferred Stock" (the "Series A Preferred
Stock") and the number of shares constituting the Series A Preferred Stock
shall be 500,000 shares of Series A Preferred Stock, having a par value of
$0.001 per share. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Corporation
convertible into Series A Preferred Stock.
<PAGE> 8
Section 2. Dividends and Distributions
(a) Subject to the rights of the holders of any shares of
any series of Preferred Stock (or any similar stock) ranking prior and superior
to the Series A Preferred Stock with respect to dividends, the holders of
shares of Series A Preferred Stock, in preference to the holders of Common
Stock, par value $0.001 per share (the "Common Stock"), of the Corporation, and
of any other junior stock, shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, (i) cash dividends in an amount per whole share (rounded to the
nearest cent) equal to the Formula Number (as defined below) then in effect,
times the aggregate per share amount of all cash dividends declared or paid on
the Common Stock, and (ii) a preferential cash dividend (a "Preferential
Dividend"), if any, on the first day of July, October, January and April in
each year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to $1.00 per
share of Series A Preferred Stock less the per share amount of all cash
dividends declared on the Series A Preferred Stock pursuant to clause (i) of
this sentence since the immediately preceding Quarterly Dividend Payment Date
or, with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Preferred Stock. In
addition, if the Corporation shall pay any dividend or make any distribution on
the Common Stock payable in assets, securities or other forms of noncash
consideration (other than dividends or distributions solely in shares of Common
Stock), then, in each such case, the Corporation shall simultaneously pay or
make on each whole outstanding share of Series A Preferred Stock, a dividend or
distribution in like kind equal to the Formula Number then in effect times such
dividend or distribution on each share of the Common Stock. The dividends and
distributions on the Series A Preferred Stock to which holders thereof are
entitled pursuant to clause (i) of the first sentence of this paragraph and the
second sentence of this paragraph are hereinafter referred to as "Participating
Dividends." As used herein, the "Formula Number" shall be 100; provided,
however, that if at any time after June 21, 1996, the Corporation shall (i)
declare or pay any dividend or make any distribution on the Common Stock,
payable in shares of Common Stock, (ii) subdivide (by a stock split or
otherwise), the outstanding shares of Common Stock into a larger number of
shares of Common Stock, or (iii) combine (by a reverse stock split or
otherwise) the outstanding shares of Common Stock into a smaller number of
shares of Common Stock, then in each such case the Formula Number in effect
immediately prior to such event shall be adjusted to a number determined by
multiplying the Formula Number then in effect by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event (and rounding the result
to the nearest whole number); and provided further, that, if at any time after
June 21, 1996, the Corporation shall issue any shares of its capital stock in a
merger, reclassification, or change of the outstanding shares of Common Stock,
then in each such event the Formula Number shall be appropriately adjusted to
reflect such merger, reclassification, or change so that each share of Series A
Preferred Stock continues to be the economic equivalent of a Formula Number of
shares of Common Stock prior to such merger, reclassification or change.
<PAGE> 9
(b) The Corporation shall declare each Participating
Dividend immediately prior to or at the same time it declares any cash or
non-cash dividend or distribution on the Common Stock in respect of which a
Participating Dividend is required to be paid. No cash or non-cash dividend or
distribution on the Common Stock in respect of which a Participating Dividend
is required shall be paid or set aside for payment on the Common Stock unless a
Participating Dividend in respect of such dividend shall have been paid.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the date
of issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board
of Directors may fix a record date for the determination of holders of shares
of Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(a) Each holder of Series A Preferred Stock shall be
entitled to a number of votes equal to the Formula Number then in effect, for
each share of Series A Preferred Stock held of record on each matter on which
holders of the Common Stock or stockholders generally are entitled to vote,
multiplied by the maximum number of votes per share which any holder of the
Common Stock or stockholders generally then have with respect to such matter
(assuming any holding period or other requirement to vote a greater number of
shares is satisfied).
(b) Except as otherwise provided herein, in any other
Certificate of Amendment creating a series of Preferred Stock or any similar
stock, or by law, the holders of shares of Series A Preferred Stock and the
holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one class on
all matters submitted to a vote of stockholders of the Corporation.
(c) Except as set forth herein, or as otherwise provided
by law, holders of Series A Preferred Stock shall have no special voting rights
and their consent shall not be required (except
3
<PAGE> 10
to the extent they are entitled to vote with holders of Common Stock as set
forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(a) Whenever Preferential Dividends or Participating
Dividends are in arrears or the Corporation shall be in default in payment
thereof, thereafter and until all accrued and unpaid Participating Dividends
and Preferential Dividends, whether or not declared, on shares of Series A
Preferred Stock outstanding shall have been paid or set aside for payment in
full, the Corporation shall not:
(i) declare or pay dividends, or make any other
distributions on or redeem or purchase or otherwise acquire for consideration
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on the shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A Preferred Stock
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are
then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior or on a parity (either as to
dividends or upon liquidation, dissolution or winding up) to or with the Series
A Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such junior or parity stock in
exchange for shares of any stock of the Corporation ranking junior (either as
to dividends or upon dissolution, liquidation or winding up) to the Series A
Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration shares of Series A Preferred Stock, or any shares of stock
ranking on a parity with the Series A Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as the Board
of Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(b) The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph (a)
of this Section 4, purchase or otherwise acquire such shares at such time and
in such manner.
4
<PAGE> 11
Section 5. Reacquired Shares. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock subject to the conditions and restrictions on issuance set
forth herein, in the Certificate of Incorporation, or in any other Certificate
of Amendment or Certificate of Designation creating a series of Preferred Stock
or any similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (a) to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution
or winding up) to the Series A Preferred Stock unless, prior thereto, the
holders of shares of Series A Preferred Stock shall have received an amount
equal to the accrued and unpaid dividends and distributions thereon, whether or
not declared, to the date of such payment, plus an amount equal to the greater
of (i) $0.01 per whole share, or (ii) an aggregate amount per share equal to
the Formula Number then in effect times the aggregate amount to be distributed
per share to holders of Common Stock, or (b) to the holders of shares of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, unless simultaneously therewith
distributions are made ratably on the Series A Preferred Stock and all such
parity stock in proportion to the total amounts to which the holders of Series
A Preferred Stock shares are entitled under clause (a)(i) of this sentence and
to which the holders of such parity shares are entitled in each case upon such
liquidation, dissolution or winding up.
Section 7. Consolidation, Merger, etc. If the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share equal to the Formula Number then in effect
times the aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each share of
Common Stock is changed or exchanged. In the event that both this Section 7
and Section 2 appear to apply to a transaction, this Section 7 shall control.
Section 8. Effective Time of Adjustments.
(a) Adjustments to the Series A Preferred Stock required
by the provisions hereof shall be effective as of the time at which the event
requiring such adjustments occurs.
(b) The Corporation shall give prompt written notice to
each holder of a share of Series A Preferred Stock of the effect on any such
shares of any adjustment to the dividend rights or rights upon liquidation,
dissolution or winding up of the Corporation required by the provisions hereof.
Notwithstanding the foregoing sentence, the failure of the Corporation to give
such notice shall not affect the validity of or the force or effect of or the
requirement for such adjustment.
5
<PAGE> 12
Section 9. No Redemption. The shares of Series A Preferred Stock
shall not be redeemable.
Section 10. Rank. Unless otherwise provided in the Certificate
of Incorporation or a Certificate of Designation relating to a subsequent
series of Preferred Stock of the Corporation, the Series A Preferred Stock
shall rank, with respect to the payment of dividends and the distribution of
assets, junior to all series of any other class of the Corporation's Preferred
Stock.
Section 11. Fractional Shares. The Series A Preferred Stock
shall be issuable upon exercise of the Rights issued pursuant to the Rights
Agreement in whole shares or in any fraction of a share that is one
one-hundredth (1/100th) of a share or any integral multiple of such fraction
which shall entitle the holder, in proportion to such holder's fractional
shares, to receive dividends, exercise voting rights, participate in
distributions and to have the benefit of all other rights of holders of Series
A Preferred Stock. In lieu of fractional shares, the Corporation, prior to the
first issuance of a share or a fraction of a share of Series A Preferred Stock,
may elect (1) to make a cash payment as provided in the Rights Agreement for
fractions of a share other than one one-hundredth (1/100th) of a share or any
integral multiple thereof, or (2) to issue depository receipts evidencing such
authorized fraction of a share of Series A Preferred Stock pursuant to an
appropriate agreement between the Corporation and a depository selected by the
Corporation; provided that such agreement shall provide that the holders of
such depository receipts shall have the rights, privileges and preferences to
which they are entitled as holders of the Series A Preferred Stock.
Section 12. Amendment. The Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred
Stock so as to affect them adversely without the affirmative vote of the
holders of at least two-thirds of the outstanding shares of Series A Preferred
Stock, voting together as a single class.
IN WITNESS WHEREOF, AAMES FINANCIAL CORPORATION has caused
this Certificate to be signed and attested this 21st day of June, 1996.
/s/ Gary K. Judis
--------------------------------
Gary K. Judis,
Chief Executive Officer
Attest:
/s/ Audry Patterson
- --------------------------------
Audry Patterson, Secretary
6
<PAGE> 13
CERTIFICATE OF CORRECTION
FILED TO CORRECT A CERTAIN ERROR IN THE
CERTIFICATE OF AMENDMENT OF
AAMES FINANCIAL CORPORATION
Aames Financial Corporation, a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
does hereby certify:
1. The name of the corporation is Aames Financial Corporation.
2. That a Certificate of Amendment was filed by the Secretary of
State of Delaware on January 19, 1996 and that said Certificate requires
correction as permitted by Section 103 of the General Corporation Law of the
State of Delaware.
3. The inaccuracy or defect of said Certificate to be corrected
is as follows: the second paragraph of Article FOURTH was inadvertently
deleted.
4. Article FOURTH of said Certificate is corrected to read in its
entirety as follows:
FOURTH: The total number of shares which the
Corporation shall have authority to issue is
51,000,000, consisting of 50,000,000 shares of common
stock, par value $0.001 per share (the "Common
Stock") and 1,000,000 shares of preferred stock, par
value $0.001 per share (the "Preferred Stock").
Shares of the Preferred Stock of the Corporation may
be issued from time to time in one or more classes or
series, each of which class or series shall have such
distinctive designation or title as shall be fixed by
the Board of Directors of the Corporation (the "Board
of Directors") prior to the issuance of any shares
thereof. Each such class or series of Preferred Stock
shall have such voting powers, full or limited, or no
voting powers, and such preferences and relative,
participating, optional or other special rights and
such qualifications, limitations or restrictions
thereof, as shall be stated in such resolution or
resolutions providing for the issue of such class or
series of Preferred Stock as may be adopted from time
to time by the Board of Directors prior to the
issuance of any shares thereof pursuant to the
authority hereby expressly vested in it, all in
accordance with the laws of the State of Delaware.
7
<PAGE> 14
Aames Financial Corporation has caused this Certificate of Correction
to be signed by Barbara S. Polsky, its authorized officer, this 26th day of
August, 1997.
By: /s/ Barbara S. Polsky
----------------------------------
Barbara S. Polsky
Executive Vice President,
General Counsel and Secretary
-2-
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
AAMES FINANCIAL CORPORATION
A DELAWARE CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I - CORPORATE OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1. Registered Office. . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Principal Office. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 3. Other Offices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - STOCKHOLDERS MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1. Place of Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Annual Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 3. Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 4. Notice of Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 5. Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 6. Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 7. Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 8. Stockholder List. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 9. Consent of Stockholders in Lieu
of Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 10. Inspectors of Election. . . . . . . . . . . . . . . . . . . . . . . . 4
Section 11. Opening and Closing of Polls. . . . . . . . . . . . . . . . . . . . . 5
Section 12. Record Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 13. Procedures for Meetings. . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III - BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 1. Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2. Number and Qualifications. . . . . . . . . . . . . . . . . . . . . . 7
Section 3. Election and Term of Office. . . . . . . . . . . . . . . . . . . . . 7
Section 4. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 5. Place of Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 6. Regular Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 7. Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 8. Meetings by Communication
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 9. Quorum and Manner of Acting. . . . . . . . . . . . . . . . . . . . . 9
Section 10. Validation of Defectively Called or
Noticed Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 11. Action Without Meeting. . . . . . . . . . . . . . . . . . . . . . . . 9
Section 12. Compensation of Directors. . . . . . . . . . . . . . . . . . . . . . 9
Section 13. Committees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
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ARTICLE IV - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 1. Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 2. Election of Officers. . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3. Subordinate Officers. . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 4. Removal and Resignation of
Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 5. Vacancies in Offices. . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6. Chairman of the Board. . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7. Chief Executive Officer. . . . . . . . . . . . . . . . . . . . . . . 11
Section 8. President. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 9. Vice Presidents. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 10. Secretary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 11. Chief Financial Officer or
Treasurer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE V - INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 1. Agents, Proceedings and Expenses. . . . . . . . . . . . . . . . . . . 12
Section 2. Actions Other Than By The
Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3. Actions by the Corporation. . . . . . . . . . . . . . . . . . . . . . 13
Section 4. Successful Defense by Agent. . . . . . . . . . . . . . . . . . . . . 14
Section 5. Required Approval. . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 6. Advance of Expenses. . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7. Contractual Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 8. Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 9. Insurance and Similar
Arrangements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 10. Constituent Corporations. . . . . . . . . . . . . . . . . . . . . . . 15
Section 11. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE VI - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 1. Inspection of Books and Records by
Stockholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 2. Inspection of Books and Records by
Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 3. Checks, Drafts, Evidences of
Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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Section 4. Corporate Contracts and Instruments;
How Executed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 5. Certificates for Shares. . . . . . . . . . . . . . . . . . . . . . . 17
Section 6. Transfer of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 7. Lost, Stolen or Destroyed
Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8. Representation of Shares of Other
Corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 9. Construction and Definitions. . . . . . . . . . . . . . . . . . . . . 18
Section 10. Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 11. Conformance to the Law. . . . . . . . . . . . . . . . . . . . . . . . 18
Section 12. Seal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 13. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 14. Dividends; Surplus. . . . . . . . . . . . . . . . . . . . . . . . . . 18
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<PAGE> 5
BYLAWS
OF
AAMES FINANCIAL CORPORATION
A Delaware Corporation
ARTICLE II
CORPORATE OFFICES
Section 1. Registered Office. The registered office of the
Corporation in the State of Delaware is located at 1209 Orange Street, in the
City of Wilmington, County of Newcastle.
Section 2. Principal Office. The principal office of the
Corporation is located at 3731 Wilshire Boulevard, Los Angeles, California
90010. The Board of Directors (herein referred to as the "Board") is hereby
granted the full power and authority, by a resolution of a majority of the
directors, to change the principal office from one location to another. Any
such change shall be noted in these Bylaws opposite this section, and this
section may be amended to state the new location.
Section 3. Other Offices. The Corporation may establish any
additional offices, at any place or places, as the Board may designate, or as
the business of the Corporation shall require.
ARTICLE III
STOCKHOLDERS MEETINGS
Section 1. Place of Meeting. Meetings of the Stockholders of
the Corporation shall be held at such place, within or without the State of
Delaware, as may from time to time be designated for that purpose either by a
majority of the Board of Directors or by the Chairman of the Board.
Section 2. Annual Meetings. The annual meeting of the
Stockholders shall be held on such date and at such time designated, from time
to time, by resolution of the Board. At each annual meeting of Stockholders,
directors shall be elected and any other proper business may be transacted.
Section 3. Special Meetings. Special meetings of the
Stockholders for the purpose of taking any action which the Stockholders are
permitted to take under the General Corporation Law of the State of Delaware
(herein, as the same may from time to time be amended, referred to as the
"General Corporation Law") may be called at any time by a majority of the Board
of Directors, the Chairman of the Board or by the Chief Executive Officer or
President of the Corporation.
<PAGE> 6
Section 4. Notice of Meetings. Except as otherwise provided by
statute, written or printed notice of each meeting of the Stockholders of the
Corporation, whether annual or special, shall be given not less than 10 nor
more than 60 days prior to the date upon which the meeting is to be held to
each stockholder entitled to vote at such meeting by leaving such notice with
him personally at, or by transmitting such notice with confirmed delivery
(including telex, telegraph, cable or other form of recorded communication,
provided that delivery of such notice in written form is confirmed in a
writing) to, his residence or usual place of business. If mailed, such notice
shall be deemed delivered when deposited in the United States mail in a sealed
envelope addressed to the stockholder at his address as it appears on the stock
records of the Corporation, with postage thereon prepaid. Such notice shall
state 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. If a meeting
is adjourned to another time or place, notice need not be given of the
adjourned meeting if the time and place thereof are announced at the meeting at
which the adjournment is taken and, at the adjourned meeting, such business may
be transacted as might properly have been transacted at the original meeting.
If the adjournment is for more than 30 days, or if after the 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.
Notice of a Stockholders' meeting or adjournment thereof is waived
upon the occurrence of the following:
(a) A Stockholders' meeting is adjourned and a time and
place for the adjourned meeting is announced at the meeting at which the
adjournment is taken, and the period of adjournment does not exceed 30 days
from the date of adjournment.
(b) Receipt by the Corporation of a written notice of
waiver, signed by the person entitled to notice before or after the time stated
therein.
(c) Attendance by the person entitled to notice and
failure of such person to object to the transaction of any business because the
meeting is not lawfully called or convened.
Whenever notice is required to be given under any statute or
the Certificate of Incorporation or these Bylaws to any Stockholder to whom (a)
notice of two consecutive annual meetings, and all notices of meetings or of
the taking of action by written consent without a meeting to such person during
the period between such two consecutive annual meetings or (b) all, and at
least two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve month period, have been mailed addressed to such
person at his address as shown on the records of the Corporation and have been
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returned undeliverable, the giving of notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been
duly given. If any such person shall deliver to the Corporation a written
notice setting forth his then current address, the requirement that notice be
given to such person shall be reinstated. In the event that the action taken
by the Corporation is such as to require the filing of a certificate under any
of the other sections of the General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to
be given pursuant to this Section 4.
Section 5. Quorum. On all questions, the presence of the
holders of a majority of the shares entitled to vote, in person or by proxy,
shall constitute a quorum for the transaction of business at any meeting of the
Stockholders. On all questions, the Stockholders present at a duly called or
held meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough Stockholders to leave
less than a quorum, if any action taken (other than adjournment) is approved by
at least a majority of the shares required to constitute a quorum. In the
absence of a quorum, the Stockholders present in person or by proxy and
entitled to vote at the meeting may, by majority vote, or, in the absence of
all Stockholders, any officer entitled to preside at the meeting, shall have
the power to adjourn the meeting from time to time until Stockholders holding
the requisite amount of stock shall be present in person or by proxy.
Section 6. Voting.
(a) The Stockholders entitled to notice of any meeting or
to vote at such meeting shall only be persons whose names stand on the stock
records of the Corporation on the record date determined in accordance with the
provisions of Section 11 of this Article.
(b) Voting shall in all cases be subject to the
provisions of the Delaware Corporation Law relating to voting of shares.
(c) The common stock shall be entitled to one vote per
share. In the election of directors, a majority of the votes cast shall elect.
Unless otherwise provided in the Certificate of Incorporation or by statute,
the affirmative vote of a majority of the shares represented and voting at a
duly held meeting at which a quorum is present shall be the act of the
Stockholders. The vote on any question need not be by written ballot.
Section 7. Proxies. Each Stockholder entitled to vote at a
meeting of Stockholders or to express consent or dissent to corporate action in
writing without a meeting may authorize another person or persons to act for
him by proxy, but no such proxy shall be voted or
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<PAGE> 8
acted upon after three years from its date, unless the proxy provides for a
longer period. Any such proxy shall be delivered to the Secretary of such
meeting, at or prior to the time designated in the order of business for so
delivering such proxies. A duly executed proxy shall be irrevocable if it
states that it is irrevocable and if, and only so long as, it is coupled with
an interest sufficient in law to support an irrevocable power. A proxy may be
made irrevocable regardless of whether the interest with which it is coupled is
an interest in the stock itself or an interest in the Corporation generally.
Section 8. Stockholder List. The officer who has charge of the
stock ledger of the Corporation shall prepare and make, at least ten 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 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.
Section 9. Vote of Stockholders. Any action required or
permitted to be taken at any annual or special meeting of Stockholders may be
taken only upon the vote of the Stockholders at an annual or special meeting
duly noticed and called and may not be taken by written consent of the
Stockholders pursuant to the GCL.
Section 10. Inspectors of Election. In advance of any meeting of
the Stockholders, the Board shall appoint at least one person, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. The number of such inspectors of election shall be one or
three. In case any person appointed as inspector fails to appear or refuses to
act, the vacancy shall be filled by appointment by the Board in advance of the
meeting, or at the meeting by the chairman of the meeting.
The duties of such inspector shall include: determining the
number of shares outstanding and voting power of each; the shares represented
at the meeting; the existence of a quorum; the authenticity, validity and
effect of proxies as described by Section 231(d) of the Delaware Corporation
Law; receiving votes, ballots or consents; hearing and determining all
challenges and questions in any way arising in connection with the right to
vote; retaining for a reasonable period the disposition of any challenges made
to their determinations; counting and tabulating all votes or consents;
4
<PAGE> 9
determining when the polls shall close; determining the result; certifying
their determination of the number of shares represented at the meeting, and
their count of all votes and ballots; and performing such acts as may be proper
to conduct the election or vote with fairness to all Stockholders. If there
are three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision, act or certificate of
all.
Section 11. Opening and Closing of Polls. An announcement shall
be made at each meeting of the Stockholders of the date and time of the opening
and closing of polls for each matter upon which the Stockholders will vote at
the meeting. No ballot, proxies or votes, nor any revocations thereof or
changes thereto, shall be accepted by the inspectors after the closing of the
polls unless the Court of Chancery upon application by a Stockholder shall
determine otherwise.
Section 12. Record Date. In order that the Corporation may
determine the Stockholders entitled to notice of or to vote at any meeting of
Stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled 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 may fix, in advance, a
record date, which shall not be more than 60 nor less than 10 days before the
date of such meeting, nor more than 60 days prior to any written consent or
other action.
If no record date is fixed:
(a) 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;
(b) 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 is necessary, shall be the day on which the first
written consent is expressed;
(c) the record date for determining Stockholders for any
other purpose shall be at the close of business on the day on which the Board
adopts the resolution relating thereto.
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 may fix a new record date for
the adjourned meeting.
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<PAGE> 10
Section 13. Procedures for Meetings. All meetings of
Stockholders shall be conducted according to such rules and procedures as the
Board of Directors may establish by resolution from time to time as being in
the best interests of the Stockholders and as may be deemed appropriate for
insuring that such meetings are conducted in a fair and orderly manner and in
accordance with the Certificate of Incorporation and these Bylaws.
ARTICLE IV
BOARD OF DIRECTORS
Section 1. Powers. The business and affairs of the Corporation
shall be managed by, or under the direction of the Board, except as may be
otherwise provided by the General Corporation Law or in the Certificate of
Incorporation or these Bylaws. Without prejudice to such powers, but subject
to the same limitation, it is hereby expressly declared that the directors
shall have the following powers in addition to other powers enumerated in these
Bylaws:
(a) To select and remove all officers, agents and
employees of the Corporation; prescribe any powers and duties for them that are
consistent with law, with the Certificate of Incorporation, and with these
Bylaws; fix their compensation; and require from them security for faithful
service;
(b) To conduct, manage and control the affairs and
business of the Corporation, and to make rules and regulations therefor
consistent with law, with the Certificate of Incorporation and with these
Bylaws;
(c) To change the offices of the Corporation from one
location to another; to fix and locate from time to time one or more other
offices of the Corporation within or without the State of Delaware; to cause
the Corporation to be qualified to do business and to conduct business in any
other state, territory, dependency or country; and to designate any place
within or without the State of Delaware for the holding of any Stockholders
meeting or meetings, including annual meetings;
(d) To adopt, make and use a corporate seal; to prescribe
the form of the seal and certificates evidencing stock; and to alter the form
of the seal and certificates;
(e) To authorize the issuance of shares of stock of the
Corporation from time to time, upon such terms and for such consideration as
may be lawful;
(f) To borrow money and incur indebtedness for the
purposes of the Corporation, and to cause to be executed and delivered
therefor, in the corporate name, promissory notes, bonds, debentures, deeds of
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<PAGE> 11
trust, mortgages, pledges, hypothecations, and other evidences of debt and
securities therefor.
Section 2. Number and Qualifications. The number of directors
of the Corporation shall not be less than three (3) nor more than nine (9) as
fixed from time to time by resolution of the Board of Directors; provided that
no decrease in the number of directors shall shorten the term of any incumbent
directors. Directors need not be Stockholders of the Corporation unless
required by the Certificate of Incorporation.
Section 3. Election and Term of Office. Members of the Board of
Directors shall hold office for the terms specified in the Certificate of
Incorporation and until their successors have been elected as provided in the
Certificate of Incorporation.
Section 4. Vacancies.
(a) Any vacancy on the Board of Directors however
resulting, shall be filled only by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director and not by the
Stockholders. Any director elected to fill a vacancy shall hold office for a
term that shall coincide with the term of the class to which such director
shall have been elected.
(b) If at any time, by reason of death or resignation or
other cause, the Corporation should have no directors in office, then any
officer or any Stockholder or an executor, administrator, trustee or guardian
of a Stockholder, or other fiduciary entrusted with like responsibility for the
person or estate of a Stockholder, may call a special meeting of Stockholders
in accordance with the provisions of the Certificate of Incorporation and the
Bylaws or may apply to the Delaware Court of Chancery for a decree summarily
ordering an election as provided by the General Corporation Law.
(c) When one or more directors shall resign from the
Board, effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in these Bylaws.
(d) Any director or the entire Board of Directors may be
removed, with cause only, by the affirmative vote of the holders of a majority
of the outstanding shares of the Corporation then entitled to vote generally in
the election of directors, considered as one class.
(e) Any director may resign effective upon giving written
notice to the Chairman of the Board, the President, the Secretary or
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<PAGE> 12
the Board, unless the notice specifies a later date for the effectiveness of
such resignation.
Section 5. Place of Meeting. Meetings, both regular and
special, of the Board shall be held at such place or places within or without
the State of Delaware, as the Board may from time to time determine.
Section 6. Regular Meetings. Immediately following each annual
meeting of the Stockholders the Board shall hold a regular meeting at the same
place at which such Stockholders' meeting is held, or any other place as may be
fixed from time to by the Board of Directors. Notice of such meeting need not
be given.
Other regular meetings of the Board shall be held without call
at such time and place as the Board may from time to time by resolution
determine. If any day fixed for a regular meeting shall be a legal holiday at
the place where the meeting is to be held, then the meeting which would
otherwise be held on that day shall be held at the same hour on the next
succeeding business day not a legal holiday. Notice of a regular meeting need
not be given.
Section 7. Special Meetings. Except as otherwise provided in
the Certificate of Incorporation, special meetings of the Board for any purpose
or purposes may be called at any time by the Chairman of the Board, the
President, the Secretary or by any three directors.
Written notice of the time and place of special meetings shall
be delivered personally to each director or communicated to each director by
telephone or telegraph or telex or cable or mail or other form of recorded
communication, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the Corporation or, if it is not so
shown on such records or is not readily ascertainable, at that director's
residence or usual place of business. In case such notice is mailed, it shall
be deposited in the United States mail at least seven days prior to the time of
the holding of the meeting. In case such notice is delivered personally or by
other form of written communication, it shall be delivered at least 48 hours
before the time of the holding of the meeting. The notice shall state the time
of the meeting, but need not specify the place of the meeting if the meeting is
to be held at the principal executive office of the Corporation. The notice
need not state the purpose of the meeting unless expressly provided otherwise
by statute.
Section 8. Meetings by Communication Equipment. Members of the
Board, or any committee designated by the Board, may participate in a meeting
of the Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in a
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meeting pursuant to this section shall constitute presence in person at such
meeting.
Section 9. Quorum and Manner of Acting. The presence of a
majority to the total number of directors shall constitute a quorum for the
transaction of business, and the act of a majority of the directors present at
a meeting duly held shall be the act of the Board. In the absence of a quorum,
a majority of the directors present may adjourn any meeting from time to time
until a quorum is present. Notice of an adjourned meeting need not be given.
Section 10. Validation of Defectively Called or Noticed Meetings.
The transactions of any meeting of the Board, however called and noticed or
wherever held, shall be as valid as though made or performed at a meeting duly
held after regular call and notice, if, either before or after the meeting,
each of the directors not present or who, though present, has prior to the
meeting or at its commencement protested the lack of proper notice to such
director, signs a written waiver of notice or a consent to holding such meeting
or approval of the minutes thereof. All such waivers, consents or approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
Section 11. Action Without Meeting. Any action required or
permitted to be taken at any meeting of the Board, or of any committee thereof,
may be taken without a meeting if all members of the Board or committee, as the
case may be, consent thereto in writing and the writing or writings are filed
with the minutes of proceedings of the Board or committee.
Section 12. Compensation of Directors. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement for expenses incurred by them, as may be fixed or determined by
resolution of the Board of Directors.
Section 13. Committees. The Board may, by resolution passed by a
majority of the directors, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. The Board 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. Any
such committee, to the extent provided in the resolution of the Board, shall
have and may exercise all the powers and authority of the Board in the
management of the business and affairs of the Corporation, and may authorize
the seal of the Corporation to be affixed to all papers which may require it;
but no such committee shall have the power or authority in reference to
amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the Stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the Stockholders a
9
<PAGE> 14
dissolution of the Corporation or a revocation of a dissolution, or amending
the Bylaws of the Corporation; and, unless the resolution expressly so
provides, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock or to adopt a certificate of
ownership and merger. Any director may be removed from a committee with or
without cause by the affirmative vote of a majority of the entire Board of
Directors.
ARTICLE V
OFFICERS
Section 1. Officers. The officers of the Corporation shall be a
Chairman, a Vice Chairman, a Chief Executive Officer and/or a President, a
Treasurer or Chief Financial Officer and a Secretary. The Corporation may also
have, at the discretion of the Board, a Chief Operating Officer, Vice Chairman,
one or more Vice Presidents, one or more Assistant Secretaries, one or more
Assistant Treasurers, and such other officers as may be appointed in accordance
with the provisions of Section 3 of this Article. Any number of offices may be
held by the same person.
Section 2. Election of Officers. The officers of the
Corporation, except such officers as may be appointed in accordance with the
provisions of Section 3 or Section 5 of this Article, shall be chosen annually
by the Board, and each shall serve at the pleasure of the Board, subject to the
rights, if any, of an officer under any contract of employment.
Section 3. Subordinate Officers. The Board may appoint, and may
empower the Chief Executive Officer or President to appoint, such other
officers as the business of the Corporation may require, each of whom shall
hold office for such period, have such authority and perform such duties as are
provided in these Bylaws or as the Board or Chief Executive Officer or
President may from time to time determine.
Section 4. Removal and Resignation of Officers. Without
prejudice to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
Board, at any regular or special meeting of the Board, or by any officer upon
whom such power of removal may be conferred by the Board. Any officer may
resign at any time by giving written notice to the Corporation. Any
resignation shall take effect at the date of the receipt of that notice or at
any later time specified in that notice; the acceptance of the resignation
shall not be necessary to make it effective. Any resignation is without
prejudice to the rights, if any, of the Corporation under any contract to which
the officer is a party.
Section 5. Vacancies in Offices. A vacancy in any office
because of death, resignation, removal, disqualification or any other
10
<PAGE> 15
cause shall be filled in the manner prescribed in these Bylaws for regular
election or appointment to such office.
Section 6. Chairman of the Board. The Chairman of the Board, if
such an officer be elected, shall, if present, preside at all meetings of the
Board and exercise and perform such other powers and duties as may be from time
to time assigned to him by the Board.
Section 7. Chief Executive Officer. Subject to such supervisory
powers, if any, as may be given by the Board to the Chairman of the Board, the
Chief Executive Officer, if such an officer be elected, shall, subject to the
control of the Board and the Chairman, have general supervision, direction and
control of the business and the officers of the Corporation. The Chief
Executive Officer shall preside at all meetings of the Stockholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board. The Chief Executive Officer shall exercise and perform such other
powers and duties as may from time to time be assigned to him by the Board.
Section 8. President. Subject to such supervisory powers, if
any, as may be given by the Board to the Chairman of the Board and the Chief
Executive Officer, the President if there be such an officer elected, shall be
the chief operating officer of the Corporation and shall, subject to the
control of the Board, have general supervision, direction, and control of the
business and the officers of the Corporation (other than the Chairman and Chief
Executive Officer). The President shall preside at all meetings of the
Stockholders in the absence of the Chairman and the Chief Executive Officer,
and, in the absence of the Chairman and the Chief Executive Officer, at all
meetings of the Board. The President shall have the general powers and duties
of management usually vested in the office of president and general manager of
a Corporation, and shall have such other powers and duties as may be prescribed
by the Board and the Chief Executive Officer.
Section 9. Vice Presidents. In the absence or disability of the
Chairman, the Chief Executive Officer and the President, the Vice Presidents,
if any, in order of their rank as fixed by the Board, or, if not ranked, the
Vice President designated by the Board shall perform all the duties of such
officer, and when so acting shall have all the powers of, and be subject to all
the restrictions upon, such offices. The Vice Presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them respectively by the Board, the Chief Executive Officer or the President.
Section 10. Secretary. The Secretary shall keep, or cause to be
kept, at the principal executive office or such other place as the Board may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and Stockholders, with the time and
11
<PAGE> 16
place of holding, whether regular or special, and, if special, how authorized,
the notice given, the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at
Stockholders' meetings, and the proceedings.
The Secretary shall give, or cause to be given, notice of all
meetings of the Stockholders and of the Board required by the Bylaws or by law
to be given, and he shall keep the seal of the Corporation, if one be adopted,
in safe custody, and shall have such other powers and perform such other duties
as may be prescribed by the Board.
Section 11. Chief Financial Officer or Treasurer. The Chief
Financial Officer or Treasurer shall keep and maintain, or cause to be kept and
maintained, adequate and correct books and records of accounts of the
properties and business transactions of the Corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares, and shall send or cause to be sent to the
Stockholders of the Corporation such financial statements and reports as are by
law or these Bylaws required to be sent to them. The books of account shall at
all reasonable times be open to inspection by any director.
The Treasurer shall deposit all monies and other valuables in
the name or to the credit of the Corporation with such depositories as may be
designated by the Board. The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Board, shall render to the President and
directors, whenever they request it, an account of all transactions undertaken
as Chief Financial Officer and of the financial condition of the Corporation,
and shall have such other powers and perform such other duties as may be
prescribed by the Board.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND OTHER AGENTS
Section 1. Agents, Proceedings and Expenses. For the purposes
of this Article, "agent" means any person who is or was a director, officer,
employee or other agent of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, employee or agent of another foreign
or domestic Corporation, partnership, joint venture, trust or other enterprise,
or was a director, officer, employee or agent of a foreign or domestic
Corporation which was a predecessor Corporation of the Corporation or of
another enterprise at the request of such predecessor Corporation; "proceeding"
means any threatened, pending or complete action or proceeding, whether civil,
criminal, administrative, or investigative; and expenses" includes, without
limitation, attorneys' fees and any
12
<PAGE> 17
expenses of establishing a right to indemnification under Section 2 or Section
3 of this Article.
Section 2. Actions Other Than By The Corporation. The
Corporation shall have power to 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 an action by or in the right of the Corporation) by
reason of the fact that he 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 expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 3. Actions by the Corporation. The Corporation shall
have power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of
the fact that he 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 expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
13
<PAGE> 18
Section 4. Successful Defense by Agent. To the extent that a
director, officer, employee or agent of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred
to in Sections 2 and 3, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
Section 5. Required Approval. Any indemnification under
Sections 1 and 2 (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in Sections 2 and 3. Such determination shall be made (a) by the Board by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (b) if such disinterested directors so direct,
by independent legal counsel in a written opinion, or (c) by the affirmative
vote of a majority of Stockholders.
Section 6. Advance of Expenses. Expenses incurred in defending
a civil or criminal action, suit or proceeding may be paid by the Corporation
in advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of the director, officer, employee or
agent to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article.
Such expenses incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board deems appropriate.
Section 7. Contractual Rights. The indemnification and
advancement of expenses provided by this Article shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any agreement, vote of Stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 8. Limitations. No indemnification or advance shall be
made under this Article, except as provided in Section 4, in any circumstances
where it appears:
(a) That it would be inconsistent with a provision of the
Certificate of Incorporation, a resolution of the Stockholders or an agreement
in effect at the time of accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred
14
<PAGE> 19
or other amounts were paid, which prohibits or otherwise limits
indemnification; or
(b) That it would be inconsistent with any condition
expressly imposed by a court in approving a settlement.
Section 9. Insurance and Similar Arrangements. The Corporation
shall have the power to 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 him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of this Article.
The Corporation may create a trust fund, grant a security
interest and/or use other means (including, without limitation, letters of
credit, surety bonds and/or other similar arrangements), as well as enter into
contracts pursuant to the provisions of Section 7 of this Article V of these
Bylaws and including as part thereof provisions with respect to any or all of
the foregoing to insure the payment of such amounts as may become necessary to
effect indemnification as provided for therein or elsewhere.
Section 10. Constituent Corporations. For purposes of this
Article, references to "the Corporation" shall include, in addition to the
Corporation, any constituent Corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent Corporation, or is or
was serving at the request of such constituent Corporation as a director,
officer, employee or agent of another Corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the
provisions of this Article with respect to the resulting or surviving
Corporation as he would have with respect to such constituent Corporation if
its separate existence had continued.
Section 11. Definitions. For purposes of this Article,
references to "other enterprises" shall include employee benefit plans;
references to "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the request
of the Corporation" shall include any service as a director, officer, employee
or agent of the Corporation which imposes duties on, or involves services by,
such director, officer, employee, or agent with respect to an employee benefit
plan, its participants, or beneficiaries; and a person who acted in good faith
15
<PAGE> 20
and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the Corporation"
as referred to in this Article.
ARTICLE VII
MISCELLANEOUS
Section 1. Inspection of Books and Records by Stockholders. Any
Stockholder of record, in person or by attorney or other agent, shall, upon
written demand under oath stating the purpose thereof delivered to the
Corporation's principal place of business, have the right during the usual
hours for business to inspect for any proper purpose the Corporation's stock
ledger, a list of its Stockholders, and its other books and records, and to
make copies or extracts therefrom. A proper purpose shall mean a purpose
reasonably related to such person's interest as a Stockholder. In every
instance where an attorney or other agent shall be the person who seeks the
right to inspection, the demand under oath shall be accompanied by a power of
attorney or such other writing which authorizes the attorney or other agent to
so act on behalf of the Stockholder.
Section 2. Inspection of Books and Records by Directors. Any
director shall have the right to examine the Corporation's stock ledger, a list
of its Stockholders and its other books and records for a purpose reasonably
related to his position as a director. Such right to examine the records and
books of the Corporation shall include the right to make copies and extract
therefrom.
Section 3. Checks, Drafts, Evidences of Indebtedness. All
checks, drafts, or other orders for payment of money, notes, or other evidences
of indebtedness, issued in the name of or payable to the Corporation, shall be
signed or endorsed by such person or persons and in such manner as, from time
to time, shall be determined by resolution of the Board.
Section 4. Corporate Contracts and Instruments; How Executed.
The Board, except as otherwise provided in these Bylaws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the Corporation, and this authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the Board or within the agency power of an officer, no officer,
agent, or employee shall have any power or authority to bind the Corporation by
any contract or engagement or to pledge its credit or to render it liable for
any purpose or for any amount.
16
<PAGE> 21
Section 5. Certificates for Shares. Every holder of stock in
the Corporation shall be entitled to have a certificate signed by, or in the
name of the Corporation by the Chairman or the President or a Vice-President,
and by the Chief Financial Officer or Treasurer or an Assistant Treasurer, or
the Secretary or an Assistant Secretary of the Corporation representing the
number of shares owned by him in the Corporation. Any or all of the signatures
on the certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent, or registrar at the
date of issue.
Section 6. Transfer of Shares. Transfers of shares of the
capital stock of the Corporation shall be made only on the books of the
Corporation by the holder thereof, or by his attorney thereunto authorized by a
power of attorney duly executed and filed with the Secretary of the Corporation
or a transfer agent of the Corporation, if any, and on surrender of the
certificate or certificates for such shares properly endorsed. A person in
whose name shares of stock and on the books of the Corporation shall be deemed
the owner thereof as regards the Corporation, and upon any transfer of shares
of stock the person or persons into whose name or names such shares shall have
been transferred, with respect to all rights, privileges and obligations of
holders of stock of the Corporation and as against the Corporation or any other
person or persons. The term "person" or "persons" wherever used herein shall
be deemed to include any partnership, Corporation, association or other entity.
Whenever any transfer of shares shall be made for collateral security, and not
absolutely, such fact, if known to the Secretary or to such transfer agent,
shall be so expressed in the entry of transfer.
Section 7. Lost, Stolen or Destroyed Certificates. The
Corporation may issue a new certificate of stock in the place of any
certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the Corporation a
bond sufficient to indemnify it against any claim that may be made against it
on account of the alleged loss, theft or destruction of any such certificate or
the issuance of such new certificate.
Section 8. Representation of Shares of Other Corporations. The
Chairman of the Board, the President, or any vice president or any person
designated by any of such officers, is authorized, in the absence of
authorization by the Board, to vote on behalf of the Corporation any and all
shares of any other Corporation or Corporations, foreign or domestic, for which
the Corporation has the right to vote. The authority granted to these officers
to vote or
17
<PAGE> 22
represent on behalf of the Corporation any and all shares held by the
Corporation in any other Corporation or Corporations may be exercised by any of
these officers in person or by any person authorized to do so by proxy duly
executed by these officers.
Section 9. Construction and Definitions. Unless the context
requires otherwise, the general provisions, rules of construction, and
definitions in the General Corporation Law shall govern the construction of
these Bylaws. Without limiting the generality of this provision, the singular
number includes the plural, the plural number includes the singular, and the
term "person" includes both a Corporation and a natural person.
Section 10. Amendments. Unless otherwise provided in the
Certificate of Incorporation or the General Corporation Law, the power to
adopt, amend or repeal any Bylaws of the Corporation shall be vested in the
Board of Directors; provided, that the Board of Directors may delegate such
power, in whole or in part, to the Stockholders.
Section 11. Conformance to the Law. In the event that it is
determined that these Bylaws, as now written or as amended, conflict with the
General Corporation Law, or any other applicable law, as now enforced or as
amended, these Bylaws shall be deemed amended, without action of the Board or
the Stockholders, to conform with such law. Such amendment to be so
interpreted as to bring these Bylaws within minimum compliance. For purposes
of this section "amendment" shall include a repeal of, or a change in
interpretation of, the relevant compendium.
Section 12. Seal. The corporate seal shall be in such form as
the Board of Directors shall prescribe. Said seal may be used by causing it or
a facsimile thereof to be impressed or affixed or reproduced or otherwise.
Section 13. Fiscal Year. The fiscal year of the Corporation
shall be fixed, and shall be subject to change, by the Board of Directors.
Section 14. Dividends; Surplus. Subject to the provisions of the
Certificate of Incorporation and any restrictions imposed by statute, the Board
of Directors may declare dividends out of the net assets of the Corporation in
excess of its capital or, in case there shall be no such excess, out of the net
profits of the Corporation for the fiscal year then current and/or the
preceding fiscal year, or out of any funds at the time legally available for
the declaration of dividends (hereinafter referred to as "surplus or net
profits") whenever, and in such amounts as, in its sole discretion, the
conditions and affairs of the Corporation shall render advisable. The Board of
Directors in its sole discretion may, in accordance with law, from time to time
set aside from surplus or net profits such sum or
18
<PAGE> 23
sums as it may think proper as a reserve fund to meet contingencies, or for
equalizing dividends, or for the purpose of maintaining or increasing the
property or business of the Corporation, or for any other purpose as it may
think conducive to the best interests of the Corporation.
19
<PAGE> 24
AMENDMENT NO. 1 TO
BYLAWS
OF
AAMES FINANCIAL CORPORATION
This Amendment No. 1 to the Bylaws of Aames Financial Corporation, a
Delaware corporation (the "Corporation"), is dated July 25, 1997.
1. The first sentence of Article I, Section 1 ("Principal
Office") of the Bylaws is hereby amended to read as follows:
The principal office of the Corporation is located at 350 S.
Grand Avenue, Los Angeles, California 90071.
2. Article III, Section 4(e) ("Vacancies") of the Bylaws is
hereby amended to read as follows:
Any director may resign effective upon giving written notice
to the Chairman of the Board, the Chief Executive Officer, the President, the
Secretary or the Board, unless the notice specifies a later date for the
effectiveness of such resignation.
3. The first sentence of Article III, Section 7 ("Special
Meetings") of the Bylaws is hereby amended to read as follows:
Except as otherwise provided in the Certificate of
Incorporation, special meetings of the Board for any purpose or purposes may be
called at any time by the Chairman of the Board, the Chief Executive Officer,
the President, the Secretary or by any three directors.
4. Article IV, Section 8 ("President") of the Bylaws is hereby
amended to read as follows:
Subject to such supervisory powers, if any, as may be given by
the Board to the Chairman of the Board and the Chief Executive Officer, the
President, if there be such an officer elected, shall be the chief operating
officer of the Corporation and shall, subject to the control of the Board, have
general supervision, direction and control of the business and the officers of
the Corporation (other than the Chairman and the Chief Executive Officer). The
President shall preside at all meetings of the Stockholders in the absence of
the Chairman and the Chief Executive Officer and, in the absence of the
Chairman and the Chief Executive Officer, at all meetings of the Board. The
President shall have the general powers and duties of management usually vested
in the office of president and general manager of a corporation, and shall have
such other powers and duties as may be prescribed by the Board.
<PAGE> 25
5. The last sentence of Article IV, Section 11 ("Chief Financial
Officer or Treasurer") of the Bylaws is hereby amended to read as follows:
The Treasurer shall disburse the funds of the Corporation as
may be ordered by the Board, shall render to the Chief Executive Officer, the
President and directors, whenever they request it, an account of all
transactions undertaken as Chief Financial Officer and of the financial
condition of the Corporation, and shall have such other powers and perform such
other duties as may be prescribed by the Board.
6. Article V, Section 2 ("Actions Other Than By The Corporation")
is hereby amended by adding at the end of such Section the following sentence:
The Corporation shall be required to indemnify a person in
connection with an action, suit or proceeding initiated by such person only if
the action, suit or proceeding was authorized by the board of directors.
7. Article V, Section 2 ("Actions by the Corporation") is hereby
amended by adding at the end of such Section the following sentence:
The Corporation shall be required to indemnify a person in
connection with an action, suit or proceeding initiated by such person only if
the action, suit or proceeding was authorized by the board of directors.
The undersigned does hereby certify that:
(a) I am the duly elected and acting Secretary of Aames Financial
Corporation, a Delaware corporation.
(b) The foregoing Amendment No. 1 to the Bylaws of said
Corporation were duly adopted by the Board of Directors on July 25, 1997.
IN WITNESS WHEREOF, I have hereunto subscribed my name as of this 25th
day of July, 1997.
/s/ Barbara S. Polsky
---------------------
Barbara S. Polsky
Secretary
2
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
PAR VALUE $.001 PER SHARE PAR VALUE $.001 PER SHARE
THIS CERTIFICATE IS TRANSFERABLE
IN NEW YORK, N.Y. AND
RIDGEFIELD PARK, N.J.
[LOGO]
INCORPORATED UNDER THE CUSIP 00253A 10 1
LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS
AAMES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Aames Financial Corporation transferable on the books of the Corporation by the
holder hereof in person or by duly authorized attorney upon the surrender of
this Certificate properly endorsed. This Certificate is not valid unless
countersigned and registered by the Transfer Agent and Registrar. Witness the
facsimile seal of the Corporation and the facsimile signatures of its duly
authorized officers.
Dated: COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY [SEAL]
[SIG] [SIG]
SECRETARY CHAIRMAN AUTHORIZED SIGNATURE
<PAGE> 2
This Certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement between Aames Financial
Corporation (the "Company") and Wells Fargo Bank, as Rights Agent, dated as
June 21, 1996, as it may from time to time be supplemented or amended pursuant
to its terms (the "Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on file at the
principal executive offices of the Company. Under certain circumstances, as set
forth in the Rights Agreement, such Rights may be redeemed, may expire, or may
be evidenced by separate certificates and no longer be evidenced by this
certificate. The Company will mail to the holder of record of this certificate
a copy of the Rights Agreement without charge within ten business days after
receipt of a written request therefor. Under certain circumstances, as set
forth in the Rights Agreement, Rights issued to, or held by, any Person who is,
was or becomes an Acquiring Person or an Affiliate or Associate thereof (as
such terms are defined in the Rights Agreement), whether currently held by or
on behalf of such Person or by any subsequent holder, may become null and void.
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the entireties -------------- ----------------
JT TEN - as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
-------------------------------------
(State)
UNIF TRF MIN ACT - Custodian (until age )
-------- ------
(Cust)
under Uniform Transfers
-------------
(Minor)
to Minors Act
-----------------------
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
__________________________________________________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
_________________________________________________________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.
Dated ________________________________________
X _______________________________________________________
X _______________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By ____________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM,
PURSUANT TO S.E.C. RULE 17AG-15.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this _____
day of _______________, 1997, by and between AAMES FINANCIAL CORPORATION, a
Delaware corporation (the "Company"), and ________________ ("Indemnitee").
R E C I T A L S
A. The Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance.
B. The Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risk at the same time that the availability and coverage
of liability insurance has been severely limited.
C. Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to continue to serve as officers and
directors without additional protection.
D. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
AGREEMENT
The Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
(a) THIRD PARTY PROCEEDINGS. The Company shall indemnify
Indemnitee if Indemnitee is or was 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 an action by or in
the right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee
<PAGE> 2
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 Indemnitee's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that Indemnitee did not act in good faith and in a manner which
Indemnitee 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
reasonable cause to believe that Indemnitee's conduct was unlawful.
(b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company
shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of Indemnitee while an officer or
director, or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) and, to the fullest extent permitted by
law, amounts paid in settlement, in each case to the extent actually and
reasonably incurred by Indemnitee in connection with the defense or settlement
of such action or suit (i) if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in the best interests of the Company and
its stockholders, except that no indemnification shall be made in respect of any
claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Company in the performance of Indemnitee's duty to the Company and
its stockholders unless and only to the extent that the court in which such
action or suit is or was pending shall determine upon application that, in view
of all the circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for expenses and then only to the extent that the court
shall determine; (ii) if Indemnitee is a director, to the extent that the action
or contemplated action seeks monetary damages for breach of Indemnitee's duties
to the Company and its stockholders in circumstances under which Indemnitee's
personal liability therefor has been eliminated as a result of the provisions of
Section 102(b)(7) of the Delaware General Corporation Law; or (iii) if
Indemnitee is an agent other than a director, to the extent that, were
Indemnitee a director, Indemnitee would have the right to be indemnified under
Section l(b)(ii), above; and in the case of Section l(b)(ii) and l(b)(iii)
above, indemnification shall include, to the extent not prohibited by law,
indemnification against all judgments, fines and amounts paid in settlement
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding.
(c) MANDATORY PAYMENT OF EXPENSES. To the extent that
Indemnitee has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Subsection (a) or (b) of this Section
1 or the defense of any claim, issue or matter therein, Indemnitee shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by Indemnitee in connection therewith.
2
<PAGE> 3
2. EXPENSES; INDEMNIFICATION PROCEDURE.
(a) ADVANCEMENT OF EXPENSES. The Company shall advance all
reasonable expenses incurred by Indemnitee in connection with the investigation,
defense, settlement or appeal of any civil or criminal action, suit or
proceeding referenced in Section l(a) or (b) hereof (but not amounts actually
paid in settlement of any such action, suit or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby. The advances to be made hereunder shall be
paid by the Company to Indemnitee within 45 days following delivery of a written
request therefor by Indemnitee to the Company.
(b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to the Chief
Executive Officer of the Company at the address shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). Notice shall be deemed received three business days after the
date postmarked if sent by domestic certified or registered mail, properly
addressed; otherwise notice shall be deemed received when such notice shall
actually be received by the Company. In addition, Indemnitee shall give the
Company such information and cooperation as it may reasonably require and as
shall be within Indemnitee's power.
(c) PROCEDURE. Any indemnification and advances provided for
in Section 1 and this Section 2 shall be made no later than 45 days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within 45 days after a written request for payment thereof has first
been received by the Company, Indemnitee may, but need not, at any time
thereafter bring an action against the Company to recover the unpaid amount of
the claim and, subject to Section 12 of this Agreement, Indemnitee shall also be
entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee. Indemnitee shall be entitled to receive
interim payments of expenses pursuant to Subsection 3(a) unless and until such
defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists. It is the intention of the parties that if the
Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including its Board of Directors, any committee or
subgroup of the Board of Directors, independent legal counsel, or its
stockholders) that Indemnitee has not met such applicable standard of conduct,
shall create a presumption that Indemnitee has or has not met the applicable
standard of conduct.
3
<PAGE> 4
(d) NOTICE TO INSURERS. If, at the time of the receipt of a
notice of a claim pursuant to Section 2(b) hereof, the Company has director and
officer liability insurance in effect, the Company shall give prompt notice of
the commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) SELECTION OF COUNSEL. In the event the Company shall be
obligated under Section 2(a) hereof to pay the expenses of any proceedings
against Indemnitee, the Company, if appropriate, shall be entitled to assume the
defense of such proceeding, with counsel approved by Indemnitee, upon the
delivery to Indemnitee of written notice of its election so to do. After
delivery of such notice, approval of such counsel by Indemnitee and the
retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees of counsel subsequently incurred by
Indemnitee with respect to the same proceeding, provided that (i) Indemnitee
shall have the right to employ separate counsel in any such proceeding at
Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee
has been previously authorized by the Company, (B) Indemnitee shall have
reasonably concluded that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense, or (C) the Company
shall not, in fact, have employed counsel to assume the defense of such
proceeding, then the fees and expenses of Indemnitee's counsel shall be at the
expense of the Company.
3. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
(a) SCOPE. Notwithstanding any other provision of this
Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest
extent permitted by law, notwithstanding that such indemnification is not
specifically authorized by the other provisions of this Agreement, the Company's
Certificate of Incorporation, the Company's Bylaws or by statute. In the event
of any change in any applicable law, statute or rule which narrows the right of
a Delaware corporation to indemnify a member of its board of directors or an
officer, such change, to the extent not otherwise required by such law, statute
or rule to be applied to this Agreement, shall have no effect on this Agreement
or the parties' rights and obligations hereunder.
(b) NONEXCLUSIVITY. The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which Indemnitee may be
entitled under the Company's Certificate of Incorporation, its Bylaws, any
agreement, any vote of stockholders or disinterested Directors, the Corporation
Law of the State of Delaware or otherwise, both as to action in Indemnitee's
official capacity and as to action in another capacity while holding such
office. The indemnification provided under this Agreement shall continue as to
Indemnitee for any action
4
<PAGE> 5
taken or not taken while serving in an indemnified capacity even though
Indemnitee may have ceased to serve in such capacity at the time of any action,
suit or other covered proceeding.
4. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by Indemnitee in the investigation, defense, appeal or settlement of
any civil or criminal action, suit or proceeding, but not, however, for the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such expenses, judgments, fines or penalties to which Indemnitee
is entitled.
5. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
6. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not an
director of the Company but is an officer; or of the Company's key employees, if
Indemnitee is not an officer or director but is a key employee. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a
subsidiary or parent of the Company.
7. SEVERABILITY. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 7. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
5
<PAGE> 6
8. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance
expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, except with respect
to proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or otherwise as required under Section 145
of the Delaware General Corporation Law, but such indemnification or advancement
of expenses may be provided by the Company in specific cases if the Board of
Directors has approved the initiation or bringing of such suit; or
(b) LACK OF GOOD FAITH. To indemnify Indemnitee for any
expenses incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous;
(c) INSURED CLAIMS. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company; or
(d) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for
expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute.
9. CONSTRUCTION OF CERTAIN PHRASES.
(a) For purposes of this Agreement, references to the
"Company" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that if Indemnitee is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have with respect to such constituent corporation if its separate
existence had continued.
(b) For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, employee or agent of the Company
6
<PAGE> 7
or any subsidiary of the Company which imposes duties on, or involves services
by, such director, officer, employee or agent with respect to an employee
benefit plan, its participants, or beneficiaries; and if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan, Indemnitee
shall be deemed to have acted in a manner "not opposed to the best interest of
the Company" as referred to in this Agreement.
10. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
11. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
12. ATTORNEYS' FEES. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement to enforce or
interpret any of the terms of this Agreement, Indemnitee shall be entitled to be
paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
13. NOTICE. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
14. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California,
or in Federal courts located in such State.
15. CHOICE OF LAW. This Agreement shall be governed by and its
provisions construed in accordance with the laws of the State of Delaware.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
AAMES FINANCIAL CORPORATION
-----------------------------------------
AGREED TO AND ACCEPTED:
INDEMNITEE:
- -----------------------------------
- -----------------------------------
(signature)
- -----------------------------------
(address)
- -----------------------------------
8
<PAGE> 1
EXHIBIT 10.2(b)
SEVERANCE AGREEMENT
This Severance Agreement (the "Agreement") is by and between Aames
Financial Corporation ("Aames"), for itself and for all of its affiliated,
related and subsidiary companies, licensees, joint venturers and partnerships,
as well as their respective directors, officers, partners, employees, agents,
attorneys, successors and assigns, past and present, and each of them,
(collectively, "Aames"), on the one hand, and Gary K. Judis, for himself and
his agents, representatives, heirs and assigns (collectively, "Mr. Judis"), on
the other hand.
In consideration of the promises, mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby mutually acknowledged, Aames and Mr. Judis
agree as follows:
1. SEVERANCE OF EMPLOYMENT RELATIONSHIP. Aames and Mr. Judis
agree and acknowledge that Mr. Judis shall voluntarily resign, under Section
7(a) of the Amended and Restated Employment Agreement dated September 12, 1996
between Aames and Mr. Judis (the "Employment Agreement"), as President and
Chief Executive Officer of Aames effective May 7, 1997 (the "Effective Date").
Mr. Judis' letter of resignation shall be in the form attached hereto as
Exhibit A (the "Letter of Resignation"). Effective on the Effective Date, the
Employment Agreement shall be terminated and Mr. Judis shall continue to serve
as Chairman of the Board and commence his duties as a consultant to Aames
pursuant to that certain Consulting Agreement between Aames and Mr. Judis of
even date herewith (the "Consulting Agreement"). Mr. Judis hereby confirms his
agreement and understanding that as of the Effective Date (a) he will become a
consultant to Aames and (b) he has received all compensation, expense
reimbursements and other benefits (other than stock options granted to Mr.
Judis prior to the date hereof and currently outstanding) to which he may be
entitled to receive under the Employment Agreement through the Effective Date,
other than Base Salary (as defined in the Employment Agreement) through the
Effective Date and reimbursement of expenses incurred prior to the Effective
Date.
2. CONSIDERATION. In consideration of the covenants and
undertakings set forth in this Agreement, and concurrently with the execution
of this Agreement, Aames and Mr. Judis agree to the following:
(a) Mr. Judis will receive a lump sum severance payment in the
amount of $900,000 upon execution of this Agreement;
(b) For a period of 12 months from the date hereof, Mr. Judis will
receive board fees of $1 million (payable monthly) for serving as Chairman of
the Board and he shall be entitled to maintain his current office and secretary
which shall be the office and secretary of the Chairman, and to receive such
other perquisites with respect to travel arrangements and use of Company credit
cards that are made available by the Company to other senior executive officers
of the Company, provided that such fees and perquisites shall terminate in the
event he is
<PAGE> 2
removed from the Board of Directors for cause or his position as Chairman
terminates as a result of his voluntary resignation, death or disability;
(c) Mr. Judis will receive from Aames lifetime coverage for
himself and his spouse under medical and dental plans comparable to those
provided by Aames to its senior executive officers;
(d) The life insurance policy provided to Mr. Judis under Section
5(f) of the Employment Agreement will be maintained throughout Mr. Judis' life;
(e) Title to Mr. Judis' current company car will be transferred to
him upon execution of this Agreement;
(f) Aames will continue to maintain directors and officers
liability insurance in an amount at least equal to the amount in effect as of
the date hereof (i.e., $100 million); and
(g) All reasonable legal fees incurred by Mr. Judis in connection
with the negotiation of this Agreement will be paid by Aames.
3. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Mr. Judis hereby
agrees that he will not disclose to any person or otherwise use or exploit any
proprietary or confidential information, including, without limitation, trade
secrets, processes, records of research, proposals, reports, methods,
processes, techniques, computer software or programming, or budgets or other
financial information, regarding Aames, its business, properties, customers or
affairs (collectively, "Confidential Information") obtained by him at any time
during his employment by Aames. Notwithstanding anything herein to the
contrary, the term "Confidential Information" shall not include information
which (a) is or becomes generally available to the public other than as a
result of disclosure by Mr. Judis in violation of this Agreement; (b) is or
becomes available to Mr. Judis on a non-confidential basis from a source other
than Aames, provided that such source is not known by Mr. Judis to be
furnishing such information in violation of a confidentiality agreement with or
other obligation of secrecy to Aames; (c) has been made available, or is made
available, on an unrestricted basis to a third party by Aames, by an individual
authorized to do so; or (d) is known by Mr. Judis prior to its disclosure to
him. Mr. Judis may use and disclose Confidential Information to the extent
necessary to assert any right or defend against any claim arising under this
Agreement or pertaining to Confidential Information or its use, to the extent
necessary to comply with any applicable statute, constitution, treaty, rule,
regulation, ordinance or order, whether of the United States, any state
thereof, or any other jurisdiction applicable to Mr. Judis, or if Mr. Judis
receives a request to disclose all or any part of the information contained in
the Confidential Information under the terms of a subpoena, order, civil
investigative demand or similar process issued by a court of competent
jurisdiction or by a governmental body or agency, whether of the United States
or any state thereof, or any other jurisdiction applicable to Mr. Judis. If
Mr. Judis is served with any subpoena, court order or other legal process
seeking disclosure of any Confidential Information, Mr. Judis shall promptly
notify the Board
2
<PAGE> 3
of Directors at the address set forth below, but in no event more than 48 hours
after receipt of same. Except in the performance of his duties hereunder, Mr.
Judis agrees not to remove any documents, records or other information from the
premises of Aames or any of its subsidiaries or affiliates containing any such
Confidential Information and acknowledges that such documents, records and
other information are the exclusive property of Aames or its subsidiaries or
affiliates. The confidentiality obligations imposed on Mr. Judis by the terms
of this Agreement shall be continuing.
4. NON-COMPETITION AND NON-SOLICITATION. Mr. Judis agrees that
for a period of three years from the date hereof, he will not directly or
indirectly (a) own, manage, operate, control, invest in, lend to or acquire an
interest in, or otherwise engage or participate (whether as a proprietor,
partner, joint venturer, officer, director, investor or other participant) in
any business that competes with Aames; provided, however, that this restriction
shall not prohibit Mr. Judis from (i) owning not more than 1% of the
outstanding shares of any publicly-held corporation engaged in a competing
business with Aames, (ii) engaging in any activity that does not compete with
any activity currently engaged in by Aames, including, but limited to, the
entertainment or recording business or (iii) making personal real estate
investments; or (b) interfere with the business of Aames, whether by way of
interfering with, soliciting or encouraging employees of Aames to terminate
their employment with Aames, or disrupting its relationship with customers,
agents, representatives or vendors or otherwise.
5. REMEDIES FOR BREACH OF THIS AGREEMENT.
(a) INJUNCTIVE RELIEF. Judis agrees and acknowledges that any
remedy at law for any breach or threatened breach of the provisions of
paragraphs 3, 4, 6(c) and 6(d) and the covenants set forth therein, will be
inadequate and, accordingly, Mr. Judis hereby stipulates that Aames is entitled
to obtain injunctive relief for any such breaches or threatened breaches. The
injunctive relief provided for in this paragraph is in addition to, and is not
in limitation of, any and all other remedies at law or in equity otherwise
available to Aames.
(b) ATTORNEYS' FEES AND COSTS. If either party brings an action
to enforce the terms of this Agreement or declare its rights under this
Agreement, the prevailing party in such action, including all appeals, shall
receive reasonable attorneys' fees, experts' fees and all costs, in addition to
such other relief as may be granted.
6. MISCELLANEOUS.
(a) RELEASE. (i) Mr. Judis hereby waives, releases and forever
discharges Aames from any claim of any kind, whether known or unknown,
suspected or unsuspected, arising out of or in any way related to Mr. Judis'
employment with Aames and/or severance of employment from Aames, including but
not limited to any claims based on allegations of discrimination under Title
VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000e, et
seq., the Age Discrimination in Employment Act, as amended, 29 U.S.C. Section
621, et seq., the Americans With Disabilities Act, 42 U.S.C. Section 12101, et
seq., the California Fair
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Employment & Housing Act, California Government Code Section 12900, et seq.,
any contract, tort, wage and hour law, and/or any federal, state or local fair
employment practice or civil rights law, ordinance or executive order, or any
other wrongdoing or improper conduct whatsoever, including but not limited to,
any claims for violation of any state or federal law or regulations, or for
breach of contract, breach of the implied covenant of good faith and fair
dealing, wrongful discharge, misrepresentation, defamation, fraud, fraudulent
inducement or emotional distress, and any and all other claims or torts
whatsoever, all to the fullest extent permitted by law, except for any claims,
obligations and liabilities resulting from, arising out of or in connection
with this Agreement. Mr. Judis acknowledges and agrees that he was provided 21
days to consider this Agreement and to consult with counsel and have the
opportunity to receive independent legal advice with respect to the matters
hereinabove set forth and the asserted rights arising out of said matters, and
has been encouraged to do so. To the extent that Mr. Judis has taken less
than 21 days to consider this Agreement, Mr. Judis acknowledges that he has had
sufficient time to consider the Agreement and to consult with counsel and that
he did not desire or need additional time.
This Agreement as it relates to a release of age discrimination claims
is revocable by Mr. Judis for a period of seven calendar days following his
execution of this Agreement. The revocation must be in writing, must
specifically revoke this Agreement, and must be directed to Alice Cobb,
facsimile number (213) 383-5931.
The foregoing release shall not limit in any way Mr. Judis' right to
indemnification under any indemnification agreement between Aames and Mr.
Judis, Aames' Bylaws or any applicable law, including, but not limited to, the
Delaware General Corporation Law.
(ii) As a material inducement to Mr. Judis to enter into this
Agreement, Aames hereby waives, releases and forever discharges Mr. Judis from
any claims, liabilities, obligations, damages, costs, losses and expenses
(including reasonable attorneys' fees and costs actually incurred), of any
kind, except for shareholder derivative suits brought by or in the right of
Aames, arising out of or in any way related to Mr. Judis' employment or
directorship with Aames and/or severance of employment from Aames which are
currently known to Aames. The parties expressly acknowledge and agree that
Aames does not release Mr. Judis from claims arising out of his employment or
directorship with Aames which are unknown or which it does not know or expect
to exist in its favor at the time of the execution of this Agreement.
(b) RELEASE OF UNKNOWN CLAIMS. In granting the general release
set forth in paragraph 6(a)(i) above, Mr. Judis expressly waives all rights
under Section 1542 of the California Civil Code, which he has read and fully
understands. This section reads as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS
FAVOR AT THE TIME OF EXECUTING THE
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RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
Thus, notwithstanding the provision of California Civil Code Section
1542, Mr. Judis expressly acknowledges that this Agreement is also intended to
include in its effect, without limitation, all claims, other than claims which
may or could arise out of a breach of this Agreement, which he does not know or
expect to exist in his favor at the time of executing this Agreement.
(c) REPRESENTATIONS CONCERNING RELEASED CLAIMS. Mr. Judis
represents he has not filed any complaint or charges against Aames with any
local, state or federal court or agency based upon events occurring prior to
the date of execution of this Agreement. Mr. Judis further represents and
agrees that he will not, in the future file, instigate or encourage the filing
of any proceeding or lawsuit by any party against Aames in any local, state or
federal court or agency. Mr. Judis further represents and agrees that he will
not in the future cooperate or participate in any such lawsuit or proceedings
except in accordance with this Agreement and as otherwise required by law.
(d) ASSISTANCE AND COOPERATION. Mr. Judis agrees that he will
fully cooperate with Aames and will make himself available to meet with
employees and representatives of Aames in connection with any public statements
and existing or future investigation, lawsuits, arbitrations or other
proceedings, whether civil, criminal or administrative in nature, in which
Aames is a party or a witness. Mr. Judis will notify Aames immediately if he
is subpoenaed on any matter to which Aames is a party. Mr. Judis agrees not to
make any negative, disparaging, detrimental or derogatory comments to any third
party about Aames or any of its businesses, employees, executives, agents or
representatives at any time whatsoever. Mr. Judis further agrees that all
public statements about the circumstances surrounding his resignation shall be
consistent with the provisions of the Letter of Resignation.
(e) ENTIRE AGREEMENT. The Consulting Agreement and this Agreement
constitute the entire agreement between Aames and Mr. Judis with respect to the
subject matter hereof and supersede any previous negotiations, agreements and
understandings (this paragraph excludes any stock option agreements between the
parties; such stock option agreements shall remain in effect under the
provisions thereof). Mr. Judis acknowledges that he has not relied on any oral
or written representations by Aames to induce him to sign this Agreement, other
than the terms of this Agreement. No modifications of this Agreement can be
made except in a writing signed by both Mr. Judis and an authorized
representative of Aames.
(f) SEVERABILITY. If any provision of this Agreement is held to
be illegal, invalid or unenforceable under existing or future laws effective
during the term of this Agreement, such provisions shall be fully severable,
the Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of this Agreement, and the
remaining provisions of this Agreement shall remain in full force and effect
and shall not
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be affected by the illegal, invalid or unenforceable provision or by its
severance from this Agreement. Furthermore, in lieu of such illegal, invalid
or unenforceable provision, there shall be added automatically as part of this
Agreement a provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and enforceable.
(g) ARBITRATION. Any and all disputes, controversies or claims
between Aames and Mr. Judis arising out of or in any way related to this
Agreement, including without limitation, fraud in the inducement of this
Agreement, or relating to the validity, enforceability or application of this
Agreement or to Mr. Judis' employment with or separation of employment from
Aames, shall be filed in Los Angeles, California and submitted to final and
binding arbitration under the auspices and rules of the Judicial Arbitration
and Mediation Services, Inc., or if it is no longer in existence, the American
Arbitration Association. There shall be one arbitrator. The parties agree
that they have waived any right to trial by jury. The decision of the
arbitrator shall be final and binding. The prevailing party in any such
arbitration proceeding shall be entitled to its costs and reasonable attorneys'
fees. Judgment upon any award rendered may be entered in any court of
competent jurisdiction.
The parties agree that nothing in this paragraph 6(j) shall in any way
limit or prevent Aames from seeking any and all equitable or legal relief as
set forth in paragraph 5 above.
(h) NOTICE PROVISION. All notices shall be sent to the following
addresses:
If to Aames, to:
Aames Financial Corporation
3731 Wilshire Boulevard
Los Angeles, California 90010
Attention: Board of Directors
(after June 1, 1997, the address for Aames shall be 350 S.
Grand Avenue, 52nd Floor, Los Angeles, California 90017)
If to Mr. Judis, to:
Gary K. Judis
806 N. Roxbury
Beverly Hills, California 90210
(i) GOVERNING LAW. Except where federal law controls, this
Agreement shall be construed and governed exclusively by the laws of the State
of California, without giving effect to its conflict of laws provisions.
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THE SIGNATORIES HAVE CAREFULLY READ THIS ENTIRE AGREEMENT. ITS
CONTENTS HAVE BEEN FULLY EXPLAINED BY THE RESPECTIVE ATTORNEYS. THE
SIGNATORIES FULLY UNDERSTAND THE FINAL AND BINDING EFFECT OF THIS AGREEMENT.
THE ONLY PROMISES MADE TO ANY SIGNATORY ABOUT THIS AGREEMENT, AND TO SIGN THIS
AGREEMENT, ARE CONTAINED IN THIS AGREEMENT. THE SIGNATORIES ARE SIGNING THIS
AGREEMENT VOLUNTARILY.
PLEASE READ CAREFULLY:
THIS SEVERANCE AGREEMENT INCLUDES
A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.
GARY K. JUDIS AAMES FINANCIAL CORPORATION
By: /s/ Gary K. Judis By: /s/ Cary H. Thompson
----------------------------- ---------------------------------
Gary K. Judis Cary H. Thompson
Chief Executive Officer
Dated: May 7, 1997 Dated: May 7, 1997
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EXHIBIT A
FORM OF LETTER OF RESIGNATION
May 7, 1997
Board of Directors
Aames Financial Corporation
3731 Wilshire Boulevard
Los Angeles, California 90010
Ladies and Gentlemen:
Effective this date, I hereby voluntarily resign from my positions as
President and Chief Executive Officer of Aames Financial Corporation (the
"Company") and each of its subsidiaries and affiliates (collectively, the
"Subsidiaries") in accordance with Section 7(a) of my Amended and Restated
Employment Agreement dated September 12, 1996. I also resign from any and all
other offices, including directorships of the Subsidiaries, I may have held
with the Company, except Chairman of the Board.
My resignation completes the planned management succession that was
started when the Company brought Cary Thompson on last year.
I look forward to my continuing involvement with the Company as
Chairman of the Board.
Sincerely,
Gary K. Judis
Chairman of the Board
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EXHIBIT 10.2(c)
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT, dated and effective as of May 7, 1997, is
by and between Aames Financial Corporation, a Delaware corporation (the
"Company"), and Gary K. Judis ("Mr. Judis").
BACKGROUND
In 1979, Mr. Judis became the President of the Company and since 1982
has served as the Company's Chairman, Chief Executive Officer and President
until his resignation on May 7, 1997. The Board of Directors of the Company
has determined that the continued services of Mr. Judis as a consultant to the
Company would be in the best interests of the Company and its stockholders.
Accordingly, the Company and Mr. Judis have agreed to enter into a consulting
arrangement on the terms and conditions set forth below.
In consideration of the mutual covenants and agreements contained
herein, and intending to be legally bound hereby, the parties agree as follows:
1. Engagement of Mr. Judis. The Company hereby engages Mr. Judis
to serve as a consultant to the Company and its subsidiaries. The duties of
Mr. Judis as a consultant, as reasonably requested by the Company and subject
to Section 3 hereof, shall include the following:
(a) Attendance at retail sales meetings;
(b) Use of Mr. Judis' voice in radio and television
advertisements;
(c) Assistance in legislative efforts on behalf of the Company;
(d) Attendance at employee meetings;
(e) Attendance at trade shows and conventions; and
(f) Assistance in capital markets sales efforts.
2. Consulting Fees. In consideration of the services to be
performed by Mr. Judis under this Agreement, the Company shall pay Mr. Judis a
fee of $5,000 per month. Such fee shall be payable in full on the first day of
each month during the term of this Agreement as set forth in Section 4 hereof.
The Company will make all deductions for tax or withholdings from such
consulting payments. In addition, Mr. Judis shall be paid AFTRA/SAG
compensation of $5,000 per advertisement for which he provides the voice-over.
3. Time Devoted to Consulting. Mr. Judis shall devote a minimum
of 10 hours per month to the performance of his duties under this Agreement
(which shall be considered reasonable for purposes of Section 1 hereof), which
may be performed at home or in the office.
<PAGE> 2
4. Term. The term of this Agreement shall commence on the date
hereof and shall continue for three years thereafter.
5. Non-Disclosure of Confidential Information. Mr. Judis hereby
agrees that he will not disclose to any person or otherwise use or exploit,
except in the course of performing services under this Agreement, any
proprietary or confidential information, including, without limitation, trade
secrets, processes, records of research, proposals, reports, methods,
processes, techniques, computer software or programming, or budgets or other
financial information, regarding the Company, its business, properties,
customers or affairs (collectively, "Confidential Information") obtained by him
at any time during the term of this Agreement. Notwithstanding anything herein
to the contrary, the term "Confidential Information" shall not include
information which (a) is or becomes generally available to the public other
than as a result of disclosure by Mr. Judis in violation of this Agreement; (b)
is or becomes available to Mr. Judis on a non-confidential basis from a source
other than the Company, provided that such source is not known by Mr. Judis to
be furnishing such information in violation of a confidentiality agreement with
or other obligation of secrecy to the Company; (c) has been made available, or
is made available, on an unrestricted basis to a third party by the Company, by
an individual authorized to do so; or (d) is known by Mr. Judis prior to its
disclosure to him. Mr. Judis may use and disclose Confidential Information to
the extent necessary to assert any right or defend against any claim arising
under this Agreement or pertaining to Confidential Information or its use, to
the extent necessary to comply with any applicable statute, constitution,
treaty, rule, regulation, ordinance or order, whether of the United States, any
state thereof, or any other jurisdiction applicable to Mr. Judis, or if Mr.
Judis receives a request to disclose all or any part of the information
contained in the Confidential Information under the terms of a subpoena, order,
civil investigative demand or similar process issued by a court of competent
jurisdiction or by a governmental body or agency, whether of the United States
or any state thereof, or any other jurisdiction applicable to Mr. Judis. If
Mr. Judis is served with any subpoena, court order, or other legal process
seeking disclosure of any Confidential Information, Mr. Judis shall promptly
notify the Board of Directors at the address set forth below, but in no event
more than 48 hours after receipt of same. Mr. Judis agrees not to remove any
documents, records or other information from the premises of the Company or any
of its subsidiaries or affiliates containing any such Confidential Information
and acknowledges that such documents, records and other information are the
exclusive property of the Company or its subsidiaries or affiliates. The
confidentiality obligations imposed on Mr. Judis by the terms of this Agreement
shall be continuing.
6. Termination. Mr. Judis shall have the right to terminate
this Agreement at any time upon 30 days written notice to the Company. The
Company shall have the right to terminate this Agreement for cause upon 30 days
written notice to Mr. Judis. For purposes hereof, the term "cause" means:
(a) Material breach of Section 5 of this Agreement by Mr. Judis;
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<PAGE> 3
(b) Gross abuse of trust committed in bad faith; or
(c) Commission of any fraud, theft, embezzlement or other
dishonest act against the Company.
7. Relationship between the Parties. The relationship between
the Company and Mr. Judis shall be that of independent contractor, and Mr.
Judis shall have control of his work and control of the manner in which the
work is performed. Nothing contained in this Agreement shall be construed to
constitute Mr. Judis as an employee, partner, joint venturer or agent of the
Company or any of its subsidiaries.
8. Notices. All notices and consents required or permitted
hereunder shall be sufficient if given in writing and either hand- delivered or
mailed by certified mail, postage prepaid, return receipt requested, to the
other party at the address set forth below or to such other address as either
party may designate by like notice.
If to the Company, to:
Aames Financial Corporation
3731 Wilshire Boulevard
Los Angeles, California 90010
Attention: Board of Directors
(after June 1, 1997, the address for the Company
shall be 350 S. Grand Avenue, 52nd
Floor, Los Angeles, California 90017)
If to Mr. Judis, to:
Mr. Gary K. Judis
806 N. Roxbury
Beverly Hills, California 90210
9. Miscellaneous. This Agreement constitutes the entire
understanding between the parties with respect to the subject matter hereof and
may be modified or terminated only by an executed writing. This Agreement
shall be binding on and enforceable by the respective successors and assigns of
the parties, except that none of the parties may assign any of their rights or
obligations under this Agreement without the express prior written consent of
the other party. No failure to exercise, delay in exercising, or single or
partial exercise of any right, power or remedy by any party shall preclude any
other or further exercise by that party of the same or any other right, power
or remedy. This Agreement shall be governed by and enforced in accordance with
the laws of the State of California. If any part of this Agreement is
construed to be invalid, illegal or unenforceable, then the remainder of this
Agreement shall not be affected by that construction and shall be enforceable
without regard to it. This Agreement may be executed in counterparts, each of
which when so executed and delivered shall be an original. the headings
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of the Sections have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
AAMES FINANCIAL CORPORATION
By: /s/ Cary H. Thompson Cary H.
------------------------------------
Thompson Chief Executive
Officer
By: /s/ Gary K. Judis
------------------------------------
Gary K. Judis
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<PAGE> 1
EXHIBIT 10.3(a)
SECOND AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Second Amended and Restated Employment Agreement (this
"Agreement") is made and entered into as of May 8, 1997 by and between AAMES
FINANCIAL CORPORATION, a Delaware corporation (the "Company'), and CARY H.
THOMPSON, an individual ("Executive").
W I T N E S S E T H:
WHEREAS, Executive and the Company entered into an Employment
Agreement as of March 11, 1996 (the "Original Agreement") as a material
inducement to Executive to accept employment with the Company;
WHEREAS, Executive and the Company entered into an Amended and
Restated Employment Agreement as of June 21, 1996 (the "First Amended
Agreement") to clarify the intent of the parties; and
WHEREAS, Executive and the Company desire to amend and restate the
First Amended Agreement for the primary purpose of reflecting Executive's
position as Chief Executive Officer and revised compensation arrangements.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and
Executive agree as set forth below.
1. Employment and Duties. The Company hereby employs Executive to
serve as Chief Executive Officer of the Company, with the powers and duties
customarily accorded to such position, including those powers and duties set
forth in the Bylaws of the Company for such office and such other duties
consistent therewith as may be assigned to Executive from time to time by the
Board of Directors of the Company (the "Board"). Executive shall report to the
Board. Executive shall endeavor in good faith to perform his duties in an
efficient, faithful and business-like manner. During the term of his employment,
it is intended that Executive also serve as a Director on the Board of the
Company, and the Company will take action within its powers to include Executive
among the slate of directors proposed to be nominated by the Board at any
applicable stockholders meeting.
2. Term. The initial term of this Agreement shall begin on March 15,
1996. The initial term shall expire on June 30, 2001 unless terminated earlier
as set forth in Section 6 hereof or by mutual agreement of the parties hereto
(the "Initial Term"). At
<PAGE> 2
the expiration of the Initial Term and each anniversary thereafter, the term of
this Agreement shall automatically be extended for an additional year (the
"Extension Term") unless either party shall have given written notice to the
other party at least ninety days prior to the end of the Initial Term or the
Extension Term, as the case may be, that it does not desire to extend the term
of this Agreement. If Executive's employment under this Agreement is extended
for an Extension Term, it shall thereafter or during any Extension Term be
terminable (other than upon expiration) only as provided in Section 6 or by
mutual agreement of the parties hereto.
3. Compensation.
(a) Base Salary. During the term of this Agreement, Executive
shall be paid a base salary (the "Base Salary"), payable in accordance with the
Company's normal payroll practices. During the first year of the term of this
Agreement and until March 31, 1997, Executive's Base Salary shall be $500,000.
Effective as of April 1, 1997, Executive's Base Salary shall be $900,000. The
annual Base Salary payable to Executive shall be reviewed by the Board at least
annually; provided, however, that Executive's Base Salary shall not be reduced
below $900,000 per annum during the term of this Agreement.
(b) Bonus.
(i) PERFORMANCE BONUS. During the first year of the
term of this Agreement and until March 31, 1997, Executive participated in the
Company's performance bonus plan for executive officers. Under such plan,
Executive was paid on a quarterly basis a performance bonus (the "Performance
Bonus") measured by return on average equity during the relevant period.
(ii) DISCRETIONARY BONUS. For fiscal years following
fiscal 1997, Executive shall be entitled to a bonus in any fiscal year in an
amount, if any, as shall be determined in the sole discretion of the Board and
may be subject to stockholder approval as determined by the Board. Any such
discretionary bonus shall be paid as soon as practicable following the
completion of the fiscal year for which such discretionary bonus was paid but
not before publication of the audited financial statements of the Company
covering such fiscal year.
(c) Stock Bonus. On the commencement of the Initial Term, the
Company shall grant Executive non-qualified options to purchase 500,000 shares
of the Company's Common Stock (the "Bonus Options"). Of such Bonus Options,
100,000 shall vest immediately upon grant and an additional 100,000 shall vest
on each anniversary of the commencement of the Initial Term. The Bonus Options
will be exercisable at an
2
<PAGE> 3
exercise price equal to $25-7/8 (the Closing Price of the Company's Common Stock
on the New York Stock Exchange on January 17, 1996, the date the Board of
Directors of the Company approved this offer of employment be made to
Executive). Once vested, the Bonus Options will remain exercisable by Executive,
whether or not Executive remains employed by the Company, until the tenth
anniversary of the date of the initial grant (subject to the effect, if any, of
Section 6(a)(x) below). The Company shall register the shares of Common Stock
issuable upon exercise of the Bonus Options and shall use its best efforts to
maintain a current registration statement under the Securities Act of 1933, as
amended, in respect of such shares. The Bonus Options shall be issued under the
Company's stock incentive plans maintained for its executives and shall contain
standard anti-dilution mechanisms to adjust for stock dividends, stock splits,
reverse stock splits, recapitalizations, consolidations and mergers as are
provided for therein. All references to number of shares of Common Stock and
exercise prices contained in this Section 3(c) refer to the Common Stock of the
Company as constituted on March 11, 1996 and the antidilution provisions
referred to in the preceding sentence shall apply to any event covered thereby
(including, but not limited to, the stock split (effected as a stock dividend)
in May 1996) occurring after such date.
(d) Options in Lieu of Tax Bonus. To assist Executive in
providing for federal and state income taxes payable as a result of the exercise
of the Bonus Options, and in recognition of the fact that the Company may
benefit from federal and state tax deductions as a result therefrom, and in lieu
of any cash bonus to provide for such taxes, the Company shall, on the date of
the First Amended Agreement, grant Executive non-qualified options to purchase
447,300 shares of the Company's Common Stock (the "Tax Bonus Options"). Of such
Tax Bonus Options, 89,460 shall vest immediately upon grant and an 89,460 shall
vest on each anniversary of the commencement of the Initial Term. The Tax Bonus
Options will be exercisable at an exercise price equal to $30.00 (the Closing
Price of the Company's Common Stock on the New York Stock Exchange on June 20,
1996). Once vested, the Tax Bonus Options will remain exercisable by Executive,
whether or not Executive remains employed by the Company, until the tenth
anniversary of the date of the initial grant (subject to the effect, if any, of
Section 6(a)(x) below); provided, however, this Option shall not be exercisable
in any tax year of the Company, to the extent that the deduction of any portion
of the compensation paid to the Executive during such year would be limited by
Section 162(m) of the Internal Revenue Code of 1986 as in effect as of the date
of this Agreement. The Company shall register the shares of Common Stock
issuable upon exercise of the Tax Bonus Options and shall use its best efforts
to maintain a current registration statement under the Securities Act of 1933,
as amended, in respect of such shares. The Tax Bonus Options shall be issued
outside the Company's stock incentive plans maintained for its executives but
shall be in a form substantially similar to, and contain standard anti-dilution
mechanisms to adjust for stock dividends, stock splits, reverse stock splits,
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<PAGE> 4
recapitalizations, consolidations and mergers, as are provided in, the Company's
1995 Stock Incentive Plan. All references to number of shares of Common Stock
and exercise prices contained in this Section 3(d) refer to the Common Stock of
the Company as constituted on June 21, 1996 and the antidilution provisions
referred to in the preceding sentence shall apply to any event covered thereby
occurring after such date. The Bonus Options and the Tax Bonus Options are
sometimes referred to collectively in this Agreement as the "Options."
4. Other Executive Benefits. During the term of this Agreement, the
Company shall provide to Executive benefits commensurate with his position,
including each of the following benefits:
(a) Medical and Dental Coverage. The Company agrees to provide
coverage to Executive and dependent members of his family under the same medical
and dental plans as may be maintained from time to time in the discretion of the
Board.
(b) Vacation. Executive shall be entitled to four (4) weeks of
paid vacation during Executive's first year of employment with the Company and
shall be entitled to five (5) weeks during each year of employment with the
Company thereafter for the term of this Agreement. In each case, such
entitlement shall accrue pro rata over the contract year and shall be taken at
such time or times as shall not unreasonably interfere with the operations of
the Company.
(c) Business Expenses. The Company will pay or reimburse
Executive for any out-of-pocket expenses incurred by Executive in the course of
providing his services hereunder, which comply with the Company's travel and
expense policies adopted from time to time by the Board for the CEO. Such
reimbursement shall be made by the Company in the same manner and within the
same time period as applicable to the other executive officers of the Company.
(d) Automobile. The Company shall provide Executive with the
use of a luxury automobile that is selected by Executive and approved by the
Board. On the earlier of significant damage or destruction or attaining three
years of age, the Company shall replace such automobile with a new automobile
selected by Executive and approved by the Board. The Company shall pay all costs
of insurance, repair, maintenance and operation of such automobile.
(e) Benefit Plans. Executive shall be entitled to participate
in any pension, profit-sharing, stock option, stock purchase or other benefit
plan of the
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<PAGE> 5
Company now existing or hereafter adopted for the benefit of employees generally
or the senior executives of the Company.
(f) Life Insurance. Provided the following policies may be
obtained at a reasonable cost, the Company shall provide Executive with a
$1,000,000 standard term life insurance policy and a $1,000,000 standard term
accidental death policy.
(g) Disability. Provided the following policy may be obtained
at a reasonable cost, the Company shall provide Executive with a long-term
disability policy which provides for an annual disability payment in an amount
equal to 125% of Executive's Base Salary.
5. Confidential Information.
(a) Non-Disclosure. Executive hereby agrees, during the term
of this Agreement, he will not disclose to any person or otherwise use or
exploit any proprietary or confidential information, including, without
limitation, trade secrets, processes, records of research, proposals, reports,
methods, processes, techniques, computer software or programming, or budgets or
other financial information, regarding the Company, its business, properties,
customers or affairs (collectively, "Confidential Information") obtained by him
at any time during the term, except to the extent required by Executive's
performance of assigned duties for the Company. Notwithstanding anything herein
to the contrary, the term "Confidential Information" shall not include
information which (i) is or becomes generally available to the public other than
as a result of disclosure by Executive in violation of this Agreement, (ii) is
or becomes available to Executive on a non-confidential basis from a source
other than the Company, provided that such source is not known by Executive to
be furnishing such information in violation of a confidentiality agreement with
or other obligation of secrecy to the Company, (iii) has been made available, or
is made available, on an unrestricted basis to a third party by the Company, by
an individual authorized to do so or (iv) is known by Executive prior to its
disclosure to Executive. Executive may use and disclose Confidential Information
to the extent necessary to assert any right or defend against any claim arising
under this Agreement or pertaining to Confidential Information or its use, to
the extent necessary to comply with any applicable statute, constitution,
treaty, rule, regulation, ordinance or order, whether of the United States, any
state thereof, or any other jurisdiction applicable to Executive, or if
Executive receives a request to disclose all or any part of the information
contained in the Confidential Information under the terms of a subpoena, order,
civil investigative demand or similar process issued by a court of competent
jurisdiction or by a governmental body or agency, whether of the United States
or any state thereof, or any other jurisdiction applicable to Executive.
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(b) Injunctive Relief. Executive agrees that the remedy at law
for any breach by him of the covenants and agreements set forth in this Section
5 may be inadequate and that in the event of any such breach, the Company may,
in addition to the other remedies that may be available to it at law, seek
injunctive relief prohibiting him (together with all those persons associated
with him) from the breach of such covenants and agreements.
6. Termination.
(a) Termination by Company for "Cause" or Voluntarily by
Executive. The Company may terminate this Agreement for "Cause" effective
immediately upon written notice thereof to Executive. For purposes of this
Agreement, "Cause" shall mean and be limited to the following events: (i) an act
of fraud, embezzlement or similar conduct by Executive involving the Company;
(ii) any action by Executive involving the arrest of Executive for violation of
any criminal statute constituting a felony if the Board reasonably determines
that the continuation of Executive's employment after such event would have a
adverse impact on the operations or reputation of the Company in the financial
community; or (iii) a continuing, repeated willful failure or refusal by
Executive to perform his duties; provided, however, that this Agreement may not
be terminated under this subclause (iii) unless Executive shall have first
received written notice from the Board advising Executive of the specific acts
or omissions alleged to constitute a failure or refusal to perform and such
failure or refusal to perform continues after Executive shall have had a
reasonable opportunity to correct the acts or omissions cited in such notice.
In the event of termination for "Cause," or voluntarily by Executive
other than as permitted in Sections 6(b)(i) and 6(b(ii) and 6(c), (x) Executive
shall be entitled to receive that portion of the Base Salary and all benefits
accrued through the date of termination and (y) all Options that have become
exercisable as of the date of termination shall remain so for a period of 90
days.
(b) Termination by Company Other Than for "Cause."
i) Death. Provided that notice of termination has not
previously been given under any Section hereof, if Executive shall die during
the term of this Agreement, this Agreement and all of the Company's obligations
hereunder shall terminate, except that Executive's estate or designated
beneficiaries shall be entitled to receive (A) all earned and unpaid Base Salary
through the date of termination; (B) the Base Salary and all benefits with
respect to the then current contract year which would have been payable or
provided to Executive had the term ended one year following the last day of the
month in which Executive's death occurred; and (C) all other benefits that may
be
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due to Executive or Executive's estate or beneficiaries under the general
provisions of any benefit plan, stock incentive plan or other plan in which
Executive is then a participant, which benefits shall continue to be provided
for a period of one year following the date of death. In addition, of the
Options which are scheduled to vest on the next anniversary of the commencement
of the Initial Term, a percentage of such number of Options shall vest at the
date of death determined by dividing the number of days which have elapsed since
the last such anniversary by the number 365 and multiplying the result by 100.
Further, all Options that have become exercisable as of the date of death
(including those which do so as a result of the provisions of the preceding
sentence) shall remain so for a period of twelve (12) months.
ii) Disability. Provided that notice of termination has
not previously been given under any Section hereof, if Executive becomes ill or
is injured or disabled during the term such that Executive fails to perform all
or substantially all of the duties to be rendered hereunder and such failure
continues for a period in excess of 26 consecutive weeks (a "Disability"), the
Company shall continue to employ Executive under this Agreement for one year
from the date of the Disability (which one year period shall commence at the
beginning of the 26 week period referred to herein) and shall continue to pay
Executive the Base Salary in effect on the date of the Disability (determined at
the beginning of the 26 week period referred to herein) and all benefits then in
effect; provided, that (A) the Company may relieve Executive of his duties and
responsibilities hereunder to the extent permitted by law and (B) any long-term
disability payments received by Executive under any disability insurance plan
made available to Executive by the Company if the premiums were paid by the
Company shall be deducted from the salary otherwise required to be paid to
Executive hereunder. If during the term and subsequent to the Disability
commencement date (which shall be at any time following the end of the 26 week
period referred to herein) Executive shall fully recover, the Company shall have
the right (exercisable within 60 days after receipt of notice from Executive of
such recovery), but not the obligation, to restore Executive to full-time
service at full compensation. If the Company elects not to restore Executive to
full-time service, Executive shall be entitled to obtain other employment. If
Executive is not restored to full-time employment with the Company, all Options
that have become exercisable as of the date of Disability (determined at the end
of the 26 week period referred to herein) shall remain so for a period of 12
months.
iii) Without Cause. If the Company elects to terminate
Executive for any reason whatsoever other than as provided in Section 6(a) or if
the Company causes a Defacto Termination of Executive (as defined below) (each a
"Severance Termination"), Executive shall receive the "Separation Package." As
used herein, the "Separation Package" shall consist of two years' Base Salary
(at the annual rate in effect at the date of the Severance Termination) plus an
amount equal to the
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Performance Bonus actually paid to Executive with respect to the eight fiscal
quarters preceding the date of the Severance Termination (or if Executive has
been employed for less than two years or participated in the performance bonus
plan for less than two years, the amount of Performance Bonus paid to Executive
for the entire period of employment or participation, as the case may be,
multiplied by a fraction, the numerator of which is the number eight and the
denominator of which is the actual number of fiscal quarters for which Executive
was employed by the Company or participated in such plan). In addition, all
Options which are scheduled to vest on the next anniversary of the commencement
of the Initial Term shall vest as of the date of the Severance Termination.
Further, all Options that have become exercisable as of the date of such
termination (including those which do so as a result of the provisions of the
preceding sentence) shall remain so for a period of 12 months. In the event of a
Severance Termination, Executive will also be provided with reasonable office
space and secretarial support as well as the same mailing address and telephone
number which Executive had during the term for up to six months, and the Company
shall pay the costs of out placement services with a provider of its choice at a
level appropriate to Executive's title and position as requested by Executive.
For purposes of this paragraph, a "Defacto Termination" shall include any of the
following events: (i) the Company shall fail to pay or shall reduce the Base
Salary or other benefits provided herein, except as permitted hereunder, or
shall otherwise breach any material provision hereof which breach is not cured
within 10 days after receipt of notice thereof from Executive; (ii) the Company
shall fail to cause Executive to remain the Chief Executive Officer of the
Company; (iii) Executive shall not be continuously afforded the authority,
powers, responsibilities and privileges contemplated in Section 1 above (whether
or not accompanied by a change in title); (iv) the Company shall require
Executive's primary services to be rendered in an area other than the Company's
principal offices in the Los Angeles metropolitan area; or (v) after a Change in
Control (as defined below), the Company increases the base salary for senior
executives of the Company generally without similarly increasing the Base Salary
of Executive. For purposes of clause (iii), Executive shall be deemed not to
have been continuously afforded the authority, powers, responsibilities and
privileges contemplated in Section 1 above if there shall occur any reduction in
the scope, level or nature of Executive's employment hereunder, or any demotion,
any phasing out or assignment to others, of the duties contemplated herein.
(c) Change in Control.
i) Following a Change in Control, this Agreement shall
continue to be binding upon the Company and Executive shall be entitled to the
payments provided for in this Section 6 in the event of termination resulting
from death, disability, cause, or a Severance Termination, all as provided for
in Section 6(a) and 6(b).
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ii) Executive may (but shall not be obligated to)
terminate this Agreement effective 30 days after the giving of such notice given
at any time within two years following a Change in Control. In the event that
Executive elects to terminate this Agreement pursuant to this Section 6(c)(ii),
Executive shall be entitled to the following payments:
(A) If the Change in Control is effected to
an Adverse Person (as defined below), then Executive shall be entitled to and
receive the Separation Package. In addition, all Options then held by Executive
which are not yet vested shall vest as of the date of such termination. Further,
all Options that have become exercisable as of the date of such termination
(including those which do so as a result of the provisions of the preceding
sentence) shall remain so for the entire remaining term of the Options.
(B) If the Change in Control is effected to
a person other than an Adverse Person, Executive shall be entitled to receive
the Separation Package. In addition, all Options which are scheduled to vest on
the next scheduled vesting date during the 12 months following the termination
date shall vest as of the date of such termination. Further, all Options that
have become exercisable as of the date of such termination (including those
which do so as a result of the provisions of the preceding sentence) shall
remain so for a period of 12 months.
(d) Payment of Termination Amounts. Executive may elect to
have all amounts to be paid to Executive pursuant to this Section 6 payable (i)
over the remaining term of this Agreement or for such shorter period as
expressly provided for herein, as applicable, or (ii) in a lump sum within 30
days following termination. In the event Executive elects to be paid pursuant to
clause (i), Executive agrees promptly to notify the Company in writing of
Executive's acceptance of full-time employment; within 15 days after receipt of
such notice, the Company shall pay Executive in a lump sum any amounts which
remain otherwise due to Executive hereunder.
(e) Stock and Similar Rights. Except with regard to the
vesting and exercise dates of Options as set forth in this Section 6,
Executive's rights under any other agreement or plan under which stock options,
restricted stock or similar awards are granted shall be determined in accordance
with the terms and provisions of such plans or agreements.
(f) No Mitigation or Offset. Payment of any sum under this
Section 6 shall not be subject to any claim of mitigation nor shall the Company
be entitled to any right of offset with respect thereto.
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(g) Other Insurance Policies. Upon any termination of
Executive's employment, and upon reimbursement of the Company of all amounts
paid by the Company in connection with such policies, Executive shall have the
right to purchase or otherwise direct the disposition or assignment of any
disability insurance policy on him held by the Company (excluding only group
disability insurance policies) upon the payment of One Dollar ($1.00) as the
total consideration for each such policy.
7. Change in Control. For purposes of this Agreement, a "Change in
Control" shall mean the occurrence of any of the following events which occur
after the date of the Original Agreement:
(a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act ("Rule 13d-3")) of 20% or more of the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding Voting
Securities"); provided, however, that neither of the following acquisitions
shall constitute a Change in Control; (i) any acquisition by the Company or (ii)
any acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company; or
(b) Individuals who, as of the date of the Original Agreement,
constitute the Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date of the Original Agreement whose
election, or nomination for election by the stockholders of the Company, shall
be approved by a vote of a least a majority of the directors then compromising
the Incumbent Board shall be considered as though such individual were a member
of the Incumbent Board; or
(c) Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless, following such
reorganization, merger or consolidation: (i) more than 60% of the combined
voting power of the then outstanding voting securities of the corporation
resulting from such reorganization, merger, or consolidation, which may be the
Company (the "Resulting Corporation") entitled to vote generally in the election
of directors (the "Resulting Corporation Voting Securities") shall then be owned
beneficially, directly or indirectly, by all or substantially all of the Persons
who were the beneficial owners of Outstanding Voting Securities immediately
prior to such reorganization, merger or consolidation, in substantially the same
proportions as their respective ownerships of Outstanding Voting Securities
immediately prior to such reorganization, merger, or consolidation; (ii) no
Person (excluding the Company, any employee benefit plan (or related trust) of
the
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Company, the Resulting Corporation, and any Person beneficially owning,
immediately prior to such reorganization, merger or consolidation, directly or
indirectly, 20% or more of the combined voting power of Outstanding Voting
Securities) shall own beneficially, directly or indirectly 20% or more of the
combined voting power of the Resulting Corporation Voting Securities; and (iii)
at least a majority of the members of the Board shall have been members of the
Incumbent Board at the time of the execution of the initial agreement providing
for such reorganization, merger or consolidation; or
(d) Approval by the stockholders of the Company of (x) a
complete liquidation or dissolution of the Company or (y) the sale or other
disposition of all or substantially all of the assets of the Company, other than
to a corporation (the "Buyer") with respect to which (i) following such sale or
other disposition, more than 60% of the combined voting power of securities of
Buyer entitled to vote generally in the election of directors ("Buyer Voting
Securities"), shall be owned beneficially, directly or indirectly, by all or
substantially all of the Persons who were the beneficial owners of the
Outstanding Voting Securities immediately prior to such sale or other
disposition, in substantially the same proportion as their respective ownership
of Outstanding Voting Securities, immediately prior to such sale or other
disposition; (ii) no Person (excluding the Company and any employee benefit plan
(or related trust) of the Company or Buyer and any Person that shall immediately
prior to such sale or other disposition own beneficially, directly or
indirectly, 20% or more of the combined voting power of Outstanding Voting
Securities), shall own beneficially, directly or indirectly, 20% or more of the
combined voting power or, Buyer Voting Securities; and (z) at least a majority
of the members of the board of directors of Buyer shall have been members of the
Incumbent Board at the time of the execution of the initial agreement or action
of the Board providing for such sale or other disposition or assets of the
Company.
For purposes of this Agreement, an Adverse Person shall mean
any person which acquires control of the Company in a transaction involving a
Change in Control other than a transaction which, before the time of the
transaction, has been approved by the Board of Directors of the Company.
8. Insurance. During the term, the Company shall maintain, at no
cost to Executive, officers and directors liability insurance that would cover
Executive in an amount of no less than $45,000,000.
9. General Provisions.
(a) Notices. All notices, requirements, requests, demands,
claims or other communications hereunder shall be in writing. Any notice,
requirement, request, demand, claim or other communication hereunder shall be
deemed duly given
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(i) if personally delivered, when so delivered, (ii) if mailed, two (2) business
days after having been set by registered or certified mail, return-receipt
requested, postage prepaid and addressed to the intended recipient as set forth
below, (iii) if given by telecopier, once such notice or other communication is
transmitted to the telecopier number specified below, and the appropriate
telephonic confirmation is received, provided that such notice or other
communication is promptly thereafter mailed in accordance with the provisions of
clause (ii) above or (iv) if sent through an overnight delivery service under
circumstances by which such service guarantees next day delivery, the date
following the date so sent:
If to the Company, to:
AAMES FINANCIAL CORPORATION
350 South Grand Avenue
Los Angeles, California 90071
Attn: Executive Vice President -- Human Resources
If to Executive to:
Cary H. Thompson
1944 Fairburn Avenue
Los Angeles, California 90025
Any party may change the address to which notices, requests, demands, claims and
other communications hereunder are to be delivered by giving the other party
notice in the manner herein set forth.
(b) Assignment. This Agreement and the benefits hereunder are
personal to the Company and are not assignable or transferable, nor may be the
services to be performed hereunder be assigned by the Company to any person,
firm or corporation; provided however, that this Agreement and the benefits
hereunder may be assigned by the Company to any corporation into which the
Company may be merged or consolidated, and this Agreement and the benefits
hereunder will automatically be deemed assigned to any such corporation,
subject, however, to Executive's right to terminate this Agreement to the extent
provided in Section 6. In the event of any assignment of this Agreement to any
corporation acquiring all or substantially all of the assets of the Company or
to any other corporation into which the Company may be merged or consolidated,
the responsibilities and duties assigned to Executive by such successor
corporation shall be the responsibilities and duties of, and compatible with the
status of, a senior executive officer of such successor corporation. The Company
may delegate any of its obligations hereunder to any subsidiary of the Company,
provided that such
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delegation shall not relieve the Company of any of its obligations hereunder.
Executive may not assign its rights hereunder or delegate his duties hereunder
to any Person.
(c) Complete Agreement. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof and
supersedes and cancels any and all previous written or oral negotiations,
commitments, understandings, agreements and any other writings or communications
in respect of such subject matter.
(d) Amendments. This Agreement may be modified, amended,
superseded or terminated only by a writing duly signed by both parties.
(e) Severability. Any provision of this Agreement which is
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction or rendering that or any other provision of this Agreement
invalid, illegal or unenforceable in any other jurisdiction.
(f) No Waiver. Any waiver by either party of a breach of any
provisions of this Agreement shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Agreement. The failure of either party to insist upon strict adherence to
any term of this Agreement on one or more occasions shall be considered a waiver
or to deprive such party of the right thereafter to insist upon strict adherence
to that term or any other term of this Agreement.
(g) Binding Effect. This Agreement shall be binding on, and
shall inure to the benefit of, the parties hereto and their permitted assigns,
successors and legal representatives.
(h) Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which when taken together shall constitute
one and the same document.
(i) Governing Law. This Agreement has been negotiated and
entered into in the State of California and shall be construed in accordance
with the laws of the State of California.
(j) Arbitration. The parties hereby expressly agree that any
controversy or claim relating to this Agreement, including the construction,
enforcement
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or application of the terms hereof, shall be submitted to arbitration in Los
Angeles, California by the American Arbitration Association in accordance with
the Commercial Arbitration Rules of such association. The arbitrator shall be a
retired judge of the Los Angeles Superior Court or other party acceptable to the
parties and the rules of evidence shall apply. The costs of the arbitrator shall
be borne equally. Each party shall be responsible for its own attorneys' fees
and costs. However, the arbitrator shall have the right to award costs and
expenses (including actual attorneys' fees) to the prevailing party as well as
equitable relief. The award of the arbitrator shall be final and binding and
shall be enforceable in any court of competent jurisdiction. Nothing in this
paragraph shall preclude the parties from seeking an injunction or other
equitable relief from a court of competent jurisdiction under appropriate
circumstances.
(k) Headings. The headings included in this Agreement are for
the convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer and Executive has executed
the same as of the day and year first above written.
AAMES FINANCIAL CORPORATION
By: /s/ Neil B. Kornswiet
-----------------------------------
Neil B. Kornswiet
Its: President
----------------------------------
/s/ Cary H. Thompson
---------------------------------------
Cary H. Thompson
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EXHIBIT 10.4(a)
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and
entered into as of the 28th day of August, 1996, by and between Aames Financial
Corporation, a Delaware corporation (the "Parent"), and Neil B. Kornswiet, an
individual ("Executive"), with reference to the following:
RECITALS
A. The Parent is a party to an Agreement and Plan of
Reorganization, dated as of August 12, 1996, by and between the Parent, One
Stop Mortgage, Inc., a Wyoming corporation (the "Company") and Aames
Acquisition Corporation, a Delaware corporation ("Merger Sub") (the
"Reorganization Agreement") pursuant to which Merger Sub will be merged with
and into the Company, resulting in the Company becoming a wholly owned
subsidiary of Parent; and
B. It is material condition to the consummation of the
transactions contemplated by the Reorganization Agreement that the parties
enter into and deliver this Agreement to one another.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and
in consideration of the parties consummating the transactions contemplated by
the Reorganization Agreement and the mutual representations, warranties,
covenants and agreements contained herein, the parties hereto to agree as
follows:
1. EMPLOYMENT AND DUTIES. The Parent hereby employs
Executive to serve as Chief Executive Officer and President and Chairman of the
Board of the Company, and effective September 3, 1996, as Executive Vice
President of the Parent, with the powers and duties customarily accorded to
such positions, including those powers and duties set forth in the respective
Bylaws of the Parent and Company for such office and such other duties
consistent therewith as may be assigned to Executive from time to time by the
Chief Executive Officer of the Parent. Executive shall report to the Chief
Executive Officer of the Parent. Executive shall devote his entire business
time and attention to his duties hereunder and shall endeavor in good faith to
perform his duties in an efficient, faithful and business-like manner. During
the term of his employment, it is intended that Executive also serve as a
Director on the Board of Directors of the Company (the "Company Board") and a
Director on the Board of Directors of Parent (the "Parent Board"), and the
Parent will take action within its powers to include Executive among the slate
of directors proposed to be nominated by the Parent Board at any applicable
stockholders meeting.
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2. TERM. The initial term of this Agreement shall begin
on the date hereof and shall expire on the fifth anniversary of the date
hereof unless terminated earlier as set forth in Section 6 hereof or by mutual
agreement of the parties hereto (the "Initial Term"). At the expiration of the
Initial Term and each anniversary thereafter, the term of this Agreement shall
automatically be extended for an additional year (the "Extension Term") unless
either party shall have given written notice to the other party at least ninety
days prior to the end of the Initial Term or the Extension Term, as the case
may be, that it does not desire to extend the term of this Agreement. If
Executive's employment under this Agreement is extended for an Extension Term,
it shall thereafter or during any Extension Term be terminable (other than upon
expiration) only as provided in Section 6 or by mutual agreement of the parties
hereto.
3. COMPENSATION.
(a) Base Salary. During the term of this
Agreement, Executive shall be paid a base salary (the "Base Salary"), payable
in accordance with the Parent's normal payroll practices in the amount of
$750,000 per year. The amount of the Base Salary payable to Executive shall
be reviewed at least annually; provided, however, that Executive's Base Salary
shall not be reduced below $750,000 per annum during the term of this
Agreement.
(b) Performance Bonus.
i) In addition to Base Salary to be
paid to Executive hereunder, the Parent shall pay to Executive a bonus (the
"Performance Bonus") equal to 7.5 percent of the Company's Adjusted Pre-Tax
Income for each fiscal year or portion thereof during the term of Executive's
employment hereunder.
ii) The Performance Bonus for each
fiscal year shall be paid in four quarterly payments (the "Quarterly Payments")
as set forth in clauses iii) and iv) below.
iii) Within forty-five days following the
end of the first three fiscal quarters during any fiscal year which includes
any portion of the employment term hereunder, the Company shall deliver to
Executive a statement setting forth the amount of the Company's Adjusted
Pre-Tax Income for such quarter and for the period from the beginning of the
fiscal year (or, in the case of fiscal 1997, the date of the commencement of
Executive's employment hereunder) through the most recent fiscal quarter (the
"Measurement Period"), certified by the Chief Financial Officer of Parent,
accompanied by a cash payment in the amount by which (x) 7.5% of the Company's
Adjusted Pre-Tax Income for the Measurement Period, exceeds (y) the sum of the
Quarterly Payments previously paid to Executive with respect to such fiscal
year.
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iv) Within 90 days following the end of the
fourth quarter of any fiscal year which includes any portion of the employment
term hereunder, the Company shall deliver to Executive a reasonably detailed
calculation of the Company's Adjusted Pre-Tax Income for such fiscal year and
the Performance Bonus payable hereunder for such fiscal year, prepared by the
Parent's outside accounting firm. If the amount of the Performance Bonus for
such fiscal year, exceeds the sum of the Quarterly Payments made to Executive
with respect to such fiscal year, such calculation shall be accompanied by a
cash payment in the amount of the difference between the Performance Bonus
payable with respect to such fiscal year and the sum of the Quarterly Payments
previously paid to Executive with respect to such fiscal year. If the sum of
the Quarterly Payments previously paid to Executive with respect to such fiscal
year exceed the amount of the Performance Bonus, then Executive shall, within
15 days of receipt of such calculation, pay such difference to the Company.
v) If the employment term of Executive
hereunder commences or ends during any of the Company's fiscal quarters or
years, the applicable Performance Bonus and Quarterly Payment computed
hereunder with respect to such fiscal period shall be prorated based upon the
actual number of days during such fiscal period included in the employment term
of Executive hereunder; provided however, that the Performance Bonus for the
fiscal quarter commencing July 1, 1996 shall not be prorated and shall be paid
as if Executive had commenced employment pursuant to this Agreement on July 1,
1996.
vi) For purposes of this Agreement, the
Company shall adopt a fiscal year commencing on July 1 and ending on June 30.
(c) Adjusted Pre-Tax Income. For purposes of
this Agreement, Adjusted Pre-tax Income shall mean the income of the Company
computed on an accrual basis in accordance with generally accepted accounting
principles as previously consistently applied by Parent (GAAP), before federal,
state and local income taxes; provided that, in determining Adjusted Pre-Tax
Income, the following adjustments and exceptions shall apply to the application
of GAAP (even if required by "push down" or similar accounting rules under
GAAP) and whether or not recorded on the financial statements of the Company:
i) Revenues shall include only revenues
(i) of the Company derived from the origination, purchase, sale or servicing of
mortgage loans in the ordinary course of the Company's business, (ii) revenues
of the Parent (net of all expenses) derived from the servicing of mortgage
loans originated by the Company (for purposes of this subsection (c)i)(ii)
revenues shall include, without limitation, all loan interest income net of
related carying costs), (iii) revenues received by the Parent (net of
commissions paid by the Parent) with respect to the refinancing of any mortgage
loan originated by the Company, and (iv) revenues received by Parent (net of
commissions paid by the Parent) with respect to credit life, disability and
other ancillary products sold in connection with the Company's origination of
mortgage loans;
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ii) Any equity based benefits to the
employees, directors or agents of the Company, such as profit interests or
appreciation rights, shall be excluded from Adjusted Pre-Tax Income;
iii) The legal, accounting and other
professional fees and expenses (whether incurred before or after the
consummation of the merger) and all other costs associated with negotiating,
entering and closing the Lehman Financing and Warrant Transactions,
Reorganization Agreement and the other agreements entered into in connection
therewith incurred by the Company, Parent or Merger Sub, or their respective
affiliates, shall be excluded from the computation of Adjusted Pre-Tax Income;
iv) All transactions between the
Company and the Parent or any of the affiliates of Parent shall be entered into
only on an arms-length basis, consistent with the past practices of Parent;
v) Charges from Parent (or its
affiliates) for outside legal and accounting services relating to the
operations of the Company, shall be based on the actual out-of-pocket costs
charged by such third party professionals;
vi) There shall be established an
intercompany account between Parent and the Company. All transfers of cash
between the two companies shall be accounted for in the intercompany account as
a loan from one company to the other and not as an equity contribution or
dividend payment to the extent the cash so transferred was raised by Parent
through the issuance of debt securities or under any credit or other financing
facilities now or hereafter made available to Parent. Adjusted Pre-Tax Income
shall reflect an interest expense on the amount owing to Parent in the
intercompany account computed using the weighted average interest rate payable
by Parent during the relevant period on Parent's outstanding debt.
vii) All costs, fees and expenses
incurred by the Company with respect to any loss which the Executive or other
stockholders of the Company actually indemnify the Company, pursuant to the
Reorganization Agreement, or which are covered by insurance (but only to the
extent of the indemnification or insurance payments actually made to the
Company), shall be excluded from the calculation of Adjusted Pre-Tax Income;
viii) All costs, fees and expenses
incurred by the Parent with respect to any department or division that provides
administrative services or support to both the Parent and the Company shall be
allocated among the Parent and the Company pro rata based upon total loan
originations and, if not included in the calculation of total loan
originations, loan purchases of the Parent (and its subsidiaries) and the
Company during the relevant period; and
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ix) The proceeds or other amounts
received, if any, by the Company from life or other key man insurance on
Executive shall not be included in income or otherwise considered in any way in
computing Adjusted Pre-tax Income.
(d) Stock Bonus. Executive shall be eligible to
receive stock options under the Parent's stock option plans with annual awards
to be determined by the Compensation Committee of the Parent Board. All
options granted to Executive by the Parent in connection with the Executive's
employment are hereinafter referred to collectively as the "Options."
4. OTHER EXECUTIVE BENEFITS. During the term of this
Agreement, the Parent shall provide to Executive benefits commensurate with his
position, including each of the following benefits:
(a) Medical and Dental Coverage. The Parent
agrees to provide coverage to Executive and dependent members of his family
under the same medical and dental plans as may be maintained from time to time
in the discretion of the Parent Board for the benefit of the Chief Executive
Officer of Parent (the "CEO") and the dependent members of his family.
(a) Vacation. Executive shall be entitled to
four (4) weeks of paid vacation during Executive's first year of employment
with the Parent and shall be entitled to five (5) weeks during each year of
employment with the Parent thereafter for the term of this Agreement. In each
case, such entitlement shall accrue pro rata over the contract year and shall
be taken at such time or times as shall not unreasonably interfere with the
operations of the Company.
(a) Business Expenses. The Parent will pay or
reimburse Executive for any out-of-pocket expenses incurred by Executive in the
course of providing his services hereunder, which comply with Parent's travel
and expense policies adopted from time to time by the Parent Board for the CEO.
Such reimbursement shall be made by the Parent in the same manner and within
the same time period as applicable to the other executive officers of the
Parent.
(a) Automobile. The Parent shall provide
Executive with the use of a luxury automobile that is selected by Executive.
On the earlier of significant damage or destruction or attaining three years of
age, the Company shall replace such automobile with a new automobile selected
by Executive. The Company shall pay all costs of insurance, repair,
maintenance and operation of such automobile.
(a) Benefit Plans. Executive shall be entitled
to participate in any pension, profit-sharing, stock option, stock purchase or
other benefit plan of the Parent and the
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<PAGE> 6
Company now existing or hereafter adopted for the benefit of employees
generally or the senior executives of the Parent and the Company.
(a) Life Insurance. Provided the following
policies may be obtained at a reasonable cost, the Parent shall provide
Executive with a $1,000,000 standard term life insurance policy and a
$1,000,000 standard term accidental death policy.
(a) Disability. Provided the following policy
may be obtained at a reasonable cost, the Parent shall provide Executive with a
long-term disability policy which provides for an annual disability payment in
an amount equal to 125% of Executive's Base Salary.
1. CONFIDENTIAL INFORMATION.
(a) Non-Disclosure. Executive hereby agrees,
during the term of this Agreement, he will not disclose to any person or
otherwise use or exploit any proprietary or confidential information,
including, without limitation, trade secrets, processes, records of research,
proposals, reports, methods, processes, techniques, computer software or
programming, or budgets or other financial information, regarding the Company,
the Parent or any of their respective subsidiaries or any of their respective
businesses, properties, customers or affairs (collectively, "Confidential
Information") obtained by him at any time during the term, except to the extent
required by Executive's performance of his assigned duties. Notwithstanding
anything herein to the contrary, the term "Confidential Information" shall not
include information which (i) is or becomes generally available to the public
other than as a result of disclosure by Executive in violation of this
Agreement, (ii) is or becomes available to Executive on a non-confidential
basis from a source other than the Company, the Parent or any of their
respective subsidiaries, provided that such source is not known by Executive to
be furnishing such information in violation of a confidentiality agreement with
or other obligation of secrecy to the Company, the Parent or any of their
respective subsidiaries, (iii) has been made available, or is made available,
on an unrestricted basis to a third party by the Company, by an individual
authorized to do so or (iv) is known by Executive prior to its disclosure to
Executive. Executive may use and disclose Confidential Information to the
extent necessary to assert any right or defend against any claim arising under
this Agreement or pertaining to Confidential Information or its use, to the
extent necessary to comply with any applicable statute, constitution, treaty,
rule, regulation, ordinance or order, whether of the United States, any state
thereof, or any other jurisdiction applicable to Executive, or if Executive
receives a request to disclose all or any part of the information contained in
the Confidential Information under the terms of a subpoena, order, civil
investigative demand or similar process issued by a court of competent
jurisdiction or by a governmental body or agency, whether of the United States
or any state thereof, or any other jurisdiction applicable to Executive.
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(b) Injunctive Relief. Executive agrees that the
remedy at law for any breach by him of the covenants and agreements set forth
in this Section 5 may be inadequate and that in the event of any such breach,
the Company, the Parent or their respective subsidiaries may, in addition to
the other remedies that may be available to it at law, seek injunctive relief
prohibiting him (together with all those persons associated with him) from the
breach of such covenants and agreements.
2. TERMINATION.
(a) Termination by Parent for "Cause or
Voluntarily by Executive. The Parent may terminate this Agreement for "Cause"
effective immediately upon written notice thereof to Executive. For purposes
of this Agreement, "Cause" shall mean and be limited to the following events:
(i) an act of fraud, embezzlement or similar conduct by Executive involving the
Company, the Parent or any of their respective subsidiaries; (ii) any action by
Executive involving the arrest of Executive for violation of any criminal
statute constituting a felony if the Board reasonably determines that the
continuation of Executive's employment after such event would have an adverse
impact on the operations or reputation of the Company, the Parent or any of
their respective subsidiaries in the financial community; or (iii) a
continuing, repeated willful failure or refusal by Executive to perform his
duties; provided, however, that this Agreement may not be terminated under this
subclause (iii) unless Executive shall have first received written notice from
the Board advising Executive of the specific acts or omissions alleged to
constitute a failure or refusal to perform and such failure or refusal to
perform continues after Executive shall have had a reasonable opportunity to
correct the acts or omissions cited in such notice.
In the event of termination for "Cause" or voluntarily by
Executive other than as permitted in Sections 6(b)(i) and (ii) and 6(c), (x)
Executive shall be entitled to receive that portion of the Base Salary and all
benefits accrued through the date of termination and (y) all Options that have
become exercisable as of the date of termination shall remain so for a period
of 90 days.
(b) Termination by Parent Other Than for "Cause."
i) Death. Provided that notice of
termination has not previously been given under any Section hereof, if
Executive shall die during the term of this Agreement, this Agreement
and all of the Parent's obligations hereunder shall terminate, except
that Executive's estate or designated beneficiaries shall be entitled
to receive (A) all earned and unpaid Base Salary through the date of
termination; (B) the Base Salary and Performance Bonus and all
benefits with respect to the then current contract year which would
have been payable or provided to Executive had the term ended two
years following the last day of the month in which Executive's death
occurred; and (C) all other benefits that may be due to Executive or
Executive's estate or
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<PAGE> 8
beneficiaries under the general provisions of any benefit plan, stock
incentive plan or other plan in which Executive is then a participant,
which benefits shall continue to be provided for a period of two years
following the date of death. In addition, all Options that have
become exercisable as of the date of death shall remain so for a
period of twelve (12) months.
ii) Disability. Provided that notice of
termination has not previously been given under any Section hereof, if
Executive becomes ill or is injured or disabled during the term such
that Executive fails to perform all or substantially all of the duties
to be rendered hereunder and such failure continues for a period in
excess of 26 consecutive weeks (a "Disability"), the Parent shall
continue to employ Executive under this Agreement for two years from
the date of the Disability (which two year period shall commence at
the beginning of the 26 week period referred to herein) and shall
continue to pay Executive the Base Salary in effect on the date of the
Disability (determined at the beginning of the 26 week period referred
to herein), the Performance Bonus and all benefits then in effect;
provided, that (A) the Parent may relieve Executive of his duties and
responsibilities hereunder to the extent permitted by law and (B) any
long-term disability payments received by Executive under any
disability insurance plan made available to Executive by the Parent if
the premiums were paid by the Parent shall be deducted from the salary
and bonus payments otherwise required to be paid to Executive
hereunder. If during the term and subsequent to the Disability
commencement date (which shall be at any time following the end of the
26 week period referred to herein) Executive shall fully recover, the
Parent shall have the right (exercisable within 60 days after receipt
of notice from Executive of such recovery), but not the obligation, to
restore Executive to full-time service at full compensation. If the
Parent elects not to restore Executive to full-time service, Executive
shall be entitled to obtain other employment. If Executive is not
restored to full-time employment with the Parent, all Options that
have become exercisable as of the date of Disability (determined at
the end of the 26 week period referred to herein) shall remain so for
a period of 12 months.
iii) Without Cause. If the Parent elects
to terminate Executive for any reason whatsoever other than as
provided in Section 6(a) or if the Parent causes a Defacto Termination
of Executive (as defined below) (each, a "Severance Termination"),
Executive shall receive the "Separation Package." As used herein, the
"Separation Package" shall consist of (x) Base Salary for the
Severance Period (at the annual rate in effect at the date of the
Severance Termination), plus (y) an amount equal to the Performance
Bonus actually paid to Executive with respect to the period prior to
the date of the Severance Termination equal to the Severance Period
(or if Executive has been employed for a term less than the Severance
Period, the amount of Performance Bonus paid to Executive for the
entire period of employment multiplied by a fraction, the numerator of
which is the number of days in the Severance Period and the
denominator
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of which is the actual number of days for which Executive was employed
by the Parent), and (z) an amount, if any, necessary to reimburse
Executive on a net after tax basis for any applicable federal excise
tax. In addition, all Options which are scheduled to vest following
the date of the Severance Termination shall vest as of such date.
Further, all Options which have become exercisable as of the date of
the Severance Termination (including those which do so as a result of
the provisions of the preceding sentence) shall remain so for a period
of 12 months. In the event of a Severance Termination, Executive will
also be provided with reasonable office space and secretarial support
as well as the same mailing address and telephone number which
Executive had during the term for up to six months, and the Parent
shall pay the costs of out placement services with a provider of its
choice at a level appropriate to Executive's title and position as
requested by Executive. For purposes of this paragraph, the
"Severance Period" shall be the longer of (x) three years, and (y) the
remaining portion of the Initial Term of Executive's employment
hereunder. For purposes of this paragraph, a "Defacto Termination"
shall include any of the following events: (i) the Parent shall fail
to pay or shall reduce the Base Salary, Performance Bonus or other
benefits provided herein, except as permitted hereunder, or shall
otherwise breach any material provision hereof which breach is not
cured within 10 days after receipt of notice thereof from Executive;
(ii) the Parent shall fail to cause Executive to remain the Executive
Vice President of the Parent and Chief Executive Officer and President
and Chairman of the Board of the Company; (iii) Executive shall not be
continuously afforded the authority, powers, responsibilities and
privileges contemplated in Section 1 above (whether or not accompanied
by a change in title); (iv) the Parent shall require Executive's
primary services to be rendered in an area other than the Company's
principal offices in Orange County; or (v) after a Change in Control
(as defined below), the Parent increases the base salary for senior
executives of the Parent generally without similarly increasing the
Base Salary of Executive. For purposes of clause (iii), Executive
shall be deemed not to have been continuously afforded the authority,
powers, responsibilities and privileges contemplated in Section 1
above if there shall occur any reduction in the scope, level or nature
of Executive's employment hereunder, or any demotion, any phasing out
or assignment to others, of the duties contemplated herein.
(c) Change in Control.
i) Following a Change in Control, this
Agreement shall continue to be binding upon the Company and Executive shall be
entitled to the payments provided for in this Section 6 in the event of
termination resulting from death, disability, cause, or a Separation
Termination, all as provided for in Section 6(a) and 6(b).
ii) Executive may (but shall not be
obligated to) terminate this Agreement effective 30 days after the giving of
such notice given at any time within two years
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<PAGE> 10
following a Change in Control. In the event that Executive elects to terminate
this Agreement pursuant to this Section 6(c)(ii), Executive shall be entitled
to the following payments:
(A) If the Change in Control is
effected to an Adverse Person (as defined below), then Executive shall be
entitled to and receive the Severance Package. In addition, all Options then
held by Executive which are not yet vested shall vest as of the date of such
termination. Further, all Options that have become exercisable as of the date
of such termination (including those which do so as a result of the provisions
of the preceding sentence) shall remain so for the entire remaining term of the
Options.
(B) If the Change in Control is
effected to a person other than an Adverse Person, Executive shall be entitled
to receive the Severance Package. In addition, all Options which are scheduled
to vest during the 12 months following the termination date shall vest as of
the date of such termination. Further, all Options that have become
exercisable as of the date of such termination (including those which do so as
a result of the provisions of the preceding sentence) shall remain so for a
period of 12 months.
(d) Payment of Termination Amounts. Executive
may elect to have all amounts to be paid to Executive pursuant to this Section
6 payable (i) over the remaining term of this Agreement or for such shorter
period as expressly provided for herein, as applicable, or (ii) in a lump sum
within 30 days following termination; provided, however, in the case of death
or disability, the Performance Bonus shall be payable at such time as
performance-based bonuses are paid to similarly situated employees of the
Parent. In the event Executive elects to be paid pursuant to clause (i),
Executive agrees promptly to notify the Parent in writing of Executive's
acceptance of full-time employment; within 15 days after receipt of such
notice, the Parent shall pay Executive in a lump sum any amounts which remain
otherwise due to Executive hereunder.
(e) Stock and Similar Rights. Except with regard
to the vesting and exercise dates of Options as set forth in this Section 6,
Executive's rights under any other agreement or plan under which stock options,
restricted stock or similar awards are granted shall be determined in
accordance with the terms and provisions of such plans or agreements.
(f) No Mitigation. Payment of any sum under this
Section 6 shall not be subject to any claim of mitigation.
(g) Other Insurance Policies. Upon any
termination of Executive's employment, and upon reimbursement of the Company of
all amounts paid by the Company in connection with such policies, Executive
shall have the right to purchase or otherwise direct the disposition or
assignment of any disability insurance policy on him held by the Company
(excluding only group disability insurance policies) upon the payment of One
Dollar ($1.00) as the total consideration for each such policy.
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(h) Officer and Director Positions. Executive
agrees that if this Agreement is terminated for any reason, he shall
immediately resign from all officer and director positions he then holds with
the Company, the Parent, or any of their respective subsidiaries.
3. CHANGE IN CONTROL. For purposes of this Agreement, a
"Change in Control" shall mean the occurrence of any of the following events
which occur after the date of the Original Agreement:
(a) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934) (a "Person") of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of more than
50% of the combined voting power of the then outstanding voting securities of
the Company or of 20% or more of the combined voting power of the then
outstanding securities of the Parent entitled to vote generally in the election
of directors (the "Outstanding Voting Securities of Parent"); provided,
however, that neither of the following acquisitions shall constitute a Change
in Control; (i) any acquisition by the Company, the Parent or their respective
subsidiaries or (ii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company, the Parent or their respective
subsidiaries or any corporation controlled by the Company, Parent or any of
their respective subsidiaries; or
(b) Individuals who, as of the date hereof
constitute the Parent Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date of the Original Agreement
whose election, or nomination for election by the stockholders of the Company,
shall be approved by a vote of a least a majority of the directors then
compromising the Incumbent Board shall be considered as though such individual
were a member of the Incumbent Board; or
(c) Approval by the stockholders of the Parent of
a reorganization, merger or consolidation, in each case, unless, following such
reorganization, merger or consolidation: (i) more than 60% of the combined
voting power of the then outstanding voting securities of the corporation
resulting from such reorganization, merger, or consolidation, which may be the
Parent or any of its subsidiaries (the "Resulting Corporation") entitled to
vote generally in the election of directors (the "Resulting Corporation Voting
Securities") shall then be owned beneficially, directly or indirectly, by all
or substantially all of the Persons who were the beneficial owners of
Outstanding Voting Securities immediately prior to such reorganization, merger
or consolidation, in substantially the same proportions as their respective
ownerships of Outstanding Voting Securities immediately prior to such
reorganization, merger, or consolidation; (ii) no Person (excluding the
Company, the Parent or any of their respective subsidiaries or any employee
benefit plan (or related trust) sponsored by any of them, the
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Resulting Corporation, and any Person beneficially owning, immediately prior to
such reorganization, merger or consolidation, directly or indirectly, 20% or
more of the combined voting power of Outstanding Voting Securities) shall own
beneficially, directly or indirectly 20% or more of the combined voting power
of the Resulting Corporation Voting Securities; and (iii) at least a majority
of the members of the Board shall have been members of the Incumbent Board at
the time of the execution of the initial agreement providing for such
reorganization, merger or consolidation; or
(d) Approval by the stockholders of the Parent of
(i) a complete liquidation or dissolution of the Parent or (ii) the sale or
other disposition of all or substantially all of the assets of the Company or
Parent, other than to a corporation (the "Buyer") with respect to which (x)
following such sale or other disposition, more than 60% of the combined voting
power of securities of Buyer entitled to vote generally in the election of
directors ("Buyer Voting Securities"), shall be owned beneficially, directly or
indirectly, by Parent, any of its subsidiaries, any employee benefit plan
sponsored by the Company, the Parent or any their respective subsidiaries or by
all or substantially all of the Persons who were the beneficial owners of the
Outstanding Voting Securities immediately prior to such sale or other
disposition, in substantially the same proportion as their respective ownership
of Outstanding Voting Securities, immediately prior to such sale or other
disposition; (y) no Person (excluding the Company and any employee benefit plan
(or related trust) of the Company or Buyer and any Person that shall
immediately prior to such sale or other disposition own beneficially, directly
or indirectly, 20% or more of the combined voting power of Outstanding Voting
Securities), shall own beneficially, directly or indirectly, 20% or more of the
combined voting power or, Buyer Voting Securities; and (z) at least a majority
of the members of the board of directors of Buyer shall have been members of
the Incumbent Board at the time of the execution of the initial agreement or
action of the Board providing for such sale or other disposition or assets of
the Company.
For purposes of this Agreement, an Adverse Person shall mean
any person which acquires control of the Parent in a transaction involving a
Change in Control other than a transaction which, before the time of the
transaction, has been approved by the Board of Directors of the Parent.
4. INSURANCE. During the term, the Parent shall maintain, at no
cost to Executive, officers and directors liability insurance that would cover
Executive in an amount of no less than $45,000,000.
5. GENERAL PROVISIONS.
(a) Notices. All notices, requirements,
requests, demands, claims or other communications hereunder shall be in
writing. Any notice, requirement, request, demand, claim or other
communication hereunder shall be deemed duly given (i) if personally delivered,
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when so delivered, (ii) if mailed, two (2) business days after having been set
by registered or certified mail, return-receipt requested, postage prepaid and
addressed to the intended recipient as set forth below, (iii) if given by
telecopier, once such notice or other communication is transmitted to the
telecopier number specified below, and the appropriate telephonic confirmation
is received, provided that such notice or other communication is promptly
thereafter mailed in accordance with the provisions of clause (ii) above or
(iv) if sent through an overnight delivery service under circumstances by which
such service guarantees next day delivery, the date following the date so sent:
If to the Company, to:
Aames Financial Corporation
3731 Wilshire Boulevard
Los Angeles, California 90010
Attention: Barbara S. Polsky, Esq.
Senior Vice President
and General Counsel
If to Executive, to:
Neil B. Kornswiet
16105 Whitecap Lane
Huntington Beach, California 92649
Any party may change the address to which notices, requests, demands, claims
and other communications hereunder are to be delivered by giving the other
party notice in the manner herein set forth.
(b) Assignment. This Agreement and the benefits
hereunder are personal to the Parent and the Company and are not assignable or
transferable, nor may be the services to be performed hereunder be assigned by
the Parent and the Company to any person, firm or corporation; provided
however, that this Agreement and the benefits hereunder may be assigned by the
Parent and the Company to any corporation into which the Parent and the Company
may be merged or consolidated, and this Agreement and the benefits hereunder
will automatically be deemed assigned to any such corporation, subject,
however, to Executive's right to terminate this Agreement to the extent
provided in Section 6. In the event of any assignment of this Agreement to any
corporation acquiring all or substantially all of the assets of the Parent or
the Company or to any other corporation into which the Parent or the Company
may be merged or consolidated, the responsibilities and duties assigned to
Executive by such successor
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corporation shall be the responsibilities and duties of, and compatible with
the status of, a senior executive officer of such successor corporation. The
Parent or the Company may delegate any of its obligations hereunder to any
subsidiary of the Company, provided that such delegation shall not relieve the
Parent or the Company of any of its obligations hereunder. Executive may not
assign its rights hereunder or delegate his duties hereunder to any Person.
(c) Complete Agreement. This Agreement contains
the entire agreement among the parties hereto with respect to the subject
matter hereof and supersedes and cancels any and all previous written or oral
negotiations, commitments, understandings, agreements and any other writings or
communications in respect of such subject matter.
(d) Amendments. This Agreement may be modified,
amended, superseded or terminated only by a writing duly signed by both
parties.
(e) Severability. Any provision of this
Agreement which is invalid, illegal or unenforceable in any jurisdiction shall,
as to that jurisdiction, be ineffective to the extent of such invalidity,
illegality or unenforceability, without affecting in any way the remaining
provisions hereof in such jurisdiction or rendering that or any other provision
of this Agreement invalid, illegal or unenforceable in any other jurisdiction.
(f) No Waiver. Any waiver by either party of a
breach of any provisions of this Agreement shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of any
other provision of this Agreement. The failure of either party to insist upon
strict adherence to any term of this Agreement on one or more occasions shall
be considered a waiver or to deprive such party of the right thereafter to
insist upon strict adherence to that term or any other term of this Agreement.
(g) Binding Effect. This Agreement shall be
binding on, and shall inure to the benefit of, the parties hereto and their
permitted assigns, successors and legal representatives.
(h) Counterparts. This Agreement may be executed
by the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which when taken together shall
constitute one and the same document.
(i) Governing Law. This Agreement has been
negotiated and entered into in the State of California and shall be construed
in accordance with the laws of the State of California.
(j) Arbitration. The parties hereby expressly
agree that any controversy or claim relating to this Agreement, including the
construction, enforcement or
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application of the terms hereof, shall be submitted to arbitration in Los
Angeles, California by the American Arbitration Association in accordance with
the Commercial Arbitration Rules of such association. The arbitrator shall be
a retired judge of the Los Angeles Superior Court or other party acceptable to
the parties and the rules of evidence shall apply. The costs of the arbitrator
shall be borne equally. Each party shall be responsible for its own attorneys'
fees and costs. However, the arbitrator shall have the right to award costs
and expenses (including actual attorneys' fees) to the prevailing party as well
as equitable relief. The award of the arbitrator shall be final and binding
and shall be enforceable in any court of competent jurisdiction. Nothing in
this paragraph shall preclude the parties from seeking an injunction or other
equitable relief from a court of competent jurisdiction under appropriate
circumstances.
(k) Headings. The headings included in this
Agreement are for the convenience of the parties only and shall not affect the
construction or interpretation of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
AAMES FINANCIAL CORPORATION,
a Delaware corporation
/s/ Cary H. Thompson
----------------------------------------
By: Cary H. Thompson
Its: Chief Operating Officer
EXECUTIVE
/s/ Neil B. Kornswiet
----------------------------------------
Neil B. Kornswiet
16
<PAGE> 1
EXHIBIT 10.4(b)
AMENDMENT NO. 1 TO
EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement (this "Agreement") is
made and entered into as of the 1st day of June, 1997, by and between Aames
Financial Corporation, a Delaware corporation (the "Parent"), and Neil B.
Kornswiet, an individual ("Executive"), with reference to the following:
RECITALS
WHEREAS, the parties entered into an Employment Agreement, dated as of
August 12, 1996 (the "Original Agreement") in connection with an Agreement and
Plan of Reorganization, dated as of August 12, 1996, by and between Aames
Financial Corporation (the "Parent"), One Stop Mortgage, Inc., a Wyoming
corporation (the "Company"), and Aames Acquisition Corporation, a Delaware
corporation ("Merger Sub") pursuant to which Merger Sub merged with and into
the Company, resulting in the Company becoming a wholly owned subsidiary of
Parent;
WHEREAS, under the Original Agreement, Executive was employed as
Executive Vice President of the Parent, in addition to Chief Executive Officer,
President and Chairman of the Board of the Company; and
WHEREAS, effective May 8, 1997, Executive was promoted from Executive
Vice President of the Parent to President of the Parent.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual representations, warranties, covenants and agreements contained in the
Original Agreement, the parties hereto agree as follows:
1. All references to Executive as "Executive Vice President of
the Parent" shall be deleted and replaced by "President of the Parent."
2. In Section 1:
a. the last six words of the first sentence shall be deleted
and replaced by the words "Board of Directors of the Parent"; and
b. the second sentence shall be deleted in its entirety.
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3. In Section 3(a), the amount of "$900,000" shall amend and
replace the amount of "$750,000" wherever it shall appear.
4. In Section 6(b)(iii)(i), the phrase "and the Parent's
principal offices in Los Angeles County" shall be added at the
end.
5. Except as otherwise amended hereby, the Original Agreement
remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment No. 1 to Employment Agreement as of the day and year first above
written.
AAMES FINANCIAL CORPORATION,
a Delaware corporation
/s/ Cary H. Thompson
By: Cary H. Thompson
----------------------------------------
Its: Chief Executive Officer
EXECUTIVE
/s/ Neil B. Kornswiet
----------------------------------------
Neil B. Kornswiet
2
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EXHIBIT 10.5
AAMES FINANCIAL CORPORATION
EXECUTIVE SEVERANCE AGREEMENT
AGREEMENT, dated as of June 1, 1997, by and between Aames Financial
Corporation, a Delaware corporation located at 350 South Grand Avenue, Los
Angeles, California 90071 ("Corporation"), and Greg Witherspoon ("Executive").
WHEREAS, the Compensation Committee of the Board of Directors
("Committee") has determined that it would be in the best interest of the
Corporation and its stockholders to reinforce and encourage the continued
attention and dedication of the Executive as a member of the Corporation's
management without the distractions occasioned from the possibility of an abrupt
change in control of the Corporation;
WHEREAS, to induce Executive to give his continued attention and
dedication to his assigned duties in the event of a change in control of the
Corporation, the Corporation desires to provide Executive with certain benefits
and inducements;
WHEREAS, the Executive is willing to continue serving the Corporation in
accordance with the provisions of this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and obligations hereinafter set forth, the parties hereto
hereby agree as follows:
1. Operation of Agreement.
This Agreement sets forth the severance compensation which the
Corporation agrees it will pay to the Executive if the Executive's employment
with the Corporation terminates under one of the circumstances described herein
in connection with or following a Change in Control of the Corporation (as
defined herein). No compensation shall be payable under this Agreement unless
and until: (i) there shall have been a Change in Control of the Corporation and
(ii) the Executive's employment by the Corporation shall have been terminated in
accordance with Section 4. To the extent that the provisions of this Agreement,
or the benefits provided hereunder, conflict with any provisions of any existing
employment agreement between the Executive and the Corporation, this Agreement
shall supersede any such provisions in any such employment agreement.
2. Term.
This Agreement shall terminate, except to the extent that any
obligation of the Corporation hereunder remains unpaid as of such time, upon the
earliest of: (i) five (5) years from the date hereof if a Change in Control of
the Corporation has not occurred within such 5-year period; (ii) the termination
of the Executive's employment with the Corporation based on death or Permanent
Disability (as defined in Section
<PAGE> 2
4(b)), by the Corporation, or by the Executive other than for Good Reason (as
defined in Section 4(d)); (iii) two (2) years from the date of a Change in
Control of the Corporation if the Executive has not terminated his employment
for Good Reason as of such time; and (iv) prior to a Change in Control, in the
discretion of the Board of Directors ("Board"), upon the Executive's ceasing to
be an executive officer of the Corporation.
3. Change in Control.
For purposes of this Agreement, a Change in Control of the
Corporation shall mean the occurrence of any of the following:
(a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act ("Rule 13d-3")) of 20% or more of the combined voting power of the
then outstanding voting securities of the Corporation entitled to vote generally
in the election of directors (the "Outstanding Voting Securities"); provided,
however, that neither of the following acquisitions shall constitute a Change in
Control: (1) any acquisition by the Corporation or (2) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Corporation or any corporation controlled by the Corporation; or
(b) Individuals who, as of the date hereof, constitute the Board
of Directors of the Corporation (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors of the Corporation;
provided, however, that any individual becoming a director subsequent to the
date hereof whose election or nomination for election by the stockholders of the
Corporation, shall be approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board; or
(c) Approval by the stockholders of the Corporation of a
reorganization, merger or consolidation, in each case, unless in connection with
such reorganization, merger or consolidation; (1) more than 60% of the combined
voting power of the then outstanding voting securities of the corporation
resulting from such reorganization, merger or consolidation, which may be the
Corporation (the "Resulting Corporation") entitled to vote generally in the
election of directors (the "Resulting Corporation Voting Securities") shall then
be owned beneficially, directly or indirectly, by all or substantially all of
the Persons who were the beneficial owners of Outstanding Voting Securities
immediately prior to such reorganization, merger or consolidation, in
substantially the same proportions as their respective ownerships of Outstanding
Voting Securities immediately prior to such reorganization, merger or
consolidation; (2) no Person (excluding the Corporation, any employee benefit
plan (or related trust) of the Corporation, the Resulting Corporation and any
Person beneficially owning, immediately
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<PAGE> 3
prior to such reorganization, merger or consolidation, directly or indirectly,
20% or more of the combined voting power of Outstanding Voting Securities) shall
own beneficially, directly or indirectly, 20% or more of the combined voting
power of the Resulting Corporation Voting Securities; and (3) at least a
majority of the members of the Board shall have been members of the Incumbent
Board at the time of the execution of the initial agreement providing for such
reorganization, merger or consolidation; or
(d) Approval by the stockholders of the Corporation of (1) a
complete liquidation or dissolution of the Corporation or (2) sale or other
disposition of all or substantially all of the assets of the Corporation, other
than to a corporation (the "Buyer") with respect to which (x) following such
sale or other disposition, more than 60% of the combined voting power of
securities of Buyer entitled to vote generally in the election of directors
("Buyer Voting Securities"), shall be owned beneficially, directly or
indirectly, by all or substantially all of the persons who were beneficial
owners of the Outstanding Voting Securities immediately prior to such sale or
other disposition, in substantially the same proportion as their respective
ownership of Outstanding Voting Securities, immediately prior to such sale or
other disposition; (y) no Person (excluding the Corporation and any employee
benefit plan (or related trust) of the Corporation or Buyer and any Person that
shall immediately prior to such sale or other disposition own beneficially,
directly or indirectly, 20% or more of the combined voting power of Outstanding
Voting Securities), shall own beneficially, directly or indirectly, 20% or more
of the combined voting power of the Buyer Voting Securities; and (z) at least a
majority of the members of the board of directors of Buyer shall have been
members of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such sale or other disposition or
assets of the Corporation.
4. Termination Following Change in Control.
(a) If a Change in Control of the Corporation shall have occurred
while the Executive is still an employee of the Corporation, (or the Board
adopts a resolution to the effect that a potential Change in Control for
purposes of this Agreement has occurred), then the Executive shall be entitled
to the compensation provided in Section 5 upon the termination of the
Executive's employment by the Corporation or by the Executive, unless such
termination is as a result of: (i) the Executive's death; (ii) the Executive's
Permanent Disability (as defined in Section 4(b) below); (iii) the Executive's
termination by the Corporation for Cause (as defined in Section 4(c) below); or
(iv) the Executive's decision to terminate employment other than for Good Reason
(as defined in Section 4(d) below).
(b) Permanent Disability. If, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from his duties with the Corporation on a full-time basis for six (6)
months and within thirty (30) days after written notice of termination is
thereafter given by the Corporation, the Executive shall not have returned to
the full-time performance of the Executive's duties, the
<PAGE> 4
Corporation may terminate this Agreement based on the Executive's "Permanent
Disability."
(c) Cause. For purposes of this Agreement, the termination of the
Executive's employment shall be deemed to have been for "Cause" only if
termination of his employment shall have been the result of an act of fraud,
embezzlement, gross dishonesty or similar conduct by Executive involving the
Corporation; any action by Executive involving the arrest of Executive, for
violation of any criminal statute consisting of a felony if the Board reasonably
determines that the continuation of Executive's employment after such event
would have an adverse impact on the operations or reputation of the Corporation
in the financial community; or continued insubordination or refusal by Executive
to perform his duties hereunder in any manner deemed to be reasonably
satisfactory to the CEO. Notwithstanding the foregoing, the Executive shall not
be deemed to have been terminated for Cause under this clause unless and until
there shall have been delivered to the Executive a Notice of Termination (as
defined in Section 4(f)).
(d) Good Reason. The Executive may terminate his employment by
the Corporation for Good Reason at any time following a Change in Control during
the term of this Agreement. For purposes of this Agreement, "Good Reason" shall
mean any of the following:
(i) the assignment to the Executive of any duties
materially inconsistent with, or any substantial diminution of, the Executive's
positions, duties, responsibilities and status with the Corporation immediately
prior to a Change in Control, or a significant adverse alteration in the nature
of the Executive's reporting responsibilities, titles, or offices as in effect
immediately prior to a Change in Control, or any removal of the Executive from
any such positions, except in connection with a termination of the employment of
the Executive for Cause, Permanent Disability, or as a result of the Executive's
death or by the Executive other than for Good Reason;
` (ii) a reduction by the Corporation in the Executive's
base salary in effect immediately prior to a Change in Control;
(iii) failure by the Corporation to continue in effect
(without substitution of a substantially equivalent plan) any compensation
plan, bonus or incentive plan, stock purchase plan, stock option plan,
life insurance plan, health plan, disability plan or other benefit plan or
arrangement in which the Executive is participating at the time of a
Change in Control, or the taking of any action by the Corporation which
would adversely affect Executive's participation in or materially reduce
Executive's benefits under any of such plans;
(iv) any material breach by the Corporation of any
provision of this Agreement;
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<PAGE> 5
(v) following a Change in Control, the Executive is
excluded (without substitution of a substantially equivalent plan) from
participation in any incentive, compensation, stock option, health, dental,
insurance, pension or other benefit plan generally made available to persons at
Executive's level of responsibility in the Corporation;
(vi) without the Executive's express written consent,
the requirement by the Corporation that the Executive's principal place of
employment be relocated more than twenty-five (25) miles from his place of
employment prior to the Change in Control; or
(vii) the Corporation's failure to obtain a satisfactory
agreement from any successor to assume and agree to perform the Corporation's
obligations under this Agreement, as contemplated in Section 7(a) hereof.
(e) Notice of Good Reason. If Executive believes that he is
entitled to terminate his employment with the Corporation for Good Reason, as
defined in Section 4(d) above, he may apply in writing to the Corporation for
confirmation of such entitlement prior to the Executive's actual separation from
employment, by following the claims procedure set forth in Section 10 hereof.
Executive shall continue to receive all compensation and benefits he was
receiving at the time of such submission throughout the resolution of the matter
pursuant to the procedures set forth in Section 10 hereof. If the Executive's
request for a termination of employment for Good Reason is denied under both the
request and appeal procedures set forth in Sections 10(b) and (c) hereof, then
the parties shall use their best efforts to resolve the claim within ninety (90)
days after the claim is submitted to binding arbitration pursuant to Section
10(d).
(f) Notice of Termination. Any termination of the Executive's
employment by the Corporation or by the Executive (other than termination based
on the Executive's death) following a Change in Control shall be communicated by
a written Notice of Termination to the other party hereto. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated. For purposes of this Agreement, no purported termination shall be
effective without the delivery of such Notice of Termination.
(g) Date of Termination. "Date of Termination" following a Change
in Control shall mean (i) if the Executive is terminated by his death, the date
of his death, (ii) if the Executive's employment is terminated due to a
Permanent Disability, thirty (30) days after the Notice of Termination is given
(provided that the Executive shall not have returned to the performance of his
duties on a full-time basis during such period), (iii) if the Executive's
employment is terminated pursuant to a termination for Cause, the date
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<PAGE> 6
specified in the Notice of Termination, and (iv) if the Executive's employment
is terminated for any other reason, the date shall be the later of thirty (30)
days after termination as provided by the Notice of Termination or the date of
the final resolution of the arbitration and claims procedures set forth in
Section 10 hereof, unless otherwise agreed by the Executive and Corporation or
otherwise provided in this Agreement.
5. Termination Benefits.
If the Executive shall be terminated from employment with the
Corporation as described in Section 4(a) such that Executive is entitled to the
compensation set forth in this Section 5, then the Executive shall be entitled
to receive the following severance benefits:
(a) Severance Payment. In lieu of any further payments to the
Executive including any payments to which the Executive would be entitled under
any existing employment agreement, the Corporation shall pay as severance pay to
the Executive an amount equal to the compensation that Executive would have
received for a twenty-four (24) month period (the "payment period") at an
annualized rate equal to the higher of the rate in effect immediately prior to
the Change in Control or the rate in effect on the date of the Notice of
Termination. Such cash payment shall be payable in a single sum, within 10
business days following the Executive's Date of Termination.
(b) Incentive Awards. The Executive shall receive a cash payment
in a single sum, within 10 business days following the Executive's Date of
Termination, in the amount equal to the bonus paid to the Executive with respect
to the eight fiscal quarters preceding the Date of Termination (or if the
Executive has been participating in such bonus plan for less than two years, the
amount of the incentive award paid to Executive under such plan multiplied by a
fraction, the numerator of which is the number eight and the denominator of
which is the actual number of fiscal quarters for which Executive participated
in such plan before the Date of Termination). The method of calculating any
bonus under such plan shall be adjusted and/or weighted in such manner as is
appropriate and equitable to reflect partial year results and the Corporation's
historical operating results, including rates of growth and seasonability.
(c) Gross-Up Payments. In the event that any payment or the value
of any benefit received or to be received by the Executive pursuant to the terms
of this Agreement (the "Agreement Payments") would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any
comparable federal, state or local excise tax (such excise tax, together with
any interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), as determined as provided below, the Corporation shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of the Excise Tax on Agreement
Payments and any federal, state and local income tax and Excise Tax upon the
payment provided for by this Section 5(d), and any interest,
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<PAGE> 7
penalties or additions to tax payable by the Executive with respect thereto,
shall be equal to the total present value of the Agreement Payments at the time
such Payments are to be made. The intent of the parties is that the Corporation
shall be solely responsible for, and shall pay, any Excise Tax on any Agreement
Payments and Gross-Up Payment and any income and employment taxes (including,
without limitation, penalties and interest) imposed on any Gross-Up Payments as
well as any loss of deduction caused by the Gross-Up Payment.
6. No Mitigation.
The Executive shall not be required to mitigate the amount of any
payments provided for by this Agreement by seeking employment or otherwise, nor
shall the amount of any cash payments or benefit provided under this Agreement
be reduced by any compensation or benefit earned by the Executive after his Date
of Termination.
7. Successors.
(a) The Corporation shall require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation, by agreement
in form and substance reasonably satisfactory to the Executive, to expressly
assume and agree to perform the obligations of the Corporation under this
Agreement in the same manner and to the same extent that the Corporation would
be required to perform this Agreement if no such succession had taken place.
Failure of the Corporation to obtain such agreement prior to the effective date
of any such succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Corporation in the same amount and on the
same terms as he would be entitled to receive hereunder if he terminated his
employment for Good Reason following a Change in Control, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Date of Termination. As used in this
Agreement, "Corporation" shall mean the Corporation as hereinabove defined and
any successor to its business and/or assets as aforesaid, which successor
executes and delivers the agreement provided for in this Section 7(a) or which
otherwise becomes bound by the terms and provisions of this Agreement by
operation of law.
(b) This Agreement and all rights of the Executive hereunder
shall inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die after his
termination while any amounts would still be payable to him hereunder if he had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Executive's devisee,
legatee, or other designee or, if there be no such designee, to the Executive's
estate.
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<PAGE> 8
8. Notices.
Any notice required or permitted by this Agreement shall be in
writing, delivered by hand, or sent by registered or certified mail, return
receipt requested, or by recognized courier service (regularly providing proof
of delivery), addressed to the Committee and the Corporation at the
Corporation's then principal office, or to the Executive at the address set
forth under the Executive's signature below, as the case may be, or to such
other address or addresses as any party hereto may from time to time specify in
writing for the purpose in a notice given to the other parties in compliance
with this Section 8. Notices shall be deemed given when received.
9. Limitation on Rights.
(a) This Agreement shall not be deemed to create a contract of
employment between the Corporation and the Executive and shall create no right
in the Executive to continue in the Corporation's employment for any specific
period of time, or to create any other rights in the Executive or obligations on
the part of the Corporation, except as set forth herein. Except as set forth
herein, this Agreement shall not restrict the right of the Corporation to
terminate the Executive, or restrict the right of the Executive to terminate his
employment.
(b) This Agreement shall not be construed to exclude the
Executive from participation in any other compensation or benefit programs in
which he is specifically eligible to participate either prior to or following
the execution of this Agreement, or any such programs that generally are
available to other executive personnel of the Corporation, nor shall it affect
the kind and amount of other compensation to which the Executive is entitled.
10. Administrator and Claims Procedure.
(a) The Administrator for purposes of this Agreement shall be the
Board of Directors of the Corporation. The Board shall have the right to
designate one or more Corporation employees as the Administrator at any time.
The Corporation shall give the Executive written notice of any change in the
Administrator, or in the address or telephone number of the same.
(b) The Executive, or other person claiming through the
Executive, must file a written claim for benefits with the Administrator as a
prerequisite to the payment of benefits under this Agreement. The Administrator
shall make all determinations as to the right of any person to receive benefits
under subsections (b) and (c) of this Section 10. Any denial by the
Administrator of a claim for benefits by the Executive, his heirs or personal
representative ("the claimant") shall be stated in writing by the Administrator
and delivered or mailed to the claimant within 10 days after receipt of the
claim, unless special circumstances require an extension of time for processing
the
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<PAGE> 9
claim. If such an extension is required, written notice of the extension shall
be furnished to the claimant prior to the termination of the initial 10-day
period. In no event shall such extension exceed a period of 10 days from the end
of the initial period. Any notice of denial shall set forth the specific reasons
for the denial, specific reference to pertinent provisions of this Agreement
upon which the denial is based, a description of any additional material or
information necessary for the claimant to perfect his claim, with an explanation
of why such material or information is necessary, and any explanation of claim
review procedures, written to the best of the Administrator's ability in a
manner that may be understood without legal or actuarial counsel.
(c) A claimant whose claim for benefits has been wholly or
partially denied by the Administrator may request, within 10 days following the
date of such denial, in a writing addressed to the Administrator, a review of
such denial. The claimant shall be entitled to submit such issues or comments in
writing or otherwise as he shall consider relevant to a determination of his
claim, and he may include a request for a hearing in person before the
Administrator. Prior to submitting his request, the claimant shall be entitled
to review such documents as the Administrator shall agree are pertinent to his
claim. The claimant may, at all stages of review, be represented by counsel,
legal or otherwise, of his choice, provided that the fees and expenses of such
counsel shall be borne by the claimant, unless the claimant is successful, in
which case, such costs shall be borne by the Corporation. All requests for
review shall be promptly resolved. The Administrator's decision with respect to
any such review shall be set forth in writing and shall be mailed to the
claimant not later than 10 days following receipt by the Administrator of the
claimant's request unless special circumstances, such as the need to hold a
hearing, require an extension of time for processing, in which case the
Administrator's decision shall be so mailed not later than 20 days after receipt
of such request.
(d) A claimant who has followed the procedure in subsections (b)
and (c) of this section, but who has not obtained full relief on his claim for
benefits, may, within 60 days following his receipt of the Administrator's
written decision on review, apply in writing to the Administrator for expedited
and binding arbitration of his claim before an arbitrator in Los Angeles County,
California, in accordance with the commercial arbitration rules of the American
Arbitration Association, as then in effect, or pursuant to such other form of
alternative dispute resolution as the parties may agree (collectively, the
"arbitration"). The arbitrator's sole authority shall be to interpret and apply
the provisions of this Agreement; he shall not change, add to, or subtract from,
any of its provisions. The arbitrator shall have the power to compel attendance
of witnesses at the hearing. Any court having jurisdiction may enter a judgment
based upon such arbitration. The arbitrator shall be appointed by mutual
agreement of the Corporation and the claimant pursuant to the applicable
commercial arbitration rules. The arbitrator shall be a professional person with
a reputation in the community for expertise in employee benefit matters and who
is unrelated to the claimant and any employees of the Corporation. All decisions
of the arbitrator shall be final and binding on the claimant and the
Corporation.
<PAGE> 10
11. Legal Fees and Expenses.
If any dispute arises between the parties with respect to the
interpretation or performance of this Agreement, the prevailing party in any
arbitration or proceeding shall be entitled to recover from the other party its
attorneys' fees, arbitration or court costs and other expenses incurred in
connection with any such proceeding. Amounts, if any, paid to Executive under
this Section 11 shall be in addition to all other amounts due to Executive
pursuant to this Agreement.
12. Non-Alienation of Benefits.
Except insofar as this provision may be contrary to applicable
law, no sale, transfer, alienation, assignment, pledge, collateralization or
attachment of any benefits under this Agreement shall be valid or recognized by
the Corporation.
13. ERISA.
This Agreement is an unfunded compensation arrangement for a
member of a select group of the Corporation's management and any exemptions
under the Employee Retirement Income Security Act of 1974, as amended, as
applicable to such an arrangement, shall be applicable to this Agreement.
14. Executive Acknowledgment.
Executive acknowledges that he has consulted with or has had the
opportunity to consult with independent counsel of his choice concerning this
Agreement, that he has read and understands this Agreement and is fully aware of
its legal effect.
15. Miscellaneous.
This Agreement contains the entire agreement of the parties
relating to the subject matter hereof and supersedes any prior written or oral
agreements or understandings relating to the subject matter hereof. No
modification, amendment or waiver of a breach of this Agreement shall be valid
unless in writing and signed by or on behalf of the parties hereto. A waiver of
the breach of any term or condition of this Agreement shall not be deemed to
constitute a waiver of any subsequent breach of the same or any other term or
condition. This Agreement is intended to be performed in accordance with, and
only to the extent permitted by, all applicable laws, ordinances, rules and
regulations. If any provisions of this Agreement, or the application thereof to
any person or circumstance, shall, for any reason and to any extent, be held
invalid or unenforceable, such invalidity and unenforceability shall not affect
the remaining provisions hereof and the application of such provisions to other
persons or circumstances, all of which shall be enforced to the greatest extent
permitted by law. Subject to the provisions of Section 5(d), the compensation
provided to the Executive
<PAGE> 11
pursuant to this Agreement shall be subject to any withholdings and deductions
required by any applicable tax laws. The headings in this Agreement are inserted
for convenience of reference only and shall not be a part of or control or
affect the meaning of any provision hereof. For purposes hereof, the masculine
gender shall be deemed to include the feminine gender, as appropriate. This
Agreement may be executed in one or more counterparts and each counterpart shall
be deemed an original but all counterparts together shall constitute one
instrument.
16. Governing Law.
This Agreement shall be governed and construed in accordance with
the internal laws of the State of California. The parties agree that any suit or
proceeding arising out of this Agreement shall be brought and maintained
exclusively in the federal or state courts located in such state, and each of
the parties hereby irrevocably submits to the exclusive jurisdiction and venue
of such courts.
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the day and year first above written.
EXECUTIVE: AAMES FINANCIAL
CORPORATION:
/s/ Greg Witherspoon By:/s/ Cary H. Thompson
- -------------------------------- --------------------------------
Greg Witherspoon Cary H. Thompson
Address: Chief Executive Officer
10310 Walavista Road
Los Angeles, California 90064
<PAGE> 1
EXHIBIT 10.6
SECOND AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Second Amended and Restated Employment Agreement (this "Agreement")
is made and entered into as of June 1, 1997 by and between AAMES FINANCIAL
CORPORATION, a Delaware corporation (the "Company"), and BARBARA POLSKY, an
individual ("Executive").
W I T N E S S E T H:
WHEREAS, Executive and the Company entered into an Employment Agreement as
of May 8, 1996 (the "Original Agreement") as a material inducement to Executive
to accept employment with the Company;
WHEREAS, Executive and the Company amended and restated (the "First
Amended Agreement") the Original Agreement for the primary purpose of amending
the performance bonus provisions effective as of May 8, 1996, the date of the
Original Agreement;
WHEREAS, Executive and the Company desire to amend and restate the First
Amended Agreement for the primary purpose of reflecting Executive's position of
Executive Vice President and General Counsel and revised executive performance
bonus provisions.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Executive agree as
set forth below.
1. EMPLOYMENT AND DUTIES. The Company hereby employs Executive to serve as
Executive Vice President and General Counsel of the Company, with the powers and
duties customarily accorded to such position, and such other duties consistent
therewith as may be assigned to Executive from time to time by the Chief
Executive Officer (the "CEO") of the Company.
2. TERM. The initial term of this Agreement shall begin as of May 8, 1996.
The initial term shall expire on June 20, 2001 unless terminated earlier as set
forth in Section 6 hereof or by mutual agreement of the parties hereto (the
"Initial Term"). At the expiration of the Initial Term and each anniversary
thereafter, the term of this Agreement shall automatically be extended for an
additional year (the "Extension Term") unless either party shall have given
written notice to the other party at least ninety days prior to the end of the
Initial Term or the Extension Term, as the case may be, that it does not desire
to extend the term of this Agreement. If Executives' employment under this
Agreement is extended for an Extension Term, it shall thereafter or during
<PAGE> 2
any Extension Term be terminable (other than upon expiration) only as provided
in Section 6 or by mutual agreement of the parties hereto.
3. COMPENSATION
(a) Base Salary. During the term of this Agreement, Executive shall
be paid a base salary (the "Base Salary"), payable in accordance with the
Company's normal payroll practices. During the first year of the term of this
Agreement, Executive's Base Salary shall be $240,000. During the second year of
the term of this Agreement, Executive's Base Salary shall be $300,000. The
annual Base Salary payable to Executive shall be reviewed on an annual basis,
provided, however, that Executive's Base Salary shall not be reduced below
$300,000 per annum during the term of this Agreement.
(i) Performance Bonus. Executive shall be entitled to
participate in the Company's performance bonus plan for executive officers.
Under such plan, (i) from the effective date of the Original Agreement through
and including the quarter ended March 31, 1997, Executive was paid on a
quarterly basis a performance bonus measured by return on average equity during
the relevant period; and (ii) for the quarters ended June 30 and September 30,
1997 and for each quarter thereafter until the compensation committee of the
Board of Directors adopts a new performance bonus plan for executive officers,
Executive shall be paid a quarterly bonus of $72,000. Amounts paid and to be
paid shall be referred to as the "Performance Bonus." Upon adoption of a new
performance bonus plan, Executive shall be paid a quarterly bonus under the
provisions of such plan.
(b) Stock Bonus. On the commencement of the Initial Term, the
Company shall grant Executive incentive options to purchase 25,000 shares of the
Company's Common Stock (the "Options"). Of such Options, 5,000 shall vest
immediately upon grant and an additional 5,000 shall vest on each anniversary of
the commencement of the Initial Term. The Options will be exercisable at an
exercise price equal to $41 (the Closing Price of the Company's Common Stock on
the New York Stock Exchange on May 8, 1996). The Company shall register the
shares of Common Stock issuable upon exercise of the Options and shall use its
best efforts to maintain a current registration statement under the Securities
Act of 1933, as amended, in respect of such shares. The Options shall be issued
under the Company's stock incentive plans maintained for its executives and
shall contain standard anti-dilution mechanisms to adjust for stock dividends,
stock splits, reverse stock splits, recapitalizations, consolidations and
mergers as are provided for therein and shall provide for acceleration of
vesting upon the merger, consolidation, sale of all or substantially all of the
assets of the Company or similar reorganization.
(c) Discretionary Bonus. In addition to a Performance Bonus,
Executive shall be entitled to an additional bonus in any fiscal year in an
amount, if any, as shall be determined in the sole discretion of the Board of
Directors of the Company. Any such discretionary bonus shall be paid as soon as
practicable following the completion of each fiscal year.
4. Other Executive Benefits. During the term of this Agreement, the
Company shall provide to the Executive benefits commensurate with her position,
including each of the following benefits:
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(a) Medical and Dental Coverage. The Company agrees to provide
coverage to Executive and dependent members of her family under the same medical
and dental plans as may be maintained generally from time to time for officers
of the Company.
(b) Vacation. Executive shall be entitled to four weeks of paid
vacation during each year of the term of this Agreement. In each case, such
entitlement shall accrue pro rata over the contract year and shall be taken at
such time or times as shall not unreasonably interfere with the operations of
the Company.
(c) Business Expenses. The Company will pay or reimburse Executive
for any out-of-pocket expenses incurred by Executive in the course of providing
services hereunder, which comply with the Company's travel and expense policies
in effect generally from time to time for other officers of the Company. Such
reimbursement shall be made by the Company in the same manner and within the
same time period as applicable to the other executive officers of the Company.
(d) Benefit Plans. Executive shall be entitled to participate in any
pension, profit-sharing, stock option, stock purchase or other benefit plan of
the Company now existing or hereafter adopted for the benefit of employees
generally.
(e) Disability. Provided the following policy may be obtained at a
reasonable cost, the Company shall provide Executive with a long-term disability
policy which provides for an annual disability payment in an amount equal to
100% of Executive's Base Salary.
5. CONFIDENTIAL INFORMATION.
(a) Non-Disclosure. Executive hereby agrees, during the term of this
Agreement, she will not disclose to any person or otherwise use or exploit any
proprietary or confidential information, including, without limitation, trade
secrets, processes, records of research, proposals, reports, methods, processes,
techniques, computer software or programming, or budgets or other financial
information, regarding the Company, its business, properties, customers or
affairs (collectively, "Confidential Information") obtained by her at any time
during the term, except to the extent required by Executive's performance of
assigned duties for the Company. Notwithstanding anything herein to the
contrary, the term "Confidential Information" shall not include information
which is or becomes generally available to the public other than as a result of
disclosure by Executive in violation of this Agreement, is or becomes available
to Executive on a non-confidential basis from a source other than the Company,
provided that such source is not known by Executive to be furnishing such
information in violation of a confidentiality agreement with or other obligation
of secrecy to the Company, has been made available, or is made available, on an
unrestricted basis to a third party by the Company, by an individual authorized
to do so or is known by Executive prior to its disclosure to Executive.
Executive may use and disclose Confidential Information to the extent necessary
to assert any right or defend against any claim arising under this Agreement or
pertaining to Confidential Information or its use, to the extent necessary to
comply with any applicable statute, constitution,
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treaty, rule, regulation, ordinance or order, whether of the United States, any
state thereof, or any other jurisdiction applicable to Executive, or if
Executive receives a request to disclose all or any part of the information
contained in the Confidential Information under the terms of a subpoena, order,
civil investigative demand or similar process issued by a court of competent
jurisdiction or by a governmental body or agency, whether of the United States
or any state thereof, or any other jurisdiction applicable to Executive.
(b) Injunctive Relief. Executive agrees that the remedy at law for
any breach by her of the covenants and agreements set forth in this Section may
be inadequate and that in the event of any such breach, the Company may, in
addition to the other remedies that may be available to it at law, seek
injunctive relief prohibiting her (together with all those persons associated
with her) from the breach of such covenants and agreements.
6. Termination.
(a) Termination by Company for "Cause" or Voluntarily by Executive.
The Company may terminate this Agreement for "Cause" effective immediately upon
written notice thereof to Executive. For purposes of this Agreement, "Cause"
shall mean and be limited to the following events: an act of fraud,
embezzlement, gross dishonesty or similar conduct by Executive involving the
Company; any action by Executive involving the arrest of Executive, for
violation of any criminal statute consisting of a felony if the Board reasonably
determines that the continuation of Executive's employment after such event
would have an adverse impact on the operations or reputation of the Company in
the financial community; or continued insubordination or a refusal by Executive
to perform her duties hereunder in a manner deemed to be reasonably satisfactory
to the CEO; provided, however, that this Agreement may not be terminated under
this subclause unless Executive shall have first received written notice from
the CEO advising Executive of the specific acts or omissions alleged to
constitute a refusal to perform and such refusal to perform continues after
Executive shall have had a reasonable opportunity to correct the acts or
omissions cited in such notice.
In the event of termination for "Cause," voluntarily or by Executive
other than as permitted in Sections 6(b)(i) and 6(b)(ii) and 6(c), (x) Executive
shall be entitled to receive that portion of the Base Salary and all benefits
accrued through the date of termination and (y) all Options that have become
exercisable as of the date of termination shall become and shall remain so for a
period of 90 days.
(b) Termination by Company Other Than For "Cause".
(i) Death. Provided that notice of termination has not been
previously been given under any Section hereof, if Executive shall die during
the term of this Agreement, this Agreement and all of the Company's obligations
hereunder shall terminate, except that Executive's estate or designated
beneficiaries shall be entitled to receive all earned and unpaid Base Salary
through the date of termination; a pro-rated portion of the Performance Bonus,
if any, earned and paid for the year preceding the death of Executive; one
year's Base Salary (at the annual rate in effect at the date of death) plus an
amount equal to the Performance Bonus, if
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any, paid for the immediately preceding year; and all other benefits, if any,
that may be due to Executive or Executive's estate or general provisions of any
benefit plan, stock incentive plan or other plan in which Executive is then a
participant. In addition, of the Options which are scheduled to vest on the next
anniversary of the commencement of the Initial Term, a percentage of such number
of Options shall vest at the date of death determined by dividing the number of
days which have elapsed since the last such anniversary by the number 365 and
multiplying the result by 5. Further, all Options that have become exercisable
as of the date of death (including those which do so as a result of the
provisions of the preceding sentence) shall remain so for a period of 12 months.
(ii) Disability. Provided that notice of termination has not
previously been given under any Section hereof, if Executive becomes ill or is
injured or disabled during the term such that Executive fails to perform all or
substantially all of the duties to be rendered hereunder and such failure
continues for a period in excess of 26 consecutive weeks (a "Disability"), the
Company shall continue to employ Executive under this Agreement for one year
from the date of Disability (which one year period shall commence at the
beginning of the 26 week period referred to herein) and shall continue to pay
Executive the Base Salary in effect on the date of the Disability (determined at
the beginning of the 26 week period referred to herein), the Performance Bonus
and all benefits then in effect; provided, that the Company may relieve
Executive of her duties and responsibilities hereunder to the extent permitted
by law and any long-term disability payments received by Executive under any
disability insurance plan made available to Executive by the Company if the
premiums were paid by the Company shall be deducted from the salary and bonus
payments otherwise required to be paid to Executive hereunder. If during the
term and subsequent to the Disability commencement date (which shall be at any
time following the end of the 26 week period referred to herein) Executive shall
fully recover, the Company shall have the right (exercisable within 60 days
after receipt of notice from Executive of such recovery), but not the
obligation, to restore Executive to full-time service at full compensation. If
the Company elects not to restore Executive to full-time service, Executive
shall be entitled to obtain other employment. If Executive is not restored to
full-time employment with the Company, all stock options that have become
exercisable as of the date of Disability (determined at the end of the 26 week
period referred to herein) shall remain so for a period of 12 months.
(iii) Without Cause. If the Company elects to terminate
Executive for any reason other than as provided in Section 6(a) or if the
Company causes a Defacto Termination of Executive (as defined below) (each a
"Severance Termination"), Executive shall receive the "Separation Package." As
used herein, the "Separation Package" shall consist of two years' Base Salary
(at the annual rate in effect at the date of Severance Termination) plus an
amount equal to the Performance Bonus actually paid to Executive with respect to
the eight fiscal quarters preceding the date of the Severance Termination (or if
Executive has been employed for less than two years, the amount of Performance
Bonus paid to Executive for the entire period of employment multiplied by a
fraction, the numerator of which is the number eight and the denominator of
which is the actual number of fiscal quarters for which Executive was employed
by the Company). In addition, all Options granted over the term shall become
immediately exercisable on the date of termination and all vested options shall
remain exercisable for a period
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of 12 months thereafter. In the event of a Severance Termination, the Company
shall pay the costs of outplacement services with a provider of its choice at a
level appropriate to Executive's title and position as requested by Executive.
For purposes of this paragraph, a Defacto Termination shall include: (i) the
Company shall fail to pay or shall reduce the Base Salary, Performance Bonus or
other benefits in effect immediately prior to the Defacto Termination, except as
permitted hereunder, or shall otherwise breach any material provision hereof
which breach is not cured within 10 days after receipt of notice thereof from
Executive, (ii) the Company shall fail to cause Executive to remain the General
Counsel and Executive Vice President of the Company; (iii) Executive shall not
be continuously afforded the authority, powers, responsibilities and privileges
contemplated in Section 1 above (whether or not accompanied by a change in
title); or the Company shall require Executive's primary services to be rendered
in an area other than the Company's principal offices in the Los Angeles
metropolitan area. For purposes of clause (iii), Executive shall be deemed not
to have been continuously afforded the authority, power, responsibilities and
privileges contemplated in Section 1 above if there shall occur any reduction in
the scope, level or nature of Executive's employment hereunder, or any demotion,
any phasing out or assignment to others of the duties contemplated herein
(c) Change in Control.
(i) Following a Change in Control, this Agreement shall
continue to be binding upon the Company and Executive shall be entitled to the
payments provided for in this Section 6 in the event of termination resulting
from death, disability, cause, or a Separation Termination, all as provided for
in Section 6(a) and 6(b).
(ii) Executive may (but shall not be obligated to) terminate
this Agreement effective 30 days after the giving of such notice given at any
time within two years following a Change in Control. In the event that Executive
elects to terminate this Agreement pursuant to this Section 6(c)(ii), Executive
shall be entitled to receive the Separation Package. In addition, all of the
Options granted over the term shall become immediately exercisable as of the
date of such termination and shall remain so for a period of 12 months
thereafter. The option provided for in this Section 6(c)(ii) shall be applicable
with respect to each Change in Control notwithstanding Executive's failure to
exercise such option with respect to any prior Change in Control.
(d) Payment of Termination Amounts. Executive may elect to have all
amounts to be paid to Executive pursuant to this Section 6 payable (i) over the
remaining term of this Agreement or for such shorter period as expressly
provided for herein, as applicable, or (ii) in a lump sum within 30 days
following termination. In the event Executive elects to be paid pursuant to
clause (i), Executive agrees promptly to notify the Company in writing of
Executive's acceptance of full-time employment; within 15 days after receipt of
such notice, the Company shall pay Executive in a lump sum any amounts which
remain otherwise due to Executive hereunder.
(e) Stock and Similar Rights. Except with regard to the vesting and
exercise dates of Options as set forth in this Section 6, Executive's rights
under any other agreement of
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plan under which stock options, restricted stock or similar awards are granted
shall be determined in accordance with the terms and provisions of such plans or
agreements.
(f) No Mitigation or Offset. Payment of any sum under this Section 6
shall not be subject to any claim or mitigation nor shall the Company be
entitled to any right of offset with respect thereto.
7. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" shall mean the occurrence of any of the following events which occur
after the date hereof.
(a) The acquisition of any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act ("Rule 13d-3")) of 20% or more of the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Voting Securities"); provided,
however, that neither of the following acquisitions shall constitute a Change of
Control; any acquisition by the Company or any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company or any
corporation controlling by the Company; or
(b) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
stockholders of the Company, shall be approved by a vote of at least a majority
of the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board; or
(c) Approval by the stockholders of the Company of a reorganization,
merger or consolidation, in each case, unless following such reorganization,
merger or consolidation; more than 60% of the combined voting power of the then
outstanding voting securities of the corporation resulting from such
reorganization, merger or consolidation, which may be the Company (the
"Resulting Corporation") entitled to vote generally in the election of directors
(the "Resulting Corporation Voting Securities") shall then be owned
beneficially, directly or indirectly, by all or substantially all of the Persons
who were the beneficial owners of Outstanding Voting Securities immediately
prior to such reorganization, merger or consolidation, in substantially the same
proportions as their respective ownerships of Outstanding Voting Securities
immediately prior to such reorganization, merger or consolidation; no Person
(excluding the Company, any employee benefit plan (or related trust) of the
Company, the Resulting Corporation and any Person beneficially owning,
immediately prior to such reorganization, merger or consolidation, directly or
indirectly, 20% or more of the combined voting power of Outstanding Voting
Securities) shall own beneficially, directly or indirectly 20% or more of the
combined voting power of the Resulting Corporation Voting Securities; and at
least a majority of the members of the Board shall have been members of the
Incumbent Board at the time of the execution of the initial agreement providing
for such reorganization, merger or consolidation; or
(d) Approval by the stockholders of the Company of (x) a complete
liquidation or dissolution of the Company or (y) sale or other disposition of
all or substantially all of the
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assets of the Company, other than to a corporation (the "Buyer") with respect to
which following such sale or other disposition, more than 60% of the combined
voting power of securities of Buyer entitled to vote generally in the election
of directors ("Buyer Voting Securities"), shall be owned beneficially, directly
or indirectly, by all or substantially all of the persons who were beneficial
owners of the Outstanding Voting Securities immediately prior to such sale or
other disposition, in substantially the same proportion as their respective
ownership of Outstanding Voting Securities, immediately prior to such sale or
other disposition; no Person (excluding the Company and any employee benefit
plan (or related trust) of the Company or Buyer and any Person that shall
immediately prior to such sale or other disposition own beneficially, directly
or indirectly, 20% or more of the combined voting power of Outstanding Voting
Securities), shall own beneficially, directly or indirectly, 20% of more of the
combined voting power or, Buyer Voting Securities; and (z) at least a majority
of the members of the board of directors of Buyer shall have been members of the
Incumbent Board at the time of the execution of the initial agreement or action
of the board providing for such sale or other disposition or assets of the
Company.
8. INSURANCE. During the term, the Company shall maintain, at no cost to
Executive, officers and directors liability insurance that would cover Executive
in amounts which are customary for companies similarly situated to the Company.
9. GENERAL PROVISIONS.
(a) Notices. All notices, requirements, requests, demands, claims or
other communications hereunder shall be in writing. Any notice, requirement,
request, demand, claim or other communication hereunder shall be deemed duly
given if personally delivered, when so delivered, if mailed, two (2) business
days after having been sent registered or certified mail, return-receipt
requested, postage-prepaid, and addressed to the intended recipient as set forth
below, if given by telecopier, once such notice or other communication is
transmitted to the telecopier number specified below, and the appropriate
telephonic confirmation is received, provided that such notice or other
communication is promptly thereafter mailed in accordance with the provision of
clause (ii) above or if sent through an overnight delivery service under
circumstances by which service guarantees next delivery, the date following the
date so sent:
If to the Company to:
AAMES FINANCIAL CORPORATION
350 South Grand Avenue, 52nd Floor
Los Angeles, California 90071
Attn: Executive Vice President -- Human Resources
If to Executive:
Ms. Barbara Polsky
4086 Hayvenhurst Drive
Encino, CA 91436
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Any changes to the address to which notices, requests, demands, claims and other
communications hereunder are to be delivered by giving the other party notice in
the manner herein set forth.
(b) Assignment. This Agreement and the benefits hereunder are
personal to the Company and are not assignable or transferable, nor may the
services to be performed hereunder be assigned by the Company to any person,
firm or corporation; provided, however, that this Agreement and the benefits
hereunder may be assigned by the Company to any corporation into which the
Company may be merged or consolidated, and this Agreement and the benefits
hereunder will automatically be deemed assigned to any such corporation, subject
however, to Executive's right to terminate this Agreement to the extent provided
in Section 6. In the event of any assignment of this Agreement to any
corporation acquiring all or substantially all of the assets of the Company or
to any other corporation into which the Company may be merged or consolidated,
the responsibilities and duties assigned to Executive by such successor
corporation shall be the responsibilities and duties of, and compatible with the
status of an executive officer of such successor corporation. The Company may
delegate any of its obligations hereunder to any subsidiary of the Company,
provided that such delegation shall not relieve the Company of any of its
obligations hereunder. Executive may not assign its rights hereunder or delegate
her duties to any Person.
(c) Complete Agreement. This Agreement contains the entire agreement
among the parties hereto with respect to the subject matter hereof and
supersedes and cancels any and all previous written or oral negotiations,
commitments, understandings, agreements and any other writings or communications
in respect of such subject matter.
(d) Amendments. This Agreement may be modified, amended, superseded
or terminated only by a writing duly signed by both parties.
(e) Severability. Any provision of this Agreement which is invalid,
illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity, illegality or unenforceability,
without affecting in any way the remaining provisions hereof in such
jurisdiction or rendering that or any other provision of this Agreement invalid,
illegal or unenforceable in any other jurisdiction.
(f) No Waiver. Any waiver by either part of a breach of any
provision of this Agreement shall not operate as or be construed to be a waiver
of any breach of such provision or of any breach of any other provision of this
Agreement. The failure of either part to insist upon strict adherence to any
term of this Agreement on one or more occasions shall not be considered a waiver
or deprive such party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement.
(g) Binding Effect. This Agreement shall be binding upon, and shall
inure to the benefit of, the parties hereto and their permitted assigns,
successors and legal representatives.
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(h) Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed shall be deemed
to be an original and all of which when taken together shall constitute one and
the same document.
(i) Governing Law. This Agreement has been negotiated and entered
into in the State of California and shall be construed in accordance with the
laws of the State of California.
(j) Arbitration. The parties hereby expressly agree to any
controversy or claim relating to this Agreement, including the construction,
enforcement or application of the terms hereof, shall be submitted to
arbitration in Los Angeles, California by the American Arbitration Association
in accordance with Commercial Arbitration Rules of such association. The
arbitrator shall be a retired judge of the Los Angeles Superior Court or other
party acceptable to the parties and the rule of evidence shall apply. The costs
of the arbitrator shall be borne equally. Each party shall be responsible for
its own attorneys' fees and costs. However, the arbitrator shall have the right
to award costs and expenses (including actual attorneys' fees) to the prevailing
party as well as equitable relief. The award of the arbitrator shall be final
and binding and shall be enforceable in any court of competent jurisdiction.
Nothing in this paragraph shall preclude the parties from seeking an injunction
or other equitable relief from a court of competent jurisdiction under
appropriate circumstances.
(k) Headings. The headings included in this Agreement are for the
convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
on its behalf by its duly authorized officer and Executive has executed the same
as of the day and year first above-written.
AAMES FINANCIAL CORPORATION
By:/s/ CARY H. THOMPSON
-------------------------------------
Cary H. Thompson
Chief Executive Officer
EXECUTIVE
/s/ BARBARA POLSKY
- ----------------------------
Barbara Polsky
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EXHIBIT 10.7
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered into as
of June 1, 1997 by and between AAMES FINANCIAL CORPORATION, a Delaware
corporation (the "Company"), and MARK COSTELLO, an individual ("Executive").
W I T N E S S E T H:
WHEREAS, Executive and the Company wish to provide for the terms and
conditions of Executive's employment as Executive Vice President -- Loan
Production of the Company.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Executive agree as
set forth below.
1. EMPLOYMENT AND DUTIES. The Company hereby employs Executive to serve
as the Executive Vice President -- Loan Production of the Company, with the
powers and duties customarily accorded to such position, and such other duties
consistent therewith as may be assigned to Executive from time to time by the
Chief Executive Officer (the "CEO") of the Company.
2. TERM. The initial term of this Agreement shall begin as of June 1,
1997. The initial term shall expire on June 1, 1999, unless terminated earlier
as set forth in Section 6 hereof or by mutual agreement of the parties hereto
(the "Initial Term"). At the expiration of the Initial Term and each anniversary
thereafter, the term of this Agreement shall automatically be extended for an
additional year (the "Extension Term") unless either party shall have given
written notice to the other party at least ninety days prior to the end of the
Initial Term or the Extension Term, as the case may be, that it does not desire
to extend the term of this Agreement.
3. COMPENSATION
(a) Base Salary. During the term of this Agreement, Executive
shall be paid a base salary (the "Base Salary"), payable in accordance with the
Company's normal payroll practices. During the first year of the term of this
Agreement, Executive's Base Salary shall be $200,000. The annual Base Salary
payable to Executive shall be reviewed on an annual basis, provided, however,
that Executive's Base Salary shall not be reduced below $200,000 per annum
during the term of this Agreement.
(b) Performance Bonus. Executive shall be entitled to receive a
quarterly bonus of up to $50,000, as shall be determined in the sole discretion
of the compensation committee of the Board of Directors, for the quarters ended
June 30, September 30 and
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December 31, 1996 and for each quarter thereafter until the compensation
committee of the Board of Directors adopts a performance bonus plan for
Executive, at which time Executive shall be entitled to participate in such
plan. It is currently contemplated that such plan will be based on the Company's
retail and wholesale loan production. Amounts so paid shall be referred to as
the "Performance Bonus." Upon the adoption of the performance bonus plan, the
computation and payment of the Performance Bonus shall be as provided in the
plan.
4. Other Executive Benefits. During the term of this Agreement, the
Company shall provide to the Executive benefits commensurate with his position,
including each of the following benefits:
(a) Group Medical and Life Insurance Benefits. The Company shall
provide for Executive, at the Company's expense, participation in medical,
dental, accident, health, life and disability insurance benefits equivalent to
the normal customary benefits currently or from time to time provided by the
Company. Said coverage shall be in existence as of the commencement of the
Initial Term.
(b) Vacation. Executive shall be entitled to 15 days of paid
vacation during the first year of this Agreement and 20 days of paid vacation
during each subsequent year of the term of this Agreement. In each case, such
entitlement shall accrue pro rata over the contract year and shall be taken at
such time or times as shall not unreasonably interfere with the operations of
the Company.
(c) Business Expenses. The Company will pay or reimburse
Executive for any out-of-pocket expenses incurred by Executive in the course of
providing services hereunder, which comply with the Company's travel and expense
policies in effect generally from time to time for other officers of the
Company. Such reimbursement shall be made by the Company in the same manner and
within the same time period as applicable to the other executive officers of the
Company.
(d) Benefit Plans. Executive shall be entitled to participate in
any pension, profit-sharing, stock option, stock purchase or other benefit plan
of the Company now existing or hereafter adopted for the benefit of employees
generally.
5. CONFIDENTIAL INFORMATION.
(a) Non-Disclosure. Executive hereby agrees, during the term of
this Agreement, he will not disclose to any person or otherwise use or exploit
any proprietary or confidential information, including, without limitation,
trade secrets, processes, records of research, proposals, reports, methods,
processes, techniques, computer software or programming, or budgets or other
financial information, regarding the Company, its business, properties,
customers or affairs (collectively, "Confidential Information") obtained by him
at any time during the term, except to the extent required by Executive's
performance of assigned duties for the Company. Notwithstanding anything herein
to the contrary, the term
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"Confidential Information" shall not include information which is or becomes
generally available to the public other than as a result of disclosure by
Executive in violation of this Agreement, is or becomes available to Executive
on a non-confidential basis from a source other than the Company, provided that
such source is not known by Executive to be furnishing such information in
violation of a confidentiality agreement with or other obligation of secrecy to
the Company, has been made available, or is made available, on an unrestricted
basis to a third party by the Company, by an individual authorized to do so or
is known by Executive prior to its disclosure to Executive. Executive may use
and disclose Confidential Information to the extent necessary to assert any
right or defend against any claim arising under this Agreement or pertaining to
Confidential Information or its use, to the extent necessary to comply with any
applicable statute, constitution, treaty, rule, regulation, ordinance or order,
whether of the United States, any state thereof, or any other jurisdiction
applicable to Executive, or if Executive receives a request to disclose all or
any part of the information contained in the Confidential Information under the
terms of a subpoena, order, civil investigative demand or similar process issued
by a court of competent jurisdiction or by a governmental body or agency,
whether of the United States or any state thereof, or any other jurisdiction
applicable to Executive.
(b) Injunctive Relief. Executive agrees that the remedy at law
for any breach by him of the covenants and agreements set forth in this Section
may be inadequate and that in the event of any such breach, the Company may, in
addition to the other remedies that may be available to it at law, seek
injunctive relief prohibiting him (together with all those persons associated
with him) from the breach of such covenants and agreements.
6. Termination.
(a) Termination by Company for "Cause" or Voluntarily by
Executive. The Company may terminate this Agreement for "Cause" effective
immediately upon written notice thereof to Executive. For purposes of this
Agreement, "Cause" shall mean and be limited to the following events: an act of
fraud, embezzlement, gross dishonesty or similar conduct by Executive involving
the Company; any action by Executive involving the arrest of Executive, for
violation of any criminal statute consisting of a felony if the Board reasonably
determines that the continuation of Executive's employment after such event
would have an adverse impact on the operations or reputation of the Company in
the financial community; or continued insubordination or a refusal by Executive
to perform his duties hereunder in a manner deemed to be reasonably satisfactory
to the CEO; provided, however, that this Agreement may not be terminated under
this subclause unless Executive shall have first received written notice from
the CEO advising Executive of the specific acts or omissions alleged to
constitute a refusal to perform and such refusal to perform continues after
Executive shall have had a reasonable opportunity to correct the acts or
omissions cited in such notice.
In the event of termination for "Cause," voluntarily or by
Executive other than as permitted in Sections 6(b)(i), 6(b)(ii) and 6(c), (x)
Executive shall be entitled to receive that portion of the Base Salary and all
benefits accrued through the date of termination and (y) all
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Options that have become exercisable as of the date of termination shall become
and shall remain so for a period of 30 days.
(b) Termination by Company Other Than For "Cause".
(i) Death. Provided that notice of termination has not
been previously given under any Section hereof, if Executive shall die during
the term of this Agreement, this Agreement and all of the Company's obligations
hereunder shall terminate, except that Executive's estate or designated
beneficiaries shall be entitled to receive (A) all earned and unpaid Base Salary
through the date of termination; (B) a pro-rated portion of the Performance
Bonus, if any, earned and paid for the year preceding the death of Executive;
and (C) all other benefits, if any, that may be due to Executive or Executive's
estate or general provisions of any benefit plan, stock incentive plan or other
plan in which Executive is then a participant.
(ii) Disability. If the Executive shall become disabled or
incapacitated to the extent that in the reasonable judgment of the Board he is
unable to perform the duties of Executive Vice President -- Loan Production, he
shall be entitled to receive disability benefits of the type generally provided
for other executive employees of the Company. In such event, the rights of the
Executive to receive the salary provided in Section 3 of this Agreement shall be
suspended until the Executive is able to fully perform his duties.
(iii) Without Cause. Subject to the provisions of Section
6(c) hereof, this Agreement may be terminated at will at any time upon sixty
(60) days' written notice of termination by Company or Executive. In the event
Company elects to terminate this Agreement during the term of this Agreement,
Executive shall be entitled to the Base Salary earned by Executive prior to the
date of termination computed pro rata up to and including that date plus
additional compensation equal to the then current Base Salary for six (6) months
or, if less, the months remaining in the term, less required withholding and
payroll taxes.
(c) Change in Control.
(i) Following a Change in Control, this Agreement shall
continue to be binding upon the Company and Executive shall be entitled to the
payments provided for in this Section 6 in the event of termination resulting
from death, disability, cause, or without cause, all as provided for in Sections
6(a) and 6(b).
(ii)If a Change in Control of the Company shall have
occurred while the Executive is still an employee of the Company, then the
Executive shall be entitled to receive the Separation Package upon the
termination of the Executive's employment by the Company or the Executive
("Severance Termination"), unless such termination is as a result of: (i) the
Executive's death; (ii) the Executive's disability (as defined in Section
6(b)(ii)) (iii) the Executive's termination by the Company for Cause (as defined
in Section 6(a)); or (iv) the Executive's decision to terminate employment other
than for Good Reason (as defined in Section
4
<PAGE> 5
6(d) below). As used herein, the "Separation Package" shall consist of two
years' Base Salary (at the annual rate in effect at the date of the Severance
Termination) plus an amount equal to the Performance Bonus actually paid to
Executive with respect to the eight fiscal quarters preceding the date of the
Severance Termination (or if Executive has been employed for less than two
years, the amount of Performance Bonus paid to Executive for the entire period
of employment multiplied by a fraction, the numerator of which is the number
eight and the denominator of which is the actual number of fiscal quarters for
which Executive was employed by the Company).
(d) Good Reason. The Executive may terminate his employment by
the Company for Good Reason at any time following a Change in Control during the
term of this Agreement. For purposes of this Agreement, "Good Reason" shall mean
any of the following:
(i) the assignment to the Executive of any duties
materially inconsistent with, or any substantial diminution of, the Executive's
positions, duties, responsibilities and status with the Company immediately
prior to a Change in Control, or a significant adverse alteration in the nature
of the Executive's reporting responsibilities, titles, or offices as in effect
immediately prior to a Change in Control, or any removal of the Executive from,
or any failure to reelect the Executive to, any such positions, except in
connection with a termination of the employment of the Executive for Cause,
disability, or as a result of the Executive's death or by the Executive other
than for Good Reason;
` (ii) a reduction by the Company in the Executive's Base
Salary in effect immediately prior to a Change in Control;
(iii) failure by the Company to continue in effect
(without substitution of a substantially equivalent plan) any compensation plan,
bonus or incentive plan, stock purchase plan, stock option plan, life insurance
plan, health plan, disability plan or other benefit plan or arrangement in which
the Executive is participating at the time of a Change in Control, or the taking
of any action by the Company which would adversely affect Executive's
participation in or materially reduce Executive's benefits under any of such
plans;
(iv) any material breach by the Company of any provision
of this Agreement;
(v) following a Change in Control, the Executive is
excluded (without substitution of a substantially equivalent plan) from
participation in any incentive, compensation, stock option, health, dental,
insurance, pension or other benefit plan generally made available to persons at
Executive's level of responsibility in the Company; or
(vi) without the Executive's express written consent, the
requirement by the Company that the Executive's principal place of employment be
relocated more than twenty-five (25) miles from his place of employment prior to
the Change in Control, or travel on the Company's business to an extent
materially greater than the Executive's customary business travel obligations.
5
<PAGE> 6
(e) Payment of Termination Amounts. Unless otherwise specifically
provided herein, Executive may elect to have all amounts to be paid to Executive
pursuant to this Section 6 payable (i) over the remaining term of this Agreement
or for such shorter period as expressly provided for herein, as applicable, or
(ii) in a lump sum within 30 days following termination. In the event Executive
elects to be paid pursuant to clause (i), Executive agrees promptly to notify
the Company in writing of Executive's acceptance of full-time employment; within
15 days after receipt of such notice, the Company shall pay Executive in a lump
sum any amounts which remain otherwise due to Executive hereunder.
(f) Stock and Similar Rights. Executive's rights under any other
agreement or plan under which stock options, restricted stock or similar awards
are granted shall be determined in accordance with the terms and provisions of
such plans or agreements.
7. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" shall mean the occurrence of any of the following events which occur
after the date hereof.
(a) The acquisition of any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act ("Rule 13d-3")) of 50% or more of the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Voting Securities"); provided,
however, that neither of the following acquisitions shall constitute a Change of
Control; any acquisition by the Company or any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company; or
(b) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election or nomination for election by the
stockholders of the Company, shall be approved by a vote of at least a majority
of the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board; or
(c) Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless in such
reorganization, merger or consolidation more than 50% of the combined voting
power of the then outstanding voting securities of the corporation resulting
from such reorganization, merger or consolidation, which may be the Company (the
"Resulting Corporation") entitled to vote generally in the election of directors
(the "Resulting Corporation Voting Securities") shall then be owned
beneficially, directly or indirectly, by all or substantially all of the Persons
who were the beneficial owners of Outstanding Voting Securities immediately
prior to such reorganization, merger or consolidation, in substantially the same
proportions as their respective ownership of Outstanding Voting Securities
immediately prior to such reorganization, merger or consolidation;
<PAGE> 7
no Person (excluding the Company, any employee benefit plan (or related trust)
of the Company, the Resulting Corporation and any Person beneficially owning,
immediately prior to such reorganization, merger or consolidation, directly or
indirectly, 20% or more of the combined voting power of Outstanding Voting
Securities) shall own beneficially, directly or indirectly 20% or more of the
combined voting power of the Resulting Corporation Voting Securities; and at
least a majority of the members of the Board shall have been members of the
Incumbent Board at the time of the execution of the initial agreement providing
for such reorganization, merger or consolidation; or
(d) Approval by the stockholders of the Company of (x) a complete
liquidation or dissolution of the Company or (y) sale or other disposition of
all or substantially all of the assets of the Company, other than to a
corporation (the "Buyer") with respect to which following such sale or other
disposition, more than 50% of the combined voting power of securities of Buyer
entitled to vote generally in the election of directors ("Buyer Voting
Securities"), shall be owned beneficially, directly or indirectly, by all or
substantially all of the persons who were beneficial owners of the Outstanding
Voting Securities immediately prior to such sale or other disposition, in
substantially the same proportion as their respective ownership of Outstanding
Voting Securities, immediately prior to such sale or other disposition; no
Person (excluding the Company and any employee benefit plan (or related trust)
of the Company or Buyer and any Person that shall immediately prior to such sale
or other disposition own beneficially, directly or indirectly, 20% or more of
the combined voting power of Outstanding Voting Securities), shall own
beneficially, directly or indirectly, 20% or more of the combined voting power
or, Buyer Voting Securities; and (z) at least a majority of the members of the
board of directors of Buyer shall have been members of the Incumbent Board at
the time of the execution of the initial agreement or action of the board
providing for such sale or other disposition or assets of the Company.
8. GENERAL PROVISIONS.
(a) Notices. All notices, requirements, requests, demands, claims
or other communications hereunder shall be in writing. Any notice, requirement,
request, demand, claim or other communication hereunder shall be deemed duly
given if personally delivered, when so delivered, if mailed, two (2) business
days after having been sent registered or certified mail, return-receipt
requested, postage-prepaid, and addressed to the intended recipient as set forth
below, if given by telecopier, once such notice or other communication is
transmitted to the telecopier number specified below, and the appropriate
telephonic confirmation is received, provided that such notice or other
communication is promptly thereafter mailed in accordance with the provision of
clause (ii) above or if sent through an overnight delivery service under
circumstances by which service guarantees next day delivery, the date following
the date so sent:
7
<PAGE> 8
If to the Company to:
AAMES FINANCIAL CORPORATION
350 South Grand Avenue, 52nd Floor
Los Angeles, California 90071
Attn: Executive Vice President -- Human Resources
If to Executive:
Mr. Mark Costello
2051 Outpost Drive
Los Angeles, California 90068
Any changes to the address to which notices, requests, demands, claims and other
communications hereunder are to be delivered by giving the other party notice in
the manner herein set forth.
(b) Assignment. This Agreement and the benefits hereunder are
personal to the Company and are not assignable or transferable, nor may the
services to be performed hereunder be assigned by the Company or to any person,
firm or corporation; provided, however, that this Agreement and the benefits
hereunder may be assigned by the Company to any corporation into which the
Company may be merged or consolidated, and this Agreement and the benefits
hereunder will automatically be deemed assigned to any such corporation. The
Company may delegate any of its obligations hereunder to any subsidiary of the
Company, provided that such delegation shall not relieve the Company of any of
its obligations hereunder. Executive may not assign its rights hereunder or
delegate his duties to any Person.
(c) Complete Agreement. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof and
supersedes and cancels any and all previous written or oral negotiations,
commitments, understandings, agreements and any other writings or communications
in respect of such subject matter.
(d) Amendments. This Agreement may be modified, amended,
superseded or terminated only by a writing duly signed by both parties.
(e) Severability. Any provision of this Agreement which is
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction, or rendering that or any other provision of this Agreement
invalid, illegal or unenforceable in any other jurisdiction.
(f) No Waiver. Any waiver by either party of a breach of any
provision of this Agreement shall not operate as or be construed to be a waiver
of any breach of such
<PAGE> 9
provision or of any breach of any other provision of this Agreement. The failure
of either party to insist upon strict adherence to any term of this Agreement on
one or more occasions shall not be considered a waiver or deprive such party of
the right thereafter to insist upon strict adherence to that term or any other
term of this Agreement.
(g) Binding Effect. This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and their permitted assigns,
successors and legal representatives.
(h) Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed shall be deemed
to be an original and all of which when taken together shall constitute one and
the same document.
(i) Governing Law. This Agreement has been negotiated and
entered into in the State of California and shall be construed in accordance
with the laws of the State of California.
(j) Arbitration. The parties hereby expressly agree that any
controversy or claim relating to this Agreement, including the construction,
enforcement or application of the terms hereof, shall be submitted to
arbitration in Los Angeles, California by the American Arbitration Association
in accordance with Commercial Arbitration Rules of such association. The
arbitrator shall be a retired judge of the Los Angeles Superior Court or other
party acceptable to the parties and the rules of evidence shall apply. The costs
of the arbitrator shall be borne equally. Each party shall be responsible for
its own attorneys' fees and costs. However, the arbitrator shall have the right
to award costs and expenses (including actual attorneys' fees) to the prevailing
party as well as equitable relief. The award of the arbitrator shall be final
and binding and shall be enforceable in any court of competent jurisdiction.
Nothing in this paragraph shall preclude the parties from seeking an injunction
or other equitable relief from a court of competent jurisdiction under
appropriate circumstances.
(k) Headings. The headings included in this Agreement are for the
convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
9
<PAGE> 10
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer and Executive has executed
the same as of the day and year first above-written.
AAMES FINANCIAL CORPORATION
By:/s/ Cary H. Thompson
-----------------------------------
Cary H. Thompson
Chief Executive Officer
EXECUTIVE
/s/ Mark Costello
---------------------------------------
Mark Costello
10
<PAGE> 1
EXHIBIT 10.10(b)
AMENDMENT NO. 1 TO THE
AAMES FINANCIAL CORPORATION
1996 STOCK INCENTIVE PLAN
This Amendment No. 1 to the Aames Financial Corporation (the "Company")
1996 Stock Incentive Plan (the "Plan") is dated as of June 12, 1997.
RECITALS:
A. Section 11 of the Plan provides that the Committee may amend the Plan
from time to time, provided such amendment does not adversely affect any rights
or obligations with respect to any Awards theretofore made under the Plan.
B. On June 12, 1997, the Compensation Committee of the Company's Board
of Directors approved an amendment to Section 9 of the Plan as set forth herein,
upon a finding that such amendment is permitted under the terms of Section 11 of
the Plan.
C. Capitalized terms used herein and not otherwise defined shall have
the meanings ascribed to such terms in the Plan.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Section 9 of the Plan is hereby amended to read in its entirety as
follows:
In the event of any change in the outstanding shares of the Common Stock
or other securities then subject to the Plan by reason of any stock split,
reverse stock split, stock dividend, recapitalization, merger, consolidation,
combination or exchange of shares or other similar corporate change, or if the
outstanding securities of the class then subject to the Plan are exchanged for
or converted into cash, property or a different kind of securities, or if cash,
property or securities are distributed in respect of such outstanding securities
(other than a regular cash dividend), then, unless the terms of such transaction
shall provide otherwise, such equitable adjustments shall be made in the Plan
and the Awards thereunder (including, without limitation, appropriate and
proportionate adjustments in (i) the number and type of shares or other
securities or cash or other property that may be acquired pursuant to Incentive
Stock Options and other Awards theretofore granted under the Plan, (ii) the
maximum number and type of shares or other securities that may be issued
pursuant to Incentive Stock Options and other Awards thereafter granted under
the Plan and (iii) the maximum number of securities with respect to which Awards
may thereafter be granted to any Employee in any fiscal year) as the Committee
determines are necessary or appropriate, including, if necessary, any
adjustments in the maximum number of shares referred to in Section 6 of the
Plan; provided, however, that no adjustment shall be made in the mandatory
grants to Outside Directors made pursuant to Section 5 of the Plan in the event
of a stock split or stock dividend declared by the Company. Such adjustments
shall be conclusive and binding for all purposes of the Plan.
<PAGE> 2
2. Except as set forth herein, all other terms and conditions of the
Plan shall remain in full force and effect.
2
<PAGE> 1
EXHIBIT 10.13(a)
OFFICE BUILDING LEASE
Between
CALIFORNIA PLAZA IIA, LLC,
a California limited liability company,
as Landlord
And
AAMES FINANCIAL CORPORATION,
a Delaware corporation,
as Tenant
Premises:
Suites 3300, 3400, 3800, 4000, 4200, 5100 and 5200
350 South Grand Avenue
Los Angeles, California
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE 1 DEFINITIONS, DEMISE, PREMISES, TERM, RENT...................................1
Section 1.1 Definitions..................................................................1
Section 1.2 Initial Premises; Right of First Offer.......................................5
Section 1.3 Commencement Date; Option Term..............................................10
Section 1.4 Base Rent...................................................................14
Section 1.5 Additional Rent.............................................................14
Section 1.6 Abatement of Rent...........................................................15
Section 1.7 Use.........................................................................16
ARTICLE 2 ALTERATIONS AND ADDITIONS..................................................16
Section 2.1 Initial Alterations.........................................................16
Section 2.2 Subsequent Alterations......................................................17
ARTICLE 3 OPERATING EXPENSES.........................................................19
Section 3.1 Operating Payment...........................................................19
Section 3.2 Estimates and Payments......................................................19
Section 3.3 Extra Charges...............................................................20
Section 3.4 Operating Expenses Defined..................................................20
Section 3.5 Audits of Operating Statements..............................................29
ARTICLE 4 TENANT'S COVENANTS AND RIGHTS..............................................30
Section 4.1 Parking.....................................................................30
Section 4.2 Assignment and Subletting...................................................31
Section 4.3 Care of Premises............................................................39
Section 4.4 Compliance with Law.........................................................40
Section 4.5 Tenant's Insurance..........................................................40
Section 4.6 Tenant's Indemnification....................................................42
Section 4.7 Utilities...................................................................43
Section 4.8 Direct Taxes................................................................44
Section 4.9 Liens.......................................................................44
Section 4.10 Access to Building, Premises, Services,
Utilities and Parking.......................................................45
Section 4.11 Signs.......................................................................45
Section 4.12 Surrender...................................................................46
Section 4.13 Telephone Service...........................................................47
Section 4.14 Consequential Damages.......................................................47
Section 4.15 Roof Rights.................................................................47
</TABLE>
(ii)
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE 5 LANDLORD'S COVENANTS AND RIGHTS............................................48
Section 5.1 Quiet Enjoyment and Subordination...........................................48
Section 5.2 Landlord's Services.........................................................49
Section 5.3 Alterations by Landlord.....................................................53
Section 5.4 Entry by Landlord...........................................................54
Section 5.5 Minimize Interference.......................................................55
Section 5.6 Landlord's Right to Cure....................................................55
Section 5.7 Restrictions on Landlord's Signage..........................................55
ARTICLE 6 EMINENT DOMAIN, CASUALTY, HAZARDOUS MATERIALS..............................56
Section 6.1 Eminent Domain..............................................................56
Section 6.2 Damage by Fire or Other Casualty............................................57
Section 6.3 Subrogation.................................................................60
Section 6.4 Hazardous Materials.........................................................60
ARTICLE 7 EVENTS OF DEFAULT, REMEDIES................................................62
Section 7.1 Events of Default...........................................................62
Section 7.2 Landlord's Remedies and Rights..............................................62
Section 7.3 Default by Landlord.........................................................64
Section 7.4 Bankruptcy..................................................................65
Section 7.5 Landlord Bankruptcy Proceeding..............................................65
ARTICLE 8 MISCELLANEOUS PROVISIONS...................................................65
Section 8.1 Administrative Service Charges..............................................65
Section 8.2 Interest Charges............................................................66
Section 8.3 Holding Over................................................................66
Section 8.4 Notices.....................................................................67
Section 8.5 Authority of Tenant.........................................................67
Section 8.5 Financial Statements........................................................67
Section 8.7 Authorities for Action......................................................68
Section 8.8 Brokerage...................................................................68
Section 8.9 Definition of Landlord......................................................68
Section 8.10 Entire Agreement............................................................68
Section 8.11 Force Majeure...............................................................69
Section 8.12 Severability................................................................69
Section 8.13 No Setoff...................................................................69
Section 8.14 Relationship of Parties.....................................................69
Section 8.15 Name or Signage of Project..................................................70
Section 8.16 Successors Bound............................................................70
Section 8.17 Interpretation..............................................................70
Section 8.18 Joint and Several Obligation................................................71
Section 8.19 Easements...................................................................71
Section 8.20 Use and Development of the Project..........................................71
Section 8.21 Limitation of Landlord Liability............................................72
</TABLE>
(iii)
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 8.22 Short Form Lease............................................................73
Section 8.23 Assignment of Rents, Leases.................................................73
Section 8.24 Intentionally Omitted.......................................................73
Section 8.25 Rules and Regulations.......................................................73
Section 8.26 Estoppel Certificate........................................................74
Section 8.27 Nondiscrimination...........................................................74
Section 8.28 Attorneys' Fees.............................................................74
Section 8.29 Landlord's Failure to Consent...............................................74
Section 8.30 No Waiver...................................................................75
Section 8.31 No Merger...................................................................75
Section 8.32 No Light or Air Easement....................................................75
Section 8.33 JURY TRIAL AND COUNTERCLAIM WAIVER..........................................75
Section 8.34 Office And Communications Services..........................................75
Section 8.35 Right to Lease..............................................................76
Section 8.36 Confidentiality.............................................................76
Section 8.37 Storage Space...............................................................76
Section 8.38 Consent/Duty to Act Reasonably..............................................77
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<S> <C>
EXHIBIT A FLOOR PLAN
EXHIBIT A-1 FIRST OFFER SPACE
EXHIBIT B PROJECT SITE PLAN
EXHIBIT C TENANT WORK LETTER
EXHIBIT D NOTICE OF LEASE TERM DATES
EXHIBIT E RULES AND REGULATIONS
EXHIBIT F ESTOPPEL CERTIFICATE
EXHIBIT G WALL SIGN
EXHIBIT H MONUMENT SIGN
EXHIBIT I CLEANING SPECIFICATIONS
EXHIBIT J FORM OF SUBORDINATION, NON-DISTURBANCE AND
ATTORNMENT AGREEMENT
EXHIBIT K FORM OF FIRST AMENDMENT
</TABLE>
(iv)
<PAGE> 5
OFFICE BUILDING LEASE
350 South Grand Avenue
Los Angeles, California
THIS OFFICE BUILDING LEASE (this "Lease") is made as of this 7th day of
August, 1996, by and between CALIFORNIA PLAZA IIA, LLC, a California limited
liability company ("Landlord"), having an office c/o Citicorp Real Estate, Inc.,
725 South Figueroa Street, Los Angeles, California 90017 and AAMES FINANCIAL
CORPORATION, a Delaware corporation ("Tenant"), having a principal place of
business at 3731 Wilshire Boulevard, Los Angeles, California 90010.
W I T N E S S E T H:
The parties hereto, for themselves, their heirs, distributees,
executors, administrators, legal representatives, successors and assigns, hereby
covenant and agree as follows.
ARTICLE 1
DEFINITIONS, DEMISE, PREMISES, TERM, RENT
Section 1.1 Definitions. The following terms shall have the meanings
hereinafter set forth throughout this Lease.
(A) "Affiliate" shall mean an entity which is controlled by,
controls, or is under common control with, Tenant. "Control," as used in this
Section 1.1(A), shall mean the ownership, directly or indirectly, of at least
fifty-one percent (51%) of the voting securities of any entity.
(B) "Base Rent" shall mean the base rent payable by Tenant during the
Term, as follows:
<TABLE>
<CAPTION>
ANNUAL
RATE PER
RENTABLE
SQUARE
PAYMENT DATES ANNUAL MONTHLY FOOT
<S> <C> <C> <C>
Commencement Date through
and including the tenth (10th)
month of the Fifth (5th)
Lease Year $2,033,591.00 $169,465.91 $11.50
</TABLE>
-1-
<PAGE> 6
<TABLE>
<S> <C> <C> <C>
Eleventh (11th) month
of fifth (5th) Lease Year through
and including the tenth (10th)
month of the Tenth (10th)
Lease Year $2,847,027.40 $237,252.28 $16.10
Eleventh (11th) month of tenth (10th)
Lease Year through and including the
Expiration Date $3,699,367.20 $308,280.60 $20.92
</TABLE>
(C) "Brokers" shall mean:
Representing Landlord:
Cushman Realty Corporation
601 South Figueroa Street
47th Floor
Los Angeles, California 90017
Attn: Norm Mitchell
Representing Tenant:
Cushman Realty Corporation
2121 Avenue of the Stars
Suite 2400
Los Angeles, California 90067
Attn: John McRoskey
(D) "Project" shall mean, collectively, the "Office Building" (as
defined in Section 1.1(M) hereof), that certain office building adjacent thereto
located at 300 South Grand Avenue (the "Adjacent Building"), the "Common Areas"
(as defined in Section 1.1(F) hereof), the "Property" (as defined in Section
1.1(T) hereof), any other building or improvements now or hereafter constructed
on the Property and, at Landlord's sole discretion, any additional real
property, areas, land, buildings or other improvements added thereto pursuant to
the terms of Section 8.20 of this Lease. Landlord hereby agrees that any such
addition to the Project shall not increase Tenant's "Base Rent" or materially
increase "Additional Rent" (as defined in Section 1.5). The Project is further
set forth on the Project Site Plan attached hereto as Exhibit B.
(E) "Commencement Date" shall, subject to the Commencement Date
Delay provisions of Section 5 of the Tenant Work Letter attached hereto as
Exhibit C, occur on May 1, 1997; provided, however, that to the extent that
Tenant commences business operations in any portion of the Premises prior to the
Commencement Date, Tenant shall pay (i) Base Rent for such portion of the
Premises at an annual rate of Eleven and 50/100 Dollars ($11.50) per rentable
square foot, and (ii) the Operating Payment for any such portion occupied by
Tenant, with such payments to be prorated on a daily basis for any such period
prior to the Commencement Date;
-2-
<PAGE> 7
and further provided that if Tenant commences business on any portion of a floor
of the Premises, Tenant shall be deemed to have commenced business on the entire
floor.
(F) "Common Areas" shall mean those portions of the Project which
are provided for use in common by Landlord, Tenant and any other tenants of the
Project, subject to the rules and regulations as described in Section 8.25(A),
below. The Common Areas shall consist of the "Project Common Areas" and the
"Building Common Areas". The term "Project Common Areas", as used in this Lease,
shall mean the portion of the Project designated as such by Landlord, and may
include, without limitation, any fixtures, systems, signs, facilities, parking
areas, lakes, water elements, fountains, gardens, parks or other landscaping
contained, maintained or used in connection with the Project, and may include
any city sidewalks adjacent to the Project, pedestrian walkway system, whether
above or below grade, park or other facilities open to the general public and
roadways, sidewalks, walkways, parkways, driveways and landscape areas
appurtenant to the Project. The term "Building Common Areas", as used in this
Lease, shall mean the portions of the Common Areas located within the Office
Building designated as such by Landlord, and may include, without limitation,
the common entrances, lobbies, atrium areas, restrooms, elevators, stairways and
accessways, loading docks, ramps, drives, platforms, passageways, serviceways,
common pipes, conduits, wires, equipment, loading and unloading areas, parking
facilities and trash areas servicing the Office Building.
(G) "Expiration Date" shall mean the last day of the calendar
month in which the one hundred seventy-eighth (178) month anniversary of the
Commencement Date shall occur; provided, however, that if the Commencement Date
shall be deemed to have occurred on the first day of a calendar month, the
Expiration Date shall be the last day of the calendar month immediately
preceding the one hundred seventy-eighth (178) month anniversary of the
Commencement Date.
(H) "First Offer Notice" shall mean that notice delivered from
Landlord to Tenant in connection with the First Offer Space (as that term is
defined in (I) below), pursuant to the terms of Section 1.2(B).
(I) "First Offer Space" shall mean floors twenty-nine (29) and
forty (40) through fifty-two (52) of the Office Building, as further set forth
in Section 1.2(B), below.
(J) "Interest Rate" shall mean the lesser of (i) the prime rate
of interest published in The Wall Street Journal or any successor publication
plus two percent (2%) per annum, or (ii) the maximum legal rate of interest
allowed by the state in which the Project is located.
(K) "Landlord's Notice Address" shall mean 350 South Grand
Avenue, Suite A2, Los Angeles, California 90071, Attention: Property Manager,
with a copy of each Notice (as defined in Sections 1.1(L) and 8.4 hereof) to
Landlord to be sent to (i) Asset Manager/California Plaza IIA, LLC, c/o Citicorp
Real Estate, Inc., 725 South Figueroa Street, Los Angeles, California 90017, and
(ii) Senior Asset Manager/California Plaza IIA, LLC, c/o Citicorp Real Estate,
Inc., 725 South Figueroa Street, Los Angeles, California 90017.
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(L) "Notice" shall mean written notice given in compliance with
Section 8.4 of this Lease. Landlord and Tenant shall each have the right to add
or delete addresses and names for notices upon five (5) business days' prior
notice to the other party.
(M) "Office Building" or "Building" shall mean that certain
building and other improvements having a street address of 350 South Grand
Avenue, Los Angeles, California 90071.
(N) "Option Rent Notice" shall mean that notice delivered by
Landlord to Tenant in connection with the Option Term (as that term is defined
in Section 1.3(D), below), pursuant to the terms of Section 1.3(D).
(O) "Option Terms" shall mean that right of Tenant to extend the
Term for two (2) periods of five (5) years each pursuant to the terms of Section
1.3(D), below.
(P) "Parking Passes" shall mean one (1) unreserved parking pass
for each 1,000 rentable square feet of the Premises in the parking facility (the
"Parking Facility") located partially beneath the Project, of which twelve (12)
passes shall be unreserved, priority parking passes.
(Q) "Permitted Assignee" shall mean an assignee of Tenant's
entire interest in this Lease, provided such assignment is approved pursuant to
the terms of Section 4.2 or requires no approval pursuant to the terms thereof.
(R) "Permitted Uses" shall mean use of the Premises solely for
general office purposes consistent (in the reasonable opinion of Landlord) with
the character of the Project as a first class office building project and for
any other office purposes consistent with the uses generally permitted by
Landlord for comparable space in the Building. No portion of the Premises shall
be used for the operation of a retail business except to the extent, if any,
that Landlord permits other tenants having comparable space in the Office
Building above the second (2nd) floor of the Office Building to use such
comparable space for retail purposes, provided that any retail use of the
Premises shall be subject to the prior written approval of Landlord, which
approval shall not be unreasonably withheld or delayed. In addition, no portion
of the Premises shall be used in any manner inconsistent with any exclusive
right granted by Landlord, as of the date hereof or at any time hereafter, to
any other tenant of the Office Building.
(S) "Premises" shall, subject to the terms of Section 1.2(A),
below, mean that space shown on the floor plans attached hereto as Exhibit A,
known as Suites 3300, 3400, 3800, 4000, 4200, 5100 and 5200, located on the
thirty-third (33rd), thirty-fourth (34th), thirty-eighth (38th), fortieth
(40th), forty-second (42nd), fifty-first (51st), and fifty-second (52nd) floors
of the Office Building, containing 176,834 rentable square feet, which is
comprised of 26,311 rentable square feet of space on the thirty-third (33rd)
floor, 26,311 rentable square feet of space on the thirty-fourth (34th) floor,
26,311 rentable square feet of space on the thirty-eighth (38th) floor, 26,224
rentable square feet of space on the fortieth (40th) floor, 26,830 rentable
square feet of
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space on the forty-second (42nd) floor, 22,454 rentable square feet of space on
the fifty-first (51st) floor, and 22,393 rentable square feet of space on the
fifty-second (52nd) floor.
(T) "Property" shall mean that certain real property on which the
Office Building and Common Areas are situated, located in the City of Los
Angeles, County of Los Angeles and State of California, as further set forth on
Exhibit B.
(U) "Rent" shall mean Base Rent and "Additional Rent," as defined
in Section 1.5.
(V) "Rent Payment Address" shall mean 350 South Grand Avenue,
Suite A2, Los Angeles, California 90071, Attention: Property Manager.
(W) "Security Deposit" shall mean Zero and 00/100 Dollars
($0.00).
(X) "Tenant's Notice Address" shall mean until the date Tenant
commences business operations from the Premises, 3731 Wilshire Boulevard, Los
Angeles, California 90010, Attention: General Counsel, and after the date Tenant
commences business operations from the Premises, notices shall be sent to 350
South Grand Avenue, Suite 5100, Los Angeles, California 90071, Attention:
General Counsel, with a copy of each notice to Tenant in each case to be sent
to: Pillsbury Madison & Sutro LLP, 725 South Figueroa Street, Suite 1200, Los
Angeles, California 90017, Attention: Michael E. Meyer, Esq., and Cushman Realty
Corporation, 2121 Avenue of the Stars, Suite 2400, Los Angeles, California
90067, Attention: Mr. John McRoskey.
(Y) "Term" shall mean the period commencing on the Commencement
Date and ending on the Expiration Date, being approximately fourteen (14) years
and ten (10) months. For purposes of this Lease, the term "Lease Year" shall
mean each consecutive twelve (12) month period during the Term; provided,
however, that the first Lease Year shall commence on the Commencement Date and
end on the last day of the eleventh month thereafter and the second and each
succeeding Lease Year shall commence on the first day of the next calendar
month; and further provided that the last Lease Year shall end on the Expiration
Date.
Section 1.2 Initial Premises; Right of First Offer.
(A) Initial Premises. Subject to and upon the terms and
conditions set forth herein, Landlord hereby leases to Tenant and Tenant hereby
hires from Landlord the Premises located in the Office Building for the period
commencing on the Commencement Date and ending on the Expiration Date.
Notwithstanding anything in this Lease to the contrary, Landlord may, at its
sole option, upon delivery of notice (the "Premises Modification Notice") to
Tenant on or before August 30, 1996 (the "Premises Modification Deadline"),
elect to delete each of floors thirty-three (33), thirty-four (34) and
thirty-eight (38) from the Premises (such space as is deleted to be referred to
herein as the "Take Back Space"), and to include each of floors forty-three
(43), forty-four (44) and forty-seven (47) in the Premises (such space as is
added to be referred to herein as the "Additional Space"). In the event Landlord
timely delivers the Premises Modification Notice, (i) for all purposes under
this Lease, the "Premises" shall mean the Premises set forth in Section 1.1(S),
above, excluding the Take Back Space but adding thereto
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the Additional Space, (ii) all numbers in this Lease which vary based upon the
rentable square footage of the Premises shall be recalculated (including, but
not limited to, the Base Rent and the Tenant Improvement Allowance) based upon
the total rentable square footage of the Premises, as modified by the Premises
Modification Notice, (iii) the Commencement Date shall be June 4, 1997 (the
"Extended Commencement Date"), provided that in the event that Landlord delivers
the Premises Modification Notice prior to the Premises Modification Deadline,
the Extended Commencement Date shall be one (1) day earlier for each day prior
to the Premises Modification Deadline that Landlord delivers the Premises
Modification Notice, (iv) the "Tenant Improvement Allowance," as that term is
defined in Section 2.1 of the Tenant Work Letter, shall (A) be increased by an
amount equal to, if the Premises Modification Notice is delivered on or before
August 16, 1996, Twenty Thousand and No/100 Dollars ($20,000.00), and if the
Premises Modification Notice is delivered after August 16, 1996 and prior to
August 30, 1996, Forty Thousand and No/100 Dollars ($40,000.00), and (B) be
decreased by an amount equal to Thirty Thousand Five Hundred Sixty-Eight and
20/100 Dollars ($30,568.20), (v) the "First Offer Space," as that term is
defined in Section 1.2(B), below, shall be re-defined as the First Offer Space
set forth in Section 1.2(B), below, but excluding the twenty-ninth (29th) floor
of the Building and the Additional Space, but adding thereto the "Landlord
Determined First Offer Floors," as that term is defined, below, and (vi) Section
1.13 of the Tenant Work Letter shall be deleted in its entirety. For purposes of
modifying the definition of the Premises following Landlord's delivery of the
Premises Modification Notice, if applicable, the forty-third (43rd) floor of the
Building shall conclusively be deemed to consist of 26,830 rentable square feet
of space, the forty-forth (44th) floor of the Building shall be conclusively
deemed to consist of 26,830 rentable square feet of space, and the forty-seventh
(47th) floor of the Building shall conclusively be deemed to consist of 26,830
rentable square feet of space. Landlord and Tenant hereby acknowledge and agree
that (a) except as specifically set forth in item (iii), above, the Commencement
Date shall not be extended as a result of Landlord's delivery of the Premises
Modification Notice, and (b) except as specifically set forth in item (iv)(A),
above, Tenant shall not be entitled to the payment of any fee or reimbursement
of any cost or expense incurred by Tenant as a result of Landlord's delivery of
the Premises Modification Notice. Within five (5) business days following
Landlord's delivery of the Premises Modification Notice, if applicable, Landlord
and Tenant shall execute an amendment to this Lease in the form attached hereto
as Exhibit K setting forth the foregoing terms. Notwithstanding anything to the
contrary set forth in this Lease, Landlord and Tenant hereby agree to be bound
by the number of rentable square feet comprising the Premises, as set forth in
Section 1.1(S), above, and, if applicable, this Section 1.2(A). For purposes of
this Section 1.2(A), the "Landlord Determined First Offer Floors," shall mean
any two (2) contiguous floors among floors two (2) through twelve (12) and
eighteen (18) through twenty-one (21) of the Building, as designated by Landlord
in its sole discretion during the Term.
(B) Right of First Offer. Landlord hereby grants to the Tenant
named in this Lease ("Original Tenant") and any Permitted Assignee a right of
first offer with respect to all of the space located on floors twenty-nine (29),
forty-one (41), and forty-three (43) through fifty (50) of the Building, as
further described on Exhibit A-1 attached hereto (the "First Offer Space").
Notwithstanding the foregoing, such first offer right of Tenant shall commence
immediately with respect to any First Offer Space which is now vacant and
following the
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expiration or earlier termination of any leases of the First Offer Space which
exist as of the date of this Lease, including any renewals of such existing
leases which leases contain express written renewal provisions as of the date
hereof (whether or not such renewal is consummated pursuant to the express terms
of such provision and regardless of whether any such renewal or extension is
consummated pursuant to a lease amendment or a new lease), and such right of
first offer shall be subordinate to all rights of expansion, first refusal,
first offer or similar rights which are set forth in leases of space in the
Building as of the date hereof (collectively, the "Superior Right Holders") with
respect to such First Offer Space. Landlord shall reoffer Tenant First Offer
Space from time to time in accordance with the terms of Section 1.2(B)(6),
below. Tenant's right of first offer shall be on the terms and conditions set
forth in this Section 1.2(B).
(1) Procedure for Offer. Landlord shall notify Tenant
(the "First Offer Notice") from time to time when and if the First Offer Space
or any portion thereof becomes available for lease to third parties, provided no
Superior Right Holder wishes to lease such space. Pursuant to such First Offer
Notice, Landlord shall offer to lease to Tenant the then available First Offer
Space. The First Offer Notice shall describe the space so offered to Tenant and
shall set forth the "First Offer Rent," as that term is defined in Section
1.2(B)(3) below, and the other economic terms upon which Landlord is willing to
lease such space to Tenant.
(2) Procedure for Acceptance. If Tenant wishes to
exercise Tenant's right of first offer with respect to the entire space
described in the First Offer Notice, then within ten (10) business days of
delivery of the First Offer Notice to Tenant, Tenant shall deliver notice
("Exercise Notice") to Landlord of Tenant's intention to exercise its right of
first offer with respect to the space described in the First Offer Notice;
provided, however, that (a) with respect to any portion of the First Offer Space
offered to Tenant which is less than one (1) full floor of the Building, Tenant
may elect in the Exercise Notice to lease less than all of the First Offer Space
offered to Tenant, provided that the portion thereof not leased by Tenant is in
a commercially leasable configuration, and (b) with respect to any portion of
the First Offer Space offered to Tenant which is one (1) or more full floors of
the Building, Tenant may elect in the Exercise Notice to lease one (1) or more
of such full floors, provided that (i) any full floor or floors of First Offer
Space leased by Tenant shall not be contiguous on both sides to First Offer
Space which Tenant at such time elects not to lease, and (ii) unless Tenant
elects to lease one or more full floors of First Offer Space which is/are
contiguous to the then Premises, Landlord may, at its sole option, elect which
floor or floors of the First Offer Space offered by Tenant shall be leased by
Tenant. In the event that concurrent with Tenant's exercise of this First Offer
Right, Tenant notifies Landlord in the Exercise Notice that Tenant irrevocably
exercises the right to lease the First Offer Space but does not accept the First
Offer Rent set forth in the First Offer Notice, then the First Offer Rent shall
be determined in accordance with the procedure set forth in Section 1.3(D)(4),
below. If Tenant does not send Landlord the Exercise Notice within the ten (10)
business day period specified in the first sentence of this Section 1.2(B)(2),
then Landlord shall be free to lease the space described in the First Offer
Notice to anyone to whom Landlord desires on any terms Landlord desires and the
first offer right set forth in this Section 1.2(B) shall be subordinate to the
terms of any such new lease entered into by Landlord; provided, however, that
any rights given to any tenant under any such new lease with respect to First
Offer Space
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other than that First Offer Space just previously offered to Tenant shall be
subject and subordinate to Tenant's First Offer Right set forth herein.
(3) First Offer Space Rent. The rent payable by Tenant
for the First Offer Space (the "First Offer Rent") shall be equal to the rent
(including additional rent and considering any "base year" or "expense stop"
applicable thereto), including all escalations, at which tenants, as of the
"First Offer Commencement Date," as that term is defined in Section 1.2(B)(5),
below, are, pursuant to transactions completed within the prior twelve (12)
months, leasing non-renewal, non-sublease, non-encumbered, non-equity,
non-expansion space unless such space was leased pursuant to a definition of
"fair market" comparable to the definition of First Offer Rent comparable in
size, location and quality to the First Offer Space, for a similar lease term,
which comparable space is located in the Building and in "Comparable Buildings",
as that term is defined in Section 3.4(C) below, giving appropriate
consideration to the annual rental rates per rentable square foot, the standard
of measurement by which the rentable square footage is measured, the ratio of
rentable square feet to usable square feet, and taking into consideration only
the following concessions: (a) any operating expense and tax protection granted
in connection with such comparable space (e.g., "base year" or "expense stop"
protection, (b) rental abatement concessions, if any, being granted such tenants
in connection with such comparable space, (c) tenant improvements or allowances
provided or to be provided for such comparable space, taking into account, and
deducting the value of, the existing improvements in the First Offer Space, such
value to be based upon the age, quality and layout of the improvements and the
extent to which the same could be utilized by a general office user, and (d) any
period of rental abatement, if any, granted to tenants in comparable
transactions in connection with the design, permitting and construction of
tenant improvements in such comparable spaces, and (e) all other monetary and
non-monetary concessions, if any, being granted such tenants in connection with
such comparable space; provided, however, that notwithstanding anything to the
contrary herein, no consideration shall be given to the fact that Landlord is or
is not required to pay a real estate brokerage commission in connection with
Tenant's leasing of the First Offer Space or the fact that the comparable deals
do or do not involve the payment of real estate brokerage commissions but only
transactions where a tenant is represented by a real estate broker shall be
considered comparable transactions. If in determining the First Offer Rent a
tenant improvement allowance is granted, Landlord may, at Landlord's sole
option, elect to grant some or all of the tenant improvement allowance as an
allowance for the refurbishment of the First Offer Space and, if none or only a
portion of such allowance is granted to Tenant to adjust the rental rate
component of the First Offer Rent to be an effective rental rate (based upon a
future value interest rate equal to the Interest Rate minus two percent (2.0%))
which deducts the total dollar value of the tenant improvement allowance not
granted to Tenant pursuant to the terms of this sentence (in which case the
tenant improvement allowance evidenced in the effective rental rate shall not be
granted to Tenant).
(4) Construction In First Offer Space. Tenant shall take
the First Offer Space in its "as is" condition, except that the Building
Structure and the Building Systems shall be in good operating order and
condition and the construction of improvements in the First Offer Space shall
comply with the terms of Article 2 of this Lease. Tenant shall receive a tenant
improvement allowance and a period of free rent during which to construct tenant
improvements
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in the First Offer Space (the "First Offer Space Construction Period") to the
extent provided pursuant to the definition of "First Offer Rent," as set forth
in Section B(3) of this Lease, provided that in the event that such First Offer
Space Construction Period shall end on a date occurring earlier than the earlier
of the date occurring (i) four (4) months after Landlord's receipt of the
Decision Notice, and (ii) two (2) months following the delivery of such space to
Tenant (the later of such dates to be known as the "Stipulated Ending Date"),
then Tenant shall be entitled to a First Offer Space Construction Period ending
on the Stipulated Ending Date and the effective rental rate for the First Offer
Space shall be increased accordingly.
(5) Amendment to Lease. If Tenant timely exercises
Tenant's right to lease the First Offer Space as set forth herein, Landlord
shall promptly thereafter prepare and deliver an amendment to this Lease for
such First Offer Space upon the terms and conditions as set forth in the First
Offer Notice and this Section 1.2(B), which amendment shall be executed by
Tenant within thirty (30) days following Tenant's receipt thereof. The rentable
square footage of the First Offer Space leased by Tenant shall be calculated
pursuant to the terms of Section 1.2(B)(7), below. Tenant shall commence payment
of the First Offer Rent, and the term of the First Offer Space shall commence
upon the earlier to occur of (A) the expiration of the First Offer Space
Construction Period, if any, which time period shall be extended for
"Commencement Date Delays," as that term is defined in Section 5 of the Tenant
Work Letter, and (B) the date that Tenant, or any person occupying any of the
First Offer Space with Tenant's permission, commences business operations from
the First Offer Space (in either event the "First Offer Commencement Date") and
terminate concurrently with termination of the lease of the initial Premises on
the Expiration Date (the "First Offer Space Term").
(6) Termination of Right of First Offer. The rights
contained in this Section 1.2(B) shall be personal to the Original Tenant and
may only be exercised by the Original Tenant or any Permitted Assignee (and not
any other assignee, sublessee or other transferee of the Original Tenant's
interest in this Lease) if the Original Tenant or the Permitted Assignee, as the
case may be, occupies at least seventy-five percent (75%) of the then existing
Premises. The right of first offer granted herein shall be suspended as to
particular First Offer Space for a period of one (1) year upon the failure by
Tenant to exercise its right of first offer with respect to any particular First
Offer Space as offered by Landlord and during the last two (2) years of the term
of this Lease (unless Tenant has exercised the first renewal right) or, when
appropriate, during the last two (2) years of the first renewal term (unless
Tenant has exercised the second renewal right). Tenant shall not have the right
to lease First Offer Space, as provided in this Section 1.2(B), if, as of the
date of the attempted exercise of any right of first offer by Tenant, or as of
the scheduled date of delivery of such First Offer Space to Tenant, an Event of
Default by Tenant exists under this Lease.
(7) Rentable Square Footage of First Offer Space.
Landlord shall calculate the rentable square footage of any First Offer Space
leased by Tenant based upon the product of (i) the applicable "Load Factor," as
set forth below, and (ii) the number of usable square feet of such First Offer
Space, calculated pursuant to Standard Method for Measuring Floor Area in Office
Buildings, ANSIZ65.1 1980. Tenant shall have the right, within sixty (60) days
following Landlord's delivery to Tenant of Landlord's calculation of the
rentable square
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footage of any First Offer Space leased by Tenant, to (a) remeasure such First
Offer Space in accordance with the standard set forth in this Section 1.2(B)(7)
and (b) object to Landlord's calculation of the rentable square footage of such
space. If Landlord disagrees with Tenant's remeasurement and a dispute occurs
regarding the final accuracy of the rentable area of the First Offer Space, such
dispute will be resolved by Tenant paying the amount determined by Landlord's
initial calculation and then filing a lawsuit against Landlord requiring a
remeasurement in accordance with the standard set forth in Section 1.2(B)(7) and
if Tenant prevails pursuant to a final, nonappelable judgment, all amounts to be
paid by Tenant shall be proportionately, retroactively and prospectively
adjusted to reflect the exact amounts due if the correct square footage had been
initially set forth in this Lease. For purposes of this Section 1.02(B)(7), the
"Load Factors" shall be as follows;
Load Factor Load Factor
Floor If Multi-Tenant Floor If Single Tenant Floor
29 1.1555 1.0881
41 1.1656 1.0939
43 1.1610 1.0919
44 1.1630 1.0937
45 1.1591 1.0934
46 1.1612 1.0948
47 1.1617 1.0957
48 1.1617 1.0957
49 1.1617 1.0957
50 1.1639 1.0962
Section 1.3 Commencement Date; Option Term.
(A) If the Commencement Date occurs on a date other than the
first day of a calendar month or if the Term expires or is terminated on a day
other than the last day of a calendar month, Base Rent and any Additional Rent
(as defined in Section 1.5 hereof) payable hereunder shall be prorated for such
partial month on the basis of a thirty (30) day month. Tenant shall pay Landlord
such prorated amount payable for the month in which the Commencement Date occurs
on the first day of the month next following, along with all charges and
payments due for such following month which were not paid by Tenant upon the
execution of this Lease.
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(B) Within ten (10) days after the Commencement Date, Landlord
and Tenant shall each execute a notice of the occurrence of the Commencement
Date substantially in the form of Exhibit D annexed hereto (the "Notice of Lease
Term Dates"), setting forth the Commencement Date and other information required
therein, which notice the receiving party shall acknowledge by executing a copy
of the notice and returning it to the sending party (provided that if such
notice is not factually correct, then the receiving party shall make such
changes as are necessary to make the notice factually correct), but the failure
by either party to execute the Notice of Lease Term Dates shall not affect the
Commencement Date.
(C) Early Entry Into Premises. Tenant, upon providing Landlord
with at least two (2) business days' prior notice, may enter the Premises after
the execution and delivery of this Lease by Landlord and Tenant in order to
commence the design and construction of the "Tenant Improvements" as that term
is defined in Section 2 of the Tenant Work Letter; provided, however, that
Landlord shall not be responsible for, and Tenant is required to obtain
insurance covering, any loss caused by Tenant or those entering the Premises on
behalf of Tenant to design or construct the Tenant Improvements, including
theft, damage or destruction to any work or material installed or stored by
Tenant or any contractor or individual involved in the construction of the
Tenant Improvements, or for any injury to Tenant or Tenant's employees or to any
other person and provided further that Landlord shall have the right to post the
appropriate notices of non-responsibility and to require Tenant to provide
Landlord with evidence that Tenant has fulfilled its obligation to provide
insurance pursuant to Section 4.5 hereof.
(D) Option Term.
(1) Option Right. Landlord hereby grants the Original
Tenant and any Permitted Assignee, two (2) options to extend the Term for a
period of five (5) years each (each, an "Option Term"), for one or more full
floors of the Premises or the entire Premises then leased by Tenant; provided
that Tenant may not extend the Term as to a full floor of the Premises if that
floor of the Premises is contiguous on both sides to a floor of the Building
which contains a portion of the Premises prior to such extension of the Term,
but which space will not be part of the Premises during such extended term. Each
of the Option Terms shall be exercisable only by written notice delivered by
Tenant to Landlord as provided below, provided that, as of the date of delivery
of each such notice, an Event of Default does not exist under this Lease. Upon
the proper exercise of such option to extend, and provided that, as of the end
of the then Term, an Event of Default does not exist under this Lease, the Term,
as it applies to the Premises, shall be extended for a period of five (5) years.
(2) Option Rent. The rent payable by Tenant during the
Option Term (the "Option Rent") shall be equal to the rent (including additional
rent and considering any "base year" or "expense stop" applicable thereto),
including all escalations, at which tenants, as of the commencement of the
applicable Option Term are, pursuant to transactions completed within the prior
twenty-four (24) months, leasing non-renewal, non-sublease, non-encumbered,
non-equity space (unless such space was leased pursuant to a definition of "fair
market" comparable to the definition of Option Rent) comparable in size,
location and quality to the Premises for a term of five (5) years (the
"Comparable Deals"), which comparable space is
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located in the Building and in Comparable Buildings, giving appropriate
consideration to the annual rental rates per rentable square foot, the standard
of measurement by which the rentable square footage is measured, the ratio of
rentable square feet to usable square feet, and taking into consideration only
the following concessions (provided that the rent payable in Comparable Deals in
which the terms of such Comparable Deals are determined by use of a discounted
fair market rate formula shall be equitably increased in order that such
Comparable Deals will not reflect a discounted rate) (collectively, the "Rent
Concessions"): (a) rental abatement concessions, if any, being granted such
tenants in connection with such comparable spaces, and (b) tenant improvements
or allowances provided or to be provided for such comparable space, taking into
account, and deducting the value of, the existing improvements in the Premises,
such value to be based upon the age, quality and layout of the improvements and
the extent to which the same could be utilized by general office users and
disregarding that the Tenant Improvements were built out for a financial
institution, and (c) all other monetary and non-monetary concessions, if any,
being granted such tenants in connection with such comparable space; provided,
however, that notwithstanding anything to the contrary herein, no consideration
shall be given to (i) the fact that Landlord is or is not required to pay a real
estate brokerage commission in connection with the applicable Option Term or the
fact that the Comparable Deals do or do not involve the payment of real estate
brokerage commissions (but only transactions where a tenant is represented by a
real estate broker shall be considered Comparable Deals) and (ii) any period of
rental abatement, if any, granted to tenants in Comparable Deals in connection
with the design, permitting and construction of tenant improvements in such
comparable spaces. If in determining the Option Rent a tenant improvement
allowance is granted, Landlord may, at Landlord's sole option, elect to grant
some or all of the tenant improvement allowance as an allowance for the
refurbishment of the Premises and, if none or only a portion of such allowance
is granted to Tenant to adjust the rental rate component of the Option Rent to
be an effective rental rate (based upon a future value interest rate equal to
the Interest Rate minus two percent (2.0%)) which deducts the total dollar value
of the tenant improvement allowance not granted to Tenant pursuant to the terms
of this sentence (in which case the tenant improvement allowance evidenced in
the effective rental rate shall not be granted to Tenant).
(3) Exercise of Option to Extend. The option contained
in this Section 1.3(D) shall be exercised by Tenant or any Permitted Assignee,
if at all, and only in the following manner: (i) Tenant may deliver written
notice to Landlord not more than nineteen (19) months nor less than seventeen
(17) months prior to the expiration of the then Lease Term, stating that Tenant
is interested in exercising its option and stating whether Tenant is interested
in exercising its option with respect to the entire Premises or with respect to
only one or more full floors of the Premises pursuant to the terms of Section
1.3(C)(1), above; (ii) Landlord, after receipt of Tenant's notice, shall deliver
notice (the "Option Rent Notice") to Tenant not less than sixteen (16) months
prior to the expiration of the then Lease Term, setting forth the Option Rent;
and (iii) if Tenant wishes to exercise such option, Tenant shall, on or before
the date occurring fifteen (15) months prior to the expiration of the then Lease
Term or if such Option Rent Notice has not been sent by Landlord more than
sixteen (16) months prior to the expiration of the then Lease Term then on or
before the date occurring within thirty (30) days after Tenant's receipt of the
Option Rent Notice, exercise the option by delivering written notice thereof to
Landlord (the
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"Option Acceptance") and upon, and concurrent with, such exercise,
if the Option Rent was determined pursuant to Section 1.03(D)(3)(ii), above,
Tenant may, at its option, object to the Option Rent contained in the Option
Rent Notice, in which case the parties shall follow the procedure, and the
Option Rent shall be determined, as set forth in Section 1.3(D)(4), below.
(4) Determination of Option Rent and First Offer Rent.
In the event Tenant timely and appropriately objects to the Option Rent or the
First Offer Rent, as the case may be, Landlord and Tenant shall attempt to agree
upon the Option Rent or the First Offer Rent, as the case may be. If Landlord
and Tenant fail to reach agreement within ten (10) days following Tenant's
objection to the Option Rent or the First Offer Rent, (in either such case, the
"Outside Agreement Date"), then each party shall make a separate determination
of the Option Rent or the First Offer Rent, as the case may be, simultaneously
exchange such determination of the Option Rent or the First Offer Rent within
five (5) days, and such determinations shall be submitted to arbitration in
accordance with items (a) through (h), below.
(a) Landlord and Tenant shall each appoint one
arbitrator (and Landlord or Tenant may consult with such arbitrator
prior to his or her appointment and each arbitrator shall be considered
an advocate arbitrator) who shall by profession be a reputable,
qualified, licensed real estate broker who shall have been active over
the five (5) year period ending on the date of such appointment in the
leasing of commercial high-rise properties in the downtown Los Angeles,
California area. The determination of the arbitrators shall be limited
solely to the issue area of whether Landlord's or Tenant's submitted
Option Rent or First Offer Rent, as the case may be, is the closer to
the actual Option Rent or First Offer Rent, as determined by the
arbitrators, taking into account the requirements of Section 1.2 (B)(3)
or 1.3(D)(2) of this Lease, as the case may be. Each such arbitrator
shall be appointed within fifteen (15) days after the applicable Outside
Agreement Date.
(b) The two arbitrators so appointed shall within
ten (10) days of the date of the appointment of the last appointed
arbitrator agree upon and appoint a third neutral arbitrator who shall
be qualified under the same criteria set forth hereinabove for
qualification of the initial two arbitrators; provided that neither
party or either of the advocate arbitrators may, directly or indirectly,
consult with the neutral arbitrator prior to his or her appointment
except as to inquire as to such arbitrator's willingness or availability
to participate in the arbitration.
(c) The three arbitrators shall within thirty (30)
days of the appointment of the third arbitrator reach a decision as to
whether the parties shall use Landlord's or Tenant's submitted Option
Rent or First Offer Rent, as the case may be, and shall notify Landlord
and Tenant thereof.
(d) The decision of the majority of the three
arbitrators shall be binding upon Landlord and Tenant. If no decision is
made by such majority, then the decision of the third arbitrator shall
be binding on Landlord and Tenant. In making the decision, in no event
shall the three arbitrators or the third arbitrator have the right to
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amend, modify, compromise, average or blend either of the first two
determinations, it being the intent of Landlord and Tenant that the
three arbitrators or the third arbitrator, as the case may be, shall
simply select the one of two such determinations that in the third
arbitrator's judgment most accurately defines the applicable Option Rent
or First Offer Rent, as the case may be.
(e) The decision of the arbitrators pursuant to the
terms of (d) above or (f) below, as applicable, shall be final and
binding upon Landlord and Tenant and judgment on such decision may be
rendered in a court of competent jurisdiction.
(f) If either Landlord or Tenant fails to appoint
an arbitrator within 15 days after the applicable Outside Agreement
Date, the arbitrator appointed by one of them shall reach a decision,
notify Landlord and Tenant thereof, and such arbitrator's decision shall
be binding upon Landlord and Tenant.
(g) If the two arbitrators fail to agree upon and
appoint a third arbitrator, or both parties fail to appoint an
arbitrator, then the appointment of the third arbitrator or any
arbitrator shall be dismissed and the matter to be decided shall be
forthwith submitted to arbitration under the provisions of the American
Arbitration Association, but subject to the instruction set forth in
this Section 1.3(D)(4).
(h) The cost of (a) arbitrators selected by
Landlord and Tenant shall be paid individually by the appointing party
and (b) the third arbitrator's fees and the costs of the arbitration
shall be paid by Landlord and Tenant equally.
Section 1.4 Base Rent. Tenant shall pay Landlord at the Rent Payment
Address set forth in Section 1.1(V) hereof or at such other address as may be
designated by Landlord from time to time, monthly, in advance, on the first day
of each calendar month during the Term, monthly installments of Base Rent,
without notice or demand and without any setoff, offset, abatement or deduction,
except as specifically set forth in this Lease. Notwithstanding the foregoing,
prior to the Commencement Date, Tenant shall pay Landlord the first installment
of Base Rent for the first full calendar month which occurs after the expiration
of the free rent period. Notwithstanding anything in this Section 1.4 to the
contrary, subject to the terms of the preceding sentence and Section 1.2(A),
above, Tenant shall not be required to pay an amount equal to One Hundred
Sixty-Nine Thousand Four Hundred Sixty-Five and 91/100 Dollars ($169,465.91) of
Base Rent which is attributable to each of the first twenty-two (22) months of
the Term beginning on the Commencement Date.
Section 1.5 Additional Rent. All sums other than Base Rent payable by
Tenant under this Lease shall be deemed additional rent ("Additional Rent"),
regardless of whether any such sum is expressly characterized as, or stated to
be, Additional Rent in any other Section of this Lease, and shall be payable on
demand unless other payment dates are set forth herein. Landlord shall have the
same rights and remedies with respect to the failure by Tenant to pay Additional
Rent as Landlord has with respect to the failure by Tenant to pay Base Rent.
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Section 1.6 Abatement of Rent. In the event that Tenant is prevented
from using, and does not use, the Premises or any portion thereof, as a result
of (i) any repair, maintenance or alteration performed by Landlord, or which
Landlord failed to perform, after the Commencement Date and required by the
Lease, which substantially interferes with Tenant's use of the Premises or
access to the Premises or the parking facility servicing the Building (ii) any
failure to provide an "Essential Service," as that term is defined, below (items
(i) and (ii), above, to be known as an "Abatement Event"), then Tenant shall
give Landlord notice of such Abatement Event, and if such Abatement Event
continues for five (5) consecutive business days after Landlord's receipt of any
such notice (the "Eligibility Period"), then the Base Rent and Operating
Payments shall be abated or reduced, as the case may be, after expiration of the
Eligibility Period for such time that Tenant continues to be so prevented from
using, and does not use, the Premises or a portion thereof, in the proportion
that the rentable area of the portion of the Premises that Tenant is prevented
from using, and does not use, bears to the total rentable area of the Premises,
and/or as appropriate, in the proportion that the number of parking spaces that
Tenant is prevented from using, and does not use, bears to the total number of
parking spaces being used by Tenant immediately prior to the Abatement Event,
but such abatement or reduction shall only apply if and to the extent such
circumstance is covered by rent continuation insurance, the cost of which is
included in Operating Expenses (the "Insurance Coverage Condition"); provided,
however, in the event that Tenant is prevented from using, and does not use, a
portion of the Premises for a period of time in excess of the Eligibility Period
and the remaining portion of the Premises is not sufficient to allow Tenant to
effectively conduct its business therein, and if Tenant does not conduct its
business from such remaining portion, then for such time after expiration of the
Eligibility Period during which Tenant is so prevented from effectively
conducting its business therein, the Base Rent and Operating Payments for the
entire Premises shall be abated for such time as Tenant continues to be so
prevented from using, and does not use, the Premises, but such abatement or
reduction shall only apply if and to the extent the Insurance Coverage Condition
is satisfied. Notwithstanding anything to the contrary set forth in this Section
1.6, the Insurance Coverage Condition shall not be applicable to an Abatement
Event set forth in item (i), above, or an Abatement Event set forth in item
(ii), above which is caused by an earthquake. If, however, Tenant reoccupies any
portion of the Premises during such period, the Rent allocable to such
reoccupied portion, based on the proportion that the rentable area of such
reoccupied portion of the Premises bears to the total rentable area of the
Premises, shall be payable by Tenant from the date Tenant reoccupies such
portion of the Premises. Such right to abate Base Rent and Operating Payments
shall be Tenant's sole and exclusive remedy at law or in equity for an Abatement
Event; provided, however, that if Landlord has not cured such Abatement Event
within one hundred eighty (180) days after receipt of notice from Tenant, Tenant
shall have the right to terminate this Lease during the first ten (10) business
days of each calendar month following the end of such 180-day period until such
time as Landlord has cured the Abatement Event, which right may be exercised
only by delivery of thirty (30) days' notice to Landlord (the "Abatement Event
Termination Notice") during such ten (10) business-day period, and shall be
effective as of a date set forth in the Abatement Event Termination Notice (the
"Abatement Event Termination Date"), which Abatement Event Termination Date
shall not be less than thirty (30) days, and not more than six (6) months,
following the delivery of the Abatement Event Termination Notice.
Notwithstanding anything contained in this Section 1.6 to the contrary,
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Tenant's Abatement Event Termination Notice shall be null and void (but only in
connection with the first notice sent by Tenant with respect to each separate
Abatement Event) if Landlord cures such Abatement Event within such thirty (30)
day period following receipt of the Abatement Event Termination Notice. If
Tenant's right to abatement occurs during a free rent period which arises after
the Commencement Date, Tenant's free rent period shall be extended for the
number of days that the abatement period overlapped the free rent period
("Overlap Period"). Landlord shall have the right to extend the Expiration Date
for a period of time equal to the Overlap Period if Landlord sends a notice to
Tenant of such election within ten (10) business days following the end of the
extended free rent period. For purposes of this Section 1.6, an "Essential
Service" shall mean the standard services to be provided by Landlord through the
HVAC systems, life safety systems, elevator systems, plumbing and waste disposal
systems, and electrical system. Except as provided in this Section 1.6, but
without limiting the rent abatement provided by Article 6 of this Lease, nothing
contained herein shall be interpreted to mean that Tenant is excused from paying
Rent due hereunder.
Section 1.7 Use. The Premises shall be used and occupied by Tenant or
its assignee or sublessees solely for the Permitted Uses, and for no other
purpose without the prior written consent of Landlord, which consent may be
withheld in Landlord's sole discretion; provided, however, that in the event
that a new use is proposed by Tenant which proposed use is being made elsewhere
in the Building above the ground floor as of the date Tenant's request, than
Landlord shall not unreasonably withhold its consent to such change in the
Permitted Use, provided that such use proposed by Tenant is of the same type and
scope as the existing use which is then being made above the ground floor of the
Building. Notwithstanding the foregoing provision, in no event shall the
Premises be used for any use prohibited or restricted by any exclusive use
rights or restrictions (1) contained in any existing leases of other tenants in
the Building as of the date of this Lease, or (2) provided by Landlord to any
future tenant in the Building. Landlord may grant exclusive uses to other
tenants, but no such exclusive use shall preclude or restrict or limit Tenant's
ability to utilize the Premises for engaging in operations normally and
generally performed by financial institutions.
ARTICLE 2
ALTERATIONS AND ADDITIONS
Section 2.1 Initial Alterations. Except as specifically set forth in
this Lease and in the Tenant Work Letter, Landlord shall not be obligated to
provide or pay for any improvement work or services related to the improvement
of the Premises and Tenant shall accept the Premises in its present "AS IS"
condition, except for latent defects and, subject to Landlord's obligations with
respect to the Base Building set forth in Section 1 of the Tenant Work Letter.
Tenant also acknowledges that Landlord has made no representation or warranty
regarding the condition of the Premises or the Project except as specifically
set forth in this Lease and the Tenant Work Letter. The construction of the
initial improvements to the Premises shall be governed by the terms of the
Tenant Work Letter and not the terms of this Article 2.
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Section 2.2 Subsequent Alterations.
(A) Tenant shall not make or allow to be made any alterations,
additions or improvements (singularly and collectively, "Alterations") to the
Premises or any part thereof without the prior written consent of Landlord,
which consent shall be requested by Tenant not less than fifteen (15) business
days prior to the commencement of such Alterations and which consent shall not
be unreasonably withheld by Landlord, provided it shall be deemed reasonable for
Landlord to withhold its consent if such Alterations (i) adversely affect the
Building Structure (as defined in Section 5.2(3)), (ii) adversely affect the
Building Systems (as defined in Section 5.2(3)), (iii) affect the exterior
appearance of the Building, (iv) do not comply with applicable laws, or (v)
unreasonably interfere with the normal and customary business operations of the
other tenants in the Building (each a "Design Problem"). Notwithstanding
anything to the contrary set forth herein, if the Alterations are purely
cosmetic, do not affect the Building Structure or Building Systems, and cannot
be seen from outside the Building, Landlord's consent shall not be required. If
Landlord shall consent to any Alterations to the Premises, such Alterations
shall be subject to any terms, covenants, conditions and agreements which
Landlord may prescribe from time to time, which shall include a requirement
that, prior to the commencement of any Alterations to the Premises, Tenant shall
deliver to Landlord written acknowledgments from all materialmen, contractors,
artisans, mechanics, laborers and any other persons furnishing any labor,
services, materials, supplies or equipment to Tenant with respect to the
Premises that they will look exclusively to Tenant for payment of any sums due
in connection therewith and that Landlord shall have no liability for such
costs.
(B) Tenant shall construct such Alterations in conformance with
any and all applicable federal, state, county or municipal laws, rules and
regulations and pursuant to a valid building permit, issued by the City of Los
Angeles, all in conformance with Landlord's construction rules and regulations.
In performing the work of any such Alterations, Tenant shall have the work
performed in such manner so as not to unreasonably obstruct access to the
Project or any portion thereof by any other tenant of the Project, and so as not
to obstruct the business of Landlord or other tenants of the Project, or
interfere with any labor force working in the Project. In addition to Tenant's
obligations under Section 4.9 of this Lease, upon completion of any Alterations,
Tenant agrees to cause a Notice of Completion to be recorded in the Office of
the Recorder of the County of Los Angeles in accordance with Sections 3093 of
the Civil Code of the State of California or any successor statute, and Tenant
shall deliver to the management office of the Office Building a reproducible
copy of the "as-built" drawings of the Alterations. In addition to the
requirements of Section 4.5 of this Lease, in the event that Tenant makes any
Alterations, prior to the commencement of such Alterations, Tenant shall provide
Landlord with evidence that Tenant carries "Builder's All Risk" insurance in an
amount approved by Landlord covering the construction of such Alterations, and
such other insurance as Landlord may require, it being understood and agreed
that the insurance obtained by Tenant pursuant to this Section 2.2(B) shall
comply with the terms of Section 4.5 of this Lease and that all of such
Alterations shall be insured by Tenant pursuant to Section 4.5 of this Lease
immediately upon completion thereof. In addition, in the event that (a) Tenant
is not the Original Tenant or (b) Tenant is the Original Tenant and the Original
Tenant has been in default after the expiration of the cure periods under
Section 7.1(A)(1) of this Lease any time prior to the date of Tenant's
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request for approval of the applicable Alteration, then Landlord may, in its
reasonable discretion, as a condition precedent to Landlord granting its consent
to any requested Alterations, require Tenant to obtain a lien and completion
bond or some alternate form of security satisfactory to Landlord, in its
reasonable discretion, in an amount sufficient to ensure the lien-free
completion of such Alterations and naming Landlord as a co-obligee. All
Alterations to the Premises made or requested by Tenant shall be at Tenant's
sole cost and expense.
(C) Tenant shall pay to Landlord any reasonable, out-of-pocket
costs incurred by Landlord in connection with Landlord's review of Tenant's
Alterations. Upon the Expiration Date or sooner termination of the Term, any
Alterations to the Premises and any Tenant Improvements, excepting movable
personal property, furniture, equipment and trade fixtures, shall become the
property of Landlord and shall be surrendered with the Premises, unless the
applicable Alteration or Tenant Improvement does not qualify as standard
office-type tenant improvements (a "Non-Standard Improvement"), which
Non-Standard Improvements shall include any stairwells installed within the
Premises by Tenant but shall exclude the "Accepted Non-Standard Improvements,"
as that term is defined, below. and Landlord requests the removal of the
Non-Standard Improvements at time consent is granted to such installation. With
respect to the Tenant Improvements initially constructed in the Premises,
Landlord shall be required to make any such request for removal in writing
during the construction drawing approval process. In the event of the occurrence
described, above, Tenant shall remove the applicable Non-Standard Improvement at
its sole cost and expense and repair in a good and workmanlike manner any damage
to the Premises occasioned by such removal and restore the Premises to the
condition existing prior to such Non-Standard Improvement. If Tenant fails to
complete such removal and/or to repair any damage caused by the removal of any
Non-Standard Improvements, Landlord may do so and may charge the cost thereof to
Tenant. For the purposes of this Section 2.2(C), the "Accepted Non-Standard
Improvements" shall mean (i) the stairwell located between the fifty-first
(51st) and fifty-second (52nd) floor of the Building, the opening for which
shall not exceed 600 rentable square feet and which stairwell shall be located
immediately adjacent to the core of the Building, or at a comparable location
between such floors (such comparability to be determined based upon the cost to
remove such stairwell, replace the slab and reinforce the slab, and the
usefulness of the stairwell for a typical two (2) floor tenant), (ii) Tenant's
executive bathrooms, each not to exceed 200 rentable square feet in size, (iii)
Tenant's computer room, provided that the same does not exceed 3,500 rentable
square feet in size, and (iv) Tenant's shower/locker room, provided that the
same does not exceed 1,200 rentable square feet in size.
(D) Tenant may install, maintain, replace, remove or use any
communications or computer wires and cables (collectively, the "Lines") at the
Office Building in or serving the Premises, provided that (i) Tenant shall
obtain Landlord's prior written consent, which consent may be withheld in
Landlord's reasonable discretion, use an experienced and qualified contractor
approved in writing by Landlord, and comply with all of the other provisions of
Sections 2.2 (as though such Lines were Alterations) and 4.3 of this Lease, (ii)
an acceptable number of spare Lines and space for additional Lines shall be
maintained for Tenant, as determined in Landlord's reasonable opinion, (iii) the
Lines therefor (including riser cables) shall be appropriately insulated to
prevent excessive electromagnetic fields or radiation, and shall be installed in
accordance with all applicable codes, (iv) any new or existing Lines servicing
the Premises shall
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comply with all applicable governmental laws and regulations, (v) as a condition
to permitting the installation of new Lines, Landlord shall cause its
contractor, at Tenant's sole cost and expense, to remove existing Lines located
in or serving the Premises and repair any damage in connection with such
removal, and (vi) Tenant shall pay all costs in connection therewith. Landlord
reserves the right to require that Tenant, at Tenant's sole cost and expense,
remove any Lines located in or serving the Premises which are installed in
violation of these provisions, are at any time in violation of any laws,
represent a dangerous or potentially dangerous condition, or materially
interfere with other tenants' use or enjoyment of their premises.
ARTICLE 3
OPERATING EXPENSES
Section 3.1 Operating Payment. Tenant shall pay to Landlord, as
Additional Rent, the product of (i) the amount of Operating Expenses for the
Office Building on a per rentable square foot basis and (ii) the number of
rentable square feet in the Premises as specified in Section 1.1(S) hereof, as
the same may be modified pursuant to Section 1.2(A) (the "Operating Payment").
For purposes of this Lease, the rentable square footage of the Office Building
shall equal 1,277,605 rentable square feet. The Operating Payment shall be made
pursuant to the provisions of Section 3.2 hereof; provided, however, that Tenant
shall not be required to pay for the Operating Payment attributable to the first
twenty-two (22) months of the Term beginning on the Commencement Date. In the
event the rentable square feet of the Premises is changed pursuant to a specific
provision of this Lease, item (ii), above, shall be appropriately adjusted, and,
as to the year in which such change occurs, the rentable square feet for the
Premises for such year shall be determined on the basis of the number of days
during such year that each such rentable square footage was in effect.
Section 3.2 Estimates and Payments. Tenant agrees to pay monthly, as
Additional Rent, one-twelfth (1/12) of Landlord's estimate of Tenant's Operating
Payment for the then current calendar year. Landlord will give Tenant thirty
(30) days written notice from time to time of such estimated amounts, and Tenant
shall pay such amounts monthly to Landlord in the same manner and at the same
time as Base Rent. At the beginning of each calendar year during the Term, until
Landlord furnishes a new estimate to Tenant, Tenant shall continue to pay
monthly, one-twelfth (1/12th) of Landlord's estimate of Tenant's Operating
Payment for the previous calendar year. At such time as Landlord furnishes
Tenant a revised estimate statement for the current calendar year, Tenant shall
pay, with its next installment of Base Rent, the amount necessary to bring the
Tenant current with the revised estimate as though the revised estimate had been
delivered at the beginning of the current calendar year; provided, however, that
such estimate may be adjusted no more than twice in any twelve (12) month
period. As soon as reasonably possible following the end of each calendar year,
Landlord will submit to Tenant a statement itemized on a major line item by line
item basis (each, an "Operating Statement"). However, the failure or delay by
Landlord to provide Tenant with an Operating Statement shall, unless it
continues for more than two (2) years following the end of the applicable
calendar year, not constitute a waiver by Landlord of Tenant's obligation to pay
its Operating Payment or of Landlord's rights to send such a statement or a
waiver of its right to reconcile Tenant's Operating
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Payment. Within thirty (30) days after receipt of an Operating Statement, Tenant
shall pay to Landlord any additional amounts owed to Landlord as shown on the
Operating Statement. Any monies owed Tenant by Landlord shall be applied by
Landlord against the next payment of Rent due from Tenant or paid to Tenant in
the event this Lease has terminated. Any payments due under this Article 3 shall
be prorated for any partial calendar year occurring during the Term. Tenant's
obligation to pay any amounts due under this Article 3 and Landlord's obligation
to refund any overpayments made by Tenant under this Article 3 for the final
year of the Term shall survive the Expiration Date or earlier termination of
this Lease.
Section 3.3 Extra Charges. In addition, Tenant shall pay, as Additional
Rent, all expenses paid or incurred by Landlord (but in no event in excess of
Landlord's Actual Cost) which are attributable to Tenant's use and occupancy of
the Premises, any document to which Tenant is a party creating or transferring
an interest or an estate in the Premises, and any and all taxes and assessments
and governmental charges levied, whether by Federal, state, county, municipal or
other taxing districts or authorities presently or hereafter created, upon or
measured by the monthly rental or other charges payable hereunder, including,
without limitation, any gross income tax or gross receipts tax, or upon or with
respect to the leasing, possession, use or occupancy by Tenant of the Premises
or the Parking Facility, and any and all expenses incurred pursuant to Tenant's
request for additional or overtime services; including, but not limited to,
overtime HVAC or heating expenses; overtime electric charges; charges for keys;
or special tenant requests. Unless such charges are included in the monthly
invoice for Base Rent or other payment dates are otherwise specifically set
forth herein, any extra charges shall be due and payable by Tenant within ten
(10) days after receipt of invoices for same.
Section 3.4 Operating Expenses Defined.
(A) The term "Operating Expenses" shall mean the aggregate of
those costs and expenses paid or incurred by or on behalf of Landlord (whether
directly or through independent contractors) relating to the ownership,
management, maintenance, repair, replacement, restoration and operation of the
Project. Without limiting the generality of the foregoing, Operating Expenses
shall include the following.
(1) Taxes - The term "Taxes" shall mean all taxes, fees
and assessments and governmental charges levied, whether by federal, state,
county, municipal, or other taxing districts or authorities presently or
hereafter created, taxing the Project and any other taxes, fees, charges or
assessments attributable to the Project or its operation including, without
limitation, any charges, fees or assessments for transit (including, without
limitation, assessments which relate to the construction, operation, management,
use, alteration or repair of mass transit improvements including, but not
limited to, any amounts paid in connection with Metrorail), housing, police,
fire, sanitation or other services of purported benefit to the Project or taxes
based upon the receipt of rent, including gross receipts or sales taxes
applicable to the receipt of rent, unless required to be paid by Tenant, or any
tax on the rent, right to rent or other income from the Project, or any portion
thereof, or as against the business of leasing the Project, or any portion
thereof, any assessment, tax, fee, levy, or charge allocable to or measured by
the area of the Premises or the rent payable hereunder, including, without
limitation, any gross income tax with
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respect to the receipt of such rent, or upon or with respect to the possession,
leasing, operating, management, maintenance, alteration, repair, use or
occupancy by Tenant of the Premises, or any portion thereof. In addition,
"Taxes" shall mean all real estate taxes and assessments or substitutes therefor
or supplements thereto upon all or any portion of the Project or any improvement
thereon, for any whole or partial tax year or period occurring during the Term
hereof, any assessment, tax, fee, levy or charge in addition to, or in
substitution, partially or totally, of any assessment, tax, fee, levy or charge
previously included within the definition of real property tax, it being
acknowledged by Tenant and Landlord that Proposition 13 was adopted by the
voters of the State of California in the June 1978 election ("Proposition 13")
and that assessments, taxes, fees, levies and charges may be imposed by
governmental agencies for such services as fire protection, street, sidewalk and
road maintenance, refuse removal and for other governmental services formerly
provided without charge to property owners or occupants, and, in further
recognition of the decrease in the level and quality of governmental services
and amenities as a result of Proposition 13, Taxes shall also include any
governmental or private assessments or the Project's contribution towards a
governmental or private cost-sharing agreement for the purpose of augmenting or
improving the quality of services and amenities. It is the intention of Tenant
and Landlord that all such new and increased assessments, taxes, fees, levies,
and charges and all similar assessments, taxes, fees, levies and charges be
included within the definition of Taxes for the purposes of this Lease. With
respect to any assessment that may be levied against, upon, or in connection
with the Project, or any portion thereof, and may be evidenced by improvement or
other bonds, or may be paid in annual installments, there shall be included
within the definition of Taxes with respect to any tax fiscal year only the
amount currently payable on such bonds, including interest, for such tax fiscal
year, or the current annual installment for such tax fiscal year. If and to the
extent that due to a change in the method of taxation or assessment, any
franchise, capital stock, capital, rent, income, profit or other tax or charge
shall be a substitute for or supplement to any of the foregoing, then all such
items shall be included within the term Taxes for the purposes of this Lease.
All expenses, including reasonable attorneys' fees and disbursements, experts'
and other witnesses' fees, incurred in contesting the validity or amount of any
Taxes or in obtaining a refund of Taxes shall be considered as part of the Taxes
for the year in which paid. Tax refunds shall be deducted from Taxes in the year
to which such refunds are attributable. If any tenant of the Office Building is
exempt in the requirement to pay any Taxes which are assessed against the Office
Building or Project as a result of its status as a governmental entity and such
Taxes would otherwise be payable by such tenant if such tenant's lease contained
the terms of this Lease, then Taxes shall be deemed to be increased by an amount
equal to the additional Taxes which would have been paid by such tenant if it
had not been exempt from the payment of such Taxes as a result of its status as
a governmental entity.
(2) Insurance - The term "Insurance" shall mean all
insurance of any type that Landlord, in its sole discretion, shall deem
necessary or advisable to carry, including, but not limited to, that necessary
in order to protect itself, its affiliates, agents and employees, the Project,
all personal property used in connection therewith, or its interests therein.
Landlord shall have the right, but not the obligation, to change, cancel,
decrease or increase any insurance coverages in respect of the Project, or add
additional forms of insurance as Landlord shall deem
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necessary or desirable; and/or to obtain umbrella or other policies covering
both the Project and other assets owned by or associated with Landlord or its
affiliates, in which event the cost thereof shall be equitably allocated. For
the purposes of this subsection (2), the term "affiliate" shall mean any entity
which controls, is controlled by or is under common control with Landlord.
Notwithstanding the foregoing, Landlord shall not include in Operating Expenses
any amount by which its insurance costs materially exceed the costs which would
be incurred by a prudent institutional owner in obtaining and maintaining
commercially reasonable insurance coverages and amounts of coverage at
prevailing market rates for an office building similar to the Building in age,
construction, and exposure to risk, excluding for this purpose any reduced
premiums that may result from obtaining what are commonly known as "blanket"
policies of insurance.
(3) Maintenance Costs - The term "Maintenance Costs"
shall mean all costs paid or incurred in connection with the operation,
maintenance, management or repair of the Project including, without limitation,
all parking areas (whether temporary or permanent), access roads, driveways,
curbs, truckways, loading areas and docks, retaining walls, lighting facilities,
service corridors, comfort stations, pedestrian sidewalks, stairways, plazas,
malls, foundations, exterior and demising walls, roofs over the entire Project,
escalators, elevators, courts and ramps, decorative walls, vacant areas,
landscaped and planting areas and facilities, service lines or conduits for gas,
water, electric, sewage, heating, ventilating and air conditioning services,
music and intercom equipment, fire suppression and warning systems, conduits and
appurtenances for use by Tenant in common with other tenants, and other areas
and facilities related to the Project, whether within or outside the Project.
Maintenance Costs shall include, but are not limited to, the following:
(a) Wages and salaries for all employees engaged in
operating, maintaining, or providing security for the Project, for the
Building Manager and Chief Engineer and all employees at levels below
the Building Manager and Chief Engineer, and personnel who provide
traffic control relating to ingress and egress to and from the parking
facilities, if any, to the adjacent public streets. All taxes, insurance
and fringe benefits relating to such employees shall be included.
Notwithstanding the foregoing, if any employees of Landlord provide
services for more than one building of Landlord, then a prorated portion
of such employees' wages, benefits and taxes shall be included in
Maintenance Costs based on the portion of their working time devoted to
the Project;
(b) All expenses incurred for supplies and
materials used in the operation and maintenance of the Project
including, but not limited to, uniforms, paper products, decorations,
painting and replacement of worn out mechanical or damaged equipment,
subject to the exclusion set forth in item (12) in (C) below;
(c) The cost of all utilities, including, but not
limited to, the cost of water, electrical service, heating, lighting,
air conditioning and ventilation, excepting those utilities supplied to
tenants of the Project at their respective premises to the extent paid
for by such tenants and excepting those utilities which have been
directly paid for by Tenant to the extent Tenant directly and separately
pays Landlord or the provider of such electric power;
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(d) the cost of operating, maintaining, repairing,
renovating, complying with conservation measures in connection with, and
managing the utility systems, mechanical systems, sanitary and storm
drainage systems, and elevator systems, the cost of supplies, equipment
and maintenance service contracts in connection therewith;
(e) The cost of all maintenance and service
agreements for the Project and equipment therein, including, but not
limited to, alarm service, cleaning, janitorial service, security and/or
guard service, window cleaning, fire protection, sprinklers, elevator
and mechanical systems maintenance, exterminating and landscape
maintenance;
(f) The annual amortization, together with interest
at the Interest Rate, on the cost of installation of capital improvement
items which result in, or are reasonably intended to result in, a
reduction in Operating Expenses or are required to be installed under
any new (or change in) governmental law, regulation or authority which
are enacted after the Commencement Date. All such costs shall be
amortized over the useful life of the capital improvement items as
reasonably determined by Landlord;
(g) Management fees (including, without limitation,
salaries and fringe benefits of Project employees and employees of the
Project's managing agent to the extent chargeable to the Project), legal
fees, accounting costs and disbursements, and other professional
services directly attributable to the operation and maintenance of the
Project;
(h) The cost of maintenance and repair of ceilings
and exterior walls, gutters, glass, plate glass, show windows, plumbing,
pipes and fixtures and other equipment;
(i) The cost of all licenses, inspections, dues,
permits and other governmental charges, including, without limitation,
the cost of contesting the validity or applicability of any governmental
enactments which may affect Operating Expenses and the costs incurred in
connection with the implementation and operation of a transportation
system management program or a municipal, public or private shuttle
system or parking program;
(j) Costs, fees, charges or assessments imposed by
any federal, state or local government for fire and police protection,
trash removal, community services, or other services which do not
constitute Taxes;
(k) Costs, fees, charges or assessments imposed
against the Project or the Office Building in connection with any
documents recorded against or affecting the Project or Office Building;
(l) All costs, fees, charges or assessments (the
"Costs") incurred to comply with laws, ordinances, rules and regulations
mandated by local, state
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or federal governmental or quasi-governmental entities (the "Laws")
enacted after the Commencement Date unless such Costs are incurred under
a Law enacted before the Commencement Date, but such Law applies on a
recurring basis; or
(m) Subject to item (30) in (C) below, all expenses
incurred in connection with making the parking facilities for the
Building, if any, available for use by Tenant and others including, but
not limited to, any reasonable rent, additional rent or management fees
that Landlord may be required to pay for such use, and all costs
incurred for sweeping, cleaning, litter control, resurfacing,
repainting, restriping, removal and replacement of pavement, curbs and
car stops, and snow and ice removal.
(B) In determining the amount of Operating Expenses for any
calendar year during the Term, if less than one hundred percent (100%) of the
rentable area of the Office Building shall have been occupied by tenant(s) at
any time during any such calendar year, Operating Expenses which vary based upon
occupancy shall be determined for such calendar year to be an amount equal to
the expenses which would have been incurred had such occupancy been one hundred
percent (100%) throughout such calendar year. If Landlord is not furnishing any
particular work or service (the cost of which, if performed by Landlord, would
be included in Operating Expenses) to a tenant who has undertaken to perform
such work or service in lieu of the performance thereof by Landlord, Operating
Expenses shall be deemed to be increased by an amount equal to the additional
Operating Expenses which would reasonably have been incurred during such period
by Landlord if it had at its own expense furnished such work or service to such
tenant. Notwithstanding the foregoing, Landlord shall not recover as Operating
Expenses more than one hundred percent (100%) of the Operating Expenses actually
paid by Landlord.
(C) Notwithstanding anything above to the contrary, Operating
Expenses shall not include the following:
(1) costs incurred in connection with the original
construction of the Project;
(2) costs of the design and construction of tenant
improvements to the Premises or the premises of other tenants and the amount of
any allowance or credits paid to or granted to tenants or other occupants for
any such design or construction;
(3) except as set forth in item (A)(3)(f), above,
depreciation, interest and principal payments on mortgages and other debt costs,
if any;
(4) marketing costs, legal fees, space planners' fees,
advertising and promotional expenses, brokerage fees and any other costs
incurred in connection with the original development, or original or future
leasing of the Project;
(5) costs for which the Landlord is reimbursed by its
insurance carrier or any tenant's insurance carrier or by anyone else;
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(6) any bad debt loss, rent loss, or reserves for bad
debts or rent loss or any reserves of any kind;
(7) costs associated with the operation of the business of
the partnership or entity which constitutes the Landlord, as the same are
distinguished from the costs of operation of the Project, including partnership
accounting and legal matters, costs of defending any lawsuits with any mortgagee
(except as the actions of the Tenant may be in issue), costs of selling,
syndicating, financing, mortgaging or hypothecating any of the Landlord's
interest in the Project, and costs incurred in connection with any disputes
between Landlord and its employees, between Landlord and Project management, or
between Landlord and other tenants or occupants;
(8) the wages and benefits of any employee who does not
devote substantially all of his or her employed time to the Project unless such
wages and benefits are prorated to reflect time spent on operating and managing
the Project vis-a-vis time spent on matters unrelated to operating and managing
the Project; provided, that in no event shall Operating Expenses for purposes of
this Lease include wages and/or benefits attributable to personnel above the
level of Project manager or Project engineer;
(9) except as set forth in item (A)(3)(f), above,
penalties and interest;
(10) amount paid as ground rental or as rental for the
Project by the Landlord;
(11) costs, including permit, license and inspection
costs, incurred with respect to the installation of tenant improvements made for
new tenants in the Project or incurred in renovating or otherwise improving,
decorating, painting or redecorating vacant space for tenants or other occupants
of the Project (excluding, however, such costs relating to any common areas of
the Project or parking facilities);
(12) costs of capital repairs and alterations, capital
improvements and equipment except as set forth in item (A)(3)(f), above;
(13) any amounts paid to the Landlord or to subsidiaries
or affiliates or internal personnel of the Landlord for services in the Project
to the extent the same exceeds the costs of such services rendered by qualified,
first class unaffiliated third parties on a competitive basis;
(14) any compensation paid to clerks, attendants or other
persons in commercial concessions and/or the parking facilities operated by or
on behalf of the Landlord;
(15) rentals and other related expenses incurred in
leasing air conditioning systems, elevators or other equipment which if
purchased the cost of which would be excluded from Operating Expenses as a
capital cost, except equipment not affixed to the Project which is used in
providing janitorial or similar services and, further excepting from this
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exclusion such equipment rented or leased to remedy or ameliorate an emergency
condition in the Project;
(16) all items and services for which Tenant or any other
tenant in the Project reimburses Landlord (provided that Landlord shall use
commercially reasonable efforts to collect such amounts which such tenants are
obligated to pay) or which Landlord provides selectively to one or more tenants
(other than Tenant) without reimbursement;
(17) electric power costs for which any tenant directly
contracts with the local public service company;
(18) costs, other than those incurred in ordinary
maintenance and repair, for sculpture, paintings, fountains or other objects of
art;
(19) tax penalties;
(20) management fees in excess of three percent (3%) (the
"Management Fee Cap") of Landlord's gross rental revenues (grossed up as though
the Building were 100% occupied with rent paying tenants), including base rent,
pass-throughs (but excluding the cost of after hours services, utilities and
parking revenues) from the Project for any calendar year or portion thereof;
(21) any costs expressly excluded from Operating Expenses
elsewhere in this Lease;
(22) rent for any office space occupied by Project
management personnel to the extent the size or rental rate of such office space
exceeds the size or fair market rental value of office space occupied by
management personnel of the "Comparable Buildings," as that term is defined,
below, with adjustment where appropriate for the size of the applicable project;
(23) Landlord's general corporate overhead and general and
administrative expenses;
(24) all assessments and premiums which are not
specifically charged to Tenant because of what Tenant has done, which can be
paid by Landlord in installments, shall be paid by Landlord in the maximum
number of installments permitted by law (except to the extent inconsistent with
the general practice of the Comparable Buildings) and shall be included as
Operating Expenses in the year in which the assessment or premium installment is
actually paid;
(25) costs incurred to comply with laws enacted prior to
the Commencement Date relating to the removal, remediation, containment or
treatment of hazardous material (as defined under applicable law) which was in
existence in the Building or on the Project prior to the Commencement Date;
(26) costs arising from Landlord's charitable or political
contributions;
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(27) the cost of any magazine, newspaper, trade or other
subscriptions, excluding those which are relevant to the management or
functioning of the Office Building, the Project or any portion thereof;
(28) in the event any facilities, services or utilities
used in connection with the Project are provided from another building owned or
operated by Landlord or vice versa, the costs incurred by Landlord in connection
therewith shall be allocated to Operating Expenses by Landlord on a reasonably
equitable basis;
(29) uninsured, non-capital improvements resulting from
damage caused by earthquakes in excess of $0.50 per rentable square foot of the
Building in any calendar year.
Notwithstanding anything in this Section 3.4(C) to the
contrary, the exceptions to Operating Expenses listed above shall not apply to
any payments or contributions required under the reciprocal easement agreement
affecting the Project. For purposes of this Lease, the "Comparable Buildings"
shall be those buildings located in the area of downtown Los Angeles, California
which has its Northern boundary, the Northernmost boundary of Second Street, as
its Southern boundary, the Southernmost boundary of Forth Street, as its Western
boundary, the Easternmost boundary of Flower Street, and as its Eastern
boundary, the Westernmost boundary of Olive Avenue, including the building
located at 400 South Hope.
(D) Allocation of Operating Expenses.
(i) Method of Allocation. The parties acknowledge
that the Office Building is a part of a multi-building project and that the
costs and expenses incurred in connection with the Project should be shared
between the tenants of the Office Building and the tenants of the other
buildings in the Project. As set forth in this Article 3, above, certain
portions of the Operating Expenses are determined annually for the Project as a
whole, and a portion of such Operating Expenses, which portion shall be
determined by Landlord on an equitable and consistent basis, shall be allocated
to all the tenants of the Office Building. Accordingly, the Operating Expenses
allocated to the tenants of the Office Building shall include all Operating
Expenses attributable solely to the Office Building and an equitable portion of
the Operating Expenses attributable to the Project as a whole.
(ii) Cost Pools. Landlord shall have the right
(and the obligation if the Operating Expenses cover more than the Building),
from time to time, to equitably allocate some or all of the Operating Expenses
for the Project among different portions or occupants of the Project (the "Cost
Pools"), in Landlord's reasonable discretion. Such Cost Pools may include, but
shall not be limited to, the office space tenants of a building of the Project
or of the entire Project, and the retail space tenants of a building of the
Project or of the entire Project. The Operating Expenses within each such Cost
Pool shall be allocated and charged to the tenants within such Cost Pool in an
equitable and consistent manner.
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(E) Tenant's Payment of Certain Taxes. Notwithstanding anything
to the contrary contained in this Lease, in the event that, during the first
five (5) Lease Years only, a sale, refinancing, or change in ownership of the
Office Building is consummated, and as a result thereof, and to the extent that
in connection therewith, the Office Building is reassessed (the "Reassessment")
for real estate tax purposes by the appropriate governmental authority pursuant
to the terms of Proposition 13, then in connection with the first such
Reassessment only, the terms of this Section 3.4(E) shall apply to such
Reassessment of the Office Building.
(i) The Tax Increase. For purposes of this Article
3, the term "Tax Increase" shall mean that portion of the Taxes, as calculated
immediately following the Reassessment, which is attributable solely to the
Reassessment. Accordingly, the term Tax Increase shall not include any portion
of the Taxes, as calculated immediately following the Reassessment, which (1) is
attributable to the amount of the Taxes incurred during the calendar year in
which the Commencement Date occurred (with such Taxes being calculated as if no
Proposition 8 reduction, if any, were applied to such Taxes), (2) is
attributable to the initial assessment of the value of the Project, the base,
shell and core of the Office Building or the tenant improvements located in the
Office Building, (3) is attributable to assessments which were pending
immediately prior to the Reassessment which assessments were conducted during,
and included in, such Reassessment, or which assessments were otherwise rendered
unnecessary following the Reassessment, or (4) is attributable to the annual
inflationary increase of real estate taxes, but not in excess of two percent
(2%) per annum.
(ii) Protection. During the initial Term only,
Tenant shall not be obligated to pay any portion of the first (1st) Tax
Increase, if applicable.
(iii) Landlord's Right to Purchase the Proposition
13 Protection Amount Attributable to a Particular Reassessment. The amount of
Taxes which Tenant is not obligated to pay or will not be obligated to pay
during the Term in connection with a particular Reassessment pursuant to the
terms of this Section 3.4(E), shall be sometimes referred to hereafter as a
"Proposition 13 Protection Amount." If the occurrence of a Reassessment is
reasonably foreseeable by Landlord and the Proposition 13 Protection Amount
attributable to such Reassessment can be reasonably quantified or estimated for
each Lease Year commencing with the Lease Year in which the Reassessment will
occur, the terms of this Section 3.4(E)(iii) shall apply to each such
Reassessment. Upon notice to Tenant, Landlord shall have the right to purchase
the Proposition 13 Protection Amount relating to the applicable Reassessment
(the "Applicable Reassessment"), at any time during the Term, by paying to
Tenant an amount equal to the "Proposition 13 Purchase Price," as that term is
defined below. As used herein, "Proposition 13 Purchase Price" shall mean the
present value of the Proposition 13 Protection Amount remaining during the Lease
Term, as of the date of payment of the Proposition 13 Purchase Price by
Landlord. Such present value shall be calculated (1) by using the portion of the
Proposition 13 Protection Amount attributable to each remaining Lease Year (as
though the portion of such Proposition 13 Protection Amount benefitted Tenant at
the end of each Lease Year), as the amounts to be discounted, and (2) by using
discount rates for each amount to be discounted equal to the average rates of
yield for United States Treasury Obligations with maturity dates as close as
reasonably possible to the end of each Lease Year during which the
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portions of the Proposition 13 Protection Amount would have benefitted Tenant,
which rates shall be those in effect as of Landlord's exercise of its right to
purchase, as set forth in this Section 3.4(E)(iii). Upon such payment of the
Proposition 13 Purchase Price, the provisions of Section 3.4(E)(ii) of this
Lease shall not apply to any Tax Increase attributable to the Applicable
Reassessment. Since Landlord is estimating the Proposition 13 Purchase Price
because a Reassessment has not yet occurred, then when such Reassessment occurs,
if Landlord has underestimated the Proposition 13 Purchase Price, then upon
notice by Landlord to Tenant, Tenant's Rent next due shall be credited with the
amount of such underestimation, and if Landlord overestimates the Proposition 13
Purchase Price, then upon notice by Landlord to Tenant, Rent next due shall be
increased by the amount of the overestimation.
Section 3.5 Audits of Operating Statements. Any objection to an
Operating Statement, or to any information reported therein, shall be deemed
waived if not raised by written notice to Landlord within two (2) years
following delivery of such Operating Statement (the "Review Period"). Following
the giving of such notice, Tenant shall have the right during Landlord's regular
business hours and on reasonable prior notice, to inspect, at the location of
Landlord's accounting records, at Tenant's sole cost, Landlord's material
accounting records with respect to Operating Expenses for the year to which such
Operating Statement relates. The inspection of Landlord's accounting records may
be conducted by an employee of Tenant, or a recognized national or regional
independent, certified, public accounting firm (the "CPA"). The inspection of
Landlord's accounting records must be completed not later than thirty (30) days
after such accounting records are made available to Tenant. If, after such
inspection of Landlord's accounting records, Tenant disputes the amount of
Operating Expenses for the year under inspection, Landlord and Tenant shall meet
and attempt in good faith to resolve the dispute. If the parties are unable to
resolve the dispute within sixty (60) days after completion of Tenant's
inspection, Tenant shall have the right to request an independent audit of
Landlord's material accounting records with respect to Operating Expenses for
such year, which right shall be exercised, if at all, by delivering a request
for such audit to Landlord not later than the last day of said sixty (60) day
period. Such audit shall be conducted by a nationally or regionally recognized
independent certified public accounting firm selected by Landlord, subject to
Tenant's reasonable approval and Landlord and Tenant shall simultaneously
initially contact such accounting firm. The independent audit shall be limited
to determination of the appropriate amount of Operating Expenses, as relevant to
the subject of the dispute, for the year under review. The results of the audit
shall be delivered simultaneously to Landlord and Tenant. The results of such
audit shall be final and binding upon Landlord and Tenant, and if the
independent audit concludes that the amount of Operating Expenses billed to
Tenant was incorrect, the appropriate party shall pay to the other party the
deficiency or overpayment, as applicable, within thirty (30) days following
delivery of the auditor's report, without interest. All costs and expenses of
the independent audit shall be paid by Tenant unless the final determination of
such audit is that Landlord overstated Operating Expenses for the applicable
calendar year by more than three percent (3%) of the originally reported
Operating Expenses, in which case Landlord shall pay all costs and expenses of
the independent audit (but not of Tenant's initial inspection of Landlord's
books and records). Tenant shall keep any information gained from its inspection
of Landlord's books and records confidential and shall not disclose it to any
other party, except as
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required by law. If requested by Landlord, Tenant shall require its employees or
agents inspecting Landlord's books and records to sign a confidentiality
agreement (the "Confidentiality Agreement") prior to making Landlord's books and
records available to them. If the CPA, and not Tenant, breaches the
Confidentiality Agreement, then Landlord shall only have recourse against the
CPA for breach of the Confidentiality Agreement. Tenant's exercise of its audit
rights shall not relieve Tenant of its obligation to pay disputed amounts. The
payment by Tenant of its Operating Payment, or any amount on account thereof,
shall not preclude Tenant from exercising its rights under this Section 3.5, but
if Tenant fails to timely exercise its audit rights in accordance with this
Section, such failure shall be conclusively deemed to constitute Tenant's
approval of Landlord's Operating Statement for the year in question. Landlord
shall maintain its accounting records with respect to Operating Expenses during
the Review Period for each year and during the pendency of any audit. The
provisions of this Section 3.5 shall survive the termination of this Lease to
allow the parties to enforce their respective rights hereunder.
ARTICLE 4
TENANT'S COVENANTS AND RIGHTS
Section 4.1 Parking.
(A) Tenant shall rent the Parking Passes during the Term. Tenant
may not use additional parking passes without the prior written consent of
Landlord, which may be withheld in Landlord's sole discretion. Tenant and its
agents, employees, contractors, invitees or licensees shall not interfere with
the rights of Landlord or others entitled to similar use of the Parking
Facility. Tenant shall pay to Landlord for automobile Parking Passes on a
monthly basis the prevailing rate charged from time to time for Parking Passes
in the Parking Facility (the "Parking Charge"); provided, however, that,
notwithstanding the foregoing during the first three (3) Lease Years of the
initial Lease Term, the Parking Charge (inclusive of parking taxes) for each
unreserved, nonpriority Parking Pass rented by Tenant shall be One Hundred Fifty
Dollars ($150.00) per month and the Parking Charge (inclusive of parking taxes)
for each unreserved, priority parking pass rented by Tenant shall be Two Hundred
Twenty-Five and No/100 Dollars ($225.00) per month. In addition, Tenant shall be
responsible for any taxes imposed by any governmental authority in connection
with the renting of such Parking Passes by Tenant or the use of the Parking
Facility by Tenant imposed after the third anniversary of the Commencement Date;
provided, however, that to the extent the tax imposed on parking charges by the
City of Los Angeles is increased or decreased during the first three (3) Lease
Years above or below the amount of such tax in effect on the Commencement Date,
then the Parking Charges for the first three (3) Lease Years set forth in the
preceding sentence shall be increased or decreased, as the case may be, by the
amount of the applicable increase or decrease in such tax. Such parking fee
shall be due and payable on the first day of each month during the Term,
together with the payment of monthly Base Rent.
(B) The Parking Facility furnished by Landlord shall be subject
to the reasonable control and management of Landlord, who may, from time to
time, establish, modify and enforce reasonable rules and regulations with
respect thereto. Landlord may totally or
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partially delegate its responsibilities hereunder to a parking operator in which
case such parking operator shall have all the rights of control and obligations
delegated by Landlord, but such delegation shall not relieve Landlord of
liability hereunder. Landlord further reserves the right to change or
reconfigure the Parking Facility (but not the location thereof except on a
temporary basis in the event of damage and destruction or eminent domain or as
required by law) and designate the Parking Passes therein, to construct or
repair any portion thereof, and to restrict or eliminate the use of any parking
areas and do such other acts in and to such areas as Landlord, in its reasonable
discretion, deems necessary or desirable; provided, however, that no such act on
the part of Landlord shall materially and unreasonably restrict Tenant's right
to use its Parking Passes nor reduce Tenant's parking rights or increase
Tenant's obligations as a result thereof. Furthermore, Landlord shall use
commercially reasonable efforts to cause any such work permitted pursuant to the
preceding sentence to be conducted in a manner which will minimize any
inconvenience to the tenants of the Building and to provide alternate parking.
(C) Landlord reserves the right at any time to designate certain
parking areas for Tenant, and Tenant shall thereafter be responsible to insure
that its employees park in the designated area. Tenant shall, if requested by
Landlord, furnish to Landlord a complete list of the license plate numbers of
all vehicles operated by Tenant, Tenant's employees and agents. The parking
passes rented by Tenant pursuant to this Article 4 are provided to Tenant solely
for use by Tenant's own personnel, provided that Tenant shall be entitled to
transfer such passes to other tenants of the Building and/or to an assignee or
sublessee of Tenant approved by Landlord pursuant to the terms of Section 4.2,
below, without Landlord's prior approval. Landlord shall not be liable for any
damage of any nature to, or any theft of, vehicles, or contents thereof, in or
about such Parking Facility. At Landlord's request, Tenant shall cause its
employees and agents using Tenant's parking passes to execute an agreement
confirming the foregoing. Notwithstanding anything to the contrary contained in
the Lease, subject to Landlord's reasonable rules and regulations, Tenant's
Parking Passes shall be available to Tenant twenty-four (24) hours per day,
seven (7) days per week, provided that during reasonable night-time hours and on
weekends, access to Project parking areas may be reasonably restricted for
security purposes (e.g., to persons with card keys or passes issued by Landlord,
or other similar restrictions).
(D) Visitor parking shall be at a charge to visitors at the rate
established by Landlord from time to time, which rates shall be comparable to
visitor parking rates being charged by landlords of Comparable Buildings. Tenant
shall have the right to purchase validations for Tenant's business visitors from
Landlord or Landlord's parking operator, as the case may be, at the prevailing
rate charged by Landlord from time to time; provided, however, that during the
first three (3) Lease Years only, Tenant shall only be required to pay
seventy-five percent (75%) of the prevailing rate charged by Landlord.
Section 4.2 Assignment and Subletting.
(A) Tenant shall not, directly or indirectly, voluntarily,
involuntarily, by operation of law or otherwise, except as otherwise expressly
set forth in Sections 4.2(B)(8) and (9) below, assign this Lease or any interest
herein or sublease the Premises or any part thereof, or
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permit the use or occupancy of the Premises by any person or entity other than
the named Tenant under this Lease without, in each instance, the prior written
consent of Landlord, which consent, subject to the terms of this Section 4.2,
shall not be unreasonably withheld, conditioned or delayed. Landlord shall grant
or deny its consent within fifteen (15) business days after Tenant's request
therefor. Except in accordance with the provisions of this Section 4.2, Tenant
shall not mortgage, pledge, encumber or otherwise hypothecate this Lease or the
Premises or any part thereof in any manner whatsoever except that Tenant may
grant security interests in its personal property, furniture, moveable fixtures
and moveable equipment. Any of the foregoing acts shall be void and shall, at
the option of Landlord, if not cured in a manner satisfactory to Landlord after
notice and the expiration of the cure period provided in Section 7.1(A)(2),
constitute an Event of Default under this Lease permitting Landlord to exercise
all remedies provided herein, at law or in equity. Whether or not Landlord's
consent shall be granted to any proposed assignment or subletting, Tenant shall
reimburse Landlord for the reasonable expenses, including reasonable, actual and
documented attorneys' fees and disbursements, incurred by Landlord in connection
with Tenant's request for such consent; provided, however, that in no event
shall Tenant be obligated to reimburse Landlord for any reasonable, actual and
documented attorney's fees and disbursements in excess of One Thousand Five
Hundred Dollars ($1,500.00) for a sublease or assignment in the ordinary course
of business. In addition, Tenant shall pay to Landlord, as Additional Rent, all
reasonable direct and indirect expenses incurred by Landlord due to any such
assignee or sublessee taking possession of the Premises, including, but not
limited to, freight elevator operation, security service, janitorial service and
rubbish removal. For the purposes of this Section 4.2 (i) any person or legal
representative of Tenant, to whom Tenant's interest under this Lease passes by
operation of law, or otherwise, shall be bound by the provisions of this Section
4.2, and (ii) a modification, amendment or extension of a sublease shall be
deemed a sublease.
(B) (1) In the event that Tenant shall desire Landlord's
consent to the subletting of all or part of the Premises or the assignment of
this Lease, Tenant shall give Landlord fifteen (15) business days' prior written
notice thereof, which notice shall include (i) the name and address of the
proposed assignee or subtenant, (ii) a reasonably detailed description of such
person or entity's business, (iii) detailed financial references for such person
or entity (including its most recent audited balance sheet and income
statement), (iv) a written authorization by such proposed subtenant or assignee
for Landlord or its designee to cause a credit check to be compiled against it,
(v) a statement setting forth (1) the effective date of the proposed assignment
or the commencement date of the proposed sublease, (2) the base annual rent and
additional rent to be paid by the proposed subtenant, and (3) the number of
rentable square feet proposed to be sublet, (vi) a copy of the proposed sublease
or assignment and assumption agreement, (vii) an executed estoppel certificate
from Tenant in the form attached hereto as Exhibit F, and (viii) such other
information as Landlord may reasonably require.
(2) Notwithstanding anything to the contrary contained in
this Section 4.2, in the event Tenant contemplates a sublease of all or a
portion of the portion of the Premises located on the fifty-first (51st) or
fifty-second (52nd) floors of the Building other than as described in (8) and
(9) below (a "Transfer"), then Tenant shall give Landlord notice (the "Intention
to Transfer Notice") of such contemplated Transfer (whether or not the
contemplated
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transferee or the terms of such contemplated Transfer have been determined). The
Intention to Transfer Notice shall specify the portion of and amount of rentable
square feet of the Premises which Tenant intends to Transfer (the "Contemplated
Transfer Space"), the contemplated date of commencement of the Contemplated
Transfer (the "Contemplated Effective Date"), and the contemplated length of the
term of such contemplated Transfer, and shall specify that such Intention to
Transfer Notice is delivered to Landlord pursuant to this Section 4.2(B)(2) in
order to allow Landlord to elect to recapture the Contemplated Transfer Space
for the term set forth in the Intention to Transfer Notice. Thereafter, Landlord
shall have the option, by giving written notice to Tenant within thirty (30)
days after receipt of any Intention to Transfer Notice, to recapture the
Contemplated Transfer Space. Such recapture shall cancel and terminate this
Lease with respect to such Contemplated Transfer Space as of the Contemplated
Effective Date until the last day of the term of the contemplated Transfer as
set forth in the Intention to Transfer Notice. In the event of a recapture by
Landlord, if this Lease shall be canceled with respect to less than the entire
Premises, the Rent reserved herein shall be prorated on the basis of the number
of rentable square feet retained by Tenant in proportion to the number of
rentable square feet contained in the Premises, and this Lease as so amended
shall continue thereafter in full force and effect, and upon request of either
party, the parties shall execute written confirmation of the same. In the event
that Landlord elects to recapture the Contemplated Transfer Space and such space
comprises all or substantially all of the fifty-first (51st) floor or all or
substantially all of the fifty-second (52nd) floor of the Building, then Tenant
shall, at Tenant's sole costs and expense, remove any stairwell installed by or
for the benefit of Tenant connecting the fifty-first (51st) and fifty-second
(52nd) floors and restore such area of the Premises to the condition which
existed prior to the installation of such stairwell. Tenant shall complete such
removal and restoration prior to the Contemplated Effective Date. If the
Contemplated Transfer Space consists of the entire fifty-first (51st) floor and
the entire fifty-second (52nd) floor, the obligations set forth in the preceding
two (2) sentences shall be inapplicable. If Landlord declines, or fails to elect
in a timely manner, to recapture such Contemplated Transfer Space under this
Section 4.2(B)(2), then, subject to the other terms of this Section 4.2, for a
period of nine (9) months (the "Nine Month Period") commencing on the last day
of such thirty (30) day period, Landlord shall not have any right to recapture
the Contemplated Transfer Space with respect to any Transfer made during the
Nine Month Period, provided that any such Transfer is substantially on the terms
set forth in the Intention to Transfer Notice; provided however, that any such
Transfer shall be subject to the remaining terms of this Section 4.2. If such a
Transfer is not so consummated within the Nine Month Period (or if a Transfer is
so consummated, then upon the expiration of the term of any Transfer of such
Contemplated Transfer Space consummated within such Nine Month Period), Tenant
shall again be required to submit a new Intention to Transfer Notice to Landlord
with respect any contemplated Transfer, as provided above in this Section
4.2(B)(2). If Landlord shall exercise its option to recapture the Contemplated
Transfer Space, Landlord, at Landlord's sole cost and expense and without
material interference with the operation of Tenant's business in the balance of
the Premises, may make such alterations as may be required or deemed necessary
by Landlord to physically separate the Contemplated Transfer Space from the
balance of the Premises and to comply with any legal insurance requirements
related to such separation. Tenant acknowledges and agrees that this Section
4.2(B)(2) is an economic provision, like rent, and that Landlord's right to
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recapture the Contemplated Transfer Space, was granted by Tenant to Landlord in
consideration of certain other economic concessions granted by Landlord to
Tenant. If required by any applicable law in connection with a termination of
this Lease, or the surrender of the Contemplated Space Transfer, Tenant shall
complete, swear to and file any questionnaires, tax returns, affidavits or other
documentation which may be required to be filed with the appropriate
governmental agency in connection with any tax which may now or hereafter be in
effect relating to any termination of this Lease or recapture of the
Contemplated Transfer Space. Landlord agrees to pay any taxes which may be
assessed in connection with any such termination or surrender and to defend,
indemnify and hold Tenant harmless from any claims for payment of such taxes as
a result of any such transactions.
(3) In the event Landlord does not exercise its option
pursuant to the provisions of this Subsection (B)(2), Landlord's consent (which
must be in writing and form reasonably satisfactory to Landlord) to the proposed
assignment or sublease shall not be unreasonably withheld or delayed beyond
thirty (30) days after Tenant's request therefor. The parties hereby agree that
it shall be deemed to be reasonable under this Lease and under any applicable
law for Landlord to withhold consent to any proposed assignment or sublease
where one or more of the following parameters, without limitation as to other
reasonable parameters for withholding consent, are not complied with:
(a) In Landlord's reasonable judgment, the
proposed assignee or subtenant is engaged in a business or activity
which is generally comparable in quality to other tenants in the
Building to which Landlord is then leasing space ("Comparable Tenants");
(b) The proposed assignee's or subtenant's use of
the Premises (i) complies with the terms of Section 1.7 of this Lease,
and (ii) will not violate any exclusive use clause contained in any
other lease of office space of the Project;
(c) The proposed assignee or subtenant is a
reputable entity and has a net worth and a credit rating that would be
acceptable to Landlord were such entity to be entering into a direct
lease with Landlord for the Premises, or portion thereof, subject to the
proposed sublease, and otherwise has sufficient financial resources to
perform all of the obligations of Tenant under this Lease, or, in the
case of a sublease, the sublease, and Landlord has been furnished with
reasonable proof thereof;
(d) The proposed assignee or sublessee is not a
person or entity who is then exclusively (not including discussions by
such assignee or sublessee with Tenant) negotiating with Landlord to
lease space in the Office Building;
(e) The proposed sublease or instrument of
assignment shall be in form and substance reasonably satisfactory to
Landlord; and
(f) The proposed subtenant or assignee is either
a governmental agency or instrumentality thereof; (the "Governmental
Transferee"), which
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Governmental Transferee is (i) a foreign country unless Landlord
directly leases space to comparable foreign countries, (ii) of a
character or reputation, is engaged in a business, or is of, or is
associated with, a political orientation or faction, which is
inconsistent with the quality of the Building, or which would otherwise
reasonably offend a landlord or a tenant of the Comparable Buildings,
(iii) is capable of exercising the power of eminent domain or
condemnation unless Landlord leases space directly to governmental
agencies who have the power to exercise eminent domain, (iv) would
significantly increase the human traffic in the Premises or Building
beyond the traffic which generally results from general office use of
space in a first class office building, or (v) would increase the
security risk of the Premises or the Building (which shall be deemed
increased in the event that (a) the Governmental Transferee typically
utilizes metal detectors or similar security devices in its offices, or
(b) some or all of the employees or invitees of the Governmental
Transferee carry firearms) (collectively, the "Increased Security
Risks"); but which shall not be deemed Increased Security Risks if
Landlord directly leases, not including assignments or subleases by
other tenants, comparably sized premises in the Building to a
governmental entity which is allowed to, and does actually have, the
Increased Security Risks occurring on its premises).
(4) If Landlord shall decline to give its consent to any
proposed assignment or sublease, or if Landlord shall exercise its option
afforded it pursuant to Subsection (B)(2), Tenant shall indemnify, defend and
hold harmless Landlord against and from any and all loss, liability, damages,
costs, and expenses (including reasonable attorneys' fees and disbursements)
resulting from any claims that may be made against Landlord by the proposed
assignee or sublessee or by any brokers or other persons claiming a commission
or similar compensation in connection with the proposed assignment or sublease.
(5) In the event that (i) Landlord fails to exercise its
option under Subsection (B)(2) and consents to a proposed assignment or
sublease, and (ii) Tenant fails to execute and deliver the assignment or
sublease to which Landlord consented within (90) days after the giving of such
consent, then, Tenant shall again comply with all of the provisions and
conditions of this Subsection (B) before assigning this Lease or subletting all
or part of the Premises.
(6) Each sublease shall provide that it is subject and
subordinate to this Lease and to the matters to which this Lease is or shall be
subordinate, and that, in the event of termination, re-entry or dispossession by
Landlord under this Lease, Landlord may, at its option, take over all of the
right, title and interest of Tenant, as sublessor, under such sublease, and such
subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then
executory provisions of such sublease, except that Landlord is not (a) liable
for any previous act or omission of Tenant under such sublease, (b) subject to
any counterclaim, offset or defense not expressly provided in such sublease,
which theretofore accrued to such subtenant against Tenant, or (c) bound by any
previous modification of such sublease or by any previous prepayment of more
than one (1) month's rent. The provisions of this paragraph shall be
self-operative and no further instrument shall be required to give effect to
this provision.
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(7) The consent by Landlord to any assignment or
subletting shall not constitute a waiver of the necessity for Landlord's consent
to any subsequent assignment or subletting. If this Lease is assigned or if the
Premises or any part thereof is occupied by anybody other than Tenant, Landlord
may collect rent from the assignee or occupant and apply the net amount
collected to the rent herein reserved, but no such assignment, subletting,
occupancy or collection shall be deemed a waiver of this provision or the
acceptance of the assignee, subtenant or occupant as tenant, or as a release of
Tenant from the further performance by Tenant of the provisions on its part to
be observed or performed herein. Notwithstanding any assignment or sublease,
Tenant shall remain fully liable and shall not be released from performing any
of the terms of this Lease.
(8) Notwithstanding anything to the contrary set forth in
Section 4.2 of this Lease, and subject to all of the provisions of this Lease,
Tenant may, upon thirty (30) days notice to Landlord, assign this Lease to or
permit any corporation or other business entities which control, are controlled
by, or are under common control with Tenant (each, a "related corporation") to
sublet the Premises for any of the purposes permitted to Tenant under this Lease
(subject, however, to compliance with Tenant's obligations under this Lease)
provided that (a) no Event of Default by Tenant is then in existence, (b) prior
to such assignment or subletting, Tenant furnishes Landlord with the name of any
such related corporations, together with the written certification of Tenant
that such other subtenant is a related corporation of Tenant, (c) in the
reasonable judgment of Landlord, the proposed assignee or subtenant is in
keeping with the reasonable standards of Landlord for the Office Building (d)
Tenant supplies Landlord with any documents or information requested by Landlord
regarding such assignment or sublease or such affiliate, (e) such assignment or
sublease is not a subterfuge by Tenant to avoid its obligations under this
Lease, and (f) the financial responsibility, including, without limitation, the
net worth, annual income and cash flow of the assignee or sublessee are
satisfactory to Landlord, in its reasonable judgment, and proof satisfactory to
Landlord of such net worth, annual income and cash flow shall have been
delivered to Landlord at least ten (10) days prior to the effective date of any
such transaction. In considering the financial responsibility of a proposed
assignee or sublessee pursuant to clause (f) above, Landlord shall take into
consideration, among other factors, the financial obligations of the proposed
assignee or sublessee under the proposed assignment or sublease and the ability
of the proposed assignee or sublessee to fulfill such financial obligations. Any
such subletting shall not be deemed to vest in any such related corporation any
right or interest in this Lease or the Premises nor shall it relieve, release,
impair or discharge any of Tenant's obligations hereunder. For the purposes of
this subsection (8), "control" shall be deemed to mean ownership of not less
than 51% of all of the voting stock of such corporation or not less than 51% of
all of the legal and equitable interest in any other business entities.
(9) The provisions of this Section requiring Landlord's
approval shall not apply to transactions with a corporation into or with which
Tenant is merged or consolidated or to which substantially all of Tenant's
assets are transferred, provided that in any of such events the financial
responsibility, including without limitation, the net worth, annual income and
cash flow of the successor to Tenant are satisfactory to Landlord, in its
reasonable judgment, and proof satisfactory to Landlord of such net worth,
annual income and cash flow shall have been
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delivered to Landlord at least ten (10) days prior to the effective date of any
such transaction. In considering the financial responsibility of the successor
to Tenant, Landlord shall take into consideration, among other factors, the
financial obligations of the successor to Tenant under this Lease and the
ability of such successor to Tenant to fulfill such financial obligations.
(10) No assignment or sublease made pursuant to this
Section and no assignment or sublease otherwise consented to by Landlord shall
be valid unless at least fifteen (15) days prior to the effective date thereof,
Tenant shall deliver to Landlord a fully executed counterpart of the proposed
(i) sublease in the form previously approved by Landlord or (ii) assignment and
assumption, in form and substance reasonably satisfactory to Landlord, pursuant
to which assignee assumes all of the obligations and liabilities of Tenant under
this Lease and agrees to be bound by all of the terms, covenants, conditions,
provisions and agreements of this Lease. The Tenant named herein and any
assignee of such Tenant who assumes the obligations of the named Tenant under
this Lease, from and after such assignment, shall be jointly and severally
liable for performance of all obligations of Tenant under this Lease.
(C) If the rent and other sums payable to Tenant by an assignee
or sublessee for or in connection with an assignment of this Lease or the
sublease of all or any part of the Premises shall be in excess (the "Excess") of
the Base Rent and any Additional Rent provided for in this Lease (allocated on a
per square foot basis in the event of a sublease of less than all of the
Premises), Tenant shall so notify Landlord and shall pay Landlord fifty (50%)
percent of the Excess as and when received by Tenant; provided, however, that
Tenant shall not be required to pay to Landlord any Excess until such time as
Tenant has recovered all applicable Subleasing Costs, as such term is defined
below. "Excess" shall also include, but not be limited to, key money and bonus
money for rent or payable in lieu of rent paid by such assignee or sublessee to
Tenant in connection with such assignment or sublease, and any payment in excess
of fair market value for services rendered by Tenant to such assignee or
sublessee or for assets, fixtures, inventory, equipment, or furniture
transferred by Tenant to such assignee or sublessee in connection with such
assignment or sublease. Notwithstanding anything in this Section 4.2(C), Excess
shall not include and there shall be excluded from the Excess the reasonable
expenses incurred by Tenant for (i) any changes, alteration and improvements to
the Premises in connection with the assignment or sublease, as applicable, (ii)
any brokerage commissions in connection with the assignment or sublease, as
applicable, (iii) legal fees reasonably incurred in connection with the
assignment or sublease, as applicable, (iv) the aggregate amount of any Base
Rent and Additional Rent paid by Tenant to Landlord with respect to the
Contemplated Transfer Space during the period commencing on the later of (a) the
date Tenant contracts with a reputable broker to market the Contemplated
Transfer Space, and (b) the date Tenant vacates the Contemplated Transfer Space,
until the commencement of term of the assignment or sublease, as applicable, (v)
any lease takeover incurred by Tenant in connection with the Transfer, (vi)
out-of-pocket costs of advertising the space subject to the Transfer, (vii) any
other "out-of-pocket" monetary concessions (including, but not limited to, free
rent, improvement allowances, remodeling or decorating costs), costs and
expenses reasonably incurred in connection with the assignment or sublease, as
applicable (collectively, the "Subleasing Costs"). In the calculations of the
rent (as it relates to the Excess calculated under this Section 4.2), the rent
paid during each annual period for the applicable portion of the Premises, shall
be computed after adjusting such
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rent to the actual effective rent to be paid, taking into consideration any and
all leasehold concessions granted in connection therewith, including, but not
limited to, any rent credit and tenant improvement allowance and all other
Subleasing Costs. Landlord or its authorized representatives shall have the
right at reasonable times and upon reasonable prior notice to review the books,
records, and papers of Tenant relating to the Excess payable under any
assignment or sublease and shall have the right to make copies thereof. If the
Excess respecting the assignment or sublease shall be found understated, Tenant
shall, within thirty (30) days enter into demand, pay for the deficiency and
Landlord cost of such audit.
(D) Landlord's Recognition of Subleases Upon Lease Termination.
At Tenant's request, Landlord shall execute a recognition agreement (the
"Recognition Agreement") in favor of any sublessee of a sublease, which
sublessee is otherwise approved by Landlord pursuant to the terms of this
Section 4.2, which Recognition Agreement shall provide that in the event this
Lease is terminated, Landlord shall recognize the transfer and not disturb such
Transferee's possession of the Premises, or applicable portion thereof, due to
such termination; provided that: (i) such sublease is made upon the same terms
and conditions set forth in this Lease, subject to equitable modifications based
on the number of rentable square feet contained in the space which is the
subject of the sublease (the "Sublease Space"); provided, however, that in the
event that the economic terms of such sublease are more favorable to Landlord
than those set forth in this Lease, the terms set forth in the Sublease shall be
binding as between Landlord and the sublessee, (ii) the Sublease Space (I) shall
be comprised all of the space in the Premises located on any particular floor of
the Building, (II) shall not be contiguous on both sides to other floors of the
Premises which are not a part of the Sublease Space, and (III) shall in no event
comprise the fifty-first (51st) floor of the Building and not the fifty-second
(52nd) floor of the Building or the fifty-second (52nd) floor of the Building
and not the fifty-first (51st) floor of the Building, (iii) Landlord shall not
be liable for any act or omission of Tenant, (iv) Landlord shall not be subject
to any offsets or defenses which the sublessee might have as to Tenant or to any
claims for damages against Tenant, nor shall Landlord be obligated to fund to,
or for the benefit of, such sublessee, any undisbursed tenant improvement or
refurbishment allowance or other allowances or monetary concessions, (v)
Landlord shall not be required or obligated to credit the sublessee with any
rent or additional rent or security deposit paid by the sublessee to Tenant,
(vi) Landlord shall not be bound by any terms or conditions of the sublease
which are inconsistent with the terms and conditions of this Lease, (vii) such
recognition shall be effective upon, and Landlord shall be responsible for
performance of only those covenants and obligations of Tenant pursuant to the
sublease accruing after the termination of this Lease and the vacation by Tenant
of the entire Premises, (viii) as a condition to Landlord's obligation to enter
into the Recognition Agreement, Landlord shall have the right to reasonably
approve the creditworthiness, financial strength and prestige of the sublessee,
which reasonable approval shall be based upon the creditworthiness, financial
strength and prestige generally required by Landlord and landlords of the
Building and the Comparable Buildings as of the time of the proposed sublease of
new tenants leasing space of floor height (giving due consideration, if
applicable, to the fact that the Sublease Space is located on the top two (2)
floors of the Building) and rentable area comparable to the that of the Subject
Space for a term equal to the remaining Lease Term and at a rental rate equal to
that payable under the sublease, (ix) the sublessee shall make full and complete
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attornment to Landlord, as lessor, pursuant to a written agreement executed by
Landlord and the sublessee, so as to establish direct privity of contract
between Landlord and the sublessee with the same force and effect as though the
transfer was originally made directly between Landlord and the sublessee, and
(x) the term of such sublease shall not be less than eighteen (18) months. Upon
Landlord's written request given any time after the termination of this Lease,
the sublessee shall execute a lease for the space subject to the applicable
sublease upon the same terms and conditions as set forth in the Recognition
Agreement. Tenant agrees to pay Landlord's reasonable legal fees incurred in
Landlord's preparation and approval of such Recognition Agreement.
Section 4.3 Care of Premises. Subject to the provisions of Sections 6.1
and 6.2 hereof, Tenant shall maintain and repair the Premises (other than the
Building Structure and/or the Building Systems), including all improvements,
fixtures and furnishings therein and the plenum area above the ceiling in the
Premises, during the Term and preserve same in the condition delivered to Tenant
on the Commencement Date, normal wear and tear, changes made by Alterations, and
damage due to casualty excepted. Notwithstanding the foregoing, Tenant shall
reimburse Landlord upon demand, unless covered by Landlord's insurance or would
have been covered by Landlord's insurance if Landlord had obtained the insurance
it was required to obtain under this Lease, for the cost of such repairs to the
Building Structure or Building Systems if necessitated by reason of the
negligence or willful misconduct of Tenant, any assignee or subtenant of Tenant,
or their respective employees, agents, invitees or contractors, or by reason of
the failure of Tenant to perform or observe any conditions or agreements in this
Lease, or if made necessary by the Tenant Improvements or any Alterations made
by Tenant or anyone claiming under Tenant. Tenant shall be responsible for
repainting and redecorating the Premises, cleaning drapes or other window
coverings and carpets at reasonable intervals as needed, and making repairs,
replacements and alterations as needed, in a good and workmanlike manner in
accordance with the terms and provisions of this Lease, including those
governing the performance of any Alterations to the Premises, using contractors
licensed in the state in which the Project is located approved by Landlord in
its reasonable judgment, and materials of equal or better quality and utility to
the original work. Tenant hereby waives all rights under California Civil Code
Sections 1932(1) and 1941 and all rights to make repairs at the expense of
Landlord or in lieu thereof to vacate the Premises as provided by California
Civil Code Section 1942 or any other, statute, or ordinance now or hereafter in
effect authorizing a tenant to make repairs at the expense of a landlord or to
terminate a lease upon the complete or partial destruction of the leased
Premises. In addition, Tenant shall label its computer cabling upon installation
of the same. If Tenant fails to make any necessary repairs within fifteen (15)
business days after demand by Landlord, Landlord may at its option make the
repairs and Tenant shall pay Landlord on demand as additional Base Rent the
actual out-of-pocket costs, without profit, overhead, depreciation or
administrative fees, incurred by Landlord therefor. Landlord shall repair or
replace, at Tenant's sole cost, any damage done to the Project or any part
thereof caused by Tenant or Tenant's agents, employees, contractors, invitees or
visitors. Tenant agrees to give Landlord or its managing agent prior written
notice of the necessity for any repairs in or to the Premises and shall not
proceed to perform same until Landlord or its managing agent has consented
thereto.
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Section 4.4 Compliance with Law.
(A) Tenant, at its sole expense, shall comply with all laws,
orders and regulations of federal, state, county and municipal authorities and
with any directive of any public officer or officers pursuant to law which shall
impose any violation, order or duty upon Landlord or Tenant and which relate to
(i) Tenant's use of the Premises for non-general office use, (ii) the
Alterations or the Tenant Improvements in the Premises, or (iii) the Building
Structure and the Building Systems, but, as to the Building Structure and
Building Systems, only to the extent such obligations are triggered by Tenant's
Alterations, the Tenant Improvements or the use of the Premises for non-general
office use. Tenant shall not do or permit to be done any act in, on or about the
Premises or store anything therein which (i) will in any way conflict with any
law, statute, ordinance or governmental rule or regulation now in force or which
may hereafter be enacted or promulgated, (ii) is not appropriate to the
Permitted Uses of the Premises or (iii) will in any way increase the existing
rate of, or adversely affect, or cause a cancellation of, any fire or other
insurance policies covering the Office Building or any of its contents.
(B) If alterations to the Common Areas other than the Building
Structure and Building Systems, since the same are dealt with in Section 4.4(A),
above, are required in order to comply with laws, orders, regulations,
directives or the "ADA," as that term is defined below, as a result of Tenant's
Alterations within the Premises or Tenant's use of the Premises, the cost
thereof shall be paid by Tenant within twenty (20) days after demand by
Landlord, unless the work would not have been required if the Building on July
1, 1996 was in compliance with the requirements of the handicap access codes
which applied to new construction in the Building. Tenant shall maintain the
Premises in compliance with Title III of the Americans with Disabilities Act of
1990 and all regulations promulgated thereunder (the "ADA"), at its cost and
expense.
(C) Landlord and Tenant acknowledge that on those floors of the
Office Building which are fully leased by Tenant, the restrooms, any public
corridor, and the passenger and service elevator lobbies on such floors are
deemed part of the Premises for purposes of this Lease.
Section 4.5 Tenant's Insurance.
(A) Tenant shall procure and maintain throughout the Term of this
Lease, at its sole cost and expense, the following insurance:
(1) Commercial General Liability Insurance providing
coverage for bodily injury (including death), property damage and products
liability insurance (where such exposure exists). This policy shall contain a
broad form contractual liability endorsement under which the insurer agrees to
insure Tenant's obligations under Section 4.6(A) hereof. Such insurance shall
have a combined single limit of not less than Three Million Dollars ($3,000,000)
per occurrence and Five Million Dollars ($5,000,000) in the aggregate for all
occurrences within each policy year. Not more frequently than once in any three
(3) year period, if, in the opinion of Landlord's lender or of the insurance
consultant retained by Landlord, the amount of public
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liability and property damage insurance coverage at that time is not adequate,
Tenant shall increase the insurance coverage as required by either Landlord's
lender or Landlord's insurance consultant; provided however, that in no event
shall any such insurance coverage be increased in excess of that which is from
time to time being required by comparable landlords of comparable tenants
leasing comparable amounts of space in Comparable Buildings;
(2) Fire and extended coverage insurance covering Tenant's
personal property, fixtures, improvements, wall coverings, floor coverings,
window coverings, alterations, furniture, equipment, lighting, ceilings,
heating, ventilation and air conditioning equipment, interior plumbing and plate
glass, including the Tenant Improvements and Alterations against loss or damage
by fire, flood, windstorms, hail, earthquakes, explosion, riot, damage from
aircraft and vehicles, smoke damage, vandalism and malicious mischief and such
other risks as are from time to time covered under "extended coverage"
endorsements and special extended coverage endorsements commonly known as "all
risks" endorsements, in an amount equal to the full replacement value from time
to time and containing the waiver of subrogation required in Section 6.3 of this
Lease. The proceeds from any such policy shall be used by Tenant for the
replacement of such personal property;
(3) State Worker's Compensation Insurance in the
statutorily mandated limits and Employers Liability Insurance with limits of not
less than Five Hundred Thousand Dollars ($500,000);
(4) Business interruption insurance with coverage for at
least one (1) year in such amounts as will reimburse Tenant for direct or
indirect loss of earnings and incurred costs attributable to the perils commonly
covered by Tenant's property insurance described above but in no event less than
One Million Dollars ($1,000,000). Such insurance will be carried with the same
insurer that issues the insurance for the personal property; and
(5) Such other insurance, or amounts of insurance, as
Landlord may reasonably require from time to time, but in no event may Landlord
require any insurance which is (a) not then being required of comparable tenants
leasing comparable amounts of space in Comparable Buildings, or (b) not then
available at commercially reasonable rates.
(B) It is expressly understood and agreed that the foregoing
minimum limits of insurance coverage shall not limit the liability of Tenant for
its acts or omissions as provided in this Lease. All of the foregoing insurance
policies (with the exception of Worker's Compensation Insurance to the extent
not available under statutory law) shall name Landlord, the operator under any
reciprocal easement agreement affecting the Project, any holder of a Mortgage,
any lessor under a Superior Lease or any managing agent for the Office Building
and such other parties as Landlord shall from time to time designate as an
additional insured as their respective interests may appear, and, except for
worker's compensation coverage, shall provide that any loss shall be payable to
Landlord and any other additional insured parties as their respective interests
may appear. All insurance required hereunder shall be placed with companies
which are rated A:XI or better by Best's Insurance Guide and licensed to do
business in California. All such policies shall be written as primary policies,
with annual deductibles not to exceed Ten Thousand Dollars
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($10,000) and shall, if such is available on a commercially reasonable basis,
contain a cross-liability endorsement or severability of interest clause
acceptable to Landlord. Such insurance shall provide that it is primary
insurance and not "excess over" or contributory, and any other policies,
including Landlord's policy, will serve as excess and non-contributing coverage.
Tenant shall deliver duplicate original copies of all such policies and all
endorsements thereto, prior to the Commencement Date, or, in the case of
renewals thereto, fifteen (15) days prior to the expiration of the prior
insurance policy, together with evidence that such policies are fully paid for,
and that no cancellation, material change or non-renewal thereof shall be
effective except upon thirty (30) days prior written notice from the insurer to
Landlord. If Tenant shall fail at any time to procure and/or maintain the
insurance required herein, Landlord may, at its option, procure such insurance
on Tenant's behalf and the cost thereof shall be payable upon demand, as
Additional Rent. Payment by Landlord of any insurance premium or the carrying by
Landlord of any such insurance policy shall not be deemed to waive or release
the default of Tenant with respect thereto. In addition, if Tenant fails to
carry the amounts and types of insurance required to be carried by it pursuant
to this Section 4.5, in addition to any remedies Landlord may have under this
Lease, such failure shall be deemed to be a covenant and agreement by Tenant to
self-insure with respect to the type and amount of insurance which Tenant so
failed to carry, with full waiver of subrogation with respect thereto.
Section 4.6 Tenant's Indemnification.
(A) Tenant shall indemnify, protect, defend and hold harmless
Landlord and its officers, directors, employees, shareholders, attorneys and
agents (collectively, the "Indemnitees") from and against any and all claims,
demands, causes of action, judgments, costs, expenses, and all losses and
damages (including consequential damages but only to the extent permitted
pursuant to Section 4.14 below) (collectively, "Claims") arising from or in
connection with any cause in, on or about the Premises, any breach or default in
the performance of any obligation on Tenant's part to be performed under the
terms of this Lease, or any acts or omissions of Tenant or any person claiming
by, through or under Tenant its partners, and their respective officers, agents,
servants, employees and independent contractors (collectively, the "Tenant
Parties"), in on or about the Project, either prior to, during, or after the
expiration of the Term, and from all costs, attorneys' fees and disbursements,
and liabilities incurred in the defense of any such claim or any action or
proceeding which may be brought against, out of or in any way related to this
Lease, except to the extent caused by the negligence or willful or criminal
misconduct of any Indemnitee. Upon notice from Landlord, Tenant shall defend any
such Claim at Tenant's expense by counsel reasonably satisfactory to Landlord.
As a material part of the consideration to Landlord for this Lease and because
Tenant is required to insure all of its Tenant Improvements and its furniture,
fixtures and equipment and because of the requirement to provide waivers of
subrogation, Tenant hereby assumes all risk of damage to property in, upon or
about the Premises from any cause whatsoever, including if attributable in whole
or in part to the act, omission or active or passive negligence of Landlord.
Tenant hereby assumes all risk of injury to persons in, upon or about the
Premises from any cause whatsoever, except only to the extent caused by the
negligence or willful or criminal conduct of Landlord, and Tenant hereby waives
all Claims with respect to the matters covered in the two preceding sentences
against Landlord. Tenant shall give immediate notice to Landlord in case of
casualty or accidents in the
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Premises. The provisions of this Section 4.6(A) shall survive the expiration or
sooner termination of this Lease.
(B) Landlord or its agents shall not be liable for any loss or
damage to persons or property resulting from fire, explosion, falling plaster,
steam, gas, electricity, water or rain which may leak from any part of the
Project or from the pipes, appliances or plumbing works therein or from the
roof, street or subsurface or from any other places resulting from dampness or
any other cause whatsoever, or from the failure of telephone service, or from
the act or negligence of any other tenant or any officer, agent, employee,
contractor or guest of any such tenant, except personal injury caused by or due
to the gross negligence or willful or criminal misconduct of Landlord. In
addition, Landlord or its agents shall not be liable for (i) interference with
the electrical service, ventilation, or for any latent defect in the Premises,
except as provided in Section 1.6 hereof, (ii) any loss or damage for which
Tenant is required to insure or (iii) any loss or damage resulting from any
construction, Alterations or repair required or permitted to be performed by
Tenant under this Lease.
Section 4.7 Utilities. Tenant shall not install any equipment (such as
tabulating or computing equipment) in the Premises without Landlord's prior
written consent. Landlord shall not unreasonably withhold its consent to
Tenant's request to install any equipment pursuant to the preceding sentence,
provided that without limiting the generality of the foregoing, Tenant agrees
that it shall be reasonable for Landlord to withhold such consent on the grounds
that the proposed equipment to be installed by Tenant will generate excessive
heat or adversely affect Building Systems or Building Structure, unless in
circumstances in which Landlord's concerns may be satisfied by taking corrective
measures, Tenant pays for all corrective measures Landlord in its reasonable
discretion deems necessary. Tenant shall pay to Landlord the estimated cost of
such corrective measures in advance of Landlord's commencing any such work. As
soon as reasonably practicable after the completion of such corrective work,
Landlord shall provide Tenant with evidence of the cost thereof. Within thirty
(30) days after receipt of such accounting, Tenant shall pay any deficiency to
Landlord or Landlord shall refund any overpayment to Tenant. It shall not be
considered unreasonable for Landlord to withhold its consent if such equipment
requires an electrical current other than 120 volt, single phase, or if such
equipment requires special circuits or grounding or singularly consumes more
than 0.5 kilowatts at rated capacity. Landlord's Actual Cost of the installation
and maintenance of special electrical facilities approved by Landlord shall be
paid by Tenant, as Additional Rent, upon demand. All costs for extraordinary,
unusual or excessive demand by Tenant for electrical or other utility service
and all costs of submetering or monitoring such use shall be borne by Tenant,
and Landlord reserves the right to impose an additional charge (which shall in
no event be in excess of Landlord's Actual Cost therefor) on Tenant for such
extraordinary, unusual or excessive demand for electrical or other utility
service in an amount reasonably determined by Landlord to be due. Excessive
demand shall mean the combined load of the incidental use equipment and Tenant's
lighting fixtures in excess of an average of four (4) watts of demand load per
rentable square foot of the Premises during the hours set forth in Section
5.2(1)(a), below. Landlord shall provide adequate electrical wiring and
facilities for Tenant's lighting fixtures and incidental use equipment to
accommodate a maximum connected load capacity of seven (7) watts per rentable
square foot of the Premises to the bus riser on each full floor of the Premises,
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provided that Tenant shall bear the expense of horizontally distributing such
electricity to the Premises, including, but not limited to, costs relating to
transformers and disconnect switches. Notwithstanding the foregoing, Landlord
shall, at Landlord's sole cost and expense, provide electrical panels on each
floor of the Premises sufficient to distribute an average of four (4) watts of
demand load per rentable square foot of the Premises during the hours set forth
in Section 5.2(1)(a), below. Landlord reserves the right to install, at Tenant's
sole cost and expense, submeters and related equipment, relating to Tenant's use
of electrical or other utility services for the purposes of monitoring and
billing any excessive use of electricity by Tenant.
Section 4.8 Direct Taxes. Tenant shall pay or cause to be paid before
delinquency, any and all taxes levied or assessed and payable during the Term
upon all of Tenant's equipment, furniture, fixtures, and other personal property
located in the Premises, and Tenant's leasehold improvements, but only to the
extent the cost or value of such leasehold improvements exceeds an amount (the
"Building Standard Amount") equal to the greater of (i) Thirty-Five and No/100
Dollars ($35.00) per rentable square foot of the Premises or (ii) the cost or
value of a building standard build-out as determined by Landlord regardless of
whether title to such improvements shall be vested in Tenant or Landlord. The
foregoing sentence shall be applicable to Tenant only if the aggregate amount of
all taxes or assessments on any leasehold improvements in the Building in excess
of the Building Standard Amount are excluded from Taxes for purposes of
computing Tenant's Operating Payment pursuant to Article 3 above.
Section 4.9 Liens.
(A) Tenant shall keep the Premises and the Project free from any
liens arising out of any work performed, materials furnished, or obligations
incurred by or on behalf of Tenant. Should any mechanic's or other lien be filed
against the Premises or the Project by reason of Tenant's or its agents' or
contractors' acts or omissions or because of a claim against Tenant, Tenant
shall cause the same to be canceled and discharged of record by bond or
otherwise within ten (10) days after the filing thereof. Should Tenant fail to
discharge such lien within such ten (10) day period, Landlord may cure same, in
which event Tenant shall reimburse Landlord, on demand, as Additional Rent, for
the amount of the lien or the amount of the bond, if greater, plus all
reasonable administrative and legal costs incurred by Landlord in connection
therewith. The remedies provided herein shall be in addition to all other
remedies available to Landlord.
(B) Nothing contained in this Lease shall be construed as
constituting the consent or request of Landlord, which may be withheld in
Landlord's sole discretion, express or implied, to, or for the performance by,
any contractor, laborer, materialman or vendor of any labor or services or for
the furnishing of any materials for any construction, alteration, addition,
repair or demolition of or to the Premises or any part thereof. Tenant and any
subtenants shall have no power to do any act or make any contract which may
create or be the foundation of any lien, mortgage or other encumbrance upon the
reversionary or other estate of Landlord, or any interest of Landlord in the
Premises. NOTICE IS HEREBY GIVEN THAT LANDLORD IS NOT AND SHALL NOT BE LIABLE
FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO TENANT OR
TO ANYONE HOLDING THE
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PREMISES OR ANY PART THEREOF, AND THAT NO MECHANICS' OR OTHER LIENS FOR ANY SUCH
LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LANDLORD
IN AND TO THE PREMISES OR THE BUILDING.
Section 4.10 Access to Building, Premises, Services, Utilities and
Parking. Tenant shall be granted access to the Building, the Premises, and the
parking provided to the Building twenty-four (24) hours per day, seven (7) days
per week, every day of the year, provided that Landlord may restrict access to
the Office Building in the event of riot, civil disturbance, or otherwise for
reasons related to the safety or security of the Building or its occupants, and
may restrict access on Saturdays, Sundays, holidays and during hours other than
normal business hours to persons having Building passes or other appropriate
identification.
Section 4.11 Signs.
(A) With respect to any portions of the Premises that comprise an
entire floor of the Office Building, Tenant may, without Landlord's consent, at
its sole cost and expense, install identification signage anywhere in such
portion of the Premises including in the elevator lobby of such portion of the
Premises, provided that such signs (i) are in keeping with the quality, design
and style of the Office Building, and (ii) must not be visible from the exterior
of the Office Building.
(B) In connection with portions of the Premises in which other
tenants occupy space on the floor on which such portion of the Premises is
located, Tenant's identifying signage shall be provided by Landlord, at Tenant's
cost, and such signage shall be comparable to that used by Landlord for other
similar floors in the Office Building and shall comply with Landlord's Office
Building standard signage program.
(C) Tenant shall have the exclusive right to have (a) a sign
located on the north wall adjacent to the escalator connecting the retail level
with the lobby of the Building in accordance with the plans and specifications
attached hereto as Exhibit G (the "Wall Sign"), provided that in no event shall
the Wall Sign penetrate the marble of the wall to which the same is affixed, and
(b) a monument sign located on the west side of the Building visible from Grand
Avenue in accordance with the plans and specifications attached hereto as
Exhibit H (the "Monument Sign"). Any aspect of the Wall Sign or Monument Sign,
as the case may be, which is not set forth on the attached exhibits, including,
without limitation, the graphics to be set forth thereon, shall be subject to
the prior approval of Landlord, which approval shall not be unreasonably
withheld. Notwithstanding anything contained herein to the contrary, (i) Tenant
shall cause the Wall Sign and the Monument Sign (collectively, "Tenant's
Signage") to at all times comply with all applicable governmental rules and
regulations; (ii) Tenant's right to Tenant's Signage shall be personal to the
Original Tenant or a sublessee which is occupying at least 100,000 rentable
square feet of the Premises (such sublessee to also be known for purposes of
this Section 4.11, as a "Permitted Assignee") or a Permitted Assignee, provided
that a Permitted Assignee shall only have the right to Tenant's Signage in the
event that (x) such Permitted Assignee occupies not less than 100,000 rentable
square feet in the Premises, (y) the name which will appear on Tenant's Signage
is the name of such Permitted Assignee, and (z) the
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Permitted Assignee is not an entity which is of a character or reputation, or is
associated with a political faction or orientation, which is inconsistent with
the quality of the Project, or which would not be acceptable to a landlord of a
Comparable Building; and (iii) Tenant's continuing right to Tenant's Signage
shall be contingent on Tenant or a Permitted Assignee, as applicable, actually
occupying at least 100,000 rentable square feet within the Premises. Tenant
shall be responsible for all costs incurred by Tenant in connection with
Tenant's Signage. Upon the expiration or earlier termination of this Lease,
Tenant shall, at its sole cost and expense remove Tenant's Signage and repair
any damage to the Building or the Project caused by such removal.
(D) Except as set forth above, Tenant shall not, without the
prior written consent of Landlord which may be given or withheld in Landlord's
sole discretion, erect or install any type of exterior or interior window or
door signs, or any other type of sign or placard, whether within or without the
Project. Except as otherwise expressly set forth herein, all signs and placards
must comply with the sign criteria promulgated by Landlord from time to time and
in any event must comply with all applicable laws. Tenant shall pay all costs of
fabrication, installation and maintenance of all permitted signs or placards.
(E) Prior to vacating the Premises, Tenant shall, at its sole
cost and expense, promptly remove its sign(s) and placards, and upon the removal
or alteration of any of its sign(s) and placards for any reason, Tenant shall
repair, paint, restore or replace the surface beneath such signs or placards
damaged by such removal. If Tenant fails to comply with any of the provisions
set forth in this Section 4.11, Landlord may, without liability, enter upon the
Premises and remove the same at Tenant's expense.
(F) A building directory will be located in the lobby of the
Office Building. Tenant shall have the right, at Landlord's expense, to
designate names to be displayed under Tenant's entry in such directory at the
rate of two (2) names per each 1,000 rentable square feet of the Premises.
Tenant shall be permitted to list such names by group or alphabetically, or
both, as elected from time to time by Tenant, on the lobby directory board
within Tenant's directory board allotment. Any changes in Tenant's directory
board listings shall be at Tenant's sole cost and expense.
Section 4.12 Surrender. No act or thing done by Landlord or Tenant or
any agent or employee of Landlord or Tenant during the Lease Term shall be
deemed to constitute an acceptance by Landlord or Tenant of a surrender of the
Premises unless such intent is specifically acknowledged in a writing signed by
Landlord and Tenant. The delivery of keys to the Premises to Landlord or any
agent or employee of Landlord shall not constitute a surrender of the Premises
or effect a termination of this Lease, whether or not the keys are thereafter
retained by Landlord, and notwithstanding such delivery Tenant shall be entitled
to the return of such keys at any reasonable time upon request until this Lease
shall have been terminated. Upon the expiration of the Term or other termination
of this Lease, and without further notice, Tenant shall peaceably and quietly
quit and surrender to Landlord the Premises, broom clean, in good order,
excepting only ordinary wear and tear and loss by fire or other casualty which
Tenant is not obligated to repair pursuant to the terms hereof. All articles of
movable personal property, trade fixtures, and furniture shall remain the
property of Tenant, and may be removed by Tenant at any time during
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the Term. Tenant shall, without expense to Landlord, remove or cause to be
removed from the Premises all such items of personal property, furniture and
trade fixtures, and such similar articles of any other persons claiming under
Tenant, as Landlord may, in its sole discretion, require to be removed, and
Tenant shall repair at its own expense all damage to the Premises and Office
Building resulting from such removal.
Section 4.13 Telephone Service. Tenant shall separately arrange with,
and pay directly to, the applicable local public authorities or utilities, as
the case may be, for the furnishing, installation and maintenance of all
telephone services and equipment as may be required by Tenant in the use of the
Premises. Landlord shall not be liable for any damage resulting from Tenant's
inability to receive such service or the failure of such service, and any such
inability or failure shall not relieve Tenant of any of its obligations under
this Lease.
Section 4.14 Consequential Damages. Notwithstanding any contrary
provision of this Lease, neither Landlord nor Tenant shall be liable to the
other party for any consequential damages for a breach or default under this
Lease, provided that this sentence shall not be applicable to any consequential
damages which may be incurred by Landlord relating to, or in connection with (i)
action taken by or on behalf of Tenant pursuant to the provisions of Section 4.3
above, or (ii) any storage, use, treatment, manufacture, sale, disposal or
discharge of any hazardous materials or substances (as those terms are defined
by applicable law) in, on, under or about the Premises, Building or Real
Property by Tenant, its agents, representatives, employees, contractors,
subtenants or assigns, or any actions taken by Tenant or such parties in
connection therewith, or (iii) any holdover by Tenant following the expiration
of the Lease Term, subject to and in accordance with the provisions of Section
8.3 hereof.
Section 4.15 Roof Rights. During the Term of the Lease (as it may be
extended), upon not less than thirty (30) days prior written notice to Landlord,
Tenant shall have the right to install and maintain, on the roof of the Building
in an area not to exceed thirty (30) square feet, satellite dishes (but not
microwave dishes), television antennas, related receiving equipment, related
cable connections and any and all other related equipment (collectively,
"Satellite Dish") required in connection with Tenant's communications and data
transmission network. The proposed construction and installation and general
appearance of the Satellite Dish and the exact location of any such Satellite
Dish shall be reasonably acceptable to Landlord, and Tenant shall have secured
the approval of all governmental authorities and all permits required by
governmental authorities having jurisdiction over such approvals and permits for
the Satellite Dish, and shall provide copies of such approvals and permits to
Landlord, prior to commencing any work with respect to such Satellite Dish.
Tenant shall pay for any and all costs and expenses in connection with the
installation, maintenance, use and removal of the Satellite Dish, and shall pay
for the cost of all utilities used in connection therewith, but in no event
shall Tenant be obligated to pay Landlord any rental for that portion of the
roof of the Building on which the Satellite Dish shall be located. Tenant's
indemnification of Landlord, as set forth in Section 4.6, above, shall apply to
all areas used by Tenant on the roof of the Building pursuant to the terms of
this Section 14.15 as if the same were part of the Premises. Upon the expiration
of the Term of the Lease, Tenant shall, at its sole cost and expense, remove the
Satellite Dish and repair any damage to the roof resulting therefrom.
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ARTICLE 5
LANDLORD'S COVENANTS AND RIGHTS
Section 5.1 Quiet Enjoyment and Subordination.
(A) Landlord covenants that Tenant, on paying the Base Rent and
Additional Rent, charges for services and other payments herein reserved and on
keeping, observing and performing all the other terms, covenants, conditions,
provisions and agreements herein contained on the part of Tenant to be kept,
observed and performed, shall, during the Term, peaceably and quietly have, hold
and enjoy the Premises subject to the terms, covenants, conditions, provisions
and agreements hereof without interference by any persons lawfully claiming by
or through Landlord. The foregoing covenant is in lieu of any other covenant of
quiet enjoyment express or implied.
(B) This Lease is subject and subordinate to any reciprocal
easement agreements or any other easements (each, an "Easement"); all ground or
underlying leases (each, a "Superior Lease"); any mortgage, deed of trust or
deed to secure debt (each, a "Mortgage"); and to any renewals, modifications,
increases, extensions, replacements, and substitutions of any thereof now or
hereafter affecting the Premises and/or all or a portion of the Project.
Landlord represents to Tenant that there are no existing Mortgages or Superior
Leases on the Building, excepting only that certain Lease of Phase 2A dated as
of July 25, 1989, between the Community Redevelopment Agency of the City of Los
Angeles, California, and Office Tower Partnership II, predecessor-in-interest to
Landlord. This provision shall be self-operative and no further instrument of
subordination shall be required; provided, however, that Tenant agrees to
execute and deliver, within five (5) days of Landlord's request, such further
instrument(s) in recordable form confirming this subordination as may be
requested by Landlord, or the holder of any Mortgage or the lessor under any
Superior Lease. In consideration of, and as a condition precedent to, Tenant's
agreement to permit its interest pursuant to this Lease to be subordinated to
any particular future Superior Lease or to the lien of any first Mortgage,
hereafter enforced against the Building or the Property and to any renewals,
extensions, modifications, consolidations and replacements thereof, Landlord
shall deliver to Tenant a non-disturbance agreement executed by the landlord
under such ground lease or underlying lease or the holder of such mortgage or
trust deed in either a commercially reasonable form, or in substantially the
form attached hereto as Exhibit J. Notwithstanding any such subordination of
this Lease, in the event of a foreclosure of any such Mortgage or the
termination of a Superior Lease, Tenant hereby agrees to attorn, without any
deductions or set-offs whatsoever, to the entity or person who acquires
Landlord's interest hereunder through any such Mortgage or Superior Lease and to
recognize such person as the Landlord under this Lease. At the option of the
holder of any Mortgage and notwithstanding anything to the contrary contained
herein, this Lease shall be made superior to such Mortgage by the insertion
therein of a declaration that this Lease is superior. Tenant hereby waives the
provisions of any current or future statute, rule or law which may give or
purport to give Tenant any right or election to terminate or otherwise adversely
affect this Lease and the obligations of the Tenant hereunder in the event of
any foreclosure proceeding or sale.
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Section 5.2 Landlord's Services. During the Term, Landlord shall provide
the following services:
(1) Services To Premises: Landlord shall provide to the
Premises:
(a) Heating and air conditioning in season at such
temperatures and in such amounts as shall be considered by Landlord to
be building standard, during the usual and customary business hours
("Building Hours") of 7:00 a.m. to 8:00 p.m., Monday through Friday, and
9:00 a.m. to 1:00 p.m. on Saturday. Sundays, and the date of the
observance of New Year's Day, Presidents' Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving, Christmas, and any other
nationally and locally recognized holidays (collectively the
"Holidays"), and any hours other than those set forth herein shall not
be deemed usual and customary business hours, and such service will be
provided at these times only if Tenant shall request same within a
reasonable period of time prior to the need for such services as
designated by Landlord. All HVAC Systems shall be capable of independent
overtime operation on a floor-by-floor basis for which Tenant shall pay
for such services, as Additional Rent, within ten (10) days after
rendition of a bill therefor, at Landlord's actual cost to provide such
service, without charge for administration, overhead or profit ("Actual
Cost"). Whenever machines, equipment, or nonstandard lighting which use
of power in excess of what is to be provided pursuant to Section 4.7
above and which generate abnormal heat which affect the temperature
otherwise maintained by the air conditioning system are used in the
Premises, then Landlord shall have the right to install supplemental air
conditioning equipment in or about the Premises, and the cost thereof,
including the cost of installation, operation, electrical use,
maintenance, and metering, shall be paid by Tenant to Landlord, as
Additional Rent, on demand. Tenant shall pay Landlord as additional Base
Rent, at Landlord's Actual Cost, charges for a condenser water riser
tap-in fee, condenser water (based upon the rated capacity in tons of
the supplementary unit) and the operation and maintenance of any
supplemental air-conditioning system installed by or for the benefit of
Tenant. Landlord shall maintain all HVAC Systems, which shall be
operated in conformance with ASHRAE 6289, or equivalent standards for
indoor air quality. Landlord shall provide Tenant with a capacity of at
least ten (10) tons of condenser water per floor of the Premises (i) for
twenty-four (24) hour cooling capacity with respect to Tenant's computer
and/or telephone room, and (ii) after Building Hours with respect to the
remainder of the Premises. Tenant shall, at its sole cost and expense,
separately meter its use of condenser water pursuant to item (ii),
above. In addition, if reasonably determined by Landlord to be
necessary, Tenant shall, at its sole cost and expense, upon notice from
Landlord, separately meter Tenant's use of condenser water pursuant to
item (i), above. In any event, Tenant shall pay to Landlord, as
Additional Rent, Landlord's Actual Cost of the condenser water utilized
by Tenant.
(b) Electrical energy (not exceeding the present
electrical capacity of the Premises and subject to the terms of Section
4.7, above) upon the following terms and conditions:
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(i) Landlord shall, as an Operating
Cost, be responsible for replacing all light bulbs, fluorescent
lamps, and all ballasts used by the Tenant in the Premises,
except that Tenant shall be responsible for replacing all lamps,
bulbs, and ballasts in non-building standard fixtures;
(ii) All meters and additional panel
boards, transformers, feeders, risers, wiring and other
conductors and equipment which may be required to obtain
additional electrical energy required by Tenant from the public
utility company shall be installed and maintained by Landlord at
Tenant's sole expense; and
(iii) Landlord shall not be liable for
damages or consequential damages or, except as specifically set
forth in Section 1.6, above, in any other way in the event of
loss, damage, failure, interruption, defect or change in the
quantity or character or supply of electricity furnished to the
Premises or of any other utility, including, but not limited to,
air conditioning, heat, water or telephone, and Tenant agrees
that such supply may be interrupted for inspection, repairs,
replacement or in case of emergency; nor shall the foregoing be
construed as a constructive eviction of Tenant, or excuse Tenant
from failing to perform any of its obligations hereunder.
(c) Janitor service five (5) days per week
(excluding Holidays) in a manner consistent with the Building standard
cleaning specifications attached hereto as Exhibit I (the "Building
Standard Cleaning Specifications"), provided that the Building Standard
Cleaning Specifications may be modified by Landlord from time to time,
provided that in no event shall such standards be less than those
provided at the Comparable Buildings; provided, however, if Tenant's
floor covering or other improvements are not building standard, Tenant
shall pay, as Additional Rent, at Landlord's Actual Cost, upon rendition
of a bill therefor, the additional cleaning cost, if any, attributable
thereto. The Premises shall be cleaned by Landlord's cleaning
contractors commencing on the first day (excluding Saturday, Sunday or a
Holiday) of Tenant's initial occupancy of the Premises.
(d) Window washing of all windows in the Premises,
both inside and out, at such times as shall be required in Landlord's
reasonable judgment.
(e) Landlord shall provide reasonable access
control for the Building and in the Parking Facility seven (7) days per
week, twenty-four (24) hours per day, in a manner consistent with the
Comparable Buildings. Landlord shall in no case be liable for personal
injury or property damage for any error with regard to the admission to
or exclusion from the Building or Project of any person.
(2) Services To Office Building: Landlord shall provide in the
Office Building:
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(a) Water for use in normal drinking fountains,
the equipment in Tenant's Premises, Tenant's private toilet facilities,
base building lavatories, Tenant's kitchen, galleys and coffee rooms.
Water shall be supplied from the Building core on each floor from Los
Angeles Department of Water and Power mains drawn through a line and
fixtures installed by Tenant, at Tenant's expense, with Landlord's
consent. If Landlord charges tenants in the Building for water furnished
within tenant premises (except for normal drinking fountains and base
building lavatories), then Tenant shall pay Landlord as Additional Rent,
at rates equal to Landlord's Actual Cost, for all water furnished in the
Premises in excess of water required for normal drinking fountains and
base building lavatories. In order to determine or verify the amount of
any such charges, Landlord may require Tenant to install, to the extent
it is commercially reasonable to require such installation, at Tenant's
expense, a meter to measure the water furnished in the Premises.
Landlord shall provide such water (hot and cold) in reasonable
quantities and consistent with the Comparable Buildings. Tenant shall
not waste or permit the waste of water.
(b) Elevator service in common with other tenants
for ingress to and egress from the Premises. Landlord, however, shall
provide limited passenger elevator service daily (at least one (1)
passenger (per elevator bank) elevator [and more if necessary to
adequately serve the demand for elevator usage] and one (1) freight
elevator shall be operational twenty-four (24) hours per, day seven (7)
days per week) at all times such normal passenger service is not
furnished. Operatorless automatic passenger and freight elevator service
shall be deemed "elevator service" within the meaning of this Section.
(3) Maintenance of Building Structure and Building
Systems: Landlord agrees that at all times it will maintain the structural
portions of the Building, including the foundation, floor/ceiling slabs, roof,
curtain wall, exterior glass and mullions, columns, beams, shafts (including
elevator shafts), stairs, stairwells, elevator cabs, plazas, art work, and
sculptures (collectively, "Building Structure") and the base building
mechanical, electrical, life safety, plumbing, sprinkler systems and HVAC
systems (not including any systems and equipment which is part of the Tenant
Improvements) (the "Building Systems") in a manner reasonably consistent with
customary practices of first class office buildings in the vicinity of the
office building. Notwithstanding anything in this Lease to the contrary, Tenant
shall not be required to make any repair to, modification of, or addition to the
Building Structure and/or the Building Systems except and to the extent required
because of (i) Tenant's use of the Premises for other than normal and customary
business office operations or (ii) the installation of the Tenant Improvements
or Alterations; provided that:
(a) Landlord shall only be required to maintain
such services as are reasonably possible under the circumstances in the
event all or any part of such systems, facilities and equipment are
destroyed, damaged or impaired until completion of the necessary repair
or replacement;
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(b) Subject to the provisions of Section 5.5
hereof, Landlord may temporarily discontinue any services at such times
as may be necessary or advisable due to causes beyond the reasonable
control of Landlord or for purposes of maintenance, repair, replacement,
testing or examination;
(c) Landlord shall use reasonable diligence in
carrying out its obligations under this Section 5.2, but shall not be
liable under any circumstances for any damages (including consequential
damages) to any person or property for any failure to do so;
(d) No reduction or discontinuance of the services
described in this Section 5.2 shall be construed as an eviction of
Tenant or release Tenant from any of its obligations under this Lease,
except as otherwise provided in Section 6.2 hereof;
(e) Tenant shall cooperate fully in Landlord's
efforts to maintain security in the Project and shall follow all
regulations promulgated by Landlord with respect thereto; and
(f) Tenant shall reimburse Landlord, within
fifteen (15) days following Landlord's request, for Landlord's Actual
Cost of any repairs or maintenance performed by Landlord in accordance
with the terms hereof if the need for same arose as a result of the
negligence or criminal or willful misconduct of Tenant or its agents,
employees, contractors, invitees and licensees, unless the cost of such
repairs or maintenance is covered by insurance carried by Landlord, the
cost of which is included as an Operating Expense (in which case Tenant
shall pay to Landlord any applicable deductible); provided, however,
that if the making of such claim against Landlord's insurance carriers
shall cause an increase in Landlord's insurance premiums, Tenant shall
pay Landlord's Actual Cost of such increases in Landlord's insurance
premiums within fifteen (15) days after demand by Landlord.
(4) Tenant's Right to Repair: Notwithstanding any
provision set forth in this Lease to the contrary, if Tenant provides written
notice (or oral notice in the event of an emergency such as damage or
destruction to or of any portion of the Building Structure and/or the Building
Systems) to Landlord of an event or circumstance which requires the action of
Landlord with respect to the repair and/or maintenance of the HVAC, electrical,
plumbing or elevator systems servicing the Premises, which event or circumstance
materially and adversely affects the conduct of Tenant's business from the
Premises, and Landlord fails to commence corrective action within a reasonable
period of time, given the circumstances, after the receipt of such notice, but
in any event not less than twenty (20) days nor later than thirty (30) days
after receipt of such notice, then Tenant may proceed to take the required
action upon delivery of an additional ten (10) business days' notice to Landlord
specifying that Tenant is taking such required action, and if such action was
required under the terms of the Lease to be taken by Landlord and was not
commenced by Landlord within such ten (10) business day period and thereafter
diligently pursued to completion, then Tenant shall be entitled to reimbursement
by Landlord of Tenant's reasonable costs and expenses in taking such action plus
interest thereon at
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the Interest Rate in accordance with the terms of this Section 5.2(4). In the
event Tenant takes such action, Tenant shall use only those contractors used by
Landlord in the Building for such work, unless such contractors are unwilling or
unable to perform, or timely and competitively perform, such work, in which
event Tenant may utilize the services of any other qualified contractor which
normally and regularly performs similar work in Comparable Buildings. Promptly
following completion of any work taken by Tenant pursuant to the terms of this
Section 5.2(f) Tenant shall deliver a detailed invoice of the work completed,
the materials used and the costs relating thereto. If Landlord does not deliver
a detailed written objection to Tenant within thirty (30) days after receipt of
such invoice from Tenant, then Tenant shall be entitled to deduct from Rent
payable by Tenant under the Lease, the amount set forth in such invoice. If,
however, Landlord delivers to Tenant, within thirty (30) days after receipt of
Tenant's invoice, a written objection to the payment of such invoice, setting
forth with reasonable particularity Landlord's reasons for its claim that such
action did not have to be taken by Landlord pursuant to the terms of this Lease
or that the charges are excessive (in which case Landlord shall pay the amount
it contends would not have been excessive), then Tenant shall not then be
entitled to such deduction from Rent, but as Tenant's sole remedy, Tenant may
proceed to claim a default by Landlord or, if elected by either Landlord or
Tenant, the matter shall proceed to resolution by litigation. If Tenant prevails
in the litigation pursuant to a non-appealable, final judgment, the amount of
the award which shall include interest at the Interest Rate (from the time of
each expenditure by Tenant until the date Tenant receives such amount by payment
or offset and attorneys' fees and related costs) and may be deducted by Tenant
from the Rent next due and owing under the Lease.
(5) Landlord's Insurance: Landlord shall carry insurance
covering fire, including rental interruption insurance in connection with fire,
in amounts consistent with the Comparable Buildings.
Section 5.3 Alterations by Landlord.
(A) Landlord may, so long as Landlord does not permanently,
materially, and adversely affect Tenant's access to the Premises or to the
parking facility or its quiet enjoyment of the Premises, from time to time:
(1) Make repairs, replacements, changes or additions to
the structure, systems, facilities and equipment in the Premises where necessary
to service the Premises or other parts of the Project;
(2) Make changes in or additions to any part of the
Project not in or forming part of the Premises;
(3) Change or alter the location of any areas of the
Project (including, but not limited to, the parking areas, provided that
Tenant's parking rights and the proximity of the same to elevators is not
materially altered for a substantial period of time) which may, from time to
time, be designated by Landlord for use during normal business hours by Tenant
in
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common with other tenants and persons in the Office Building but under the
exclusive control of Landlord;
(4) Grant easement(s) on, over, under and above the
Premises; and
(5) Reduce the rentable square footage of the Premises in
order to comply with applicable laws so long as Tenant's use of the Premises is
not materially or adversely affected and appropriate adjustments are made to the
Base Rent and the Operating Payment payable by Tenant hereunder.
(B) In connection therewith, Landlord and/or its representatives
may enter the Premises and other areas of the Project with such materials as
Landlord may deem necessary, and may erect scaffolding and all other necessary
structures in or about the Premises or the Project. Tenant hereby agrees that
such alterations shall in no way constitute a constructive eviction of Tenant
nor, except as otherwise expressly provided in Section 1.6 above, entitle Tenant
to any abatement of Base Rent or Additional Rent. Landlord shall have no
responsibility or for any reason be liable to Tenant for any injury to or
interference with Tenant's business arising from the alterations, nor shall
Tenant be entitled to any compensation or damages from Landlord for loss of the
use of the whole or any part of the Premises or of Tenant's personal property or
improvements resulting from the alterations, or for any inconvenience or
annoyance occasioned by such alterations.
Section 5.4 Entry by Landlord.
(A) Landlord and Landlord's agents and representatives shall have
the right to enter the Premises at any time in case of an emergency, and at all
reasonable times to comply with applicable laws or for any purpose permitted
pursuant to the terms of this Lease, including, but not limited to, examining
the Premises; making such repairs or alterations therein as may be necessary or
appropriate in Landlord's judgment for the safety and preservation thereof;
erecting, installing, maintaining, repairing or replacing wires, cables,
conduits, vents, ducts, risers, pipes, HVAC equipment or plumbing equipment
running in, to, or through the Premises; showing the Premises to prospective
purchasers or mortgagees and, during the last fifteen (15) months of the Term
or, when appropriate, during the last fifteen (15) months of an Option Term, if
Tenant has not exercised its right to lease the Premises during the next
applicable Option Term, prospective tenants; and posting notices of
non-responsibility. Tenant may designate certain areas of the Premises as
"Secured Areas" should Tenant require such areas for the purpose of securing
certain valuable property or confidential information. Landlord may not enter
such Secured Areas except in the case of emergency in which case no notice shall
be required, or in the event of a Landlord inspection, in which case Landlord
shall provide Tenant with two (2) days' prior written notice of the specific
date and time of such Landlord inspection. No keys for any door other than those
keys provided by Landlord shall be made. If more than two keys for one lock are
desired by Tenant, Landlord shall provide the same upon payment by Tenant of
Landlord's actual out-of-pocket cost. Upon termination of this Lease or of
Tenant's possession, Tenant shall surrender all keys to the Premises and shall
make known to Landlord the explanation of all combination locks on safes,
cabinets and vaults.
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(B) Tenant shall give Landlord a key for all of the doors for the
Premises, excluding Tenant's vaults, designated Secured Areas, safes and files.
Landlord shall have the right to use any and all means to open the doors to the
Premises in an emergency in order to obtain entry thereto without liability to
Tenant therefor. Any entry to the Premises by Landlord by any of the foregoing
means, or otherwise, shall not be construed or deemed to be a forcible or
unlawful entry into or a detainer of the Premises, or an eviction, partial
eviction or constructive eviction of Tenant from the Premises or any portion
thereof, and shall not relieve Tenant of its obligations hereunder.
Section 5.5 Minimize Interference. In performing its covenants under
this Article 5, Landlord shall use reasonable efforts to minimize interference
with the conduct of Tenant's business in connection with the performance by
Landlord of any work or the provision of any services required or permitted
pursuant to the terms of this Lease, but Landlord shall not be required to use
overtime or premium time labor.
Section 5.6 Landlord's Right to Cure. All agreements and provisions to
be performed by Tenant under any of the terms of this Lease shall be at Tenant's
sole cost and expense and without any abatement of Base Rent or any Additional
Rent. If Tenant shall fail to perform any act or to pay any sum of money (other
than Base Rent) required to be performed or paid by it hereunder, or shall fail
to cure any default and such failure shall continue beyond any applicable notice
and grace period set forth herein, then Landlord may, at its option, and without
waiving or releasing Tenant from any of its obligations hereunder, make such
payment or perform such act on behalf of Tenant. All of Landlord's Actual Costs
incurred by Landlord in taking such action shall be deemed Additional Rent and
shall be paid to Landlord on demand.
Section 5.7 Restrictions on Landlord's Signage. Provided that (i) Tenant
is using the Premises predominantly for the sale and/or administration of
residentially secured loans, and (ii) Tenant is not in default of this Lease
after the expiration of the applicable cure period, Landlord agrees that it will
not during the Term (as it may be extended) name the Building after, nor provide
signage on the exterior of, or outside of, the Building, or in the ground floor
lobby of the Building (other than customary listings on the Building directory),
to a "Competitor," as this term is defined, below. In the event that, at any
time during the Term, the Original Tenant occupies less than 100,000 rentable
square feet of the Premises (the "Signage Restriction Termination Condition"),
the terms of this Section 5.7 shall, subject to the remaining terms of this
Section 5.7, thereafter be void and of no force or effect, and Landlord may, in
its sole discretion, grant signage rights of any type and at any location to a
Competitor of Tenant. In the event that, following the occurrence of the Signage
Restriction Termination Condition, Tenant occupies 100,000 or more rentable
square feet of the Premises, the terms of this Section 5.7 shall again be
applicable, provided that any signage rights granted by Landlord during the
period of time in which Tenant occupied less than 100,000 rentable square feet
of the Premises shall not be a violation of this Section 5.7. Notwithstanding
anything in this Section 5.7 to the contrary, the terms of this Section 5.7
shall permanently terminate and be of no force or effects at such time, if
applicable, that the Original Tenant for the second (2nd) time occupies less
than 100,000 rentable square feet of the Premises. For purposes of this Section
5.7, a "Competitor" shall mean any of the following entities: Advanta,
Cityscape, Conti Financial, IMC Corporation, Long Beach
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Mortgage, Moneystore, Southern Pacific Corporation, and United Companies, but
shall not include (a) any successors or assigns of such entities, (b) any entity
into which any of the foregoing entities is consolidated or merged, or (c) any
entity which otherwise acquires one of the foregoing entities.
ARTICLE 6
EMINENT DOMAIN, CASUALTY, HAZARDOUS MATERIALS
Section 6.1 Eminent Domain.
(A) If, during the Term, all of the Premises shall be taken (or
temporarily taken for a period of one (1) year or more) by a public authority
under any statute or by right of eminent domain, or purchased under threat of
such taking, this Lease shall automatically terminate on the date on which the
condemning authority takes possession of the Premises ("Date of Such Taking").
(B) If, during the Term, a significant portion of the Project is
so taken or purchased, and if, in the reasonable opinion of Landlord,
substantial alteration or reconstruction of the Project is necessary or
desirable as a result thereof, whether or not the Premises are or may be
affected, Landlord shall have the right to terminate this Lease by giving Tenant
at least thirty (30) days written notice of such termination provided that the
leases of all other tenants similarly affected by such taking are also
terminated, and thereupon this Lease shall terminate on the date set forth in
such notice.
(C) Notwithstanding the foregoing, if more than one-third (1/3)
of the number of rentable square feet in the Premises is so taken or purchased,
Tenant shall have the right to terminate this Lease by giving Landlord notice no
later than thirty (30) days after the Date of Such Taking, and thereupon this
Lease shall terminate on the last day of the month following the month in which
notice is given.
(D) Tenant shall immediately surrender to Landlord the Premises
and all interests therein under this Lease on any such date of termination under
this Section 6.1. Landlord may re-enter and take possession of the Premises and
remove Tenant therefrom if necessary, and, in the event of a termination under
this Section 6.1, the Base Rent and any Additional Rent shall abate on the later
of the date of termination or the Date of Such Taking. After such termination,
and on notice from Landlord stating the Base Rent and any Additional Rent then
owing, Tenant shall forthwith pay Landlord such amounts.
(E) If a portion of the Premises is so taken, and no rights of
termination herein conferred are timely exercised, the Term of this Lease shall
expire with respect to the portion so taken on the Date of Such Taking. In such
event, the Base Rent and any Additional Rent with respect to such portion so
taken shall abate on such date or on such later date as Tenant shall deliver
possession thereof, and the Base Rent and any Additional Rent thereafter payable
with respect to the remainder of the Premises shall be adjusted pro rata by
Landlord in order to
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account for the reduction in the number of rentable square feet in the Premises.
Landlord shall restore and redemise the Premises to the extent required to
exclude from the Premises that portion so taken; provided, however, that
Landlord's obligation to restore and redemise the remainder of the Premises
shall be limited to the funds available to Landlord from the condemnation award
or other consideration paid for the affected portion of the Premises. Landlord's
obligation in connection with such restoration shall be limited to the basic
building area and in no event shall Landlord be obligated to replace, repair or
restore any improvements to the Premises or alterations thereof installed
therein by or on behalf of Tenant, nor shall Landlord be obligated to replace,
repair or restore Tenant's leasehold improvements, personal property, furniture,
fixtures, equipment or the like.
(F) Upon any such taking or purchase, Landlord shall be entitled
to receive and retain the entire award or consideration for the affected portion
of the Project, and Tenant shall not have or advance any claim against Landlord
for the value of its property or the unexpired Term of the Lease, or for costs
of removal or relocation, or business interruption expense or any other damages
arising out of such taking or purchase. Nothing herein shall give Landlord any
interest in or preclude Tenant from seeking and recovering for its own account
from the condemning authority any award or compensation attributable to the
taking or purchase of Tenant's improvements, chattels or trade fixtures, or the
removal or relocation of its business and effects, or the interruption of its
business; provided that any such award or compensation shall not reduce the
amount of the award otherwise payable to Landlord. Notwithstanding anything in
this Section 6.1(F) to the contrary, Landlord and Tenant shall each be entitled
to receive fifty percent (50%) of the "bonus value" of the leasehold estate in
connection with this Lease, which bonus value shall be equal to the difference
between the Rent payable under this Lease and the sum established by the
condemning authority as the award for compensation of the leasehold estate. If
any such award made or compensation paid to either party specifically includes
an award or amount for the other, the party first receiving the same shall
promptly account therefor to the other.
(G) If all or any portion of the Premises shall be condemned or
taken for governmental occupancy for a period of less than one year, this Lease
shall continue in full force and effect and Tenant shall continue to pay in full
all Base Rent and any Additional Rent herein reserved, without reduction or
abatement, and Tenant shall be entitled to receive, for itself, so much of any
award or payment made for such use as is equal to the payments that are actually
made by Tenant to Landlord during such temporary taking, and Landlord shall
receive the balance thereof.
(H) Tenant hereby waives California Code of Civil Procedure
Sections 1265.110 through 1265.160 (providing for termination of a lease upon
the taking of property for public use).
Section 6.2 Damage by Fire or Other Casualty.
(A) If the Premises shall be damaged by fire or other casualty,
then, except as otherwise provided in this Section 6.2, the damage to the Tenant
Improvements and Alterations
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shall be repaired by Landlord with reasonable promptness; provided, however,
that Landlord's obligation to restore the Tenant Improvements and the
Alterations (i) shall be limited to the amount of funds available to Landlord
from any casualty insurance policy proceeds actually paid to Landlord for such
repair work, and (ii) is subject to all necessary approvals from all applicable
governmental entities and modifications required by zoning and building codes
and other laws or any other modifications to the common areas deemed desirable
by Landlord. Landlord shall not be liable for any delay (whether or not within
the reasonable control of Landlord) in the completion of the repair and
restoration of the Premises nor shall Landlord shall not be liable for any
inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's
business resulting in any way from such damage or the repair thereof.
(B) If (i) the Office Building or Premises are totally damaged or
rendered wholly untenantable by fire or other casualty, or (ii) Landlord's
architect certifies to Landlord and to Tenant that the Office Building or
Premises cannot be repaired within one (1) year after the date (the "Casualty
Date") the casualty becomes known to Landlord, or (iii) all or any portion of
the proceeds of any insurance policy in excess of $2,000,000.00 are retained by
the lessor under any Superior Lease or the holder of any Mortgage, and Landlord
terminates the leases of all other tenants similarly affected by the damage and
destruction, or (iv) the damage is not fully covered, except for the first
$2,000,000.00, by Landlord's insurance policies and Landlord terminates the
leases of all other tenants similarly affected by the damage and destruction, or
(v) any owner of any other portion of the Project, other than Landlord, does not
intend to repair the damage to such portion of the Project, and this Building,
as a result thereof, cannot be operated on a commercially reasonable basis, or
(vi) Landlord decides not to repair the Office Building, or decides to demolish
the Office Building or not to rebuild it, then Landlord may, within sixty (60)
days after such Casualty Date, give Tenant notice of termination of this Lease,
and thereupon the Term shall expire ten (10) days after such notice is given,
and Tenant shall vacate the Premises and surrender same to Landlord. In the
event this Lease is terminated pursuant to the terms of this Section 6.2,
Landlord shall be entitled to receive and retain all insurance proceeds paid or
payable to Landlord and/or Tenant pursuant to the insurance required to be
carried under this Lease, except for insurance proceeds for Tenant's personal
property, furniture, trade fixtures and equipment, which insurance proceeds
shall be paid or payable to Tenant pursuant to the terms of this Section 6.2 and
except for the Tenant Improvements and Alterations which are subject to Section
6.2(E), below. If Landlord has the right to terminate this Lease because of an
occurrence described in Section 6.2(B)(i) and/or (ii), Tenant may, within ten
(10) days' notice to Landlord provided within sixty (60) days following the
occurrence of the fire or casualty described in Section 6.2(B)(i), terminate
this Lease.
(C) If Landlord does not substantially complete the repair and
restoration of the Premises within one (1) year after the Casualty Date (subject
to extension for the period of any delays resulting from causes beyond the
reasonable control of Landlord), Tenant shall have the right to cancel and
terminate this Lease upon delivery of notice to Landlord delivered not more than
twenty (20) days after the expiration of such one (1) year period, as same may
be extended.
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(D) Tenant hereby waives California Civil Code Sections 1932(2)
and 1933(4) (providing for the termination of a lease upon the destruction of
the thing hired). Tenant waives the benefit of any statute allocating insurance
proceeds or requiring application thereof in specific ways or relieving Tenant
of rental obligations and agrees that Tenant will not be relieved of the
obligations to pay Base Rent or any Additional Rent in case of damage to or
destruction of the Project or the Premises, except as provided by this Lease;
provided however, that if such fire or other casualty shall have damaged the
Premises or Common Areas necessary to Tenant's occupancy, Landlord shall allow
Tenant a proportionate abatement of Base Rent and Additional Rent, during the
time and to the extent the Premises are unfit for occupancy for the purposes
permitted under this Lease, and not occupied by Tenant as a result thereof;
provided, further, if the Premises is damaged such that the remaining portion
thereof is not sufficient to allow Tenant to conduct its business operations
from such remaining portion and Tenant does not conduct its business operations
therefrom, Landlord shall allow Tenant a total abatement of Base Rent and
Additional Rent during the time and to the extent the Premises are unfit for
occupancy for the purposes permitted under this Lease, and not occupied by
Tenant as a result of the subject damage.
(E) Notwithstanding any other provision of this Lease, upon the
occurrence of any damage to the Premises, and if this Lease is not terminated,
then upon notice to Tenant, delivered at Landlord's sole option, Tenant shall
assign to Landlord (or to any party designated by Landlord) all insurance
proceeds payable to Tenant under Tenant's insurance required under Section
4.5(A)(2) of this Lease (except for proceeds for Tenant's personal property,
furniture, equipment, or trade fixtures), and Landlord shall repair any injury
or damage to the Alterations and the Improvements (which shall include the
"Tenant Improvements," as that term is defined in the Tenant Work Letter)
installed in the Premises and shall return such Alterations and Improvements to
their original condition; provided that if the cost of such repair by Landlord
exceeds the amount of insurance proceeds received by Landlord from Tenant's
insurance carrier, as assigned by Tenant, the cost of such repairs shall be paid
by Tenant to Landlord on a progress payment basis in connection with Landlord's
repair of the damage. Conversely, if this Lease is not terminated, upon notice
to Tenant, delivered at Landlord's sole option, Tenant shall retain all
insurance proceeds payable under Tenant's insurance required under Section
4.5(A)(2) of this Lease and Tenant shall repair, at Tenant's sole cost and
expense, any injury or damage to the Alterations and the Improvements, including
the Tenant Improvements, installed in the Premises and shall return such
Improvements and Alterations to their original condition. In either event, in
connection with such repairs and replacements, Tenant shall, prior to the
commencement of construction, submit to Landlord, for Landlord's review and
approval, all plans, specifications and working drawings relating thereto, and
Landlord shall select the contractors to perform such improvement work. Such
submittal of plans and construction of improvements shall be performed in
substantial compliance with the terms of the Tenant Work Letter as though such
construction of improvements were the initial construction of the Tenant
Improvements. In no event shall Landlord be obligated to replace, repair or
restore any of Tenant's personal property, furniture, fixtures, equipment or the
like. Tenant shall repair or replace, at its sole cost and expense, any such
personal property, furniture, trade fixtures and equipment. Notwithstanding
anything in this Section 6.2(E) to the contrary, in the event that this Lease is
terminated upon the
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occurrence of damage to the Premises, Tenant shall assign to Landlord the
insurance proceeds payable to Tenant with Tenant's insurance required pursuant
to Section 4.5(A)(2) in an amount not to exceed an amount equal to the product
of (i) the Tenant Improvement Allowance and (ii) a fraction, the numerator of
which is the unexpired full or partial months left in the initial Term as of the
date of damage, and a denominator of 178.
(F) Tenant shall give immediate written notice to Landlord of any
damage caused to the Premises by fire or other casualty.
Section 6.3 Subrogation. Notwithstanding anything to the contrary
contained herein, Landlord and Tenant hereby mutually waive and release their
respective rights of recovery against one another and their officers, agents and
employees for any damage to real or personal property, including resulting loss
of use, interruption of business, and other expenses occurring as a result of
the use or occupancy of the Premises or the Project to the extent of insurance
coverage which would be included in a standard "all-risk" or special form policy
of property insurance. Landlord and Tenant shall cause all policies of insurance
obtained by them pursuant to the terms of this Lease to contain provisions or
endorsements thereto waiving the insurer's rights of subrogation with respect to
claims against the other, and, unless the policies permit waiver of subrogation
without notice to the insurer, each shall notify its insurance companies of the
existence of the waiver and indemnity provisions set forth in this Lease.
Section 6.4 Hazardous Materials.
(A) During the term of this Lease, Tenant shall comply with all
Environmental Laws and Environmental Permits (each as defined in Section 6.4(D)
hereof) applicable to the operation or use of the Premises, shall cause all
other persons occupying or using the Premises to comply with all such
Environmental Laws and Environmental Permits, shall immediately pay all costs
and expenses incurred by reason of such compliance, and shall obtain and renew
all Environmental Permits required for operation or use of the Premises. Tenant
shall not generate, use, treat, store, handle, release or dispose of, or permit
the generation, use, treatment, storage, handling, release or disposal, of
Hazardous Materials (as defined in Section 6.4(D) hereof) on the Premises, the
Project or the Property or transport or permit the transportation of Hazardous
Materials to or from the Premises, the Project or the Property except for
limited quantities used or stored at the Premises and required in connection
with the routine operation and maintenance of the Premises, and then only in
compliance with all applicable Environmental Laws and Environmental Permits.
(B) Tenant will immediately advise Landlord in writing of any of
the following: (1) any pending or threatened Environmental Claim (as defined in
Section 6.4(D) hereof) against Tenant relating to the Premises, the Project or
the Property; (2) any condition or occurrence on the Premises, the Project or
the Property that (a) results in noncompliance by Tenant with any applicable
Environmental Law, or (b) could reasonably be anticipated to form the basis of
an Environmental Claim against Tenant and/or Landlord or the Premises and (3)
the actual or anticipated taking of any removal or remedial action in response
to the actual or alleged presence of any Hazardous Material on the Premises, in
the Project or on the Property. All such
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notices shall describe in reasonable detail the nature of the claim,
investigation, condition, occurrence or removal or remedial action and Tenant's
response thereto. In addition, Tenant will provide Landlord with copies of all
communications regarding the Premises with any government or governmental agency
relating to Environmental Laws, all such communications with any person relating
to Environmental Claims, and such detailed reports of any such Environmental
Claim as may reasonably be requested by Landlord. At any time and from time to
time during the term of this Lease, and at Tenant's sole cost and expense,
Landlord or its agents may perform an environmental inspection of the Premises,
and Tenant hereby grants to Landlord and its agents access to the Premises to
undertake such an inspection.
(C) Tenant agrees to protect, defend, indemnify and hold harmless
the Indemnitees from and against all obligations (including removal and remedial
actions), losses, claims, suits, judgments, liabilities, penalties (including,
by way of illustration and not by way of limitation, civil fines), damages
(including consequential and punitive damages), costs and expenses (including
attorneys' and consultants' fees and expenses) of any kind or nature whatsoever
that may at any time be incurred by, imposed on or asserted against such
Indemnitees directly or indirectly based on, or arising or resulting from (a)
the actual or alleged presence of Hazardous Materials on the Premises, in the
Project or on the Property which is caused or permitted by Tenant and/or (b) any
Environmental Claim relating in any way to Tenant's operation or use of the
Premises, the Project or the Property. The provisions of this Section 6.4(C)
shall survive the expiration or sooner termination of this Lease.
(D) (1) "Hazardous Materials" means (a) petroleum or petroleum
products, natural or synthetic gas, asbestos in any form, urea formaldehyde foam
insulation, and radon gas; (b) any substances defined as or included in the
definition of "hazardous substances," "hazardous wastes," "hazardous materials,"
"extremely hazardous wastes," "restricted hazardous wastes," "toxic substances,"
"toxic pollutants," "contaminants" or "pollutants," or words of similar import,
under any applicable Environmental Law; and (c) any other substance exposure
which is regulated by any governmental authority; (2) "Environmental Law" means
any federal, state or local statute, law, rule, regulation, ordinance, code,
policy or rule of common law now or hereafter in effect and in each case as
amended, and any judicial or administrative interpretation thereof, including
any judicial or administrative order, consent decree or judgment, relating to
the environment, health, safety or Hazardous Materials; (3) "Environmental
Claims" means any and all administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of non-compliance or violation,
investigations, proceedings, consent orders or consent agreements relating in
any way to any Environmental Law or any Environmental Permit, including without
limitation (a) any and all Environmental Claims by governmental or regulatory
authorities for enforcement, cleanup, removal, response, remedial or other
actions or damages pursuant to any applicable Environmental Law and/or (b) any
and all Environmental Claims by any third party seeking damages, contribution,
indemnification, cost recovery, compensation or injunctive relief resulting from
Hazardous Materials or arising from alleged injury or threat of injury to
health, safety or the environment; and (4) "Environmental Permits" means all
permits, approvals, identification numbers, licenses and other authorizations
required under any applicable Environmental Law.
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ARTICLE 7
EVENTS OF DEFAULT, REMEDIES
Section 7.1 Events of Default.
(A) The occurrence of any one or more of the following events
during the Term (each, individually, an "Event of Default" and collectively,
"Events of Default") shall constitute a breach of this Lease by Tenant and
Landlord may exercise the rights set forth in Section 7.2 of this Lease or as
otherwise provided at law or in equity:
(1) Tenant shall fail to pay any Base Rent or any
Additional Rent (or cure any other default which is curable by the payment of
money) within five (5) days after the date Tenant has received a notice from
Landlord notifying Tenant that Tenant failed to make the payment when such
payment first became due and payable; or
(2) Tenant shall fail to perform or comply with any of the
other covenants, agreements, terms or conditions of this Lease to be performed
by Tenant (other than any default described in Section 7.1(A)(1) curable by the
payment of money), and, such default shall continue for a period of fifteen (15)
days after written notice thereof from Landlord to Tenant, or, in the case of a
failure to perform or comply which cannot with due diligence be cured within
fifteen (15) days, Tenant fails to commence such cure promptly within such
fifteen (15) day period and thereafter diligently prosecute such cure to
completion.
(B) Any notice required to be given by Landlord under this Lease
shall, in each case, be in addition to and not in lieu of, any notice required
to be given under California Code of Civil Procedure Sections 1161 through 1162,
or any other applicable unlawful detainer statutes.
Section 7.2 Landlord's Remedies and Rights.
(A) If an Event of Default occurs, Landlord shall have the right
at any time to give a written termination notice to Tenant and, on the date
specified in such notice, Tenant's right to possession shall terminate and this
Lease shall terminate, in which event Tenant shall immediately surrender the
Premises to Landlord, and if Tenant fails to do so, Landlord may, without
prejudice to any other remedy which it may have for possession or arrearages in
rent, enter upon and take possession of the Premises and expel or remove Tenant
and any other person who may be occupying the Premises or any part thereof,
without being liable for prosecution or any claim or damages therefor. Upon such
termination, Landlord shall have the right to recover from Tenant:
(1) the worth at the time of award of all unpaid rent
which had been earned at the time of termination; plus
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(2) the worth at the time of award of the amount by which
all unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
(3) the worth at the time of award of the amount by which
all unpaid rent for the balance of the term of this Lease after the time of
award exceeds the amount of such rental loss that Tenant proves could be
reasonably avoided; plus
(4) All other amounts necessary to compensate Landlord for
all the detriment proximately caused by Tenant's failure to perform all of
Tenant's obligations under this Lease or which, in the ordinary course of
things, would be likely to result therefrom, specifically including but not
limited to, brokerage commissions and advertising expenses incurred, expenses of
remodeling the Premises or any portion thereof for a new tenant, whether for the
same or a different use, and any special concessions made to obtain a new
tenant. The "worth at the time of award" of the amounts referred to in clauses
(1) and (2) above shall be computed by allowing interest at the maximum annual
interest rate allowed by law for business loans (not primarily for personal,
family or household purposes) not exempt from the usury law at the time of
termination, or, if there is no such maximum annual interest rate, at the rate
of eighteen percent (18%) per annum. The "worth at the time of award" of the
amount referred to in clause (3) above shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). For the purpose of determining unpaid rent
under clauses (1), (2) and (3), the rent reserved in this Lease shall be deemed
to be the Base Rent and any Additional Rent, including, without limitation, the
charges payable under Article 3 hereof.
(B) Even though Tenant has breached this Lease, this Lease shall
continue in effect for so long as Landlord does not terminate Tenant's right to
possession, and Landlord shall have the right to enforce all its rights and
remedies under this Lease, including the remedy described in California Civil
Code Section 1951.4 (granting the landlord the right to continue a lease in
effect after a tenant's breach and abandonment and to recover all rent as it
becomes due if the tenant has the right to sublet or assign, subject only to
reasonable limitations). Acts of maintenance or preservation or efforts to relet
the Premises or the appointment of a receiver upon initiative of Landlord to
protect Landlord's interest under this Lease shall not constitute a termination
of Tenant's right to possession unless written notice of termination is given by
Landlord to Tenant.
(C) The remedies provided for in this Lease are in addition to
all other remedies available to Landlord at law or in equity, by statute or
otherwise.
(D) Tenant does not waive and surrender any right and privilege
which it may have under any law to redeem the Premises to be relieved from a
forfeiture of this Lease, (including, without limitation, a waiver of California
Civil Code Section 1179 which allows a court to relieve a tenant from forfeiture
of a lease in the case of hardship) or to have a continuance or reinstatement of
this Lease after being dispossessed or ejected therefrom by
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process of law or under the terms of this Lease or after the termination of this
Lease following the occurrence of an Event of Default.
(E) Landlord and Tenant further acknowledge that, to induce
Tenant to enter into this Lease, and in consideration of Tenant's agreement to
perform all of the terms, covenants and conditions to be performed by Tenant
under this Lease, as and when performance is due during the Term, Landlord has
agreed to waive (i) reimbursement from Tenant of the amount of any tenant
improvement expenses which pursuant to the terms of this Lease, Landlord has
agreed to be liable for in connection with the build-out of the Premises for
Tenant's initial occupancy and/or (ii) payment by Tenant of Base Rent or
portions thereof during the period(s) specified herein. Upon the occurrence of
an Event of Default under this Lease, Landlord may, at its option, by notice to
Tenant, elect, in addition to any other remedies Landlord may have under the
Lease, one or both of the following remedies: (A) that the unexpired portion of
any period of waiver of Base Rent or portions thereof as of such default shall
be moved to the end of the then current Term (provided that during such revised
period of Base Rent waiver, Base Rent shall only be abated in an amount that was
to have been abated during the initial period of waiver) and Tenant shall
immediately be obligated to begin paying Base Rent in full and/or (B) that the
foregoing waiver of payment of Base Rent or portions thereof shall be of no
further force and effect as to any subsequent payments of Base Rent otherwise
due under this Lease, and each of the foregoing waivers shall be deemed revoked
retroactively and Tenant shall immediately pay to Landlord as Additional Rent:
(1) any and all payments of Base Rent which have theretofore been waived and (2)
the unamortized cost of any tenant improvement expenses incurred by Landlord,
which shall be equal to the product of (a) the tenant improvement expenses
incurred by Landlord, and (b) a fraction, the numerator of which shall be the
number of months and/or portions thereof from the date of the occurrence of the
Event of Default to the Expiration Date, not to exceed the number of months in
which Tenant is obligated to pay rent hereunder without any abatement or
concession, and the denominator of which shall be the number of months and/or
portions thereof in the Term less the number of months in the Term in which
Landlord has waived payment of Base Rent or portions thereof. Landlord may, or,
at Tenant's request, shall, after the occurrence of an Event of Default, forward
a statement to Tenant setting forth the unamortized cost of the tenant
improvement expenses incurred by Landlord and of all Base Rent payments which
have theretofore been waived by Landlord and are now payable in accordance with
this Subsection, but the failure to deliver such statement shall not be deemed
to be a waiver of the right to collect such amounts. Notwithstanding the
foregoing, Landlord shall not be entitled to recover the amounts set forth in
this Section 7.2(E) to the extent Tenant proves that such recovery would be
duplicative of amounts that Landlord is otherwise entitled to recover pursuant
to California Civil Code Sections 1951.2 or 1951.4, as applicable.
Section 7.3 Default by Landlord. Notwithstanding anything to the
contrary set forth in this Lease, Landlord shall be in default in the
performance of any obligation required to be performed by Landlord pursuant to
this Lease if Landlord fails to perform such obligation within thirty (30) days
after the receipt of notice from Tenant specifying in detail Landlord's failure
to perform; provided, however, if the nature of Landlord's obligation is such
that more than thirty (30) days are required for its performance, then Landlord
shall not be in default under this Lease if it shall commence such performance
within such thirty (30) day period and thereafter
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diligently pursue the same to completion. Upon any such default by Landlord
under this Lease, Tenant may, except as otherwise specifically provided in this
Lease to the contrary, exercise any of its rights provided at law or in equity.
Section 7.4 Bankruptcy. Landlord and Tenant understand that,
notwithstanding certain provisions to the contrary contained herein, a trustee
or debtor in possession under the Code may have certain rights to assume or
assign this Lease. Landlord and Tenant further understand that, in any event,
Landlord is entitled under the Code to adequate assurances of future performance
of the terms and provisions of this Lease. The parties hereto agree that, with
respect to any such assumption or assignment, the term "adequate assurance"
shall include at least the following:
(1) Any proposed assignee of this Lease must assume and
agree to be personally bound by the terms, covenants and provisions of this
Lease.
(2) The proposed assignee must be a reputable entity and
have a net worth and a credit rating that would be acceptable to Landlord were
such entity to be entering into a direct lease with Landlord for the Premises,
and otherwise have sufficient financial resources to perform all of the
obligations of Tenant under this Lease and Landlord has been furnished with
reasonable proof thereof.
Section 7.5 Landlord Bankruptcy Proceeding. In the event that the
obligations of Landlord under this Lease are not performed during the pendency
of a bankruptcy or insolvency proceeding involving the Landlord as the debtor,
or following the rejection of this Lease in accordance with Section 365 of the
United States Bankruptcy Code and the election of the Tenant to remain in the
possession of the Premises in a bankruptcy or insolvency proceeding involving
the Landlord as the debtor, then notwithstanding any provision of this Lease to
the contrary, Tenant shall have the right to set off against Rents next due and
owing under this Lease (i) any and all damages that it demonstrates to the
Bankruptcy Court were caused by such non-performance of Landlord's obligations
under this Lease by Landlord, debtor-in-possession, or the bankruptcy trustee,
and (ii) any and all damages caused by the non-performance of Landlord's
obligations under this Lease following any rejection of this Lease in accordance
with Section 365 of the United States Bankruptcy Code.
ARTICLE 8
MISCELLANEOUS PROVISIONS
Section 8.1 Administrative Service Charges. Tenant acknowledges that any
failure by it to timely pay any of its obligations hereunder will result in and
cause monetary loss to Landlord beyond the amount unpaid by Tenant, the exact
amount of such costs being extremely difficult and impracticable to fix. Such
costs include, without limitation, processing and accounting charges and late
charges that may be imposed on Landlord by the terms of any encumbrance covering
the Premises. Therefore, in addition to any other rights and remedies provided
Landlord, any and all payments, whether for rentals due or other charges,
adjustments or assessments, which remain unpaid for five (5) days after written
notice from Landlord that same
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was not paid on their respective due dates, will be subject to an administrative
service charge of two percent (2%) of the total overdue amount; provided,
however, that no such notice shall be required if Tenant has previously received
two such late notices in the twelve (12) month period immediately preceding the
applicable delinquency, in which case, the administrative service charge will be
applicable if the payment is not received within five (5) days after its due
date . The parties agree that this charge represents a fair and reasonable
estimate of the costs Landlord will incur by reason of such late payment by
Tenant. Acceptance of any such administrative service charge shall not
constitute a waiver of Tenant's default with respect to the overdue amount, or
prevent Landlord from exercising any of the other rights and remedies available
to Landlord.
Section 8.2 Interest Charges. In addition to the administrative service
charge described in Section 8.1 and all other rights and remedies provided
Landlord, all amounts payable hereunder which remain unpaid for five (5) days
after written notice from Landlord that same was not paid on their respective
due dates shall bear interest from the date that Tenant received notice from
Landlord that such payment was not paid when due, at the Interest Rate.
Section 8.3 Holding Over. If Tenant remains in possession of the
Premises after the expiration or other termination of the Term, then, at
Landlord's option, Tenant shall be deemed to be occupying the Premises as a
month-to-month tenant only, at a monthly rental equal to (i) during the first
sixty (60) days of such holdover, one hundred twenty-five percent (125%) of the
monthly Base Rent applicable during the last rental period of the Term, and (ii)
following the first sixty (60) days of any holdover, one hundred fifty percent
(150%) of the monthly Base Rent applicable during the last rental period of the
Term. Tenant shall also pay all Additional Rent payable under this Lease,
prorated for each month during which Tenant remains in possession. Such
month-to-month tenancy may be terminated by Landlord or Tenant effective as of
the last day of any calendar month by delivery to the other of notice of such
termination prior to the first day of such calendar month. Nothing contained in
this Section 8.3 shall be construed as consent by Landlord, which consent may be
withheld in Landlord's sole discretion, to any holding over by Tenant, and
Landlord expressly reserves the right to require Tenant to surrender possession
of the Premises to Landlord as provided in this Lease upon the expiration or
other termination of this Lease. The provisions of this Section 8.3 shall not be
deemed to limit or constitute a waiver of any other rights or remedies of
Landlord provided herein or at law. Tenant shall protect, defend, indemnify and
hold Landlord harmless from and against any and all claims, losses and
liabilities for damages resulting from failure to surrender possession no later
than ninety (90) days after the Expiration Date or sooner termination of the
Term, including, without limitation, any claims made by any succeeding tenant
and any lost profits to Landlord resulting therefor (collectively "Consequential
Damages"); provided, however, that during the first ninety (90) days following
the Expiration Date, such Consequential Damages shall include only the excess,
if any, of the amount of rental income which would have been payable to Landlord
from the next tenant of the Premises (or portion thereof) in the event Tenant
had timely vacated the Premises (or portion thereof) over the holdover rent
payable by Tenant during such period. Tenant's indemnification obligations
pursuant to this Section 8.3 shall survive the expiration or sooner termination
of this Lease. Notwithstanding any contrary provisions of this Lease or set
forth in applicable law to the contrary, Landlord and Tenant hereby acknowledge
and agree that in the
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event Tenant remains in possession of all or a portion of the Premises following
the expiration or earlier termination of this Lease, Landlord may, at Landlord's
sole option, commence and pursue to completion an unlawful detainer action or
other action to terminate the Lease with respect to any full floor of the
Premises, and Landlord shall not be required to terminate the remainder of the
Lease unless Landlord chooses to do so in its sole discretion.
Section 8.4 Notices. Any and all notices, demands, statements,
designations, approvals or other communications required or which either party
herein may desire to give to the other (each, a "Notice") shall be made in
writing and shall be given by certified or registered mail, postage prepaid,
return receipt requested, or by a nationally recognized overnight courier, such
as Federal Express or Airborne Express, and shall be deemed to be given on the
third (3rd) business day after the date of posting in a United States Post
Office or branch post office or one day after delivery to the overnight courier,
and shall be delivered to Landlord's Notice Address or Tenant's Notice Address,
as appropriate. The parties agree that copies of all Notices to be delivered to
Landlord and Tenant hereunder shall be simultaneously delivered to the specified
addresses for copies set forth in Section 1.1(K) and Section 1.1(X),
respectively, if any. Copies of any Notices commencing or relating to any
action, suit or proceeding against Landlord arising hereunder shall also be sent
to Citicorp Real Estate, Inc., 599 Lexington Avenue, New York, New York 10043,
Attention: General Counsel. Either party may, by notice as aforesaid actually
received, designate a different address or addresses for communications intended
for it. Anything contained herein to the contrary notwithstanding, any bills or
invoices for Base Rent, any Additional Rent or any Landlord's Operating
Statement may be given by hand or by mail (which need not be registered or
certified) and, if so given, shall be deemed given on the date of delivery or
refusal, if by hand, or on the third (3rd) business day following the date of
posting, if mailed. Notices given hereunder by any party may be given by counsel
for such party.
Section 8.5 Authority of Tenant.
(A) Tenant is a corporation. Each individual executing this Lease
on behalf of said corporation represents and warrants that he is duly authorized
to execute and deliver this Lease on behalf of said corporation in accordance
with a duly adopted resolution of the Board of Directors or the By-Laws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms. In addition, Tenant shall, within thirty (30) days after the
execution of this Lease, deliver to Landlord a certified copy of a resolution of
the Board of Directors of said corporation authorizing or ratifying the
execution of this Lease.
(B) Landlord is a limited liability company. Each individual
executing this Lease on behalf of said company represents and warrants that he
or she is duly authorized to execute and deliver this Lease on behalf of said
company, and that this Lease is binding upon said company in accordance with its
terms.
Section 8.6 Financial Statements. Tenant shall, when requested by
Landlord from time to time, furnish a statement of its financial condition that
is generally available to the public pursuant to a federal filing requirement.
In addition, in the event that Tenant is no longer a publicly traded
corporation, Tenant shall, when requested by Landlord from time to time, furnish
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Landlord with financial information reasonably requested by Landlord (including,
but not limited to, third party financial references and internal, verbal
discussions with Tenant's financial personnel but excluding written financial
statements), provided that Landlord shall not disclose such information to any
entity other than Landlord's affiliates, financial and legal consultants,
existing and prospective lenders and partners, and prospective purchasers, or in
connection with a dispute or litigation hereunder.
Section 8.7 Authorities for Action. Landlord may act through its
managing agent for the Project or through any other person who may from time to
time be designated by Landlord in writing. Tenant shall designate in writing one
or more persons to act on its behalf and may from time to time change such
designation by written notice to Landlord. In the absence of any such
designation, the person or persons executing this Lease on behalf of Tenant
shall be deemed to be authorized to act on behalf of Tenant in any matter
provided for herein.
Section 8.8 Brokerage. Tenant represents and warrants that it has dealt
only with the Brokers and/or with Landlord and its direct employees, and no
other broker or agent, in connection with the negotiation or execution of this
Lease. Tenant agrees to indemnify and hold Landlord harmless from and against
any and all damage, loss, cost or expense including, without limitation, all
attorneys' fees and disbursements incurred by reason of any claim of or
liability to any other broker or other person claiming to represent Tenant for
commissions or other compensation or charges with respect to the negotiation,
execution and delivery of this Lease, and such obligations shall survive the
expiration or sooner termination of this Lease. Notwithstanding anything to the
contrary contained in this Lease, Landlord shall pay Cushman Realty Corporation
for its brokerage services pursuant to a written contract prepared independently
of this Lease.
Section 8.9 Definition of Landlord. The term "Landlord" as used in this
Lease shall mean only the owner of the Office Building at the time in question.
In the event of any transfer of title to or lease of the Office Building, the
transferor shall be entirely freed and relieved of all covenants and obligations
of Landlord hereunder (whether express or implied) without further agreement
between the parties or their successors in interest and Tenant shall look solely
to the successor in interest of the transferor as Landlord under this Lease.
This Lease shall not be affected by such transfer or lease, and Tenant agrees to
attorn to the transferee or assignee, such attornment to be effective and
self-operative without the execution of any further instrument by the parties to
this Lease.
Section 8.10 Entire Agreement.
(A) Tenant and Landlord acknowledge and agree that it has not
relied upon any statements, representations, agreements or warranties except
those expressed in this Lease, and that this Lease contains the entire agreement
of the parties. No amendment or modification of this Lease shall be binding or
valid unless expressed in writing and executed and delivered by Landlord and
Tenant in the same manner as the execution of this Lease.
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(B) The submission of this document for examination and review
does not constitute an option, an offer to lease space, or an agreement to lease
space. This document shall have no binding effect on the parties hereto unless
and until executed and delivered by both Landlord and Tenant and will be
effective only upon Landlord's execution and delivery of same.
Section 8.11 Force Majeure. Any obligation of Landlord or Tenant which
is delayed or not performed due to Acts of God, strike, riot, shortages of labor
or materials, war (whether declared or undeclared), governmental laws,
regulations or restrictions, governmental action, or lack thereof, or any other
causes of any kind whatsoever which are beyond such party's reasonable control
(collectively, a "Force Majeure"), shall not constitute a default hereunder and,
notwithstanding anything to the contrary contained in this Lease, if this Lease
specifies a time period for performance of an obligation by Landlord or Tenant,
that time period shall be extended by the period of any delay in such party's
performance caused by such Force Majeure but in no event will lack of financial
resources be considered a Force Majeure event and, further, Tenant's obligation
to pay Rent hereunder shall not be delayed as a result of Force Majeure events
except as otherwise expressly set forth in this Lease.
Section 8.12 Severability. If any term or provision of this Lease or the
application thereof to any person or circumstances shall, to any extent, be
illegal, invalid or unenforceable, the remainder of this Lease, or the
application of such term or provision to persons or circumstances other than
those to which it is held invalid or unenforceable, shall not be affected
thereby, and all other terms and provisions of this Lease shall be valid and
enforced to the fullest extent permitted by law.
Section 8.13 No Setoff. This Lease shall be construed as though the
covenants herein between Landlord and Tenant are independent, and Tenant shall
not be entitled to any setoff, offset, abatement or deduction of rent (except as
specifically set forth in this Lease) or other amounts due Landlord hereunder if
Landlord fails to perform its obligations hereunder; provided, however, the
foregoing shall in no way impair the right of Tenant to commence a separate
action against Landlord for any violation by Landlord of the provisions hereof
or to which Tenant has not waived any claim pursuant to the provisions of this
Lease so long as notice is first given to Landlord and any holder of a Mortgage
and/or lessor under a Superior Lease, and a reasonable opportunity is granted to
Landlord and such holder and/or lessor to correct such violation. In no event
shall Landlord, any holder of a Mortgage and/or lessor under a Superior Lease be
responsible for any consequential damages incurred by Tenant, including, without
limitation, lost profits or interruption of business, as a result of any
default, act, omission, or otherwise by Landlord or the Indemnities.
Section 8.14 Relationship of Parties. Nothing contained in this Lease
shall create any relationship between the parties hereto other than that of
Landlord and Tenant, and it is acknowledged and agreed that Landlord shall not
be deemed to be a partner of Tenant in the conduct of its business, or a joint
venturer or a member of a joint or common enterprise with Tenant.
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Section 8.15 Name or Signage of Project. Upon notice to Tenant, Landlord
shall have the right to designate, or to change, the name or numbers of the
Office Building or Project without liability to Tenant and to install, affix and
maintain any and all signs on the exterior and on the interior of the Project or
Office Building as Landlord may, in Landlord's sole discretion, desire. Tenant
shall not use the name of the Project or Office Building or use pictures or
illustrations of the Project or Office Building in advertising or other
publicity, without the prior written consent of Landlord, which may be withheld
in Landlord's sole discretion.
Section 8.16 Successors Bound. Except as otherwise specifically provided
herein, the terms, covenants and conditions contained in this Lease shall bind
and inure to the benefit of the respective heirs, successors, executors,
administrators and assigns of each of the parties hereto.
Section 8.17 Interpretation.
(A) Whenever in this Lease any words of obligation or duty are
used, such words or expressions shall have the same force and effect as though
made in the form of a covenant.
(B) Words of any gender used in this Lease shall be deemed to
include any other gender, and words in the singular shall be deemed to include
the plural, when the context requires.
(C) All pronouns and any variances thereof shall be deemed to
refer to the neuter, masculine, feminine, singular or plural, when the context
requires.
(D) No remedy or election given pursuant to any provision in this
Lease shall be deemed exclusive unless so indicated, but each shall, wherever
possible, be cumulative with all other remedies at law or in equity as otherwise
specifically provided herein.
(E) If and to the extent that, any of the provisions of any
amendment, modification or rider to this Lease conflict or are otherwise
inconsistent with any of the preceding provisions of this Lease, or of the Rules
and Regulations appended to this Lease, whether or not such inconsistency is
expressly noted in such amendment, modification or rider, the provisions of such
amendment, modification or rider shall prevail, or in case of any inconsistency
with the Rules and Regulations, such Rules and Regulations shall be deemed to be
waived with respect to Tenant to the extent of such inconsistency.
(F) The parties mutually agree that the headings and captions
contained in this Lease are inserted for convenience of reference only, and are
not to be deemed part of or to be used in construing this Lease.
(G) This Lease shall be construed in accordance with the laws of
the state of California. Unless herein waived, Landlord and Tenant acknowledge
that all of the applicable statutes of such state are superimposed on the
rights, duties and obligations of Landlord and Tenant hereunder.
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(H) Except as expressly contained herein, (i) neither Landlord
nor Landlord's agent or attorneys have made representations, warranties or
promises with respect to the Premises, the Office Building or the Project or
this Lease; (ii) Tenant has inspected the Premises and agrees to take same in
its "as-is" condition; and (iii) Landlord shall have no obligation to do any
work in and to the Premises in order to prepare the Premises for occupancy and
use by Tenant. In executing and delivering this Lease, Tenant has not relied on
any representations, including, but not limited to, any representation as to the
amount of any item comprising Additional Rent or the amount of the Additional
Rent in the aggregate, or that Landlord is furnishing the same services to other
tenants at all, on the same level, or on the same basis, or on any warranty or
any statement of Landlord which is not set forth herein or in one or more of the
exhibits attached hereto.
(I) Landlord and Tenant each acknowledge and warrant that each
has been represented by independent counsel and has executed this Lease after
being fully advised by said counsel as to its effect and significance. This
Lease is the result of negotiations between the parties and their respective
attorneys and shall be construed in an even and fair manner, regardless of the
party who drafted this Lease, or any provision thereof.
(J) In all instances where Tenant is required by the terms and
provisions of this Lease to pay any sum of money or to do any act at a
particular indicated time or within any indicated period, it is understood and
agreed that time is of the essence.
(K) Whenever in this Lease a payment is required to be made by
one party to the other, but a specific date for payment is not set forth or a
specific number of days within which payment is to be made is not set forth, or
the words "immediately," "promptly" and/or "on demand," or the equivalent, are
used to specify when such payment is due, then such payment shall be due ten
(10) days after the party which is entitled to such payment sends written notice
to the other party demanding payment.
Section 8.18 Joint and Several Obligation. If this Lease is executed by
more than one tenant, Tenant's obligations hereunder shall be the joint and
several obligations of each tenant executing this Lease.
Section 8.19 Easements. Landlord shall have the right to grant any
Easements on, over, under and above the Premises for such purposes as Landlord
determines, provided that such Easements will not materially interfere with
Tenant's use of the Premises.
Section 8.20 Use and Development of the Project.
8.20.1 Landlord's Use and Operation of the Office Building,
Project, and Common Areas. Landlord reserves the right from time to time without
notice to Tenant (i) to close temporarily any of the Common Areas; (ii) to make
changes to the Common Areas, including, without limitation, changes in the
location, size, shape and number of street entrances, driveways, ramps,
entrances, exits, passages, stairways and other ingress and egress, direction of
traffic, landscaped areas, loading and unloading areas, and walkways; (iii) to
expand the Office
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Building; (iv) to add additional buildings and improvements to the Common Areas;
(v) to designate land outside the Project to be part of the Project, and in
connection with the improvement of such land to add additional buildings and
common areas to the Project; (vi) to use the Common Areas while engaged in
making additional improvements, repairs or alterations to the Project or to any
adjacent land, or any portion thereof; and (vii) to do and perform such other
acts and make such other changes in, to or with respect to the Project, Common
Areas, the Adjacent Building, and Office Building or the expansion thereof as
Landlord may reasonably deem to be appropriate.
8.20.2 Subdivision. Landlord reserves the right to further
subdivide all or a portion of the Project. Tenant agrees to execute and deliver,
upon demand by Landlord and in the form requested by Landlord, any additional
documents needed to conform this Lease to the circumstances resulting from such
subdivision.
8.20.3 The Other Improvements. If portions of the Project or
property adjacent to the Project (collectively, the "Other Improvements") are
owned by an entity other than Landlord, Landlord, at its option, may enter into
an agreement with the owner or owners of any or all of the Other Improvements to
provide (i) for reciprocal rights of access and/or use of the Project and the
Other Improvements, (ii) for the common management, operation, maintenance,
improvement and/or repair of all or any portion of the Project and the Other
Improvements, (iii) for the allocation of a portion of the Direct Expenses to
the Other Improvements and the operating expenses and taxes for the Other
Improvements to the Project, and (iv) for the use or improvement of the Other
Improvements and/or the Project in connection with the improvement,
construction, and/or excavation of the Other Improvements and/or the Project.
Nothing contained herein shall be deemed or construed to limit or otherwise
affect Landlord's right to convey all or any portion of the Project or any other
of Landlord's rights described in this Lease.
8.20.4 Construction of Project and Other Improvements. Tenant
acknowledges that portions of the Project and/or the Other Improvements may be
under construction following Tenant's occupancy of the Premises, and that such
construction may result in levels of noise, dust, obstruction of access, etc.
which are in excess of that present in a fully constructed project. Tenant
hereby waives any and all rent offsets or claims of constructive eviction which
may arise in connection with such construction except as otherwise expressly
provided in Section 1.6 above.
Section 8.21 Limitation of Landlord Liability. In no event shall
Landlord be liable to Tenant for any failure of other tenants in the Office
Building to operate their businesses, or for any loss or damage that may be
occasioned by or through the acts or omissions of other tenants. Notwithstanding
anything to the contrary provided in this Lease, neither Landlord, nor any
general or limited partner in or of Landlord, whether direct or indirect, nor
any direct or indirect partners in such partners, nor any disclosed or
undisclosed officers, shareholders, principals, directors, employees, partners,
servants or agents of Landlord, nor any of the foregoing, nor any investment
adviser or other holder of any equity interest in Landlord, their successors,
assigns, agents, or any mortgagee in possession shall have any personal
liability with respect to any provisions of this Lease and, if Landlord is in
breach or default with respect to its obligations or
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otherwise, Tenant shall look solely to Landlord's interest in the Office
Building for the satisfaction of Tenant's remedies. The limitations of liability
contained in this Section 8.21 shall inure to the benefit of Landlord's and the
Indemnitees' present and future partners, beneficiaries, officers, directors,
trustees, shareholders, agents and employees, and their respective partners,
heirs, successors and assigns.
Section 8.22 Short Form Lease. Tenant shall not record this Lease or a
memorandum hereof without the prior written consent of Landlord, which consent
may be withheld in Landlord's sole discretion. Upon Landlord's request, Tenant
agrees to execute and acknowledge a short form lease in recordable form,
indicating the names and addresses of Landlord and Tenant, a description of the
Premises, the Term, the Commencement and Expiration Dates, and options for
renewal, if any, but omitting rent and other terms of this Lease. Further, upon
Landlord's request, Tenant agrees to execute and acknowledge a termination of
lease in recordable form to be held by Landlord until the Expiration Date or
sooner termination of the Term.
Section 8.23 Assignment of Rents, Leases.
(A) Tenant agrees that Landlord may assign the rents and its
interest in this Lease to the holder of any Mortgage.
(B) Tenant further agrees that, in the event of such an
assignment, Tenant shall give the holder of such Mortgage a copy of any request
for performance by Landlord or any notice of default by Landlord; and, in the
event Landlord fails to cure any such default, Tenant shall give such holder a
reasonable period, commencing on the last day on which Landlord could cure such
default, in which to cure same.
Section 8.24 Intentionally Omitted.
Section 8.25 Rules and Regulations.
(A) The rules and regulations set forth in Exhibit E annexed
hereto (the "Rules and Regulations") have been adopted by Landlord for the
safety and convenience of all tenants and other persons in the Project. Tenant
shall at all times comply with, and shall cause its employees, agents,
contractors, licensees and invitees to comply with, the Rules and Regulations
from time to time in effect and any rules and regulations promulgated by the
operator of any reciprocal easement agreement affecting the Project and shall be
bound by any requirements of any reciprocal easement agreement affecting the
Project applicable to Tenant. Landlord may, from time to time, make reasonable
amendments, deletions or additions to the Rules and Regulations.
(B) Landlord shall use reasonable efforts to secure compliance by
all tenants and other persons with the Rules and Regulations from time to time
in effect, but shall not be liable to Tenant for failure of any person to comply
with such Rules and Regulations. Any failure by Landlord to enforce any of the
Rules and Regulations will not constitute a waiver of same with respect to
Tenant. Landlord reserves the right, in its sole discretion, to waive, either
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temporarily or permanently, application of the Rules and Regulations to any
particular tenant in the Project.
(C) Landlord agrees that the Rules and Regulations of the
Building, attached to the Lease as Exhibit E, shall not be changed or revised in
any unreasonable manner by Landlord. Landlord shall not enforce the Rules and
Regulations in a discriminatory manner. Landlord shall use commercially
reasonable efforts to enforce the Rules and Regulations of the Building in the
event that a violation of the Rules and Regulations by any other tenants or
occupants of the Building materially interferes with Tenant's Permitted Uses.
Section 8.26 Estoppel Certificate. At any time and from time to time
upon written request by Tenant or Landlord, Tenant or Landlord, as appropriate
hereby agrees to deliver within five (5) days after request, a certificate to
Landlord or to any present or proposed (a) mortgagee, (b) lessor under a
Superior Lease, (c) prospective purchaser designated by Landlord, (d)
prospective assignee or sublessee or (e) company with intent to merge with,
consolidate with or acquire Tenant, an estoppel certificate which shall be
substantially in the form of Exhibit F, attached hereto (or such other form as
may be required by any such mortgagee, lessor or purchaser), and shall also
contain any other information reasonably requested by the recipient.
Section 8.27 Nondiscrimination. Tenant covenants by and for himself, his
heirs, executors, administrators and assigns, and all persons claiming under or
through him, and this Lease is made and accepted upon and subject to the
following conditions: That there shall be no discrimination against or
segregation of any person or group of persons on account of sex, marital status,
race, color, religion, creed, national origin, physical handicap, sexual
orientation, medical condition, age or ancestry, in the leasing, subleasing,
transferring, use, occupancy, tenure or enjoyment of the Premises nor shall
Tenant, or any person claiming under or through Tenant, establish or permit any
such practice or practices of discrimination or segregation with reference to
the selection, location, number, use or occupancy, of tenants, lessees,
sublessees, subtenants or vendees in the Premises.
Section 8.28 Attorneys' Fees. In the event of any action or proceeding
brought by Landlord or Tenant against the other under this Lease, the prevailing
party shall be entitled to recover court costs and the fees and disbursements of
its attorneys in such action or proceeding (whether at the administrative, trial
or appellate levels) in such amount as the court or administrative body may
judge reasonable together with expenses of enforcing any judgment.
Section 8.29 Landlord's Failure to Consent. If Tenant shall request
Landlord's consent hereunder and Landlord shall fail or refuse to give such
consent, Tenant hereby waives any right or remedy at law or equity to terminate
this Lease, it being intended that Tenant's sole remedies shall be an action for
specific performance, injunction or damages and that such remedies shall be
available only in those cases where Landlord has expressly agreed in writing not
to unreasonably withhold its consent or where, as a matter of law, Landlord may
not unreasonably withhold its consent.
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Section 8.30 No Waiver. The failure of Landlord or Tenant to exercise
its respective rights in connection with this Lease or any breach or violation
of any term, covenant or condition herein contained shall not be deemed to be a
waiver of such term, covenant or condition or any subsequent breach of the same
or any other term, covenant or condition herein contained. The subsequent
acceptance of any payments hereunder by Landlord or Tenant ("Payee") shall not
be deemed to be a waiver of any preceding breach by the other ("Payor") of any
term, covenant or condition of this Lease other than the failure of Payor to pay
the particular amount so accepted, regardless of Payee's knowledge of such
preceding breach at the time of acceptance of such monies.
Section 8.31 No Merger. The voluntary or other surrender of possession
of the Premises by Tenant, or a mutual cancellation of this Lease, shall not
result in a merger of Landlord's and Tenant's estates, and shall, at the option
of Landlord, either terminate any or all existing subleases or subtenancies, or
operate as an assignment to Landlord of any or all of such subleases or
subtenancies.
Section 8.32 No Light or Air Easement. Any diminution or shutting off of
light or air by any structure which is now or hereafter erected on the Property
or upon property adjacent to the Property shall not affect this Lease or impose
any liability on Landlord.
Section 8.33 JURY TRIAL AND COUNTERCLAIM WAIVER. LANDLORD AND TENANT
HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY
EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR THEIR SUCCESSORS IN RESPECT OF
ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS LEASE, THE RELATIONSHIP OF
LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM
FOR INJURY OR DAMAGE, OR ANY EMERGENCY OR STATUTORY REMEDY. IN THE EVENT
LANDLORD COMMENCES ANY SUMMARY PROCEEDINGS OR ACTION FOR NON-PAYMENT OF BASE
RENT OR ANY ADDITIONAL RENT, TENANT SHALL NOT INTERPOSE ANY COUNTERCLAIM OF ANY
NATURE OR DESCRIPTION (UNLESS SUCH COUNTERCLAIM SHALL BE MANDATORY) IN ANY SUCH
PROCEEDING OR ACTION, BUT SHALL BE RELEGATED TO AN INDEPENDENT ACTION AT LAW.
Section 8.34 Office And Communications Services.
8.34.1 The Provider. Landlord has advised Tenant that certain
office and communications services may be offered to tenants of the Office
Building by a concessionaire under contract to Landlord ("Provider"). Tenant
shall be permitted to contract with Provider for the provision of any or all of
such services on such terms and conditions as Tenant and Provider may agree.
8.34.2 Other Terms. Tenant acknowledges and agrees that: (i)
Landlord has made no warranty or representation to Tenant with respect to the
availability of any such services, or the quality, reliability or suitability
thereof; (ii) the Provider is not acting as the agent
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or representative of Landlord in the provision of such services, and Landlord
shall have no liability or responsibility for any failure or inadequacy of such
services, or any equipment or facilities used in the furnishing thereof, or any
act or omission of Provider, or its agents, employees, representatives, officers
or contractors; (iii) Landlord shall have no responsibility or liability for the
installation, alteration, repair, maintenance, furnishing, operation, adjustment
or removal of any such services, equipment or facilities; and (iv) any contract
or other agreement between Tenant and Provider shall be independent of this
Lease, the obligations of Tenant hereunder, and the rights of Landlord
hereunder, and, without limiting the foregoing, no default or failure of
Provider with respect to any such services, equipment or facilities, or under
any contract or agreement relating thereto, shall have any effect on this Lease
or give to Tenant any offset or defense to the full and timely performance of
its obligations hereunder, or entitle Tenant to any abatement of rent or
additional rent or any other payment required to be made by Tenant hereunder, or
constitute any accrual or constructive eviction of Tenant, or otherwise give
rise to any other claim of any nature against Landlord.
Section 8.35 Right to Lease. Landlord reserves the absolute right to
effect such other tenancies in the Project as Landlord in the exercise of its
sole business judgment shall determine to best promote the interests of the
Office Building or Project. Tenant does not rely on the fact, nor does Landlord
represent, that any specific tenant or type or number of tenants shall, during
the Term, occupy any space in the Office Building or Project.
Section 8.36 Confidentiality. Landlord and Tenant acknowledge that the
content of this Lease and any related documents are confidential information.
Landlord and Tenant shall keep such confidential information strictly
confidential and shall not disclose such confidential information to any person
or entity other than each party's respective financial, legal, and space
planning consultants.
Section 8.37 Storage Space. Upon notice to Landlord at least thirty (30)
days prior to the Commencement Date or thereafter, subject to availability (if
notice is given following the date which is thirty (30) days prior to the
Commencement Date), upon not less than thirty (30) days prior notice to
Landlord, Tenant shall have the right, to lease from Landlord approximately 995
rentable square feet of storage space in the Building (the "Storage Premises").
Tenant shall be required to pay twelve dollars ($12.00) per square foot per
annum for the Storage Premises. Following Tenant's lease of Storage Space,
Tenant shall have the right to permanently terminate its lease of such space
upon not less than thirty (30) days prior written notice to Landlord. Tenant
shall give prompt notice to Landlord in case of fire or accidents in or about
the Storage Premises or of defects therein or in the fixtures or equipment
related thereto. Tenant acknowledges and agrees that Landlord shall have no
obligation to provide any security for the Storage Premises. All Storage
Premises rental amounts shall be due on a monthly basis concurrent with Tenant's
payment of the Base Rent due with respect to the Premises, and shall constitute
rent under the Lease. All Storage Premises leased by Tenant shall be leased by
Tenant in its present existing, "as-is" condition so long as any such Storage
Premises is enclosed by drywall or a fence, has reasonable access thereto and
adequate utilities therein for its use as storage space, and Tenant shall be
fully responsible for repairing any damage to the Storage
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Premises resulting from or relating to Tenant's use thereof. Tenant's insurance
obligations under the Lease shall also pertain to Tenant's use of the Storage
Premises.
Section 8.38 Consent/Duty to Act Reasonably. Except (1) as to references
in this Lease to the terms "sole" or "absolute," or (2) when another standard is
set forth in this Lease, or (3) in connection with matters which (a) could have
an adverse effect on the structural integrity of the Building Structure, (b)
could have an adverse effect on the Building Systems, or (c) could have an
adverse effect on the exterior appearance of the Building, or (4) in connection
with matters covered by the terms of Articles 3 and 7 of this Lease and Sections
4.5, 4.6, 4.8, 6.4 and 8.3 of this Lease, any time the consent of Landlord or
Tenant is required, such consent shall not be unreasonably withheld, conditioned
or delayed. Whenever this Lease grants Landlord or Tenant the right to take
action, exercise discretion, establish rules and regulations or make allocations
or other determinations, Landlord and Tenant shall act reasonably and in good
faith.
IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this
Lease as of the day and year first above written.
TENANT: AAMES FINANCIAL CORPORATION,
a Delaware corporation
By: /s/ BOBBIE BURROUGHS
---------------------------------------
Bobbie Burroughs,
Executive Vice President-Finance
By: /s/ CARY H. THOMPSON
---------------------------------------
Cary H. Thompson,
Chief Operating Officer
LANDLORD: CALIFORNIA PLAZA IIA, LLC, a California
limited liability company
By: Bunker Hill Office Realty, Inc.,
a California corporation
By: /s/ SHARI L. REED
-------------------------------
Shari L. Reed,
Vice President
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EXHIBIT A
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FIRST OFFER SPACE
-----------------
[TO BE PROVIDED]
EXHIBIT A-Page 1
<PAGE> 83
EXHIBIT A-1
-----------
FIRST OFFER SPACE
-----------------
[TO BE PROVIDED]
EXHIBIT A-1-Page 1
<PAGE> 84
EXHIBIT B
---------
PROJECT SITE PLAN
-----------------
[TO BE PROVIDED]
EXHIBIT B-Page 1
<PAGE> 85
EXHIBIT C
TENANT WORK LETTER
This Tenant Work Letter shall set forth the terms and conditions
relating to the construction of the Premises. This Tenant Work Letter is
essentially organized chronologically and addresses the issues of the
construction of the Premises, in sequence, as such issues will arise during the
actual construction of the Premises. All references in this Tenant Work Letter
to Articles or Sections of "this Lease" shall mean the relevant portions of
Articles 1 through 8 of this Lease to which this Tenant Work Letter is attached
as Exhibit C, and all references in this Tenant Work Letter to Sections of "this
Tenant Work Letter" shall mean the relevant portions of Sections 1 through 6 of
this Tenant Work Letter.
SECTION 1
DELIVERY OF THE PREMISES AND BASE BUILDING
Except as otherwise set forth in this Lease, including this Tenant Work
Letter, Landlord shall deliver to Tenant the Premises and "Base Building," as
that term is defined below in this Section 1, which Base Building shall, as of
the date of the delivery of the same be in good condition and working order and
shall comply with applicable building codes and other governmental laws,
ordinances and regulations for unoccupied space (collectively, the "Code"),
which were enacted prior to the date of this Lease and applicable to new
construction whether or not then being enforced and which Base Building, except
as otherwise set forth in this Lease, including this Tenant Work Letter, shall
be accepted by Tenant from Landlord in their presently existing, "as-is"
condition. The "Base Building" shall, in addition to including the Building
Structure and Building Systems, as such terms are defined in Section 5.2(3) of
this Lease, consist of only the following items:
1.1 Smooth concrete floor.
1.2 Unfinished ceilings.
1.3 Drywall (fire-taped) around surfaces of core walls, around surfaces
of columns and underneath window sills, smooth, sanded and ready for paint.
1.4 Primary heating, ventilating and air-conditioning service ("HVAC")
including the main distribution loop, which loop shall not contain leaks or
resistance that materially impede the standard performance of the ducts from
properly functioning when reasonably pressurized in accordance with standard
mechanical pressurization testing.
1.5 Primary electrical system, including switchgear, panels and
breakers, transformers and related equipment necessary to service the floors of
the Building on which the Premises are located and which system shall comply
with the terms of Section 5.2 of this Lease.
EXHIBIT C-Page 1
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1.6 Fire and life-safety systems and all disability access work
(including without limitation any speaker/strobe or other systems as required by
the Code), including the main sprinkler loop with, with sufficient capacity to
service Tenant's secondary distribution.
1.7 Main telephone terminal panel located in the telephone/electrical
room designated by Landlord and available for secondary branching by Tenant of
lines to the Premises. All subpanels and related equipment must be located in
the Premises.
1.8 Intentionally Omitted.
1.9 Building standard restrooms on the floors of the Building on which
the Premises are located, except for wall coverings on three walls in the
restrooms vestibule.
1.10 Building standard elevator lobbies on the floors of the Building on
which the Premises are located, except for wall coverings, finished ceilings,
floor coverings and tenant identification signage.
1.11 Illuminated exit signs, per the Code.
1.12 Doors, frames and hardware assemblies as required by the Code at
all core entries, including, but not limited to, freight and public elevator
lobbies.
1.13 An unfinished, shell condition elevator lobby materially per
Landlord's building standards for elevator lobbies, and in compliance with
applicable law on the thirty-eighth (38th) floor of the Building, which
elevators service the high-rise elevator bank (the "Crossover Improvements").
To the extent there are improvements to the Base Building as of the date
hereof in excess of the foregoing, such improvements will remain as part of the
Base Building work at no cost to Tenant.
Landlord shall provide Tenant with a copy of the set of base building
drawings pertaining to the Premises which Landlord possesses as of the date
hereof (the "Base Building Drawings"), without representation as to accuracy or
completeness. Tenant shall field verify the accuracy of the dimensions and
conditions set forth in the Base Building Drawings.
In the event Landlord delivers the Premises Modification Notice (i)
Landlord shall deliver to Tenant as-built drawings with respect to the
forty-seventh (47th) floor of the Building (the "47th Floor") on or before
August 30, 1996, (ii) within five (5) business days following receipt of such
drawings, Tenant shall notify Landlord as to which, if any, of the "Above
Ceiling Improvements," as that term is defined, below, Tenant desires Landlord
not to demolish or remove (the "Designated Improvements"), and (iii) Landlord
shall, subject to the terms of Section 1.2(A) of the Lease, at Landlord's sole
cost and expense, demolish and/or remove all improvements from the 47th Floor,
except the Designated Improvements, and shall deliver the 47th Floor to Tenant
in the condition set forth above in this Section 1, except to the extent
inconsistent with leaving the Designated Improvements on the 47th Floor,
provided that Tenant
EXHIBIT C-Page 2
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shall accept the Designated Improvements in their then existing, "as is"
condition. For purposes of this Tenant Work Letter, the "Above Ceiling
Improvements" shall mean the ceiling and all tenant improvements located in and
above the ceiling of the 47th Floor.
SECTION 2
TENANT IMPROVEMENTS
2.1 Tenant Improvement Allowance. Tenant shall be entitled to a one-time
tenant improvement allowance (the "Tenant Improvement Allowance") in the amount
of Sixty and No/100 Dollars ($60.00) for each of the 176,834 rentable square
feet of the Premises, or Ten Million Six Hundred Ten Thousand Forty and No/100
Dollars ($10,610,040.00) for the costs relating to the initial design and
construction of Tenant's improvements including consultant fees, moving
expenses, permits, furniture, fixtures and equipment and those other items as
specified below in this Tenant Work Letter (the "Tenant Improvements"). In no
event shall Landlord be obligated to make disbursements pursuant to this Tenant
Work Letter in a total amount which exceeds the Tenant Improvement Allowance,
"Landlord's Drawing Contribution," as that term is defined in Section 3.1 below,
and the "Additional Allowance," as that term is defined in Section 2.2.1.4
below.
2.2 Disbursement of the Tenant Improvement Allowance.
2.2.1 Tenant Improvement Allowance Items. Except as otherwise set
forth in this Tenant Work Letter, the Tenant Improvement Allowance shall be
disbursed by Landlord only for the following items and costs (collectively the
"Tenant Improvement Allowance Items"):
2.2.1.1 Payment of the fees of the "Architect" and the
"Engineers," as those terms are defined in Section 3.1 of this Tenant Work
Letter, and the fees and costs of Tenant's project management consultants;
2.2.1.2 The payment of plan check, permit and license fees
relating to construction of the Tenant Improvements;
2.2.1.3 The cost of construction of the Tenant
Improvements, including, without limitation, testing and inspection costs,
parking charges and contractors' fees and general conditions and insurance costs
with respect thereto;
2.2.1.4 The cost of any changes in the Base Building work
when such changes are required by the Construction Drawings (including if such
changes are due to the fact that such work is prepared on an unoccupied basis),
such cost to include all direct architectural and/or engineering fees and
expenses incurred in connection therewith; provided that the cost of any changes
to the Base Building shall not include costs incurred by Tenant to modify any
changes to the Base Building, which modifications result from a material
inaccuracy in the plans and specifications of the Base Building Drawings (which
inaccuracy was not discernible by visible inspection as of the date of this
Lease), which costs shall be reimbursed to Tenant in addition to, and separate
and apart from, the Tenant Improvement Allowance and Landlord's
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Drawing Contribution. Costs to be paid by Landlord to Tenant pursuant to this
Section 2.2.1.4 and Section 6.9 below are collectively referred to as the
"Additional Allowance" and the items covered thereby are collectively referred
to as the "Additional Items";
2.2.1.5 The cost of any changes to the Construction
Drawings or Tenant Improvements required by Code;
2.2.1.6 Sales and use taxes and Title 24 fees;
2.2.1.7 The "Coordination Fee," as that term is defined in
Section 4.2.2.2 of this Tenant Work Letter;
2.2.1.8 The cost of furniture, fixtures and equipment for
the Premises;
2.2.1.9 The cost of telephone and data cabling;
2.2.1.10 Moving expenses;
2.2.1.11 The cost of the Monument Sign; and
2.2.1.12 All other costs to be expended by Landlord or
Tenant in connection with the construction of the Tenant Improvements.
Notwithstanding anything in this Tenant Work Letter to the
contrary, in no event shall in excess of Eleven Dollars ($11.00) for each
rentable square foot of the Premises be disbursed from the Tenant Improvement
Allowance for items 2.2.1.8, 2.2.1.9, 2.2.1.10 and 2.2.1.11, above.
2.2.2 Disbursement of Tenant Improvement Allowance. During the
period from the date hereof through construction of the Tenant Improvements,
Landlord shall make monthly disbursements of the Tenant Improvement Allowance
for Tenant Improvement Allowance Items for the benefit of Tenant and shall
authorize the release of monies for the benefit of Tenant as follows.
2.2.2.1 Monthly Disbursements. On or before the first
(1st) day of each calendar month during the period from the date hereof through
construction of the Tenant Improvements (or such other date as Landlord may
designate), Tenant shall deliver to Landlord: (i) a request for payment of the
"Contractor," as that term is defined in Section 4.1 of this Tenant Work Letter
or reimbursement to Tenant if Tenant has already paid the Contractor or other
person or entity entitled to payment, approved by Tenant, using AIA form 701 or
such other form as may be provided by Landlord, showing the schedule, by trade,
of percentage of completion of the Tenant Improvements in the Premises,
detailing the portion of the work completed and the portion not completed, and
demonstrating that the relationship between the cost of the work completed and
the cost of the work to be completed complies with the terms of the
"Construction Budget," as that term is defined in Section 4.2.1 of this Tenant
Work Letter; (ii) invoices from all of "Tenant's Agents," as that term is
defined in Section 4.1.2 of this Lease, for labor and services
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rendered and materials delivered to the Premises; (iii) executed mechanic's lien
releases from all of Tenant's Agents, except as provided below, which shall
comply with the appropriate provisions of California Civil Code Section 3262(d)
so that conditional lien releases are provided with each initial request and
once payment is made an unconditional lien release is provided within thirty
(30) days of each such payment; provided, however, that with respect to fees and
expenses of the Architect, Engineers, or construction or project managers or
other similar consultants, and/or any other pre-construction items for which the
payment scheme set forth in items (i) through (iii), above, is not applicable
(collectively, the "Non-Construction Allowance Items"), Tenant shall only be
required to deliver to Landlord on or before the applicable submittal date,
reasonable evidence of incurring the cost for the applicable Non-Construction
Allowance Items (unless Landlord has received a preliminary notice in connection
with such costs, in which event conditional lien releases must be submitted in
connection with such costs); and (iv) all other information reasonably requested
by Landlord. Tenant's request for payment shall be deemed Tenant's acceptance
and approval of the work furnished and/or the materials supplied as set forth in
Tenant's payment request vis-a-vis Landlord but not vis-a-vis Tenant's Agents.
On or before the date occurring thirty (30) days after Landlord's receipt of the
information described in items (i) through (iv), above, Landlord shall deliver a
check to Tenant made jointly payable to Tenant and Contractor and/or a separate
check to Tenant where Tenant has provided evidence reasonably satisfactory to
Landlord that Tenant has paid such Contractor (or other supplier of services or
goods) accompanied when appropriate by unconditional lien releases, or any other
provider of good and services designated by Tenant to Landlord, in payment of
the lesser of: (A) the amounts so requested by Tenant, as set forth in this
Section 2.2.2.1, above, less a ten percent (10%) retention (the aggregate amount
of such retentions to be known as the "Final Retention"), and (B) the balance of
any remaining available portion of the Tenant Improvement Allowance (not
including the Final Retention). Notwithstanding the foregoing, no retention
shall be held for, and no lien releases shall be required for, fees and expenses
of Architect, Engineers, or project managers or other similar consultants, which
fees and expenses shall be disbursed by Landlord on or before the date of each
calendar month determined by Landlord, during the period from the date hereof
through the construction of the Tenant Improvements. Landlord's payment of such
amounts shall not be deemed Landlord's approval or acceptance of the work
furnished or materials supplied as set forth in Tenant's payment request.
2.2.2.2 Final Retention. Subject to the provisions of this
Tenant Work Letter, a check for the Final Retention payable jointly to Tenant
and Contractor and/or just Tenant where Tenant provided evidence reasonably
satisfactory to Landlord that Tenant has paid such Contractor (or other supplier
of services or goods) accompanied when appropriate by unconditional lien
releases shall be delivered by Landlord to Tenant following the completion of
construction of the Premises, provided that (i) Tenant delivers to Landlord
properly executed mechanics lien releases in compliance with both California
Civil Code Section 3262(d)(2) and either Section 3262(d)(3) or Section
3262(d)(4) and (ii) Architect delivers to Landlord a certificate, in a form
reasonably acceptable to Landlord, certifying that the construction of the
Tenant Improvements in the Premises has been substantially completed and final
lien releases are provided by Tenant; provided, however, if Landlord has
reasonably determined that substantial
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work exists which (a) adversely affects the mechanical, electrical, plumbing,
HVAC, life-safety or other systems of the Building, the curtain wall of the
Building or the structure of the Building or (b) affects the exterior appearance
of the Building, or (c) unreasonably interferes with any other tenant's use of
such other tenant's leased premises in the Building, Landlord may withhold an
amount sufficient to allow the appropriate corrective action to be taken to
remedy the foregoing and shall pay such withheld amount to Tenant when the
corrective action has been taken.
2.2.2.3 Other Terms. Landlord shall only be obligated to
make disbursements from the Tenant Improvement Allowance to the extent costs are
incurred by Tenant for Tenant Improvement Allowance Items or to the extent
otherwise specifically permitted by this Tenant Work Letter. All Tenant
Improvement Allowance Items for which the Tenant Improvement Allowance has been
made available shall be deemed Landlord's property under the terms of Section
2.2(C) of this Lease.
2.3 Standard Tenant Improvement Package. Except with respect to the
Designated Improvements, Tenant and Tenant's Agents shall comply with the terms
of that certain Tenant Improvement Specifications for Two California Plaza dated
September 20, 1991 and revised May 10, 1993, which specifications are partially
set forth on Schedule 1, attached hereto.
2.4 Unused Allowance. In the event that all or any portion of the Tenant
Improvement Allowance remains undisbursed six (6) months following the
Commencement Date, Tenant shall be entitled to a credit against the next Base
Rent due under this Lease in an amount equal to such unused Tenant Improvement
Allowance.
2.5 Failure to Disburse Tenant Improvement Allowance. In the event that
Landlord fails to fulfill its obligation to disburse the Tenant Improvement
Allowance in accordance with the terms of Section 2.2.2 above, following twenty
(20) business days' notice from Tenant and Landlord's failure to cure within
such period, Tenant shall have the right to offset any unpaid portions of the
Tenant Improvement Allowance (together with interest at the Interest Rate from
the date such payment was due until the date of such offset) against Tenant's
obligation for Rent next coming due under this Lease.
SECTION 3
CONSTRUCTION DRAWINGS
3.1 Selection of Architect/Construction Drawings. Tenant shall retain an
architect/space planner (the "Architect") which will be either (i) Landlord's
architect/space planner, or (ii) an architect/space planner approved by
Landlord, which approval shall not be unreasonably withheld by Landlord, to
prepare the Construction Drawings. Landlord and Tenant acknowledge that Tenant
has selected Gensler & Associates as its Architect, which selection is deemed
approved by Landlord. Landlord shall pay to Tenant, or the designee approved by
Tenant, as a cost ("Landlord's Drawing Contribution") not to be deducted from
the Tenant Improvement Allowance, an amount equal to $0.10 per rentable square
foot of the Premises to
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cover the cost of one (1) preliminary space plan for the Premises. Tenant shall
retain Landlord's engineering consultants or other engineers reasonably approved
by Landlord, including, but not limited to, Syska & Hennessy, Ove Arup and
Partners California and Levine/Seegel Associates (the "Engineers") to prepare
all plans and engineering working drawings relating to the structural,
mechanical, electrical, plumbing, HVAC, lifesafety, and sprinkler work in the
Premises, which work is not part of the Base Building work. Notwithstanding the
foregoing, Landlord may, at Tenant's sole cost and expense, have I&N Consulting
Engineers ("I&N") review the foregoing plans and engineering working drawings,
provided that in no event shall Tenant be required to pay such cost to the
extent the same exceeds the amount that I&N would have charged Landlord for a
comparable review for Landlord's own account where Landlord was not recouping
such amount from Tenant or a third party. The plans and drawings to be prepared
by Architect and the Engineers hereunder shall be known collectively as the
"Construction Drawings." All Construction Drawings shall comply with the drawing
format set forth on Schedule 2 and specifications determined by Landlord as set
forth on Schedule 1, attached hereto, or deviations of equal or better quality,
except for such specifications which directly affect performance of the Building
Systems and Building Structure and shall be subject to Landlord's reasonable
approval. Tenant and Architect shall verify (to the extent such verification can
be done by visual inspection without penetrating a wall, ceiling or floor) in
the field, the dimensions and conditions as shown on the relevant portions of
the Base Building Plans, and Tenant and Architect shall be solely responsible
for the same, and Landlord shall have no responsibility in connection therewith
(other than conditions not capable of visual confirmation and except as
otherwise specifically set forth in the Lease and/or in this Tenant Work
Letter). Landlord's review of the Construction Drawings as set forth in this
Section 3, shall be for its sole purpose and shall not imply Landlord's review
of the same, or obligate Landlord to review the same, for quality, design, Code
compliance or other like matters. Accordingly, notwithstanding that any
Construction Drawings are reviewed by Landlord or its space planner, architect,
engineers and consultants, and notwithstanding any advice or assistance which
may be rendered to Tenant by Landlord or Landlord's space planner, architect,
engineers, and consultants, Landlord shall have no liability whatsoever (except
as specifically set forth in the Lease and/or in this Tenant Work Letter) in
connection therewith, except to the extent that Landlord has specifically
requested a modification to the Construction Drawings as a condition to
Landlord's approval of the Construction Drawings, and shall not be responsible
for any omissions or errors contained in the Construction Drawings, and Tenant's
waiver and indemnity set forth in Section 4.6 of this Lease shall specifically
apply to the Construction Drawings. Each time Landlord is granted the right to
review, consent or approve any Construction Drawing (collectively, "consent"),
such consent shall be granted unless a "Design Problem," as that term is
defined, below, exists. "Design Problem" shall exist if the work shown on the
plans and specifications in the Construction Drawings, will (a) have an adverse
affect on the Building Structure, (b) have an adverse affect on the Building
Systems, (c) have an affect on the exterior appearance of the Building, (d) not
be in compliance with applicable Codes, or (e) unreasonably interfere with the
normal and customary business operations of other tenants of the Building.
Tenant may submit to Landlord each Construction Drawing in one or more parts and
at one or more times, but Landlord's requirement of consent shall be governed by
the terms of this Section 3.
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3.2 Final Space Plan. Tenant shall supply Landlord with two (2) copies
signed by Tenant of its final space plan for each floor of the Premises which
may be submitted in one or more stages (the "Final Space Plan"). The Final Space
Plan shall show all corridors, internal offices and partitions, paths of travel
and exiting. Landlord may reasonably request clarification or more specific
drawings for special use items not included in the Final Space Plan. Landlord
shall advise Tenant within five (5) business days after Landlord's receipt of
the Final Space Plan for the entire Premises if the same is approved or if the
same is incomplete in any respect or if a Design Problem exists; provided that
Landlord's failure to timely respond to Tenant within such five (5) business day
period shall be deemed Landlord's approval of the Final Space Plan. If Tenant is
so advised, Tenant shall cause the Final Space Plan to be revised to correct any
deficiencies or other matters Landlord may reasonably require.
3.3 Final Working Drawings. After the approval of the Final Space Plan
by Landlord and Tenant, Tenant shall supply the Engineers with a complete
listing of standard and non-standard equipment and specifications, including,
without limitation, B.T.U. calculations, electrical requirements and special
electrical receptacle requirements for the Premises, to enable the Engineers and
the Architect to complete the "Final Working Drawings," as that term is defined
below, in the manner as set forth below. Following such approval of the Final
Space Plan, Tenant shall promptly cause the Architect and the Engineers to
complete the architectural and engineering drawings for the Premises, and
Architect shall compile a fully coordinated set of architectural, structural,
mechanical, electrical and plumbing working drawings in a form which is complete
to allow subcontractors to bid on the work and to obtain all applicable permits
(collectively, the "Final Working Drawings") and shall submit the same to
Landlord for Landlord's approval. Tenant shall supply Landlord with two (2)
copies signed by Tenant of such Final Working Drawings. Landlord shall advise
Tenant within five (5) business days after Landlord's receipt of the Final
Working Drawings for the Premises if the same is approved or if same is
incomplete in any respect or if a Design Problem exists; provided that
Landlord's failure to timely respond to Tenant within such five (5) business day
period shall be deemed Landlord's approval of the Final Working Drawings. If
Tenant is so advised, Tenant shall revise the Final Working Drawings in
accordance with such review and any disapproval of Landlord in connection
therewith.
3.4 Approved Working Drawings. The Final Working Drawings shall be
approved by Landlord (the "Approved Working Drawings") prior to the commencement
of construction of the Premises by Tenant. After approval by Landlord of the
Final Working Drawings, Tenant may submit the same to the City of Los Angeles
for all applicable building permits. To the extent that portions of the
construction can be commenced pursuant to valid permits, Tenant may commence
construction on that portion of the Tenant Improvements which have been
consented to by Landlord. Tenant hereby agrees that neither Landlord nor
Landlord's consultants shall be responsible for obtaining any building permit or
certificate of occupancy for the Premises and that obtaining the same shall be
Tenant's responsibility; provided, however, that Landlord shall cooperate with
Tenant in executing permit applications and performing other ministerial acts
reasonably necessary to enable Tenant to obtain any such permit or certificate
of occupancy. Except for changes, modifications or alterations in the Approved
Working Drawings which do
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not create a Design Problem (in which case notice shall be given to Landlord but
no consent shall be required from Landlord), no changes, modifications or
alterations in the Approved Working Drawings may be made without the prior
written consent of Landlord, which consent may be withheld in Landlord's sole
discretion and shall be granted or denied within three (3) business days
following Tenant's written request and Landlord's receipt of the Approved
Working Drawings, as materially changed, modified or altered; provided that
Landlord's failure to timely respond to Tenant shall be deemed Landlord's
approval only with respect to the change, modification or alteration set forth
in Tenant's request given to Landlord.
SECTION 4
CONSTRUCTION OF THE TENANT IMPROVEMENTS
4.1 Tenant's Selection of Contractors.
4.1.1 The Contractor. Tenant shall retain a licensed general
contractor (the "Contractor"), approved in writing by Landlord, which approval
shall not be unreasonably withheld or delayed, as contractor for the
construction of the Tenant Improvements. Landlord hereby approves the following
general contractors: Inner Space, Dinwiddie Construction Company, Environmental
Contracting Corporation, Turelk, Inc., Illig Construction Company, and Kajima
Construction Services, Inc. In addition, subject to Landlord's approval of
individuals comprising the succeeding contractors' teams, which approval shall
not be unreasonably withheld, Landlord hereby approves Turner Construction
Company and Swinerton & Walberg Company.
4.1.2 Tenant's Agents. All subcontractors, laborers, materialmen,
and suppliers used by Tenant (such subcontractors, laborers, materialmen, and
suppliers, and the Contractor to be known collectively as "Tenant's Agents")
must be approved in writing by Landlord, which approval shall not be
unreasonably withheld or delayed; provided that, in any event, Tenant must
contract with Landlord's base building subcontractors for any life safety work
in the Premises. Tenant's Agents shall all be union labor in compliance with the
master labor agreements existing between trade unions and the Southern
California Chapter of the Associated General Contractors of America.
4.2 Construction of Tenant Improvements by Tenant's Agents.
4.2.1 Construction Contract; Cost Budget. Within ten (10) days of
the commencement of the construction of the Tenant Improvements, and after
Tenant has accepted all bids or negotiated prices for the Tenant Improvements,
Tenant shall provide Landlord with a detailed breakdown, by trade, of the final
costs to be incurred or which have been incurred in connection with the design
and construction of the Tenant Improvements to be performed by or at the
direction of Tenant or the Contractor (which costs form a basis for the amount
of the construction contract, if any (the "Final Costs")) along with a
construction budget (the "Construction Budget"), the amount of which
Construction Budget shall be equal to (i) the Final Costs plus (ii) the other
costs of design and construction of the Premises as determined by Tenant
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(to the extent not already included in the Final Costs), which costs shall
include, but not be limited to, the cost of the standard improvements items to
be used by Tenant, the costs of the Architect and Engineers fees, and the
"Coordination Fee," as defined in Section 4.2.2.2. If the amount of the
Construction Budget is greater than the amount of the Tenant Improvement
Allowance (excluding the amount of such allowance expended in connection with
the preparation of the Construction Drawings, and the cost of all other Tenant
Improvement Allowance Items incurred prior to the commencement of construction
of the Tenant Improvements) (the "Improvement Excess") then Landlord shall have
the option of requiring Tenant to pay a percentage of each amount disbursed by
Landlord to the Contractor or otherwise disbursed under this Tenant Work Letter,
which percentage shall be equal to the amount of the Improvement Excess divided
by the amount of the Construction Budget, and such payment by Tenant shall be a
condition to Landlord's obligation to pay any amounts of Tenant Improvement
Allowance. In the event that, after the Construction Budget has been delivered
by Landlord to Tenant, the costs relating to the design and construction of the
Tenant Improvements shall change, any additional costs necessary to such design
and construction in excess of the Construction Budget, shall be added to the
Construction Budget for purposes of this Section 4.2.1.
4.2.2 Tenant's Agents.
4.2.2.1 Landlord's General Conditions for Tenant's Agents
and Tenant Improvement Work. Tenant's and Tenant's Agent's for the construction
of the Tenant Improvements shall comply with the following: (i) the Tenant
Improvements shall be constructed in material conformance with the Approved
Working Drawings; (ii) Tenant and Tenant's Agents shall not, in any way,
interfere with, obstruct, or delay, the work of any other work in the Building
but Tenant's construction of the Tenant Improvements in accordance with industry
custom and practice shall not be considered to unreasonably interfere with,
obstruct or delay Landlord's Base Building contractor and/or subcontractor; and
(iii) Tenant shall abide by all reasonable rules made by Landlord's Building
contractor or Landlord's Building manager with respect to the use of freight,
loading dock and service elevators, storage of materials, coordination of work
with the contractors of other tenants, and any other matter, within reason, in
connection with this Tenant Work Letter, including, without limitation, the
construction of the Tenant Improvements as long as such rules and requirements
are consistent with the rules and requirements of other first class office
buildings; provided that such rules and regulations shall not be applied in a
discriminatory manner among the tenants, including Tenant, of the Building.
4.2.2.2 Coordination Fee. Tenant shall pay to Landlord a
logistical coordination fee in an amount equal to the lesser of (i) Seventeen
Thousand Five Hundred and No/100 Dollars ($17,500.00) or (ii) the actual,
reasonable and documented out-of-pocket costs incurred by Landlord in
coordinating the construction, design and engineering functions relative to the
design and construction of the Tenant Improvements (the "Coordination Fee").
4.2.2.3 Indemnity. Tenant's indemnity of Landlord as set
forth in Section 4.6 of this Lease shall also apply with respect to any and all
costs, losses, damages, injuries and liabilities related in any way to any act
or omission of Tenant or Tenant's Agents, or
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anyone directly or indirectly employed by any of them, or in connection with
Tenant's non-payment of any amount arising out of the Tenant Improvements and/or
Tenant's disapproval of all or any portion of any request for payment
(individually or collectively, "Indemnification Claim"). Notwithstanding the
foregoing, Tenant shall not be required to indemnify Landlord pursuant to this
Section 4.2.2.3, to the extent such Indemnification Claim directly results from
the negligence or gross negligence or willful misconduct of Landlord and
Landlord's agents. The waivers of subrogation set forth in the Lease pertaining
to property damage shall be fully applicable to damage to property arising as a
result of work performed pursuant to the terms of this Tenant Work Letter and
Tenant shall be excused from its indemnification obligation to the extent
Landlord's damage is covered by insurance carried by Landlord as part of
Operating Expenses and as to which the waiver of subrogation is applicable.
4.2.2.4 Requirements of Tenant's Agents. Each of Tenant's
Agents shall guarantee to Tenant and for the benefit of Landlord that the
portion of the Tenant Improvements for which it is responsible shall be free
from any defects in workmanship and materials for a period of not less than one
(1) year from the date of substantial completion thereof. Each of such Tenant's
Agents performing actual construction work shall be responsible for the
replacement or repair, without additional charge, of all work done or furnished
in accordance with its contract that shall become defective within one (1) year
after the substantial completion of the work performed by such contractor or
subcontractors. The correction of such work shall include, without additional
charge, all additional expenses and damages incurred in connection with such
removal or replacement of all or any part of the Tenant Improvements, and/or the
Building and/or common areas that may be damaged or disturbed thereby. All such
warranties or guarantees as to materials or workmanship of or with respect to
the Tenant Improvements shall be contained in the Contract or subcontract and
shall be written such that such guarantees or warranties shall inure to the
benefit of both Landlord and Tenant, as their respective interests may appear,
and can be directly enforced by either, provided that Landlord shall only
enforce such guarantee or warranty if Tenant fails to do so in a reasonable time
following notice thereof from Landlord. Tenant covenants to give to Landlord any
assignment or other assurances which may be necessary to effect such right of
direct enforcement.
4.2.2.5 Insurance Requirements.
4.2.2.5.1 General Coverages. All of Tenant's
Agents shall carry worker's compensation insurance covering all of their
respective employees, and shall also carry public liability insurance,
including property damage, all with limits, in form and with companies
as are required to be carried by Tenant as set forth in Section 4.5 of
this Lease, and the policies therefor shall insure Landlord and Tenant,
as their interests may appear, as well as the Contractor and
subcontractors, provided that the limits of liability to be carried by
Tenant's Agents, other than Contractor, shall be in an amount which is
customary for such respective Tenant's Agents employed by tenants
constructing improvements in the Comparable Buildings.
4.2.2.5.2 Special Coverages. Tenant or Contractor
shall carry "Builder's All Risk" insurance in an amount not more than
the amount of the Contract
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covering the construction of the Tenant Improvements, and such other
insurance as Landlord may require, it being understood and agreed that
the Tenant Improvements shall be insured by Tenant pursuant to Section
4.5 of this Lease immediately upon completion thereof. Such insurance
shall be in amounts and shall include such extended coverage
endorsements as may be reasonably required by Landlord, provided that
the same are generally required by landlords of the Comparable Building.
4.2.2.5.3 General Terms. Certificates for all
insurance carried pursuant to this Section 4.2.2.5 shall be delivered to
Landlord before the commencement of construction of the Tenant
Improvements and before the Contractor's equipment is moved onto the
site. All such policies of insurance must contain a provision that the
company writing said policy will give Landlord ten (10) days prior
written notice of any cancellation or lapse of the effective date or any
reduction in the amounts of such insurance. In the event that the Tenant
Improvements are damaged by any cause during the course of the
construction thereof, Tenant shall immediately repair the same at
Tenant's sole cost and expense. Tenant's Agents shall maintain all of
the foregoing insurance coverage in force until the Tenant Improvements
are substantially completed, except for any Products and Completed
Operation Coverage insurance required by Landlord, which is to be
maintained for the term of the policies of insurance following the
completion of the work. All such insurance relating to property, except
Workers' Compensation, maintained by Tenant's Agents shall preclude
subrogation claims by the insurer against anyone insured thereunder.
Such insurance shall provide that it is primary insurance as respects
Landlord (except as to damage to the Building, Building Structure and
Building Systems) and that any other insurance maintained by owner is
excess and noncontributing with the insurance required hereunder. The
requirements for the foregoing insurance shall not derogate from the
provisions for indemnification of Landlord by Tenant under Section
4.2.2.3 of this Tenant Work Letter and Tenant's rights with respect to
the waiver of subrogation.
4.2.3 Governmental Compliance. The Tenant Improvements shall
comply in all respects with the following: (i) the Code and other state,
federal, city or quasi-governmental laws, codes, ordinances and regulations, as
each may apply according to the rulings of the controlling public official,
agent or other person; (ii) applicable standards of the American Insurance
Association (formerly, the National Board of Fire Underwriters) and the National
Electrical Code; and (iii) building material manufacturer's specifications, but
none of the foregoing requirements shall restrict or limit Landlord's obligation
to deliver the Base Building to Tenant in the condition required by this Lease
and this Tenant Work Letter.
4.2.4 Inspection by Landlord. Landlord shall have the right upon
reasonable notice to Tenant to inspect the Tenant Improvements at all reasonable
times; provided, however, that Landlord's failure to inspect the Tenant
Improvements shall in no event constitute a waiver of any of Landlord's rights
hereunder nor shall Landlord's inspection of the Tenant Improvements constitute
Landlord's approval of the same. Should Landlord disapprove any portion of the
Tenant Improvements because of a Design Problem, Landlord shall notify Tenant in
writing of such disapproval and shall specify the items disapproved. Any defects
or deviations in, and/or
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reasonable disapproval (because of the existence of a Design Problem) by
Landlord of, the Tenant Improvements shall be rectified by Tenant, at Tenant's
expense, which expense shall be deducted from the Tenant Improvement Allowance,
and shall be at no additional expense to Landlord; provided, however, that in
the event Landlord determines that a defect or deviation exists or reasonably
disapproves of any matter in connection with any portion of the Tenant
Improvements because a Design Problem exists, Landlord may, following notice to
Tenant and a reasonable period of time for Tenant to cure, take such action as
Landlord deems necessary to correct the Design Problem, at Tenant's expense,
which expense may be deducted from the Tenant Improvement Allowance, and shall
be at no additional expense to Landlord, and without incurring any liability on
Landlord's part, to correct any such defect, deviation and/or matter, including,
without limitation, causing the cessation of performance of the construction of
the Tenant Improvements to correct the Design Problem until such time as the
defect, deviation and/or matter is corrected to Landlord's satisfaction, unless
the Design Problem could reasonably have been identified during Landlord's
review of Tenant's plans, in which event additional time required to correct
such Design Problem shall be a Landlord Caused Delay and any premium costs shall
be the responsibility of Landlord.
4.2.5 Meetings. Commencing upon the execution of this Lease,
Tenant shall hold regular meetings at a reasonable time, with the Architect and
the Contractor regarding the progress of the preparation of Construction
Drawings and the construction of the Tenant Improvements, which meetings shall
be held prior to the commencement of construction at a place reasonably
designated by Tenant, and after the commencement of construction, at the
Building, and Landlord and/or its agents shall receive prior notice of, and
shall have the right to attend, jobsite construction meetings only, which are
held while construction is actually in progress. In addition, minutes may be
taken at all such meetings by the project manager, Architect and/or the
Contractor, and a copy of such minutes shall be promptly delivered to Landlord.
One such meeting each month shall include the review of Contractor's current
request for payment.
4.3 Copy of "As Built" Plans. At the conclusion of construction, (i)
Tenant shall cause the Architect and Contractor (A) to update the Approved
Working Drawings as to the mechanical drawing portion thereof, and to provide
field-grade markups of the remaining portion of the Approved Working Drawings,
in all cases only necessary to reflect all changes made to the Approved Working
Drawings during the course of construction, (B) to certify to the best of their
knowledge that the Approved Working Drawings as so marked are true and correct,
which certification shall survive the expiration or termination of this Lease,
and (C) to deliver to Landlord one (1) set of sepia of such record set or field
grade drawings, as the case may be, within ninety (90) days following issuance
of a certificate of occupancy for the Premises, and (ii) Tenant shall deliver to
Landlord a copy of all warranties, guaranties, and operating manuals and
information relating to the improvements, equipment, and systems in the
Premises.
EXHIBIT C-Page 13
<PAGE> 98
SECTION 5
DELAY OF COMMENCEMENT DATE
5.1 Commencement Date Delays. The Commencement Date shall occur as
provided in Section 1.1(E) of this Lease, provided that the Commencement Date
shall be delayed by the number of days of delay of the "substantial completion
of the Tenant Improvements," as that term is defined below in this Section 5, in
the Premises to the extent caused by a "Commencement Date Delay," provided that
Tenant shall use reasonable efforts to adapt and compensate for any such delays.
As used herein, the term "Commencement Date Delay" shall mean only a "Force
Majeure Delay" or a "Landlord Caused Delay," as those terms are defined below in
this Section 5.1. As used herein, the term "Force Majeure Delay" shall mean only
an actual delay resulting from strikes, fire, earthquake, damage or destruction
to the Building, explosion, flood, hurricane, the elements, acts of God or the
public enemy, war, invasion, insurrection, rebellion, or riots, to the extent
such delay does not result from a failure by Tenant to pay any sum of money when
due; provided, however, that in the event that a fire or an explosion is caused
by the willful misconduct of Tenant, such event(s) shall not be a Force Majeure
Delay for purposes of this Tenant Work Letter unless and to the extent the lost
rental suffered by Landlord is covered by Landlord's insurance. As used in this
Tenant Work Letter, "Landlord Caused Delay" shall mean actual delays to the
extent resulting from the acts or omissions of Landlord (except to the extent
caused by the good faith exercise of Landlord's rights under this Tenant Work
Letter) including, but not limited to, (i) failure of Landlord to timely approve
or disapprove any Construction Drawings; (ii) material interference by Landlord,
its agents or contractors with the completion of the Tenant Improvements which
objectively precludes or delays construction of tenant improvements in the
Building by any person, which interference relates to access by Tenant, its
agents and contractors to the Building or any Building facilities (including
loading docks and freight elevators) or service (including temporary power and
parking areas as provided herein) during normal construction hours, or the use
thereof during normal construction hours; (iii) delays due to the acts or
failures to act of Landlord, its agents or contractors with respect to payment
of the Tenant Improvement Allowance and/or any cessation of work upon the Tenant
Improvements as a result thereof, (iv) the failure to remediate hazardous
materials located in the Building or the Project which are in violation of
current law (other than those brought into the Building or the Project by
Tenant),; (v) the failure of the Base Building to comply with Code as required
by of Section 1 of this Tenant Work Letter; (vi) the failure of Landlord to
deliver the Premises to Tenant in substantially the condition required by the
Lease and this Exhibit C by September 1, 1996, except with respect to the
Crossover Improvements and the 47th Floor; (vii) Landlord's failure to complete
the Crossover Improvements required by this Tenant Work Letter on or before the
Commencement Date (provided that Landlord shall complete the Crossover
Improvements in such a manner so as not to materially interfere with Tenant's
construction of the Tenant Improvements); and (viii) Landlord's failure to
deliver the 47th Floor to Tenant in substantially the condition required by the
Lease and this Exhibit C by November 1, 1996. If the construction of the Tenant
Improvements are delayed because the Crossover Improvements were not completed
by the time Tenant was otherwise ready to commence construction of the Tenant
Improvements, and the
EXHIBIT C-Page 14
<PAGE> 99
construction of the Tenant Improvements would not have otherwise been delayed
had such Crossover Improvements been completed, then to the extent Tenant is
actually delayed in its construction of the Tenant Improvements because the
Crossover Improvements were not complete, if Tenant provides the notice required
by Section 5.2, below, such failure shall constitute a Landlord Caused Delay.
5.2 Determination of Commencement Date Delay. If Tenant contends that a
Commencement Date Delay has occurred, Tenant shall notify Landlord in writing
(the "Delay Notice") of the event which constitutes such Commencement Date
Delay, and the Commencement Date Delay shall be deemed to have occurred
commencing as of the date of Landlord's receipt of the Delay Notice.
5.3 Definition of Substantial Completion of the Tenant Improvements. For
purposes of this Section 5, "substantial completion of the Tenant Improvements"
shall mean completion of construction of the Tenant Improvements in the Premises
pursuant to the "Approved Working Drawings," with the exception of any punch
list items.
SECTION 6
MISCELLANEOUS
6.1 Tenant's Representative. Tenant has designated Scott Choate, Vice
President of PMLA, as its sole representative with respect to the matters set
forth in this Tenant Work Letter, who, until further notice to Landlord, shall
have full authority and responsibility to act on behalf of the Tenant as
required in this Tenant Work Letter.
6.2 Landlord's Representative. Landlord has designated Cathy Stern as
its sole representative with respect to the matters set forth in this Tenant
Work Letter, who, until further notice to Tenant, shall have full authority and
responsibility to act on behalf of the Landlord as required in this Tenant Work
Letter.
6.3 Time of the Essence in This Tenant Work Letter. Unless otherwise
indicated, all references herein to a "number of days" shall mean and refer to
calendar days. If any item requiring approval is timely disapproved by Landlord,
the procedure for preparation of the document and approval the thereof shall be
repeated until the document is approved by Landlord.
6.4 Tenant's Lease Default. Notwithstanding any provision to the
contrary contained in this Lease, if an Event of Default as described in Section
7.1 of Lease or this Tenant Work Letter has occurred at any time on or before
the substantial completion of the Premises, then (i) in addition to all other
rights and remedies granted to Landlord pursuant to this Lease, Landlord shall
have the right to withhold payment of all or any portion of the Tenant
Improvement Allowance and/or Landlord may cause Contractor to cease the
construction of the Premises (in which case, Tenant shall be responsible for any
delay in the substantial completion of the Premises caused by such work
stoppage), and (ii) all other obligations of Landlord under the terms of this
Tenant Work Letter shall be forgiven until such time as such default is cured
EXHIBIT C-Page 15
<PAGE> 100
pursuant to the terms of this Lease (in which case, Tenant shall be responsible
for any delay in the substantial completion of the Premises caused by such
inaction by Landlord).
6.5 Freight Elevator Usage. Tenant shall have the right, subject to
Landlord's reasonable scheduling, to use the freight elevator during Tenant's
construction of the Tenant Improvements and the cost thereof shall be included
in Operating Expenses for the Building. Notwithstanding the foregoing, if Tenant
reserves the freight elevator for excess usage or usage after normal Building
hours (other than as required by Landlord), then Tenant shall pay Landlord for
the use of the freight elevator at the uniform rate established for tenants of
the Building.
6.6 Parking. During and after normal Building hours during the period of
the construction of the Tenant Improvements, Tenant and each of Tenant's Agents
shall be entitled to utilize Parking Passes in accordance with the terms of this
Lease; provided, however, that during such period Tenant shall not be required
to pay the Parking Charge.
6.7 Miscellaneous Charges. During the construction of the Tenant
Improvements, Landlord shall provide and neither Tenant nor Tenant's Agents
shall be charged for, directly or indirectly, HVAC usage during Building hours,
or electricity, water, restrooms or, during Building hours, freight elevator
usage in connection with the design and construction of the Tenant Improvements.
6.8 Bonding. Notwithstanding anything to the contrary set forth in this
Lease, Tenant shall not be required to obtain or provide any completion or
performance bond in connection with the Tenant Improvements.
6.9 Codes. In the event that the Base Building does not comply with Code
as required by the terms of Section 1 of this Tenant Work Letter, and therefore
Tenant incurs increased design or construction costs that it would not have
incurred but for such non-compliance with Code, then such costs shall be
reimbursed by Landlord to Tenant within ten (10) business days after receipt by
Landlord from Tenant of an invoice documenting and evidencing such increased
costs and any delays encountered by Tenant in the construction of the Tenant
Improvements as a result of such non-compliance shall be considered a Landlord
Caused Delay, as such term is defined in Section 5.1 above.
6.10 Post Commencement Date Events. If any event occurs after the
Commencement Date but prior to Tenant's commencement of business operations from
the Premises which would have otherwise constituted a Commencement Date Delay
had it occurred prior to the Commencement Date, then such event shall be deemed
a Commencement Date Delay and Tenant shall receive one (1) day of Base Rent and
Operating Payment abatement for each day of any such Commencement Date Delay
which occurs following Landlord's receipt of the Delay Notice.
6.11 Staging Area. During the period prior to the Commencement Date,
Tenant shall have the right, subject to availability as determined by Landlord
in its sole and absolute discretion, without the obligation for the payment of
any Rent under the Lease, to use such
EXHIBIT C-Page 16
<PAGE> 101
available space in the Building as designated by Landlord in its sole and
absolute discretion, for the purposes of storing and staging its furniture and
equipment only. With respect to this free storage space, Tenant shall be
responsible for providing all insurance and for providing any necessary fencing
or other protective facilities. Tenant shall hold Landlord harmless and shall
indemnify Landlord from and against any and all loss, liability or cost arising
out of or in connection with the use of such storage space by Tenant. Tenant
shall be obligated to remove all of the stored materials and its fencing and
other facilities within ten (10) days after Tenant's receipt of written notice
from Landlord in which event comparable space, to the extent such space is
available as determined by Landlord, in its sole and absolute discretion, shall
be made available to Tenant as a substitute staging area.
EXHIBIT C-Page 17
<PAGE> 102
SCHEDULE 1 TO EXHIBIT C
SPECIFICATIONS
1. INTERIOR PARTITIONS. Ceiling height partition with 25 gauge, 2-1/2"
metal studs, spaced 24" on center. One layer 5/8" thick, type "X" gypsum
board each side. Height of partition extending from floor slab to
underside of ceiling grid at 8'-9" above finish floor. Partition to be
taped smooth to receive paint or wallcovering. Diagonal bracing placed
in alternating directions 4'-0" on center per Code.
2. DEMISING PARTITION. Full height partition from floor slab to underside
of slab above. 25 gauge, 2-1/2" metal studs, 24" on center. One layer,
5/8" thick, type "X" gypsum board each side. Partition taped smooth to
receive paint or wallcovering. Batt insulation (R-11) in cavity. Sound
boot installed in partition between tenants.
3. ACOUSTICAL PARTITION. Full height partition from floor slab to underside
of slab above. 25 gauge, 2-1/2" metal studs, 24" on center. One layer,
5/8" thick, type "X" gypsum board each side. Partition taped smooth to
receive paint or wallcovering. Batt insulation (R-11) in cavity. Sound
boot installed in partition between tenants.
4. 1-HOUR FIRE-RATED CORRIDOR PARTITION. Full height partition from floor
slab to underside of slab above. 25 gauge, 2-1/2" metal studs, 24" on
center. One layer, 5/8" thick, type "X" gypsum board each side.
Partition taped smooth to receive paint or wallcovering. Batt insulation
(R-11) in cavity.
5. ACOUSTICAL INSULATION. 1-1/2" unfaced glass fiber blankets or batts of
minimum 1.5 pcf density, or unfaced mineral wool blankets or batts or
maximum 4 pcf density, such as "Unfaced Building Insulation" or "Sound
Control Batts" by Certain Teed Corp., "Unfaced Building Insulation" by
Manville Corp., "Unfaced Building Insulation" or "Noise Barrier Batts"
by Owens-Corning Fiberglass Corp., or "Unfaced Thermafiber SAFB" or
"FS-15 Blankets" by USG Interiors, Inc.
6. ACOUSTICAL CEILING. 24x24x3/4" Travertone P589 Cirrus Tegular by
Armstrong World Industries for superfine 9/16" T-bar grid by Chicago
Metallic in vinyl latex finish.
7. PERIMETER SHADOW MOULDING. Custom shadow moulding in eggshell finish to
match the ceiling, by Custom Products, Inc.
8. DOOR FRAMES. "800 Series" extended aluminum door frames by Architectural
Components, Inc.
SCHEDULE 1 TO EXHIBIT C-Page 1
<PAGE> 103
9. WOOD DOORS. Maple (Acer-Saccharum) premium grade, quartered, straight
vertical grain, book matched of equal widths, none less than 6". Veneer
panels shall not have cathedral or birds' eye patterns, knots, or dark
spots.
10. HARDWARE SCHEDULE.
a. 20-Minute Fire-Rated Corridor Doors:
Lockset:
Schlage L9453P-03L, 629 Finish/Polished Stainless Steel.
Door Closer:
Norton 7500BF
Door Stop:
Quality W302PT
Hinges:
McKinney #TA 2714 - 4-1/2 x 4-1/2
Threshold:
Custom Stainless Steel by Custom Products Distributors
b. All Other Doors:
Latchset:
Schlage L9010-03L, 629 Finish/Polished Stainless Steel
If lock is required:
Schlage L9050-03L, 629 Finish
Hinges:
McKinney #TA 2714 - 4-1/2 x 4-1/2
Door Stop:
Quality W302PT
11. RUBBER BASE. 1/8" X 4" high topset flat for carpet or cove as
directed, by Burke Industries, Inc.
12. CARPETING. Cushion glued to concrete slabs and carpeting glued to
cushion.
a. Carpeting:
Manufacturer: Prince Street Technologies, Ltd.
Product Name: Classic II
Surface: Ultra dense pencil point finish sold color cut
pile.
Face Yarn: Monsanto Ultron 3-D 4th Generation soil hiding
Nylon with permanent static control.
Color: CL-165 For Elevator Lobby Field and Corridor
(Light Green)
CL-166 For Elevator Lobby Border (Dark Green)
b. Carpet Cushion:
"Tred-Mor #2580-2" by Sponge Cushion, Inc.
SCHEDULE 1 TO EXHIBIT C-Page 2
<PAGE> 104
13. PAINT. Two coats eggshell washable latex paint by Dunn-Edwards, PPG
Industries, Sherwin Williams, Benjamin Moore, or Sinclair Paint Company.
One accent color, one base color.
14. WALLCOVERING.
a: Type: "ClarksVille" woven 100% solution dyed polypropylene
acrylic backed fabric by Design Tex Fabrics, Inc.
b. Pattern: 6310-104
c. Color: Custom beige as selected.
15. HVAC.
a. Interior Zone - single duct variable air volume fan
powered boxes, as manufactured by Titus, with ASI
electrical controls.
b. Exterior Zone - single duct variable air volume boxes with
hot water duct heater, as manufactured by Titus, with ASI
electronic controls.
c. Ceiling Diffusers - slot type air registers and return air
grilles are manufactured by U.S.G., Model CPT-Donn Air
Diffuser 24" x 24" model or equal.
d. Room Sensors - manufactured by ASI Controls, one per zone.
Mounted at 48" A.F.F. next to light switch. Color to be
white.
e. Conference rooms will have their own air terminal unit box
with individual thermostat.
f. Return air openings will be provided at demising partitions.
16. PLUMBING.
a. Sink: Single, 17" x 19" model "Just" SL-17519-B-GR or approved
equal. Faucet shall be as manufactured by Chicago Model No.
50E3.
b. Garbage Disposal: Model "In Sinkerator 77" or approved equal.
c. Water Heater: If a dishwasher is used: 20 gallon electric tank
hot water heater, 3 kw, 277 volt, 1 phase, 60 hertz. Model No.
DEL 20 as manufactured by A.O. Smith. Provide funnel drain with
No. 3811 as manufactured by J.R. Smith. Pipe water heater drain
and pressure relief line to FD as per sketch SKFD-1.
d. Water Heater: If a dishwasher is not used: Instant flow tankless
electric water heater, 8 kw, 277 volt, 1 phase, 60 hertz. Model
No. S-80-LP, low pressure drop, 1 gpm flow, as manufactured by
"Chronomite Laboratories, Inc."
e. Water Filter and Water Pressure Regulator: To be used when there
is a refrigerator with ice maker and/or coffee maker. Water
pressure regulator shall be Watts regulator model 26A 2-way
brass body. For 3-50 PSIG reduced pressure at up to 300 PSIG
initial pressure, 3/8" inlet/outlet. Water filter shall be
Everpure model H-200 fine carbon inline types replaceable
cartridge. 3/8" MPT connections. Furnish filter with one
cartridge installed and one case of 6 re-charge fine carbon
filters.
SCHEDULE 1 TO EXHIBIT C-Page 3
<PAGE> 105
17. ELECTRICAL
a. Lighting Fixtures.
2'x2' Fluorescent Recessed Light Fixture: CSL #12075 or
Lightolier #VPA2T16PR2U4BX or Lithonia
#2PM4-2STD2-16QLS277 MOTRN-JP16, 2x2 16-cell 4" deep
parabolic low iridescent louver fluorescent lighting
fixture with (2) GE BIAX F40BX/SPX30/RS 3000K lamps,
factory installed, with electronic ballasts by Magnatek
#B240127711P, Maximum fixture depth 6" with air return for
use with slot grid ceiling and soft wire cables, 277 volt.
There shall be no extraneous holes in the can and no light
leaks. Electonic ballast shall be designed specifically
for (2) twin tube rapid start lamps F40BX/1RS. Ballast
designed for instant start lamps are not acceptable.
There shall be no extraneous holes in the can and no light leaks.
Electronic ballast shall be designed specifically for (2)
twin tube rapid start lamps - F4OBX/RS. Ballasts designed
for instant start lamps are not acceptable.
b. Recessed Downlight: Lightolier #8055CL/7213HM277, open
reflector fluorescent downlight with (2) PL13,13 watt
lamps, high power factor ballast, 277 volt.
c. Recessed Wallwasher: Lightolier #8042CL/7213HM277, spread lens
fluorescent wallwasher with (2) PL13, 13 watt lamps, high power
factor ballast, 277 volt.
d. Light Exit Sign:
Lithonia Precise Series #F2RP Series, recessed
architectural edge lit Exit Sign in green with (2) F8T5, 8
watt lamps, single or double face, two circuit, 277 volt.
Housing trim: brass or chrome finish.
e. Motion Sensors
1) Motion Sensors for small rooms shall be Novita 01-151, a
wall switch mounted sensor in place of a single gang or
double gang wall switch. Wall switch sensors shall be U.L.
listed. The sensors are rated for 120 volts from 25 to 800
watts and for 277 volts from 60 to 1200 watts. Coverage is
for 300 square feet maximum.
2) Motion sensors for medium size rooms shall be Novitas,
01-072, ceiling mounted, wide range types.
3) Motion sensors for use in large rooms or open office areas
shall be Novitas 01-083 ceiling mounted wide range types.
4) Motion sensors for use in corridors or storage aisleways
shall be Novitas 01-092, two-way pattern ceiling mounted
sensors.
5) Switch packs for ceiling mounted sensors shall be Novitas
13-012. Relay contacts shall have ratings of:
SCHEDULE 1 TO EXHIBIT C-Page 4
<PAGE> 106
10A-120VACTungsten
20A-120VAC Ballast
20A-277VAC Ballast
f. Light Switch Assembly: Leviton #1221-W or equal, 20A
single pole toggle switch, white in color, with smooth
white plastic switch plate. Switches paired in multi gang
box to meet Title 24 requirements.
Mounted at 48" A.F.F.
g. Electrical Wall Outlet (Convenience): Leviton #5362-W or
equal, 20A duplex receptacle, white in color, with smooth
white plastic plate. Mounted vertically. Outlet height at
15" A.F.F. to center line of outlet.
h. Electrical Wall Outlet (Electrical Equipment): Leviton
#5380-W or equal, 20A surge suppressor duplex receptacle,
white in color, with smooth white plastic plate. Mounted
vertically. Outlet height at 15" A.F.F. to center line of
outlet.
i. Telephone Wall Outlet: Single gang box in wall. Mounted
vertically, 3/4" empty conduit up to plenum and stubbed
out. Cable and cover plate by tenant's vendor, to match
receptacles.
j. Data Wall Outlet: Single gang box in wall. Mounted vertically.
3/4" empty conduit up to plenum and stubbed out. Cable and cover
plate by tenant's vendor, to match receptacles.
18. FIRE LIFE SAFETY
a. All devices and wiring shall be furnished and installed by
the building's Life Safety Vendor.
b. ADA 75 candella strobes, wall mounted per code. Separate ceiling
mounted speakers (white).
c. Smoke Detector: Honeywell TC-806A, photoelectric smoke sensor,
direct surface mounting, white.
d. Sprinkler heads shall be as manufactured by Reliable or Central.
e. The sprinkler heads shall be of the automatic closed type with
165(Degree) temperature rating. Heads should be polished chrome
finish recessed with adjustable escutcheon. Reliable Model G
recessed.
SCHEDULE 1 TO EXHIBIT C-Page 5
<PAGE> 107
SCHEDULE 2 TO EXHIBIT C
CONSTRUCTION DRAWINGS
FORMAT AND SPECIFICATIONS
FINAL SPACE PLAN REQUIREMENTS
1. Final Space Plan. The Final Space Plan shall include floor plans (not
less than 1/8" scale) indicating the general location of rooms,
partitions, doors and specialty construction.
CONSTRUCTION DRAWINGS REQUIREMENTS
2. Architectural Floor Plan. The Architectural floor plan shall include
floor plans (not less than 1/8" scale) indicating:
2.1 Room numbers and room descriptions.
2.2 Keyed partition types with complete dimensioned location.
Notations indicating that partition locations must be determined
at the time of construction are not acceptable.
2.3 Keyed door types and hardware sets sufficient to determine all
of the required details of construction and all hardware
components.
2.4 Keyed architectural sections, elevations, and details of
construction for such items as millwork, control joints, hanging
rods, shelving, soffits, and special gyp board assemblies, etc.
2.5 All required materials, finishes, and assembly support
relationships. 2.6 All required dimensional information,
especially note that the excessive use of field verified
dimensions will extend the construction period of custom tenant
improvements which is a schedule extension attributable to the
Tenant's custom requirements.
2.7 All detailed items should be coordinated and cross referenced
with the plan drawings, especially such items as rough blocking
and attachment locations. Cross references requiring the
Architect's presence at the jobsite are unacceptable to the
Landlord since the reliance on this field technique has proven
to be ineffective in expediting construction.
2.8 Location of soffits and special ceiling construction should be
dotted to show relationships to plan elements.
3. Electrical Location Floor Plan. The Electrical location floor plan shall
include floor plans (not less than 1/8" scale) indicating:
3.1 Room numbers and room descriptions.
3.2 Location of all telephone, data, and electrical outlets.
Location of these items should be dimensioned only if final
placement is critical. Unless specifically noted, the final
placement of these items will be approximately to scale and to
the nearest stud location. Dimension all floor mounted telephone
and electrical outlets.
SCHEDULE 2 TO EXHIBIT C-Page 1
<PAGE> 108
4. Architectural Reflected Ceiling Plan. The architectural reflected
ceiling plan shall indicate (in not less than 1/8" scale):
4.1 Room numbers and designations.
4.2 Location of all fixed ceiling elements such as fluorescent
lighting fixtures, custom tenant lighting fixtures, exit signs,
emergency lighting fixtures, emergency communication speakers,
tenant sound and paging speakers, special integrated ceiling
assemblies or details, etc.
4.3 Complete indication of the tile grid pattern in order to
precisely locate all of these ceiling elements. Dimensions
should be indicated only where the relationship to the tile grid
pattern is not maintained or is ambiguous.
4.4 Indicate any special assemblies which either contact the ceiling
or come within 1'6" of the ceiling such as full-height millwork
assemblies, file or library shelving, etc.
4.5 Indicate all drywall ceilings, lightcoves, drapery pockets,
soffits, etc., and keyed to details of work.
4.6 Indicate all doors and door swings.
4.7 Indicate all ceiling heights that are not standard.
5. The Finish Plan. The Final Plan (not less than 1/8" scale) shall
indicate:
5.1 Room numbers and room descriptions.
5.2 Wall finish plan indicating location, color and type of wall
covering and paint.
5.3 Floor finish plan indicating location and color of carpeting,
vinyl flooring and any special flooring materials.
6. Millwork Details.
6.1 The architect shall prepare drawings in sufficient detail for
construction or fabrication of all millwork components.
6.2 If required, a separate 1/8" = 1'0" plan showing location of
millwork shall be prepared.
7. Custom Detail Sheets. The Architect shall prepare drawings in sufficient
detail for construction or fabrication of any non-standard or custom
treatments for leasehold improvements.
8. Furniture Plan (Optional). The furniture plan (not less than 1/8" scale)
shall indicate:
8.1 Room numbers and room descriptions.
8.2 All furniture and equipment should be shown including seating
arrangements.
8.3 Equipment with special electrical and environmental
characteristics must be labeled and cross-referenced to the
equipment schedule on the electrical engineered drawings.
8.4 Any areas with special environmental or structural design
considerations should be shown as a means of highlighting these
requirements.
SCHEDULE 2 TO EXHIBIT C-Page 2
<PAGE> 109
9. Tenant Engineered Drawings.
9.1 The Architect will be responsible for providing structural,
mechanical, and electrical input for special conditions.
Particular reference is made to the voltage and amperage
requirements for special outlets. In addition, dedicated
circuits must be clearly identified and heat load of office
copiers, etc., must also be identified.
9.2 The Architect will be responsible to submit mylar reproducibles
of each of the following drawings to the Engineers:
9.2.1 Electrical Power plan locating all telephone, data and
electrical outlets. Location of these items should be
dimensioned only if placement is critical. Dimension all
floor mounted telephone and electrical outlets. Submit
one mylar reproducible for electrical circuiting.
9.2.2 Reflected ceiling plan. Layout of the building ceiling
grid and location of all light fixtures and light
fixtures. Submit two mylar reproducibles for electrical
circuiting and HVAC layout.
9.2.3 Plumbing plan. A copy of the floor plan indicating all
locations of all items requiring water or waste. Submit
one mylar reproducible for plumbing layout.
9.2.4 Structural loading plan. For tenant spaces with
concentrated loads, a plan indicating location, type
weight and other information required by the structural
engineer will be submitted for review. This information
will be required for file rooms, libraries, or other
heavy equipment or loading conditions.
SCHEDULE 2 TO EXHIBIT C-Page 3
<PAGE> 110
EXHIBIT D
NOTICE OF LEASE TERM DATES
[Letterhead of Tenant]
Date:_________
[INSERT NAME AND ADDRESS OF LANDLORD]
Re: Office Building Lease (the "Lease") dated ________________,
between ________________ ("Landlord") and _____________
("Tenant") Premises:____________________________________________
The undersigned, as Tenant, hereby confirms as of this _____ day of
________, 199_, the following:
1. Tenant has accepted possession of the Premises on _________, 199_ and
is currently occupying same.
2. The Commencement Date and Expiration Date, as each is defined in the
Lease, are as follows:
Commencement Date: ______________________
Expiration Date: ______________________
3. The obligation to commence the payment of rent commenced or will
commence on __________________, 199_.
4. All alterations and improvements required to be performed by Landlord
pursuant to the terms of the Lease to prepare the entire Premises for Tenant's
initial occupancy have been satisfactorily completed, except for the following:
(a) _________________________
(b) _________________________
5. As of the date hereof, Landlord has fulfilled all of its obligations
under the Lease.
6. The Lease is in full force and effect and has not been modified,
altered, or amended, except pursuant to any instruments described above.
7. There are no offsets or credits against Base Rent or Additional Rent,
nor has any Base Rent or Additional Rent been prepaid except as provided
pursuant to the terms of the Lease.
8. Tenant has no notice of any prior assignment, hypothecation, or
pledge of the Lease or any rents due under the Lease.
Very truly yours,
[TENANT]
By:
Title:
EXHIBIT D-Page 1
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EXHIBIT E
RULES AND REGULATIONS
(1) Security. Landlord may from time to time adopt systems and
procedures for the security or safety of the Project, any persons occupying,
using or entering the same, or any equipment, furnishings or contents thereof,
and Tenant shall comply with Landlord's reasonable requirements relating
thereto. Tenant hereby acknowledges that Landlord shall have no obligation to
provide guard service or other security measures for the benefit of the
Premises, the Office Building or the Project. Tenant hereby assumes all
responsibility for the protection of Tenant and its agents, employees,
contractors, invitees and guests, and the property thereof, from acts of third
parties, including keeping doors locked and other means of entry to the Premises
closed, whether or not Landlord, at its option, elects to provide security
protection for the Project or any portion thereof. Tenant further assumes the
risk that any safety and security devices, services and programs which Landlord
elects, in its sole discretion, to provide may not be effective, or may
malfunction or be circumvented by an unauthorized third party, and Tenant shall,
in addition to its other insurance obligations under this Lease, obtain its own
insurance coverage to the extent Tenant desires protection against losses
related to such occurrences.
(2) Locks. Landlord may from time to time install and change locking
mechanisms on entrances to the Project, the Common Areas, and the Premises and
(unless 24-hour security is provided for the Project) shall provide to Tenant a
reasonable number of keys and replacements therefor to meet the bona fide
requirements of Tenant. In these rules "keys" include any device serving the
same purpose. Tenant shall not add to or change existing locking mechanisms on
any door in or to the Premises without Landlord's prior written consent, which
consent may be withheld in Landlord's sole discretion, nor duplicate any keys
provided for access to the Project, the Common Areas, or the Premises. If,
without Landlord's consent, Tenant installs lock(s) incompatible with the
Project master locking system:
(a) Landlord, without abatement of rent, shall be relieved of any
obligation under the Lease to provide any service to the affected areas which
requires access thereto;
(b) Tenant shall indemnify Landlord against any expense as a
result of forced entry thereto which may be required in an emergency; and
(c) Tenant shall at the end of the Term and at Landlord's request
remove such lock(s) at Tenant's expense.
(3) Return of Keys. At the end of the Term, Tenant shall promptly return
to Landlord all keys for the Project and Premises which are in the possession of
Tenant.
(4) Window Coverings. Tenant shall observe Landlord's rules with respect
to maintaining uniform drapes or blinds on all windows in the Premises so that
the Project represents a uniform exterior appearance, and shall not install
deflective film, window shades, screens, drapes, covers or other materials on or
at any window in the Premises without
EXHIBIT E-Page 1
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Landlord's prior written consent, which consent may be withheld in Landlord's
sole discretion. Tenant shall ensure that drapes or blinds are closed on all
windows in the Premises while they are exposed to the direct rays of the sun.
(5) Signs. Unless otherwise expressly agreed to in writing by Landlord:
(a) no signs will be allowed on the exterior of the Project or
the interior or exterior of windows;
(b) no signs except in uniform locations and styles designated
by Landlord will be permitted in the public corridors or on corridor doors or
entrances to Tenant's space; and
(c) the construction and/or installation of all authorized signs
for Tenant will be contracted for by Landlord at the rate fixed by Landlord from
time to time, and Tenant shall pay for such service promptly upon rendition of a
bill therefor.
(6) Repair, Maintenance, Alterations and Improvements. Tenant shall
perform Tenant's repair, maintenance, alterations and improvements in the
Premises only during times agreed to in advance by Landlord and in a manner
which will not interfere with the rights of other tenants in the Project.
(7) Water Fixtures. Tenant shall not use water closets or water fixtures
for any purposes for which they are not intended. Tenant shall pay any cost
incurred as a result of any misuse of water closets or fixtures by Tenant.
(8) Damage to Premises. Except as permitted by Landlord, no tenant shall
mark up, paint signs upon, cut, drill into, drive nails or screws into, or in
any way mar or deface the walls, ceilings, partitions or floors of any premises
or the Office Building. Notwithstanding the foregoing, normal picture hanging is
permitted within the Premises. Any defacement, damage or injury caused by any
tenant, its agents or employees shall be paid for by such tenant.
(9) Prohibition Against Inflammable or Hazardous Materials. The use of
oil, gas, or other inflammable liquids for any purpose is expressly prohibited.
Explosives or any other article deemed hazardous shall not be brought into the
Project.
(10) Antennas and Aerials. Except as otherwise set forth in Section 4.15
of the Lease, no antenna or aerial shall be erected on the roof or exterior
walls of the Project without the prior written consent of Landlord, which
consent may be withheld in Landlord's sole discretion. Notwithstanding that
Landlord consents, Landlord reserves the right to assess a reasonable charge for
such use which shall be paid monthly as Additional Rent. Any antenna or aerial
so installed without prior consent shall be subject to removal without notice at
any time, and Tenant shall bear all costs of removal and any repairs
necessitated by virtue of its attachment to the Project. In addition, Tenant
shall not be granted access to the telephone control rooms unless 24-hours prior
notice is given to Landlord.
EXHIBIT E-Page 2
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(11) Personal Use of Premises. The Premises shall not be used or
permitted to be used for residential lodging or sleeping purposes or for the
storage of personal effects or property not required for business purposes.
(12) Heavy Articles. Tenant shall not place in or move about the
Premises, without Landlord's prior written consent, which consent may be
withheld in Landlord's sole discretion, any safe or other heavy article which in
Landlord's reasonable opinion may damage the Project, and Landlord may designate
the location of any heavy articles in the Premises.
(13) Intentionally Omitted.
(14) Bicycles, Animals. Tenant shall not bring any animals or birds into
the Project, and shall not permit bicycles or other vehicles inside or on the
sidewalks outside the Project except in areas designated from time to time by
Landlord for such purposes.
(15) Deliveries. Tenant shall insure that deliveries of materials and
supplies to the Premises are made through such entrances, elevators and
corridors and at such times as may from time to time be designated by Landlord,
and shall promptly pay or cause to be paid to Landlord the cost of repairing any
damage in or to the Project caused by any person making such deliveries.
(16) Furniture and Equipment. Tenant shall insure that furniture and
equipment being moved into or out of the Premises is moved through such
entrances, elevators and corridors and at such times as may from time to time be
designated by Landlord, and by movers or a moving company approved by Landlord,
and shall promptly pay or cause to be paid to Landlord the cost of repairing any
damage in or to the Project caused thereby. Landlord shall not be obligated to
permit Tenant to use the freight elevators at any time that Tenant is in default
in the payment of Base Rent or any Additional Rent.
(17) Solicitations. Landlord reserves the right to restrict or prohibit
canvassing, soliciting or peddling in the Project.
(18) Food and Beverage. Only persons approved from time to time by
Landlord may prepare, solicit orders for, sell, serve or distribute foods or
beverages in the Project, or use the elevators, corridors or common areas for
any such purpose. Except with Landlord's prior written consent, which consent
may be withheld in Landlord's sole discretion, and in accordance with
arrangements approved by Landlord, Tenant shall not permit the use of equipment
for dispensing food or beverages or for the preparation, solicitation of orders
for sale, serving or distribution of food or beverages at the Premises.
(19) Refuse. Tenant shall place all refuse in proper receptacles
provided by Tenant at its expense in the Premises or in receptacles (if any)
provided by Landlord for the Project, and shall keep the lobbies, corridors,
stairwells, ducts and shafts of the Project free of all refuse.
(20) Obstruction. Tenant shall not obstruct or place anything in or on
the sidewalks or driveways outside the Office Building or in the lobbies,
corridors, stairwells or other common
EXHIBIT E-Page 3
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areas of the Project, or use such locations for any purpose except ingress to
and egress from the Premises without Landlord's prior written consent, which
consent may be withheld in Landlord's sole discretion. Landlord may remove, at
Tenant's expense, any such obstruction or thing (unauthorized by Landlord)
without notice or obligation to Tenant.
(21) Dangerous or Immoral Activities. Tenant shall not make any use of
the Premises which involves any danger of injury to any person, nor shall the
same be used for any immoral purpose.
(22) Proper Conduct. Tenant shall not conduct itself in any manner which
is inconsistent with the character of the Project as a first quality building or
which will impair the comfort and convenience of other tenants in the Project.
(23) Employees, Agents and Invitees. In these Rules and Regulations,
"Tenant" includes the employees, contractors, agents, invitees and licensees of
Tenant and others permitted by Tenant to use or occupy the Premises.
(24) Directory Listings. Landlord shall provide Tenant, at Landlord's
expense, with a single listing of Tenant's name on the directory in the lobby of
the Project. At Tenant's request, Landlord shall provide Tenant with additional
listings on such directory at Tenant's expense; provided that unless there is a
computerized directory, Tenant shall be limited to the lesser of (i) its
proportionate share of the total number of passes for listings on such directory
or (ii) the number of passes then available on such directory.
(25) Extermination. If the Premises shall become infested with vermin,
Tenant, at its expense, shall cause the same to be exterminated as may be
required by contractors approved by Landlord.
(26) Governmental Programs. To the extent required by any governmental
direction, approval, permit or certificate of occupancy issued to or for the
Project, upon the request of Landlord, Tenant at its sole cost and expense,
shall cooperate with Landlord in the implementation of programs of general
public and social benefit applicable to Landlord and the occupants of the
Project.
(27) Landlord reserves the right to close and keep locked all entrance
and exit doors of the Project during such hours as are customary for comparable
projects in the downtown Los Angeles, California area. Tenant, its employees and
agents must be sure that the doors to the Project are securely closed and locked
when leaving the Premises if it is after the normal hours of business for the
Project. Any tenant, its employees, agents or any other persons entering or
leaving the Project at any time when it is so locked, or any time when it is
considered to be after normal business hours for the Project, may be required to
sign the Project register. Access to the Project may be refused unless the
person seeking access has proper identification or has a previously arranged
pass for access to the Project. Landlord will furnish passes to persons for whom
Tenant requests same in writing. Tenant shall be responsible for all persons for
whom Tenant requests passes and shall be liable to Landlord for all acts of such
persons. The Landlord
EXHIBIT E-Page 4
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and its agents shall in no case be liable for damages for any error with regard
to the admission to or exclusion from the Project of any person. In case of
invasion, mob, riot, public excitement, or other commotion, Landlord reserves
the right to prevent access to the Office Building or the Project during the
continuance thereof by any means it deems appropriate for the safety and
protection of life and property.
(28) Tenant must comply with the State of California "No-Smoking" law
set forth in California Labor Code Section 6404.5, and any local "No-Smoking"
ordinance which may be in effect from time to time and which is not superseded
by such State law.
Tenant shall be deemed to have read these Rules and Regulations and to
have agreed to abide by them as a condition of its occupancy of the Premises.
EXHIBIT E-Page 5
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EXHIBIT F
ESTOPPEL CERTIFICATE
TO: ________________________
________________________
________________________
Attn:___________________
________________________________ ("Tenant") hereby certifies as follows:
1. The undersigned is the Tenant under that certain Office Building
Lease dated ______________, 19___ (the "Lease"), executed by
___________________________ ("Landlord") as Landlord and the undersigned as
Tenant, covering a portion of the property located at __________________________
(the "Property").
2. Pursuant to the Lease, Tenant has leased approximately ______ square
feet of space (the "Premises") at the Property and has paid to Landlord a
security deposit of $________. The term of the Lease commenced on __________,
19___ and the expiration date of the Lease is ________________, 19___. Tenant
has paid rent through _________________, 19___. The next rental payment in the
amount of $____________ is due on ________________, 19___. Tenant is required to
pay ____ percent (___%) of all annual operating expenses for the Property in
excess of _____________.
3. Tenant is entitled to ___________ parking spaces at a charge of
$_____________ per month per space.
4. The Lease provides for an option to extend the term of the Lease for
____ years. The rental rate for such extension term is as follows:______________
________________________________________________________________________________
___________________________.as expressly provided in the Lease, and other
documents attached hereto, Tenant does not have any right or option to renew or
extend the term of the Lease, to lease other space at the Property, nor any
preferential right to purchase all or any part of the Premises or the Property.
5. True, correct and complete copies of the Lease and all amendments,
modifications and supplements thereto are attached hereto and the Lease, as so
amended, modified and supplemented, is in full force and effect, and represents
the entire agreement between Tenant and Landlord with respect to the Premises
and the Property. There are no amendments, modifications or supplements to the
Lease, whether oral or written, except as follows (include the date of such
amendment, modification or supplement):_________________________________________
________________________________________________________________________________
_____________________.
EXHIBIT F-Page 1
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6. All space and improvements leased by Tenant have been completed and
furnished in accordance with the provisions of the Lease, and Tenant has
accepted and taken possession of the Premises.
7. To Tenant's knowledge Landlord is not in any respect in default in
the performance of the terms and provisions of the Lease. To Tenant's knowledge
Tenant is not in any respect in default under the Lease and has not assigned,
transferred or hypothecated the Lease or any interest therein or subleased all
or any portion of the Premises except as follows:
________________________________________________
________________________________________________.
8. There are no offsets or credits against rentals payable under the
Lease and no free periods or rental concessions have been granted to Tenant,
except as follows:______________________________________________________________
________________________________________________________________________________
9. Tenant has no actual or constructive knowledge of any processing,
use, storage, disposal, release or treatment of any explosive, corrosive,
hazardous or toxic materials or substances, or materials capable of emitting
toxic fumes, on the Premises or the Property except as follows (if none, state
"none"):________________________________________________________________________
________________________________________________________________________________
___________________________________________________.
This Certificate is given to ____________________________ with the
understanding that ________ will rely hereon in connection with the conveyance
of the Property of which the Premises constitute a part to _______. The
undersigned represents and warrants that the undersigned is duly authorized to
execute this Certificate on behalf of Tenant and that the execution of this
certificate by the undersigned shall be binding upon the Tenant. Following any
such conveyance, Tenant agrees that the Lease shall remain in full force and
effect and shall bind and inure to the benefit of the _________ and its
successor in interest as if no purchase had occurred.
DATED: ______________, 19___ "TENANT"
_____________________________
_____________________________
[ATTACH LEASE AND AMENDMENTS TO THIS CERTIFICATE]
EXHIBIT F-Page 2
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EXHIBIT G
WALL SIGN
EXHIBIT G-Page 3
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EXHIBIT H
MONUMENT SIGN
EXHIBIT H-Page 1
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EXHIBIT I
CLEANING SPECIFICATIONS
TWO CALIFORNIA PLAZA
350 S. GRAND AVENUE
LOS ANGELES, CA 90071
A. TENANT SUITES
1. General
The Contractor is responsible for damage to a tenant space
including repair and/or replacement of any broken items, damaged
furniture such as desks, plants, etc. Missing items that are the
result of negligence or misconduct of the Contractor's associates
will be promptly replaced by the Contractor.
2. Nightly
a. Carpeted Floors: All carpeted floors will be vacuumed
daily using a pile lifter, moving all light furniture such
as chairs and cigarette stands. All furniture will be
replaced to its original position. Vacuum under all desks
and large furniture where possible. Spot-clean, as
required.
b. Uncarpeted Floors: All hard-surfaced floors will be
dust-mopped nightly, using a treated dust mop, moving all
light furniture . All furniture will be replaced to its
original position. Dust-mop under all desks and large
furniture where possible. Spot-clean where necessary to
remove spills and smudges and buff as necessary.
c. Dusting and Cleaning: Wipe all furniture tops, legs, rungs
and sides; wipe telephones. Wipe all horizontal surfaces
within reach, including window ledges, baseboards, ledges,
molding and sills on glass and partitions. No feather
dusters will be allowed. Paper or other personal items
(i.e., pictures, keys, wallets, etc.) left on desk tops
should not be removed. Desk drawers and filing cabinets
should not be opened.
d. Furniture and Accessories: Spot-clean and remove finger
marks, if necessary, from all furniture, file cabinets and
telephones.
e. Doors and Walls: All doors, jambs, walls and window
mullions will be spot-cleaned to remove streaks, smudges,
finger marks, spills and stains, paying particular
attention to walls around switch plates and door jambs and
doors (both sides) around knobs and opening edges.
EXHIBIT I-Page 1
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f. Trash Removal: All trash from wastebaskets, ashtrays and
other debris identified as trash will be removed from the
premises and deposited in the trash compactor, and
wastebasket liners replaced as needed. Release trapped air
after placement of liner in wastebasket so as to ensure
maximum usage. Liners to be provided by Contractor if
requested to do so by Management. Contractor will
participate in building recycling program.
3. Weekly
Carpeted Floors: All carpeted floors will be edged with a small
broom or other edging tool, paying particular attention to
corners, behind doors, and around furniture legs and bases.
Rubber and vinyl baseboards will be washed with mild soap, rinsed
with clean water, and wiped dry. Wooden baseboards will be wiped
with a treated dust cloth.
4. Monthly
a. Uncarpeted Floors: All hard-surfaced floors will be buffed
with an electric rotary buffing machine as necessary, but
no less than once a month. All finish marks (wax) and/or
residual cleaning fluids will be removed from baseboards,
doors and frames.
b. Upholstered Furniture: All upholstered furniture will be
vacuumed with an upholstery attachment to remove crumbs
and dust.
c. High Dusting: All horizontal surfaces and ledges, such as
picture frames, ceiling air diffuser grills, etc. that are
beyond the reach of normal nightly dusting, will be dusted
monthly using a treated dust cloth. No feather dusters
will be allowed.
5. Bi-Monthly (Every 60-62 days)
a. Uncarpeted Floors: All hard-surfaced floors will be
completely stripped, removing all finish. After the floors
have been mopped, rinsed and dried, they will be
refinished and machine polished to a uniformly bright,
clean appearance. All wax spills and splashes will be
removed from baseboards, doors, jambs, molding and walls.
Supervisors are responsible to make sure floors are not
too slippery after this procedure is complete.
b. Wastebaskets: As requested by Management or the tenant,
thoroughly wash wastebaskets inside and out, dry and
return to their original location.
6. Annually
All building standard horizontal blinds will be dusted. Building
standard parabolic light fixtures will be removed, cleaned and
replaced.
EXHIBIT I-Page 2
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B. RESTROOMS
1. General
It is the intention of this specification to keep lavatories
thoroughly clean and sanitary. Odorless disinfectants shall be
used. Remove all wastepaper and refuse, including sanitary
napkins, to a designated area in the building and dispose of
same. All wastepaper and sanitary napkin receptacles are to be
thoroughly cleaned and washed, and new liners installed; liners
to be installed so as to ensure maximum usage of receptacles.
Fill toilet tissue holders, seat cover containers, soap
dispensers, towel dispensers and sanitary dispenser machines. The
paper supplies, liners and hand soap are to be purchased for
Management by the Contractor if requested to do so. Accurate
inventory of these supplies shall be updated nightly and turned
in to Management on Thursdays. The filling of such dispensers to
be in such quantity as to last the entire business day, whenever
possible do not overfill. Report all necessary
repairs/replacements to Management including lights not
functioning properly and dripping faucets.
The sanitary dispenser machines will be maintained by Contractor.
The products for the sanitary dispensers shall be purchased by
the Contractor. Revenues collected by the Contractor on a regular
basis shall be deemed the revenue of Contractor.
2. Nightly
a. Walls and Metal Partitions: Spot clean all metal toilet
partitions and tiled walls, removing graffiti with care
taken not to damage surfaces. All surfaces are to be wiped
dry so that all wipe marks are removed and surface has a
uniformly bright appearance. Dust the top edges of all
partitions, ledges and mirror tops.
b. Floors and Tile: Floors will be swept clean and wet mopped
using a germicidal detergent approved by Management. The
floors will then be mopped dry and all watermarks and
stains wiped from wall and metal partition bases, paying
particular attention to corners.
c. Metal Fixtures: Wash and polish all mirrors, powder
shelves, bright work (including exposed piping below wash
basins and behind toilet fixtures), towel dispensers,
receptacles and any other metal accessories. Contractor
shall use only non-abrasive, non-acidic material to avoid
damage to metal fixtures.
d. Ceramic Fixtures: Scour, wash and disinfect all basins,
including faucet handles, bowls, urinals and tile walls
near urinals, with a germicidal detergent solution, which
is an "Approved Product" (as defined in Section
IV.A.13). Special care must be taken to inspect and clean
areas of difficult access such as the underside of the
lip/rim of toilet bowls and urinals, to prevent buildup
of calcium and iron oxide deposits. Wash both sides of
all toilet seats with approved germicidal solution and
wipe dry. Toilet seats are to be left in an upright
position.
EXHIBIT I-Page 3
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3. Monthly
a. Floors: All floors will be machine scrubbed, using a
germicidal solution, which is an Approved Product,
detergent and water. After scrubbing, floors will be
rinsed with clean water and dried. All water marks will be
removed from walls, partitions and fixtures. An approved
floor finish will be applied and buffed as needed.
b. Floor Drains: Clean, disinfect and fill with water to
avoid the escape of sewer gasses.
c. Walls and Metal Partitions and Washable Ceilings: Wash
with water and a germicidal solution which is an Approved
Product. Wipe dry and polish to a uniformly bright, clean
condition.
4. Quarterly
a. Light Fixtures and Ceiling Grills: Specially trained
employees will remove light lenses and ceiling grills.
Wash thoroughly, dry, and replace. This will be done as
often as necessary, but no less than quarterly. A proposed
cleaning schedule providing for the cleaning of such
lenses and cleaning grills in 25% of the Building will be
submitted with Contractor's proposal for the proper care
and maintenance of these fixtures. Such schedule will be
subject to approval by Management.
C. COMMON AREAS
1. Nightly
a. Carpeted Areas: All carpeted floors are to be vacuumed and
edged with a small broom or edging tool, moving any and
all furniture and accessories. Carpet will be spot cleaned
where necessary.
b. Uncarpeted Areas: All hard-surfaced floors are to be
mopped with a treated dust mop and buffed, as needed, to
maintain a uniformly bright appearance, with particular
attention to edges, corners and behind doors. All spills
and stains will be removed with a damp mop or cloth.
Frames (molding) and granite will be wiped down with a
treated dust cloth. The painted pedestrian squares on the
P-1 Valet drop-off and lobby area will be mopped nightly
(where applicable).
EXHIBIT I-Page 4
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c. Walls: All walls will be spot-cleaned to remove smudges,
stains and hand marks, using only clean water or a mild
cleaning agent, where necessary. When soap or other
cleaner is used, the wall will be rinsed with clean water
and dried. No abrasive materials or solutions are to be
used.
d. Doors and Jambs: All doors and jambs will be spot-cleaned
to remove any hand marks, stains, spills or smudges. Use
only clean water or a mild cleaning agent where necessary,
and rinse with clean water and dry. When completed, doors
and jambs shall have a uniformly clean appearance.
e. Glass Doors and Partitions: All glass doors and
partitions, including any directory glass, will be
spot-cleaned to remove any finger marks, smudges, or
stains and will be left in a uniformly bright, clean
condition.
f. Miscellaneous Metalwork: All metalwork, such as mail
chutes, door hardware and frames, metal lettering, and
other metal accessories will be wiped clean and polished
and left in a uniformly clean and bright condition, free
of all dust and streaks.
g. Elevator Doors and Saddles: Elevator doors, panels
(granite or metal) and frames will be completely wiped
down and polished, removing all dust, marks and stains,
and left in a uniformly clean and bright condition.
h. Cigarette Urns: Clean all cigarette urns, removing all
butts and debris utilizing a sifter screen and fill to
within one (1) inch of top with clean sand as needed. Sand
shall be provided by Contractor.
i. Dusting: Dust all accessories, ledges and all other
horizontal surfaces, using a treated dust cloth. No
feather dusters are to be used. All surfaces to be left in
a clean, dust free condition.
Spot-clean as necessary.
j. Furniture and Miscellaneous: All furniture is to be wiped,
using treated dust cloths, paying particular attention to
legs and surfaces near the floor. Vinyl or leather
surfaces are to be dusted and spot-cleaned where
necessary, fabric is to be vacuumed as necessary.
2. Weekly
a. Carpeted Areas: All carpeted floors will be vacuumed,
using a pile lifter to remove all embedded dirt and grit
and restore pile to a uniformly upright condition.
b. Uncarpeted Areas: All hard-surfaced floors will be
wet-mopped. All residual wax and mop or scrubber marks
will be removed from baseboards. Floors, chrome frames,
granite walls and baseboards to be left in a uniformly
bright, clean condition.
EXHIBIT I-Page 5
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c. Baseboards: All baseboards will be cleaned with a mild
soap and water, rinsed with clean water and wiped dry
after vacuuming of carpets is completed.
3. Monthly
a. Carpeted Areas: All carpeted areas will be shampooed
removing all stains. Any damage (i.e., burns, rips, etc.)
will be reported to the supervisor to report to
Management. Baseboards will be washed with mild soap,
rinsed with clean water and wiped dry.
b. Uncarpeted Areas: All hard-surfaced floors are to be
stripped of all wax or other coating, cleaned and dried,
removing any and all marks or stains. Floors will then be
refinished and polished and left in a uniformly bright,
clean condition. All finish spills and splashes will be
completely removed from baseboards, walls, doors, granite
and frames.
c. High Dusting: All high dusting beyond the reach of the
normal day-to-day dusting will be accomplished monthly.
This will include, but not be limited to, all ledges,
charts, picture frames, graphs, air diffusers, and other
horizontal surfaces as well as all vertical surfaces such
as walls and partitions.
d. Doors and Jambs: All painted doors and jambs will be
washed down with clean water, using a mild cleaning agent
where necessary, rinsed with clean water and dried,
leaving no streaks, marks, or smudges. Chips or scratches
will be reported to the supervisor to report to
Management.
e. Air Diffusers: All air diffusers will be thoroughly washed
and dried and left in a clean condition as often as
necessary, but not less often than once a month.
EXHIBIT I-Page 6
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EXHIBIT J
FORM OF SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT
THIS SUBORDINATION, NON-DISTURBANCE, AND ATTORNMENT AGREEMENT (this
"Agreement") made and entered into as of the ____ day of _________________,
199__, by and among CALIFORNIA PLAZA IIA, LLC, a California limited liability
company, having an office c/o Citicorp Real Estate, Inc., 725 South Figueroa
Street, Los Angeles, California, ("Owner"), ____________________, a
____________________, having an office at ____________________ ("Mortgagee"),
and AAMES FINANCIAL CORPORATION, a Delaware corporation, having an office of
California Plaza II, 350 South Grand Avenue, Suite ____, Los Angeles, California
90071("Tenant").
W I T N E S S E T H:
WHEREAS, Owner owns the improved real property described in Schedule A
annexed hereto (the "Premises");
WHEREAS, Mortgagee is the owner and holder of the mortgages and/or deeds
of trust listed in Schedule B annexed hereto (which mortgages and/or deeds of
trust, together with all amendments, increases, renewals, modifications,
consolidations, spreaders, replacements, combinations, supplements,
substitutions and extensions thereof, now or hereafter made, are hereinafter
collectively referred to as the "Mortgage," and which Mortgage, together with
the promissory note or notes, loan agreement(s), and other documents executed in
connection therewith, and any amendments, increases, renewals, modifications,
consolidations, spreaders, replacements, combinations, supplements,
substitutions and extensions thereof, are hereinafter collectively referred to
as the "Loan Documents");
WHEREAS, pursuant to a lease dated ____________________, 1996 (the
"Lease"), Tenant has leased from Owner, as landlord, a portion of the Premises
(the "Leased Premises") more particularly described therein; and
WHEREAS, Mortgagee has agreed to recognize the status of Tenant in the
event Mortgagee shall acquire the title to Premises by foreclosure, by the
acceptance of a deed in lieu thereof, or by any other means and Tenant has
agreed to attorn to Mortgagee in any such event.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
hereinafter mentioned and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Mortgagee hereby consents to the Lease.
2. Tenant hereby agrees that the Lease is and shall be under,
subject and subordinate at all times to the lien, right, title and terms of the
Loan Documents and all advances and/or payments made, or to be made, under any
Loan Document. In confirmation of such
EXHIBIT J-Page 1
<PAGE> 127
subordination, Tenant shall promptly execute, acknowledge and deliver any
instrument that Mortgagee may request to evidence such subordination, and Tenant
hereby irrevocably constitutes and appoints Mortgagee as Tenant's
attorney-in-fact, coupled with an interest, to execute and deliver any such
instruments for and on behalf of Tenant if Tenant fails to execute, acknowledge
or deliver any such instruments within ten (10) days after request therefor.
3. So long as Tenant (a) is not in default under the Lease beyond
the expiration of any applicable grace or cure periods, (b) has not canceled or
terminated the Lease (without regard to whether Owner or Tenant is then in
default under the Lease), nor surrendered or abandoned the Leased Premises, and
(c) except as specifically required pursuant to the terms of the Lease, has not
made any advance payment of rent or additional rent, in the event that Mortgagee
shall commence an action to foreclose the Mortgage or to otherwise acquire title
to, and possession of, the Premises, Tenant shall not be joined as a party
defendant in any such action or proceeding and Tenant shall not be disturbed in
its possession of the Leased Premises nor shall the Lease be terminated;
provided, however, if as a condition precedent to commencing or proceeding with
any such action to foreclose the Mortgage or to otherwise acquire title to, and
possession of, the Premises, Mortgagee is required by statute, judicial decision
or the court in which such action or proceeding has been commenced or is pending
so to name Tenant as a party defendant, Mortgagee may so name Tenant. For the
purposes of this Agreement, any rent abatements or free rent periods expressly
provided for in the Lease shall not be deemed to be an advance payment of rent
or additional rent.
4. If (a) Mortgagee shall acquire title to, and possession of,
the Premises upon foreclosure in an action in which Mortgagee shall have been
required to name Tenant as a party defendant, and (b) Tenant is not in default
under the Lease beyond any applicable cure or grace periods, has not canceled or
terminated the Lease (without regard to whether Owner or Tenant is then in
default under the Lease) nor surrendered or abandoned the Leased Premises, and
remains in actual possession or constructive possession (i.e., Tenant is current
in the payment of rent and is otherwise performing all of its obligations under
the Lease) of the Leased Premises at the time Mortgagee shall so acquire title
to, and possession of, the Premises, then, in such event, Mortgagee shall enter
into a new lease with Tenant upon the same terms and conditions as were
contained in the Lease, except that (x) the obligations and liabilities of
Mortgagee under any such new lease shall be subject to the terms and conditions
of this Agreement (including, without limitation, the provisions of Paragraphs
5, 6, and 7 hereof), (y) without limiting the generality of clause (x) above,
Mortgagee shall, in no event, have any obligations or liabilities to Tenant
under any such new lease beyond those of Owner (or its predecessors-in-interest)
as were contained in the Lease (to the extent assumed by Mortgagee under this
Agreement), and (z) the expiration date of such new lease shall coincide with
the original expiration date of the Lease. Tenant shall execute any such new
lease and shall attorn to Mortgagee or its nominee, successors or assigns or any
purchaser (as the case may be) as to establish direct privity between Mortgagee
and Tenant.
5. If (a) Mortgagee shall acquire title to, and possession of,
the Premises upon foreclosure in an action in which Tenant has not been named as
a party defendant, or by deed in lieu of foreclosure, or by trustee's sale, or
by any other means, and (b) Tenant is not in
EXHIBIT J-Page 2
<PAGE> 128
default under the Lease beyond any applicable cure or grace periods and Tenant
has not surrendered, vacated or abandoned the Leased Premises at the time
Mortgagee shall so acquire title to and possession of the Premises:
(i) Tenant shall be deemed to have made a full and complete
attornment to Mortgagee so as to establish direct privity between Mortgagee and
Tenant;
(ii) All obligations of Tenant under the Lease shall
continue in full force and effect and be enforceable against Tenant by
Mortgagee, with the same force and effect as if the Lease had originally been
made and entered into directly by and between Mortgagee, as landlord thereunder,
and Tenant; and
(iii) Mortgagee shall recognize and accept the rights of
Tenant under the Lease and, subject to the provisions of Paragraphs 6 and 7
hereof, shall thereafter assume the obligations of Owner under the Lease in
respect of Owner's obligations under the Lease thereafter falling due subject,
in all events, to (A) the provisions of Paragraph 6 and 7 below and (B) Tenant's
waiver, as against Mortgagee, of any defaults of Owner (whether or not curable)
which occurred prior to Mortgagee acquiring title to, and possession of, the
Premises.
6. (a) Nothing herein contained shall impose any obligation upon
Mortgagee to perform any of the obligations of Owner under the Lease, unless and
until Mortgagee shall take possession of the Premises, and, in any event,
Mortgagee shall have no liability with respect to any acts or omissions of Owner
occurring prior to the date on which Mortgagee shall take possession of the
Premises, excepting only Tenant's right of offset if Landlord fails to pay the
Tenant Improvement Allowance, as set forth in, and subject to the limitations
contained in, Section 2.5. of Exhibit C to the Lease. The foregoing sentence
shall not be deemed to relieve Mortgagee from its obligation, once it takes
possession of the Leased Premises, to perform the repair and maintenance
obligations of Landlord pursuant to the Lease that are of a continuing nature,
including the repair, within a reasonable time, of items that failed prior to
the date Mortgagee takes possession of the Leased Premises, provided that in no
event shall Mortgagee be liable in any manner for Owner's breach of its repair
or maintenance obligations.
(b) Notwithstanding anything to the contrary contained
herein, officers, directors, shareholders, agents, servants and employees of
Mortgagee shall have no personal liability to Tenant and the liability of
Mortgagee, in any event, shall not exceed and shall be limited to Mortgagee's
interest in the Premises.
7. Tenant hereby agrees that notwithstanding anything to the
contrary in this Agreement or the Lease:
(a) No amendment, modification, termination, assignment or
sublease of the Lease shall be effective against Mortgagee, unless consented to
in writing by Mortgagee, or unless such document memorializes the exercise of
rights, options or elections contained in the Lease;
EXHIBIT J-Page 3
<PAGE> 129
(b) Mortgagee shall not be bound by any advance payment of
rent or additional rent to Owner (or its predecessors-in-interest) in excess of
one month's prepayment thereof, in the case of rent, or in excess of one
periodic payment in advance, in the case of additional rent, except as
specifically provided in the Lease or expressly approved in writing by
Mortgagee;
(c) Mortgagee shall not be liable for any act or omission
of Owner (or, its predecessor-in-interest), excepting only Tenant's right of
offset if Landlord fails to pay the Tenant Improvement Allowance, as set forth
in, and subject to the limitations contained in, Section 2.5 of Exhibit C or any
allowance granted pursuant to the Right of First Offer (which for this purpose
shall also be deemed a Tenant Improvement Allowance) to the Lease;
(d) Mortgagee shall not be subject to any offsets or
defenses which Tenant might have against Owner, excepting only Tenant's right of
offset if Landlord fails to pay the Tenant Improvement Allowance, as set forth
in, and subject to the limitations contained in, Section 2.5 of Exhibit C or any
allowance granted pursuant to the Right of First Offer (which for this purpose
shall also be deemed a Tenant Improvement Allowance) to the Lease;
(e) Mortgagee shall not be bound by any covenant to
undertake or complete any construction of the Premises, the Leased Premises or
any portion thereof;
(f) Mortgagee shall not be bound by any obligation of
Owner to make any payment to Tenant, except that (i) Mortgagee shall be liable
for the timely return of any security or other deposit actually received by
Mortgagee and (ii) Mortgagee shall be liable on account of any prepayments of
rent or other charges owing to Tenant if the funds are actually received by
Mortgagee;
(g) Mortgagee shall not be bound by any obligation to
repair, replace, rebuild or restore the Premises, the Leased Premises, or any
part thereof, in the event of damage by fire or other casualty, except as
provided in the Lease, or in the event of partial condemnation, beyond such
repair, replacement, rebuilding or restoration as can reasonably be accomplished
with the use of the net insurance proceeds or the net condemnation award
actually received by or made available to Mortgagee; and
(h) Mortgagee shall not be required to remove any person
occupying the Leased Premises or any part thereof.
8. Tenant hereby agrees to provide Mortgagee with prompt notice
of any asserted default by Owner of its obligations under the Lease. In the
event any such asserted default constitutes a legal basis for the cancellation
of the Lease by Tenant, Tenant hereby agrees that the Lease shall not be
canceled or terminated until Mortgagee shall have a reasonable period of time
within which to (a) obtain possession of the Leased Premises, and (b) cure such
default.
9. Tenant and Owner hereby agree that, in the event that
Mortgagee delivers to Tenant a notice (i) stating that an Event of Default (as
defined in the Mortgage) has occurred
EXHIBIT J-Page 4
<PAGE> 130
under the Mortgage or any other Loan Document and (ii) requesting that all rent
and additional rent due under the Lease be thereafter paid to Mortgagee, Tenant
shall pay, and is hereby authorized and directed by Owner to pay, such rent and
additional rent directly to Mortgagee. Delivery to Tenant of the aforedescribed
notice from Mortgagee shall be conclusive evidence of the right of Mortgagee to
receive such rents and payment of the rents by Tenant to Mortgagee pursuant to
such notice shall constitute performance in full of Tenant's obligation under
the Lease to pay such rents to Owner. If and to the extent that the Lease or any
provision of law shall entitle Tenant to notice of any mortgage, Tenant
acknowledges and agrees that this Agreement shall constitute such notice to
Tenant of the existence of the Mortgages. Tenant acknowledges that it has notice
that the Lease and the rent and all other sums due thereunder have been assigned
to Mortgagee as part of the security for the Loan Documents.
10. Each of Owner and Tenant represents and warrants to Mortgagee
that, as of the date hereof, there are no agreements other than the Lease in
existence or contemplated between Owner and Tenant, relating to the Premises or
the Leased Premises or with respect to any other matter related to Tenant's
occupancy of the Leased Premises.
11. Owner, by its execution of this Agreement, agrees to be bound
by and to act in accordance with the terms and conditions hereinabove contained.
12. This Agreement (i) shall be governed by and construed in
accordance with the laws of the state in which the Premises are located, (ii)
contains the entire agreement among the parties with respect to the subject
matter hereof and (iii) may not be modified, nor may any provision hereof be
waived, orally or in any manner other than by an agreement in writing signed by
the parties hereto or their respective successors, administrators and assigns.
13. All notices to be given hereunder shall be in writing and
shall be deemed sufficiently given if (a) hand delivered, (b) delivered by
reputable overnight courier or (c) mailed by certified mail, return receipt
requested, in each case to the address of each party as set forth above. Each
such notice shall be deemed to be effective, in the case of mail deliveries, on
the second business day after mailing, and otherwise, upon receipted delivery.
Any party may change its address for notice by notifying the other parties
hereunder in accordance with the provisions of this Paragraph 13.
14. All rights of Mortgagee hereunder shall accrue to, and all
obligations of Mortgagee shall be binding upon, Mortgagee, its successors,
assigns and nominees, including, without limitation, the grantee under a deed in
lieu of foreclosure and/or the purchaser of the Premises at a judicial or
non-judicial foreclosure sale or at any sale of the Premises following the
granting of a deed in lieu of foreclosure or following foreclosure; provided,
however, that following any sale or other transfer of its interest in the
Premises, Mortgagee, any such grantee or purchaser (as the case may be) shall be
fully released and discharged of and from any and all obligations and
liabilities of any kind hereunder or under the Lease and/or under any such new
lease. Without limiting the generality of the foregoing, this Agreement shall be
binding upon and inure to the benefit of the successors, administrators and
permitted assigns of Owner and Tenant hereto.
EXHIBIT J-Page 5
<PAGE> 131
IN WITNESS WHEREOF, this Agreement has been executed as of the day and
year first above set forth.
Owner: CALIFORNIA PLAZA IIA, LLC,
a California limited liability company
By:______________________________________________
Its:____________________________________________
Mortgagee:
By:______________________________________________
Its:____________________________________________
Tenant:AAMES FINANCIAL CORPORATION,
a Delaware corporation
By:______________________________________________
Its:____________________________________________
EXHIBIT J-Page 6
<PAGE> 132
STATE OF________________________)
) ss.
COUNTY OF_______________________)
On ________________________, before me, ________________________, a
Notary Public in and for said state, personally appeared
_______________________, personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person whose name is subscribed to the within
instrument and acknowledged to me that he/she executed the same in his/her
authorized capacity, and that by his/her signature on the instrument, the
person, or the entity upon behalf of which the person acted, executed the
instrument.
WITNESS my hand and official seal.
--------------------------------------------
Notary Public in and for said State
EXHIBIT J-Page 7
<PAGE> 133
SCHEDULE A
DESCRIPTION OF PREMISES
[TO BE PROVIDED IN CONNECTION WITH FUTURE EXECUTION]
SCHEDULE A-Page 1
<PAGE> 134
SCHEDULE B
DESCRIPTION OF MORTGAGE(S)
[TO BE PROVIDED IN CONNECTION WITH FUTURE EXECUTION]
SCHEDULE B-Page 1
<PAGE> 135
EXHIBIT K
FORM OF FIRST AMENDMENT TO LEASE
FIRST AMENDMENT TO OFFICE BUILDING LEASE
This FIRST AMENDMENT TO OFFICE BUILDING LEASE ("First Amendment") is
made and entered into as of August __, 1996, by and between CALIFORNIA PLAZA
IIA, LLC, a California limited liability company ("Landlord"), and AAMES
FINANCIAL CORPORATION, a Delaware corporation ("Tenant").
R E C I T A L S :
A. Landlord and Tenant entered into that certain Office Building Lease
(the "Lease"), dated August 7, 1996, whereby Landlord leased to Tenant and
Tenant leased from Landlord approximately 176,834 rentable square feet of space
commonly known as Suites 3300, 3400, 3800, 4200, 5100 and 5200 (the "Premises")
located on the 33rd, 34th, 38th, 42nd, 51st and 52nd floors of the building (the
"Building") known as Two California Plaza, located at 350 South Grand Avenue,
Los Angeles, California.
B. Landlord has delivered to Tenant the "Premises Relocation Notice," as
that term is defined in Section 1.2 (A) of the Lease. Based upon the foregoing,
the parties desire to amend the Lease on the terms and conditions set forth in
this First Amendment.
A G R E E M E N T :
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows.
1. TERMS. All undefined terms when used herein shall have the same
respective meanings as are given such terms in the Lease unless expressly
provided otherwise in this First Amendment.
2. PREMISES.
2.1 INITIAL PREMISES. Section 1.1(S) of the Lease is hereby
deleted and is replaced with the following:
"(S) 'Premises' shall mean that space shown on the floor
plans attached hereto as Exhibit A, known as Suites 4000,
4200, 4300, 4400, 4700, 5100 and 5200, located on the
fortieth (40th), forty-second (42nd), forty third (43rd),
forty-fourth (44th), forty-seventh (47th), fifty-first
(51st), and fifty-second (52nd) floors of the Office
Building, containing
EXHIBIT K-Page 1
<PAGE> 136
178,391 rentable square feet, which is comprised of 26,224
rentable square feet of space on the fortieth (40th)
floor, 26,830 rentable square feet of space on the
forty-second (42nd) floor, 26,830 rentable square feet of
space on the forty-third floor (43rd) floor, 26,830
rentable square feet of space on the forty-fourth floor
(44th) floor, 26,830 rentable square feet of space on the
forty-seventh floor (47th) floor, 22,454 rentable square
feet of space on the fifty-first (51st) floor, and 22,393
rentable square feet of space on the fifty-second (52nd)
floor."
In connection with the foregoing, Exhibit A attached to the Lease is hereby
deleted and is replaced with Exhibit A, attached hereto.
2.2 FIRST OFFER SPACE. Notwithstanding anything in Section 1.2
(B) of the Lease to the contrary, the First Offer Space shall be comprised of
all of the space located on floors 41, 45, 46, 48, 49 and 50 of the Building and
the Landlord Designated First Offer Floors. In connection with the Landlord
Designated First Offer Floors, as applicable, the Load Factors shall be as
follows:
<TABLE>
<CAPTION>
Load Factor Load Factor
Floor If Multi-Tenant Floor If Single Tenant Floor
----- --------------------- ----------------------
<S> <C> <C>
2 1.1656 1.0954
3 1.1693 1.0964
4 1.1632 1.0935
5 1.1632 1.0934
6 1.1644 1.0945
7 1.1657 1.0959
8 1.1657 1.0956
9 1.1669 1.0967
10 1.1669 1.0967
11 1.1669 1.0967
12 1.1692 1.0987
18 1.3265 1.1721
19 1.1677 1.0960
20 1.1674 1.0960
21 1.1674 1.0960
</TABLE>
In connection with the foregoing, Exhibit A-1 of the Lease is hereby deleted and
is replaced with Exhibit A-1, attached hereto, which attached Exhibit A-1
includes all of the potential Landlord Designated First Offer Floors.
EXHIBIT K-Page 2
<PAGE> 137
3. COMMENCEMENT DATE. Notwithstanding anything in Section 1.1
(E) of the Lease to the contrary, the Commencement Date shall, subject to the
Commencement Date Delay provisions of the Tenant Work Letter attached to the
Lease as Exhibit C, occur on _____________, 1996.
4. RENT.
4.1 BASE RENT. Section 1.1 (B) of the Lease is hereby deleted
and is replaced with the following:
"(B) 'Base Rent' shall mean the base rent payable by Tenant during the
Term, as follows:
<TABLE>
<CAPTION>
ANNUAL
RENTABLE
SQUARE
PAYMENT DATES ANNUAL MONTHLY RATE PER FOOT
------------- ------ --------------- ----
<S> <C> <C> <C>
Commencement Date through
and including the tenth (10th)
month of the Fifth (5th)
Lease Year $2,051,496.50 $170,958.04 $11.50
Eleventh (11th) month
of fifth (5th) Lease Year
through and including the
tenth (10th) month of the
Tenth (10th) Lease Year $2,872,095.10 $239,341.25 $16.10
Eleventh (11th) month of
tenth (10th) Lease Year
through and including the
Expiration Date $3,731,939.70 $310,994.97 $20.92
</TABLE>
4.2 FREE RENT. The last sentence of Section 1.4 of the Lease
is hereby deleted and is replaced with the following:
"Notwithstanding anything in this Section 1.4 to the
contrary, Tenant shall not be required to pay an amount
equal to One Hundred Seventy Thousand Nine Hundred
Fifty-Eight and 04/100ths Dollars ($170,958.04) of Base
Rent which is attributable to the first twenty-two (22)
months of the Term beginning on the Commencement Date."
5. TENANT WORK LETTER MODIFICATIONS.
EXHIBIT K-Page 3
<PAGE> 138
5.1 TENANT IMPROVEMENT ALLOWANCE. The first sentence of
Section 2.1 of the Tenant Work Letter is hereby deleted and is replaced with the
following:
"Tenant shall be entitled to a one-time tenant improvement
allowance (the "Tenant Improvement Allowance") in the amount of
Sixty and No/100 Dollars ($60.00) for each of the 178,391
rentable square feet of the Premises, or Ten Million Seven
Hundred Three Thousand Four Hundred Sixty and No/100 Dollars
($10,703,460.00) for the costs relating to the initial design and
construction of Tenant's improvements including consultant fees,
moving expenses, permits, furniture, fixtures and equipment and
those other items as specified below in this Tenant Work Letter
(the "Tenant Improvements"). Notwithstanding the foregoing,
Landlord and Tenant hereby acknowledge and agree that the Tenant
Improvement Allowance shall (a) be increased by an amount equal
to __________________________________ ($_________) , and (b) be
decreased by Thirty Thousand Five Hundred Sixty-Eight and 20/100
Dollars ($30,568.20)."
5.2 CROSSOVER IMPROVEMENTS. Section 1.13 of the Tenant Work Letter is
hereby deleted in its entirety.
6. BROKER. Landlord and Tenant hereby warrant to each other that they
have had no dealings with any real estate broker or agent in connection with the
negotiation of this First Amendment other than Cushman Realty Corporation (the
"Broker"), and that they know of no other real estate broker or agent who is
entitled to a commission in connection with this First Amendment. Each party
agrees to indemnify and defend the other party against and hold the other party
harmless from any and all claims, demands, losses, liabilities, lawsuits,
judgments, costs and expenses (including without limitation reasonable
attorneys' fees) with respect to any leasing commission or equivalent
compensation alleged to be owing on account of any dealings with any real estate
broker or agent, other than the Broker, occurring by, through, or under the
indemnifying party. The terms of this Section 6 shall survive the expiration or
earlier termination of the Term. For purposes of calculating the commission due
Broker, the 1,557 rentable square feet of space added to the Premises pursuant
to this First Amendment shall be deemed "Additional Space."
7. NO FURTHER MODIFICATION. Except as specifically set forth in this
First Amendment, all of the terms and provisions of the Lease shall remain
unmodified and in full force and effect.
IN WITNESS WHEREOF, this First Amendment has been executed as of the day
and year first above written.
TENANT: AAMES FINANCIAL CORPORATION,
a Delaware corporation
EXHIBIT K-Page 4
<PAGE> 139
By:________________________________________
Name:______________________________________
Title:_____________________________________
Federal Tax I.D. Number or Social Security
Number:____________________________________
Date:______________________________________
LANDLORD: CALIFORNIA PLAZA IIA, LLC, a California
limited liability company
By:________________________________________
Name:______________________________________
Title:_____________________________________
Date:______________________________________
EXHIBIT K-Page 5
<PAGE> 140
EXHIBIT A
PREMISES FLOOR PLAN
[TO BE PROVIDED AT TIME OF EXECUTION OF FIRST AMENDMENT]
EXHIBIT A-Page 1
<PAGE> 141
EXHIBIT B
FIRST OFFER SPACE
[TO BE PROVIDED AT TIME OF EXECUTION OF FIRST AMENDMENT]
EXHIBIT B-Page 1
<PAGE> 1
EXHIBIT 10.13(b)
FIRST AMENDMENT TO OFFICE BUILDING LEASE
This FIRST AMENDMENT TO OFFICE BUILDING LEASE ("First Amendment") is
made and entered into as of August 15, 1996, by and between CALIFORNIA PLAZA
IIA, LLC, a California limited liability company ("Landlord"), and AAMES
FINANCIAL CORPORATION, a Delaware corporation ("Tenant").
R E C I T A L S:
A. Landlord and Tenant entered into that certain Office Building
Lease (the "Lease"), dated August 7, 1996, whereby Landlord leased to Tenant
and Tenant leased from Landlord approximately 176,834 rentable square feet of
space commonly known as Suites 3300, 3400, 3800, 4200, 5100 and 5200 (the
"Premises") located on the 33rd, 34th, 38th, 42nd, 51st and 52nd floors of the
building (the "Building") known as Two California Plaza, located at 350 South
Grand Avenue, Los Angeles, California.
B. Landlord has delivered to Tenant the "Premises Relocation
Notice," as that term is defined in Section 1.2 (A) of the Lease. Based upon
the foregoing, the parties desire to amend the Lease on the terms and
conditions set forth in this First Amendment.
A G R E E M E N T:
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto hereby agree as follows:
1. TERMS. All undefined terms when used herein shall have the
same receptive meanings as are given such terms in the Lease unless expressly
provided otherwise in this First Amendment.
2. PREMISES.
2.1 INITIAL PREMISES. Section 1.1(S) of the Lease is
hereby deleted and is replaced with the following:
"(S) 'Premises' shall mean that space shown
on the floor plans attached hereto as
Exhibit A, known as Suites 4000, 4200, 4300,
4400, 4700, 5100 and 5200, located on the
fortieth (40th), forty-second (42nd), forty
third (43rd), forty- fourth (44th),
forty-seventh (47th), fifty-first (51st),
and fifty-second (52nd) floors of the Office
Building, containing 178,391 rentable square
feet, which is comprised of 26,224 rentable
square feet of space on the fortieth
1
TWO CALIFORNIA PLAZA
[AAMES FINANCIAL CORPORATION]
<PAGE> 2
(40th) floor, 26,830 rentable square feet on
space on the forty-second (42nd) floor,
26,830 rentable square feet of space on the
forty-third floor (43rd) floor, 26,830
rentable square feet of space on the
forty-fourth floor (44th) floor, 26,830
rentable square feet of space on the
forty-seventh floor (47th) floor, 22,454
rentable square feet of space on the
fifty-first (51st) floor, and 22,393
rentable square feet of space on the
fifty-second (52nd) floor."
In connection with the foregoing, Exhibit A attached to the Lease is hereby
deleted and is replaced with Exhibit A, attached hereto.
2.2 FIRST OFFER SPACE. Notwithstanding anything in Section
1.2 (B) of the Lease to the contrary, the First Offer Space shall be comprised
of all of the space located on floors 41, 45, 46, 48, 49 and 50 of the Building
and the Landlord Designated First Offer Floors. In connection with the
Landlord Designated First Offer Floors, as applicable, the Load Factors shall
be as follows:
<TABLE>
<CAPTION>
Load Factor Load Factor
------------ -----------
Floor If Multi-Tenant Floor If Single Tenant Floor
----- --------------------- ----------------------
<S> <C> <C>
2 1.1656 1.0954
3 1.1693 1.0964
4 1.1632 1.0935
5 1.1632 1.0934
6 1.1644 1.0945
7 1.1657 1.0959
8 1.1657 1.0956
9 1.1669 1.0967
10 1.1669 1.0967
11 1.1669 1.0967
12 1.1692 1.0987
18 1.3265 1.1721
19 1.1677 1.0960
20 1.1674 1.0960
21 1.1674 1.0960
</TABLE>
In connection with the foregoing, Exhibit A-1 of the Lease is hereby deleted
and is replaced with Exhibit A-1, attached hereto, which attached Exhibit A-1
includes all of the potential Landlord Designated First Offer Floors.
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TWO CALIFORNIA PLAZA
[AAMES FINANCIAL CORPORATION]
<PAGE> 3
3. COMMENCEMENT DATE. Notwithstanding anything in Section 1.1 (E) of
the Lease to the contrary, the Commencement Date shall, subject to the
Commencement Date Delay provisions of the Tenant Work Letter attached to the
Lease as Exhibit C, occur on May 19, 1997.
4. RENT.
4.1 BASE RENT. Section 1.1 (B) of the Lease is hereby deleted and is
replaced with the following:
"(B) 'Base Rent' shall mean the base rent payable by Tenant during the
Term, as follows:
<TABLE>
<CAPTION>
ANNUAL
RATE PER
RENTABLE
SQUARE
FOOT
PAYMENT DATES ANNUAL MONTHLY
<S> <C> <C> <C>
Commencement Date through and
including the tenth (10th) month of
the Fifth (5th)
Lease Year $2,051,496.50 $170,958.04 $11.50
Eleventh (11th) month of the fifth
(5th) Lease Year through and
including the tenth (10th) month
of the Tenth (10th)
Lease Year 2,872,095.10 $239,341.25 $16.10
Eleventh (11th) month of tenth
(10th) Lease Year through and
including the
Expiration Date $3,731,939.70 $310,994.97 $20.92
</TABLE>
4.2 FREE RENT. The last sentence of Section 1.4 of the Lease is
hereby deleted and is replaced with the following:
"Notwithstanding anything in this Section 1.4 to the
contrary, Tenant shall not be required to pay an
amount equal to One Hundred Seventy Thousand Nine
Hundred Fifty-Eight and 04/100ths Dollars
($170,958.04) of Base Rent which is attributable to
the first twenty-two (22)
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TWO CALIFORNIA PLAZA
[AAMES FINANCIAL CORPORATION]
<PAGE> 4
months of the Term beginning on the Commencement Date."
5. TENANT WORK LETTER MODIFICATIONS.
5.1. TENANT IMPROVEMENT ALLOWANCE. The first sentence of Section
2.1 of the Tenant Work Letter is hereby deleted and is replaced with the
following:
"Tenant shall be entitled to a one-time tenant
improvement allowance (the "Tenant Improvement
Allowance") in the amount of Sixty and No/100 Dollars
($60.00) for each of the 178,391 rentable square feet
of the Premises, or Ten Million Seven Hundred Three
Thousand Four Hundred Sixty and No/100 Dollars
($10,703,460.00) for the costs relating to the
initial design and construction of Tenant's
improvements including consultant fees, moving
expenses, permits, furniture, fixtures and equipment
and those other items as specified below in this
Tenant Work Letter (the "Tenant Improvements").
Notwithstanding the foregoing, Landlord and Tenant
hereby acknowledge and agree that the Tenant
Improvement Allowance shall (a) be increased by an
amount equal to Twenty Thousand and No/100 Dollars
($20,000.00), and (b) be decreased by Thirty Thousand
Five Hundred Sixty-Eight and 20/100 Dollars
($30,568.20)."
5.2 CROSSOVER IMPROVEMENTS. Section 1.13 of the Tenant Work
Letter is hereby deleted in its entirety.
6. BROKER. Landlord and Tenant hereby warrant to each other that
they have no dealings with any real estate broker or agent in connection with
the negotiation of this First Amendment other than Cushman Realty Corporation
(the "Broker"), and that they know of no other real estate broker or agent who
is entitled to a commission in connection with this First Amendment. Each
party agrees to indemnify and defend the other party against and hold the other
party harmless from any and all claims, demands, losses, liabilities lawsuits,
judgments, costs and expenses (including without limitation reasonable
attorneys' fees) with respect to any leasing commission or equivalent
compensation alleged to be owing on account of any dealings with any real
estate broker or agent, other than the Broker, occurring by, through, or under
the indemnifying party. The terms of this Section 6 shall survive the
expiration or earlier termination of the Term. For purposes of calculating the
commission due Broker, the 1,557 rentable square feet of space added to the
Premises pursuant to this First Amendment shall be deemed "Additional Space."
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TWO CALIFORNIA PLAZA
[AAMES FINANCIAL CORPORATION]
<PAGE> 5
7. NO FURTHER MODIFICATION. Except as specifically set forth in this
First Amendment, all of the terms and provisions of the Lease shall remain
unmodified and in full force and effect.
IN WITNESS WHEREOF, this First Amendment has been executed as of the day
and year first above written.
TENANT: AAMES FINANCIAL CORPORATION,
a Delaware corporation
By: /s/ Bobbie Burroughs
-------------------------------------
Name: Bobbie Burroughs
-------------------------------------
Title: EXEC. V.P.
------------------------------------
Federal Tax I.D. Number or Social Security
Number: 95-4340340
-----------------------------------
Date: 8-20-96
-------------------------------------
LANDLORD: CALIFORNIA PLAZA IIA, LLC, a California
limited liability company
By: /s/ Shari L Reed
-------------------------------------
Name: Shari L. Reed Title:Vice President
-------------------------------------
Date: 8/20/96
-------------------------------------
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TWO CALIFORNIA PLAZA
[AAMES FINANCIAL CORPORATION]
<PAGE> 1
EXHIBIT 10.17(a)
INTERIM LOAN AND SECURITY AGREEMENT
INTERIM LOAN AND SECURITY AGREEMENT, dated as of November 22,
1996 (as amended, supplemented or otherwise modified from time to time, this
"Agreement"), between (i) PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware
corporation (the "Lender"), and (ii) AAMES CAPITAL CORPORATION, a California
corporation (the "Borrower") and a subsidiary of Aames Financial Corporation, a
Delaware corporation (the "Guarantor").
RECITALS
WHEREAS, Prudential Securities Incorporated has agreed to act
from time to time as lead manager or co-manager or placement agent of one or
more public or private offerings of residential loan pass-through certificates
(the "Certificates") to be issued by one or more trusts to be sponsored by the
Borrower; and
WHEREAS, the Lender has agreed, subject to the terms and
conditions contained herein, to provide interim funding from time to time to
finance the origination or acquisition of fixed rate first, second or third
mortgage lien loans ("Fixed Rate Mortgage Loans") or six-month LIBOR and one
year CMT indexed floating rate first or second mortgage lien loans ("Floating
Rate Mortgage Loans") (Fixed Mortgage Loans and Floating Rate Mortgage Loans,
collectively, "Mortgage Loans"), which Mortgage Loans are identified for
inclusion in one of two trusts (each, a "Designated Trust"), which Designated
Trust (i) for the period from the date hereof to but excluding December 1, 1996,
shall be Aames Mortgage Trust 1996-D, (ii) from December 1, 1996 to but
excluding the initial Funding Termination Date, shall be Aames Mortgage Trust
1997-A, and (iii) if the Funding Termination Date is extended in accordance with
Section 2(a) hereof, for the period from the date of such extension to but
excluding the Funding Termination Date so specified (such initial period and
each such subsequent period, a "Funding Period"), shall be the trust specified
in the Notice of Extension of Agreement delivered in accordance with Section
2(a) hereof, and which Mortgage Loans are to be pledged to secure the Advances
to be made by the Lender hereunder, with the proceeds of the related
Certificates to be used to repay such Advances;
NOW, THEREFORE, the parties to this Agreement hereby agree as
follows (an index of certain capitalized, defined terms appears in Section 22 of
this Agreement):
Section 1. The Advances. Subject to the terms of this Agreement,
the Lender agrees to lend to the Borrower from time to time an aggregate
principal amount outstanding, not to exceed at any one time outstanding an
amount (the "Maximum Funding Amount") equal to (i) for the period from the date
hereof to and including the initial Funding Termination
<PAGE> 2
Date, $125,000,000, and (ii) if the Funding Termination Date is extended in
accordance with Section 2(a) hereof, for each subsequent Funding Period the
amount specified in the Notice of Extension of Agreement delivered in accordance
with Section 2(a) hereof in respect of such Funding Period, to be made in one or
more advances (each an "Advance" and, collectively, "Advances"). Each Advance
shall be made on a date other than a Saturday, Sunday or other day on which
banks in New York, New York are authorized or required by law to be closed or on
which the New York Stock Exchange is closed (any such date, a "Business Day")
that is prior to the Funding Termination Date (as defined below; each such date
on which an Advance is made, a "Funding Date"); provided that:
(a) the representations and warranties of the Borrower in Section
5 hereof and Schedule 1 hereto shall be true and correct on and as of
such Funding Date as if made on and as of such date;
(b) no Default or Event of Default shall have occurred and be
continuing or would exist after the making of any Advance on such
Funding Date;
(c) if requested by the Lender, the Lender shall have conducted a
due diligence review of the mortgage files relating to the Mortgage
Loans, the results of which shall have been satisfactory to the Lender;
(d) the Lender shall have received (i) a timely Notice of
Borrowing as provided in Section 2(b) hereof, (ii) a Certification from
the Custodian as provided in Section 2(b) hereof to the effect that the
Custodian has reviewed the Mortgage Loan Documents relating to the
Mortgage Loans being pledged in connection with the Advance being made
on such Funding Date in the manner required by the Custodial Agreement
and has found no material deficiencies in such Mortgage Loan Documents
as so reviewed, and (iii) in connection with the first Advance, (A) a
legal opinion from counsel to the Borrower and the Guarantor, in the
form of Exhibit C attached hereto, (B) the Secured Note (as defined
below), (C) the Custodial Agreement, and (D) a Guarantee, dated as of
the date hereof, made by the Guarantor in favor of the Lender,
substantially in the form of Exhibit F hereto (as amended, supplemented
or otherwise modified from time to time, the "Guarantee") in each case
duly executed by the parties thereto;
(e) the Borrower shall have delivered to the Custodian all
documents to be delivered with respect to the Mortgage Loans being
pledged on such Funding Date;
(f) after the making of such Advance: (i) the outstanding
principal amount of the aggregate of all Advances will not exceed the
Maximum Funding Amount; (ii) the outstanding principal amount of the
aggregate of all Advances made in respect of Fixed Rate Mortgage Loans
will not exceed the lesser of (A) 102% of the aggregate par amount of
all Fixed Rate Mortgage Loans held as Collateral and (B) 96.0% of the
aggregate market value of all Fixed Rate Mortgage Loans held as
Collateral; and (iii) the outstanding principal amount of the aggregate
of all Advances made in respect of
-2-
<PAGE> 3
Floating Rate Mortgage Loans will not exceed the lesser of (X) 102% of
the aggregate par amount of all Floating Rate Mortgage Loans held as
Collateral and (Y) 97.0% of the aggregate market value of all Floating
Rate Mortgage Loans held as Collateral;
(g) the Lender shall not have determined, in its sole discretion,
that the Designated Trust is not reasonably likely to be established on
substantially the terms agreed upon at the time of the specifying of the
Designated Trust hereunder;
(h) the Mortgage Loans in respect of which such Advance is
proposed to be made shall not include any Specified Mortgage Loans (as
defined in Section 7(h) hereof); and
(i) any general conditions for the making of Advances, specified
in Section 2 below, shall have been satisfied and will continue to be
satisfied if such Advance is made.
Section 2. Terms and Conditions for All Advances.
(a) Each outstanding Advance shall mature on the related Maturity
Date (as defined below), and the obligation of the Lender to make any Advances
hereunder shall terminate on March 31, 1997 (the "Funding Termination Date");
provided that the Funding Termination Date may be extended from time to time, in
the sole and absolute discretion of the Lender, upon (i) the execution and
delivery by the parties hereto of a Notice of Extension of Agreement
substantially in the form of Exhibit B-1 annexed hereto, (ii) the delivery of an
opinion of counsel to the Borrower substantially in the form of Exhibit B-2
annexed hereto and (iii) in connection with an increase of the Maximum Funding
Amount to an amount greater than the then maximum principal amount of the
Secured Note, the execution and delivery by the parties hereto of an Endorsement
to the Secured Note, substantially in the form of Exhibit B-3 hereto.
(b) If the Borrower wishes to receive an Advance, then the
Borrower shall give the Lender written notice by no later than 2:00 p.m. (New
York City time) two Business Days prior to a Funding Date of the amount of such
Advance to be advanced on such Funding Date by delivering a Notice of Borrowing
substantially in the form of Exhibit D attached hereto, and the Custodian shall
have delivered a Certification no later than 2:00 p.m. (New York City time) one
Business Day before such Funding Date.
(c) Each Advance shall bear interest from the related Funding
Date to but excluding the Maturity Date at a rate per annum equal to LIBOR plus
0.70% and thereafter as provided in Section 2(f). "LIBOR" shall mean the rate
appearing at page 3750 of the Telerate Screen as one-month LIBOR and, if such
rate shall not be so quoted, the rate per annum at which deposits in U.S.
dollars for a period of one month are offered by Morgan Guaranty Trust Company
of New York (or such other prime bank in the London interbank market as the
Lender shall designate) to prime banks in the London interbank market at
approximately 11:00 a.m. (London Time) on the related Funding Date (for purposes
of determining LIBOR, a
-3-
<PAGE> 4
Business Day being a Business Day on which dealings between banks may be carried
on in the London interbank market). Interest shall be calculated on the basis of
a 360-day year and for the actual number of days elapsed.
(d) Each outstanding Advance shall mature on the related maturity
date specified for such Advance as set forth in the related Notice of Borrowing
(the "Maturity Date"); provided that the Maturity Date shall, for any Advance,
be no later than the earlier of (i) subject to the next succeeding proviso
hereto, the applicable Funding Termination Date, and (ii) subject to Sections
2(m) and 2(n), below, the date upon which the Certificates related to the
Mortgage Loans funded by such Advance shall be issued by the Designated Trust;
provided, further, that the Lender shall have the option, in its sole
discretion, to extend the Maturity Date of an Advance from time to time for a
period of up to thirty (30) days by delivering to the Borrower notice of such
election in the form of Exhibit E attached hereto no later than 5 days preceding
the then scheduled Maturity Date of such Advance. If no such notice is delivered
by the Lender, such Advance shall automatically become due and payable without
any further action by the Lender on its Maturity Date, and in such event the
Lender may exercise all rights and remedies available to it as the holder of a
first perfected security interest under the Uniform Commercial Code as in effect
in the State of New York (the "NY UCC"). The extension of the Maturity Date of
any Advance beyond the applicable Funding Termination Date shall not be deemed
to be an extension, renewal, or modification of the Lender's commitment to lend
to the Borrower under this Agreement at any time after the Funding Termination
Date.
(e) The Advances are pre-payable at any time without premium or
penalty, in whole or in part. Any amounts pre-paid shall be applied to repay the
outstanding principal amount of any Advances (together with interest thereon)
until paid in full. Amounts repaid may be borrowed in accordance with the terms
of this Agreement. If the Borrower intends to prepay an Advance in whole or in
substantial part from a source other than the proceeds of Certificates, the
Borrower shall give two Business Days' prior notice thereof to the Lender.
(f) If the Advances are not repaid in whole on the date when due,
the Advances shall, commencing on such date, bear interest at a rate per annum
equal to LIBOR plus 3.0% until repaid.
(g) With respect to each Advance, LIBOR shall be determined
initially as of the date of such Advance for the period from such date to but
excluding the fifth calendar day of the month following the month in which such
Advance was made (such fifth calendar day of a month and each succeeding fifth
calendar day of a month, an "Interest Payment Date") and shall thereafter be
determined as of each Interest Payment Date for the period from such date to but
excluding the following Interest Payment Date.
(h) Interest on each Advance is payable on each Interest Payment
Date and on the Maturity Date for such Advance. In the event that an Advance is
not repaid in full on the date when due, interest shall be payable thereafter on
demand.
-4-
<PAGE> 5
(i) The Advances shall be evidenced collectively by the secured
promissory note of the Borrower in the form attached hereto as Exhibit A (the
"Secured Note"). The Lender is authorized to record the date and amount of each
Advance and the date and amount of each repayment of principal thereof on the
schedule annexed to the Secured Note and any such recordation shall be
conclusive evidence of the accuracy of the amounts so recorded (absent manifest
error); provided that the failure of the Lender to make such recordation (or any
error in such recordation) shall not affect the rights and obligations of the
Borrower hereunder or under the Secured Note.
(j) Each Advance shall be repaid in full on the related Maturity
Date, and the Lender shall release its security interest in and to the Mortgage
Loans relating to a Designated Trust when all Advances relating thereto are so
repaid.
(k) If an Advance is not repaid in full when due, thereafter all
payments and prepayments of the related Mortgage Loans shall be paid to the
Lender as promptly as practicable following receipt of such payments but in any
event no later than five Business Days following receipt thereof.
(l) If at any time,
(A) the aggregate outstanding principal amount of all
Advances in respect of Fixed Rate Mortgage Loans exceeds the lesser of
(i) 102% of the par amount of the Mortgage Loans held as Collateral for
such Advances, and (ii) 96.0% of the aggregate market value of the Fixed
Rate Mortgage Loans held as Collateral for such Advances, as determined
by the Lender and notified to the Borrower on the third Business Day of
each week (or, in the sole discretion of the Lender following notice to
the Borrower, on any Business Day); or
(B) the aggregate outstanding principal amount of all
Advances in respect of Floating Rate Mortgage Loans exceeds the lesser
of (i) 102% of the par amount of the Mortgage Loans held as Collateral
for such Advances, and (ii) 97.0% of the aggregate market value of the
Floating Rate Mortgage Loans held as Collateral for such Advances, as
determined by the Lender and notified to the Borrower on the third
Business Day of each week (or, in the sole discretion of the Lender
following notice to the Borrower, on any Business Day); or
(C) any monthly installment of any Mortgage Loan is
delinquent for a period of not less than the period from the due date of
such monthly installment to the due date of the immediately succeeding
monthly installment;
the Borrower shall no later than one Business Day after receipt of notice of
such excess or after such Mortgage Loan becomes delinquent, (X) prepay the
related Advances (together with interest thereon) in part or in whole, (Y)
pledge additional Collateral to the Lender, and/or (Z) in the case of clause (C)
of this subsection (l) only, pledge one or more replacement Mortgage Loans
having an aggregate unpaid principal amount of not less than the principal
amount of
-5-
<PAGE> 6
such delinquent Mortgage Loan and otherwise meeting the requirements of this
Agreement and the Custodial Agreement, such that after giving effect to such
prepayment, pledge or replacement, the unpaid principal amount of the Advances
does not exceed the lesser of the amounts set forth in subclauses (A)(i) and
(A)(ii) or (B)(i) and (B)(ii), as applicable, of this subsection (l) and the
condition described in clause (C) of this subsection (l) shall no longer exist
with respect to any Mortgage Loan.
(m) On the date which is the earlier of (i) the date Certificates
shall be issued by Aames Mortgage Trust 1996-D, and (ii) December 31, 1996, the
Borrower shall prepay the Advances made prior to the cut-off date for Aames
Mortgage Trust 1996-D ("Pre-Cut-Off Date Advances") such that after giving
effect to such prepayment, the aggregate outstanding principal amount of
Pre-Cut-Off Date Advances does not exceed the lesser of (i) $25,000,000 and (ii)
20% of the aggregate principal amount of all Pre-Cut-Off Date Advances which
were outstanding on such cut-off date.
(n) Notwithstanding anything to the contrary in this Agreement,
on the date that the Certificates shall be issued by Aames Mortgage Trust
1997-A, the Borrower shall prepay all Advances in respect of Mortgage Loans
which were pledged to the Lender hereunder prior to the cut-off date for Aames
Mortgage Trust 1996-D, and were not included in either Aames Mortgage Trust
1997-A or Aames Mortgage Trust 1996-D.
(o) Notwithstanding anything to the contrary in this Agreement,
(i) if the Lender is unable, after good faith effort, to obtain a source of
funds for the proposed Advance on substantially the same economic terms as are
available to the Lender as of the date of this Agreement, and as a result the
cost to the Lender of making such Advance is increased by an amount which the
Lender deems material, the Lender shall not be obligated to make such Advance
unless the Borrower agrees to pay the Lender any additional amounts necessary to
compensate the Lender for such increased cost, as notified by the Lender to the
Borrower, and (ii) the Lender shall have no obligation to make any Advance
hereunder if there shall have occurred any material adverse change in (A) the
financial condition of the Lender, (B) the financial markets generally or (C)
the secondary market for Mortgage Loans. The Lender shall promptly notify the
Borrower of any such determination by the Lender of any of the foregoing.
(p) If any payment hereunder becomes due and payable, or any
action hereunder is required to be taken, on a day other than a Business Day,
the date for such payment or action shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest thereon shall
accrue at the then applicable rate during such extension.
Section 3. Purpose of Advances. Each Advance shall be used to
finance or refinance Mortgage Loans originated by the Borrower or to acquire
Mortgage Loans from affiliates of the Borrower or unaffiliated third parties, in
each case in arm's-length transactions.
-6-
<PAGE> 7
Section 4. Mortgage Files and Custodian; Secured Obligations. (a)
In connection with each Advance, the Borrower shall deliver, or heretofore has
delivered, to Bankers Trust Company of California, N.A., as custodian (the
"Custodian") on behalf of the Lender, the documents and instruments listed in
Section 2 of that certain Custodial Agreement, dated as of the date hereof (as
amended, supplemented or otherwise modified from time to time, the "Custodial
Agreement"), among the Borrower, the Lender, and the Custodian, and the Borrower
shall further cause to be delivered to the Custodian the documents and
instruments described in the last sentence of Section 2 of the Custodial
Agreement as and to the extent required to be delivered to the Custodian
pursuant thereto. All such Mortgage Loans, all such documents and instruments
evidencing and relating to the Mortgage Loans (collectively, the "Mortgage Loan
Documents"), together with all computer records and tapes relating thereto, and
any proceeds thereof, are hereinafter referred to as the "Collateral". Pursuant
to the Custodial Agreement, the Custodian shall hold the Mortgage Loan Documents
on behalf of the Lender pursuant to terms of the Custodial Agreement and shall
deliver to the Lender a Certification (as defined in the Custodial Agreement) to
the effect that it has reviewed such Mortgage Loan Documents in the manner
required by the Custodial Agreement and identifying any deficiencies in such
Mortgage Loan Documents as so reviewed.
(b) The Borrower hereby pledges and grants a security interest in
all of its respective right, title and interest in and to the Collateral, now
owned or hereafter acquired, to the Lender to secure the repayment of principal
of and interest on all Advances and all other amounts owing to the Lender
hereunder (collectively, the "Secured Obligations"). The Borrower agrees to mark
its computer records and tapes to evidence the security interests granted to the
Lender hereunder.
Section 5. Representations and Warranties. (a) The Borrower
represents and warrants to the Lender that:
(i) It has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of
California.
(ii) It is duly licensed as a licensee or is otherwise
qualified in each state in which its ownership of property or the
conduct of its business requires such licensure or qualification and
where failure to be so licensed or qualified would have a material
adverse effect on the business of the Borrower, on the Collateral, on
the ability of the Borrower to pay or perform the Secured Obligations or
on the rights and remedies of the Lender hereunder or under the Secured
Note, the Custodial Agreement or the Guarantee, and the Borrower is in
compliance in all material respects with each such state's applicable
statutes, laws, rules and regulations. It has the requisite corporate
power and authority and legal right to own and grant a lien on all of
its right, title and interest in and to the Collateral, and to execute
and deliver, engage in the transactions contemplated by, and perform and
observe the terms and conditions of, this Agreement, the Secured Note
and the Custodial Agreement.
-7-
<PAGE> 8
(iii) It is solvent and is not in default under any
mortgage, borrowing agreement or other instrument or agreement
pertaining to indebtedness for borrowed money, and the execution,
delivery and performance by it of this Agreement, the Secured Note and
the Custodial Agreement do not conflict with any term or provision of
its articles of incorporation or by-laws or any law, rule, regulation,
order, judgment, writ, injunction or decree applicable to any of them of
any court, regulatory body, administrative agency or governmental body
having jurisdiction over it and will not result in any violation of any
such mortgage, instrument or agreement.
(iv) All financial statements or certificates of the
Borrower or any of its officers furnished to the Lender are true and
complete and do not omit to disclose any material liabilities or other
facts relevant to the Borrower's condition. All such financial
statements have been prepared in accordance with GAAP. No financial
statement or other financial information as of a date later than
September 30, 1996, has been furnished by the Borrower to any lender
that has not been furnished to the Lender.
(v) No consent, approval, authorization or order of,
registration or filing with, or notice to any governmental authority or
court is required under applicable law in connection with the execution,
delivery and performance by the Borrower of this Agreement, the Secured
Note or the Custodial Agreement, where the failure to obtain any of the
foregoing would materially adversely affect the business, operations,
property or financial condition of the Borrower taken as a whole, the
ability of the Borrower to perform its obligations under this Agreement,
the Secured Note or the Custodial Agreement or the validity or
enforceability of this Agreement, the Secured Note or the Custodial
Agreement, except as have been obtained and are in full force and
effect.
(vi) There is no action, proceeding or investigation
pending or, to the best of its knowledge, threatened against it before
any court, administrative agency or other tribunal (A) asserting the
invalidity of this Agreement, the Custodial Agreement or the Secured
Note, (B) seeking to prevent the consummation of any of the transactions
contemplated by this Agreement, the Custodial Agreement or the Secured
Note, or (C) which might materially and adversely affect the validity of
the Mortgage Loans or the performance by it of its obligations under, or
the validity or enforceability of, this Agreement, the Secured Note or
the Custodial Agreement.
(vii) There has been no material adverse change in the
business, operations, financial condition, properties or prospects of
the Borrower since September 30, 1996.
(viii) This Agreement, the Secured Note and the Custodial
Agreement have each been duly authorized, executed and delivered by the
Borrower, all requisite corporate action having been taken, and each is
legal, valid and binding and enforceable against the Borrower in
accordance with its terms.
-8-
<PAGE> 9
(ix) Upon receipt by the Custodian of the Mortgage Loan
Documents with respect to any Mortgage Loan and for so long as the
Custodian maintains actual physical possession of such Mortgage Loan
Documents, the Custodian shall have, for the benefit of the Lender, a
fully-perfected first priority security interest in the Collateral with
respect to such Mortgage Loan; provided however until such time as
assignments of mortgage with respect to the Mortgage Loans are recorded
in the appropriate office in the name of the Custodian (1) the Custodian
may not independently be able to enforce a mortgage against the related
mortgaged property or the related mortgagor, (2) the Borrower could
record an assignment of such mortgage in the name of a third party or
record a discharge and satisfaction of such mortgage with the result
that, in the former case such third party could acquire the rights
represented by such mortgage and, in the latter case, the lien of such
mortgage could be discharged, with the result that such mortgage note
would no longer be secured by the related property and (3) any notice
which may be given to the record holder of a mortgage, including,
without limitation, notices regarding the non-payment of real estate
taxes, would instead be given to the Borrower.
(b) With respect to every Mortgage Loan delivered or to be
delivered to the Custodian, the Borrower makes the representations and
warranties set forth in Schedule 1 hereof.
Section 6. Rights of Lender; Limitations on Lender's Obligations.
(a) Anything herein to the contrary notwithstanding, the Borrower shall remain
liable under each of the Mortgage Loan Documents to which it is a party to
observe and perform all the conditions and obligations to be observed and
performed by it thereunder, all in accordance with and pursuant to the terms and
provisions of each such Mortgage Loan Document. The Lender shall not have any
obligation or liability under any Mortgage Loan Document by reason of or arising
out of this Agreement or the receipt by the Lender of any payment relating to
such Mortgage Loan Document pursuant hereto, nor shall the Lender be obligated
in any manner to perform any of the obligations of the Borrower under or
pursuant to any Mortgage Loan Document, to make any payment, to make any inquiry
as to the nature or the sufficiency of any payment received by it or as to the
sufficiency of any performance by any party under any Mortgage Loan Document, to
present or file any claim, to take any action to enforce any performance or to
collect the payment of any amounts which may have been assigned to it or to
which it may be entitled at any time or times.
(b) Upon the request of the Lender at any time after the
occurrence and during the continuance of an Event of Default, the Borrower shall
notify parties to the Mortgage Loan Document to which it is a party that the
Mortgage Loan Documents have been assigned to the Lender and that payments in
respect thereof shall be made directly to the Lender. The Lender may in its own
name or in the name of others communicate with parties to the Mortgage Loan
Documents to verify with them to its satisfaction the existence, amount and
terms of any Mortgage Loan Documents.
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<PAGE> 10
Section 7. Covenants. The Borrower covenants and agrees with the
Lender that, from and after the date of this Agreement until the obligations of
the Borrower hereunder and under the Secured Note are paid in full:
(a) Further Documentation. At any time and from time to
time, upon the written request of the Lender, and at the sole expense of
the Borrower, the Borrower will promptly and duly execute and deliver
such further instruments and documents and take such further action as
the Lender may reasonably request for the purpose of obtaining or
preserving the full benefits of this Agreement and of the rights and
powers herein granted, including, without limitation, the filing of any
financing or continuation statements under the Uniform Commercial Code
in effect in any jurisdiction with respect to the security interests
created hereby. The Borrower also hereby authorizes the Lender to file
any such financing or continuation statement without the signature of
the Borrower to the extent permitted by applicable law. A carbon,
photographic or other reproduction of this Agreement shall be sufficient
as a financing statement for filing in any jurisdiction.
(b) Limitation on Liens on Collateral. The Borrower will
not create, incur or permit to exist, will defend the Collateral
against, and the Borrower will take such other action as is necessary to
remove, any lien, security interest or claim on or to the Collateral,
other than the security interests created hereby, and will defend the
right, title and interest of the Lender in and to any of the Collateral
against the claims and demands of all persons whomsoever.
(c) Limitations on Modifications, Waivers and Extensions of
Mortgage Loan Documents. The Borrower will not (i) amend, modify,
terminate or waive any provision of any Mortgage Loan Document to which
the Borrower is a party in any manner which could reasonably be expected
to materially adversely affect the value of such Mortgage Loan Document
as Collateral, (ii) fail to exercise promptly and diligently each and
every material right which the Borrower may have under each such
Mortgage Loan Document (other than any right of termination) where the
failure to so act could materially adversely affect the Collateral
relating to such Mortgage Loan Document or (iii) fail to deliver to the
Lender a copy of each material demand, notice or document received by it
relating in any way to any such Mortgage Loan Document other than any
such demand, notice or document relating to the delinquency of a
Mortgage Loan Document or the bankruptcy of the obligor thereunder.
(d) Further Identification of Collateral. The Borrower will
furnish to the Lender from time to time statements and schedules further
identifying and describing the Collateral and such other reports in
connection with the Collateral as the Lender may reasonably request, all
in reasonable detail.
(e) Limitation on Foreclosure. The Borrower will not take
title to real estate mortgaged in connection with a Mortgage Loan,
whether by means of a
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<PAGE> 11
foreclosure action (judicial or non-judicial), acceptance of a deed in
lieu of foreclosure, or any voluntary transfer, without the express
written consent of the Lender.
(f) Notices. The Borrower will notify the Lender promptly,
in reasonable detail and in accordance with Section 21 of this
Agreement, (i) of any lien or security interest (other than security
interests created hereby) on, or claim asserted against, any of the
Collateral, (ii) of the occurrence of any other event which could
reasonably be expected to have a material adverse effect on the
aggregate market value of the Collateral or on the security interests
created hereunder, (iii) of the existence of circumstances requiring the
Borrower, or permitting the Lender to require the Borrower, to prepay
the Advances pursuant to Section 2(l), Section 8(b) or Section 12 hereof
and (iv) of any amendments or waivers to the covenants applicable to the
Guarantor under that certain Indenture, dated as of February 1, 1995 (as
amended from time to time, the "Aames Note Indenture"), between the
Guarantor and Bankers Trust Company of California, N.A., as trustee, and
relating to the issuance by the Guarantor of $23,000,000 of 10.50%
Senior Notes due 2002 (the "Senior Notes").
(g) Compliance with Law. At all times after the Custodian has
received a Mortgage Loan from the Borrower and until payment in full of
the related Advances, the Borrower will not commit any act in violation
of applicable laws, or regulations promulgated pursuant thereto.
(h) Further Inquiry in Event of Earthquake. In the event an
earthquake occurs in, or affecting in any material respect, any
geographic area (which may be identified by zip code) in which property
is located that secures a Mortgage Loan that is proposed to be pledged,
or has been pledged, as Collateral hereunder, and the Lender believes
that, in light of the magnitude, duration and scope of the earthquake,
the earthquake is reasonably likely to have caused material structural
damage to one or more of such properties securing such Mortgage Loans,
the Lender may request that the Borrower visually inspect such
properties. In the event that the Borrower does not complete such
inspection and notify the Lender of the results thereof no later than
twenty Business Days following a request therefor, or such inspection
reveals that the property is reasonably likely to have sustained
material structural damage, (A) in the case of a Mortgage Loan that is
proposed to be pledged as Collateral hereunder, the Lender shall not be
obligated to make an Advance in respect of such Mortgage Loan, and (B)
in the case of a Mortgage Loan that has been pledged as Collateral
hereunder, such Mortgage Loan shall be deemed to be a Mortgage Loan in
respect of which the Lender may require prepayment pursuant to Section
8(b) hereof (any Mortgage Loan referred to in the preceding clauses (A)
and (B), together with any Mortgage Loan secured by property as to which
the period of twenty Business Days referred to in the preceding sentence
has not yet run, a "Specified Mortgage Loan").
(i) Line of Credit. The Borrower shall maintain in full force
and effect the Mortgage Loan Warehousing Agreement, dated as of December
27, 1995,
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<PAGE> 12
among the Borrower, the Guarantor, the lenders from time to time parties
thereto and NationsBank of Texas, N.A., as co-agent and administrative
agent, and First Interstate Bank of California, as co-agent, as amended
by that certain First Amendment thereto dated as of February 20, 1996
(the "NationsBank Credit Agreement"), providing for a credit commitment
of not less than $150,000,000 (or a substitute bank credit line with
such lenders, providing for a credit commitment of not less than
$150,000,000 and upon such terms as shall be satisfactory to the Lender)
(the NationsBank Credit Agreement or such substitute credit agreement
being referred to herein as the "Bank Credit Agreement"), and the
Borrower shall not consent to any amendment, supplement or modification
to the Bank Credit Agreement which would have a material adverse effect
on the Lender's rights and remedies hereunder or under the Intercreditor
Agreement, without the prior written consent of the Lender.
Section 8. Repayment of Advances If Mortgage Loan Found
Defective. (a) Upon discovery by the Borrower or the Lender of any breach of any
of the representations and warranties listed in Section 5 hereof or Schedule 1
hereto or any inaccuracy in a Mortgage Loan Schedule (as defined in the
Custodial Agreement), the party discovering such breach shall promptly give
notice of such discovery to the other and to the Custodian.
(b) The Lender has the right to require, in its sole discretion,
the Borrower to prepay the amount of any Advance made in respect of any Mortgage
Loan which breaches one or more of the representations and warranties listed in
Schedule 1 hereto (including, without limitation, any Specified Mortgage Loan),
or in respect of which there is a material inaccuracy in the related Mortgage
Loan Schedule, no later than one Business Day after notice from the Lender to
the Borrower of such breach.
Section 9. Release of Mortgage Files following Payment of Secured
Obligations. The Lender agrees to cause to be delivered the documents and
instruments held by the Custodian on the Lender's behalf pursuant to Section 4
hereof upon request of the Borrower upon payment in full of the Secured
Obligations.
Section 10. Servicing. The Borrower shall service and administer
the Mortgage Loans with due care and in accordance with customary and prudent
servicing procedures for mortgage loans of a similar type.
Section 11. No Oral Modifications; Successors and Assigns. No
provisions of this Agreement shall be waived or modified except by a writing
duly signed by the authorized agents of the Lender and the Borrower. This
Agreement shall be binding upon the successors and assigns of the parties
hereto.
Section 12. Collateral Report. Whether for delinquency or
otherwise pursuant to Section 2(l) hereof, the Borrower shall provide the
Lender, in electronic format (a) no later than two (2) days prior to each
proposed Funding Date, and (b) no later than five (5) days following the end of
each month, with an accurate listing and description of each Mortgage Loan held
by the Custodian as Collateral as of the date of such notice, in the case of
clause (a)
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of this sentence, or as of the last day of such month, in the case of clause (b)
of this sentence. The Borrower shall provide to the Lender on the date of
delivery of any replacement Mortgage Loans, as described in Section 2(l), a
listing and description thereof in electronic format.
Section 13. Events of Default. Any of the following shall
constitute an event of default (an "Event of Default") hereunder (a "Default"
being any of the following whether or not any requirement for the giving of
notice, the lapse of time, or both, has been satisfied):
(a) Failure of the Borrower to make any payment of interest
or principal or any other sum which has become due, whether by
acceleration or otherwise, under the terms of the Secured Note, this
Agreement or any other document evidencing or securing indebtedness of
the Borrower to the Lender;
(b) Failure of the Borrower to prepay Advances or pledge
additional Collateral when required to do so pursuant to Section 2(l),
Section 2(m), Section 2(n), Section 8(b) or Section 12 hereof;
(c) Failure of the Borrower to observe or perform any other
agreement contained in this Agreement thirty days after the occurrence
of such failure to observe or perform;
(d) Any representation or warranty made by the Borrower
herein (other than in Section 5(b) hereof and Schedule 1 hereto with
respect to the Mortgage Loans, as to which the Borrower shall prepay the
Advances or provide substitute Collateral in accordance with Section
8(b) or Section 12 hereof, as applicable) in connection with any Advance
made hereunder or in any certificate, document or financial or other
statement furnished at any time under or in connection with this
Agreement or the Custodial Agreement, or any representation or warranty
made or deemed made by the Guarantor in the Guarantee, shall prove to
have been incorrect in any material respect on or as of the date made;
(e) Assignment or attempted assignment by the Borrower of
this Agreement or any rights hereunder, without first obtaining the
specific written consent of Lender, or the granting by the Borrower of
any security interest, lien or other encumbrance on any Collateral to
other than the Lender;
(f) The filing by or against the Borrower or any subsidiary
of the Borrower or the Guarantor of a petition for liquidation,
reorganization, arrangement or adjudication as a bankrupt or similar
relief under the bankruptcy, insolvency or similar laws of the United
States or any state or territory thereof or of any foreign jurisdiction;
the failure of the Borrower or such subsidiary or the Guarantor to
secure dismissal of any such petition filed against it within thirty
(30) days of such filing; the making of any general assignment by the
Borrower or any subsidiary or the Guarantor for the benefit of
creditors; the appointment of a receiver or trustee for the Borrower or
any subsidiary or the Guarantor, or for any part of the Borrower or such
subsidiary's or the
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<PAGE> 14
Guarantor's assets; the institution by the Borrower or any subsidiary or
the Guarantor of any other type of insolvency proceeding (under the
Bankruptcy Code or otherwise) or of any formal or informal proceeding,
for the dissolution or liquidation of, settlement of claims against, or
winding up of the affairs of, the Borrower or any subsidiary or the
Guarantor; the institution of any such proceeding against the Borrower
or any subsidiary or the Guarantor if the Borrower or such subsidiary or
the Guarantor shall fail to secure dismissal thereof within thirty (30)
days thereafter; the consent by the Borrower or any subsidiary or the
Guarantor to any type of insolvency proceeding against the Borrower or
such subsidiary or the Guarantor (under the Bankruptcy Code or
otherwise); the occurrence of any event or existence of any condition
which could be the ground, basis or cause for any proceeding or petition
described in this Section 13(f);
(g) Any materially adverse change in the business,
operations, financial condition, properties or prospects of the Borrower
or of any subsidiary or the Guarantor as determined by the Lender in its
discretion or the existence of any other condition which, in the
Lender's determination, constitutes an impairment of the Borrower's or
such subsidiary's ability to perform their obligations under this
Agreement or the Borrower's obligations under the Secured Note;
(h) Failure by the Borrower to service the Mortgage Loans
in substantial compliance with the servicing standards set forth in
Section 10 hereof;
(i) The Custodial Agreement or the Guarantee ceases to be
in full force and effect, or any party thereto so asserts in writing;
(j) Default by the Guarantor in any payment of principal of
or interest on the Senior Notes or in the observance or performance of
any other agreement or condition relating to the Senior Notes or
contained in the Aames Note Indenture or any other instrument or
agreement evidencing, securing or relating thereto; or the occurrence of
any other event or the existence of any other condition, the effect of
which event or condition is to cause, or to permit the holder or holders
of the Senior Notes to cause, with the giving of notice if required,
such Senior Notes to become due prior to the stated maturity of the
Senior Notes; or
(k) (A) any event of default shall have occurred and be
continuing under the Bank Credit Agreement, whether or not waived, (B)
any default shall occur in the payment of any principal of or interest
on (i) the Senior Notes or (ii) the Borrower's $115,000,000 Aames
Financial Corporation 5-1/2% Convertable Subordinated Debentures, due
March 15, 2006 (the "Subordinated Debentures"), beyond the applicable
grace period, if any (not to exceed 30 days), provided in respect
thereof, (C) any default shall occur in the payment of any principal of
or interest on any other indebtedness of the Borrower (other than the
Advances, the indebtedness under the Bank Credit Agreement, the Senior
Notes or the Subordinated Debentures), aggregating $2,000,000 or more,
or in the payment of any guarantee by the Guarantor
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<PAGE> 15
or any of its Subsidiaries of any indebtedness of another person
aggregating $2,000,000 or more, beyond the applicable grace period, if
any (not to exceed 30 days), provided in the instrument creating such
indebtedness or guarantee, or (D) any other default or event shall have
occurred with respect to any of the foregoing indebtedness or such
guarantees the effect of which is to cause, or permit the holder or
holders of such indebtedness or the beneficiary or beneficiaries of such
guarantees (or a trustee or agent therefor) to cause, such indebtedness
to become due before its scheduled maturity date or such guarantees to
become payable.
Section 14. Remedies Upon Default. (a) Upon the happening of one
or more Events of Default, the Lender may immediately declare the principal of
all Advances under the Secured Note then outstanding to be immediately due and
payable, together with all interest thereon and fees and expenses accruing under
this Agreement; provided that upon the occurrence of the Event of Default
referred to in Section 13(f), such amounts shall immediately and automatically
become due and payable without any further action by any person or entity. Upon
such declaration or such automatic acceleration, the balance then outstanding on
the Secured Note shall become immediately due and payable without presentation,
demand or further notice of any kind to the Borrower.
(b) Upon the happening of one or more Events of Default, the
Lender shall have the right to obtain physical possession of all files of the
Borrower relating to the Collateral and all documents relating to the Collateral
which are then or may thereafter come in to the possession of the Borrower or
any third party acting for the Borrower, and the Borrower shall deliver to the
Lender such assignments of mortgage as the Lender shall request. The Lender
shall be entitled to specific performance of all agreements of the Borrower
contained in this Agreement.
(c) Upon the happening of one or more Events of Default, the
Lender shall have the right to collect and receive all further payments made on
the Collateral, and if any such payments are received by the Borrower, the
Borrower shall not commingle the amounts received with other funds of the
Borrower and shall promptly pay them over to the Lender. In addition, the Lender
shall have the right to dispose of the Collateral as provided herein, servicing
retained or servicing released, or as provided in the other documents executed
in connection herewith, or in any commercially reasonable manner, or as provided
by law. The Lender shall be entitled to place the Mortgage Loans which it
recovers after any default in a pool for issuance of mortgage-backed securities
at the then-prevailing price for such securities and to sell such securities for
such prevailing price in the open market as a commercially reasonable
disposition of collateral subject to the applicable requirements of the New York
UCC. The Lender shall also be entitled to sell any or all of such Mortgage Loans
individually for the prevailing price as a commercially reasonable disposition
of collateral subject to the applicable requirements of the New York UCC. The
specification in this Section 14 of manners of disposition of collateral as
being commercially reasonable shall not preclude the use of other commercially
reasonable methods (as contemplated by the New York UCC) at the option of the
Lender. Upon disposition of the Collateral and repayment in full to the Lender
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<PAGE> 16
of all amounts owing hereunder plus the reasonable expenses incurred (including
fees and expenses of its counsel), the Lender shall promptly remit any remaining
proceeds to the Borrower or as required by law or as a court of competent
jurisdiction shall direct.
Section 15. Indemnification and Expenses. (a) The Borrower agrees
to hold the Lender harmless from and indemnifies the Lender against all
liabilities, losses, damages, judgments, costs and expenses of any kind which
may be imposed on, incurred by, or asserted against the Lender relating to or
arising out of this Agreement, the Secured Note, the Custodial Agreement, the
Guarantee, any transaction contemplated hereby or thereby, or any amendment,
supplement or modification of, or any waiver or consent under or in respect of
this Agreement, the Secured Note, the Custodial Agreement, the Guarantee, or any
transaction contemplated hereby or thereby, resulting from anything other than
the Lender's gross negligence or willful misconduct. In any suit, proceeding or
action brought by the Lender in connection with any Mortgage Loan Document for
any sum owing thereunder, or to enforce any provisions of any Mortgage Loan
Document, the Borrower will save, indemnify and keep the Lender harmless from
and against all expense, loss or damage suffered by reason of any defense,
set-off, counterclaim, recoupment or reduction or liability whatsoever of the
obligor thereunder, arising out of a breach by the Borrower of any obligation
thereunder or arising out of any other agreement, indebtedness or liability at
any time owing to or in favor of such obligor or its successors from the
Borrower. The Borrower also agrees to reimburse the Lender for all its costs and
expenses incurred in connection with the enforcement or the preservation of the
Lender's rights under this Agreement, the Secured Note, the Custodial Agreement,
the Guarantee or any transaction contemplated hereby or thereby, including,
without limitation, the reasonable fees and disbursements of counsel. The
Borrower hereby acknowledges that, notwithstanding the fact that the Secured
Note is secured by the Collateral, the obligation of the Borrower under the
Secured Note is a recourse obligation of the Borrower.
(b) The Borrower agrees to pay as and when billed by the Lender
all of the reasonable out-of-pocket costs and expenses incurred in connection
with the development, preparation and execution of, and any amendment,
supplement or modification to this Agreement, the Secured Note, the Custodial
Agreement, the Guarantee or any other documents prepared in connection herewith
or therewith, and the consummation and administration of the transactions
contemplated hereby and thereby including, without limitation, (i) all the
reasonable fees, disbursements and expenses of Lender's counsel, (ii) all the
reasonable due diligence, inspection, testing and review costs and expenses
incurred by the Lender (or a third-party contract underwriter that is both
acceptable to the Lender and is acting on behalf of the Lender), with respect to
Mortgage Loans pledged as Collateral under this Agreement and (iii) all the fees
and expenses incurred by the Custodian in connection with its duties under the
Custodial Agreement.
(c) The Borrower's agreements in this Section 15 shall survive
the payment in full of the Secured Note and the expiration or termination of
this Agreement.
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Section 16. Power of Attorney. The Borrower hereby authorizes the
Lender (without requiring the Lender), at the Borrower's expense, to file such
financing statement or statements relating to the Collateral without the
Borrower's signature thereon as the Lender at its option may deem appropriate,
and appoints the Lender as the Borrower's attorney-in-fact to execute any such
financing statement or statements in the Borrower's name and to perform all
other acts which the Lender deems appropriate to perfect and continue the
security interest granted hereby and to protect, preserve and realize upon the
Collateral, including, but not limited to, the right to endorse notes, complete
blanks in documents and sign assignments on behalf of the Borrower as its
attorney-in-fact. This Power of Attorney is coupled with an interest and is
irrevocable without the Lender's consent. Notwithstanding the foregoing, the
power of attorney hereby granted may be exercised only during the occurrence and
continuance of any Event of Default hereunder.
Section 17. No Duty on Lender's Part. The powers conferred on the
Lender hereunder are solely to protect the Lender's interests in the Collateral
and shall not impose any duty upon it to exercise any such powers. The Lender
shall be accountable only for amounts that it actually receives as a result of
the exercise of such powers, and neither it nor any of its officers, directors,
employees or agents shall be responsible to the Borrower for any act or failure
to act hereunder, except for its own gross negligence or willful misconduct.
Section 18. Limitation on Duties Regarding Preservation of
Collateral. The Lender's sole duty with respect to the custody, safekeeping and
physical preservation of any Collateral in its possession, under Section 9-207
of the Uniform Commercial Code or otherwise, shall be to deal with it in the
same manner as the Lender deals with similar property for its own account.
Neither the Lender nor any of its directors, officers, employees or agents shall
be liable for failure to demand, collect or realize upon all or any part of the
Collateral or for any delay in doing so or shall be under any obligation to sell
or otherwise dispose of any Collateral upon the request of the Borrower or
otherwise.
Section 19. Powers Coupled with an Interest. All authorizations
and agencies herein contained with respect to the Collateral are irrevocable and
powers coupled with an interest.
Section 20. Severability. Any provision of this Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
Section 21. Notices. All written communications hereunder shall
be mailed, telecopied or delivered to the respective addresses as listed in the
Custodial Agreement or to such other address as shall be designated by a party
in a written notice to the other parties. All such notices and communications
shall be effective when delivered to the party to which such notice is to be
given.
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Section 22. Certain Definitions. The following capitalized terms
are defined in the corresponding sections specified below:
"Aames Note Indenture" - Section 7(f).
"Advance" - Section 1.
"Agreement" - Introductory Clause.
"Bank Credit Agreement" - Section 7(i).
"Business Day" - Section 1.
"Borrower" - Introductory Clause.
"Certificates" - Recitals.
"Certification" - Section 4(a).
"Collateral" - Section 4(a).
"Custodial Agreement" - Section 4(a).
"Custodian" - Section 4(a).
"Default" - Section 13.
"Designated Trust" - Recitals.
"Event of Default" - Section 13.
"Fixed Rate Mortgage Loans" - Recitals.
"Floating Rate Mortgage Loans" - Recitals.
"Funding Date" - Section 1.
"Funding Period" - Recitals.
"Funding Termination Date" - Section 2(a).
"Guarantee": - Section 1(d).
"Guarantor" - Introductory Clause.
"Interest Payment Date" - Section 2(g).
"Lender" - Introductory Clause.
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<PAGE> 19
"LIBOR" - Section 2(c).
"Maturity Date" - Section 2(d).
"Maximum Funding Amount" - Section 1.
"Mortgage Loan Documents" - Section 4(a).
"Mortgage Loans" - Recitals.
"NationsBank Credit Agreement" - Section 7(i).
"NY UCC" - Section 2(d).
"Pre-Cut-Off Date Advances" - Section 2(m).
"Secured Note" - Section 2(i).
"Secured Obligations" - Section 4(b).
"Senior Notes" - Section 7(f).
"Specified Mortgage Loan" - Section 7(h).
Section 23. Paragraph Headings. The paragraph headings used in
this Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
Section 24. No Waiver; Cumulative Remedies. The Lender shall not
by any act (except by a written instrument pursuant to Section 11 hereof),
delay, indulgence, omission or otherwise be deemed to have waived any right or
remedy hereunder or to have acquiesced in any Event of Default or in any breach
of any of the terms and conditions hereof. No failure to exercise, nor any delay
in exercising, on the part of the Lender, any right, power or privilege
hereunder shall operate as a waiver thereof. No single or partial exercise of
any right, power or privilege hereunder shall preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. A
waiver by the Lender of any right or remedy hereunder on any one occasion shall
not be construed as a bar to any right or remedy which the Lender would
otherwise have on any future occasion. The rights and remedies herein provided
are cumulative, may be exercised singly or concurrently and are not exclusive of
any rights or remedies provided by law.
Section 25. Assignment. The Borrower may not assign its rights or
delegate its obligations under this Agreement without the express written
consent of the Lender. The Lender may assign its rights and obligations
hereunder to any affiliate of the Lender upon written notice thereof to the
Borrower.
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<PAGE> 20
Section 26. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, and all
of which taken together shall constitute one and the same instrument.
Section 27. Agreement Constitutes Security Agreement. This
Agreement is intended by the parties hereto to be governed by New York law, and
to constitute a security agreement within the meaning of the New York UCC.
Section 28. Hypothecation or Pledge of Collateral. Nothing in
this Agreement shall preclude Lender from engaging in repurchase transactions
with any of the Collateral or otherwise pledging, repledging, hypothecating, or
rehypothecating any of the Collateral, but no such transaction shall relieve the
Lender of its obligations to the Borrower under this Agreement or the Custody
Agreement with respect to the Collateral or impair the Borrower's right to
redeem the Collateral.
[SIGNATURE PAGE FOLLOWS]
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<PAGE> 21
IN WITNESS WHEREOF, the parties have executed this Agreement the
day and year first above written.
Borrower: AAMES CAPITAL CORPORATION
By: /s/ GREGORY J. WITHERSPOON
----------------------------------------
Name: Gregory J. Witherspoon
Title: Executive Vice President and
Chief Financial Officer
Lender: PRUDENTIAL SECURITIES CREDIT
CORPORATION
By: /s/ ELIZABETH W. CASTAGNA
----------------------------------------
Name: Elizabeth W. Castagna
Title:
<PAGE> 22
Schedule 1
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
IN RESPECT OF THE MORTGAGE LOANS
The Borrower represents and warrants to the Lender as to each
Mortgage Loan as follows:
(a) The information in respect of the Mortgage Loan set forth in
the related Mortgage Loan Schedule is true and correct;
(b) The Mortgage Loan is being and will be serviced by the
Borrower or by a third-party subservicer reasonably acceptable to the Lender;
(c) The mortgage note related to the Mortgage Loan bears a
fixed-rate of interest or a floating rate of interest tied to six-month LIBOR or
one-year CMT;
(d) The Mortgage Loan and all accompanying documents are complete
and authentic and all signatures are genuine, and the mortgage related to the
Mortgage Loan is a valid and subsisting first, second or (but only if such
Mortgage Loan is a Fixed Rate Mortgage Loan) third lien on real property subject
(i) in the case of any second Mortgage Loan, only to a lien of a first mortgage
on such real property, (ii) in the case of any third Mortgage Loan, only to a
lien of a first and a second mortgage on such real property and (iii) in all
cases to the exceptions to title set forth in the title insurance policy or the
other evidence of title in respect of the related Mortgage Loan, which
exceptions are generally acceptable to prudent home equity mortgage lending
companies, and such other exceptions to which similar properties are commonly
subject and which do not individually, or in the aggregate, materially and
adversely affect the benefits of the security intended to be provided by such
mortgage;
(e) To the best of the Borrower's knowledge, there is no
delinquent tax or assessment lien on any real property mortgaged in connection
with the related Mortgage Loan;
(f) All parties to the Mortgage Loan Documents had legal capacity
to execute them and each such document has been duly and properly executed by
such parties; the Mortgage Loan arose from a bona fide loan and is not subject
to any right of rescission, set-off, counterclaim or defense, including the
<PAGE> 23
defense of usury (each rescission period under applicable federal, state or
local law having expired), nor will the operation of any of the terms of the
related mortgage note or the related mortgage, or the exercise of any right
thereunder, render either such mortgage note or such mortgage (i) unenforceable
in whole or in part, or (ii) subject to any right of rescission, set-off,
counterclaim or defense, including the defense of usury, and no such right of
rescission, set-off, counterclaim or defense has been asserted with respect
thereto;
(g) To the best of the Borrower's knowledge, there is no
mechanics' lien or claim for work, labor or material affecting any real property
mortgaged in connection with the related Mortgage Loan which is or may be a lien
prior to, or equal with, the lien of mortgage securing the related Mortgage Loan
except those which are insured against by a title insurance policy;
(h) All disclosures relating to the Mortgage Loan required by
Regulation Z of the Board of Governors of the Federal Reserve System promulgated
pursuant to the statute commonly known as the Truth-in-Lending Act and the
Notice of the Right of Rescission required by said statute and regulation have
been properly made and given, and the Mortgage Loan, at the time it was made,
otherwise complied in all material respects with applicable state and federal
laws and regulations, including, without limitation, equal credit opportunity
laws;
(i) With respect to the Mortgage Loan, a written commitment for a
lender's title insurance policy, issued in standard American Land Title
Association or California Land Title Association form, or other form acceptable
in a particular jurisdiction, by a title insurance company generally acceptable
to prudent mortgage lending companies and authorized to transact business in the
state in which the real property mortgaged in connection with such Mortgage Loan
is situated (together with a condominium endorsement, if applicable, in an
amount at least equal to the original principal amount of such Mortgage Loan),
insuring the mortgagee's interest under the related Mortgage Loan as the holder
of a valid first or second mortgage lien of record on the real property
described in the mortgage (subject to the exception noted in paragraph (r)), was
effective on the date of the origination of such Mortgage Loan and as of the
related Funding Date for an Advance in connection with such Mortgage Loan; such
commitment will be valid and thereafter the policy issued pursuant to such
commitment shall continue in full force and effect;
(j) The improvements upon the real property mortgaged in
connection with the related Mortgage Loan are covered by a valid and existing
hazard insurance policy (that also provides for fire and extended coverage) with
a generally acceptable carrier;
(k) If obtainable, a flood insurance policy is in effect with
respect to the real property, mortgaged in connection with the related Mortgage
Loan and located in a flood zone, with a generally acceptable carrier for a
commercially reasonable amount;
(l) The Mortgage Loan Documents for the Mortgage Loan are the
legal, valid and binding obligation of the maker thereof and are enforceable in
accordance with their terms, except only as such enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity (whether considered in a proceeding or action in equity or
at law);
-2-
<PAGE> 24
(m) The Borrower has performed any and all acts required to be
performed to preserve the rights and remedies of the Lender in any insurance
policies applicable to the Mortgage Loans including, without limitation, any
necessary notifications of insurers, assignments of policies or interests
therein, and establishments of co-insured, joint loss payee and mortgagee rights
in favor of the Lender;
(n) The terms of the original mortgage note and the original
mortgage related to the Mortgage Loan have not been impaired, altered or
modified in any material respect, except by a written instrument and a certified
copy (as defined in Section 2 of the Custodial Agreement) of which has been
delivered to the Lender or the Custodian; the substance of any such alteration
or modification is reflected on the Mortgage Loan Schedule; the original
mortgage was recorded (or will be duly submitted for recordation as of the time
of origination of the related Mortgage Loan and the Lender or the Custodian has
been provided with such a certified copy thereof), and all subsequent
assignments of such mortgage have been recorded (or will be duly submitted for
recordation and the Lender or the Custodian has been provided with such a
certified copy thereof) in the appropriate jurisdictions wherein such
recordation is necessary to perfect the lien thereof as against creditors of the
Borrower;
(o) No monetary default has occurred in any provisions of the
Mortgage Loan that would have caused or will cause a prepayment of Advances made
in respect of the Mortgage Loan pursuant to Section 12 of the Agreement, no
non-monetary default has occurred in any provisions of the Mortgage Loan, no
instrument of release or waiver has been executed in connection with the
Mortgage Loan, and no borrower in respect of such Mortgage Loan has been
released, in whole or in part;
(p) All taxes, governmental assessments, insurance premiums,
water, sewer and municipal charges, leasehold payments or ground rents which
previously became due and owing have been paid, or an escrow of funds has been
established in an amount sufficient to pay for every such item which remains
unpaid;
(q) There is no proceeding pending or, to the best of the
Borrower's knowledge, threatened, for the total or partial condemnation of the
real property mortgaged in connection with the related Mortgage Loan, nor is
such a proceeding currently occurring; such property is in average repair; such
property has not been damaged by waste, fire, earthquake or earth movement,
windstorm, flood, tornado or other casualty or otherwise damaged so as to affect
adversely the value of such real property as security for the Mortgage Loan or
the use for which the premises were intended;
(r) To the best of the Borrower's knowledge, all of the
improvements which were included for the purpose of determining the appraised
value of the real property mortgaged in connection with the related Mortgage
Loan lie wholly within the boundaries and building restriction lines of such
property, and no improvements on adjoining properties encroach upon such real
property except those identified in the related title insurance policy and which
are affirmatively insured against;
-3-
<PAGE> 25
(s) To the best of the Borrower's knowledge, no improvement
located on or being part of the real property mortgaged in connection with the
related Mortgage Loan is in violation of any applicable zoning law or
regulation. To the best of the Borrower's knowledge, all inspections, licenses
and certificates required to be made or issued with respect to all occupied
portions of such real property and, with respect to the use and occupancy of the
same, including (but not limited to) certificates of occupancy and fire
underwriting certificates, have been made or obtained from the appropriate
authorities and such real property is lawfully occupied under applicable law;
(t) The mortgage note related to the Mortgage Loan is not and has
not been secured by any collateral, pledged account or other security except the
lien of the corresponding mortgage;
(u) No Mortgage Loan was originated under a buy down plan
(whereby the seller of the mortgaged property or any third party, other than the
mortgagor, has agreed, or is obligated, to supplement or pay a portion of the
mortgagor's mortgage payments in respect of such Mortgage Loan);
(v) There is no obligation on the part of the Borrower or any
other party to make payments in addition to those made by the borrower in
respect of the Mortgage Loan, except for payments in the nature of escrow
payments, including, without limitation, taxes and insurance payment, to be made
by such borrower;
(w) No Mortgage Loan has a shared appreciation feature, or other
contingent interest feature;
(x) With respect to the Mortgage Loan secured by a second
priority mortgage, either (i) no consent for the Mortgage Loan is required by
the holder of the related first mortgage, or (ii) such consent has been obtained
and is part of the Mortgage Loan Documents;
(y) All parties which have had any interest in the Mortgage Loan,
whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period
in which they held and disposed of such interest, were) (1) in compliance with
any and all applicable licensing requirements of the laws of the state wherein
the real property mortgaged in connection with the Mortgage Loan is located, and
(2)(A) organized under the laws of such state, or (B) qualified to do business
in such state, or (C) federal savings and loan associations or national banks
having principal offices in such state, or (D) not doing business in such state
so as to require qualification or licensing;
(z) The mortgage related to the Mortgage Loan contains a
customary provision for the acceleration of the payment of the unpaid principal
balance of the Mortgage Loan in the event the real property mortgaged in
connection with the Mortgage Loan is sold without the prior consent of the
mortgagee thereunder;
-4-
<PAGE> 26
(aa) The mortgage related to the Mortgage Loan contains customary
and enforceable provisions which render the rights and remedies of the holder
thereof adequate for the realization against the real property mortgaged in
connection with such Mortgage Loan of the benefits of the security, including,
(i) in the case of a mortgage designated as a deed of trust, by trustee's sale,
and (ii) otherwise by judicial or non-judicial foreclosure. There is no
homestead or other exemption available to the mortgagor which would materially
interfere with the right to sell such real property at a trustee's sale or the
right to foreclose such mortgage;
(bb) There is no monetary default, breach, violation or event of
acceleration existing under the mortgage or the mortgage note for the related
Mortgage Loan and no event which, with the passage of time or with notice and
the expiration of any grace or cure period, would constitute a monetary default,
breach, violation or event of acceleration that has or will cause a prepayment
of Advances made in respect of such Mortgage Loan pursuant to Section 12 of the
Agreement; there is no non-monetary default, breach, violation or event of
acceleration existing under the mortgage or the mortgage note for the related
Mortgage Loan and no event which, with the passage of time or with notice and
the expiration of any grace or cure period, would constitute a non-monetary
default, breach, violation or event of acceleration; and the Borrower has not
waived any monetary or non-monetary default, breach, violation or event of
acceleration in respect of the mortgage or the mortgage note for the related
Mortgage Loan;
(cc) The Mortgage Loans were not selected by the Borrower on any
basis intended to adversely affect the value of the Lender's security interest
therein;
(dd) A full appraisal was performed in connection with the real
property mortgaged in connection with the Mortgage Loan;
(ee) To the best of the Borrower's knowledge, (i) there has not
occurred, nor has any person or entity alleged that there has occurred, upon the
real property securing the Mortgage Loan, any spillage, leakage, discharge or
release into the air, soil or groundwater of any hazardous or toxic substance or
regulated wastes, and (ii) there exists no violation of any local, state or
federal environmental law, rule or regulation with respect to the real property
securing the Mortgage Loan;
(ff) The Mortgage Loan meets the eligibility requirements of the
insurer, if any, providing credit enhancement for the Designated Trust; and
(gg) The Borrower held good and indefeasible title to, and was
the sole owner of, the Mortgage Loan subject to no liens, charges, mortgages,
participations, encumbrances or rights of others or other liens released
simultaneously with such pledge.
-5-
<PAGE> 27
Exhibit A
SECURED NOTE
$125,000,000.00 November 22, 1996
New York, New York
FOR VALUE RECEIVED, AAMES CAPITAL CORPORATION, a California
corporation (the "Borrower"), hereby promises to pay to the order of PRUDENTIAL
SECURITIES CREDIT CORPORATION, a Delaware corporation (the "Lender"), whose
address is One New York Plaza, New York, New York 10292, in lawful money of the
United States of America, the lesser of (a) ONE HUNDRED TWENTY-FIVE MILLION
DOLLARS ($125,000,000.00) and (b) the outstanding principal amount of all
Advances (as defined in the Agreement hereinafter referred to) made by the
Lender to the undersigned pursuant to the that certain Interim Loan and Security
Agreement, dated as of November 22, 1996 (as amended or otherwise modified from
time to time, the "Agreement"), by and between the Lender and the Borrower, plus
interest thereon from the date of each such Advance as provided in the
Agreement. All such payment obligations (whether in respect of the aggregate
principal amount of outstanding Advances made, interest thereon, or other
payment obligations of the Borrower under the Agreement) shall be made in lawful
money of the United States of America, in immediately available funds, on the
dates and in the amounts specified in, or determined in accordance with, the
Agreement.
The holder of this Secured Note is authorized to record the date
and amount of each Advance, and the date and amount of each repayment of
principal thereof, on the schedule annexed hereto, and any such recordation
shall be conclusive evidence of the accuracy of the amounts so recorded (absent
manifest error); provided that the failure of the holder hereof to make such
recordation (or any error in such recordation) shall not affect the obligations
of the Borrower hereunder or under the Agreement.
It is intended that the rate of interest herein shall never
exceed the maximum rate, if any, which may be legally charged on the loan
evidenced by this Secured Note (the "Maximum Rate"), and if the provisions for
interest contained in this Secured Note would result in a rate higher than the
Maximum Rate, interest shall nevertheless be limited to the Maximum Rate, and
any amounts which may be paid toward interest in excess of the Maximum Rate
shall be applied to the reduction of principal, or, at the option of the Lender,
returned to the Borrower.
All payments hereon shall be made, and all notices to the Lender
required or authorized hereby shall be given, at the office of the Lender at the
address designated in the Agreement, or to such other place as the Lender may
from time to time direct by written notice to the Borrower. Payments remitted by
the Borrower via wire transfer initiated after 4:00 p.m. New York City time
shall be deemed to be received on the next Business Day.
The Borrower agrees to pay all the Lender's costs of collection
and enforcement (including reasonable attorneys' fees and disbursements of
Lender's counsel) in respect of this
<PAGE> 28
Secured Note when incurred, including, without limitation, reasonable attorneys'
fees through appellate proceedings.
Capitalized terms not otherwise defined herein shall have the
respective meanings ascribed to them in the Agreement. Notwithstanding the
pledge of the Collateral, the Borrower hereby acknowledges, admits and agrees
that the Borrower's obligations under this Secured Note are recourse obligations
of the Borrower to which the Borrower pledges its full faith and credit.
The Borrower, and any indorsers or guarantors hereof (including,
without limitation, the Guarantor), (a) severally waive diligence, presentment,
protest and demand and also notice of protest, demand, dishonor and nonpayments
of this Secured Note, (b) expressly agree that this Secured Note, or any payment
hereunder, may be extended from time to time, and consent to the acceptance of
further Collateral, the release of any Collateral for this Secured Note, the
release of any party primarily or secondarily liable hereon, and (c) expressly
agree that it will not be necessary for the Lender, in order to enforce payment
of this Secured Note, to first institute or exhaust the Lender's remedies
against such Borrower or any other party liable hereon or against any Collateral
for this Secured Note. No extension of time for the payment of this Secured
Note, or any installment hereof, made by agreement by the Lender with any person
now or hereafter liable for the payment of this Secured Note, shall affect the
liability under this Secured Note of the Borrower, even if the Borrower is not a
party to such agreement; provided, however, that the Lender and the Borrower, by
written agreement between them, may affect the liability of the Borrower.
Any reference herein to the Lender shall be deemed to include and
apply to every subsequent holder of this Secured Note.
Reference is made to the Agreement for provisions concerning
mandatory principal repayments, Collateral, acceleration and other material
terms affecting this Secured Note.
THIS SECURED NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE
LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE)
WHOSE LAWS THE BORROWER EXPRESSLY ELECTS TO APPLY TO THIS SECURED NOTE. THE
BORROWER AGREES THAT ANY ACTION OR PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT
OF THIS SECURED NOTE MAY BE COMMENCED IN THE SUPREME COURT OF THE STATE OF NEW
YORK, BOROUGH OF MANHATTAN, OR IN THE DISTRICT COURT OF THE UNITED STATES FOR
THE SOUTHERN DISTRICT OF NEW YORK.
AAMES CAPITAL CORPORATION
By: _______________________________
Name:
Title:
-2-
<PAGE> 29
Schedule to Secured Note
Schedule of Advances
<TABLE>
<CAPTION>
Amount
of Total
Amount of Principal Principal
Date Advance Repaid Outstanding
- ---- ------- --------- -----------
<S> <C> <C> <C>
- ------------- $---------------- $---------------- ----------------
- ------------- $---------------- $---------------- ----------------
- ------------- $---------------- $---------------- ----------------
- ------------- $---------------- $---------------- ----------------
- ------------- $---------------- $---------------- ----------------
- ------------- $---------------- $---------------- ----------------
- ------------- $---------------- $---------------- ----------------
- ------------- $---------------- $---------------- ----------------
- ------------- $---------------- $---------------- ----------------
</TABLE>
-3-
<PAGE> 30
Exhibit B-1
NOTICE OF EXTENSION OF AGREEMENT NO. __________
Prudential Securities Credit Corporation
One New York Plaza, 12th Floor
Whole Loan Operations
New York, New York 10292-2012
Attention: Mr. Dan Lynch
Telecopy: 212-778-8876
Confirmation: 212-778-7462
1. Pursuant to the Interim Loan and Security Agreement, dated as
of November 22, 1996 (as amended from time to time, the "Agreement"), between
you and Aames Capital Corporation (the "Borrower"), the undersigned Borrower
hereby requests:
(i) that the Funding Period be extended to the period from
[insert date] to but excluding [insert date] (the "Termination Date");
(ii) that the Maximum Funding Amount be for the Funding Period as
so extended [be increased/decreased to] [remain][ [$__________]; and
(iii) that the Designated Trust in respect of the Advances to be
made during the Funding Period as so extended be [insert name of trust].
The undersigned Borrower agrees that, upon acceptance by the Lender of this
Notice of Extension of Agreement No. ___ by signing and dating the same below,
the Borrower will be bound by the terms of the Agreement as amended by this
Notice of Extension of Agreement in the manner set forth in this paragraph 1.
2. The undersigned Borrower hereby certifies that the following
statements are true and correct on the date hereof and shall be true and correct
on the date of the extension of the Funding Termination Date requested herein,
before and after giving effect thereto:
A. Each of the representations and warranties contained in the
Agreement, the Custodial Agreement and the Guarantee is true and
correct in all material respects; provided that the reference to
September 30, 1996 in Section 5(a)(iv) of the Agreement shall be
deemed to be a reference to [insert date of most recently
delivered financial statements]; and
B. No Default or Event of Default has occurred and is continuing.
3. Unless otherwise defined in this Notice of Extension of
Agreement No. ___, terms defined in the Agreement shall have their defined
meanings when used herein.
<PAGE> 31
4. Except as expressly modified by this Notice of Extension of
Agreement No. ___, the Agreement shall be in full force and effect.
5. This Notice of Extension of Agreement No. ___ and the rights
and obligations of the parties hereunder and under the Agreement as amended
hereby shall be governed by, and construed and interpreted in accordance with,
the laws of the State of New York.
6. The undersigned Borrower is delivering herewith to the Lender
an opinion of counsel to the Borrower, substantially in the form of Exhibit B-2
to the Agreement [and an Endorsement to the Secured Note, substantially in the
form of Exhibit B-3 to the Agreement.]1
IN WITNESS WHEREOF, the undersigned Borrower has caused this
Notice of Extension of Agreement No. ___ to be executed and delivered by its
proper and duly authorized officers as of the day and year first above written.
AAMES CAPITAL CORPORATION
By: _______________________________
Name:
Title:
AGREED TO AND ACCEPTED:
PRUDENTIAL SECURITIES CREDIT
CORPORATION
By: ________________________
Name:
Title:
Date: ______________________
- ------------------
1 Required if the Maximum Funding Amount is being increased to an amount greater
than the then maximum principal amount of the Secured Note.
-2-
<PAGE> 32
Exhibit B-2
[LETTERHEAD OF COUNSEL TO THE BORROWER AND THE GUARANTOR]
_____________, 199__
Prudential Securities Credit Corporation
One New York Plaza
New York, New York 10292-2012
Gentlemen:
I am counsel to Aames Capital Corporation, a California
corporation (the "Borrower"), and Aames Financial Corporation, a Delaware
corporation (the "Guarantor"), and have acted as such in connection with the
execution and delivery of the following documents:
(i) the Interim Loan and Security Agreement, dated as of November
22, 1996 (the "Interim Loan Agreement"), between Prudential Securities
Credit Corporation (the "Lender") and the Borrower;
(ii) the Secured Note (the "Note") dated November__, 1996, made
by the Borrower in favor of the Lender [and the Endorsement, dated
__________ __, 199_, to the Secured Note (the "Endorsement")];
(iii) the Custodial Agreement, dated as of November 22, 1996,
(the "Custodial Agreement"), among the Borrower, the Lender and Bankers
Trust Company of California, N.A. (the "Custodian");
(iv) the Intercreditor and Joint Shipment Agreement, dated as of
November 22, 1996 (the "Intercreditor Agreement"), among NationsBank of
Texas, N.A. and the Custodian, as joint custodians, the Lender and the
Borrower;
(v) the Guarantee, dated as of November 22, 1996 (the
"Guarantee"), made by the Guarantor in favor of the Lender; and
(vi) the Notice of Extension of Agreement No. __ , dated
__________, 199_ (the "Notice of Extension"), between the Borrower and
the Lender.
<PAGE> 33
This opinion is being delivered to you pursuant to Section 2(a)
of the Interim Loan Agreement. Capitalized terms used herein and not defined
herein shall have the meanings assigned to them in the Interim Loan Agreement.
I have examined executed copies of the Interim Loan Agreement,
the Note, the Intercreditor Agreement, the Custodial Agreement, the Guarantee
[,the Endorsement] and the Notice of Extension. I have also examined originals
or photostatic or certified copies of all such corporate records of the
Borrower, and such certificates of public officials, certificates of corporate
officers, and other documents, as I have deemed appropriate and necessary as a
basis for the opinions hereinafter expressed. In making my examination and
rendering the opinions hereinafter expressed I have assumed that each party to
each of the Interim Loan Agreement, the Intercreditor Agreement and the
Custodial Agreement (other than the Borrower) has the corporate power to enter
into and perform all of its obligations thereunder, (ii) the due authorization,
execution and delivery of each of the Interim Loan Agreement, the Intercreditor
Agreement and the Custodial Agreement by the parties thereto (other than the
Borrower) and (iii) the validity and binding effect on the parties thereto
(other than the Borrower) of each of the Interim Loan Agreement, the
Intercreditor Agreement and the Custodial Agreement.
The opinions expressed below with respect to enforceability are
subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization,
moratorium, receivership, or other similar laws of general applicability
relating to or affecting creditors' rights generally in the event of
bankruptcy, insolvency, reorganization, moratorium or receivership.
(b) The application of general principles of equity, including,
but not limited to, the right of specific performance (regardless of
whether enforceability is considered in a proceeding in equity or at
law).
Based upon the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly organized, validly existing
and in good standing under the laws of the State of California.
2. The Borrower has the corporate power and legal right to
execute and deliver [the Endorsement and] the Notice of Extension, to borrow
under the Interim Loan Agreement, as amended by the Notice of Extension, and the
Note [as amended by the Endorsement], and to grant liens under the Interim Loan
Agreement, as amended by the Notice of Extension, and has taken all necessary
corporate action to authorize such borrowing and such granting of liens upon the
terms and conditions of the Interim Loan Agreement, as amended by the Notice of
Extension, and to authorize the execution and delivery of the Notice of
Extension. The Borrower is duly licensed as a licensee or is otherwise qualified
in each state in which its ownership of property or the conduct of its business
requires such licensure or qualification and where failure to be so licensed or
qualified would have a material adverse
-2-
<PAGE> 34
effect on the business of the Borrower, on the Collateral, on the ability of the
Borrower to pay or perform the Secured Obligations or on the rights and remedies
of the Lender under the Interim Loan Agreement, the Note, the Custodial
Agreement, the Intercreditor Agreement or the Guarantee, and the Borrower is, to
our knowledge, in compliance in all material respects with each such state's
applicable statutes, laws, rules and regulations. No consent of any other Person
(including, without limitation, stockholders of the Borrower), and no consent,
license, permit, approval or authorization of, or registration or declaration
with, any governmental authority, bureau of agency is required connection with
the execution and delivery of [the Endorsement and] the Notice of Extension or
the enforceability of each of the Interim Loan Agreement, as amended by the
Notice of Extension, and the Note [as amended by the Endorsement].
3. Each of the Interim Loan Agreement, as amended by the Notice
of Extension, the Note [as amended by the Endorsement], the Intercreditor
Agreement and the Custodial Agreement constitutes the legal, valid, and binding
obligation of the Borrower enforceable against the Borrower in accordance with
its respective terms.
4. The Guarantee constitutes the legal, valid, and binding
obligation of the Guarantor enforceable against the Guarantor in accordance with
its terms.
5. The execution and delivery of the Notice of Extension and the
performance of each of the Interim Loan Agreement, as amended by the Notice of
Extension, and the Note [as amended by the Endorsement] will not violate any
provision of any existing Federal laws or the laws of the State of California or
of the charter or by-laws of the Borrower or of any mortgage, indenture,
contract or other undertaking to which, to the best of my knowledge (after due
inquiry), the Borrower is a party or which is binding upon it or its assets,
and, to the best of my knowledge (after due inquiry), will not result in the
creation or imposition of any lien, charge or encumbrance on any of its assets
pursuant to the provisions of any of the foregoing.
6. No litigation or administrative proceeding of or before any
governmental authority or court is currently pending, or, to the best of my
knowledge (after due inquiry), threatened, against the Borrower or its assets,
the liability with respect to which is likely to be material to the financial
position or results of operations of the Borrower.
7. Assuming that the Lender acquired the promissory notes (the
"Mortgage Notes") evidencing the Mortgage Loans for value, the Interim Loan
Agreement, as amended by the Notice of Extension, creates in favor of the Lender
a security interest under the Uniform Commercial Code (the "UCC") as currently
in effect in New York in all rights of the Borrower in the Mortgage Notes.
Provided that on the date hereof (i) the Custodian has acquired and maintains
continuous possession of
-3-
<PAGE> 35
the Mortgage Notes within the State of California and (ii) the Custodian is
acting on behalf of the Lender in accordance with the terms of the Custodial
Agreement and no other agreements or understandings, written or oral, govern the
relationship between the Custodian and the Lender, then, the security interest
in the Mortgage Notes granted by the Borrower to the Lender will be, on the date
of possession of the Mortgage Notes by the Custodian, perfected and prior to any
other security interest which can be perfected under the Uniform Commercial Code
as currently in effect in California.
I am admitted to practice law in the State of California, and the
foregoing opinions are limited to the Federal laws of the United States, the
Delaware General Corporation Law and the laws of the State of California. I note
that the Interim Loan Agreement, the Note, the Custodial Agreement and the
Guarantee are governed by the law of the State of New York and, with your
consent, I have assumed for purposes of Paragraphs 3, 4 and the first sentence
of Paragraph 11 of this opinion that the the law of the State of New York is
identical to the law of the State of California.
Sincerely yours,
-4-
<PAGE> 36
Exhibit B-3
SECURED NOTE
ENDORSEMENT NO. ___
_____________, 199_
The undersigned Borrower hereby agrees with Prudential Securities
Credit Corporation (the "Lender") that the Secured Note of the Borrower, dated
November 22, 1996, as it may have been previously amended by endorsement, in the
maximum principal amount of $__________, to which this Secured Note Endorsement
No. __ is attached, is hereby amended by changing the maximum principal amount
of the Secured Note to $_________.
This Secured Note Endorsement No. __ is given as a renewal,
rearrangement and extension of the obligations of the Borrower to the Lender
under the Secured Note and is not given in substitution therefor or
extinguishment thereof. The Borrower hereby authorizes the Lender to attach this
Secured Note Endorsement No. __ to the Secured Note.
Borrower: AAMES CAPITAL CORPORATION
By:_____________________________
Name:
Title:
Lender: PRUDENTIAL SECURITIES CREDIT
CORPORATION
By:______________________________
Name:
Title:
<PAGE> 37
Exhibit C
[Letterhead of Counsel to Aames Capital Corporation]
November 22, 1996
Bankers Trust Company of California, N.A.
3 Park Plaza, 16th Floor
Irvine, CA 92714
Prudential Securities Credit Corporation
One New York Plaza
New York, New York 10292-2012
Gentlemen:
I am counsel to Aames Capital Corporation, a California
corporation (the "Borrower"), and Aames Financial Corporation, a Delaware
corporation (the "Guarantor"), and have acted as such in connection with the
execution and delivery of the following documents:
(i) the Interim Loan and Security Agreement, dated as of November
22, 1996 (the "Interim Loan Agreement"), between Prudential Securities
Credit Corporation (the "Lender") and the Borrower;
(ii) the Secured Note (the "Note") dated November 22, 1996, made
by the Borrower in favor of the Lender;
(iii) the Custodial Agreement, dated as of November 22, 1996 (the
"Custodial Agreement"), among the Borrower, the Lender and Bankers Trust
Company of California, N.A. (the "Custodian");
(iv) the Intercreditor and Joint Shipment Agreement, dated as of
November 22, 1996 (the "Intercreditor Agreement"), among NationsBank of
Texas, N.A. and the Custodian, as joint custodians, the Lender and the
Borrower; and
<PAGE> 38
(v) the Guarantee, dated as of November 22, 1996 (the
"Guarantee"), made by the Guarantor in favor of the Lender.
This opinion is being delivered to you pursuant to subsection
1(d)(iii)(A) of the Interim Loan Agreement. Capitalized terms used herein and
not defined herein shall have the meanings assigned to them in the Interim Loan
Agreement.
I have examined executed copies of the Interim Loan Agreement,
the Note, the Custodial Agreement, the Intercreditor Agreement and the
Guarantee. I have also examined originals or photostatic or certified copies of
all such corporate records of the Borrower, and such certificates of public
officials, certificates of corporate officers, and other documents, as I have
deemed appropriate and necessary as a basis for the opinions hereinafter
expressed. In making my examination and rendering the opinions hereinafter
expressed I have assumed that each party to each of the Interim Loan Agreement,
the Intercreditor Agreement and the Custodial Agreement (other than the
Borrower) has the corporate power to enter into and perform all of its
obligations thereunder, (ii) the due authorization, execution and delivery of
each of the Interim Loan Agreement, the Intercreditor Agreement and the
Custodial Agreement by the parties thereto (other than the Borrower) and (iii)
the validity and binding effect on the parties thereto (other than the Borrower)
of each of the Interim Loan Agreement, the Intercreditor Agreement and the
Custodial Agreement.
The opinions expressed below with respect to enforceability are
subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization,
moratorium, receivership, or other similar laws of general applicability
relating to or affecting creditors' rights generally in the event of
bankruptcy, insolvency, reorganization, moratorium or receivership.
(b) The application of general principles of equity, including,
but not limited to, the right of specific performance (regardless of
whether enforceability is considered in a proceeding in equity or at
law).
Based upon the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly organized, validly existing
and in good standing under the laws of the State of California.
2. The Guarantor is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
3. The Borrower has the corporate power and legal right to enter
into each of the Interim Loan Agreement, the Note, the Intercreditor Agreement
and the Custodial Agreement, to borrow under the Interim Loan Agreement and the
Note and to grant liens under the Interim Loan Agreement and has taken all
necessary corporate action to authorize
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<PAGE> 39
such borrowing and such granting of liens upon the terms and conditions of the
Interim Loan Agreement and to authorize the execution, delivery and performance
of the Interim Loan Agreement, the Note, the Intercreditor Agreement and the
Custodial Agreement. The Borrower is duly licensed as a licensee or is otherwise
qualified in each state in which its ownership of property or the conduct of its
business requires such licensure or qualification and where failure to be so
licensed or qualified would have a material adverse effect on the business of
the Borrower, on the Collateral, on the ability of the Borrower to pay or
perform the Secured Obligations or on the rights and remedies of the Lender
under the Interim Loan Agreement, the Note, the Custodial Agreement, the
Intercreditor Agreement or the Guarantee, and the Borrower is, to our knowledge,
in compliance in all material respects with each such state's applicable
statutes, laws, rules and regulations. No consent of any other Person
(including, without limitation, stockholders of the Borrower), and no consent,
license, permit, approval or authorization of, or registration or declaration
with, any governmental authority, bureau or agency is required in connection
with the execution and delivery or enforceability of each of the Interim Loan
Agreement, the Note, the Intercreditor Agreement and the Custodial Agreement.
4. The Guarantor has the corporate power and legal right to enter
into the Guarantee and to guaranty obligation pursuant thereto and has taken all
necessary corporate action to authorize the execution, delivery and performance
of the Guarantee. The Guarantor is duly licensed as a licensee or is otherwise
qualified in each state in which its ownership of property or the conduct of its
business requires such licensure or qualification and where failure to be so
licensed or qualified would have a material adverse effect on the business of
the Guarantor, on the Collateral, on the ability of the Guarantor to pay or
perform its obligations under the Guarantee or on the rights and remedies of the
Lender under the Interim Loan Agreement, the Note, the Custodial Agreement, the
Intercreditor Agreement or the Guarantee, and the Guarantor is, to our
knowledge, in compliance in all material respects with each such state's
applicable statutes, laws, rules and regulations. No consent of any other Person
(including, without limitation, stockholders of the Guarantor), and no consent,
license, permit, approval or authorization of, or registration or declaration
with, any governmental authority, bureau or agency is required in connection
with the execution and delivery or enforceability of the Guarantee.
5. Each of the Interim Loan Agreement, the Note, the
Intercreditor Agreement and the Custodial Agreement constitutes the legal, valid
and binding obligation of the Borrower, enforceable against the Borrower in
accordance with its respective terms.
6. The Guarantee constitutes the legal, valid, and binding
obligation of the Guarantor, enforceable against the Guarantor in accordance
with its terms.
7. The execution, delivery and performance by the Borrower of
each of the Interim Loan Agreement, the Note, the Intercreditor Agreement and
the Custodial Agreement will not violate any provision of any existing law, rule
or regulation of the Federal government or the State of California or of the
charter or by-laws of the Borrower or of any mortgage,
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<PAGE> 40
indenture, contract or other undertaking to which, to the best of my knowledge
(after due inquiry), the Borrower is a party or which is binding upon it or its
assets, and, to the best of my knowledge (after due inquiry), will not result in
the creation or imposition of any lien, charge or encumbrance on any of its
assets pursuant to the provisions of any of the foregoing.
8. The execution, delivery and performance by the Guarantor of
the Guarantee will not violate any provision of any existing law, rule or
regulation of the Federal government or the State of California or of the
charter or by-laws of the Guarantor or of any mortgage, indenture, contract or
other undertaking to which, to the best of my knowledge (after due inquiry), the
Guarantor is a party or which is binding upon it or its assets, and, to the best
of my knowledge (after due inquiry), will not result in the creation or
imposition of any lien, charge or encumbrance on any of its assets pursuant to
the provisions of any of the foregoing.
9. No material litigation or administrative proceeding of or
before any governmental authority or court is presently pending, or, to the best
of my knowledge (after due inquiry), threatened, against the Borrower or the
Guarantor or its respective assets.
10. Assuming that the Lender acquired the promissory notes (the
"Mortgage Notes") evidencing the Mortgage Loans for value, the Interim Loan
Agreement creates in favor of the Lender a security interest under the Uniform
Commercial Code (the "UCC") as currently in effect in New York in all rights of
the Borrower in the Mortgage Notes. Provided that on the date hereof (i) the
Custodian has acquired and maintains continuous possession of the Mortgage Notes
within the State of California and (ii) the Custodian is acting on behalf of the
Lender in accordance with the terms of the Custodial Agreement and no other
agreements or understandings, written or oral, govern the relationship between
the Custodian and the Lender, then, the security interest in the Mortgage Notes
granted by the Borrower to the Lender will be, on the date of possession of the
Mortgage Notes by the Custodian, perfected and prior to any other security
interest which can be perfected under the Uniform Commercial Code as currently
in effect in California.
I am admitted to practice law in the State of California, and the
foregoing opinions are limited to the Federal laws of the United States, the
Delaware General Corporation Law and the laws of the State of California. I note
that the Interim Loan Agreement, the Note, the Custodial Agreement and the
Guarantee are governed by the law of the State of New York and, with your
consent, I have assumed for purposes of Paragraphs 5, 6 and the first sentence
of Paragraph 11 of this opinion that the the law of the State of New York is
identical to the law of the State of California.
Sincerely yours,
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<PAGE> 41
Exhibit D
NOTICE OF BORROWING NO. ________
Prudential Securities Credit Corporation
One New York Plaza, 12th Floor
Whole Loan Operations
New York, New York
Attention: Mr. Jonathan Rochlin
Telecopy: 212-778-7462
Confirmation: 212-778-8876
Pursuant to the Interim Loan and Security Agreement, dated as of
November 22, 1996 (as amended from time to time, the "Agreement"), between you
and Aames Capital Corporation (the "Borrower"), the undersigned Borrower hereby
gives notice of its election to request an Advance and, in connection therewith,
sets forth below the following information (all capitalized terms used herein
shall have the meaning specified therefor in the Agreement):
1. The Advance is being made in respect of Mortgage Loans to be sold
to [Name of Trust] (the "Designated Trust").
2. The principal amount of the requested Advance is $___________.
3. The Business Day on which this Advance is to be made is
___________, 199__ (the "Funding Date") [no earlier than [three]
following the date hereof].
4. The date on which this Advance shall mature is ___________, 199__
[the Funding Termination Date], or, if earlier, the date upon
which the Certificates related to the Mortgage Loans funded by
such Advance shall be issued by the Designated Trust.
5. Attached hereto is a copy of the Mortgage Loan Schedule (as
defined in the Custodial Agreement) being submitted to the
Custodian in connection with the Advance requested hereby.
<PAGE> 42
The undersigned hereby certifies that the following statements
are true and correct on the date hereof and shall be true and correct on the
date of the Advance requested herein, before and after giving effect thereto:
A. Each of the representations and warranties contained in the
Agreement and the Custodial Agreement are true and correct in
all material respects; and
B. No Default or Event of Default has occurred and is continuing.
AAMES CAPITAL CORPORATION
By:____________________________________________
Name:__________________________________________
Title:_________________________________________
Date:___________________________________, 199__
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<PAGE> 43
Exhibit E
NOTICE OF EXTENSION
Reference is made to the Interim Loan and Security Agreement,
dated as of November 22, 1996 (as amended from time to time, the "Agreement"),
among Prudential Securities Credit Corporation (the "Lender") and Aames Capital
Corporation (the "Borrower").
The Lender hereby notifies the Borrower pursuant to Section 2(d)
of the Agreement that with respect to the Advance made on _________ __, 199_,
the Lender hereby extends the date on which the Advance matures through
__________ __, 199_1, on which date such Advance shall be due and payable.
PRUDENTIAL SECURITIES CREDIT CORPORATION
By _____________________________
Title:
Date:________________________
- --------------
1 Insert date no more than 30 days following the then-existing Maturity
Date for such Advance.
<PAGE> 44
Exhibit F
GUARANTEE
GUARANTEE, dated as of November 22, 1996, by AAMES FINANCIAL
CORPORATION, a Delaware corporation (the "Guarantor"), in favor of PRUDENTIAL
SECURITIES CREDIT CORPORATION ("Lender").
1. Guarantee. To induce Lender to enter into an Interim Loan and
Security Agreement, dated as of the date hereof (the "Interim Loan Agreement"),
with Aames Capital Corporation, Inc., a California corporation ("Borrower"), the
Guarantor unconditionally guarantees to Lender, its successors, endorsees, and
permitted assigns, the prompt payment when due of all present and future
obligations and liabilities of all kinds of Borrower to Lender arising out of
the Interim Loan Agreement (the "Obligations").
2. Absolute Guarantee. The Guarantor's obligations under this
Guarantee shall not be affected by the genuineness, validity, regularity, or
enforceability of the Obligations or of any instrument evidencing the
Obligations, or by the existence, validity, enforceability, perfection, or
extent of any collateral for the Obligations, or by any other circumstance
relating to the Obligations which might otherwise constitute a discharge of or
defense to this Guarantee. Lender makes no representation or warranty to the
Guarantor regarding such matters, and has no duty or responsibility to disclose
to the Guarantor any circumstances that may now or hereafter affect such
matters. Lender shall not be obligated to file any claim relating to the
Obligations if Borrower becomes subject to a bankruptcy, reorganization, or
similar proceeding, and the failure of Lender so to file shall not affect the
Guarantor's obligations hereunder. If any payment by Borrower to Lender on
account of the Obligations is rescinded or must otherwise be returned for any
reason whatsoever, the Guarantor shall remain liable hereunder for such
Obligations as if such payment had not been made. The Guarantor's obligations
under this Guarantee constitute a guarantee of payment and not of collection.
3. Consents, Waivers, and Renewals. Lender may at any time and
from time to time, either before or after the maturity thereof, without notice
to or further consent of the Guarantor, extend the time of payment of, exchange,
or surrender any collateral for, or renew, any of the Obligations, and may also
make any agreement with Borrower or with any other individual or entity liable
on any of the Obligations, or interested therein, for the extension, renewal,
payment, compromise, discharge, or release thereof, in whole or in part, or for
any modification of the terms thereof or of any agreement between Lender and
Borrower or any such other individual or entity, without impairing or affecting
this Guarantee. Lender may seek payment of any of the Obligations from the
Guarantor, whether or not Lender shall have resorted to any collateral for the
Obligations or shall have proceeded against Borrower or any other obligor
principally or secondarily obligated for any of the Obligations.
4. Expenses. The Guarantor shall pay on demand all out-of-pocket
expenses (including the reasonable fees and expenses of Lender's counsel)
incurred in the
<PAGE> 45
enforcement or protection of the rights of Lender under this Guarantee, and any
collateral for the Obligations shall secure such payment; provided, however,
that the Guarantor shall not be liable for any expenses of Lender if no payment
under this Guarantee is due.
5. No Subrogation. Notwithstanding any payment or payments made
by the Guarantor hereunder, or any set-off or application of funds of the
Guarantor by the Lender, the Guarantor waives any right that it may have to be
subrogated to any of the rights of the Lender against the Borrower or against
any collateral security for guarantee or right of offset held by the Lender for
the payment of the Obligations or to otherwise seek reimbursement, indemnity or
contribution or any other payment from the Borrower in respect of payments made
by the Guarantor hereunder.
6. Continuing Guarantee. This Guarantee is absolute,
unconditional, and irrevocable and shall remain in full force and effect and be
binding upon the Guarantor and its successors and permitted assigns until all of
the Obligations have been satisfied in full. If any present or future
Obligations are guaranteed by individuals or entities in addition to the
Guarantor, the death, release, or discharge, in whole or part or the bankruptcy,
liquidation, termination, or dissolution of one or more of them shall not
discharge or affect the liabilities of the Guarantor hereunder.
7. No Waiver; Cumulative Rights. No failure on the part of Lender
to exercise, and no delay in exercising, any right, remedy, or power under this
Guarantee shall operate as a waiver thereof, nor shall any single or partial
exercise by Lender of any right, remedy, or power hereunder preclude any other
or future exercise of any right, remedy, or power. Each and every right, remedy,
and power hereby granted to Lender or allowed it by law or other agreement shall
be cumulative and not exclusive of any other, and may be exercised by Lender
from time to time.
8. Waiver of Notice. Except as required otherwise herein, the
Guarantor waives notice of the acceptance of this Guarantee, presentment to or
demand of payment from anyone liable for any of the Obligations, notice of
dishonor or non-payment, protest, diligence, suit, notice of any sale of any
collateral for the Obligations, notice of the taking of any action by Lender
against Borrower, the Guarantor, or others, and all other notices that may
otherwise be required by law.
9. Representations and Warranties.
(a) The Guarantor is duly organized and validly existing under
the law of the State of Delaware and has full corporate power and authority to
execute, deliver, and perform this Guarantee.
(b) The execution, delivery, and performance of this Guarantee
have been and remain duly authorized by all necessary corporate action and do
not contravene any provision of the Guarantor's certificate of incorporation or
by-laws, as amended to date, or any law, regulation, rule, decree, order,
judgment, or contractual restriction binding on the Guarantor or its assets.
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<PAGE> 46
(c) All consents, licenses, authorizations, and approvals of, and
registrations and declarations with, any governmental authority or regulatory
body necessary for the due execution, delivery, and performance of this
Guarantee have been obtained and remain in full force and effect and all
conditions thereof have been duly complied with, and no other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required in connection with the execution, delivery, or performance of this
Guarantee.
(d) This Guarantee constitutes the legal, valid, and binding
obligation of the Guarantor and is enforceable against the Guarantor in
accordance with its terms, subject as to enforceability to bankruptcy,
insolvency, reorganization, moratorium, conservatorship, receivership, and other
laws of general applicability relating to or affecting creditors' rights and to
equitable principles of general application.
10. Assignment. The Guarantor may not assign its rights,
interests, or obligations under this Guarantee to any other person without the
prior written consent of Lender.
11. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WITHIN SUCH STATE.
12. Notices. Any notice or communication to the Guarantor in
respect of this Guarantee shall be sufficiently given if in writing and
delivered in person or sent by certified or registered mail or the equivalent
(with return receipt requested), by courier, or by facsimile addressed to the
following:
Aames Financial Corporation
3731 Wilshire Boulevard
10th Floor
Los Angeles, California 90010
Attention: Gary K. Judis
Chairman and CEO
Telephone: 213-351-6100
Telecopy: 213-380-9365
with a copy to:
Aames Financial Corporation
3731 Wilshire Boulevard
10th Floor
Los Angeles, California 90010
Attention: Legal Department
Telephone: 213-351-6100
Telecopy: 213-383-4580
-3-
<PAGE> 47
Any such notice or communication shall specifically identify the amounts to
which this Guarantee relates, and shall be sufficiently given only upon actual
receipt by the Guarantor. Any notice or communication by the Guarantor to Lender
in respect of this Guarantee shall be sufficiently given if in writing and
delivered in the manner provided in the Interim Loan Agreement.
[SIGNATURE PAGE FOLLOWS]
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<PAGE> 48
IN WITNESS WHEREOF, this Guarantee has been duly executed and
delivered by the Guarantor to Lender as of the date first above written.
AAMES FINANCIAL CORPORATION
By:_________________________
Name:
Title:
<PAGE> 1
EXHIBIT 10.17(b)
NOTICE OF EXTENSION OF AGREEMENT NO. 1
May 15, 1997, with effect as of March 31,
1997
Prudential Securities Credit Corporation
One New York Plaza, 12th Floor
Whole Loan Operations
New York, New York 10292-2012
Attention: Mr. Dan Lynch
Telecopy: 212-778-8876
Confirmation: 212-778-7462
1. Pursuant to the Interim Loan and Security Agreement, dated as
of November 22, 1996 (as amended from time to time, the "Agreement"), between
you and Aames Capital Corporation (the "Borrower"), the undersigned Borrower
hereby requests:
(i) that the obligation of the Lender to make Advances under the
Agreement be revived, and that the Funding Period be extended to the
period from March 31, 1997 to but excluding September 30, 1997 (the
"Termination Date");
(ii) that the Maximum Funding Amount for the Funding Period as so
extended be increased to, for the period from March 31, 1997 to but
excluding the earlier of June 30, 1997 and the date that the
Certificates shall be issued by the Aames Mortgage Trust 1997-B, to
$250,000,000, and thereafter to be decreased to $125,000,000; and
(iii) that the Designated Trust in respect of the Advances to be
made during the Funding Period as so extended be (A) until the
Certificates shall be issued for Aames Mortgage Trust 1997-B, Aames
Mortgage Trust 1997-B and (B) thereafter, Aames Mortgage Trust 1997-C.
The undersigned Borrower agrees that, upon acceptance by the Lender of this
Notice of Extension of Agreement No. 1 by signing and dating the same below, the
Borrower will be bound by the terms of the Agreement as amended by this Notice
of Extension of Agreement in the manner set forth in this paragraph 1.
2. The undersigned Borrower hereby certifies that the following
statements are true and correct on the date hereof and shall be true and correct
on the date of the extension of the Funding Termination Date requested herein,
before and after giving effect thereto:
A. Each of the representations and warranties contained in the
Agreement, the Custodial Agreement and the Guarantee is true and
correct in all material
<PAGE> 2
respects; provided that the reference to September 30, 1996 in
Section 5(a)(iv) of the Agreement shall be deemed to be a
reference to March 31, 1997; and
B. No Default or Event of Default has occurred and is continuing.
3. Unless otherwise defined in this Notice of Extension of
Agreement No. 1, terms defined in the Agreement shall have their defined
meanings when used herein.
4. Except as expressly modified by this Notice of Extension of
Agreement No. 1, the Agreement shall be in full force and effect.
5. This Notice of Extension of Agreement No. 1 and the rights and
obligations of the parties hereunder and under the Agreement as amended hereby
shall be governed by, and construed and interpreted in accordance with, the laws
of the State of New York.
6. The undersigned Borrower is delivering to the Lender (A)
herewith, or on or prior to May 29, 1997 an opinion of counsel to the Borrower,
substantially in the form of Exhibit B-2 to the Agreement and (B) herewith, an
Endorsement to the Secured Note, substantially in the form of Exhibit B-3 to the
Agreement. It is expressly agreed by the Borrower that if the opinion of counsel
referred to in clause (A) of this paragraph 6 is not delivered to the Lender on
or prior to May 29, 1997, the extension and increase provided for in this Notice
of Extension of Agreement No. 1, and the Lender's obligation to make Advances,
shall automatically terminate and be of no further force or effect.
IN WITNESS WHEREOF, the undersigned Borrower has caused this
Notice of Extension of Agreement No. 1 to be executed and delivered by its
proper and duly authorized officers as of the day and year first above written.
AAMES CAPITAL CORPORATION
By: /s/ MARK E. ELBAUM
-------------------------------------------
Name: Mark E. Elbaum
Title: Senior Vice President -
Finance and Chief Accounting Officer
AGREED TO AND ACCEPTED:
PRUDENTIAL SECURITIES CREDIT
CORPORATION
By: /s/ JEFF K. FRENCH
---------------------------------------
Name:
Title:
Date: May 15, 1997
<PAGE> 3
[LETTERHEAD OF COUNSEL TO THE BORROWER AND THE GUARANTOR]
May __, 1997
Prudential Securities Credit Corporation
One New York Plaza
New York, New York 10292-2012
Gentlemen:
I am counsel to Aames Capital Corporation, a California
corporation (the "Borrower"), and Aames Financial Corporation, a Delaware
corporation (the "Guarantor"), and have acted as such in connection with the
execution and delivery of the following documents:
(i) the Interim Loan and Security Agreement, dated as of November
22, 1996 (the "Interim Loan Agreement"), between Prudential Securities
Credit Corporation (the "Lender") and the Borrower;
(ii) the Secured Note (the "Note") dated November 22, 1996,
made by the Borrower in favor of the Lender and the Endorsement, dated
March 31, 1997, to the Secured Note (the "Endorsement");
(iii) the Custodial Agreement, dated as of November 22, 1996,
(the "Custodial Agreement"), among the Borrower, the Lender and Bankers
Trust Company of California, N.A. (the "Custodian");
(iv) the Intercreditor and Joint Shipment Agreement, dated as of
November 22, 1996 (the "Intercreditor Agreement"), among NationsBank of
Texas, N.A. and the Custodian, as joint custodians, the Lender and the
Borrower;
(v) the Guarantee, dated as of November 22, 1996 (the
"Guarantee"), made by the Guarantor in favor of the Lender; and
(vi) the Notice of Extension of Agreement No. 1, dated May __,
1997 with effect as of March 31, 1997 (the "Notice of Extension"),
between the Borrower and the Lender.
<PAGE> 4
This opinion is being delivered to you pursuant to Section 2(a)
of the Interim Loan Agreement. Capitalized terms used herein and not defined
herein shall have the meanings assigned to them in the Interim Loan Agreement.
I have examined executed copies of the Interim Loan Agreement,
the Note, the Intercreditor Agreement, the Custodial Agreement, the Guarantee,
the Endorsement and the Notice of Extension. I have also examined originals or
photostatic or certified copies of all such corporate records of the Borrower,
and such certificates of public officials, certificates of corporate officers,
and other documents, as I have deemed appropriate and necessary as a basis for
the opinions hereinafter expressed. In making my examination and rendering the
opinions hereinafter expressed I have assumed that each party to each of the
Interim Loan Agreement, the Intercreditor Agreement and the Custodial Agreement
(other than the Borrower) has the corporate power to enter into and perform all
of its obligations thereunder, (ii) the due authorization, execution and
delivery of each of the Interim Loan Agreement, the Intercreditor Agreement and
the Custodial Agreement by the parties thereto (other than the Borrower) and
(iii) the validity and binding effect on the parties thereto (other than the
Borrower) of each of the Interim Loan Agreement, the Intercreditor Agreement and
the Custodial Agreement.
The opinions expressed below with respect to enforceability are
subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization,
moratorium, receivership, or other similar laws of general applicability
relating to or affecting creditors' rights generally in the event of
bankruptcy, insolvency, reorganization, moratorium or receivership.
(b) The application of general principles of equity, including,
but not limited to, the right of specific performance (regardless of
whether enforceability is considered in a proceeding in equity or at
law).
Based upon the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly organized, validly existing
and in good standing under the laws of the State of California.
2. The Borrower has the corporate power and legal right to
execute and deliver the Endorsement and the Notice of Extension, to borrow under
the Interim Loan Agreement, as amended by the Notice of Extension, and the Note
as amended by the Endorsement, and to grant liens under the Interim Loan
Agreement, as amended by the Notice of Extension, and has taken all necessary
corporate action to authorize such borrowing and such granting of liens upon the
terms and conditions of the Interim Loan Agreement, as amended by the Notice of
Extension, and to authorize the execution and delivery of the Notice of
Extension. The Borrower is duly licensed as a licensee or is otherwise qualified
in each state in which its ownership of property or the conduct of its business
requires such licensure or qualification and where failure to be so licensed or
qualified would have a material adverse
<PAGE> 5
effect on the business of the Borrower, on the Collateral, on the ability of the
Borrower to pay or perform the Secured Obligations or on the rights and remedies
of the Lender under the Interim Loan Agreement, the Note, the Custodial
Agreement, the Intercreditor Agreement or the Guarantee, and the Borrower is, to
our knowledge, in compliance in all material respects with each such state's
applicable statutes, laws, rules and regulations. No consent of any other Person
(including, without limitation, stockholders of the Borrower), and no consent,
license, permit, approval or authorization of, or registration or declaration
with, any governmental authority, bureau of agency is required connection with
the execution and delivery of the Endorsement and the Notice of Extension or
the enforceability of each of the Interim Loan Agreement, as amended by the
Notice of Extension, and the Note as amended by the Endorsement.
3. Each of the Interim Loan Agreement, as amended by the Notice
of Extension, the Note as amended by the Endorsement, the Intercreditor
Agreement and the Custodial Agreement constitutes the legal, valid, and binding
obligation of the Borrower enforceable against the Borrower in accordance with
its respective terms.
4. The Guarantee constitutes the legal, valid, and binding
obligation of the Guarantor enforceable against the Guarantor in accordance with
its terms.
5. The execution and delivery of the Notice of Extension and the
performance of each of the Interim Loan Agreement, as amended by the Notice of
Extension, and the Note as amended by the Endorsement will not violate any
provision of any existing Federal laws or the laws of the State of California or
of the charter or by-laws of the Borrower or of any mortgage, indenture,
contract or other undertaking to which, to the best of my knowledge (after due
inquiry), the Borrower is a party or which is binding upon it or its assets,
and, to the best of my knowledge (after due inquiry), will not result in the
creation or imposition of any lien, charge or encumbrance on any of its assets
pursuant to the provisions of any of the foregoing.
6. No litigation or administrative proceeding of or before any
governmental authority or court is currently pending, or, to the best of my
knowledge (after due inquiry), threatened, against the Borrower or its assets,
the liability with respect to which is likely to be material to the financial
position or results of operations of the Borrower.
7. Assuming that the Lender acquired the promissory notes (the
"Mortgage Notes") evidencing the Mortgage Loans for value, the Interim Loan
Agreement as amended by the Notice of Extension, creates in favor of the Lender
a security interest under the Uniform Commercial Code (the "UCC") as currently
in effect in New York in all rights of the Borrower in the Mortgage Notes.
Provided that on the date hereof (i) the Custodian has acquired and maintains
continuous possession of the Mortgage Notes within the State of California and
(ii) the Custodian is acting on behalf of the Lender in accordance with the
terms of the Custodial Agreement and no other agreements or understandings,
written or oral, govern the relationship between the Custodian and the Lender,
then, the security interest in the Mortgage Notes granted by the Borrower to the
Lender will be, on the date of possession of
<PAGE> 6
the Mortgage Notes by the Custodian, perfected and prior to any other security
interest which can be perfected under the Uniform Commercial Code as currently
in effect in California.
I am admitted to practice law in the State of California, and the
foregoing opinions are limited to the Federal laws of the United States, the
Delaware General Corporation Law and the laws of the State of California. I note
that the Interim Loan Agreement, the Note, the Custodial Agreement and the
Guarantee are governed by the law of the State of New York and, with your
consent, I have assumed for purposes of Paragraphs 3, 4 and the first sentence
of Paragraph 11 of this opinion that the law of the State of New York is
identical to the law of the State of California.
Sincerely yours,
<PAGE> 1
EXHIBIT 10.17(c)
AMENDMENT
AMENDMENT, dated as of August 19, 1997 (this "Amendment"), to the
Interim Loan and Security Agreement, dated as of November 22, 1996 (as modified
by that certain Notice of Extension of Agreement No. 1 dated May 15, 1997 with
effect as of March 31, 1997 ("Extension No. 1"), and as otherwise amended,
supplemented or otherwise modified prior to the date hereof, the "Agreement"),
between AAMES CAPITAL CORPORATION, a California corporation (the "Borrower"),
and PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware corporation (the
"Lender").
RECITALS
Pursuant to Extension No. 1, the Funding Termination Date was extended
from March 31, 1997 to September 30, 1997, and the Maximum Funding Amount was
increased from $125,000,000 to $250,000,000 for the period from March 31, 1997
to but excluding the earlier of June 30, 1997 and the date that the Certificates
shall be issued by the Aames Mortgage Trust 1997-B. The Borrower has requested
the Lender to agree to amend the Agreement to increase the Maximum Funding
Amount to $250,000,000 for the period commencing on the effective date of this
Amendment to but excluding the Funding Termination Date. The Lender is willing
to agree to such amendment, but only on the terms and subject to the conditions
set forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Lender hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
Agreement are used herein as therein defined.
2. Amendment. The Agreement is hereby amended by deleting clause 1(ii)
of Extension No. 1 and substituting in lieu thereof a new clause 1(ii) to read
in its entirety as follows:
"(ii) that the Maximum Funding Amount for the Funding Period as
so extended by increased to $250,000,000; and"
3. Effectiveness. This Amendment shall become effective upon receipt by
the Lender of evidence satisfactory to the Lender that this Amendment has been
executed and delivered by the Borrower and the Guarantor. In addition, it shall
be a condition subsequent to effectiveness of this Amendment that the Agent
shall have received, within 7 days following the date hereof, an opinion of
counsel to the Borrower, substantially in the form of Exhibit A hereto.
<PAGE> 2
4. Representations and Warranties. To induce the Lender to enter into
this Amendment, the Borrower hereby represents and warrants to the Lender that,
after giving effect to the amendment provided for herein, the representations
and warranties contained in the Agreement, the Custodial Agreement and the
Guarantee will be true and correct in all material respects as if made on and as
of the date hereof and that no Default or Event of Default will have occurred
and be continuing.
5. No Other Amendments. Except as expressly amended hereby, the
Agreement, the Secured Note, the Custodial Agreement and the Guarantee shall
remain in full force and effect in accordance with their respective terms,
without any waiver, amendment or modification of any provision thereof.
6. Counterparts. This Amendment may be executed by one or more of the
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
7. Expenses. The Borrower agrees to pay and reimburse the Lender for all
of the out-of-pocket costs and expenses incurred by the Lender in connection
with the preparation, execution and delivery of this Amendment, including,
without limitation, the fees and disbursements of Cadwalader, Wickersham & Taft,
counsel to the Lender.
8. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGES FOLLOW]
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<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the day and year first above written.
AAMES CAPITAL CORPORATION
By: /s/ MARK E. ELBAUM
-----------------------------------------------
Name: Mark E. Elbaum
Title: Senior Vice President -
Finance and Chief Accounting Officer
PRUDENTIAL SECURITIES CREDIT CORPORATION
By: /s/ JEFF K. FRENCH
-----------------------------------------------
Name: Jeff K. French
Title:
<PAGE> 4
EXHIBIT A
[LETTERHEAD OF COUNSEL TO THE BORROWER AND THE GUARANTOR]
August __, 1997
Prudential Securities Credit Corporation
One New York Plaza
New York, New York 10292-2012
Gentlemen:
I am counsel to Aames Capital Corporation, a California
corporation (the "Borrower"), and Aames Financial Corporation, a Delaware
corporation (the "Guarantor"), and have acted as such in connection with the
execution and delivery of the following documents:
(i) the Interim Loan and Security Agreement, dated as of November
22, 1996 (the "Original Interim Loan Agreement"), between Prudential
Securities Credit Corporation (the "Lender") and the Borrower;
(ii) the Secured Note (the "Original Note") dated November 22,
1996, made by the Borrower in favor of the Lender, the Endorsement,
dated March 31, 1997, to the Secured Note (the "Endorsement"; the
Original Note, as amended by the Endorsement, is referred to as the
"Note");
(iii) the Custodial Agreement, dated as of November 22, 1996,
(the "Custodial Agreement"), among the Borrower, the Lender and Bankers
Trust Company of California, N.A. (the "Custodian");
(iv) the Intercreditor and Joint Shipment Agreement, dated as of
November 22, 1996 (the "Intercreditor Agreement"), among NationsBank of
Texas, N.A. and the Custodian, as joint custodians, the Lender and the
Borrower;
(v) the Guarantee, dated as of November 22, 1996 (the
"Guarantee"), made by the Guarantor in favor of the Lender;
(vi) the Notice of Extension of Agreement No. 1, dated May 15,
1997 with effect as of March 31, 1997 (the "Notice of Extension"),
between the Borrower and the Lender; and
<PAGE> 5
(vii) the Amendment, dated as of August __, 1997 (the
"Amendment"; the Original Interim Loan Agreement, as amended by the
Notice of Extension and the Amendment, is referred to as the "Interim
Loan Agreement"), between the Borrower and the Lender.
This opinion is being delivered to you pursuant to Section 3(b)
of the Amendment. Capitalized terms used herein and not defined herein shall
have the meanings assigned to them in the Interim Loan Agreement.
I have examined executed copies of the Interim Loan Agreement,
the Note, the Intercreditor Agreement, the Custodial Agreement, the Guarantee,
the Endorsement, the Notice of Extension and the Amendment. I have also examined
originals or photostatic or certified copies of all such corporate records of
the Borrower, and such certificates of public officials, certificates of
corporate officers, and other documents, as I have deemed appropriate and
necessary as a basis for the opinions hereinafter expressed. In making my
examination and rendering the opinions hereinafter expressed I have assumed that
each party to each of the Interim Loan Agreement, the Intercreditor Agreement,
and the Custodial Agreement (other than the Borrower) has the corporate power to
enter into and perform all of its obligations thereunder, (ii) the due
authorization, execution and delivery of each of the Interim Loan Agreement, the
Intercreditor Agreement and the Custodial Agreement by the parties thereto
(other than the Borrower) and (iii) the validity and binding effect on the
parties thereto (other than the Borrower) of each of the Interim Loan Agreement,
the Intercreditor Agreement and the Custodial Agreement.
The opinions expressed below with respect to enforceability are
subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization,
moratorium, receivership, or other similar laws of general applicability
relating to or affecting creditors' rights generally in the event of
bankruptcy, insolvency, reorganization, moratorium or receivership.
(b) The application of general principles of equity, including,
but not limited to, the right of specific performance (regardless of
whether enforceability is considered in a proceeding in equity or at
law).
Based upon the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly organized, validly existing
and in good standing under the laws of the State of California.
2. The Borrower has the corporate power and legal right to
execute and deliver the Amendment, to borrow under the Interim Loan Agreement,
as amended by the Amendment, and the Note, and to grant liens under the Interim
Loan Agreement, and has taken all necessary corporate action to authorize such
borrowing and such granting of liens upon the terms and conditions of the
Interim Loan Agreement, and to authorize the execution
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<PAGE> 6
and delivery of the Amendment. The Borrower is duly licensed as a licensee or is
otherwise qualified in each state in which its ownership of property or the
conduct of its business requires such licensure or qualification and where
failure to be so licensed or qualified would have a material adverse effect on
the business of the Borrower, on the Collateral, on the ability of the Borrower
to pay or perform the Secured Obligations or on the rights and remedies of the
Lender under the Interim Loan Agreement, the Note, the Custodial Agreement, the
Intercreditor Agreement or the Guarantee, and the Borrower is, to our knowledge,
in compliance in all material respects with each such state's applicable
statutes, laws, rules and regulations. No consent of any other Person
(including, without limitation, stockholders of the Borrower), and no consent,
license, permit, approval or authorization of, or registration or declaration
with, any governmental authority, bureau of agency is required connection with
the execution and delivery of the Amendment or the enforceability of each of the
Interim Loan Agreement, and the Note.
3. Each of the Interim Loan Agreement, the Note, the
Intercreditor Agreement and the Custodial Agreement constitutes the legal,
valid, and binding obligation of the Borrower enforceable against the Borrower
in accordance with its respective terms.
4. The Guarantee constitutes the legal, valid, and binding
obligation of the Guarantor enforceable against the Guarantor in accordance with
its terms.
5. The execution and delivery of the Amendment and the
performance of each of the Interim Loan Agreement, and the Note will not violate
any provision of any existing Federal laws or the laws of the State of
California or of the charter or by-laws of the Borrower or of any mortgage,
indenture, contract or other undertaking to which, to the best of my knowledge
(after due inquiry), the Borrower is a party or which is binding upon it or its
assets, and, to the best of my knowledge (after due inquiry), will not result in
the creation or imposition of any lien, charge or encumbrance on any of its
assets pursuant to the provisions of any of the foregoing.
6. No litigation or administrative proceeding of or before any
governmental authority or court is currently pending, or, to the best of my
knowledge (after due inquiry), threatened, against the Borrower or its assets,
the liability with respect to which is likely to be material to the financial
position or results of operations of the Borrower.
7. Assuming that the Lender acquired the promissory notes (the
"Mortgage Notes") evidencing the Mortgage Loans for value, the Interim Loan
Agreement creates in favor of the Lender a security interest under the Uniform
Commercial Code (the "UCC") as currently in effect in New York in all rights of
the Borrower in the Mortgage Notes. Provided that on the date hereof (i) the
Custodian has acquired and maintains continuous possession of the Mortgage Notes
within the State of California and (ii) the Custodian is acting on behalf of the
Lender in accordance with the terms of the Custodial Agreement and no other
agreements or understandings, written or oral, govern the relationship between
the Custodian and the Lender, then, the security interest in the Mortgage Notes
granted by the Borrower to the Lender will be, on the date of possession of the
Mortgage Notes by the Custodian, perfected
-3-
<PAGE> 7
and prior to any other security interest which can be perfected under the
Uniform Commercial Code as currently in effect in California.
I am admitted to practice law in the State of California, and the
foregoing opinions are limited to the Federal laws of the United States, the
Delaware General Corporation Law and the laws of the State of California. I note
that the Interim Loan Agreement, the Note, the Custodial Agreement and the
Guarantee are governed by the law of the State of New York and, with your
consent, I have assumed for purposes of Paragraphs 3, 4 and the first sentence
of Paragraph 11 of this opinion that the law of the State of New York is
identical to the law of the State of California.
Sincerely yours,
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<PAGE> 1
EXHIBIT 10.20
AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
EFFECTIVE APRIL 15, 1997
COPYRIGHT (C) 1997
BY COMPENSATION RESOURCE GROUP, INC.
ALL RIGHTS RESERVED
<PAGE> 2
AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
AAMES FINANCIAL CORPORATION
DEFERRED COMPENSATION PLAN
Effective April 15, 1997
PURPOSE
The purpose of this Plan is to provide specified benefits to a select
group of management and highly compensated Employees who contribute materially
to the continued growth, development and future business success of Aames
Financial Corporation, a Delaware corporation, and its subsidiaries, if any,
that sponsor this Plan. This Plan shall be unfunded for tax purposes and for
purposes of Title I of ERISA.
ARTICLE 1
DEFINITIONS
For purposes of this Plan, unless otherwise clearly apparent from the
context, the following phrases or terms shall have the following indicated
meanings:
1.1 "Account Balance" shall mean, with respect to a Participant, a credit
on the records of the Employer equal to the sum of (i) the Deferral
Account balance, (ii) the vested Discretionary Contribution Account
balance and (iii) the vested Company Matching Account balance. The
Account Balance, and each other specified account balance, shall be a
bookkeeping entry only and shall be utilized solely as a device for the
measurement and determination of the amounts to be paid to a
Participant, or his or her designated Beneficiary, pursuant to this
Plan.
1.2 "Annual Bonus" shall mean any compensation, in addition to Base Annual
Salary relating to services performed during any calendar year, whether
or not paid in such calendar year or included on the Federal Income Tax
Form W-2 for such calendar year, payable to a Participant as an
Employee under any Employer's annual bonus and cash incentive plans,
excluding stock options.
1.3 "Annual Company Matching Amount" for any one Plan Year shall be the
amount determined in accordance with Section 3.6.
1.4 "Annual Deferral Amount" shall mean that portion of a Participant's
Base Annual Salary and Annual Bonus that a Participant elects to have,
and is deferred, in accordance with Article 3, for any one Plan Year.
In the event of a Participant's Retirement, Disability (if deferrals
cease in accordance with Section 8.1), death or a Termination of
Employment prior to the end of a Plan Year, such year's Annual Deferral
Amount shall be the actual amount withheld prior to such event.
- --------------------------------------------------------------------------------
-1-
<PAGE> 3
AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
1.5 "Annual Discretionary Contribution Amount" shall mean, for any one Plan
Year, the amount determined in accordance with Section 3.5.
1.6 "Base Annual Salary" shall mean the annual cash compensation, including
commissions, relating to services performed during any calendar year
whether or not paid in such calendar year or included on the Federal
Income Tax Form W-2 for such calendar year, excluding bonuses,
overtime, fringe benefits, stock options, relocation expenses,
incentive payments, non-monetary awards, and other fees, automobile and
other allowances paid to a Participant for employment services rendered
(whether or not such allowances are included in the Employee's gross
income). Base Annual Salary shall be calculated before reduction for
compensation voluntarily deferred or contributed by the Participant
pursuant to all qualified or non-qualified plans of any Employer and
shall be calculated to include amounts not otherwise included in the
Participant's gross income under Code Sections 125, 402(e)(3), 402(h),
or 403(b) pursuant to plans established by any Employer; provided,
however, that all such amounts will be included in compensation only to
the extent that, had there been no such plan, the amount would have
been payable in cash to the Employee.
1.7 "Beneficiary" shall mean one or more persons, trusts, estates or other
entities, designated in accordance with Article 9, that are entitled to
receive benefits under this Plan upon the death of a Participant.
1.8 "Beneficiary Designation Form" shall mean the form established from
time to time by the Committee that a Participant completes, signs and
returns to the Committee to designate one or more Beneficiaries.
1.9 "Board" shall mean the board of directors of the Company.
1.10 "Change in Control" shall mean the first to occur of any of the
following events:
(a) Any "person" (as that term is used in Section 13 and 14(d)(2)
of the Securities Exchange Act of 1934 ("Exchange Act"))
becomes the beneficial owner (as that term is used in Section
13(d) of the Exchange Act), directly or indirectly, of 50% or
more of the Company's capital stock entitled to vote in the
election of directors;
(b) During any period of not more than two consecutive years, not
including any period prior to the adoption of this Plan,
individuals who at the beginning of such period constitute the
board of directors of the Company, and any new director (other
than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described
in clause (a), (c), (d) or (e) of this Section 1.10) whose
election by the board of directors or nomination for election
by the Company's stockholders was approved by a vote of at
least three-fourths (3/4ths) of the directors then still in
office who either
- --------------------------------------------------------------------------------
-2-
<PAGE> 4
AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
were directors at the beginning of the period or whose
election or nomination for election was previously so
approved, cease for any reason to constitute at least a
majority thereof;
(c) The shareholders of the Company approve any consolidation or
merger of the Company, other than a consolidation or merger of
the Company in which the holders of the common stock of the
Company immediately prior to the consolidation or merger hold
more than 50% of the common stock of the surviving corporation
immediately after the consolidation or merger;
(d) The shareholders of the Company approve any plan or proposal
for the liquidation or dissolution of the Company; or
(e) The shareholders of the Company approve the sale or transfer
of all or substantially all of the assets of the Company to
parties that are not within a "controlled group of
corporations" (as defined in Code Section 1563) in which the
Company is a member.
1.11 "Claimant" shall have the meaning set forth in Section 14.1.
1.12 "Code" shall mean the Internal Revenue Code of 1986, as it may be
amended from time to time.
1.13 "Committee" shall mean the committee described in Article 12.
1.14 "Company" shall mean Aames Financial Corporation, a Delaware
corporation, and any successor to all or substantially all of the
Company's assets or business.
1.15 "Company Matching Account" shall mean (i) the sum of all of a
Participant's Annual Company Matching Amounts, plus (ii) amounts
credited in accordance with all the applicable crediting provisions of
this Plan that relate to the Participant's Company Matching Account,
less (iii) all distributions made to the Participant or his or her
Beneficiary pursuant to this Plan that relate to the Participant's
Company Matching Account.
1.16 "Deduction Limitation" shall mean the following described limitation on
a benefit that may otherwise be distributable pursuant to the
provisions of this Plan. Except as otherwise provided, this limitation
shall be applied to all distributions that are "subject to the
Deduction Limitation" under this Plan. If an Employer determines in
good faith prior to a Change in Control that there is a reasonable
likelihood that any compensation paid to a Participant for a taxable
year of the Employer would not be deductible by the Employer solely by
reason of the limitation under Code Section 162(m), then to the extent
deemed necessary by the Employer to ensure that the entire amount of
any distribution to the Participant pursuant to this Plan prior to the
Change in Control is deductible, the Employer may defer all or any
portion of a distribution under this Plan. Any amounts deferred
pursuant to this limitation shall continue to be credited/debited with
additional amounts in accordance with Section 3.9 below, even if such
amount is being paid out in installments. The amounts so deferred and
amounts credited thereon shall be distributed to the
- --------------------------------------------------------------------------------
-3-
<PAGE> 5
AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
Participant or his or her Beneficiary (in the event of the
Participant's death) at the earliest possible date, as determined by
the Employer in good faith, on which the deductibility of compensation
paid or payable to the Participant for the taxable year of the Employer
during which the distribution is made will not be limited by Section
162(m), or if earlier, the effective date of a Change in Control.
Notwithstanding anything to the contrary in this Plan, the Deduction
Limitation shall not apply to any distributions made after a Change in
Control.
1.17 "Deferral Account" shall mean (i) the sum of all of a Participant's
Annual Deferral Amounts, plus (ii) amounts credited in accordance with
all the applicable crediting provisions of this Plan that relate to the
Participant's Deferral Account, less (iii) all distributions made to
the Participant or his or her Beneficiary pursuant to this Plan that
relate to his or her Deferral Account.
1.18 "Director" shall mean any member of the board of directors of any
Employer.
1.19 "Disability" shall mean a period of disability during which a
Participant qualifies for permanent disability benefits under the
Participant's Employer's long-term disability plan, or, if a
Participant does not participate in such a plan, a period of disability
during which the Participant would have qualified for permanent
disability benefits under such a plan had the Participant been a
participant in such a plan, as determined in the sole discretion of the
Committee. If the Participant's Employer does not sponsor such a plan,
or discontinues to sponsor such a plan, Disability shall be determined
by the Committee in its sole discretion.
1.20 "Disability Benefit" shall mean the benefit set forth in Article 8.
1.21 "Discretionary Contribution Account" shall mean (i) the sum of the
Participant's Annual Discretionary Contribution Amounts, plus (ii)
amounts credited in accordance with all the applicable crediting
provisions of this Plan that relate to the Participant's Discretionary
Contribution Account, less (iii) all distributions made to the
Participant or his or her Beneficiary pursuant to this Plan that relate
to the Participant's Discretionary Contribution Account.
1.22 "Election Form" shall mean the form established from time to time by
the Committee that a Participant completes, signs and returns to the
Committee to make an election under the Plan.
1.23 "Employee" shall mean a person who is an employee of any Employer.
1.24 "Employer(s)" shall mean the Company and/or any of its subsidiaries
(now in existence or hereafter formed or acquired) that have been
selected by the Board to participate in the Plan and have adopted the
Plan as a sponsor.
1.25 "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as it may be amended from time to time.
1.26 "First Plan Year" shall mean the period beginning April 15, 1997 and
ending December 31, 1997.
- --------------------------------------------------------------------------------
-4-
<PAGE> 6
AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
1.27 "Monthly Installment Method" shall be a monthly installment payment
over the number of months selected by the Participant in accordance
with this Plan, calculated as follows: The Account Balance of the
Participant shall be calculated as of the close of business three
business days prior to the last business day of the month. The monthly
installment shall be calculated by multiplying this balance by a
fraction, the numerator of which is one, and the denominator of which
is the remaining number of monthly payments due the Participant. By way
of example, if the Participant elects a 120 month Monthly Installment
Method, the first payment shall be 1/120 of the Account Balance,
calculated as described in this definition. The following month, the
payment shall be 1/119 of the Account Balance, calculated as described
in this definition. Each monthly installment shall be paid on or as
soon as practicable after the last business day of the applicable
month.
1.28 "Participant" shall mean any Employee (i) who is selected to
participate in the Plan, (ii) who elects to participate in the Plan,
(iii) who signs a Plan Agreement, an Election Form and a Beneficiary
Designation Form, (iv) whose signed Plan Agreement, Election Form and
Beneficiary Designation Form are accepted by the Committee, (v) who
commences participation in the Plan, and (vi) whose Plan Agreement has
not terminated. A spouse or former spouse of a Participant shall not be
treated as a Participant in the Plan or have an account balance under
the Plan, even if he or she has an interest in the Participant's
benefits under the Plan as a result of applicable law or property
settlements resulting from legal separation or divorce.
1.29 "Plan" shall mean the Company's Deferred Compensation Plan, which shall
be evidenced by this instrument and by each Plan Agreement, as they may
be amended from time to time.
1.30 "Plan Agreement" shall mean a written agreement, as may be amended from
time to time, which is entered into by and between an Employer and a
Participant. Each Plan Agreement executed by a Participant and the
Participant's Employer shall provide for the entire benefit to which
such Participant is entitled under the Plan; should there be more than
one Plan Agreement, the Plan Agreement bearing the latest date of
acceptance by the Employer shall supersede all previous Plan Agreements
in their entirety and shall govern such entitlement. The terms of any
Plan Agreement may be different for any Participant, and any Plan
Agreement may provide additional benefits not set forth in the Plan or
limit the benefits otherwise provided under the Plan; provided,
however, that any such additional benefits or benefit limitations must
be agreed to by both the Employer and the Participant.
1.31 "Plan Year" shall, except for the First Plan Year, mean a period
beginning on January 1 of each calendar year and continuing through
December 31 of such calendar year.
1.32 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in
Article 6.
1.33 "Retirement", "Retire(s)" or "Retired" shall mean, with respect to an
Employee, severance from employment from all Employers for any reason
other than a leave of absence, death or Disability
- --------------------------------------------------------------------------------
-5-
<PAGE> 7
AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
on or after the attainment of age fifty-five (55). If a Participant is
both an Employee and a Director, Retirement shall not occur until he or
she Retires as both an Employee and a Director, which Retirement shall
be deemed to be a Retirement as a Director; provided, however, that
such a Participant may elect, at least three years prior to Retirement
and in accordance with the policies and procedures established by the
Committee, to Retire for purposes of this Plan at the time he or she
Retires as an Employee, which Retirement shall be deemed to be a
Retirement as an Employee.
1.34 "Retirement Benefit" shall mean the benefit set forth in Article 5.
1.35 "Short-Term Payout" shall mean the payout set forth in Section 4.1.
1.36 "Termination Benefit" shall mean the benefit set forth in Article 7.
1.37 "Termination of Employment" shall mean the severing of employment with
all Employers, voluntarily or involuntarily, for any reason other than
Retirement, Disability, death or an authorized leave of absence. If a
Participant is both an Employee and a Director, a Termination of
Employment shall occur only upon the termination of the last position
held; provided, however, that such a Participant may elect, at least
three years before Termination of Employment and in accordance with the
policies and procedures established by the Committee, to be treated for
purposes of this Plan as having experienced a Termination of Employment
at the time he or she ceases employment with an Employer as an
Employee.
1.38 "Trust" shall mean one or more trusts established pursuant to that
certain Master Trust Agreement, dated as of ________ 1, 199_ between
the Company and the trustee named therein, as amended from time to
time.
1.39 "Unforeseeable Financial Emergency" shall mean an unanticipated
emergency that is caused by an event beyond the control of the
Participant that would result in severe financial hardship to the
Participant resulting from (i) a sudden and unexpected illness or
accident of the Participant or a dependent of the Participant, (ii) a
loss of the Participant's property due to casualty, or (iii) such other
extraordinary and unforeseeable circumstances arising as a result of
events beyond the control of the Participant, all as determined in the
sole discretion of the Committee.
1.40 "Years of Plan Participation" shall mean the total number of full Plan
Years a Participant has been a Participant in the Plan prior to his or
her Termination of Employment (determined without regard to whether
deferral elections have been made by the Participant for any Plan
Year). Any partial year shall not be counted. Notwithstanding the
previous sentence, a Participant's first Plan Year of participation
shall be treated as a full Plan Year for purposes of this definition,
even if it is only a partial Plan Year of participation.
1.41 "Years of Service" shall mean the total number of full years in which a
Participant has been employed by one or more Employers. For purposes of
this definition, a year of employment shall
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be a 365 day period (or 366 day period in the case of a leap year)
that, for the first year of employment, commences on the Employee's
date of hiring and that, for any subsequent year, commences on an
anniversary of that hiring date. Any partial year of employment shall
not be counted.
ARTICLE 2
SELECTION, ENROLLMENT, ELIGIBILITY
2.1 SELECTION BY COMMITTEE. Participation in the Plan shall be limited to a
select group of management and highly compensated Employees of the
Employers, as determined by the Committee in its sole discretion. From
that group, the Committee shall select, in its sole discretion,
Employees to participate in the Plan.
2.2 ENROLLMENT REQUIREMENTS. As a condition to participation, each selected
Employee shall complete, execute and return to the Committee a Plan
Agreement, an Election Form and a Beneficiary Designation Form, all
within 30 days after he or she is selected to participate in the Plan.
In addition, the Committee shall establish from time to time such other
enrollment requirements as it determines in its sole discretion are
necessary.
2.3 ELIGIBILITY; COMMENCEMENT OF PARTICIPATION. Provided an Employee
selected to participate in the Plan has met all enrollment requirements
set forth in this Plan and required by the Committee, including
returning all required documents to the Committee within the specified
time period, that Employee shall commence participation in the Plan on
the first day of the month following the month in which the Employee
completes all enrollment requirements. If an Employee fails to meet all
such requirements within the period required, in accordance with
Section 2.2, that Employee shall not be eligible to participate in the
Plan until the first day of the Plan Year following the delivery to and
acceptance by the Committee of the required documents.
2.4 TERMINATION OF PARTICIPATION AND/OR DEFERRALS. If the Committee
determines in good faith that a Participant no longer qualifies as a
member of a select group of management or highly compensated employees,
as membership in such group is determined in accordance with Sections
201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the
right, in its sole discretion, to (i) terminate any deferral election
the Participant has made for the remainder of the Plan Year in which
the Participant's membership status changes, (ii) prevent the
Participant from making future deferral elections and/or (iii)
immediately distribute the Participant's then Account Balance as a
Termination Benefit and terminate the Participant's participation in
the Plan.
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ARTICLE 3
DEFERRAL COMMITMENTS/COMPANY MATCHING/CREDITING/TAXES
3.1 MINIMUM DEFERRAL.
(a) BASE ANNUAL SALARY, AND ANNUAL BONUS. For each Plan Year, a
Participant may elect to defer, as his or her Annual Deferral
Amount, Base Annual Salary, and/or Annual Bonus in the
following minimum amounts for each deferral elected:
<TABLE>
<CAPTION>
Minimum
Deferral Amount
-------- -------
<S> <C>
Base Annual Salary $2,000
Annual Bonus $2,000
</TABLE>
If an election is made for less than stated minimum amounts,
or if no election is made, the amount deferred shall be zero.
(b) SHORT PLAN YEAR. Notwithstanding the foregoing, if a
Participant first becomes a Participant after the first day of
a Plan Year, or in the case of the first Plan Year of the Plan
itself, the minimum Base Annual Salary deferral shall be an
amount equal to the minimum set forth above, multiplied by a
fraction, the numerator of which is the number of complete
months remaining in the Plan Year and the denominator of which
is 12.
3.2 MAXIMUM DEFERRAL.
(a) BASE ANNUAL SALARY AND ANNUAL BONUS. For each Plan Year, a
Participant may elect to defer, as his or her Annual Deferral
Amount, Base Annual Salary, and/or Annual Bonus up to the
following maximum percentages for each deferral elected:
<TABLE>
<CAPTION>
Maximum
Deferral Amount
-------- =======
<S> <C>
Base Annual Salary 50%
Annual Bonus 100%
</TABLE>
(b) Notwithstanding the foregoing, if a Participant first becomes
a Participant after the first day of a Plan Year, or in the
case of the first Plan Year of the Plan itself, the maximum
Annual Deferral Amount, with respect to Base Annual Salary and
Annual Bonus shall be limited to the amount of compensation
not yet earned by the Participant as of the date the
Participant submits a Plan Agreement and Election Form to the
Committee for acceptance.
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3.2 ELECTION TO DEFER; EFFECT OF ELECTION FORM.
(a) FIRST PLAN YEAR. In connection with a Participant's
commencement of participation in the Plan, the Participant
shall make an irrevocable deferral election for the Plan Year
in which the Participant commences participation in the Plan,
along with such other elections as the Committee deems
necessary or desirable under the Plan. For these elections to
be valid, the Election Form must be completed and signed by
the Participant, timely delivered to the Committee (in
accordance with Section 2.2 above) and accepted by the
Committee.
(b) SUBSEQUENT PLAN YEARS. For each succeeding Plan Year, an
irrevocable deferral election for that Plan Year, and such
other elections as the Committee deems necessary or desirable
under the Plan, shall be made by timely delivering to the
Committee, in accordance with its rules and procedures, before
the end of the Plan Year preceding the Plan Year for which the
election is made, a new Election Form. If no such Election
Form is timely delivered for a Plan Year, the Annual Deferral
Amount shall be zero for that Plan Year.
3.4 WITHHOLDING OF ANNUAL DEFERRAL AMOUNTS. For each Plan Year, the Base
Annual Salary portion of the Annual Deferral Amount shall be withheld
from each regularly scheduled Base Annual Salary payroll in equal
amounts, as adjusted from time to time for increases and decreases in
Base Annual Salary. The Annual Bonus portion of the Annual Deferral
Amount shall be withheld at the time the Annual Bonus otherwise would
be paid to the Participant, whether or not this occurs during the Plan
Year itself.
3.5 ANNUAL DISCRETIONARY CONTRIBUTION AMOUNT For each Plan Year, the
compensation committee of the Board, in its sole discretion, may, but
is not required to, credit any amount it desires to any Participant's
Discretionary Contribution Account under this Plan, which amount shall
be for that Participant the Annual Discretionary Contribution Amount
for that Plan Year. The amount so credited to a Participant may be
smaller or larger than the amount credited to any other Participant,
and the amount credited to any Participant for a Plan Year may be zero,
even though one or more other Participants receive an Annual
Discretionary Contribution Amount for that Plan Year. The Annual
Discretionary Contribution Amount, if any, shall be credited as of the
last day of the Plan Year. If a Participant is not employed by an
Employer as of the last day of a Plan Year other than by reason of his
or her Retirement or death while employed, the Annual Discretionary
Contribution Amount for that Plan Year shall be zero.
3.6 ANNUAL COMPANY MATCHING AMOUNT.. A Participant's Annual Company
Matching Amount for any Plan Year shall be equal to 100% of the portion
of the Participant's Annual Deferral Amount related to Base Annual
Salary for such Plan Year, up to an amount that does not exceed 4% of
the Participant's Base Annual Salary. If a Participant is not employed
by an Employer, as of the last day of a Plan Year other than by reason
of his or her Retirement or death, the Annual Company Matching Amount
for such Plan Year shall be zero. In the event of Retirement or death,
a Participant shall be credited with the Annual Company Matching Amount
for the Plan Year in which he or she Retires or dies.
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3.7 INVESTMENT OF TRUST ASSETS. The Trustee of the Trust shall be
authorized, upon written instructions received from the Committee or
investment manager appointed by the Committee, to invest and reinvest
the assets of the Trust in accordance with the applicable Trust
Agreement, including the disposition of stock and reinvestment of the
proceeds in one or more investment vehicles designated by the
Committee.
3.8 VESTING.
(a) A Participant shall at all times be 100% vested in his or her
Deferral Account and Company Matching Account.
(b) A Participant shall be vested in his or her Discretionary
Contribution Account in accordance with the following
schedule:
<TABLE>
<CAPTION>
YEARS OF SERVICE ON DATE VESTED PERCENTAGE OF
OF TERMINATION OF EMPLOYMENT DISCRETIONARY CONTRIBUTION ACCOUNT
---------------------------- ----------------------------------
<S> <C>
Less than 5 years 0%
5 years or more 100%
</TABLE>
(c) Notwithstanding anything to the contrary contained in this
Section 3.8, in the event of a Change in Control, a
Participant's Discretionary Contribution Account shall
immediately become 100% vested (if it is not already vested in
accordance with the above vesting schedules).
(d) Notwithstanding subsection (c), the vesting schedule for a
Participant's Discretionary Contribution Account shall not be
accelerated to the extent that the Committee determines that
such acceleration would cause the deduction limitations of
Section 280G of the Code to become effective. In the event
that all of a Participant's Discretionary Contribution Account
is not vested pursuant to such a determination, the
Participant may request independent verification of the
Committee's calculations with respect to the application of
Section 280G. In such case, the Committee must provide to the
Participant within 15 business days of such a request an
opinion from a nationally recognized accounting firm selected
by the Participant (the "Accounting Firm"). The opinion shall
state the Accounting Firm's opinion that any limitation in the
vested percentage hereunder is necessary to avoid the limits
of Section 280G and contain supporting calculations. The cost
of such opinion shall be paid for by the Company.
3.9 CREDITING/DEBITING OF ACCOUNT BALANCES. In accordance with, and subject
to, the rules and procedures that are established from time to time by
the Committee, in its sole discretion, amounts shall be credited or
debited to a Participant's Account Balance in accordance with the
following rules:
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(a) ELECTION OF MEASUREMENT FUNDS. A Participant, in connection
with his or her initial deferral election in accordance with
Section 3.3(a) above, shall elect, on the Election Form, one
or more Measurement Fund(s) (as described in Section 3.9(c)
below) to be used to determine the additional amounts to be
credited to his or her Account Balance for the first calendar
quarter or portion thereof in which the Participant commences
participation in the Plan and continuing thereafter for each
subsequent calendar quarter in which the Participant
participates in the Plan, unless changed in accordance with
the next sentence. Commencing with the first calendar quarter
that follows the Participant's commencement of participation
in the Plan and continuing thereafter for each subsequent
calendar quarter in which the Participant participates in the
Plan, no later than the next to last business day of the
calendar quarter, the Participant may (but is not required to)
elect, by submitting an Election Form to the Committee that is
accepted by the Committee, to add or delete one or more
Measurement Fund(s) to be used to determine the additional
amounts to be credited to his or her Account Balance, or to
change the portion of his or her Account Balance allocated to
each previously or newly elected Measurement Fund. If an
election is made in accordance with the previous sentence, it
shall apply to the next calendar quarter and continue
thereafter for each subsequent calendar quarter in which the
Participant participates in the Plan, unless changed in
accordance with the previous sentence.
(b) PROPORTIONATE ALLOCATION. In making any election described in
Section 3.9(a) above, the Participant shall specify on the
Election Form, in increments of five percentage points (5%),
the percentage of his or her Account Balance to be allocated
to a Measurement Fund (as if the Participant was making an
investment in that Measurement Fund with that portion of his
or her Account Balance).
(c) MEASUREMENT FUNDS. The Participant may elect one or more of
the following measurement funds, based on certain mutual funds
(the "Measurement Funds"), for the purpose of crediting
additional amounts to his or her Account Balance:
(1) Alger American MidCap Growth Fund (described as a
mutual fund seeking long term capital appreciation by
investing primarily in equity securities of companies
included in the S&P MidCap 400 Index);
(2) Fidelity VIP Overseas Portfolio (described as a
mutual fund which seeks long-term growth of capital
by investing primarily in foreign securities);
(3) Fidelity VIP Growth Portfolio (described as a mutual
fund which seeks long-term growth of capital
primarily through investments in common stocks
without emphasis on dividend income);
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(4) Fidelity VIP II Index 500 Portfolio (described as a
mutual fund which seeks investment results by holding
stock investments listed on and in proportion to the
S&P 500 Index); and
(5) Fidelity VIP Money Market Portfolio (described as a
mutual fund which seeks to obtain as high a level of
current income as is consistent with preserving
capital and providing liquidity).
As necessary, the Committee may, in its sole discretion,
discontinue, substitute or add a Measurement Fund. Each such
action will take effect as of the first day of the calendar
quarter that follows by thirty (30) days the day on which the
Committee gives Participants advance written notice of such
change.
(d) CREDITING OR DEBITING METHOD. The performance of each elected
Measurement Fund (either positive or negative) will be
determined by the Committee, in its sole discretion, based on
the performance of the Measurement Funds themselves. A
Participant's Account Balance shall be credited or debited on
a daily basis based on the performance of each Measurement
Fund selected by the Participant, as determined by the
Committee in its sole discretion, as though (i) a
Participant's Account Balance were invested in the Measurement
Fund(s) selected by the Participant, in the percentages
applicable to such calendar quarter, as of the close of
business on the first business day of such calendar quarter,
at the closing price on such date; (ii) the portion of the
Annual Deferral Amount that was actually deferred during any
calendar quarter were invested in the Measurement Fund(s)
selected by the Participant, in the percentages applicable to
such calendar quarter, no later than the close of business on
the third business day after the day on which such amounts are
actually deferred from the Participant's Base Annual Salary
through reductions in his or her payroll, at the closing price
on such date; and (iii) any distribution made to a Participant
that decreases such Participant's Account Balance ceased being
invested in the Measurement Fund(s), in the percentages
applicable to such calendar quarter, no earlier than three
business days prior to the distribution, at the closing price
on such date. The Participant's Annual Company Matching Amount
shall be credited to his or her Company Matching Account for
purposes of this Section 3.9(d) as of the close of business on
the first business day in February of the Plan Year following
the Plan Year to which it relates.
(e) NO ACTUAL INVESTMENT. Notwithstanding any other provision of
this Plan that may be interpreted to the contrary, the
Measurement Funds are to be used for measurement purposes
only, and a Participant's election of any such Measurement
Fund, the allocation to his or her Account Balance thereto,
the calculation of additional amounts and the crediting or
debiting of such amounts to a Participant's Account Balance
shall not be considered or construed in any manner as an
actual
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investment of his or her Account Balance in any such
Measurement Fund. In the event that the Company or the Trustee
(as that term is defined in the Trust), in its own discretion,
decides to invest funds in any or all of the Measurement
Funds, no Participant shall have any rights in or to such
investments themselves. Without limiting the foregoing, a
Participant's Account Balance shall at all times be a
bookkeeping entry only and shall not represent any investment
made on his or her behalf by the Company or the Trust; the
Participant shall at all times remain an unsecured creditor of
the Company.
3.10 FICA AND OTHER TAXES.
(a) ANNUAL DEFERRAL AMOUNTS. For each Plan Year in which an Annual
Deferral Amount is being withheld from a Participant, the
Participant's Employer(s) shall withhold from that portion of
the Participant's Base Annual Salary and Bonus that is not
being deferred, in a manner determined by the Employer(s), the
Participant's share of FICA and other employment taxes on such
Annual Deferral Amount. If necessary, the Committee may reduce
the Annual Deferral Amount in order to comply with this
Section 3.10.
(b) COMPANY MATCHING AMOUNTS. When a participant is credited with
an Annual Company Matching Amount, the Participant's
Employer(s) shall withhold from the Participant's Base Annual
Salary and/or Bonus that is not deferred, in a manner
determined by the Employer(s), the Participant's share of FICA
and other employment taxes on such Amount. If necessary, the
Committee may reduce the Participant's Company Matching
Account in order to comply with this Section 3.10.
3.11 DISTRIBUTIONS. The Participant's Employer(s), or the trustee of the
Trust, shall withhold from any payments made to a Participant under
this Plan all federal, state and local income, employment and other
taxes required to be withheld by the Employer(s), or the trustee of the
Trust, in connection with such payments, in amounts and in a manner to
be determined in the sole discretion of the Employer(s).
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ARTICLE 4
SHORT-TERM PAYOUT; UNFORESEEABLE FINANCIAL EMERGENCIES;
WITHDRAWAL ELECTION
4.1 SHORT-TERM PAYOUT. In connection with each election to defer an Annual
Deferral Amount, a Participant may irrevocably elect to receive a
future "Short-Term Payout" from the Plan with respect to such Annual
Deferral Amount. Subject to the Deduction Limitation, the Short-Term
Payout shall be a lump sum payment in an amount that is equal to the
Annual Deferral Amount plus amounts credited or debited in the manner
provided in Section 3.9 above on that amount, determined at the time
that the Short-Term Payout becomes payable (rather than the date of a
Termination of Employment). Subject to the Deduction Limitation and the
other terms and conditions of this Plan, each Short-Term Payout elected
shall be paid out during a period beginning 1 day and ending 60 days
after the last day of any Plan Year designated by the Participant that
is at least five Plan Years after the Plan Year in which the Annual
Deferral Amount is actually deferred. By way of example, if a five year
Short-Term Payout is elected for Annual Deferral Amounts that are
deferred in the Plan Year commencing January 1, 1997, the five year
Short-Term Payout would become payable during a 60 day period
commencing January 1, 2003.
4.2 OTHER BENEFITS TAKE PRECEDENCE OVER SHORT-TERM. Should an event occur
that triggers a benefit under Article 5, 6, 7 or 8, any Annual Deferral
Amount, plus amounts credited or debited thereon, that is subject to a
Short-Term Payout election under Section 4.1 shall not be paid in
accordance with Section 4.1 but shall be paid in accordance with the
other applicable Article.
4.3 WITHDRAWAL PAYOUT/SUSPENSIONS FOR UNFORESEEABLE FINANCIAL EMERGENCIES.
If the Participant experiences an Unforeseeable Financial Emergency,
the Participant may petition the Committee to (i) suspend any deferrals
required to be made by a Participant and/or (ii) receive a partial or
full payout from the Plan. The payout shall not exceed the lesser of
the Participant's Account Balance, calculated as if such Participant
were receiving a Termination Benefit, or the amount reasonably needed
to satisfy the Unforeseeable Financial Emergency. If, subject to the
sole discretion of the Committee, the petition for a suspension and/or
payout is approved, suspension shall take effect upon the date of
approval and any payout shall be made within 60 days of the date of
approval. The payment of any amount under this Section 4.3 shall not be
subject to the Deduction Limitation.
4.4 WITHDRAWAL ELECTION. A Participant (or, after a Participant's death,
his or her Beneficiary) may elect, at any time, to withdraw all of his
or her Account Balance, calculated as if there had occurred a
Termination of Employment as of the day of the election, less a
withdrawal penalty equal to 10% of such amount (the net amount shall be
referred to as the "Withdrawal Amount"). This election can be made at
any time, before or after Retirement, Disability, death or Termination
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of Employment, and whether or not the Participant (or Beneficiary) is
in the process of being paid pursuant to an installment payment
schedule. If made before Retirement, Disability or death, a
Participant's Withdrawal Amount shall be his or her Account Balance
calculated as if there had occurred a Termination of Employment as of
the day of the election. No partial withdrawals of the Withdrawal
Amount shall be allowed. The Participant (or his or her Beneficiary)
shall make this election by giving the Committee advance written notice
of the election in a form determined from time to time by the
Committee. The Participant (or his or her Beneficiary) shall be paid
the Withdrawal Amount within 60 days of his or her election. Once the
Withdrawal Amount is paid, the Participant's participation in the Plan
shall terminate and the Participant shall not be eligible to
participate in the Plan in the future. The payment of this Withdrawal
Amount shall not be subject to the Deduction Limitation.
ARTICLE 5
RETIREMENT BENEFIT
5.1 RETIREMENT BENEFIT. Subject to the Deduction Limitation, a Participant
who Retires shall receive, as a Retirement Benefit, his or her Account
Balance.
5.2 PAYMENT OF RETIREMENT BENEFIT. A Participant, in connection with his or
her commencement of participation in the Plan, shall elect on an
Election Form to receive the Retirement Benefit in a lump sum or
pursuant to a Monthly Installment Method of 60, 120 or 180 months. The
Participant may annually change his or her election to an allowable
alternative payout period by submitting a new Election Form to the
Committee, provided that any such Election Form is submitted at least 2
years prior to the Participant's Retirement and is accepted by the
Committee in its sole discretion. The Election Form most recently
accepted by the Committee shall govern the payout of the Retirement
Benefit. If a Participant does not make any election with respect to
the payment of the Retirement Benefit, then such benefit shall be
payable in a lump sum. The lump sum payment shall be made, or
installment payments shall commence, no later than 60 days after the
date the Participant Retires. Any payment made shall be subject to the
Deduction Limitation.
5.3 DEATH PRIOR TO COMPLETION OF RETIREMENT BENEFIT. If a Participant dies
after Retirement but before the Retirement Benefit is paid in full, the
Participant's unpaid Retirement Benefit payments shall continue and
shall be paid to the Participant's Beneficiary (a) over the remaining
number of months and in the same amounts as that benefit would have
been paid to the Participant had the Participant survived, or (b) in a
lump sum, if requested by the Beneficiary and allowed in the sole
discretion of the Committee, that is equal to the Participant's unpaid
remaining Account Balance.
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ARTICLE 6
PRE-RETIREMENT SURVIVOR BENEFIT
6.1 PRE-RETIREMENT SURVIVOR BENEFIT. Subject to the Deduction Limitation,
the Participant's Beneficiary shall receive a Pre-Retirement Survivor
Benefit equal to the Participant's Account Balance if the Participant
dies before he or she Retires, experiences a Termination of Employment
or suffers a Disability.
6.2 PAYMENT OF PRE-RETIREMENT SURVIVOR BENEFIT. A Participant, in
connection with his or her commencement of participation in the Plan,
shall elect on an Election Form whether the Pre-Retirement Survivor
Benefit shall be received by his or her Beneficiary in a lump sum or
pursuant to a Monthly Installment Method of 60, 120 or 180 months. The
Participant may annually change this election to an allowable
alternative payout period by submitting a new Election Form to the
Committee, which form must be accepted by the Committee in its sole
discretion. The Election Form most recently accepted by the Committee
prior to the Participant's death shall govern the payout of the
Participant's Pre-Retirement Survivor Benefit. If a Participant does
not make any election with respect to the payment of the Pre-Retirement
Survivor Benefit, then such benefit shall be paid in a lump sum.
Despite the foregoing, if the Participant's Account Balance at the time
of his or her death is less than $25,000, payment of the Pre-Retirement
Survivor Benefit may be made, in the sole discretion of the Committee,
in a lump sum or pursuant to a Monthly Installment Method of not more
than 60 months. The lump sum payment shall be made, or installment
payments shall commence, no later than 60 days after the date the
Committee is provided with proof that is satisfactory to the Committee
of the Participant's death. Any payment made shall be subject to the
Deduction Limitation.
ARTICLE 7
TERMINATION BENEFIT
7.1 TERMINATION BENEFIT. Subject to the Deduction Limitation, the
Participant shall receive a Termination Benefit, which shall be equal
to the Participant's Account Balance if a Participant experiences a
Termination of Employment prior to his or her Retirement, death or
Disability.
7.2 PAYMENT OF TERMINATION BENEFIT. The Participant's Termination Benefit
shall be paid in a lump sum. The lump sum payment shall be made no
later than 60 days after the date the date of the Participant's
Termination of Employment. Any payment made shall be subject to the
Deduction Limitation.
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ARTICLE 8
DISABILITY WAIVER AND BENEFIT
8.1 DISABILITY WAIVER.
(A) WAIVER OF DEFERRAL. A Participant who is determined by the
Committee to be suffering from a Disability shall be excused
from fulfilling that portion of the Annual Deferral Amount
commitment that would otherwise have been withheld from a
Participant's Base Annual Salary and/or Annual Bonus for the
Plan Year during which the Participant first suffers a
Disability. During the period of Disability, the Participant
shall not be allowed to make any additional deferral
elections, but will continue to be considered a Participant
for all other purposes of this Plan.
(B) RETURN TO WORK. If a Participant returns to employment with an
Employer, after a Disability ceases, the Participant may elect
to defer an Annual Deferral Amount for the Plan Year following
his or her return to employment or service and for every Plan
Year thereafter while a Participant in the Plan; provided such
deferral elections are otherwise allowed and an Election Form
is delivered to and accepted by the Committee for each such
election in accordance with Section 3.3 above.
8.2 CONTINUED ELIGIBILITY; DISABILITY BENEFIT. A Participant suffering a
Disability shall, for benefit purposes under this Plan, continue to be
considered to be employed and shall be eligible for the benefits
provided for in Articles 4, 5, 6 or 7 in accordance with the provisions
of those Articles. Notwithstanding the above, the Committee shall have
the right to, in its sole and absolute discretion and for purposes of
this Plan only, and must in the case of a Participant who is otherwise
eligible to Retire, deem the Participant to have experienced a
Termination of Employment, or in the case of a Participant who is
eligible to Retire, to have Retired, at any time (or in the case of a
Participant who is eligible to Retire, as soon as practicable) after
such Participant is determined to be suffering a Disability, in which
case the Participant shall receive a Disability Benefit equal to his or
her Account Balance at the time of the Committee's determination;
provided, however, that should the Participant otherwise have been
eligible to Retire, he or she shall be paid in accordance with Article
5. The Disability Benefit shall be paid in a lump sum within 60 days of
the Committee's exercise of such right. Any payment made shall be
subject to the Deduction Limitation.
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AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
ARTICLE 9
BENEFICIARY DESIGNATION
9.1 BENEFICIARY. Each Participant shall have the right, at any time, to
designate his or her Beneficiary(ies) (both primary as well as
contingent) to receive any benefits payable under the Plan to a
beneficiary upon the death of a Participant. The Beneficiary designated
under this Plan may be the same as or different from the Beneficiary
designation under any other plan of an Employer in which the
Participant participates.
9.2 BENEFICIARY DESIGNATION; CHANGE; SPOUSAL CONSENT. A Participant shall
designate his or her Beneficiary by completing and signing the
Beneficiary Designation Form, and returning it to the Committee or its
designated agent. A Participant shall have the right to change a
Beneficiary by completing, signing and otherwise complying with the
terms of the Beneficiary Designation Form and the Committee's rules and
procedures, as in effect from time to time. If the Participant names
someone other than his or her spouse as a Beneficiary, a spousal
consent, in the form designated by the Committee, must be signed by
that Participant's spouse and returned to the Committee. Upon the
acceptance by the Committee of a new Beneficiary Designation Form, all
Beneficiary designations previously filed shall be canceled. The
Committee shall be entitled to rely on the last Beneficiary Designation
Form filed by the Participant and accepted by the Committee prior to
his or her death.
9.3 ACKNOWLEDGMENT. No designation or change in designation of a
Beneficiary shall be effective until received and acknowledged in
writing by the Committee or its designated agent.
9.4 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a
Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all
designated Beneficiaries predecease the Participant or die prior to
complete distribution of the Participant's benefits, then the
Participant's designated Beneficiary shall be deemed to be his or her
surviving spouse. If the Participant has no surviving spouse, the
benefits remaining under the Plan to be paid to a Beneficiary shall be
payable to the executor or personal representative of the Participant's
estate.
9.5 DOUBT AS TO BENEFICIARY. If the Committee has any doubt as to the
proper Beneficiary to receive payments pursuant to this Plan, the
Committee shall have the right, exercisable in its discretion, to cause
the Participant's Employer to withhold such payments until this matter
is resolved to the Committee's satisfaction.
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AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
9.6 DISCHARGE OF OBLIGATIONS. The payment of benefits under the Plan to a
Beneficiary shall fully and completely discharge all Employers and the
Committee from all further obligations under this Plan with respect to
the Participant, and that Participant's Plan Agreement shall terminate
upon such full payment of benefits.
ARTICLE 10
LEAVE OF ABSENCE
10.1 PAID LEAVE OF ABSENCE. If a Participant is authorized by the
Participant's Employer for any reason to take a paid leave of absence
from the employment of the Employer, the Participant shall continue to
be considered employed by the Employer and the Annual Deferral Amount
shall continue to be withheld during such paid leave of absence in
accordance with Section 3.3.
10.2 UNPAID LEAVE OF ABSENCE. If a Participant is authorized by the
Participant's Employer for any reason to take an unpaid leave of
absence from the employment of the Employer, the Participant shall
continue to be considered employed by the Employer and the Participant
shall be excused from making deferrals until the earlier of the date
the leave of absence expires or the Participant returns to a paid
employment status. Upon such expiration or return, deferrals shall
resume for the remaining portion of the Plan Year in which the
expiration or return occurs, based on the deferral election, if any,
made for that Plan Year. If no election was made for that Plan Year, no
deferral shall be withheld.
ARTICLE 11
TERMINATION, AMENDMENT OR MODIFICATION
11.1 TERMINATION. Although each Employer anticipates that it will continue
the Plan for an indefinite period of time, there is no guarantee that
any Employer will continue the Plan or will not terminate the Plan at
any time in the future. Accordingly, each Employer reserves the right
to discontinue its sponsorship of the Plan and/or to terminate the Plan
at any time with respect to any or all of its participating Employees,
by action of its board of directors. Upon the termination of the Plan
with respect to any Employer, the Plan Agreements of the affected
Participants who are employed by that Employer, shall terminate and
their Account Balances, determined as if they had experienced a
Termination of Employment on the date of Plan termination or, if Plan
termination occurs after the date upon which a Participant was eligible
to Retire, then with respect to that Participant as if he or she had
Retired on the date of Plan termination, shall be paid to the
Participants as follows: Prior to a Change in Control, if the Plan is
terminated with respect to all of its Participants, an
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AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
Employer shall have the right, in its sole discretion, and
notwithstanding any elections made by the Participant, to pay such
benefits in a lump sum or pursuant to a Monthly Installment Method of
up to 15 years, with amounts credited and debited during the
installment period as provided herein. If the Plan is terminated with
respect to less than all of its Participants, an Employer shall be
required to pay such benefits in a lump sum. After a Change in Control,
the Employer shall be required to pay such benefits in a lump sum. The
termination of the Plan shall not adversely affect any Participant or
Beneficiary who has become entitled to the payment of any benefits
under the Plan as of the date of termination; provided however, that
the Employer shall have the right to accelerate installment payments
without a premium or prepayment penalty by paying the Account Balance
in a lump sum or pursuant to a Monthly Installment Method using fewer
months (provided that the present value of all payments that will have
been received by a Participant at any given point of time under the
different payment schedule shall equal or exceed the present value of
all payments that would have been received at that point in time under
the original payment schedule).
11.2 AMENDMENT. Any Employer may, at any time, amend or modify the Plan in
whole or in part with respect to that Employer by the action of its
board of directors; provided, however, that no amendment or
modification shall be effective to decrease or restrict the value of a
Participant's Account Balance in existence at the time the amendment or
modification is made, calculated as if the Participant had experienced
a Termination of Employment as of the effective date of the amendment
or modification or, if the amendment or modification occurs after the
date upon which the Participant was eligible to Retire, the Participant
had Retired as of the effective date of the amendment or modification.
The amendment or modification of the Plan shall not affect any
Participant or Beneficiary who has become entitled to the payment of
benefits under the Plan as of the date of the amendment or
modification; provided, however, that the Employer shall have the right
to accelerate installment payments by paying the Account Balance in a
lump sum or pursuant to a Monthly Installment Method using fewer months
(provided that the present value of all payments that will have been
received by a Participant at any given point of time under the
different payment schedule shall equal or exceed the present value of
all payments that would have been received at that point in time under
the original payment schedule).
11.3 PLAN AGREEMENT. Despite the provisions of Sections 11.1 and 11.2 above,
if a Participant's Plan Agreement contains benefits or limitations that
are not in this Plan document, the Employer may only amend or terminate
such provisions with the consent of the Participant.
11.4 EFFECT OF PAYMENT. The full payment of the applicable benefit under
Articles 4, 5, 6, 7 or 8 of the Plan shall completely discharge all
obligations to a Participant and his or her
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AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
designated Beneficiaries under this Plan and the Participant's Plan
Agreement shall terminate.
ARTICLE 12
ADMINISTRATION
12.1 COMMITTEE DUTIES. This Plan shall be administered by a Committee which
shall consist of the Board, or such committee as the Board shall
appoint. Members of the Committee may be Participants under this Plan.
The Committee shall also have the discretion and authority to (i) make,
amend, interpret, and enforce all appropriate rules and regulations for
the administration of this Plan and (ii) decide or resolve any and all
questions including interpretations of this Plan, as may arise in
connection with the Plan. Any individual serving on the Committee who
is a Participant shall not vote or act on any matter relating solely to
himself or herself. When making a determination or calculation, the
Committee shall be entitled to rely on information furnished by a
Participant or the Company.
12.2 AGENTS. In the administration of this Plan, the Committee may, from
time to time, employ agents and delegate to them such administrative
duties as it sees fit (including acting through a duly appointed
representative) and may from time to time consult with counsel who may
be counsel to any Employer.
12.3 BINDING EFFECT OF DECISIONS. The decision or action of the Committee
with respect to any question arising out of or in connection with the
administration, interpretation and application of the Plan and the
rules and regulations promulgated hereunder shall be final and
conclusive and binding upon all persons having any interest in the
Plan.
12.4 INDEMNITY OF COMMITTEE. All Employers shall indemnify and hold harmless
the members of the Committee, and any Employee to whom the duties of
the Committee may be delegated, against any and all claims, losses,
damages, expenses or liabilities arising from any action or failure to
act with respect to this Plan, except in the case of willful misconduct
by the Committee or any of its members or any such Employee.
12.5 EMPLOYER INFORMATION. To enable the Committee to perform its functions,
each Employer shall supply full and timely information to the Committee
on all matters relating to the compensation of its Participants, the
date and circumstances of the Retirement, Disability, death or
Termination of Employment of its Participants, and such other pertinent
information as the Committee may reasonably require.
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AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
ARTICLE 13
OTHER BENEFITS AND AGREEMENTS
13.1 COORDINATION WITH OTHER BENEFITS. The benefits provided for a
Participant and Participant's Beneficiary under the Plan are in
addition to any other benefits available to such Participant under any
other plan or program for employees of the Participant's Employer. The
Plan shall supplement and shall not supersede, modify or amend any
other such plan or program except as may otherwise be expressly
provided.
ARTICLE 14
CLAIMS PROCEDURES
14.1 PRESENTATION OF CLAIM. Any Participant or Beneficiary of a deceased
Participant (such Participant or Beneficiary being referred to below as
a "Claimant") may deliver to the Committee a written claim for a
determination with respect to the amounts distributable to such
Claimant from the Plan. If such a claim relates to the contents of a
notice received by the Claimant, the claim must be made within 60 days
after such notice was received by the Claimant. All other claims must
be made within 180 days of the date on which the event that caused the
claim to arise occurred. The claim must state with particularity the
determination desired by the Claimant.
14.2 NOTIFICATION OF DECISION. The Committee shall consider a Claimant's
claim within a reasonable time, and shall notify the Claimant in
writing:
(a) that the Claimant's requested determination has been made, and
that the claim has been allowed in full; or
(b) that the Committee has reached a conclusion contrary, in whole
or in part, to the Claimant's requested determination, and
such notice must set forth in a manner calculated to be
understood by the Claimant:
(i) the specific reason(s) for the denial of the claim,
or any part of it;
(ii) specific reference(s) to pertinent provisions of the
Plan upon which such denial was based;
(iii) a description of any additional material or
information necessary for the Claimant to perfect the
claim, and an explanation of why such material or
information is necessary; and
(iv) an explanation of the claim review procedure set
forth in Section 14.3 below.
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AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
14.3 REVIEW OF A DENIED CLAIM. Within 60 days after receiving a notice from
the Committee that a claim has been denied, in whole or in part, a
Claimant (or the Claimant's duly authorized representative) may file
with the Committee a written request for a review of the denial of the
claim. Thereafter, but not later than 30 days after the review
procedure began, the Claimant (or the Claimant's duly authorized
representative):
(a) may review pertinent documents;
(b) may submit written comments or other documents; and/or
(c) may request a hearing, which the Committee, in its sole
discretion, may grant.
14.4 DECISION ON REVIEW. The Committee shall render its decision on review
promptly, and not later than 60 days after the filing of a written
request for review of the denial, unless a hearing is held or other
special circumstances require additional time, in which case the
Committee's decision must be rendered within 120 days after such date.
Such decision must be written in a manner calculated to be understood
by the Claimant, and it must contain:
(a) specific reasons for the decision;
(b) specific reference(s) to the pertinent Plan provisions upon
which the decision was based; and
(c) such other matters as the Committee deems relevant.
14.5 LEGAL ACTION. A Claimant's compliance with the foregoing provisions of
this Article 14 is a mandatory prerequisite to a Claimant's right to
commence any legal action with respect to any claim for benefits under
this Plan.
ARTICLE 15
TRUST
15.1 ESTABLISHMENT OF THE TRUST. The Company shall establish the Trust, and
each Employer shall at least annually transfer over to the Trust such
assets as the Employer determines, in its sole discretion, are
necessary to provide, on a present value basis, for its respective
future liabilities created with respect to the Annual Deferral Amounts,
Annual Discretionary Contribution Amounts, and Company Matching Amounts
for such Employer's Participants for all periods prior to the transfer,
as well as any debits and credits to the Participants' Account Balances
for all periods prior to the transfer, taking into consideration the
value of the assets in the trust at the time of the transfer.
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AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
15.2 INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the Plan
and the Plan Agreement shall govern the rights of a Participant to
receive distributions pursuant to the Plan. The provisions of the Trust
shall govern the rights of the Employers, Participants and the
creditors of the Employers to the assets transferred to the Trust. Each
Employer shall at all times remain liable to carry out its obligations
under the Plan.
15.3 DISTRIBUTIONS FROM THE TRUST. Each Employer's obligations under the
Plan may be satisfied with Trust assets distributed pursuant to the
terms of the Trust, and any such distribution shall reduce the
Employer's obligations under this Plan.
ARTICLE 16
MISCELLANEOUS
16.1 STATUS OF PLAN. The Plan is intended to be a plan that is not qualified
within the meaning of Code Section 401(a) and that "is unfunded and is
maintained by an employer primarily for the purpose of providing
deferred compensation for a select group of management or highly
compensated employee" within the meaning of ERISA Sections 201(2),
301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted
to the extent possible in a manner consistent with that intent.
16.2 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries,
heirs, successors and assigns shall have no legal or equitable rights,
interests or claims in any property or assets of an Employer. For
purposes of the payment of benefits under this Plan, any and all of an
Employer's assets shall be, and remain, the general, unpledged
unrestricted assets of the Employer. An Employer's obligation under the
Plan shall be merely that of an unfunded and unsecured promise to pay
money in the future.
16.3 EMPLOYER'S LIABILITY. An Employer's liability for the payment of
benefits shall be defined only by the Plan and the Plan Agreement, as
entered into between the Employer and a Participant. An Employer shall
have no obligation to a Participant under the Plan except as expressly
provided in the Plan and his or her Plan Agreement.
16.4 NONASSIGNABILITY. Neither a Participant nor any other person shall have
any right to commute, sell, assign, transfer, pledge, anticipate,
mortgage or otherwise encumber, transfer, hypothecate, alienate or
convey in advance of actual receipt, the amounts, if any, payable
hereunder, or any part thereof, which are, and all rights to which are
expressly declared to be, unassignable and non-transferable. No part of
the amounts payable shall, prior to actual payment, be subject to
seizure, attachment, garnishment or sequestration for the payment of
any debts, judgments, alimony or separate maintenance owed by a
Participant or any other person, be transferable by operation of law in
the event of a Participant's or any other person's bankruptcy or
insolvency or be transferable to a spouse as a result of a property
settlement or otherwise.
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AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
16.5 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan
shall not be deemed to constitute a contract of employment between any
Employer and the Participant. Such employment is hereby acknowledged to
be an "at will" employment relationship that can be terminated at any
time for any reason, or no reason, with or without cause, and with or
without notice, unless expressly provided in a written employment
agreement. Nothing in this Plan shall be deemed to give a Participant
the right to be retained in the service of any Employer as an Employee,
or to interfere with the right of any Employer to discipline or
discharge the Participant at any time.
16.6 FURNISHING INFORMATION. A Participant or his or her Beneficiary will
cooperate with the Committee by furnishing any and all information
requested by the Committee and take such other actions as may be
requested in order to facilitate the administration of the Plan and the
payments of benefits hereunder, including but not limited to taking
such physical examinations as the Committee may deem necessary.
16.7 TERMS. Whenever any words are used herein in the masculine, they shall
be construed as though they were in the feminine in all cases where
they would so apply; and whenever any words are used herein in the
singular or in the plural, they shall be construed as though they were
used in the plural or the singular, as the case may be, in all cases
where they would so apply.
16.8 CAPTIONS. The captions of the articles, sections and paragraphs of this
Plan are for convenience only and shall not control or affect the
meaning or construction of any of its provisions.
16.9 GOVERNING LAW. Subject to ERISA, the provisions of this Plan shall be
construed and interpreted according to the internal laws of the State
of California without regard to its conflicts of laws principles.
16.10 NOTICE. Any notice or filing required or permitted to be given to the
Committee under this Plan shall be sufficient if in writing and
hand-delivered, or sent by registered or certified mail, to the address
below:
Aames Financial Corporation
3731 Wilshire Boulevard
Los Angeles, CA 90010
Attn: Compensation Committee
Such notice shall be deemed given as of the date of delivery or, if
delivery is made by mail, as of the date shown on the postmark on the
receipt for registration or certification.
Any notice or filing required or permitted to be given to a Participant
under this Plan shall be sufficient if in writing and hand-delivered,
or sent by mail, to the last known address of the Participant.
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AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
16.1 SUCCESSORS. The provisions of this Plan shall bind and inure to the
benefit of the Participant's Employer and its successors and assigns
and the Participant and the Participant's designated Beneficiaries.
16.2 SPOUSE'S INTEREST. The interest in the benefits hereunder of a spouse
of a Participant who has predeceased the Participant shall
automatically pass to the Participant and shall not be transferable by
such spouse in any manner, including but not limited to such spouse's
will, nor shall such interest pass under the laws of intestate
succession.
16.3 VALIDITY. In case any provision of this Plan shall be illegal or
invalid for any reason, said illegality or invalidity shall not affect
the remaining parts hereof, but this Plan shall be construed and
enforced as if such illegal or invalid provision had never been
inserted herein.
16.4 INCOMPETENT.. If the Committee determines in its discretion that a
benefit under this Plan is to be paid to a minor, a person declared
incompetent or to a person incapable of handling the disposition of
that person's property, the Committee may direct payment of such
benefit to the guardian, legal representative or person having the care
and custody of such minor, incompetent or incapable person. The
Committee may require proof of minority, incompetence, incapacity or
guardianship, as it may deem appropriate prior to distribution of the
benefit. Any payment of a benefit shall be a payment for the account of
the Participant and the Participant's Beneficiary, as the case may be,
and shall be a complete discharge of any liability under the Plan for
such payment amount.
16.5 COURT ORDER. The Committee is authorized to make any payments directed
by court order in any action in which the Plan or the Committee has
been named as a party. In addition, if a court determines that a spouse
or former spouse of a Participant has an interest in the Participant's
benefits under the Plan in connection with a property settlement or
otherwise, the Committee, in its sole discretion, shall have the right,
notwithstanding any election made by a Participant, to immediately
distribute the spouse's or former spouse's interest in the
Participant's benefits under the Plan to that spouse or former spouse.
16.6 DISTRIBUTION IN THE EVENT OF TAXATION.
(a) IN GENERAL. If, for any reason, all or any portion of a
Participant's benefits under this Plan becomes taxable to the
Participant prior to receipt, a Participant may petition the
Committee before a Change in Control, or the trustee of the
Trust after a Change in Control, for a distribution of that
portion of his or her benefit that has become taxable. Upon
the grant of such a petition, which grant shall not be
unreasonably withheld (and, after a Change in Control, shall
be granted), a Participant's Employer shall distribute to the
Participant immediately available funds in an amount equal to
the taxable portion of his or her benefit (which amount shall
not exceed a Participant's unpaid Account Balance under the
Plan). If the petition is granted, the tax liability
distribution shall be made within 90
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AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
days of the date when the Participant's petition is granted.
Such a distribution shall affect and reduce the benefits to be
paid under this Plan.
(b) TRUST. If the Trust terminates in accordance with Section
3.6(e) of the Trust and benefits are distributed from the
Trust to a Participant in accordance with that Section, the
Participant's benefits under this Plan shall be reduced to the
extent of such distributions.
16.17 INSURANCE. The Employers, on their own behalf or on behalf of the
trustee of the Trust, and, in their sole discretion, may apply for and
procure insurance on the life of the Participant, in such amounts and
in such forms as the Trust may choose. The Employers or the trustee of
the Trust, as the case may be, shall be the sole owner and beneficiary
of any such insurance. The Participant shall have no interest
whatsoever in any such policy or policies, and at the request of the
Employers shall submit to medical examinations and supply such
information and execute such documents as may be required by the
insurance company or companies to whom the Employers have applied for
insurance.
16.18 LEGAL FEES TO ENFORCE RIGHTS AFTER CHANGE IN CONTROL. The Company and
each Employer is aware that upon the occurrence of a Change in Control,
the Board or the board of directors of a Participant's Employer (which
might then be composed of new members) or a shareholder of the Company
or the Participant's Employer, or of any successor corporation might
then cause or attempt to cause the Company, the Participant's Employer
or such successor to refuse to comply with its obligations under the
Plan and might cause or attempt to cause the Company or the
Participant's Employer to institute, or may institute, litigation
seeking to deny Participants the benefits intended under the Plan. In
these circumstances, the purpose of the Plan could be frustrated.
Accordingly, if, following a Change in Control, it should appear to any
Participant that the Company, the Participant's Employer or any
successor corporation has failed to comply with any of its obligations
under the Plan or any agreement thereunder or, if the Company, such
Employer or any other person takes any action to declare the Plan void
or unenforceable or institutes any litigation or other legal action
designed to deny, diminish or to recover from any Participant the
benefits intended to be provided, then the Company and the
Participant's Employer irrevocably authorize such Participant to retain
counsel of his or her choice at the expense of the Company and the
Participant's Employer (who shall be jointly and severally liable) to
represent
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AAMES FINANCIAL CORPORATION
Variable Deferred Compensation Plan
Master Plan Document
================================================================================
such Participant in connection with the initiation or defense of any
litigation or other legal action, whether by or against the Company,
the Participant's Employer or any director, officer, shareholder or
other person affiliated with the Company, the Participant's Employer or
any successor thereto in any jurisdiction.
IN WITNESS WHEREOF, the Company has signed this Plan document as of
April 15, 1997.
"Company"
Aames Financial Corporation, a Delaware
corporation
By: /s/ Alice A. Cobb
--------------------------------------
Title: SVP Human Resources
-----------------------------------
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<PAGE> 1
EXHIBIT 11
AAMES FINANCIAL CORPORATION
EARNINGS PER SHARE
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
1995 1996 1997
----------- ----------- -----------
Shares outstanding 13,403,500 23,845,000 26,400,000
Common equivalent shares:
Options and warrants 128,500 1,349,000 1,971,000
Convertible subordinated notes -- 2,054,000 6,145,000
----------- ----------- -----------
Fully diluted shares outstanding 13,532,000 27,248,000 34,516,000
=========== =========== ===========
Net Income $10,034,000 $29,791,000 $17,109,000
Adjustment to add back interest on
Convertible subordinated notes -- 1,223,000 3,710,000
----------- ----------- -----------
Adjusted Net Income $10,034,000 $31,014,000 $20,819,000
=========== =========== ===========
----------- ----------- -----------
Fully diluted earnings per share $ 0.74 $ 1.14 $ 0.60
=========== =========== ===========
Shares outstanding adjusted for the three-for-two stock split in the form of a
stock dividend in February 1997.
Fiscal 1996 restated to incorporate One Stop Mortgage acquisition in August
1996.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION FICTITIOUS BUSINESS NAMES
- ------------------ --------------- -------------------------
<S> <C> <C>
Aames Capital Acceptance Corp. Delaware
Aames Capital Corporation California Aames Home Loan, The Center for Loan
Servicing
Aames Capital Corporation of Minnesota Minnesota
Aames Funding Corporation California Aames Home Loan, Aames Capital
Corporation, The Center for Loan
Servicing, One-Stop Mortgage, Inc.
Aames Home Loan California Aames Realty, The Center for Loan
Servicing, Aames Advertising
Aames Home Loan of America, Inc. California
Aames Home Loan of Colorado, Inc. Colorado
Aames Home Loan of Nevada, Inc. Nevada
One Stop Mortgage Inc. Wyoming One Stop Funding
Oxford Aviation Corporation, Inc. California
Oxford Escrow Co. California
Rossmore Financial Insurance Services, Inc. California Rossmore Financial Insurance
Agency, Inc.
Serrano Insurance Services Nevada
Windsor Management Co. California
Value-America Appraisal Services, Inc. California
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Forms S-3 (Nos. 33-95120,
33-93826, 333-15777 and 333-27537) and S-8 (Nos. 33-44606, 333-01512, 333-12063
and 333-19675) of Aames Financial Corporation of our report dated August 25,
1997, appearing on page F-1 of this Form 10-K.
/s/ PRICE WATERHOUSE LLP
Los Angeles, California
September 29, 1997
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to incorporation by reference in the registration statements (No.
33-95120, 33-93826, 333-15777 and 333-27537) on Forms S-3 of Aames Financial
Corporation (AFC) and in the registration statements (Nos. 33-44606, 333-01512,
333-12063 and 333-19675) on Forms S-8 of AFC, of our report dated August 16,
1996, relating to the balance sheet of One Stop Mortgage, Inc. as of June 30,
1996 and the related statements of operations, changes in stockholders' equity
and cash flows for the period January 1, 1996 through June 30, 1996 and the
period August 24, 1995 (inception) through December 31, 1995, which report
appears in the June 30, 1997 annual report on Form 10-K of AFC.
/s/ KPMG Peat Marwick LLP
Orange County California
September 29, 1997
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